Archive for the ‘Economy and Business’ Category

Housing, financialization and the crash

October 27, 2014

Via Corrente

This video by Richard D. Wolff is a clear and accurate account of the financial crash and the current struggles of American working people.  It dates from 2011, but it is still relevant.  I recommend fast-forwarding through the first three and a half minutes minutes, which are about economic classes, and getting to the meat of the video, which is about the foreclosure and credit crisis.

I can remember when most goods and services were paid for through cash and check, without having to go through credit card companies, other lends and insurance companies.  I don’t deny the benefit of credit or of insurance, or advocate going without either, but it is striking how much we Americans are at the mercy of lenders and insurers.

Bad Paper: The world of the debt collector

October 20, 2014

Jake Halpern wrote a New Yorker article, and then a book, Bad Paper (which I haven’t read), about the debt collection industry.  He was interviewed by Bloomberg’s Megan McArdle.

My mom was getting hounded by a debt collector for a bill that she did not owe.  She eventually paid it just to get him to stop harassing her.

bad.paperI started investigating and found out that much debt-collection activities were in my hometown of Buffalo, New York.  I ended up writing a profile on a Buffalo-based debt collector who bought and sold and collected on debt for pennies on the dollar; that story ran in the New Yorker.

That New Yorker story got optioned by Brad Pitt’s production company.  So I went back to Buffalo with the screenwriter.

No one wanted to talk to a journalist back when I was doing the New Yorker piece, but now that I was with Brad Pitt, everyone talked.  One night, the screenwriter and I go out to dinner with a banker and a former armed robber who had gone into business with one another.

They tell me an incredible tale.  They purchased $1.5 billion worth of bad debt for pennies on the dollar. Their aim was to make a fortune.   All goes well on this unlikely venture until some of the debt is stolen and the former armed robber must delve into an underworld where debt is bought and sold on street corners.  This quest ends in a showdown with guns in the inner city of Buffalo, New York.

The world Halpern describes is lower on the economic food chain than the one described by Matt Taibbi in The Divide, but the process is basically the same.  A lender decides it is not worth the effort to collect on certain bad debts, and sells the debt to a collection agency for pennies on the dollar.

The problem is the lack of reliable information as to what is owed and for what.  Sometimes the collectors don’t know how much is principal and how much is accrued interest.  Sometimes unscrupulous lenders will sell the same debt to several collection agencies.

Halpern said he wound up having more sympathy with debt collectors than he expected.  It is one of the few occupations open to convicted felons.  The central figure in his New Yorker article was a former cocaine dealer trying to go straight.

What does he think needs to be changed about debt collection?

(more…)

How much shale oil and gas is there, really?

October 13, 2014

Click to enlarge.

Source: Bloomberg News.

Shale drillers are a lot more optimistic about potential oil and gas when they talk to shareholders than when they report to the U.S. Securities and Exchange Commission.  Why?

Hint:  The SEC can prosecute for false statements.  Shareholders have to sue.

 

Low interest rates haven’t spurred a recovery

October 10, 2014

It’s a financial axiom that central banks can make money available and set the rates, but they cannot dictate where it goes.

Yet, the IMF just now seems to be figuring that out.

As for central bank sponsored “risk taking,” haven’t we seen enough already?

Where the Money Went

  • Junk bond speculation
  • Stock market speculation
  • Stock market buybacks at ludicrous prices
  • Robots in lieu of hiring
  • Free profit for banks thanks to interest on “excess reserves”
  • Private equity firms buying up houses
  • In Europe, banks loaded up on their own allegedly risk-free bonds
  • In China, property bubbles and profitless SOEs [state-owned enterprises]

Where the Money Didn’t Go

  • Higher wages
  • Infrastructure
  • Investment

via Mish’s Global Economic Trend Analysis.

(Hat tip to Naked Capitalism)

(more…)

Fed official says low unemployment is dangerous

September 29, 2014

Richard Fisher, president of the Federal Reserve Bank of Dallas, said it may be necessary to raise interest rates if the unemployment rate falls below 6.1 percent because low unemployment could lead to higher wages.

Crowded Michigan Unemployment OfficeFisher pointed out that in Texas, wages are rising faster than the rate of inflation.

To me, that is a good thing, not a bad thing.  Why interfere with the law of supply and demand?  The only reason that I can think of is that it might decrease the market value of financial assets.

I am reminded of Karl Marx’s claim that “a reserve army of the unemployed” is necessary to the functioning of capitalism.

I believe in the value of self-discipline, education and the willingness to work.  But anybody who preaches these values ought to be able to show that there is a payoff, and that the payoff is available to everyone, not just the exceptionally talented and the exceptionally lucky.

If the economic system is set up so that at least 6.1 percent of the work force is unemployed at all times, then there is no way to rise out of that 6.1 percent without knocking somebody else down into it.

LINKS

Fed’s Fisher: wages rise when joblessness falls below 6.1 percent by Reuters (via Tom the Dancing Bug).

‘Poor people don’t plan long term.  We’ll just get our hearts broken’ by Linda Tirado for The Guardian.  Somewhat long, but well worth reading.

Obama’s Long Battle to Cut Social Security Benefits by Eric Zuesse for Washington’s Blog (via Mike the Mad Biologist).  The President’s goals are not what his supporters think they are.

An ebbing tide lowers most boats

September 23, 2014

casselman-feature-income-3

Most Americans today are poorer than their counterparts 15 years ago, no matter what their race, marital status, educational credentials or region of residence.

LINK

The American Middle Class Hasn’t Gotten a Raise in 15 Years by Ben Casselman for FiveThirtyEight

Forgetful mutual fund investors perform best

September 15, 2014

c-75Proponents of Social Security privatization say that the average investor will do better investing the money that goes to Social Security taxes in the stock market.  The chart above, which is from Business Insider, shows the problem with this.

It is true enough that, over a long period of time, stock market averages, such as the Russell 2000 or the Standard & Poor’s 500, do better than Treasury bonds.  But most of us don’t do that.

We get overoptimistic when stock prices are going up and panic when stock prices are going down.  So we buy high and sell low—the opposite of what a smart investor should do.

The following is from an exchange between Barry Rithotz, a financial adviser and blogger, and James O’Shaughessy, of O’Shaughessy Asset Management, on Bloomberg Radio.

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity.  And what they found was…”

Ritholtz: “They were dead.”

O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.”

via Business Insider.

Ritholtz told about some of his experiences in estate planning, where a family fought over inherited assets for 10 or 20 years, didn’t touch them in the meantime and found those 10 or 20 years were the best period of performance.

(more…)

Why it made business sense to make bad loans

September 8, 2014
subprime

Click to enlarge

The subprime mortgage crisis was caused by bankers intentionally lending money to people without good incomes, sold assets or good credit records.

This is hard for a lot of people to understand.  As a friend of mine said, why would a bank lend her money unless they had good reason to believe that she would pay them back?

The answer is that what’s financially destructive for a bank as a corporation can be profitable for a banker as an individual.

Irresponsible-Borrowers-Cartoon4During the run-up to the subprime mortgage crisis, bankers got big bonuses for making high-interest loans, without regard to how risky those loans were.  In many cases, they were able to package financial instruments based on these mortgages, get high ratings for them from credit agencies and unload them on suckers.

There’s name for this practice.   It is “control fraud“.

But the Obama administration has chosen not to prosecute bankers.  Instead it is going after the small fry who put incorrect or incomplete information on their applications.   Thomas Frank wrote an article in Salon about how a California jury refused to convict a bunch of “liar’s loan” applicants on the grounds that you can’t mislead someone who isn’t interested in knowing the truth in the first place.

The article is worth reading for its clear explanation of how control fraud works, but I think Thomas Frank is over-optimistic about how much of a precedent the California jury’s verdict will create.  It depends on how many judges will allow this kind of defense to be made.  Many of them rule that the only issue is whether the form is filled out correctly, and that the largest context is irrelevant.

Alternatively the government could allow the banks to face the consequences of making bad loans.  This would provide an incentive for boards of directors to think about long-term consequences as well as short-term profit.  But the Obama administration, like administrations before it, has chosen to bail out the banks on the grounds that their failure would disrupt the economy.

The problem with bailouts is twofold.   Bailouts give recklessly-managed banks an advantage over prudently-managed banks.   And at some point the too-big-to-fail banks become too big to save.

(more…)

‘Drill, tovarich, drill': Putin’s economic dilemma

September 4, 2014

russia.exports

Vladimir Putin’s Russia is a great military power with a backward economy.

Without a strong manufacturing base, Russia’s economy depends sale of oil and natural gas, which are non-renewable.   This means that, unless Russia changes direction, it is fated to become a resource colony of China or the European Union.

Economic sanctions promoted by the USA could be an opportunity for Russia to develop its domestic industries and its internal market, much as the infant USA did when it was cut off from trade with Europe prior to and during the War of 1812.  But according to this article by Mikhail Matveev for Inter-Press Service, Russia is going in the opposite direction.

The recent call from Russian Prime Minister Dmitry Medvedev for “tightening belts” has convinced even optimists that something is deeply wrong with the Russian economy.

No doubt the planned tax increases introduction of a sales tax and increases in VAT [1] and income tax will inflict severe damage on most businesses and their employees, if last year’s example of what happened when taxes were raised for individual entrepreneurs is anything to go by – 650,000 of them were forced to close their businesses.

Nevertheless, it looks like some lucky people are not only going to escape the “belt-tightening” but are also about to receive some dream tax vacations and the lucky few are not farmers, nor are they in technological, educational, scientific or professional fields – it is the Russian and international oil giants involved in oil and gas projects in the Arctic and in Eastern Siberia that stand to gain.

“In October [2013], Vladimir Putin signed a bill under which oil extraction at sea deposits will be exempt from severance tax.  Moreover, VAT will not need to be paid for the sales, transportation and utilization of the oil extracted from the sea shelf,” noted Russian newspaper Rossiiskie Nedra.

[snip]

In fact, the line of thinking adopted by Russian officials responsible for tax policy is very simple. Faced with the predicament of an economy dependent on oil and gas half of the state budget comes from oil and gas revenue, while two-thirds of exports come from the fossil fuel industry, they decided to act as usual – by stimulating more drilling and charging the rest of the economy with the additional tax burden.

Matveev wrote that Russia, like other countries, suffers the bad effects of global climate change caused by fossil fuel emissions.  The Russian economy is at risk, he wrote, if the USA or European Union ever achieve their announced goals for shifting to renewable energy sources.   I don’t think the latter is as likely as Matveev seems to think.

The fact that economic sanctions cause serious problems to Russia does not mean that they are a good idea.  Weaker nations than Russia have survived U.S.-led economic sanctions, and the economic war with Russia hurts European Union countries as much or more than Russia.

(more…)

Rise of the machines: Links & comments 8/19/14

August 19, 2014

The Internet’s Original Sin by Ethan Zuckerman for The Atlantic.

The basic problem with the commercial Internet, according to this writer, is the use of advertising to finance Internet services.

Because an individual advertisement on the Internet has little impact, the value of advertising is based on the ability of the firm to target individuals who are interested in this particular product.  And the only way to do this is to gather data and use it to profile individuals.

Invasion of privacy is not a bug.  It is a necessary feature.  The reason it is necessary is that most people would rather give up their privacy than pay for Internet services.

Zuckerman thinks this is the reason that NSA surveillance is no big deal for most Americans.  We’re already accustomed to giving up our privacy.

He doesn’t have a good answer as to what to do about all this, and neither do I.

How We Imprison the Poor for Crimes That Haven’t Happened Yet by Hamilton Nolan for Gawker.

The science-fiction movie Minority Report imagined a world in which it was possible to predict when people would commit crimes and to arrest them before the crime occurred.  A predictive science of human behavior does not exist, but that does not stop people in authority from acting as if it did.

American courts are increasingly using what’s called “evidence-based sentencing” on which the severity of the sentence is based on a computer algorithm’s determination of the likelihood that the person will commit another crime.

In practice, what this means that that poor youth who grew up in a family without a father will get a worse sentence than a middle-class youth with access to psychiatrists and good job opportunities.

This is contrary to the basic principle of equal justice under law.   If you commit a crime, you should be punished for what you did, not for what somebody thinks you may do.

(more…)


Follow

Get every new post delivered to your Inbox.

Join 601 other followers