Archive for the ‘Economy and Business’ Category

What’s new (at least to me) about the TPP

October 8, 2015

Click to enlarge.

The Obama administration has moved very shrewdly to deflect some of the main criticisms of the proposed Trans Pacific Partnership agreement.

  1.  Fast Track is not as fast as I previously thought It is true that once the TPP is submitted to Congress, there will be only 90 days to debate and decide.  But there will be a longer preliminary phase in which to study and discuss the proposed agreement.  I don’t know whether this was true all along and I (along with many others) didn’t realize it, or whether this is something new.  But in any case, the TPP is not necessarily going to be rushed through Congress as quickly as I had previously thought.
  2.   Evidently there will be amendments to address some of the main criticismsFor example, tobacco companies will not be able to use the Investor State Dispute Settlement mechanism to protest restrictions on cigarette advertising.

But here is the Cato Institute’s timetable for making the agreement public.

Even with the deal “concluded,” the president cannot sign the agreement until 90 days after he officially announces his intention to do so. During that period, there will be intensive consultations between the administration and Congress over the details; the legal text of the agreement will be made available to the public on the internet; the USTR advisory committees will submit their assessments of the deal to Congress; and there will be ample opportunity for informed, robust domestic debate about the deal’s pros and cons.

After the 90-day consultation period, the president can return to the TPP partners with input from Congress, which may or may not warrant modifications to the deal to improve its chances of ratification.

Once the deal is signed, the administration then has a maximum of 60 days to prepare a list of all U.S. laws that will need to be changed on account of TPP; the U.S. International Trade Commission will have a maximum of 105 days to do an analysis of the likely impact of the TPP on the U.S. economy; the congressional trade committees will perform mock markups of the implementing legislation; and, then, the final TPP implementing legislation will be introduced in both chambers.

After the legislation is introduced, the House will have 60 days and the Senate will have 30 days to hold votes. These requirements stem from the Trade Promotion Authority legislation enacted over the summer. If the TPP is going to be ratified by this Congress under this president, the timelines suggest that there isn’t much room for delay.

Source: Cato @ Liberty

Without Fast Track, there would be no deadline at all for voting the TPP up or down, there would be no restriction on amendments, and 60 votes instead of a 51-vote majority would be required for the TPP to clear the Senate.


The passing scene – October 7, 2015

October 7, 2015

Why Free Markets Make Fools of Us by Cass R. Sunstein for The New York Review of Books.  (Hat tip to my expatriate e-mail pen pal Jack)

The TPP has a provision that many will love to hate: ISDS.  What is it, and why does it matter? by Todd Tucker for the Washington Post.  (Hat tip to naked capitalism)

Hillary Clinton says she does not support Trans Pacific Partnership by the PBS Newshour.

Q: Is the Obama Administration Complicit With Slavery? A: Yes by Eric Loomis for Lawyers, Guns and Money.  Slavery in Malaysia is overlooked for the sake of the TPP.

Houston is a lot more tolerant of immigrants than Copenhagen is on Science Codex.  (Hat tip to Jack)

Science Saves: The Young Iraqis Promoting Evolutionary Theory and Rational Thought to Save Iraq by Marwan Jabbar for Niqash: briefings from inside and across Iraq.  (Hat tip to Informed Comment)

The Amazing Inner Lives of Animals by Tim Flannery for The New York Review of Books.  (Hat tip to Jack)

Is the chilli pepper friend or foe? by William Kremer for BBC World Service.  (Hat tip to Jack)

My economic philosophy in a nutshell

October 6, 2015

When, lo, these many years ago, I studied economics in college, I learned that capital was the most important factor in a prosperous economy.

I still think this is true.  But that doesn’t mean that owners of financial assets are the most valuable members of society.

Standard economics teaches that three  are factors of production—land, labor and capital.  “Land” means all natural resources—everything of value not created by human beings.  “Labor” means all human effort, physical or mental.

 “Capital” is the most important of the three.  It means everything that increases the productivity of land and labor—railroads, machine tools, computers.  It is the force multiplier for land and labor.  It is what makes economic growth possible.

The problem is that “capital” also means also the financial resources available (but not necessarily used) to create these tangible resources.

Landlords who receive rents contribute nothing to the wealth of nations.  Laborers who earn wages contribute a fixed amount.  Capitalists who make profits have—so I was taught—an incentive to direct their capital in a way that created the most value, and thus increase the total wealth of society.

Late in life I have come to read Karl Marx’s rebuttal.  Physical and intellectual capital is not created by capitalists, he noted.  Every railroad, every machine tool, every computer was created not by money, but by the mental and physical effort of human beings.

The increase in human wealth that physical capital generates does not go to those who created it.  It goes to those who own it.

Marx denied that the owners of capital are job creators.  He asserted that workers are capital creators.


The passing scene – October 4, 2015

October 4, 2015

Roger Millikin: The Man Who Launched the GOP’s Civil War by Jonathan M. Katz for Politico (hat tip to naked capitalism)

Roger Millikin, a right-wing textile magnate, was a driving force in transforming the South from solidly Democratic to solidly Republican, and the Republican Party from the party of Lincoln into the party of Strom Thurmond, Jessie Helms and Trent Lott.

If not for him, or someone like him, Rick Perry might still be a Democrat and Elizabeth Warren might still be a Republican.

The Invisible Poverty of ‘Poor White Trash’ by Rod Dreher for The American Conservative.

I never use expressions such as “redneck” or “white trash.”  The word “redneck” originally to poor white farmers who worked in the hot sun in long-sleeved shirts.  It was a term used by educated people to express their contempt for manual labor and lack of schooling.  The term implies that poor white people are more racist than affluent white people, which in my experience has not been the case.

One Day After Warning Russia of Civilian Casualties, the U.S. Bombs a Hospital in Afghanistan by Glenn Greenwald for The Intercept.  (Hat tip to my expatriate e-mail pen pal Jack).

Bubbles Always Burst: the Education of an Economist by Michael Hudson, author of Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

Debacle Inc.: How Henry Kissinger Helped Create Our “Proliferated” World by Greg Grandin, author of Kissinger’s Shadow: The Long Reach of America’s Most Controversial Statesman.


Donald Trump in the 1980s

September 28, 2015

Hat tip to KeldBach’s Journal.

This informative 1991 documentary film about Donald Trump traces the history of his business up until the bankruptcy of Trump Taj Mahal, the first of four Trump businesses to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

Donald is the son of Fred Trump, a successful developer in Brooklyn.  Part of his success, as the documentary shows, is due to the Trump family money.  Part is due to Donald Trump’s use of his father’s name to obtain political influence and to get use of other people’s money.

The documentary shows Trump was a talented and successful deal-maker.  It shows he was an even more successful salesman and promoter, and how that trumped (so to speak) his failure to provide good service to his tenants or to achieve sustainable financial results.

The makers of the documentary write Trump off as a failure, and yet, as we now know, he bounced back and survived even more setbacks, by using his celebrity to promote the Trump brand.

Is this what we Americans want in a President of the United States?  It would not be a change for the better, but a doubling down on everything that has been wrong in Washington for the past 10 or 15 years—how repeated failures are hidden behind a smokescreen of denital and bluff.

Romney, Fiorina, Trump: who did the most harm?

September 22, 2015

Last week a friend of mine wondered out loud who ruined more lives—Donald Trump, Carly Fiorina or Mitt Romney?

After doing a little Internet research, I would say—probably Mitt Romney, possibly Carly Fiorina, but not Donald Trump.

romney-record-620x1024Mitt Romney was CEO of an investment firm called Bain Capital.  It started out in 1984 as a venture capital firm; its most successful investment was the Staples chain of office supply stores.

But from 1989 to 1999, it adopted a new strategy—borrowing money to buy existing companies, saddling the companies themselves with the debt while meanwhile giving Bain big consulting fees.

Some of the companies collapsed under the burden of debt, some survived.  Having to service a big debt obligation probably tipped many into failure.  Nobody would argue that it helped.  But Romney and the other Bain partners did well whether the companies succeeded or not.

Carly Fiorina became head of Hewlett-Packard in 1999.   Her most notable accomplishment was aquisition of Compaq Computer, which by most accounts didn’t pay off.  The H-P board of directors fired her in 2005.

The Boston Globe estimated that 30,000 employees were laid off during her tenure.  On the other hand total jobs at H-P when she left were roughly equal to the combined H-P and Compaq employment in 2009.

Donald Trump took his companies into bankruptcy—that is, reorganization under Chapter 11 of the U.S. Bankruptcy Code—four times.  These were Trump Taj Mahal in 1991, Trump Plaza Hotel in 1992, Trump Hotels and Casino Resorts in 2004 and Trump Entertainment Resorts in 2009.

In each of these reorganizations, Trump took a loss and gave up control.   The businesses continued, and evidently there weren’t any big layoffs at the time.   Trump Taj Mahal filed again for bankruptcy last year, but Trump no longer controls it.


An ‘economic hit man’ tells his story

September 22, 2015

I read CONFESSIONS OF AN ECONOMIC HIT MAN by John Perkins on the recommendation of a fellow blogger known as Holden.

Perkins wrote this memoir in 2004 about his work as an international economics consultant in the 1970s.  He said his job was to intentionally make bogus projections of economic growth for Third World countries such as Indonesia, Ecuador and Iran.

The idea was to encourage developing countries to borrow heavily to finance economic development projects using U.S.-based contractors.  The countries’ leaders were promised that these projects would bring about rapid economic growth, and make their countries prosperous and modern.

14273_johnperkins_nWhen the countries became unable to finance their debt, this created opportunities for American and international companies to buy up their national assets at bargain prices.

And even when the economic development plans worked, they only benefited tiny elites while leaving the majority of the people just as badly off or even worse off.

To stay in power, the elite accepted U.S. military aid in return for supporting U.S. foreign policy or hosting U.S. military bases or both.

Perkins said he was in on U.S. negotiations with Saudi Arabia following the 1973 oil embargo, which led to the U.S.-Saudi alliance which endures to this day.

The Saudi royal family agreed to manipulate oil production in order to protect the U.S. economy from big fluctuations in world oil prices.  The Saudis further agreed to invest their revenues in U.S. Treasury bonds

In return, the U.S. Treasury Department invested the income from those bonds in infrastructure projects, all carried out by U.S. contractors, to give Saudi Arabia the appearance of being a modern country.  The U.S. Defense Department provided a military shield for this weak, thinly-populated country against enemies such as Iraq and Iran.

The problem, as I see it, is that it has made the United States hostage to Saudi ambitions to dominate the Middle East.


Sabbath observance as a class privilege

September 6, 2015

I attend church almost every Sunday morning.  Not everybody is able to do this.

Nowadays many people are forced to work on Sunday mornings or work on flextime schedules so that they don’t know whether their Sunday mornings will be free or not.   And even more are unable to have an old-fashioned Sunday dinner with family or spend Sundays visiting relatives and family friends.

Closed-on-SundayI hadn’t given much thought to this until it was pointed out this Sunday morning by Peter House, who serves as summer minister at First Universalist Church of Rochester NY.

Peter grew up in one of those families of whom members say later, “We were poor, but we were happy, because we didn’t know we were poor.”  His mother was a poor widow who supported the family by working in a retail store.

When he was a boy, Sundays were spent going to church, visiting relatives, paying respects at the cemetery to deceased loved ones, and eating family meals.

This started to erode when he was in his early teens, with the repeal of the Sunday blue laws and the coming of big box retail stores.   Churches adapted by holding multiple Sunday services and even Saturday evening services, but it was no long possible for his family to count on all being together at the same time on Sunday.  His mother was sometimes free on Sunday mornings, but no longer could be sure of knowing when.

Traditional holidays are being broken down as well.  Black Friday means that store employees have to cut short their Thanksgiving in order to be read to open at 5 a.m. or even midnight.  Now Walmart opens all day on Thanksgiving.

Peter’s weekday job is teacher of special needs children.  As part of an effort to teach social skills to children, he once talked to six of his students about Thanksgiving.  Five of the six had mothers who had to work on Thanksgiving Day.   Some of them didn’t know what a traditional Thanksgiving meal consisted of.  One thought Thanksgiving dinner was hot dogs cut up into macaroni and cheese.

The teachers’ aides at his school, many of them women of color, have to moonlight at other jobs, often big-box retailers.   Many miss not being able to cook holiday meals for their families.  But the reality of employment in 21st century America is that they can’t.


Why Americans need labor unions

September 5, 2015


During the past 40 years, the productivity of American workers has continued to increase but their wages (adjusted for inflation) have barely increased at all.

Labor lawyer Thomas Geoghegan, in his new book, Only One Thing Can Save Us, says this is because corporate America has decided that it doesn’t want highly-skilled, well-paid workers; it wants low-paid, replaceable workers.


The middle class is the middle 60% of income earners, between the top and bottom 20%

Many evils flow from this.  Working people and the middle class have take on more debt in order to buy homes, pay for higher education or maintain their material standard of living.

Bankers and financiers find it more profitable to invest in debt than in the production of goods and services.

This results in the financialization and hollowing-out of the U.S. economy.

Geoghegan thinks the one thing that can save us is a labor union movement strong enough to win wage increases sufficient to keep up with the increase in the production of wealth.

This will give working people and the middle class enough buying power to generate a real economic recovery.

It will enable them to pay down debt.  Shrinking the debt industry will free up money to be invested in producing real goods and services.

Labor union contracts will make it harder to lay people off at will.  This will give employers an incentive to invest in training to make their workers more productive, which union apprenticeship programs can help with.

With more Americans earning good incomes, tax revenues will increase and governmental budgets will be more in balance.  With fewer jobs being shipped overseas, the U.S. trade deficit may shrink.

A politically powerful union movement will bring American politics into balance.  The USA will have both a left wing and a right wing rather than, as at present, only a right wing.

He advocates reforms to strengthen labor unions, including:
1.  Making union membership a civil right.
2.  Allowing members-only unions without NLRB elections.


The U.S. economy on life support

September 4, 2015



The Federal Reserve Board will soon decide once again whether to continue to hold down interest rates or to allow them to rise.

The board is in more or less the same position as a physician trying to decide whether to remove life support a patient who is in intensive care.

All the indicators are that the patient is too weak to be removed from life support.  Yet the patient can’t stay on life support forever.

I used to criticize the Federal Reserve Board on the grounds that it preferred tight money and high unemployment to the possibility of inflation.  That’s yesterday’s news.  Now the Fed’s concern is how to get the country out of its long-term recession.

The historic Keynesian remedy for recession is to increase the money supply and hold down interest rates.  The idea is that putting money in circulation and making credit readily available will encourage consumers to buy things and businesses to invest.

But this time around, it didn’t happen.  Banks and financial institutions invested in debt rather than in production of tangible goods and services.   Savers invested in stocks and bonds because they couldn’t get any interest on their bank accounts, but this didn’t stimulate the real economy either, or at least not very much.


The stock market in 100-year perspective

August 26, 2015

 DowJones1914-2014-Constant-e1440525772683Source: American Enterprise Institute

The Dow Jones Industrial Average of 30 industrial stocks was at 54.6 at the end of 1914.  By the end of 2014, it was at 17,823.

But adjusted for changes in the Consumer Price Index, the gain is much more moderate—about 2.7 percent a year. The average dividend yield on DJIA stocks was about 4.1 percent.  So the total average annual gain was 6.8 percent.

What the chart shows is that there have been long periods when stock prices declined or were static.  You can’t count on stocks always going up.  The 1920s and 1990s booms were not necessarily typical.

I’m not smart enough or stupid enough to predict how the stock market will go, but you’d have to be very optimistic to think the boom will continue.

I don’t think the recent rise in stock prices reflects the real economy.  I think it is a result of the Federal Reserve Board holding down bank interest rates, so that savers are driven to buy stocks in order to get a yield on their money.

Many CEOs are buying back the companies’ stocks, thereby driving up the price, instead of investing in expanding their businesses, which would benefit the nation as a whole.

This is another example of Stein’s Law:  If something cannot go on forever, someday it will stop.   The recent stock price boom could not go on forever.


The stock market in 100-year perspective by Alex J. Pollock for the American Enterprise Institute.

Wall Street Panic by Mike Whitney for Counterpunch.

Quick Thoughts on the Stock Market and the Economy by Dean Baker for Beat the Press.

Smoke and Mirrors of Corporate Buybacks Behind the Market Crash, an interview of Michael Hudson for the Real News Network.


Update 8/27/2015.  I made some changes in wording that didn’t change the meaning of this post.

There never was an “economic stimulus”

August 24, 2015

Source: the Wall Street Journal

All the recessions since World War Two were followed by an “economic stimulus”.   The current one is the exception.  As the chart above indicates, government spending—combined local, state and federal government spending—has actually declined.

The idea behind “economic stimulus” was that increased government spending would put people to work and put money in circulation so that the recession would not have a domino effect and develop into a full-fledged recession.

Of course some of this was not intentional.  Spending for unemployment insurance and other safety net programs automatically increases in hard times.

For the idea to work, there has to be deficit spending.  There is no economic stimulus if governments take as much money out of the economy through taxes as they inject through spending.   Keynesian economists think this should be offset by government budget surpluses when the economy is booming and needs to be cooled off.

You could argue about whether this is justified and how much effect it really works.  I personally think that the severity of the Great Recession is due to the long-range decline of American wages in inflation-adjusted terms.

But it is interesting to note that the current recession is the worst since the Great Depression of the 1930s and that it is the only one followed by an actual decrease in government spending.


Chart of the Day: Here’s Why the Recovery Has Been So Weak by Kevin Drum for Mother Jones.

The passing scene – August 19, 2015

August 19, 2015

On the elementary structure of domination: The Bully’s Pulpit by David Graeber for The Baffler.

Schoolyard bullies typically believe they have a right and duty to punish and humiliate those who manifest vulnerability, fear or deviance, and they retroactively justify their actions by the inappropriate ways in which their victims resist, Graeber wrote; this reflects the structure of domination in the larger society.

Algorithms can be a digital star chamber by Frank Pasquale for Aeon.

An algorithm fed into a computer can determine whether you get a job, get credit or get insurance, or what kind.  Probably you don’t know about it.  Probably you can’t appeal the result because arbitrary assumptions processed through a computer are considered “objective.”

Climate Change Threatens Economic Development, World Bank President Jim Yong Kim Says by Julia Glum for International Business Times.   (Hat tip to Hal Bauer)

We’ll see whether he puts the World Bank’s money where his mouth is.


The passing scene – August 8, 2015

August 8, 2015

Republican Assault on Trump May Only Make Him Stronger by Matt Taibbi for Rolling Stone.

Trump’s Triumph: Billionaire Bloward Exposes Fake Political System by Mike Whitney for Counterpunch.

How Pathetic: Why Donald Trump May Be the Best Thing Going by Andrew Levine for Counterpunch.

The Republican Candidates Agree that the System Is Rigged for the Rich by William K. Black for New Economic Perspectives.

720x405-GettyImages-483208910I still can’t take Donald Trump seriously as a Presidential candidate, but he has said things that need to be said, especially about how he and other billionaires have the power to buy politicians.

Other Republican candidates also point out that the political system is rigged in favor of Wall Street and the large corporations.

Their answer appears to be lower taxes, less regulation and a minimal role for government, on the theory that the less government does, the less it matters whether corporations and wealthy individuals can manipulate government.

My problem with this is that some large corporations have grown so large and powerful that they are the next thing to governments themselves.

Hillary’s Libyan Torturers by Daniel McAdams for The Ron Paul Institute.

hillary-tortureThe achievement of Barack Obama and Hillary Clinton in foreign affairs was to find a way to find a way to continue the policies of George W. Bush without large numbers of American casualties.

The attack on Libya is an example of this.  The U.S. government supported an attack on a country that did not threaten the United States, based on lies, and reduced it to bloody chaos in which terrorists such as ISIS flourish.

The problem with Bernie Sanders by Joseph Cannon of Cannonfire.

Bernie Sanders is like many democratic socialists of the 1950s and 1960s—a defender of the interests of working people, a defender of civil rights, but also a cold warrior.

He thinks the United States should support Saudi Arabia and Turkey against ISIS, when these two governments are interested only in fighting the enemies of ISIS—Syria for Saudi Arabia and the Kurds for Turkey.   Likewise he favors confrontation of Vladimir Putin over Ukraine, which puts the United States at risk of nuclear war.


Pro-TPP companies, groups bankroll Clinton

August 7, 2015

CLQEBW4XAAAMhhvSource: LittleSis.

Hillary Clinton in her book, Hard Choices, endorsed the Trans Pacific Partnership.  If she makes any statements appearing to back off from that position, I’d read them like a lawyer looking for loopholes.

She’s been paid more than $2.5 million—actually, more than $2.7 million—in speaking fees by companies and organizations that lobby in favor of the TPP.

Bernie Sanders and Martin O’Malley, two other Democratic candidates for President, are opposed to the TPP, as are Republican candidates Mike Huckabee and Donald Trump.

Republicans Jeb Bush, Ted Cruz, Rand Paul and Rick Perry support the TPP.

I think the TPP is a terrible idea because, based on information now available, it appears to lock in a corporate wish-list as international law.  International corporations, but no other entities, would have the right to appeal to a special tribunal against laws they deem unfair, and the tribunal would have authority to fine governments for allegedly unfair laws.

At the very least Congress should have time to discuss and debate it fully rather than having it rushed through on fast track.


Groups lobbying on trade paid Hillary Clinton $2.5 million in speaking fees by Julianna Goldman for CBS News.

TPP Agreement: Where Do 2016 Presidential Candidates Stand on the Trans Pacific Partnership? by Howard Koplowitz for International Business Times.

Donald Trump slams Pacific free trade deal by CNN Money.  Trump appears to be right for wrong reasons.  Like some TPP supporters, he talks as if the TPP is mainly about free trade.


Greece and the economic hit men

August 3, 2015

Like many people, I once naively believed that banks made a profit by lending money to people who would pay them back.  I’m sure that is still true of the many honest bankers still left in the world.

But it can be more profitable for banks to lend money to people who can’t pay them back.  The lender collects higher interest rates.  Sometimes the loans are securitized and sold to suckers.   Foreclosures are profitable if the value of the underlying asset is greater than the loan.

And last, but not least, if the lender is large enough and politically powerful enough, a government will bail him out.

John Perkins, author of Confessions of an Economic Hit Man (which I haven’t read), gave an interview to a Greek radio station explaining how this works.

Essentially, my job was to identify countries that had resources that our corporations want, and that could be things like oil – or it could be markets – it could be transportation systems.  There are so many different things.


John Perkins

Once we identified these countries, we arranged huge loans to them, but the money would never actually go to the countries; instead it would go to our own corporations to build infrastructure projects in those countries, things like power plants and highways that benefited a few wealthy people as well as our own corporations, but not the majority of people who couldn’t afford to buy into these things, and yet they were left holding a huge debt, very much like what Greece has today, a phenomenal debt.

And once [they were] bound by that debt, we would go back, usually in the form of the IMF – and in the case of Greece today, it’s the IMF and the EU [European Union] – and make tremendous demands on the country: increase taxes, cut back on spending, sell public sector utilities to private companies, things like power companies and water systems, transportation systems, privatize those, and basically become a slave to us, to the corporations, to the IMF, in your case to the EU, and basically, organizations like the World Bank, the IMF, the EU, are tools of the big corporations, what I call the “corporatocracy.”

via TruthOut.

The so-called “bailout” of Greece is not a bailout of the Greek people and does not reduce the Greek debt burden.  It is a bailout of banks by European governments and the International Monetary Fund.

I’d guess that’s the reason the Russian government turned down a Greek plea for help.   The Russians would get no benefit from providing funds to Greece that would flow through to European governments that support the Ukrainian government’s fight against pro-Russian separatists.  Far better, from the Russian standpoint, to wait until Greece defaults and disconnects from Europe, and then step in.

Ukraine itself will soon be in the same situation.  It has greater debts than it ever can repay, and rich assets, especially in agricultural land, that speculators would like to acquire.


An Economic Hit Man Speaks Out: John Perkins on How Greece Has Fallen Victim to “Economic Hit Men”, an interview by Michael Nevradakis for Dialogos Radio in Greece.

Bailout Money Goes to Greece, Only to Flow Out Again by Jack Ewing and Liz Alderman for the New York Times.

Who Really Benefits From Bailouts? by Barry Ritholtz for BoombergView.

Jack Bogle on why the financial sector is too big

August 3, 2015

Jack Bogle is the founder of the Vanguard group of mutual funds and a pioneer of the concept of investing in no-load index funds with low expense ratios rather than trying to outguess the market.

Vanguard has the largest share of fund assets in the industry, and two-thirds of that is in index funds.  I myself have put my retirement savings in Vanguard and T. Rowe  Price funds.

This is from an interview of Jack Bogle in the August issue of Money magazine.

Q: You’re concerned that the financial sector is too big. Why?

Jack Bogle

Jack Bogle

A: The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings. What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.


Mitch Tuchman of MarketWatch pointed out that $32 trillion is nearly double the size of the U.S. economy.  Merely moving this from one pocket to another during the course of a year is at best useless and at worst destabilizing to the U.S. economy.  Yet a lot of people get rich collecting fees just for moving the money around.

There should be a transaction tax of some fraction of 1 percent.  This wouldn’t affect serious long-term investors, but it would slow down speculators.


Jack Bogle Explains How the Index Fund Won With Investors, an interview by Pat Regnier for Money magazine.

Why 99% of trading is pointless by Mitch Tuchman of MarketWatch.

Failing to learn from the Great Depression

July 30, 2015

The Great Depression of the 1930s was made worse than it needed to be because European governments prioritized balanced budgets and stable currencies over putting people back to work and putting money into circulation.

As Matthew Yglesias noted—

In Germany, for example, the [ruling socialist] SPD took the view, roughly speaking, that capitalism was an inherently flawed system and the Depression just proved that.  But short of a revolution and a total transformation of the political universe, there was just nothing to be done to alleviate unemployment.

Similarly, in 1929 Ramsay MacDonald’s Labour Party swept into power in the United Kingdom and proceeded to … enact spending cuts necessary to keep the country on the gold standard.  As this led to left-wing defections, MacDonald eventually made up lost ground by forming a coalition with Conservatives that eventually ended up being mostly backed by conservative MPs.

Sweden was an exception where the local social democrats took bold steps to bolster employment. But mostly it was left to other parties with less worthy overall agendas — Hitler, for example — to step in and say that if the rules of the game led to prolonged spells of mass unemployment then the rules of the game had to be changed.


Brad  DeLong, an economist at UC Berkeley, said that he used to joke that governments would never again make the mistakes that prolonged the Great Depression, but instead would make new mistakes.  Now he admits he was wrong.  Governments are making the same old mistakes.

austerity-depressionEurope’s governments are held back by fear of fiscal imbalance and undermining the Euro standard, just as they once were held back for fear of undermining the gold standard.  But, as in the 1930s, there are nationalist parties waiting in the wings to do the things that the mainstream parties fear to do.

The European public may well turn to parties such as the United Kingdom Independence Party, the National Front in France or the neo-Nazi Golden Dawn party in Greece.   As far as that goes, similar movements will arise in the United States if Democrats and Republicans fail to act.


Depression’s Advocates by J. Bradford DeLong for Project Syndicate.

I don’t want to go back there by Matthew Yglesias for

Why did Germany abandon the good path?

July 29, 2015

A decade ago, looking at the state of the union the Bush administration, it seems to me that it was the European Union, and Germany in particular, had replaced the USA as the last, best hope of earth.  As recently as five years ago, I posted an article on Germany as an Economic Role Model.

Germany had seemingly created an economy based not on cutting costs, but on creating value, investing in people and worker participation in decision-making.  The Germans had learned how how to hold their own in international trade and still enjoy high wages, generous social benefits and excellent public services, without sacrificing civil liberties.

Or so I thought at the time.  But the Greek debt crisis shows Germany as much in the grip of a financial oligarchy as the USA was.

Germany.austerity16678The German leaders have embraced the idea, very familiar to us Americans, that the purpose of an economic system is not cooperation for mutual benefit, but to reward winners and punish losers.

The best way to help Greece’s creditors is to promote Greece’s economic recovery, so at least a portion of the debt can be repaid.  The austerity measures being imposed by the European Central Bank, European Commission and International Monetary Fund are driving Greece deeper into economic depression.  They are being imposed as a punishment and a deterrent.

The German leaders also have made the mistake of allowing central banks, rather than the public, to determine economic policy.   The problem with this is that bankers have different priorities than the public.

Broadly speaking, bankers want zero inflation and debts to be repaid in full.  All other things being equal, these are desirable goals, but not at the cost of rising unemployment, falling wages and non-functioning government services.

Unfortunately the European Central Bank is in charge of European monetary policy, and the public has nothing to say about its policies.   It is governed by a committee consisting of 19 national central banks and a six-member executive board appointed by the European Council.   I looked up “accountability” on the bank’s web site, and found that this consists of regularly issuing reports.

The best way to enforce accountability for the Greek debt crisis would be to investigate the Greek public officials and their banker advisers who created it, and determined whether they should be charged with malfeasance.  Instead the banks have been bailed out, and the public officials escape blame—much the same as in the 2008 financial crisis in the United States.


How NAFTA drove poor Mexicans north

July 22, 2015

If not for NAFTA, the United States probably wouldn’t have the issue it does with unauthorized immigration from Mexico.

The North American Free Trade Agreement, enacted in 1993, was part of a strategy by the Bill Clinton administration, continuing the policy of previous administrations, to increase U.S. exports.

ImageGen.ashxThe government gave up trying to preserve the family-operated farm.  Instead it favored large-scale operations that could produce food for export.  Farmers were told: “Get big or get out.”

NAFTA, although it eliminated government subsidies for many products, preserved U.S. subsidies for corn and dairy products.  The corn subsidy was also in effect a subsidy for meat, since meat animals are fed subsidized corn.

Small Mexican farmers, especially corn farmers, could not compete against the cheap food imports that flooded into Mexico.  Many left the land, and joined the migrant stream into the United States.

U.S. government policy was successful in increasing exports of corn.  The unintended result was increased imports of unauthorized workers.   I think NAFTA should be amended or repealed, but, sadly, this will not change the results of NAFTA.


Under Nafta, Mexico Suffered and the United States felt its pain by Laura Carlsen for the New York Times.

Corn Sales to Western Hemisphere Surge by the National Corn Growers Association.

NAFTA and US farmers—20 years later by Karen Hansen-Kuhn for the Institute for Agriculture and Trade Policy.

Mexican Farmers Affected by Agricultural Subsidies from NAFTA, Other International Agreements by Susana G. Baumann for the Huffington Post.

Corn Subsidies at Root of U.S.-Mexico Immigration Problems by Anthony B. Bradley of the Acton Institute.

How U.S. Policies Fueled Mexico’s Great Migration by David Bacon for The Nation.

Free trade: As U.S. corn flows south, Mexicans stop farming by Tim Johnson for McClatchy Newspapers.

Greece’s debt and the Wiemar Republic analogy

July 14, 2015

Historical analogies don’t necessarily hold, but Germany in the 1920s and early 1930s, like Greece today, had a dysfunctional democratic government and was saddled with war debts beyond the nation’s ability to pay.

All well-informed people understood the situation, but the demands of the creditor nations on the Wiemar Republic were uncompromising.  Then Hitler came to power, and the debt was forgiven.

I wouldn’t be surprised if the fascist Golden Dawn party came to power in Greece, and I wouldn’t be completely surprised if the creditor nations relaxed their demands for debt repayment.


Banks get bailed out, Greece doesn’t

July 13, 2015

Joseph Cannon came across this information on a comment thread on the Moon of Alabama blog.  It compares the amounts of the U.S. government bailouts of banks to the bailout needed to save Greece.

Citigroup – Citigroup $2.513 Trillion

Morgan Stanley – $2.041 Trillion

Merrill Lynch – $1.949 Trillion

Bank of America – $1.344 Trillion

Barclays PLC – $868 Billion

Bear Sterns – $853 B

Goldman Sachs – $814 B

Royal Bank of Scotland – $541 B

JP Morgan Chase $391 B


Deutche Bank – $354 B

UBS – $287 B

Credit Suisse – $262 B

Lehman Bros – $183 B

Bank of Scotland – $181 B

BNP Paribas – $175 B

Wells Fargo – $159 B

Dexia – $159 B

Wachovia – $142 B

Dresdner Bank – $135 B

via Moon of Alabama.

What these figures show—I haven’t verified them, but I take them to be correct—is that a rescure of Greece is not beyond the realm of fiscal possibility.

Now you could argue that these comparisons are unfair because the banks paid back their TARP funds.  That’s true, but, as Cannon pointed out, they paid them back largely with other government money.

greece_2457626aThe real reason that the comparisons are unfair is that the bulk of the Greek debt has been transferred from private banks to quasi-public entities.  Greece is not comparable to Citigroup or Morgan Stanley.  Rather the people are Greece are comparable to the people who lost their homes to mortgage foreclosures.


As Greece goes, so go other debtor nations

July 13, 2015

The Greek debt burden is more than the people of Greece can ever repay.

But evidently the creditor nations will not accept this until Greece is bled dry.

Their “austerity” plan is for higher taxes, lower wages and higher prices and the sale of Greek national assets at bargain prices.

Greece is being treated like a nation defeated in war, and, like a defeated nation, it will never prosper until it can free itself from the power of its conquerors.

A trust fund created by Greece’s creditors will sell off 50 billion Euros worth of Greek national assets, with half the money to be used to pay Greece’s debt and half to recapitalize Greek banks.   Greeks will not have a voice in what is sold or at what price.

greece-debt-crisisHeather Stewart of The Guardian recently listed 23 nations that, like Greece, are in an external debt crisis, and 14 at high risk of an external debt crisis.

The 23 nations also in external debt crisis are Armenia, Belize, Costa Rica, Croatia, Cyprus, the Dominican Republic, El Salvador, The Gambia, Grenada, Ireland, Jamaica, Lebanon, Macedonia, Marshall Islands, Montenegro, Portugal, Spain, Sri Lanka, St. Vincent and the Grenadines, Sudan, Tunisia, Ukraine and Zimbabwe.

The 14 high risk nations are Bhutan, Cape Verde, Dominica, Ethiopia, Ghana, Laos, Mauritania, Mongolia, Mozambique, Samoa, Sao Tome e Principe, Senegal, Tanzania and Uganda.

My guess is that Ukraine is the next country in line to lose its national sovereignty to creditors; this is likely as soon as the government no longer needs financing to crush the rebellion in Donetsk and Lugansk.

We Americans should remember that the United States is a debtor nation like Greece, not a creditor nation like Germany, Japan or China.  What happens to Greece today and to Ukraine tomorrow could happen to the USA someday, too, when our debts are in yuan or some other currency instead of dollars.


Beyond Greece, the world is filled with debt crises by Heather Stewart for The Observer.

Global Debt Can’t Be Paid by Briton Ryle for WealthDaily.

The rich are richer, the rest of us are poorer

July 13, 2015

inequality1108k_0Source: The Economist.

Americans of all stripes, from the Tea Party to the Occupy movement, are angry.  They think government doesn’t represent them.

Rep. Alan Grayson, a Florida Democrat, thinks they’re right about that.  He said he knows congressional representatives whose mail was running 1oo to 1 against “fast track” approval of trade agreements who  nevertheless voted for it.

But, he explained, the reason for their anger is more deep-seated—

For most Americans, life simply is getting harder.  This was painfully obvious from a Sage Foundation study last year, following up on an article in the Annals of the American Academy of Political and Social Science.  The study looked at changes in the wealth of American households over a decade, from 2003 to 2013.  The study found that median net worth had dropped by 36 percent, from $87,992 to $56,335.

Rep. Alan Grayson

Rep. Alan Grayson

Let me repeat that: The net worth of the average American household dropped by more than one-third in ten years.  The decline from the 2007 peak was almost 50 percent, in just six years.  (Most of that loss was in the value of one’s home — home is where the heartache is.)

That’s why everyone is so angry.

The net worth decline of someone at the 25th [75th] percentile (meaning that three-quarters of all household are richer than you) was even more extreme — from $10,129 to $3200.  And among the bottom five percent, whose net worth is negative, their debt tripled.

Only the top 10 percent of all Americans improved their standards of living during that decade.  As the study summarized, “wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.”

via Rep. Alan Grayson.

My friends who are content to always vote for the “lesser evil” are correct in one respect.  Things could be worse—a lot worse—than they are now.

But I don’t believe the present situation is sustainable.   The anger of the American people will boil over at some point.  If change for the better seems impossible within the current political and economic system, democracy and constitutional government will be at risk.


Why Is Everybody Angry?  I’ll Tell You Why by Rep. Alan Grayson for the Huffington Post.

The Typical Household, Now Worth a Third Less by Anna Bernasek for The New York Times.

Wealth Levels, Wealth Inequality and the Great Recession by Fabian T. Pfeffer, Sheldon Danziger and Robert F. Schoeni for the Russell Sage Foundation.

Why is the economic recovery so weak?

July 13, 2015

weakrecoverySource: Sentier Research

Why is the current economic recovery so much weaker than in the previous two recoveries?

www-usnews2I don’t claim a profound knowledge of economics, but here’s what I think.

During the time of peak prosperity, the American economy was based on a benign cycle—high wages supported a mass consumer market, which supported high employment.

Since the 1980s, American wages have been stagnant or falling, and Americans maintained their purchasing power by means of borrowing.  But since the 2008 recession, they have reached the limits of their power to borrow and spend.

Big financial institutions and holders of financial assets are investing more in debt instruments or in production overseas than in job-creating enterprises in the United States.  At the same time government at all levels has responded to hard times by cutting spending and employment.

Both the public and private sector are dis-investing in education and training, in scientific research and in the infrastructure necessary to a productive economy.

Barring a change of direction, I expect things to continue to worsen.

How can we the people turn things around?  Being honest about the situation would be the first step.  Government could stop doing harmful things, such as the no-strings bank bailout and pro-corporate trade agreements.  Corrente’s 12-Point Platform is the kind of thing we should be thinking about.



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