Monday, May 31, 2010

No sentient being believes the banksters anymore

Money management is a matter of retaining confidence.  Banks share a lot of architectural features with churches.  And for good reason.  Both are in the business of selling magic and making promises.  The churches offer you a god who cares what you do and eternal life.  The banks transmute electrons on computer chips into money and into control of the social order.  Both suffer greatly from loss of legitimacy.
The peasants are getting restless 
by gjohnsit
Wed May 26, 2010 at 11:28:45 AM CDT
Strikes and protests from Greece to Spain to Slovenia to Ireland to Romania have followed riots and bloodshed.
The corporate media has reported this unrest with the following narrative:
The Greek people are angry because their government pledged to make cuts in social spending... 
Fox News correctly observed that "Greece lived for years beyond its means, borrowing money and spilling red ink to finance excessive government spending, offer socialized health care and provide lavish wages for federal workers."
It's a rather convenient spin: greedy, lazy, leftists workers that are getting their comeuppance. It's the same narrative that the corporate media rolls out whenever social services are being cut anywhere in the world. 
It's a convenient story because it is a complete story. Nothing more needs to be done. Good guys win. Bad guys lose. Roll the credits.
Except that this isn't the whole story by a long shot.
The Greek protesters outside of parliament were chanting "Thieves, thieves!" That doesn't sound like people angry at budget cuts. It sounds like people angry about their tax money being stolen.  
It turns out that they have every right to be angry. more

Little Timmy proves his "worth"

Outlawing bankster profit centers will not be easy with sneaky little weasels on the job.  Timmy, Timmy--if there is EVER a chance to do the right thing, we can rest assured you will not do it.
Geithner Rushes To Sabotage German Derivatives Ban
Schäuble Prepares New Moves Against Speculators
By Webster G. Tarpley 5-30-10 
The German government is now fully committed to escalating its ongoing counterattack against international financial speculation. These moves represent an historical watershed as Germany becomes the first major economic power to roll back the tide of financial globalization, under which crackdowns on hedge funds, derivatives, and the world gambling casino were branded as taboo for national governments. German Finance Minister Wolfgang Schäuble has announced that the Merkel government is sending a draft bill to the German parliament (the Bundestag) targeting "turbulence" and "volatility" through further regulation of "certain transactions [which] amplify the crisis." The bill reaffirms the most fundamental German measure enacted so far, the May 18 blanket ban on all naked credit default swaps issued against the treasury bonds of the eurozone nations. This ban represents the most aggressive move anywhere in the OECD against these most toxic derivatives, which have figured prominently in the AIG bankruptcy and the recent Goldman Sachs Abacus scandal. They are also the derivatives being widely used by hedge fund hyenas and zombie banks to attack such nations as Greece , Spain , and the rest of the Southern tier of the euro. 
The naked CDS ban protects euroland government bonds, To that would now be added a ban on the naked shorting of those Euro zone government bonds themselves. This means that a speculator wishing to sell a Euro zone government bond short must own that bond in advance. This makes speculation more complex and expensive, and is all to the good. 
Schäuble's new measures also expand protection for certain stocks and for the euro itself. The draft bill would outlaw naked shorts of all German stocks, meaning stocks whose primary listing is at a German exchange. The original May 18 package had banned naked shorts against a list of 10 large German banks, insurance companies, and reinsurance firms. The obvious next step is to ban naked shorting of stocks altogether. From now on, speculators who wish to short German stocks must own those stocks before they sell, making it more difficult and costly for said speculators to operate. The new draft bill would also outlaw the naked shorting of the euro itself in the foreign exchange markets. The Bundestag needs to approve this bill on the fast track, and then do more. more

Taibbi on trying to regulate the big banksters

Think Wall Street doesn't have clout in DC?  Taibbi is brilliant as usual.
Wall Street's War
Congress looked serious about finance reform – until America's biggest banks unleashed an army of 2,000 paid lobbyists
By Matt Taibbi
May 26, 2010 9:15 AM EDT
It's early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act – the massive, year-in-the-making effort to clean up the Wall Street crime swamp – word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once-indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.
The real shocker is a thing known among Senate insiders as "716." This section of an amendment would force America's banking giants to either forgo their access to the public teat they receive through the Federal Reserve's discount window, or give up the insanely risky, casino-style bets they've been making on derivatives. That means no more pawning off predatory interest-rate swaps on suckers in Greece, no more gathering balls of subprime shit into incomprehensible debt deals, no more getting idiot bookies like AIG to wrap the crappy mortgages in phony insurance. In short, 716 would take a chain saw to one of Wall Street's most lucrative profit centers: Five of America's biggest banks (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup) raked in some $30 billion in over-the-counter derivatives last year. By some estimates, more than half of JP Morgan's trading revenue between 2006 and 2008 came from such derivatives. If 716 goes through, it would be a veritable Hiroshima to the era of greed.
"When I first heard about 716, I thought, 'This is never gonna fly,'" says Adam White, a derivatives expert who has been among the most vocal advocates for reform. When I speak to him early in May, he sounds slightly befuddled, like he can't believe his good fortune. "It's funny," he says. "We keep waiting for the watering-down to take place – but we keep getting to the next hurdle, and it's still staying strong." more

The REAL problem is that finance is just too large

There are always problems when one sector of the economy becomes too large and powerful.
Scaling Back Our Bloated Financial Sector
By Zach Carter
May 26, 2010 - 4:38pm ET
It's been apparent for several weeks that the Wall Street reform bill will not cut down the largest U.S. banking behemoths to a safe and manageable size. But individual oversized banks are not the only problem Big Finance poses to the economy—the overall sector is much too large, and if we do not shrink it, we'll be dealing with difficult economic conditions for years to come.
Right before the banking system crashed, the financial sector accounted for an astonishing 40 percent of corporate profits. That share of the economy plunged as banks sought their bailouts, but by the end of 2009, finance was back, again accounting for almost 36 percent of corporate profits.
When the financial industry takes up that much of the economy, it becomes a big problem for two reasons. First, instead of serving as a catalyst for broader economic growth, finance is simply devouring other sectors of the economy. Like money, finance is not a goal in and of itself—it's just a way to support goods and services that make life better. At 40 percent of profits, finance is not supporting that activity, it's destroying it.
Second, for finance to take up 35 to 40 percent of the total profit pie, it has to be engaging in a lot of raw speculative gambling, rather than economically productive lending. That creates a tower of speculation that can easily topple with a single event—and the resulting mess can be very hard to clean up. As Nomi Prins has detailed, between 2002 and 2008, only about $1.4 trillion in subprime mortgages were issued, while about $14 trillion in securitized bets were derived from these mortgages. When the subprime market cratered, all that speculation made a big problem much bigger.
So in addition to cutting the biggest banks down to size, we also need to scale back the entire financial sector. There are a handful of provisions in Wall Street reform packages approved by the House and Senate that would help accomplish that goal. Unfortunately, the bank lobby, and in some cases, the Obama administration itself, is fighting those provisions. more

The Consensus On Big Banks Shifts, But Not At Treasury
By Simon Johnson, co-author 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown
Attitudes towards big banks are changing around the world and across the political spectrum. In the UK, the new center-right government is looking for ways to break them up:
“We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.”
The European Commission, among others, signals that a bank tax is coming; presumably, as suggested by the IMF, this will have higher rates for bigger banks and for banks with less capital. And other European officials are increasingly worried by the lack of capital in German banks, by the recent reckless lending sprees in Ireland and Spain, and by the dangers posed by banks that are much bigger than their home countries (e.g., Switzerland).
Yet top Obama administration officials refuse to change their opinions in the slightest; they have dug in behind the idea that they represent the moderate center on banking policy. This is a weak position; it is simply a myth with no factual basis – the people who pushed effectively for more reform over the past few months were the center, not the left, of the Democratic party. more

Banking split essential to avoid new financial crisis, warns OECD adviser
'We need to separate capital market banking from standard commercial banking. That's the most basic lesson of the crisis,' says Adrian Blundell-Wignall
Larry Elliott, economics editor, in Paris, Thursday 27 May 2010 11.33 BST
The global economy will be plunged into a second and even more serious crisis unless banks are split into separate retail and speculative arms, a senior policymaker from the west's leading thinktank said today.
Adrian Blundell-Wignall, special adviser on financial markets to Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development, said that without a basic reform of banks "the lesson from the crisis was that it was not big enough".
Blundell-Wignall, speaking in a personal capacity at the OECD's annual forum in Paris, said one of the big obstacles to better global governance was "institutional capture" of policymakers by the leading global financial institutions. more

Are Goldman Sachs and the Megabanks Able to Wipe out an Entire Economy with a Keystroke?
Scott Thill
Thu, 27 May 2010 00:00 EDT
How artificial intelligence and robotrading pose a growing threat to the global marketplace. 
"We have found no evidence that these events were triggered by 'fat finger' errors, computer hacking, or terrorist activity, although we cannot completely rule out these possibilities," a recent Securities Exchange Commission (SEC) report on the so-called May 6 "Flash Crash" that wiped out a cool trillion in a mere half-hour weakly admitted. "Much work is needed to determine all of the causes of the market disruption." 
That's another way of saying that it remains only the market makers that caused the largest single-day point decline in Dow Jones history who actually know where the bodies are buried. The rest of us, including the SEC, have a Sisyphean task of sifting through mountains of dense data. But regardless of who ends up on the end of possible criminal proceedings, the SEC is sure that the whole cluster stock was seriously exacerbated by the robot traders executing light-speed electronic transactions via supercomputers, while exposing our hyper real economy as an Internet worked casino. If anything, the Flash Crash proved that market makers like Goldman Sachs and plenty more playing both sides of securities could be capable -- with the high-priced help of math and computer science Ph.Ds crafting up proprietary, recursive algorithms -- of wiping out any corporation's stock, perhaps any nation's economy, in a comparative instant with just the press of a button. 
"It was actually amazing watching it all happen," Gina Sanchez, Director of Equity and Asset Allocation Strategy for Roubini Global Economics, told AlterNet by phone. "We went from risk-aversion to risk-seeking in the matter of an hour. But it doesn't bother me so much that the algorithms went after the bids. They were doing what they're supposed to do, which is seek out arbitrage opportunities. What concerned me was how the bids got out there in the first place." more

Friday, May 28, 2010

Those electronic miracles come at a cost to Producers

Here endeth the race to the bottom--or is it.
iPad Factory in the Firing Line
Worker Suicides Have Electronics Maker Uneasy in China
By Wieland Wagner

A series of apparent suicides has shaken the management of Foxconn, an electronics manufacturer that builds parts and assembles products for many Silicon Valley firms. Hundreds of thousands of people live and work at a Foxconn factory complex in southern China, in what critics say are sweat-shop conditions.
It's shortly after seven in the morning, a half-hour before the morning shift. Young Chinese workers file past gray-uniformed guards, pressing their corporate IDs on the electronic gates and waiting for the green light. Then they hurry through the labyrinth of the gray factory halls and workers' dorms.
Around 300,000 people work here, in the southern Chinese city of Shenzhen, outside Hong Kong, on a gigantic factory complex belonging to the Taiwanese firm Foxconn. Another 120,000 people work at a smaller complex several streets away. They build cult products for global digital brands like Apple, Nintendo and Dell, ranging from the iPhone and iPad to the Notebook. Many sacrifice their health; others, even their lives.
Ma Xiangqian, 18, was part of this peculiar Foxconn world, where everything is numbered: buildings, machines, component parts, finished products and, of course, people. For wages of up to 1,940 yuan per month (€230, or $285), the young man from Henan province spent his 12-hour shifts shoving plastic pieces into a machine that formed casings for Apple computers. Then he went home to sleep with nine colleagues in a room of one of the many dormitory blocks on the factory complex. more

Europe is getting very serious about solar

Developing Desertec
European Dream of Desert Energy Takes Shape

By Cordula Meyer

Can the Sahara Desert really meet Europe's voracious appetite for energy? The Desertec solar power project aims to do just that, but a host of obstacles remain. Overly optimistic expectations are now being scaled down as the project starts to take shape.
When the sun rises and it's still hazy over Andalusia, the future is particularly visible. That's when beams of light as thick as tree trunks and as sharp as lasers slice through the haze. They come together just below the tops of two towers, the taller of which rises 162 meters (531 feet) into the sky, taller than Cologne Cathedral. These light beams are not being emitted by some UFO, but are in fact the core of the most advanced solar power plant in the world.
The towers are surrounded by close to 2,000 mirrors that face the sun. Each mirror has a surface area of about 120 square meters (1,290 square feet) and, like flowers, they follow the light, to the sound of a rattling motor that orients them toward receivers up in the towers. The bundled solar energy, which reaches a temperature of 250 degrees Celsius (482 degrees Fahrenheit), strikes steel pipes through which water is conducted. The water vaporizes and drives a turbine. The facility, known as PS20, is the world's largest solar power tower and generates enough electricity for 10,000 households.
There is not a cloud in the sky on this spring morning, 20 kilometers (12.5 miles) west of Seville. "It's easy today," Enrique Sales Rodriguez says with satisfaction, as the turbine roars and the tower runs at full capacity. Rodriguez, an engineer, monitors the technology from a control room at the base of the tower. He reacts quickly whenever large clouds appear in the sky, making adjustments to the system to extract as much energy as possible from the rays of the sun. Everything is designed to increase the harvest of light. Trucks equipped with large blue cleaning brushes are constantly roaming through the rows of mirrors. "We clean 24 hours a day," says Rodriguez. more

Monetary policy for beginners

This is an interesting historical primer to the basic arguments over monetary policy.  This guy gets the essential arguments straight. And he is a LOT more entertaining than I.
The Bankster-Gangster Crowd..Murdering People for over 2,000 Years
International bankers saw that interest-free scrip would keep America free of their influence, so by 1781 banker-backed Alexander Hamilton succeeded in starting the Bank of America. After a few years of "bank money", the prosperity of "Colonial Scrip" was gone. Benjamin Franklin said, "Conditions were so reversed that the era of prosperity had ended and a depression set in to such an extent that the streets of the Colonies were filled with the unemployed!" Bank money was like our FED money. It had debt and interest attached.


More on the austerity ghouls

And just think, these crazy people believe they are being sober and responsible.
Deficit Hawk Hypocrisy Is Getting Unbelievable
Marshall Auerback | May 26, 2010, 5:12 PM | 1,400 | 32
How the elites are vying to undo the social safety net — and hurt our chances for recovery.
Harold Meyerson is spot on: “Of all the gaps between elite and mass opinion in America today, perhaps the greatest is this: The elites don’t really believe we’re still in recession. Or maybe, they just don’t care.” What is even more galling is that, having been the greatest beneficiaries of the government’s largesse over the past 2 years, these very same people now decry the government’s “irresponsible” and “unsustainable” fiscal policy.
The collective amnesia and moral turpitude of these elites is truly mind-boggling.
Why do we have a deficit of about 10% of GDP right now when it was less than 2% about 3 years ago? The reasons are: the Obama stimulus, the TARP, and the slower economy (which arose in response to a major financial crisis, not because the government began an irrational and irresponsible spending binge). A slower economy leads to lower revenues (less income=less taxes paid since most tax revenue is based on income, and lower tax brackets) and higher spending on the social safety net.
Conveniently lost in all of this furor about the deficit are the beneficiaries of this recent government largesse. It’s certainly not the unemployed or the vast majority of people who do not work in the financial services industry. more

Just think, there are still folks worrying about inflation

I wonder what it will take to get the to worry about the real economic problems.
US money supply plunges at 1930s pace as Obama eyes fresh stimulus
The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.
By Ambrose Evans-Pritchard
Published: 9:40PM BST 26 May 2010
The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said. more

The uber-banksters are still dictating policy

That is one nice thing the Predators have going for them--there never seems to be any penalties for royally screwing up.
The Cult of Subprime Central Bankers
Dean Baker
The world is suffering from the worst downturn since the Great Depression. The crisis has left tens of millions unemployed in the U.S., Europe, and elsewhere. The huge baby boomer generation in the United States, now on the edge of retirement, has seen much of its wealth destroyed with the collapse of the housing bubble.
It would be difficult to imagine a worse economic disaster. Prior periods of bad performance, like the inflation ridden seventies, look like mild flurries compared to the blizzard of bad economic news in which we are now enmeshed.
None of this is new. People don't need economists to tell them that times are bad. However, what the public may not recognize is that the same people who caused this disaster are still calling the shots. Specifically, there has been little change in personnel and no acknowledgment of error at the central banks whose incompetence was responsible for the crisis.
Remarkably, this crew of incompetents is still claiming papal infallibility, warning governments and the general public that bad things will happen if they are subjected to more oversight. Instead, the central bankers and their accomplices at the IMF are dictating policies to democratically elected governments. Their agenda seems to be the same everywhere, cut back retirement benefits, reduce public support for health care, weaken unions and make ordinary workers take pay cuts.
Given how much they have messed up, it is amazing that these central bankers have the gall to even show their face in public. They are lucky that they still have jobs -- and very good paying ones at that. (Many of the boys and girls at the IMF can retire with six figure pensions at the age of 50.) Ordinary workers, like teachers, autoworkers, or custodians, would be fired in a second if they performed as badly as the world's central bankers. more

Thursday, May 27, 2010

The austerity ghouls gave us THIS

The worst money supply plunge since the Great Depression.  The next "economist" who openly worries about inflation should be shot on general principle.
The Worst Money Supply Plunge Since The Depression Means A Double Dip Is Now A 'Virtual Certainty'
Vincent Fernando, CFA | May 27, 2010, 3:18 AM 
The stock of U.S. money as measured by 'M3' money supply fell to $13.9 trillion from $14.2 trillion during the three months ending in April.
This 9.6% annualized contraction is unprecedented in the post-Depression era, and shows how, in this sense, America isn't printing more money. There are actually less dollars in the system since U.S. money supply is crashing, even well into the recent economic recovery.
The positive take on this is that we don't have to worry about either inflation or the Fed tightening significantly any time soon.
The negative take is that this crashing money supply will lead to both deflation and a double dip recession:
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said. more

The banksters dodged a bullet

I'll bet very few were actually worried about meaningful regulation.
Wall Street's Victory Lap
Simon Johnson
MIT Professor and co-author of 13 Bankers
Posted: May 26, 2010 08:56 AM
By now you have probably realized -- correctly -- that "financial reform" has turned into a victory lap for Wall Street.
When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they -- and Congress -- manifestly have failed to do.
Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers).
There is only one small chance for any sensible progress remaining -- and you are about to see this crushed in conference by the supporters of unfettered big banks. more

The banksters are engineering a global disaster

The is simple no possible good outcome when the austerity ghouls insist the citizens pay off bank fraud.
The Greek People are the Victims of a Carefully Engineered Financial Extortion Racket
by Olivier Besancenot and Pierre-François Grond
Global Research, May 19, 2010
Le Monde (original in French) - 2010-05-14
What is happening in Greece concerns all of us. The people are paying for a crisis and a debt that are not their own. Today it is the Greeks, tomorrow it will be others, for the same causes will produce the same effects if we allow it.
First and above all, we express our full and unconditional solidarity with the people who are suffering from an austerity plan without precedent combined with contempt and an arrogance bordering on racism. The strikes and demonstrations are legitimate, and we support them. This is not the crisis of the Greek people, it is the crisis of the world capitalist system. What the Greek people are experiencing is revealing of today’s capitalism. The plan dictated by the European Union and the International Monetary Fund (IMF) rides roughshod over the most elementary rules of democracy.
If this plan is implemented, it will result in a collapse of the economy and of peoples’ incomes without precedent in Europe since the 1930s. Equally glaring is the collusion of markets, central banks and governments to make the people pay the bill for the arbitrary caprice of the system. [French President] Nicolas Sarkozy still dares to talk of the need to regulate the market, although all the measures he implements are more liberal than ever. The movement is accompanied by a deadening consensus of the Right and the Left. The plan is designed by European governments of the Right and Left – and by Dominique Strauss-Kahn, the managing director of the IMF, an institution that has ravaged the Third World for decades and is now attacking Europe. A plan that is implemented by a Socialist government, [Greek Prime Minister] George Papandreou's, the French side of which is adopted by the UMP [Union pour un Mouvement Populaire, a centre-right party] and the SP [Socialist Party of France] members of parliament combined. more
See also: Austerity comes to USA

Wednesday, May 26, 2010

Interesting Keiser

I am not so enchanted with Max's worldview but this video is interesting.  In part one, he outlines the reasons why Merkel's move to ban naked short selling should be applauded.  In part two, he interviews a guy who believes the current operations of the markets are so damaging, they should be considered on par with any other military threat.  These are amazing conclusions because Keiser and friends are dedicated Predator Class apologists.

Some humor from the Guardian

The very idea that good economic policy could have ever come from the folks who also invented naked short selling is fundamentally absurd.  But folks who actually see the humor in this absurdity are rare.  So enjoy!
Why heed the fickle gods of traders in underpants?
I've been swotting up the City – and naked short-selling is the least of its absurdities. We need our own FDR to tell it like it is
Marina Lewycka, Tuesday 25 May 2010 20.00 BST
Can't you just see them in their designer underpants, lolling around the greasy trading halls, these predators of global finance calculating new, fiendish ways to rob us decent, hard-working folk of our measly hard-earned pensions and savings? No matter that stock exchanges are falling, established businesses are going bankrupt, hundreds have lost their homes and thousands their jobs, cities are going unplanned, parks unmowed, students untaught, crims uncaught – there's still shedloads of money to be made out there.
A year ago it would have seemed incredible to me that you could borrow shares and sell them on straightaway, before you'd even paid for them, then wait until the price drops and buy them back for less than you sold them for, and return them to the lender, pocketing the difference. It's called short-selling, and it's all perfectly legal. My next novel is partly set in the City, so I've been swotting up on what goes on there. Believe me, the underpants are the least of it.
But wait! As the tempo steps up and temperatures rise in trading rooms, even the underpants are ripped off, and there they are, pale City-white flesh luminous in the glimmer of computer monitors, sweltering stark bollock-naked – naked short-selling for all they're worth. Actually, I made up the bit about the underpants. Naked short-selling means you sell shares you don't own without even borrowing them – without even being able to show they're available for sale. Being undressed while you do it hardly seems more implausible.
You don't have to be a financial genius to realise that selling millions of shares – especially if you don't actually own them – can force their value down, enabling you to snap them up later at bargain basement prices. This, we're told, manipulated the markets and drove down the value of government bonds across Europe. Now who's this dumpy blonde striding into the trading hall wearing high heels and carrying a big cane? It's Angela Merkel, calling for a ban on naked short trading. Go Angela! Smack their naughty bottoms! Tell them to get their keks on! more

Bailing out the banksters (again)

Lest anyone think that the crises in the Eurozone is about setting wasteful governments on a path to honest prosperity, this piece describes the real beneficiaries of these bailout schemes.
Who are the real winners in Europe's bailout?
It's supposed to be the people of Europe's poorer nations. But it's actually rich countries and their banks
On Sunday, the European Union and the International Monetary Fund announced they were creating a $955 billion fund to rescue eurozone economies that find themselves in financial peril. This announcement came less than five days after the EU had decided to make $140 billion available to Greece to aid in its recovery.
What few people realize is that the banks holding a substantial portion of Greece's $430 billion of government debt are not being asked to take a single dollar haircut to their investment. This is highly unusual for restructurings that involve the IMF. Typically, to receive IMF funding, a country must engage in not only budgetary and fiscal tightening, but also haircuts to the banks and other debt investors. The idea that companies and countries can restructure without debt investors losing a penny is a relatively new phenomenon. Hank Paulson and Ben Bernanke pretty much invented it when they bailed out Fannie Mae and Freddie Mac, Bear Stearns, Citibank, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of America, Morgan Guaranty and AIG and assured that all of their creditors were paid off at 100 cents on the dollar. And the Greek government debt works out to almost $170,000 per household, which, by definition, is unsustainable and needs restructuring. 
People may think that the beneficiaries of this EU largess are the poorer countries of Europe and their people, who have suffered through high unemployment and domestic economies weakened by the crisis. But if the banks lending to countries such as Greece, Portugal, Ireland, Spain and Italy are going to be repaid in full from the proceeds of these EU and IMF programs, then maybe we need to rethink who actually is benefiting from these programs. This is not lost on the people of Greece, 100,000 of whom took to the streets last week to protest cuts in their government's budget, which was part of the Greek bailout plan. Nor is it lost on Wall Street: on Monday, European bank stocks shot up an average of 20 percent -- a sign that traders are well aware of who the primary beneficiaries of the bailout plan will be. more

Tuesday, May 25, 2010

The problem with free cross-border capital flows, i.e., hot money

A few days ago, Ian Walsh noted that there is actually a lot of money out there, which has created a really devilish dynamic:

There is a lot of hot money in the world economy, more hot money than there are truly safe investments. The financial bubble and collapse could be summed up as “trying to get AAA security with higher than AAA returns”. The paper was almost all produced in an attempt to get better than Treasury bond returns while claiming to be as secure as Treasury bonds. Obviously, the paper wasn’t, and it all crashed out.

There is still too much hot money which wants AAA security, and better than AAA returns. They demand that governments find a way to give it to them. One way is for the Fed to give them free money, then borrow it back from them (we’ll lend to you at zero, you lend back to us at 3%. Free money!) But there are limits to these sorts of games.

Why? Well, that’s the contradiction. Because the hot money is both scared by the prospects of high deficits (government defaults) and by the economy itself crashing out because, well, there isn’t enough stimulus. If you’re scared of too much stimulus and you’re scared of too high deficits, well, you’re caught between the proverbial rock and a hard place.

Currently the pressure is mostly on the austerity side, with an IMF style crackdown in both Greece and Spain, with a healthcare bill in the US which “saves money” and so on.

The problem is that actual private income in the US, for example, is about 500 billion lower than it was pre-crisis.

The economy breathes fine, as long as we don’t unplug the life support.

And unplug the life support is what everyone except the Chinese seem to want to do.

Those of you who actually have some money to invest may want to read the entire article, entitled Crunch Time: Two Economic Scenarios for the rest of the year.

Yesterday, Walsh discussed the fundamental conundrum any country finds itself in once it accepts economic neo-liberalism's free and unfettered flows of capital (i.e., hot money) across borders:

Here’s the catch-22. Investors are worried about deficits, so they get out of bonds or demand higher rates and attack currencies. The response to that by governments is to slash spending: austerity. But austerity will crash out the economy, which will hurt the stock market and weaken the state’s ability to repay bonds.

As long as governments feel they are at the mercy of the hot money, and as long as the hot money insists that governments both be fiscally austere and have good economies, there is no way out.

Notice, that while China has significant issues, it does not have this issue because it does not rely on hot money. No smart government should. Currency flows are far too fast, not only should there be a tax on all currency flows but every smart country should make it essentially impossible to move large amounts of money in and out of its economy quickly without taking a huge haircut. Flighty money is more trouble than it’s worth. Money that wants to come, and stay, and really invest in the economy should be welcome, but fast money should be heavily discouraged. The harm done by such money is far larger than the good.

Likewise the hot money needs to be taught a lesson. Such “investors” seem to think that they deserve higher than market returns in exchange for lending money. The people lending money are expected to bear all the risk, and expected to get less than market returns (since they’re giving the surplus to the hot money). Would you borrow money under such circumstances? Of course not, which is why no one who doesn’t have a sure thing does, which is why the economy doesn’t grow, because the idle money thinks it deserves most of the returns and none of the risk, and entrepreneurs aren’t interested in that deal.

Once you accept the reality of this relatively simple conundrum, it's not hard to figure out the proper policy responses: a "Tobin" tax on all financial market transactions, especially foreign exchange, and favorable tax treatment for investments in the real economy, especially the building of renewable energy sources. The real problem, of course, is political: overcoming the immense power of the financiers and rentiers, and their chorus of sycophants in the economics profession that continue in their slavish devotion to the discredited ideas of economic neo-liberalism.

The austerity ghouls in USA

After giving the public's spare change to the crooked banksters, it was inevitable that someone would come to the "brilliant" conclusion that this should be paid for by raiding Social Security.  3,2,1...
Whacking the Old Folks
By William Greider / The Nation
In setting up his National Commission on Fiscal Responsibility and Reform, Barack Obama is again playing coy in public, but his intentions are widely understood among Washington insiders. The president intends to offer Social Security as a sacrificial lamb to entice conservative deficit hawks into a grand bipartisan compromise in which Democrats agree to cut Social Security benefits for future retirees while Republicans accede to significant tax increases to reduce government red ink.
Obama's commission is the vehicle created to achieve this deal. He ducks questions about his preferences, saying only that "everything has to be on the table." But White House lieutenants are privately talking up a bargain along those lines. They are telling anxious liberals to trust the president to make only moderate cuts. Better to have Democrats cut Social Security, Obama advisers say, than leave the task to bloodthirsty Republicans.
The president has stacked the deck to encourage this strategy. The eighteen-member commission is top-heavy with fiscal conservatives and hostile right-wingers who yearn to dismantle the retirement program. The Republican co-chair, former Senator Alan Simpson, is especially nasty; he likes to get laughs by ridiculing wheezy old folks. Democratic co-chair Erskine Bowles and staff director Bruce Reed secretly negotiated a partial privatization of Social Security with Newt Gingrich back when they served in the Clinton White House, but the deal blew up with Clinton's sex scandal. Monica Lewinsky saved the system. more

Will the austerity ghouls finally provoke a political reaction?

The cranky old right-winger of the London Telegraph certainly thinks so.  Me, I am hoping there is a more sane response than a return to Marxism.
Europe's deflation torture is a gift to the Far Left
If Europe’s ultra-Left has so far reaped little dividend from the great "Crisis of Capitalism", this will surely change as the eurozone’s 1930s policies of wage deflation sap the credibility of the governing centre and the EU itself.
By Ambrose Evans-Pritchard
Published: 6:20PM BST 23 May 2010
The tragedy of the interwar years in Germany was that the Social Democrats - then the world’s foremost socialist party - became fatally tainted by acquiescing in Bruning’s deflation torture from 1930 to 1932. They did so, of course, because they dared not confront the orthodoxies of the Gold Standard.
By then the fixed-exchange mechanism had gone horribly wrong - in much the same way that EMU has gone horribly wrong - because the surplus countries were not recycling demand to maintain equilibrium. It had become a job-destruction machine. The result in Germany was the Reichstag election of July 1932 when the Communists and Nazis won over the half the seats.
As historian Simon Schama wrote over the weekend in the Financial Times - "The world teeters on the brink of a new age of rage: we face a tinderbox moment" - there is typically a lag-time between economic shocks and social fury. Luckily there is no Fascist threat this time. It is the (more benign) Marxist Left that stands to gain. more

Monday, May 24, 2010

The latest good sense from Ellen Brown

What is extra cool about Ms. Brown is that she is modernizing monetary ideas that are in most cases, over 100 years old.
The Mysterious CAFRs: How Stagnant Pools of Government Money Could Help Save the Economy
Ellen Brown
Author, "Web of Debt"
Posted: May 21, 2010 03:31 PM
For over a decade, accountant Walter Burien has been trying to rouse the public over what he contends is a massive conspiracy and cover-up, involving trillions of dollars squirreled away in funds maintained at every level of government. His numbers may be disputed, but these funds definitely exist, as evidenced by the Comprehensive Annual Financial Reports (CAFRs) required of every government agency. If they don't represent a concerted government conspiracy, what are they for? And how can they be harnessed more efficiently to help allay the financial crises of state and local governments? The Elusive CAFR Money
Burien is a former commodity trading adviser who has spent many years peering into government books. He notes that the government is composed of 54,000 different state, county, and local government entities, including school districts, public authorities, and the like; and that these entities all keep their financial assets in liquid investment funds, bond financing accounts and corporate stock portfolios. The only income that must be reported in government budgets is that from taxes, fines and fees; but the investments of government entities can be found in official annual reports (CAFRs), which must be filed with the federal government by local, county and state governments. These annual reports show that virtually every U.S. city, county, and state has vast amounts of money stashed away in surplus funds. Burien maintains that these slush funds have been kept concealed from taxpayers, even as taxes are being raised and citizens are being told to expect fewer government services. more

The austerity ghouls are riding again

And they are just as wrong as they have always been.
Get a Grip: Austerity Does Not Produce Prosperity
Robert Kuttner
Co-founder and co-editor of The American Prospect
Posted: May 23, 2010 08:05 PM
Austerity has suddenly become the universally prescribed cure for the fallout from the financial collapse. If widely adopted, it will prove worse than the disease.
The price of the rescues of Greece, Spain and Portugal will be brutal deflation. The International Monetary Fund, which supposedly learned from its earlier mistakes of imposing austerity on already damaged economies, is back in cold-bath mode, demanding higher taxes and dramatically reduced spending as its pound of flesh.
The European Central Bank and key leaders of the E.U. are promoting economic pain as the price of relief. Here at home, President Obama has sworn off serious new outlays for jobs or aid to the states, and is using his fiscal commission to pursue a bipartisan consensus on spending cuts and higher taxes.
The nations of the European Union are being treated as the object lesson in the costs of profligacy. This is supposedly what happens when you provide decent social benefits to regular people. In fact, most of Europe had reasonably well-disciplined budgets until a made-on-Wall-Street economic crisis took down their economies. more

More proof, if any were needed

That economics, in sprite of all the fancy math, is more often than not just another branch of religion.  Hudson is especially good at pointing this out.
Temple of Friedman Set to Drive Out Jesus
The Chicago Boys' Free Market Theology
Many academics recently received a petition signed by 111 University of Chicago faculty members, explaining that “without any announcement to its own community, [the University] has commissioned Ann Beha Architects, a Boston firm, to remake the Chicago Theological Seminary building into a home for the Milton Friedman Institute for Research in Economics (MFIRE) and has renewed aggressive fund-raising activity for the controversial Institute.”
It would be hard to find a more fitting metaphor than what the press release characterizes as “conversion of the Seminary building into a temple of neoliberal economics.” Even the acronym MFIRE seems symbolically appropriate. The M might well stand for Money in Prof. Friedman’s MV = PT (Money x Velocity = Price x Transactions). And the FIRE sector comprises finance, insurance and real estate – the “free lunch” sector whose wealth the Chicago monetarists celebrate.
Classical economists characterized the rent and interest accruing to the FIRE sector as “unearned income,” headed by land rent and land-price (“capital”) gains, which John Stuart Mill described as what landlords made “in their sleep.” Milton Friedman, by contrast, insisted that “there is no such thing as a free lunch” – as if the economy were not all about a free lunch and how to get it. And the main way to get it is to dismantle the role of government and sell off the public domain – on credit. more

I'm not so sure that Predator criminality is a left-right issue

And neither does the author of this piece--in spite of the title.  But rest assured, the Predators WILL oppose financial reform with all the cunning they can muster.  Why? Because there is simply no way they can have the incomes they have and run an honest enterprise.  Corruption is built into the business plans of Predator operations and that will not be changed without a BIG fight.
The Rightwing-Wall Street Alliance to Blunt Economic Reform
Twisted Minds
Attempts to rewrite the history of the economic crisis come in many forms; some come from the reactionary right, others from centrists and the liberal left – but all are pursued in the service of neoliberal corporatism. I’ve written previously on the efforts of right-wingers to blame the housing bubble on “big government” and community activists on the left who sought increased funding for affordable housing. Diatribes from Sean Hannity, Rush Limbaugh, Dana Perino, and other right-wingers in recent weeks seek to blame the 2008 collapse, not on Wall Street, but on the Community Reinvestment Act, Fannie Mae and Freddie Mac, and Democrats like Chris Dodd and Barney Frank, all of whom pushed homeownership for the poor and working class.
The right’s attacks are strategically timed to coincide with the discussion of Wall Street reform in Washington. As the thinking goes, if government can be effectively blamed for the economic collapse, then Wall Street can stave off long unwanted pressure for regulation and change. 
Condemnations of “big government,” however, represent little more than the paranoid fantasies of those with an axe to grind against anyone even remotely linked to “the left.” In this blanket campaign, left radicals like Frances Fox Piven and Robert McChesney are lumped together with corporate socialists like Barack Obama and Nancy Pelosi, and blamed for causing America’s current economic downturn (see Glenn Beck’s recent speech to the NRA, and the recent Nation article, “The Mad Tea Party”). more

The Producers are taking it in the chops...again

It not enough that the Predators scorn the Producers--they take away their means for survival.
April mass layoffs rise led by manufacturing
Fri May 21, 2010 11:08am EDT
(Reuters) - The number of mass layoffs by U.S. employers rose in April led by manufacturers who shed workers even as the economy began to recover.
The Labor Department said the number of mass layoff events -- defined as job cuts involving at least 50 people from a single employer -- increased by 228 to 1,856 as employers shed 200,870 jobs on a seasonally adjusted basis.
The number of mass layoffs in the manufacturing sector totaled 448 resulting in 63,616 initial jobless benefit claims, the department said. That was more than 24,000 higher than the previous month, but well below the 125,000 initial jobless claims in the manufacturing sector a year ago.
The Labor Department said the manufacturing sector accounted for 23 percent of all mass layoffs and 28 percent of the initial claims filed in April. more

Friday, May 21, 2010

The Obama administration as “managed democracy"

As regular readers know, I recently spent a week enjoying Jonathan's hospitality. We of course engaged in one long, deep conversation on politics, economics, and the current state of affairs in the United States and the rest of the world. It allowed me to fill out some ideas I've been cogitating, with much insight provided by Jonathan's mastery of the published works of Thorstein Veblen. Forthwith is the first fruit of that week's collaboration and discourse.

Financial reform has passed, but it is a botched job. Health care reform has been signed into law, but it is also a botched job that does nothing for actual health care and which actually makes health care insurance an even riskier proposition for the middle class. Despite hopes for fundamental change, the Obama administration is quietly continuing to defend much of the executive overreach of the Bush regime. How can this be? Why is it so difficult to actually get the public interest served by public servants? Why is there no sense of urgency about unemployment, especially unemployment among the lowest income brackets, which are being ravaged by combined unemployment and underemployment rates of over fifty percent? Why is there no interest in the types massive infrastructure program that would create millions of new jobs while propelling the United States into a sustainable future? Why are political, media, and business elites mystified and terrified about the growing voters’ revolt against political incumbents?

In his important 2008 book, Democracy Inc.: Managed Democracy and the Specter of Inverted Totalitarianism, Princeton professor emeritus of politics Sheldon S. Wolin has identified and dissected the emergence of a new type of authoritarian political system in the United States.
The new constitution conceives politics and governance as a strategy based upon the powers that technology and science (including psychology and the social sciences) have made possible. Exploitation of those powers enables their owners to redefine the citizenry as respondents rather than actors, as objects of manipulation rather than as autonomous.
This new political type has arisen as the revolving door between government and the private sector as spun faster and faster, infusing the government with the morals and social customs of the American managerial class, while suffocating the older, more noble idea of civic virtue. In short, American politics has been “managerialized.” To fully understand this, Wolin first recounts the history of the concept of civic virtue and the emergence of the polis:
Over the centuries politicians and political theorists-starting with Plato's Republic have emphasized disinterestedness, not personal advantage, as the fundamental virtue required of those entrusted with state power. In recognition of the temptations of power and self-interest a variety of constraints -- legal, religious, customary, and moral -- were invoked or appealed to in the hope of limiting rulers or at least inhibiting them from doing harmful or evil acts. At the same time rulers were exhorted to protect and promote the common good of society and the well-being of all of their subjects. With the emergence of democratic ideas during the seventeenth and eighteenth centuries, it fell to the citizen to assume responsibility for taking care of political and social arrangements, not only operating institutions but "cultivating" them, caring for them, improving them, and, ultimately, defending them. Democracy presumed the presence of a "popular culture," not in the contemporary sense of packaged pleasures for a perpetually adolescent consumer, but culture in its original meaning: from the Latin cultus = tilling, cultivating, tending. The ideal of a democratic political culture was about cooperating in the care of common arrangements, of practices in which, potentially, all could share in deciding the uses of power while bearing responsibility for their consequences. The assumption was that if decision-making institutions of a community were left untended, all or most might suffer.
Wolin does not get into enough details to actually name names, but the basic trajectory of America’s descent is clear enough. In the era immediately after World War Two, the U.S. political establishment -- or at least, the foreign policy arm of it -- was dominated by an easily identfied group of patricians, beginning with Walter Isaacson’s The Wise Men (Dean Acheson, Averell Harriman, George Kennan, John McCloy Jr., Charles Bohlen, and Robert Lovett) who hand-crafted the post-war posture of the Cold War, and ending with David Halberstam’s The Best and the Brightest (Dean Rusk, Robert McNamara, Clark Clifford, George Ball, McGeorge Bundy, Walt Rostow, William Bundy and others), who muddied the U.S. political establishment in the rice paddies of Vietnam.

Of these latter, Ford Motor Co. CEO McNamara stands out, for bringing modern business management theories and practices, including cost-benefit analysis, into the Pentagon, and the government generally. However, Wolin does not mention McNamara and his Whiz Kids (including Charlie “Tex” Thornton, founder of Litton Industries, America's first major corporate conglomerate since the Morgan trusts of the late 1800s and General Motors of the 1920s). Instead, Wolin fingers the Reagan administration as the first major example of business managers transforming American politics.

The examples of McNamara and Lovett show there have always been businessmen present in top levels of the U.S. government. This particular point -- of exactly when a business mentality gained ascendance in U.S. government -- is more than an interesting academic question. It brings us to an subject that Wolin fails to consider: just how American capitalism itself has been transformed. Simply stated, there has been a fundamental shift from industrial capitalism to financial capitalism, and it has huge implications for cultural and political norms of behavior, not just in government, but in the entire society. Basically, while it has become the dominant type of culture in the United States, business culture, as foreseen and explained by Thorstein Veblen, has degenerated to lower forms of barbarism, dragging the rest of society down with it. Veblen’s understanding of the politico-sociological, as well as economic, differences between industrial producers, as distinct from financial predators, gives us a far more powerful means of socio-economic analysis than Marxism does, which fails to distinguish between productive and predatory economic and social behaviors. Marxism’s obsession with ownership of the means of production blinds Marxists to the crucial differences and deadly conflict between real industry and predatory financial and monetary systems.

According to Wolin,
Corporate culture might be defined as the norms and practices operative at various levels of the corporate hierarchy that shape or influence the beliefs and behavior of those who work in a particular institutional context. Today corporate culture is not confined to the corporation. Managed democracy depends upon managers, and managers are the product and creators of corporate culture. The question is this: what are the characteristics of the culture that corporate managers bring to government? How are the corporatists likely to approach power and governance, and how does that approach differ from political conceptions?
Wolin’s approach here is basically that of Veblen’s institutional analysis. Wolin compares corporate culture to the civic culture he discussed above.
In contrast, the ethos of the twenty-first-century corporation is an antipolitical culture of competition rather than cooperation, of aggrandizement, of besting rivals, and of leaving behind disrupted careers and damaged communities. It is a culture for increase that cannot rest (= "stagnation") but must continuously innovate and expand. It accepts as axiomatic that top executives have to be, first and foremost, competition-oriented and profit-driven: the profitability of the corporate entity is more important than any commonality with the larger society. "The competitor is our friend," according to an Archer Daniels Midland internal memo," and the customer is our enemy." Enron had "visions and values" cubes on display; its chief financial officer's cube read, "When Enron says it will rip your face off, it will rip your face off."
The ADM internal memo exactly defines the political culture in the U.S. Congress, and its uneasy relationship with its citizen constituents. Remember how Joe Lieberman was welcomed back by his fellow Senators after running as an “independent” to beat back Ned Lamont’s challenge. And “the customer is our enemy" mentality goes a long way in explaining Rahm Emanuel’s notorious antipathy to political progressives.

A little later, Wolin writes,
The essential skill that a corporate executive brings to his firm and to a top-level governmental position is the skill of devising and implementing strategies of aggrandizement. . .
Here, Wolin’s work would be made vastly more powerful if he incorporated Veblen’s insight about the essential difference between “industry” and “business.” As economist Douglas W. MacKenzie explains in a November 2007 paper, Veblen examined the functional and cultural differences between financial and industrial institutions, contrasting the profit-driven process of financial capitalism, to the workmanship and science-driven machine process of industry. In general, once an industrial firm falls under the sway of “business managers” and financiers, its focus becomes one “of acquisition, not of production; of exploitation, not of serviceability”.

Moreover, unlike industrialists, business managers and financiers dislike the uncertainty and unpredictability created by technological innovation. American folklore is rife with stories and myths of breakthrough technologies that were suppressed by corporate behemoths. Rather than creating wealth through increased and less imperfect production (here, think of the Japanese concept of kaizen), business managers and financiers instead seek to acquire wealth “by a shrewd restriction of output,” causing privation and unemployment. This actually establishes and perpetuates a process of financial sabotage of industry. In the first chapter of Veblen’s 1921 book, The Engineers and the Price System, he writes:
Without some salutary restraint in the way of sabotage on the productive use of the available industrial plant and workmen it is altogether unlikely that prices could be maintained at a reasonably profitable figure for any appreciable time. A businesslike control of the rate and volume of output is indispensable for keeping up a profitable market and a profitable market is the first and unremitting condition of prosperity in any community whose industry is owned and managed by business men. And the ways and means of this necessary control of the output of industry are always and necessarily something in the nature of sabotage: something in the way of retardation, restriction, withdrawal, unemployment of plant and workmen, whereby production is kept short of productive capacity. The mechanical industry of the new order is inordinately productive. So the rate and volume of output have to be regulated with a view to what the traffic will bear; that is to say, what will yield the largest net return in terms of price to the business men who manage the country's industrial system.
(To see how mainstream economics today veers far and violently away from Veblen’s ideas, pick up any introductory economics textbook and read the first two or three paragraphs, which invariably describe economics as the study of “how society allocates scarce resources.” Such a definition immediately launches the student away from any serious consideration of modern industry and its near-miraculous productive potentials, into pastures more congenial to the ever status-conscious “leisure class.”)

The reality and effects of industrial sabotage by financiers and business managers is all too familiar to anyone who has examined the effects of the leveraged buy-out binge and corporate raiding of the 1980s, which mainstream economists have strived to hide from public view behind academic arguments that these predatory financial practices actually represented a “more efficient use of capital” that “increased shareholder value” – a crime of active misinformation that the economics profession has yet to answer for. (Two excellent books that rip the economists’ pretty façade to shreds are the 1992 series of investigative reports by Philadelphia Inquirer Pulitzer Prize-winning reporters Donald L. Barlett and James B. Steele, America: What Went Wrong?; and the 1990 history by Max Holland of how one of America’s largest machine tool companies was destroyed in a series of buyouts, When the Machine Stopped : A Cautionary Tale from Industrial America, which has been republished under the new title, From Industry to Alchemy: Burgmaster, A Machine Tool Company.)

In short, Veblen saw finance as an acquisitive process similar to the barbaric practices of leisure classes in earlier civilizations. (For further discussion of Veblen’s views on this point, see this diary and its thread on EuroTrib: The Credit Bubble theory of the Business Cycle (I: Veblen) especially this comment.)

It is worth peering even deeper into the business manager’s mindset, since it has come, since the 1980s, to so completely dominate America’s political elites, and because it has absolutely crucial implications for the making and practice of national economic policies. James Crotty, a heterodox economist at the Political Economy Research Institute (PERI), has a July 2003 paper, The Neoliberal Paradox: The Impact of Destructive Product Market Competition and Impatient Finance on Nonfinancial Corporations in the Neoliberal Era in which he examines a number of negative effects on general economic performance by large U.S. non-financial corporations (NFCs) (not exactly industrial firms, but as close as we can hope to get, as we shall see as Crotty’s analysis unfolds). Crotty stresses
two aspects of the changing relation between financial markets and large NFCs. The first is a shift in the beliefs of financial agents, from an implicit acceptance of the Chandlerian view of the large NFC as an integrated combination of illiquid real assets – that is, physical and organizational assets that cannot be sold for cash quickly and without a major loss in value – assembled to pursue long-term growth and innovation, to a “financial” conception in which the NFC is seen as a ‘portfolio’ of liquid subunits that home-office management must continually restructure to maximize the stock price at every point in time. The second is a fundamental change in management’s reward structure, from one that linked pay to the long-term success of the firm, to one that links it to short-term stock price movements.
The 1960s conglomerate merger movement initiated a change in the perception of the proper role of top management, from one in which managers were expected to be experts in the main business of the firm, to an evolving view of top executives as generalists who knew how to buy and sell subsidiaries as business conditions changed. This shift remained incomplete, however, until the hostile takeover movement of the 1980s, which forced NFC insiders to either divest units whose stock price fell below the level demanded by Wall Street or yield control of the firm to corporate raiders. Raiders relied primarily on debt to finance takeovers, while managers of targeted firms often defended their turf by loading the firm with debt-financed stock buybacks and special cash dividends to deter potential raiders. These developments pushed NFC debt burdens to historic highs. They also forced a change in managerial goals, from concern with the long-term success of the firm to a short-term obsession with keeping the stock price high enough to deter a hostile takeover.

NFC payments to financial markets.jpg

Crotty’s phrase, “the Chandlerian view of the large NFC as an integrated combination of illiquid real assets” is extremely important because it points to something that very few economists ever consider: the immense difficulty and length of time required to assemble a well-functioning industrial enterprise. Consider that it takes at least ten years to train a competent tool-and-die maker. Or how long it takes to train a competent airline pilot. Why would any industrial enterprise want to invest in years of educating someone, if that industrial enterprise is likely to be sold off like a commodity in a few years?

In fact, as an industrial enterprise grows and matures, its trained and skilled employees make the surrounding community a pool of technical talent that is highly conducive to the creation of other industrial enterprises that use the same or similar skills. That’s why certain towns and cities become known as centers for specific industrial products. Sheffield in England was known for its highly specialized alloy irons and steels. Delft in Holland is known world-wide for its blue pottery. The Hocking River valley in southern Ohio became known in the 1800s as a center of brick manufacture. The Connecticut River valley was known for almost a century as “Precision Valley” because it was a center of designing and making high-precision metal-working machine tools. Detroit became known for making automobiles. Today, almost every high-speed, high-volume printing press in the world comes from Heidelberg, Germany. The southern part of the San Francisco Bay area became known as Silicon Valley.

How much is it worth to have a locale or city renowned for the technical excellence of its local enterprises and workers? What value can be assigned to having a few hundred wizened old men around who can train entire generations of new, highly-skilled workers? Or who have a few different ideas than their boss, and decide to start up their own company? The value must be very high, because thousands of national, regional, and local governments around the world have spent hundreds of billions of dollars over the past two decades trying to create “incubators” of new technologies, new companies, and new “employment opportunities.” Such a great irony: finance capitalism is unleashed and destroys the social organizations of industrial enterprises in which technical excellence is revered and rewarded, and the public worldwide has been forced to pay billions of dollars to fund a poor replacement.

How is it possible that political elites would allow financiers and business managers to pillage and destroy industry, and then spend billions trying to repair the damage that could have been prevented in the first place by simply preserving the regulatory legacy of Franklin Roosevelt’s New Deal? Why did the Democratic Party turn its back on organized labor in the 1970s and 1980s, and embrace instead Friedman / Thatcher / Reagan policies of “free trade” and “free markets” that have destroyed the American working class?

“Destroyed the American working class” is not hyperbole. It is now widely known that Americans’ earnings have stagnated for the past four decades. The December 2007 report Economic Mobility: Is the American Dream Alive and Well?, by the Economic Mobility Project of The Pew Charitable Trusts showed conclusively that American men now have less income than their fathers’ generation did at the same age. Even more troubling is that income mobility has been falling over the same period – meaning that it is less and less likely that a person born into a poor family will ever earn enough to also avoid being poor. (Trends in U.S. Family Income Mobility, 1967–2004, Federal Reserve Bank of Boston Working Paper No. 09-7, September 2009.) Why is it that American political elites, including President Obama and his economics team, seem so unresponsive to this national calamity?

Here again, we can turn to Veblen for answers. Political elites are members of the Leisure Class or Predatory Class, along with financiers and business managers, according to Veblen. The Leisure Class sets themselves apart from the unwashed masses with a refusal to get their hands dirty doing the actual work of procuring and producing the necessities of everyday life.
The institution of a leisure class is found in its best development at the higher stages of the barbarian culture; as, for instance, in feudal Europe or feudal Japan. In such communities the distinction between classes is very rigorously observed; and the feature of most striking economic significance in these class differences is the distinction maintained between the employments proper to the several classes. The upper classes are by custom exempt or excluded from industrial occupations. . . .

. . . . A distinction is still habitually made between industrial and non-industrial occupations; and this modern distinction is a transmuted form of the barbarian distinction between exploit and drudgery. . . .

During the predatory culture labour comes to be associated in men's habits of thought with weakness and subjection to a master. It is therefore a mark of inferiority, and therefore comes to be accounted unworthy of man in his best estate. By virtue of this tradition labour is felt to be debasing, and this tradition has never died out. On the contrary, with the advance of social differentiation it has acquired the axiomatic force due to ancient and unquestioned prescription.
--The Theory of the Leisure Class, Chapter One – "Introductory." (The text of the book in full has been made available online by Project Gutenberg at
What makes Veblen far superior to Marx is that Veblen recognizes that the essential characteristic of modern industrial societies is a culture of tools, workmanship, and machine processes.
In more than one respect the industrial system of today is notably different from anything that has gone before. It is eminently a system, self balanced and comprehensive; and it is a system of interlocking mechanical processes, rather than of skilful manipulation. It is mechanical rather than manual. It is an organization of mechanical powers and material resources, rather than of skilled craftsmen and tools; although the skilled workmen and tools, are also an indispensable part of its comprehensive mechanism. It is of an impersonal nature, after the fashion of the material sciences, on which it constantly draws. It runs to "quantity production" of specialized and standardized goods and services. For all these reasons it lends itself to systematic control under the direction of industrial experts, skilled technologists, who may be called " production engineers," for want of a better term.

This industrial system runs on as an inclusive organization of many and diverse interlocking mechanical processes, interdependent and balanced among themselves in such a way that the due working of any part of it is conditioned on the due working of all the rest. Therefore it will work at its best only on condition that these industrial experts, production engineers, will work together on a common understanding; and more particularly on condition that they must not work at cross purposes. These technological specialists whose constant supervision is indispensable to the due working of the industrial system constitute the general staff of industry, whose work it is to control the strategy of production at large and to keep an oversight of the tactics of production in detail.

Such is the nature of this industrial system on whose due working depends the material welfare of all the civilized peoples.
--The Engineers and the Price System, pp 52-53.
In his 1993 book Elegant Technology: Economic Prosperity from an Environmental Blueprint, Veblen scholar Jonathan Larson zeros in on the exact point of interface between human beings and the modern industrial system of mechanical processes:
Nothing can be manufactured without the use of tools. Hand-made is only a term to describe goods that are made with primitive tools. Some items, like sweaters and furniture, can be made with primitive tooling and still compete in the marketplace.

Most items can only be manufactured with advanced tooling. There are no primitive options for making a color picture tube . . . Understanding the levels of sophistication in tools is to comprehend a very great deal about industrialization.

. . . . Sophisticated products can only be made with sophisticated tools. A computer cannot be made with a stone axe. The primary producer motivation for increased sophistication in tools is to permit the production of sophisticated products. Peoples who can fabricate sophisticated tools usually dominate peoples who cannot.

. . . . The most interesting fact about tools is that it takes tools to make tools. Making primitive tools with sophisticated tools is a simple proposition. Making a pair of pliers is easy if there is a steel mill and a drop forge. Making sophisticated tools with simple tools is an extremely difficult proposition. The ability to go up the ladder of tool sophistication is the essential story of industrial development.
As we noted earlier, Veblen draws a distinct line between business and industry. So, a curious thing happens as societies progess industrially. In his 1904 book, The Theory of the Business Enterprise, Veblen observes
Conversely as regards the men in the pecuniary occupations, the business men. Their exemption from taking thought of mechanical facts and processes is likewise only relative. Even those business men whose business is in a peculiar degree remote from the handling of tools or goods and from the oversight of mechanical processes as for example bankers, lawyers, brokers, and the like have still at the best to take some cognizance of the mechanical apparatus of everyday life they are at least compelled to take some thought of what may be called the mechanics of consumption. . . Their exemption from mechanical thinking from thinking in terms of cause and effect is therefore materially qualified. But after all qualifications have been made the fact still is apparent that the everyday life of those classes which are engaged in business differs materially in the respect cited from the life of the classes engaged in industry proper. There is an appreciable and widening difference between the habits of life of the two classes and this carries with it a widening difference in the discipline to which the two classes are subjected. It induces a difference in the habits of thought and the habitual grounds and methods of reasoning resorted to by each class. There results a difference in the point of view in the facts dwelt upon in the methods of argument, in the grounds of validity appealed to, and this difference gains in magnitude and consistency as the differentiation of occupations goes on. So that the two classes come to have an increasing difficulty in understanding one another and appreciating one another's convictions ideals capacities and shortcomings. (pp 316-18)
Now, if Veblen is correct about 1) how the Predator Class abhors actually having to do real work, and in fact does not even like to think about it, and 2) political elites are part of the Predator Class and embody that class’s ways of thinking and understanding the world, what would be the results as manifested in national economic policies? Would we expect to find any sympathy for the plea of industrialists to prevent Wall Street from forcing them to focus on quarterly and annual earnings gains? Would we expect to find any understanding of the opposition of industrialists to short selling of stocks or floating exchange rates and currency futures trading? Would we expect to find any consideration for industrialists’ desire for low, fixed interest rates below the natural usury point? Would we expect to find any serious consideration of a coherent national industrial plan that would revive the nation’s manufacturing base? How much weight would we expect political elites to actually give to the views and concerns of trade unions of machinists, steelworkers, assembly line workers, maids, and bus drivers? Would we expect to find any real concern for a national employment picture where the unemployment rate in the working class is five times higher than in the Leisure Class?
unemployment by income

Earlier, I quoted Veblen on the origins of the Leisure Class. Veblen’s reference to "barbarian" is crucial, because the more advanced a society becomes industrially, the more removed from real industry the elites become. In a very real sense, the elites become more barbaric. This devolution of business culture is clearly seen in how the meme of "ripping their faces off" has spread from the trading floors of Wall Street in the 1980s (as captured in Michael Lewis's first book, Liar's Poker: Rising Through the Wreckage on Wall Street), to the rest of the business world. As the elites drive the culture downward into ever more primitive barbarism (think of what modern art and modern architecture have become), the very idea of civic virtue comes under explicit attack. We see this in the assaults by "conservatives" on the idea of the common good being a "liberal codeword" for nazism or socialism, i.e., Glen Beck's recent warning to his followers about the dangers of their churches preaching the gospel of social justice.

Which brings us back to the theme Sheldon Wolin develops in Democracy Inc.: Managed Democracy and the Specter of Inverted Totalitarianism. Whether or not President Obama is a sell-out is not the real question we must face. The real question is: what are we going to do about the corporate culture that has come to dominate our politics?