Monday, August 23, 2010

The TOTAL failure of Predator Class economics

Let me start out with a pitch for one of my more popular papers on the difference between Finance (Predator) Capitalism and Industrial (Producer) Capitalism.

Essentially the take-away message is this: Highly regulated economies wildly outperform the "deregulated" ones because well-written rules allow, protect, and encourage honest enterprise.  This matters because a fascination for the facts is utterly essential in building the parts of a high-quality, environmentally sustainable society.  Dishonest people build shit if they even try, or more likely, destroy the efforts of those who would do it right.
Alan Greenspan And His Disciples Are Intrinsically Terrible Regulators
William Black, Benzinga | Aug. 16, 2010, 4:01 PM 
Neoclassical economists have long been convinced that they would make exemplary regulators – and that the unique advantage they would bring to the task is their knowledge that those that regulated the least would regulate the best.
Consider two crises in which economists controlled regulation – the S&L debacle and the U.S. nonprime crisis. Dick Pratt (Federal Home Loan Bank Board Chairman in 1981-83) and Alan Greenspan (Federal Reserve Chairman in 1987-2006) failed because of bad theory, methodology, and crippling ideology. These deficiencies interacted and led them to adopt regulatory policies that were intensely criminogenic.
Dick Pratt and Alan Greenspan shared an ideological hate for regulation. They both pushed deregulation in circumstances where even neoclassical economic theory predicted would be disastrous. Pratt deregulated at a time when virtually every savings and loan (S&L) was insolvent on a market value basis – which neoclassical economics predicts will maximize “moral hazard.” Greenspan refused to regulate at a time when it was becoming the norm for mortgage lenders to engage in deliberate “adverse selection” – which meant that the “expected value” of their loans was negative.
Deliberate adverse selection is a hallmark of “accounting control fraud” (those that control a seemingly legitimate entity use accounting as their fraud “weapon”). The FBI warned publicly in September 2006 that there was an “epidemic” of mortgage fraud and predicted that it would cause a financial “crisis” if it were not stopped. Greenspan took no meaningful action against the fraud. He was the prisoner of the “efficient market hypothesis.” more
When Wall Street Rules, We Get Wall Street Rules
Dean Baker
Co-Director of the Center for Economic and Policy Research
Posted: August 20, 2010 09:47 AM
The middle class is getting whacked by the Great Recession. Fifteen million people are out of work, another 9 million workers can only find part-time jobs, and millions more have given up looking for work altogether. Those lucky enough to be employed are unlikely to see any substantial wage gains for years to come.
Millions of homeowners are facing the loss of their home and more than ten million are underwater in their mortgage. Most of the huge baby boom cohort is approaching retirement with little other than Social Security to support them, now that the collapse of the housing bubble has destroyed their home equity and much of the rest of their savings.
This pain is infuriating for two reasons. First, this was an entirely preventable disaster. The housing bubble was easy to see. Competent economists had long warned of its dangers.
The second reason why the current situation is infuriating is that we know how to get the economy out of this mess. We just need to boost demand. This can be done either with much more government stimulus, more aggressive monetary policy from the Fed, or pushing the dollar down to boost exports.
If this disaster was preventable and we know how to get out of it, why didn't our leaders try to stop it before it happened? Why don't they take the steps necessary now to get the economy moving again?
The answer to both these questions is simple; the politicians work for someone else. more
And then there is the tragedy of David Stockman, a farmboy from Michigan who should have understood that his role in the Reagan administration was to turn loose the Predator classes so they could more viciously prey on the productive people of Michigan.  He is still with us.  Still as confused as ever.  Taibbi writes in Rolling Stone:
David Stockman and the GOP Welfare State 
I'm a little late in taking notice of this hilarious and extraordinary piece of punditry, but it strikes me that not enough attention has been paid to the recent self-crucifying New York Times editorial written by Ronald Reagan's former budget chief and economic Svengali, the notorious Richie Rich weasel David Stockman. 
Stockman, if you remember, was the perfect Picture of Dorian Gray Republican counter-persona hiding behind the broad-shouldered, muscular cowboy image Reagan projected when he was lecturing the world about how poor people had to give up the welfare tit and do their own damn work. The self-reliant tough-guy act was the public face of Republican economics, but laboring quietly behind the facade was Stockman, a rail-thin bean-counting geek with giant glasses who preached the supply-side lunacy of giving the rich a helping hand in the ostensible hope that wealth would magically trickle downhill. 
Stockman was once the arch-priest of supply-side economics, but he's had a conversion over the years. In a piece blasting the legacy of Republican economic policy entitled "The Four Deformations of the Apocalypse" Stockman essentially argues that Reaganomics evolved into a policy that fused the worst aspects of the traditional economic strategies of both the right and the left: 
Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes... This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. 
The line about "Keynesianism robed in the ideological vestments of the prosperous classes" is a truth that is both brutally accurate and unfortunately a little too subtle for the Tea Partiers and disaffected Republicans who ought naturally to be struck by it with the most violence. Stockman here is on to a basic truth about the direction in which the economy has evolved in the last decades: a seemingly endless campaign of reckless borrowing and money-printing, undertaken with the aim of propping up an Atlas class whose prosperity under Randian/Greenspanian dogma must be guaranteed at all costs. This goes far beyond the original supply-side thinking of cutting taxes to give the employer class an incentive to create jobs. Instead, this is a welfare state on crack, indulging in massive public borrowing to fuel what Stockman calls the "vast, unproductive expansion of our financial sector." more
End Free Trade
by Peter G. Cohen  
"Under free trade the trader is the master and the producer the slave"
--Pres. William McKinley
America is in crisis. According to a recent Rockefeller Foundation report, in 2009 more than one in five American families without a financial cushion experienced a 25% or greater loss of household income over the preceding year. The Economic Security Index is a new measure of security developed by Professor Jacob Hacker of Yale University.
"More than 14 million people are out of work and many more are either under employed or so discouraged they've just stopped looking. Big corporations, sitting on fat profits even as the economy continues to struggle, have made it clear that they are not interested in putting a lot more people back to work any time soon."
--Bob Herbert in a N.Y.Times op-ed July 27, 2010.
Obviously, something is terribly out of whack in our economic system and is causing widespread suffering. There are two major causes of our current lack of jobs. One is automation, which has vastly increased the productivity of average workers, though not their income. The second is Free Trade, which has shipped our jobs overseas making products cheaper to produce, while eliminating millions of American jobs.
Free Trade has an interesting history. The New Republican Party under Lincoln opposed free trade and protected American industry with a 44% tariff during the Civil War. Opposition continued to be the position of the Republican Party until the Eisenhower administration and the onset of the Cold War. Since then the U.S. government has become a strong proponent of free trade supporting GATT, NAFTA and other trade agreements.
Today free trade is being challenged by the increasing chaos of global warming, while the cost of shipping products back to the U.S. has tripled in the last year. At the same time, China is beginning to lose some of its customers to lower labor costs in Bangladesh, Vietnam and Cambodia.
The result of this out sourcing has been to provide lower costs and increase corporate profits, while American labor has fewer jobs and less real income. No wonder the increasing profits of our economic growth in the last decades has gone almost exclusively to the wealthy. Why do we persist in a policy that has so obviously failed the majority of Americans? more


  1. Free trade is not trade as historically practiced and defined. Free trade is based on moving production from place to place for the sake of cheaper labor. Factories are portable ready to be moved again and again if the workers involved and regulations get out of hand.

    Federal Reserve Chairman Ben Bernanke actually summed up the problem. During a congressional hearing during the first Pres Bush stimulus plans, he told Congress that the best way to stimulate the economy is to buy "domestically produced goods" - however this has proven to be a very difficult task.

    When tax breaks come, any extra money that flows into the economy first goes to the retail level and quickly fans out the the places where the goods are produced. And much of it is made outside of the USA. The money does not stay in the U.S. to grow our economy.

    Only local value added economies that have up to about seven levels of added value from the raw product stage to the finished stages and the retail level work. Now our economy based on making money on money instead of making things is burning out. The money products will not longer fill the voids.

    See or from articles in the Baltimore Sun and the Washington Times about - Free trade fails the U.S.