Some of the noteworthy econ-finance news of late

Every week there are a number of articles and blogs I would like to comment on, but never do. Here are a few of the most noteworthy from the past two or three weeks.

A tip-o-the-hat to Jesse's Café Américain for posting Financial Fukushima: US Big Bank Derivative Bets Double in Six Years To $236 Trillion, based on a summary of the Sept 2012 report from the Bank for International Settlements, As Stirling Newberry commened about two years ago, all that the Obama administration has really accomplished is to get Wall Street willing to play with itself again.

According to the FDIC, at the end of June 2012 all depository institutions held derivatives with a notational value of $224,998 trillion. However, such bets are not spread across the entire banking system. Banks with at least $10 billion in assets hold virtually all derivatives, securities with a notational value of $224.803 trillion. While the FDIC insures deposits in some 7,200 banks and savings associations, only 59 FDIC-insured institutions have deposits of more than $10 billion. Your little community bank, savings association or credit union likely has no derivatives department.

Derivatives are simply bets. They finance no factories, no research, no colleges, no homes and no cars. Any jobs they produce are incidental and inconsequential relative to the potential risk they represent, the risk that credit exposure has been incorrectly figured by hundreds of billions of dollars if not more. Since big banks hold virtually all derivatives, and since taxpayers can face massive costs if big banks fail, it follows that something should be done to limit taxpayer risk....

Derivatives have nearly doubled, but has bank lending? The major rationale for derivatives, after all, is that they're supposed to help financiers better manage risks, thus making credit more readily available.  I have more than a strong suspicion that if derivatives had such a legitimate role, we would be inundated with commercials from Skank of America and CitiCorpse boasting about how much more lending they've done to help America's economic recovery.
 

CFO Magazine's website had a shocking admission from a financial wunderkind: Credit Swaps – A Travesty of a Mockery of a Sham.

I now believe that the credit default swap market may not be a reliable indicator of anything – it’s completely flawed, and serves very little economic purpose. What’s changed my mind? News last week that Markit Group, the creator of CDS indices, is creating a new CDS index that will include three CDS contracts that don’t exist.

This makes it screamingly obvious the Obama administration has learned NOTHING from the financial crash. A major cause of the crash was that Wall Street had begun, in its voracious search for commissions and fees, to create mortgage backed securities based on mortgages securities that did not exist. These were called Collateralized Debt Obligations, or CDOs, and Michael Lewis provided an excellent explanation of how these damn things were created and why, in his 2010 book The Big Short: Inside the Doomsday Machine. But Wall Street is up to its same old tricks, creating junk paper by abusing and misusing its social function of creating and allocating credit.


Wall Street and the banksters being out of control is not a new problem. Back in the early 1990s, two investigative reporters from the Philadelphia Inquirer, Donald Barlett and James Steele, wrote a series of articles on the financial looting then destroying hundreds of industrial companies and communities accross America. Thousands people requested additional copies of the series, and Barlett and Steele released the series as the book, America: What Went Wrong?  Now they have written a new, updated book, The Betrayal of the America Dream, detailing how the financial looting of America has evolved over the past two decades. Amy Dean of Truthout interviewed them this past Wednesday, and people really need to understand the title: The Betrayal of America's Middle Class Was a Choice, Not an Accident.

"One of the myths out there is that high wages paid to union workers are driving these jobs offshore. We make the point that in a whole series of key manufacturing sectors - like the auto industry - workers in places like Germany and Japan make more money through wages and benefits than autoworkers in this country. The idea that just high wages are the reason that companies are going offshore is complete malarkey. The main reason is the incentives provided by foreign governments; and then, when companies bring their product back to this country, there's essentially no tariff on it."

Turns out Romney's pal is one of the worst financial looters. Dr. Eileen Appelbaum reported on Truthout on September 20 that Marc J. Lede, the guy who hosted Romney when Romney made his now infamous remarks to a bunch of rich pricks that 47% of Americans will never be self-responsible and self-reliable, has made millions forcing raided companies into failure.

The private equity firm that Leder co-founded, Sun Capital, has more than once driven one of its portfolio companies into bankruptcy - shedding liability for the company's pension plan and reducing its debt - only to have another of its units buy the company out of bankruptcy. Normally, owners lose their investment in a bankruptcy, but this maneuver allows Sun Capital to retain ownership of the portfolio company after having stiffed the company's creditors and thrown its workers and retirees onto the mercy of a government agency for their retirement income.

Just this past November, Sun Capital took Friendly's, the iconic family restaurant and ice cream parlor it took private in 2008, into Chapter 11 bankruptcy protection. Friendly's used the bankruptcy to jettison the pensions of nearly 6,000 employees and retirees. Outrageous as this seems, Friendly's also sold itself out of bankruptcy to another affiliate of Sun Capital. A key part of Sun Capital's restructuring plan involved shifting liability for the pension plan to the federal government's Pension Benefit Guaranty Corporation (PBGC).

The inferior performance of the American health system from 1970 to 2010, relative to other industrialized countries, has been once again documented, this time in a new study by Oxford University. The Abstract of the study,  A Warrant for Pain: Caveat Emptor Vs. the Duty of Care In American Medicine, C. 1970-2010, states:

Bad ethics can make for bad economic outcomes. Bad ethics are defined hedonically as the infliction of pain on others for private advantage. The infliction of pain is often justified by ‘Just World Theories’, which state that everyone gets what they deserve. Market liberalism (and its theoretical underpinning in neoclassical economics) is one theory of this kind. As an example, the micro and macro underperformance of the American health system c. 1970-2010 is explained in terms of the shift in policy norms from the fiduciary norm "first do no harm" to the neo-liberal market norm of "let the buyer beware" (caveat emptor) since the 1970s.

The Oxford study concludes:

...what the medical analogy really shows, is that neither an interpersonal relationship, nor a strict code of professional practice are sufficient. Even in medicine, where the norm of care is so powerful, it is inadequate to counteract the ravages of market forces. What is needed in this area of personal service for the duty of care to be effective, is an explicit rejection of the norm of caveat emptor, of the license to exploit counterparty ignorance.

Two thirds of the gains in U.S. productivity have been wasted in increased income inequality. Paul Krugman summarized an April 2012 study by Larry Mishel of the Economic Policy Institute, The wedges between productivity and median compensation growth, which systematically dissects the reasons for worker income stagnation since 1973. Krugman notes that "the incomes of typical workers would be 30 or 40 percent higher than they are if inequality hadn’t soared." My own estimate, based on projecting average weekly earnings from 1980 to 2010 growing at the same rate that earnings grew in the three decades before Saint Ronnie Raygun, was that family incomes would be nearly double what they are now.


The bottom fifth of U.S. households have expenses that are double what they earn, according to a new study from the Bureau of Labor Statistics.  David Dayen had the scoop on FireDogLake on Thursday, September 27: Expensive To Be Poor: Expenses Twice as Much as Income for Bottom 20% of US Households.

Meanwhile, the net worth of the richest Americans grew by 13 percent in the past year to $1.7 trillion, according to a Reuters wire report on the most recent Forbes magazine tally of the filthy rich.

There are 114 million households in USA. If that &1.7 trillion had been evenly distributed, each household would have had $14,912 more in income last year. That's just one year, folks. If one half of that $1.7 trillion had gone to the bottom one fifth of households instead, each of those households would have had $37,280 more in income. Do you think that would have solved the problem of households earning half of what their expenses are? Do you think the present weak economic "recovery" might have a lot more oomph?

The rich are as much a danger to a self-governing republic as a standing military. I have been arguing for almost a year now that we need to revive this fundamental idea that created America. Consider sentence 1 in paragraph 6 of James Madison's Vices of the Political System of the United States, notes Madison made to prepare for the Constitutional Convention. Those who "possess the great pecuniary resources." In the next sentence: keeping people in poverty is another bad idea that endangers a republic. 

AmericaBlog featured a funny but scary video the Huffington Post put together of Republican vice-presidential candidate and would-be serial grandma starver Paul Ryan pushing his Randian vision of American "makers" being overwhelmed by too many "takers."  Sorry, it's not a YouTube video, so you'll have to follow the link.

Paul Ryan is an Ayn Rand acolyte. But shortly before he died, Chuck Colson issued a video warning that Ayn Rand is satanic, Atlas Shrugged and So Should You. What does that make Paul Ryan?

It really is a serious cultural problem, how deeply corrupted American christianity has become. A Congressmen professing economic ideas any educated person a century ago would have immediately recognized were a complete rejection of Christ's social gospel, now running as a vice-presidential candidate, and not a peep is heard from leading USA clergy and churchmen?

Former Senator Alan Simpson got his Paul Ryan on last week. Simpson, of the B.S. Commission on deficit reduction (that B.S. would be Bowles-Simpson) - dropped his mask last week and was caught on film growling “I get so damn sick and tired of listening to the little guy, the vulnerable, the veteran.”

Simpson's whining reminds me of the anonymous ass-hats in the Obama administration who back at the beginning of July complained that they were "bored" with hearing about home foreclosures.

Amazingly, Erskine Bowles may be the next Treasury Secretary. Bowles, the other half of the B.S. Commission, is on Obama's shortlist as the next rich prick to replace Tim Geithner as Secretary of the Treasury. David Dayen at FireDoglake wrote on October 1, Treasury Rumors: Replacements for Geithner on Either Side a Fairly Sorry Lot.  

USA is burdened with the worst rich elites in the world. Richard Eskow, of Campaign for America's Future, took a brief look at America's rich, and what he found was not pretty. Hedge Fund Hype, Wall Street Horoscopes, and Drop-Top Jets: The Magical Minds of the “Radical Rich”

This mosaic of data points illustrates an economy that increasingly rewards the wrong skills. It suggests that a growing number of rich and powerful people don't really know what they're doing. Their wealth isn't based on knowledge, or inventiveness, or diligence. They've entered the upper-income strata through salesmanship, and an ability to manipulate the political process for their own ends.

They're good at convincing people they're good. They're good at getting government favors. But they're not very good at what they're paid to be good at - running banks, turning businesses around, or coming up with new ideas.

Jordan Weissmann, associate editor at The Atlantic, reports that the myth of the American entrepreneur is greatly exagerated: Think We're the Most Entrepreneurial Country In the World? Not So Fast.