Punk Economics

Here's a good explanation of the European debt crisis that's also applicable in the US:



A few points that might warrant further explanation:

First, there are good reasons why it's both more fair and more constructive to require lenders and derivatives speculators to eat losses arising from bad loans, rather than passing them on to innocent taxpayers. A basic concept in the law as it's evolved through the centuries is that, when a transaction or other course of conduct results in harm, if the person who was the primary cause (in this case, the borrower) lacks the financial means to make things right, the next person who should be held liable is the person who was in a position to figure out that there could be a problem but who, rather than investigating the situation and preventing the bad transaction, facilitated it and profited from it. In the present situation, this next person would be the banks that made and securitized the bad loans and especially those that created and sold pools of those loans and who also placed bets that those loans would go bad.

If the bankers are required to eat the losses on the loans and the bets they made on them, they'll be motivated not to make the same mistakes or commit the same frauds again. If, on the other hand, innocent taxpayers are required to pay for bankers' mistakes and frauds, the bankers are given every incentive to do it again. So it's both more fair and more constructive to let the bankers eat the losses they should have known would result, rather than imposing them on innocent taxpayers.

I personally also have no problem requiring borrowers who took out loans that went bad to eat their losses, although I do believe we should have a decent social safety net, so they don't end up on the streets.

Instead, we're doing the exact opposite of what would be most fair and constructive – we're bailing out the bankers and some of the borrowers, at the expense of the people who took no part in any of the foolishness or fraud.

Second, the reason excessive austerity won't help is that it's demand that drives economic recoveries. Even proponents of austerity occasionally slip up and admit this; and it's consistent with actual, historical experience in the US – the fact that the economy has tended to grow and deficits have tended to shrink during Democratic administrations, which tend to favor social safety nets and protections for workers, while the economy has tended to shrink and deficits have tended to grow during Republican administrations, whose policies have favored the 1%.

Giving money to people who already have more than they can spend does not stimulate the economy because they don't spend it. More particularly, rich people know it makes no sense to use the money to create inventory when so few others can afford to buy it, so they know it makes no sense to hire workers to create more inventory. When you give money to rich people during a recession, you encourage not job-creation but money-hoarding, which helps no one other than the rich. Thus, despite – or rather, because of – the fact that so much of the U.S. stimulus has gone to banks and big corps., employment has risen very little, while cash reserves held by those businesses have swollen dramatically. Time and again, "trickle-down" has been proven not to work, and that's why conservatives have abandoned the phrase; but they're still pushing the policy.

(It's ironic, too, that in order to believe that trickle-down could work, you have to embrace something its proponents emphatically reject: namely, you'd have to assume it makes sense for the rich to create products regardless of whether the market demands them, even at the risk that they're products no one would ever want, rather than letting the market – i.e., in this case, the rest of us – decide. I.e., you have to embrace centralized planning, only it's planning by the oligarchs rather than by an elected government.)

As a result of the way we've handled things under the undue influence of the rich, vast sums have been sucked out of the productive economy and pocketed by the oligarchs.

Basically, economics can be boiled down to one metaphor: you generally can't eat a carrot unless someone cultivates one. To the extent we allow the 1% to loot our carrots without doing anything to help grow them, we starve. The same is true vis à vis deadbeats among the 99%; but the 1% have perfected the means to loot our carrots faster and on a vaster scale. And we're not just practicing socialism for the rich; we're literally making crime pay, while impoverishing the people who have been the most economically productive . . . because the latter are the only people with any money left but who still lack (or who have as yet failed to effectively exercise) the political clout of the rich.

Finally, I agree with ar47yrr4p, who commented on the video, " . . . I think it might have been beneficial to mention Iceland and what happened there a couple years ago . . . you see they jailed their bankers and some of their MP's, threw out their government, [and] told the banks to shove it . . . and now Iceland is prospering." The same thing happened in the wake of the S&L debacle that resulted from Reagan's deregulation of those institutions: we liquidated the bad S&L's, prosecuted the fraudsters, and moved on.

Update Re- "Derivatives for Dummies" (What Every Legislator Should Know About How to Fix Our Economy, but Doesn't)

Remember my posts in May, 2009 (here and here) on "Derivatives for Dummies"?

Well, they're still relevant, because we still haven't done anything about regulating the derivatives that were the source of the biggest loss to our economy (no, it wasn't bad mortgages!) – so the problem has only gotten worse since 2008.

Charles Hugh Smith's oftwominds has an updated discussion, with a description of the current state of the looming, derivatives-driven disaster: "[a]ccording to the Bank of International Settlements, as of June, 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, (32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are [still] not transparent or regulated." [Emphasis supplied.]

If you don't know what I'm talking about, read my original posts (links at the top of this post). I don't think I've seen a simpler explanation, and it's not nearly as hard to understand as they try to make it seem.

As the hippies used to say, "where the people lead, the leaders will follow."

The Larger Economic/Political Cycle

"Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to 'take the multitude into their camp' and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history."

That's the first paragraph; it gets even better. E.g., after an incredibly succinct yet enlightening history of economic/political evolution through the ages, he explains,

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. The same is true for America’s $13 trillion added since September 2008 (including $5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and $2 trillion of Federal Reserve “cash-for-trash” swaps).

By Michael Hudson at Counterpunch; much more here.

The Eurozone Crisis

. . . is not about market "discipline," according to Dean Baker:

The people who gave us the eurozone crisis are working around the clock to redefine it in order to profit politically. Their editorials – run as news stories in media outlets everywhere – claim that the euro crisis is a story of profligate governments being reined in by the bond market. This is what is known in economics as a "lie". The eurozone crisis is most definitely not a story of countries with out of control spending getting their comeuppance in the bond market. Prior to the economic collapse in 2008, the only country that had a serious deficit problem was Greece. In the other countries now having trouble financing their debt, the debt to GDP ratio was stable or falling prior; Spain and Ireland were actually running budget surpluses and had debt to GDP ratios that were among the lowest in the OECD. . . . The crisis changed everything. It threw the whole continent into severe recession. This had the effect of causing deficits to explode, since tax revenues plummet when the economy contracts and payments for unemployment benefits and other transfer programmes soar. . . .

* * * * *
People should recognize this process for what it is: class war. The wealthy are using their control of the ECB to dismantle welfare state protections that enjoy enormous public support. This applies not only to government programs like public pensions and healthcare, but also to labour market regulations that protect workers against dismissal without cause. And of course, the longstanding foes of Social Security and Medicare in the US are anxious to twist the facts to use the eurozone crisis to help their class war agenda here. The claim that the countries in Europe are just coming to grips with the reality of modern financial markets is covering up for the class war being waged on workers across the globe. The assertion that this crisis is about market discipline should not appear in a serious newspaper, except on the right side of the opinion page.

More at Al Jazeera. (Dean Baker was among the first observers to identify a US housing bubble in 2002. He was a senior economist at the Economic Policy Institute and worked as a consultant for the World Bank and the Joint Economic Committee of the US Congress, and authored weekly commentaries for the NYT and WaPo.)

UPDATE: Other recent headlines of economic interest:

The Four Companies that Control the 147 Companies that Own Everything (re- the 147 cos., see here).

Iceland is Our Modern Utopia (rejecting a bailout for their banks, the citizens of Iceland took control of their now-resurgent economy).

Germany Builds 2X the Cars & Pays Workers 2X the Wages

Evidence of Market Manipulation in the Financial Crisis

Is Bank of America Holding the US Hostage? (referring to the fact that BoA just moved its derivatives business into its FDIC (i.e. taxpayer) -insured depositary).

Too Big to Stop: Why Big Banks Keep Getting Away with Breaking the Law (the industry has captured the regulators, so the fines are too small to deter).

Resource on ALEC (Where All That Awful Legislation Comes From)

If you think it's a coincidence that legislatures in multiple, Republican-controlled states have been passing bills aimed at busting unions, privatizing state property, "reforming" education, etc., think again. The American Legislative Exchange Council (ALEC) has pre-fabricated dozens of "model bills" that would benefit ALEC's global corporate funders at the expense of the rest of us, and ALEC has been working with conservative politicians to get them enacted.

There's now an excellent website for info re- what ALEC is up to, at ALEC Exposed – pass the word.

A Few Recent Headlines Re- the Economy

. . . that should have appeared prominently in your local corporate media, but mostly didn't:

Republicans Confirm: $30 Billion for Unemployed Would Bankrupt Us, but We Should Extend $600 Billion in Tax Cuts for the Rich (Paul Krugman, "Redo that VooDoo," NYT).

It's All About the Wages: Economy Would be Fine if Everyone Made Their Fair Share (Robert Reich, Alternet). See also 22 Statistics that Prove the U.S. Middle Class Is Being Systematically Wiped Out (Business Insider).

Corporate Media Abet Banksters' Lie that Corporate Communisim Is Working ("Lies Divide, Truth Unites," Dylan Ratigan, The Big Picture).

Goldman Gets Off with Fine Worth One Week of Its Trading Income and a Small Fraction of the $16 Billion It Paid in Bonuses Last Year ("Wall Street: The Banks Are Still the Boss," The Guardian).

Unequivocal, Real-time Evidence of Illegal Stock Market Manipulation (Karl Denninger, Market Ticker, starting about half-way into the video).

The New Finance Bill: A Mountain of Legislative Paper, a Molehill of Reform (Robert Reich).

(And speaking of market manipulation, I hope you've heard of the gummint's Plunge Protection Team?)

Modern Ruin

"On . . . September 25, 2008 the U.S. Government took over Washington Mutual, selling most of it to JPMorgan Chase.

"Roughly a year earlier, at the height of a frenzied economic bubble, Washington Mutual began building a new $1 million branch at 5030 Greenville Ave., just south of Lovers Lane [Dallas, TX]. Just after its completion, the government seized WaMu, and JPMorgan Chase decided not to occupy the building.

"The new building was never opened, never used, and has sat as an empty shell for more than a year.

"On February 20, 2010, Modern Ruin – an exhibition organized by Christina Rees and Thomas Feulmer – will open. The two-day exhibition will be the only use for the million-dollar building before the demolition process begins the following week.

* * * * *

"15 artists will create work inspired by and in dialogue with the building . . . ."

including Frances Bagley, Tim Best, Michael Corris, Thomas Feulmer, Annette Lawrence, M, Margaret Meehan, Tom Orr, Richard Patterson, Cam Schoepp, Noah Simblist, Christoph Trendel, Terri Thornton, Kevin Todora, Jeff Zilm. There's a "reception/intervention" Sat., Feb. 20, 8-11pm, and the exhibition will otherwise be open only Sat. and Sun. Feb. 20 and 21, 12-5pm.

In a related story today, indianexpress.com reports, "JPMorgan Chase & Co said it is cutting up to 14,000 jobs, more than previously disclosed . . . . JPMorgan expects $2.75 billion of savings from Washington Mutual . . . . by the end of 2009, sooner than originally thought."

"While There May Be Complacency on Wall St., . . .

uptown . . . the only question is, when is the next crisis going to happen," says Nobel-winning Joseph Stiglitz.



(Thanks, girl gone mad! And to DeSwiss, who adds this quote:

America is run largely by and for about 5,000 people who are actively supported by 50,000 beavers eager to take their places. I arrive at this figure this way: maybe 2,500 megacorporation executives, 500 politicians, lobbyists and Congressional committee chairmen, 500 investment bankers, 500 partners in major accounting firms, 500 labor brokers. If you don't like my figures, make up your own.

– Robert Townsend, former head of Avis)

More Fun

(Published in 2006.) Available at amazon together with "Dow, 30,000 by 2008", Why It's Different this Time for only $36.60.

Inquiring Minds Want to Know . . .

• Is AIG still selling credit derivatives? (see, e.g., Timmeh, here.)

• Has Goldman Sachs bought any derivatives (from AIG or anyone else) since the AIG bailout (see, e.g., this)?

• If so, what are the terms (i.e., what is G-S betting for or against, and are those derivatives attached to any "insurable interest" of G-S – i.e., if they're hedging risks re- a commodity or whatever that they actually own, that's one thing; if they're simply speculating that, e.g., commercial real estate in general will tank, that's another)?

Huffington on Our Economic Vesuvius

Having recently visited Pompeii, Huffington muses there are two kinds of warning signs: those recognized while there's still time, and those ignored 'til we're buried.

"In the case of Pompeii, the warning signs included a severe earthquake in 62 A.D., continued tremors over the ensuing years, springs and wells drying up, dogs running away, and birds no longer singing. And then the most obvious warning sign of all: columns of smoke belching out of Mount Vesuvius before the volcano blew its top, burying the city and its inhabitants under 60 feet of ash and volcanic rock."

"[T]he . . . tremors were dismissed as 'not particularly alarming because they are frequent in Campania.' And the billowing smoke was quaintly described as looking like an 'umbrella pine.'"

Now, we too are surrounded by economic warning signs that are being rationalized away:

• Unemployment has hit a level beyond the administration's worst projections [reaching double-digits in many states, up to 15.2 percent.] Meanwhile, over 650,000 workers will run out of unemployment benefits come September.
• Credit card defaults have surpassed 10 percent, and in May hit a record high – the sixth straight month that dubious achievement has been reached.
• Foreclosure numbers continue to shatter records. . . . And more than 15 million homeowners now owe more on their homes than they are worth.
• In the first six months of 2009, 675,351 individuals filed for bankruptcy. In June alone, there were 116,365 bankruptcy filings – a 40 percent increase over June 2008.
• Since the recession began, an estimated 2.4 million workers have lost their health care benefits.

And the biggest warning sign . . . is how many of the very people responsible for the economic collapse not only are still in power, but are still lining their pockets with outrageous windfalls – courtesy of the American taxpayer.

According to last week's earnings reports, Goldman Sachs posted a $3.44 billion second-quarter profit, Citigroup earned $3 billion, and Bank of America earned $2.4 billion. On top of this, Goldman Sachs just announced it was setting aside $11.36 billion for employee compensation through the first half of the year. And AIG – which we bailed out to the tune of $150 billion – is apparently doing so well they're ready to set aside $235 million in bonuses.

After the earthquake that severely damaged Pompeii in 62 A.D., it is said that among the first buildings repaired were Pompeii's famous brothels. The metaphor holds. Only in 2009, we call them Goldman, AIG, Bank of America, and Citi. Though that is probably unfair. To the brothels.

More at HuffPo (rock me, Arianna!)

Meanwhile, the nearby, wealthier Herculaneum, was timely evacuated!

GREAT Article on AIG and the Bail-Out

in Rolling Stone.

(Seems like they and The New Yorker are among the few print media left in the U.S. doing real journalism anymore. Wonder if they're suffering as much as the print media owned/eviscerated by conservatives {i.e., most of the rest})?

Could We PLEASE Get this Straight Re- AIG:

IT'S NOT THE BONUSES.

Ok, the bonuses are bad; but they're the LEAST of the problems with what's going on.

AIG is insolvent; it lacks assets or income sufficient to pay off its obligations to its existing creditors.

When you or I get into this situation, if we fail to file bankruptcy, our creditors can force us into it, to provide for an orderly liquidation of our assets and debts. We have to fully disclose all of both. Our assets are sold on terms reasonable under current conditions, and the proceeds are divided fairly among our creditors -- i.e., none of the unsecured creditors get 100% on the dollar owed them, but they all get the same percent -- there's no favoritism.

AND, if you or I get into this situation, NO new creditors come along to give us yet more money. New creditors are on notice that we're insolvent and, guess what, they don't lend us any more money! Our existing creditors can give us more or less time to try to work things out; but ultimately, THEY bear the brunt of their original and/or subsequently mistaken judgments -- not new creditors.

This is what should happen to AIG.

Instead, AIG is NOT in bankruptcy, because its existing creditors would like us taxpayers to step in as new creditors and throw enough new, bailout money into AIG so the existing creditors won't actually have to suffer any losses -- WE will be the losers, instead of them.

So, that's where our tax money's going: to save AIG's existing creditors from the consequences of their mistakes in acquiring debt obligations of AIG. THAT is what is happening right now.

The bonuses are TRIVIAL compared to the amounts being paid to AIG's existing creditors.

AIG is just a conduit. The real robbers are its creditors, Goldman Sachs -- surprise! -- being one of the biggest.

As usual, Elliott Spitzer's nailing it:

The Real AIG Scandal
It's not the bonuses. It's that AIG's counterparties are getting paid back in full.
By Eliot Spitzer Posted Tuesday, March 17, 2009, at 10:41 AM ET

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

More at Slate.com; see also Newsday.

The bonuses are just a diversion.

Cuts from Stimulus Bill: Only the Most Impt. Stuff

I'm starting to wonder if the oligarchs' strategy is to deliberately enrage us masses to the point that either we stop looking in order to avoid having an apoplexy or we resort to sufficient violence to justify using our own army to lock us up in those "detention centers" Halliburton's been building in the U.S.

The "curiously weak" Demtoids' latest excuse is that they have to compromise on the stimulus bill or the Repubs will filibuster it. This is rubbish.

First: let the Repubs filibuster, and let 'em take the rap for it.

Second: the Dems can simply change the rules whenever they like on what's required to bring the bill to a vote; e.g., they could reduce the number of senators needed for cloture to 55% of the Senate -- see William Greider's more detailed explanation here -- or even 50% plus one. Writes Greider, "If Democrats allow the sixty-vote filibuster to survive, it is because they want to keep it as a convenient way to avoid taking responsibility." (Emphasis supplied.)

What's been cut from the stimulus? Among other things, per Gizmodo,

• $2 billion for public broadband access has been totally eliminated. Sorry, "real America," you're gonna keep getting screwed.
• $7 billion for energy-efficient public buildings has been cut in half.
• a fleet of hybrid vehicles for the federal government has also been cut in half, from $600 million to $300 million.
• $50 million for NASA has been totally cut.
• a combined $300 million for scientific research has been totally cut.

Funds for education and the arts have also been cut. Please contact your reps here.

New Meme: "Too Big to Save"

"Fact #1. Too big to save. Bank of America Corp. and Citigroup, Inc. have combined assets of $3.9 trillion, or 43 times the size of the Treasury bailout funds they've received to date.

"Fact #2. Bigger losses ahead. Even before any further declines in the economy, an unusually large portion of their assets are already in grave jeopardy — commercial real estate loans going sour, credit cards loans tanking, auto loans sinking, and residential mortgages turning to dust. Now, as the economy continues to tumble, avoiding much larger losses will be almost impossible.

"Fact #3. Big derivatives players. Bank of America and Citigroup are the nation's second and third largest high-rollers in the derivatives market, with a combined total of $78 trillion in these bets outstanding. That's over ten times the derivatives that Lehman Brothers had on its books when it failed last year.

"Fact #4. They've bet far too much on each other's failure. Bank of America and Citigroup are also the second and third largest participants in the most dangerous derivatives of all — credit default swaps. These are the big bets that financial institutions make on the failure of other major companies."

More here.

Doing Great:

" . . . McDonald's said Monday its 2008 net profit soared 80 percent from a year [ago], lifted by growing demand from consumers seeking low-cost meals in a deepening global recession." More here.

"Simply Because You're Near Me . . . "

Ok, so I appreciate cats' potential.



(Thanks, snarky!)