I am sorry to go all AWOL lately. I'll try to post something substantative over the weekend. My temporal balance sheet looks a great deal like Lehman's (LEH) financials. Plus, despite the generous antidotes provided by Yves Smith, the events of the past few weeks have me twitchy and disoriented, reading obsessively but barely capable of drooling. I think I speak for a lot of us who've been on the pessimistic side of the financial blogosphere these last few years in saying I wish we had been wrong. (I wish the mighty who are now falling had paid us some mind, too.)
Friday's big news is the hint of a bail-out to end all bail-outs. I often have mixed feelings about Robert Reich's commentary, but I commend to you his piece today.
There is no question that we are going to spend a lot of public money to address the current crisis. We have already put a very extraordinary amount at risk. The question we should be asking is not whether or how much, but to whom and for what. The financial crisis we are facing is a symptom of a much larger economic and social crisis. Wall Street is not the source of the pain. On the contrary, the financial sector has been put this decade primarily in the service of hiding, literally of papering over, unsustainable trends in the current account, income distribution, human and physical capital deterioration, and the sectoral composition of the American economy. The conventional wisdom is that this is a financial crisis, and that so far "Main Street" has been largely insulated from the catastrophe. That is rubbish. The cancer is on Main Street, and the tumor has been growing there for years. Wall Street provided drugs to hide the pain and keep us going, palliative but not curative. What is happening now is those drugs are wearing off. The American economy is fundamentally unsound, and has been for some time. We would have noticed sooner, were it not for financial methamphetamine conjured by mad scientists in lower Manhattan from a whirlwind of foreign central bank money.
I think we'll only get one shot to set things right by throwing a ton of money at the problem, so we'd better think carefully before we throw it at symptoms rather than causes. Trying to figure this out in a week before Congress goes off to reelect itself strikes me as ambitious. Broadly, my view is that if we are going to legislate, Congress should empower regulators to declare systemically important firms insolvent, write off existing common and preferred, fire incumbent management and unilaterally convert debt to equity as far up the capital structure as they need to go until the firms are unambiguously well-capitalized, with little or no public money required. Going forward, investors should understand that firms that are too big to fail are too big to be debt-financed, and government enforcement of debt claims against such firms will be limited. If economies of scale are real, equityholders should be glad to reap them. Otherwise markets function better anyway when populated by small actors who compete rather than by behemoths who dominate. The government should not subsidize the many negative externalities of scale. Members of the Pigou Club might suggest that bigness should be taxed and diversity subsidized.
As far as the money is concerned, throw it at infrastructure. Increase worker bargaining power by offering Federally funded retraining sabbaticals for any worker over thirty who decides they want to retool. I'd rather see a new WPA than a new RTC. If it is true that during a debt deflation, the government can spend freely without fear of inflation, let's spend in a way that balances the economy, not in a manner that tries to ratify the imbalances that brought us here in the first place.
There's no such thing as a choice-free bailout. The government's largesse will go to some and not to others, and we have to decide. Don't believe self-styled technocrats who claim that science or the market tells them who deserves the tax- (or inflation-) payers' dollar. In a bail-out, there are winners and losers, and we get to pick. I think we should focus on a simple goal: Restructuring the economy so that the vast majority of Americans can afford a middle-class lifestyle with very little leverage on household or government balance sheets. That may be a radical suggestion in 2008, but our grandparents would have considered it only common sense.
This article has 23 comments:
- bbzz24
- 243 Comments
Sep 19 05:54 AM- WEBISKING
- 173 Comments
My Website
Sep 19 07:19 AM- anarchist
- 121 Comments
Sep 19 09:31 AM- alajac
- 109 Comments
My Website
Sep 19 10:13 AMHOW TO FIX THE ECONOMY
a plan to stimulate the economy, lower taxes, start paying off the National Debt, alleviate poverty and decrease crime
by replacing our OLD economic system with a NEW system based on
a new and debt-free U.S. currency to replace Federal Reserve Debt-Money,
a 0.5% tax on electronic transfers to replace the Federal Income Tax and the IRS,
and $1000 per month privatization compensation (non-Fed $) for all legal U.S. residents
There is NO BENEFIT AT ALL in having a Central Bank (well, none for us) compared to having the U.S. Treasury print and distribute our own debt-free money to ourselves. THE ONLY DIFFERENCE between having a central bank or not, is that ``One system costs us 95% of our wealth every hundred years and puts us and our posterity into mind-boggling debt until the end of time``... and the other doesn`t.
So the first thing we need for our NEW SYSTEM is our own, debt-free U.S. Government fiat currency, backed by all the property within the nation`s borders. Obviously I disagree with those who insist that `only gold is real money`. The hoarding of gold-backed money has led to and prolonged many U.S. economic depressions which explains why the U.S. has tried and abandoned `the gold standard` many times over the years. ``Bad money drives out good`` means people will always wind up using as money whatever has the least actual value that will still be accepted by others to facilitate trade. Debt-Free fiat money will work just as well as Federal Reserve fiat Debt-money, but without all the nasty side-effects.
Another problem with the OLD SYSTEM is that income-based taxation creates wasteful tax avoidance behavior, requires an expensive tax reporting industry and an intrusive collection bureaucracy, and is, arguably, a form of `involuntary servitude`. Under our NEW SYSTEM, we should replace all income-related taxes with a one-half percent, automatically-collecte... electronic transfer tax (also known as a `debit tax`) which will be avoidable by transacting business using cash or barter. This will not only rid us of the IRS (saving the billions currently spent on `tax reporting`), it will also end the current penalization of work and entrepreneurism, as well as freeing up untold billions currently spent on `tax avoidance`. A debit tax is `more just`, corresponding closely with ``benefits previously-obtained`` rather than penalizing labor and industriousness, and (as it can be legally avoided, even if only inconveniently so) this debit tax can be considered ``voluntarily-paid``. A small electronic transfer tax will also act to discourage excessive short-term market speculation and should be able to raise enough revenue to begin paying off the National Debt. The tax should be either paid with the new debt-free money or exchanged for it by the Treasury with tax revenue on Federal Reserve money being used to start retiring the National Debt.
As argued by Tom Paine in his 1797 essay ``Agrarian Justice``, the third problem with the OLD SYSTEM is that, because governments privatize all of their claimed property (allocating it however they like), everyone winds up being denied free access to all property (other than that which has been specifically allocated to them) without being compensated for that loss. That`s not a problem for those with access to capital and property ownership, but for the rest of us, it is totally unfair and creates a slanted playing field upon which wealth gravitates to the already wealthy and the well-connected. However governments allocate their property, every method has the same result of `denial to everyone of free access to all land`. It has taken 200 years for this injustice to be acknowledged in a place and time where something can be done about it and when events have conspired to make rectification not only just, but vital to our economic survival. Just as compensation for eminent domain takings are provided for in the 5th Amendment of the U.S. Constitution, governments should provide compensation for denying everyone `right of free access to all property`.
Thus, in order to remedy this, we must elect a Congress that will PAY EVERY LEGAL U.S. RESIDENT `Adequate and Equal Compensation for Denial of Free Access to U.S. Property`, compensation which can FUNCTIONALLY REPLACE ALL FORMS OF PERSONAL AND CORPORATE WELFARE AND SUBSIDIES, including rescinding Federal Minimum Wage laws and phasing-out the Social Security system. (Once everyone is getting `Denial of Free Access` compensation their whole lives, most people will be able to save enough to be able to comfortably cease working at some point in their lives.)
Our NEW SYSTEM should pay $1000 per month (of our new, non-Fed, non-Debt-Money) to every legal adult resident. Compensation for minors should be held in a trust fund to avoid incentivizing `baby factories`. Since everyone gets the same amount of compensation, this plan is not wealth redistributive, but will give the least wealthy the biggest relative monthly percentage increase of wealth. Because when people HAVE something, they have something to lose, we can expect a reduction in all sorts of crime under our NEW SYSTEM as well as better childcare, less poverty, more rural homesteading, better maintained urban areas, less intrusive and cheaper government with lower military-related expenses and a safer world in general. Once this NEW SYSTEM gets going, I expect residents of other countries will insist their governments either copy our NEW SYSTEM or else apply for U.S. statehood as Texas did in 1845.
HEALTH CARE...The AMA and FDA work to constrain competition in order to maximize the medical and pharmaceutical industries` ability to extort unconscionable prices for services and substances that should be affordable out-of-pocket. We need to train up thousands more doctors and other healthcare professionals and to decriminalize and unbridle access for adults to WHATEVER drugs adults want, obtained from WHATEVER source adults decide thay want to obtain them, for WHATEVER purpose those adults wish to use them, and let the market work to make prices of normal medical help and pharmacology affordable.
SEND A MESSAGE to candidates running for Congress in 2010 and 2012 (that, in order to get elected, they will need to support a change to a NEW SYSTEM, whether exactly like my plan or not) with a MASS WRITE-IN CAMPAIGN that `blows socks off` from DC to LA. I will be registered as a Write-In Candidate for US President in Michigan, and in other states as I get help with other states` registering processes. Pass this message along to several people every day (or, even better, to everyone you know today, and to everyone you meet from now on). IF EACH OF US EVERY DAY CONVINCE EVEN ONE OTHER PERSON TO JOIN US, OVER ONE BILLION PEOPLE WILL BE `ON BOARD` IN 30 DAYS. (Seriously. Grab a calculator and start doubling from 1.) For an e-copy, or to ask questions or volunteer, write me at alan_jacquemotte@yahoo... or P.O. Box 183393, Shelby Twp, MI 48318.
- carey_jim
- 423 Comments
Sep 19 10:28 AMIt might be better to vote for McCain and Palin just to let them hammer the nails firmly into the coffin and then lower it into the ground. Four years from now, the "left" will then have an easy election, take over the Presidency and the Congress and (hopefully) bring back free enterprise and sanity to America!
Who could have predicted this level of political inconsistency and these shameless reversals of political rhetoric by the Republican Party?
"It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us; we were all going directly to Heaven, we were all going the other way."
Charles Dickens
- bearfund
- 509 Comments
Sep 19 10:38 AM- Chris B
- 371 Comments
Sep 19 11:49 AM- Chris B
- 371 Comments
Sep 19 11:57 AMHopefully, a new WPA would focus on building extensive light rail infrastructure in any city over 100k people, building independent energy solutions such as wind, solar, and geothermal, and finally put more people through college so that productivity increases can be maintained.
Then we need to pay off the national debt instead of wasting 25% of our taxes just to pay the interest.
- Lin
- 45 Comments
Sep 19 02:45 PM- Lin
- 45 Comments
Sep 19 03:14 PM- mediapro
- 54 Comments
Sep 19 03:44 PMCongress should empower regulators to declare systemically important firms insolvent, write off existing common and preferred, fire incumbent management and unilaterally convert debt to equity as far up the capital structure as they need to go until the firms are unambiguously well-capitalized, with little or no public money required.
Actually there is another alternative.
AIG has already experienced the appropriate medicine. Strike a deal with every one of these pigs along the lines of Paulson (doing a remarkable version of Franklin Roosevelt). (e.g. You want money. We got money. Now let's see what you're really worth and how important it is for you to stay afloat.) The U.S. Treasury made $15 Billion today on the AIG deal, and at a 10% interest rate on the borrowed capital will continue to make money off these Hank Greenburg-inspired scum.
Let's finally face it and celebrate the fact that the U.S. Government has always been in the business of business and finally take ownership to that fact. If we truly believe in the ability of business to make a buck, let them make that buck and shovel back our share of the profits when they fail to understand that they aren't the most brilliant lights in the sky flying home to Uncle Sam when their greed exceeds their intelligence.
- junkyarddog
- 63 Comments
Sep 19 04:15 PMThis "game" of parties pointing fingers at each other has been going on for decades and people still believe in this corrupt 2 party system, where in essence there's no choice at all between the two.
Sure, throw gay rights, abortion, or other hot potato issues to divert attention from the real issues, such as the economy, energy policy, education, and war to name a few. In all of the above both parties are identical: spenders, war mongers (yes, even the democrats), influenced by oil companies, and both insist on the same ideas for a failed education system.
Obama, McCain, what a joke. Both will do what the next president will do (read above).
I could go on but you get the point (I hope).
- carey_jim
- 423 Comments
Sep 19 04:17 PMThe Soviet Union tried it and it didn't work.
But then again, Europe tried World War I and that didn't work either ....
- Chris B
- 371 Comments
Sep 19 04:50 PMEver heard of Hoover Dam? Bridges? Roads? Buildings? If you want to learn about the WPA, this is how you spell w-i-k-i-p-e-d-i-a . Their world-class infrastructure set the stage for the next 40 years of economic gains.
If you think construction workers retire at age 45, talk to one sometime. Can the person not drive a truck or a bulldozer?
Too much education you think? Then I suppose the economy of Hati leads the world. LOL
- Lin
- 45 Comments
Sep 19 05:35 PMNo I'm not against college education , but the fact still remains , unless you have an Ivy League graduate degree + tons of inside hookups , Good jobs in this country have been long gone ! Heck , I keep reading where college grads of the last 2-3 years are still unemployed or vastly underemployed . I have known personally some truck drivers , big rigs + heavy equipment operators . Lots of these folks skeletal systems are shot by the time they hit 50 ! Retrain ,I don't think so . I just read last week , for instance in the AJC , that 1 in 6 jobs in the metro atlanta area was tied to the real estate industry , bankers , builders , realtors etc. Industry coming back , no , we are greatly overbuilt + will be for a long time . I was laughed at 8 years ago , when I built my modest size ranch home , in an area , of McMansions . Many of these homes have been on the market for 2 1/2 years + are vacant . Who is laughing now .The housing bubble was created by Greenspan , with low interest rates . This was in response to the Dot Com bubble crash . The recession then , would have been far less severe than what is going to happen now . You'll see , past election , look out below !
- Rokjok777
- 59 Comments
Sep 19 05:54 PMThis has been the received wisdom since Saint Reagan. But when you let the fox guard the henhouse...the result is obvious. Banks lobbied to remove Glass-Steagall (vote was Repubs 53 for Dems 41 AGAINST); Phil & Wendy Gramm sucessfully kept CFTC oversight from the derivatives business, the rest is history. Do you think these firms would be belly-up just because a few more percentage increase in sub-prime default? They are going belly up because they leveraged their balance sheets 30X with financial products so complex even they couldn't figure out what they are worth. They still can't. Now the US taxpaper is left holding the bag, the biggest sucker of them all. I'm voting McCain because these bastards need to be held responsible for the mess they've made. They shit the bed so let them sleep in it. Four more years of Phil Gramm's brilliant economic advice and the Republican Party will be circling the drain, a sad footnote in history books.
- 101010
- 18 Comments
Sep 19 08:59 PM- Pretzel Logic
- 65 Comments
Sep 20 05:26 AMNo one mentions all the Fanny and Freddie "campaign contributions" (80% of which were to Dems).
No one mentions how Fannie and Freddie became employer heaven for bundles of out-of-work Clinton cabinet members.
No one mentions how the Clinton-era "fair housing act" forced lenders to give loans on crappy houses in low-income (minority dominated) neighborhoods. These were high-risk loans which banks would have avoided if the government hadn't mandated them, and which are now causing huge problems and defaults.
Oh, but MORE regulations will fix it. That's really logical.
You people listen to MSNBC too much.
Here's an enlightening article from IBD regarding some of the myths of the 1999 deregulation bill (1999 was Clinton, for those of you who let the Dem spinmeisters do your thinking for you and who have fully bought into the "this is Bush's fault!" lie):
www.ibdeditorials.com/...
- icandoitdon
- 371 Comments
Sep 20 10:31 AMrepublicans had the congressional majority in 2003 and they were as heavily invested in preserving the status quo as the other party.
that anyone would argue against regulation of an industry that has just imploded, forcing republicans to go begging congress for the biggest taxpayer bailout in history to prevent a crash of the financial system, is mind boggling.
get a clue.
- LobsterM
- 332 Comments
Sep 20 06:26 PM- philly jim
- 117 Comments
Sep 20 09:50 PMThese are the type of people that give disgusted looks when they have to drive through a working-class neighborhood and get out and shake their hands before elections.
Remember the savings & loans collapse of the 80's? They learned from that and took it to an extreme this round. Foxes guarding the Hen House.
Now we have Mr. Closet extremist liberal Obama or the old and confused radical right McCain to pick from to finish the job. Oh man, our founding fathers gotta be screaming treason by now.
- LobsterM
- 332 Comments
Sep 21 02:17 AMbunch of hate and lies. No good for this country at all.
- mediapro
- 54 Comments
Sep 26 05:47 PMIt's with little irony that the only instance of favoring greater regulation over financials was McCain's one act against his basic nature -- his move in 2003 to reign in the excesses of Freddie/Fannie. We should look at his history over the other 26 years as a clear indication of where his heart lies -- with those who are subjects of predatory lending or with the lenders. Please remember that the Keating 5 was not so long ago.
As for the greater picture that Pretzl and Jeff so conveniently leave out, here's the result of lasseiz faire, trickle down government:
We bought whole hog into a ton of manure that the way for all to get wealthy is to let the market work, cut taxes such that capital flows towards those with the capital, and get out of the way. That's exactly the picture that McCain has espoused and bullied around for 26 years (remember the Keating Five?)
Now for some shocking realities:
1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.
2. In terms of inherited wealth only 1.6% inherit moe than $100,000. 91.9% receive nothing. Yet the "death tax" is the highest priority on the ultra-conservative agenda.
Now for some sobering reminders:
Under Clinton we enjoyed a $287 Billion SURPLUS that's now a $600 Billion deficit and national debt that has grown from $5.7 Trillion to 9/7 Trillion in just seven years.
It wasn't because Clinton was an economic genious. He simply chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).
Listen to the convenient excuses -- actually the only possible example -- offered by Pretzl and Jeff J, yes, but let's hear more truth as well.
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