billy blog Wed 2010-09-08 19:04 EDT

Michal Kalecki -- The Political Aspects of Full Employment

...several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki -- The Political Aspects of Full Employment. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki's argument given that it is often raised by progressives as a case against effective fiscal intervention...[Job Guarantee concepts briefly summarized]...While orthodox economists typically attack the Job Guarantee policy for fiscal reasons, economists on the left also challenge its validity and effectiveness. In 1943, Michal Kalecki published the Political Aspects of Full Employment, in the Political Quarterly, which laid out the blueprint for socialist opposition to Keynesian-style employment policy. The criticisms would be equally applicable to a Job Guarantee policy...Kalecki's principle objection then seemed to be that ``the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders.''...the major political blockages are no longer those that Kalecki foresaw. The opponents of fiscal activism are a different elite and work against the ``captains of industry'' just as much as they work against the broader working class. The growth of the financial sector and global derivatives trading and the substantial deregulation of labour markets and retrenchment of welfare states has altered things considerably since Kalecki wrote his brilliant article in 1943...

Billy Blog; full employment; Michal Kalecki; political aspects.

Tue 2010-08-03 15:02 EDT

Economics of Contempt: Anatomy of Lehman's Failure, and the Importance of Liquidity Requirements

Remember the Lehman Examiner's Report? The 4000+ page report by the court-appointed examiner was lauded for a couple of weeks after it was released, and then largely forgotten. The media and blogosphere quickly moved on to the next outrage-du-jour...Well, I did not forget about it, and thanks to the uptick in flights -- and thus reading time -- in the last few months, I can now credibly claim to have read....well, not every single word in the Examiner's Report (some appendices are just pages of CUSIPs), but all of the substantive sections...Anton Valukas and the lawyers at Jenner & Block who wrote the Examiner's Report did a masterful job. I was, and continue to be, in awe of the quality and comprehensiveness of the report...think I have a pretty good handle on what went wrong at Lehman, and why it failed...they were misrepresenting their liquidity pool. In a huge way...the brazenness of their misrepresentation was shocking...Including the clearing-bank collateral in its liquidity pool was not only inappropriate, but also aggressively deceptive...Lehman was also including in its liquidity pool non-central bank eligible CLOs and CDOs. And they had the audacity to mark these CLOs and CDOs at 100 (par) for purposes of the liquidity pool, even though JPMorgan's third-party pricing vendor marked them at 50--60...

Anatomy; contempt; economic; important; Lehman's failure; liquidity requirements.

Credit Writedowns Fri 2010-07-30 15:30 EDT

Subversive Economists

The economic research staff at the Federal Reserve Bank of New York has been busy. Last week we wrote about the New York Fed's Staff Report No. 458 , which discussed the shadow banking system in the United States. Today we refer to two other new reports: Staff Report No. 457 , entitled ``Resolving Troubled Systemically Important Cross-Border Financial Institutions: Is a New Corporate Organizational Form Required?'', and Staff Report No. 463 , ``The Central-Bank Balance Sheet as an Instrument of Monetary Policy.'' After reviewing them, we are left to conclude that these three papers demonstrate that the research staff at the New York Fed is perhaps the most subversive group of working economists currently on the government payroll....The combination of these three papers seems to suggest that the Federal Reserve is conducting a serious re-evaluation of its traditional role in the new financial landscape. No. 458 acknowledges that the shadow banking system is huge, but largely beyond the regulatory reach--and backstopping help--of the Fed. No. 457 suggests that the complexity of a large, modern financial institution is not only a challenge for managers, but is also a challenge for regulators. It is a cri de coeur for simplicity. And No. 463 breaks new ground by explicitly including central bank balance sheet management as a part of the monetary policy model...

credit writedowns; Subversive Economists.

naked capitalism Sun 2010-07-25 16:13 EDT

The bailouts continue: The Economic Populist

Garrett Johnson

Most people [wrongly] think that the Wall Street bailouts ended at least a year ago...Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trillion...the current outstanding balance of overall Federal support for the nation's financial system...has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases, the TARP inspector general, Neil Barofsky, wrote in the report...Congress nearly comes to a standstill over $33 Billion for unemployment extensions, but there isn't even a debate over $700 Billion for Wall Street.

bailout continued; economic populist; naked capitalism.

New Deal 2.0 Sun 2010-07-25 16:08 EDT

Marriner S. Eccles: Keynesian Evangelist Before Keynes

Henry C. K. Liu

...From direct experience, [1930s Federal Reserve chairman Marriner S. Eccles] realized that bankers like himself, by doing what seemed sound on an individual basis, by calling in loans and refusing new lending in hard times, only contributed to the financial crisis. He saw from direct experience the evidence of market failure. He concluded that to get out of the depression, government intervention, something he had been taught was evil, was necessary to place purchasing power in the hands of the public. In the industrial age, the mal-distribution of income (which was hugely unequal) and the excessive savings for capital investment always lead to the masses exhausting their purchasing power, unable to sustain the benefits of mass production that such savings brought...By denying the masses necessary purchasing power, capital denies itself of the very demand that would justify its investment in new production. Credit can extend purchasing power but only until the credit runs out, which would soon occur without the support of adequate income...Eccles, who never attended university or studied economics formally, articulated his pragmatic conclusions in speeches a good three years before Keynes wrote his epoch-making The General Theory of Employment, Interest, and Money (1936)....Eccles' transformation from a businessman, brought up to believe in survival of the fittest, to his belief in government spending on the neediest can teach us many lessons today...The solution is to start the money flowing again by directing it not toward those who already have a surplus, but to those who have not enough. Giving more money to those who already have too much would take more money out of circulation into idle savings and prolong the depression...Eccles promoted a limited war on poverty and unemployment, not on moral but on utilitarian grounds.

0; Keynes; Keynesian Evangelist; Marriner S. Eccles; new dealing 2.

Credit Writedowns Mon 2010-07-19 12:08 EDT

Misunderstanding Modern Monetary Theory

Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won't Do That (Wonkish)." The gist of Krugman's post was to refute Modern Monetary Theory's view on money and deficits...Krugman's post mischaracterizes both MMT and Galbraith's statement...Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world...the problem for deficits is not national solvency but inflation and currency depreciation. That makes me worried about deficits. If that makes me an inflation hawk and anti-deficit, then so be it. Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation. But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap. But you can't spend at will under MMT; eventually the output gap closes and inflation becomes a big problem...

credit writedowns; Misunderstanding Modern Monetary Theory.

Fri 2010-07-16 18:30 EDT

On Pelosi's Duplicity and Apparent Sandbagging of Elizabeth Warren <<; naked capitalism

Yves Smith

Despite her longevity as a California pol, house speaker Nancy Pelosi is looking like every bit as much of a dyed-in-the-wool financial services industry backer as the Congressmen on the New York-Boston corridor...So why are we pointing a finger at Pelosi in particular? The next chapter is her appointment of one Richard Nieman to the Congressional Oversight Panel...Nieman is the New York Superintendant of Banks. He helped Goldman set up its bank holding company...Nieman fell out with the other Democrats and wrote a joint opinion with John Sununu...to anyone with a passing acquaintance with the facts, the dissenting views are absurd...I can't imagine that Nieman would have fallen in with the Republicans without at least as a courtesy informing Pelosi in advance...So Pelosi is at a minimum sitting this one out (which I deem unlikely) or on board with the program to undermine Warren. And let us not kid ourselves, the knives are coming out...[2009-04-26]

Apparent Sandbagging; Elizabeth Warren; naked capitalism; Pelosi's Duplicity.

Credit Writedowns Sun 2010-05-16 14:53 EDT

Spinoza, Descartes and suspension of disbelief in the ivory tower of economics

...The core of my argument will come from James Montier, now at the fund manager GMO. As a strategist at Dresdner Kleinwort Benson in 2005, he wrote a timeless piece on the debate between two 17th century philosophers René Descartes of France and Baruch de Spinoza of the Netherlands. Descartes was of the view that people process information for accuracy before filing it away in memory. Spinoza made the opposite claim, that people must suspend disbelief in order to process information. The two competing ideas were put to the test; and it appears that Spinoza was right about the need for naïve belief, something that has grave implications for investing, the subject of Montier's essay..."Distraction, then, is an especially useful technique when a person's arguments are poor because even though people might be aware that some arguments were presented, they might be unaware that the arguments were not very compelling."...

credit writedowns; Descartes; disbelief; economic; ivory-tower; Spinoza; suspension.

The Wall Street Examiner Sun 2010-05-09 09:58 EDT

The Minsky Cruise (part 2, Households)

...Now for the Minsky part. The theory above, in layman's terms, argues that over time, when an economy expands without serious contractions, finances will become increasingly risky. Minsky wrote of a shift from hedge finance (when debt, both principal and interest, can be serviced from cash flows) through speculative finance (when debt must be rolled over as only interest payments can be serviced from cash flows) and into Ponzi finance (when cash flows cannot cover interest payments and thus new debt must be added or assets sold). The idea in the Ponzi finance stage is that asset appreciation will compensate for the extra risk...I don't mean to suggest we (collectively) are broke, just that, as Minsky argued (and the data bears out) our balance sheets are increasingly betting on real estate and equity price appreciation with borrowed money...

Household; Minsky Cruise; Part 2; Wall Street Examiner.

Jesse's Café Américain Wed 2010-04-07 19:00 EDT

"How to Corner the Gold Market" By Janet Tavakoli

Jesse

Janet Tavakoli wrote an interesting essay that was just posted over at the Huffington Post called "How to Corner the Gold Market" which can be read in its entirety from her website here...What struck me as odd is that I just wrote a blog piece along similar lines on the same topic today, raising many of the same issues, but that is from the opposite perspective...there is little evidence that anyone is willing to take on the exchanges, even the big players, and try and force a corner or even a squeeze against what they perceive as mispricing, such as Soros and so many other big players did with the British Pound , and most recently other big hedge funds did with mispriced products from the latest bubble in the debt markets, and financial stocks...The piece I wrote today and reference above is about a situation in the precious metals markets which has the potential to become another serious problem for almost the same basic reasons as the debt markets in our most recent financial crisis: excessive leverage concentrated in a few TBTF institutions, lack of transparency, regulatory laxity, and a mispricing of risk...

corner; gold market; Janet Tavakoli; Jesse's Café Américain.

Fri 2010-04-02 10:36 EDT

Archein: Krugman as Failure

...I'd like to direct you to a scathing, sniveling little review, Krugman wrote fifteen years ago on Bill Greider's most excellent "One World Ready or Not". Greider's book documents the ravaging of the American middle-class caused by the processes of corporate globalization. Krugman counters with a ludicrous little tale about hot dogs, and then proceeds to defend it pushing all the pop-economic theory of the day, by so doing, an economist was bestowed with money and pats on the head from the mega-corporate boardrooms, you know, like the money Paul was paid working for Enron. According to the Nobel Laureate, replacing good paying steel jobs with McDonald's jobs was just great. Now today, fifteen years later, Mr. Krugman's contradicting what he's been saying his entire career, while Greider, no back page of the NYT for him, was right along...Mr. Krugman represents the most serious problem this republic currently faces, power has lost all accountability. From the top of government, to media, to finance, to our large corporations, we've seen spectacular failure, and no one held accountable. It's a lot bigger problem than the fact Paul Krugman is really a very silly man.

Archein; failure; Krugman.

Sun 2010-02-07 10:10 EST

Web of Debt - THE BATTLE OF THE TITANS: JPMORGAN VS. GOLDMAN SACHS

Ellen Brown

The late Libertarian economist Murray Rothbard wrote that U.S. politics since 1900, when William Jennings Bryan narrowly lost the presidency, has been a struggle between two competing banking giants, the Morgans and the Rockefellers. The parties would sometimes change hands, but the puppeteers pulling the strings were always one of these two big-money players...In 2000, the Rockefellers and the Morgans joined forces, when JPMorgan and Chase Manhattan merged to become JPMorgan Chase Co. Today the battling banking titans are JPMorgan Chase and Goldman Sachs, an investment bank that gained notoriety for its speculative practices in the 1920s...Goldman's superpower status comes from something more than just access to the money spigots of the banking system. It actually has the ability to manipulate markets...But Goldman Sachs has been caught in this blatant market manipulation so often that the JPMorgan faction of the banking empire has finally had enough.

battle; debt; Goldman Sachs; JPMorgan; titans; Web.

naked capitalism Fri 2010-01-08 19:29 EST

Limiting the destruction wrought by irrational exuberance in a one-party state

Edward Harrison

I wanted to highlight a piece [Matt Taibbi] wrote yesterday called Fannie, Freddie, and the New Red and Blue. The crux of his argument is this: The partisan rhetoric is on full display in the dust-up over the unlimited liabilities coming from Fannie and Freddie thrust upon taxpayers on Christmas Eve. This rhetoric is not just beside the point, it is specifically designed to obscure the point, namely that both Democrats and Republicans, private industry and the government are culpable in the shambles our economic system has become...We effectively have a one-party system when it comes to investment in the present economic, power, and wealth structure.

destruction Wrought; irrational exuberance; limit; naked capitalism; party state.

naked capitalism Mon 2009-12-28 22:05 EST

``Body Count From Goldman Actions Crosses Into Criminal Territory''

Thomas Adams

Readers may have noticed Janet Tavakoli's recent article at Huffington Post on Goldman Sachs and AIG. While much of it covers territory that Yves and I already wrote about previously, Ms. Tavakoli stops short of telling the whole story...The Federal Reserve and the Treasury aided and abetted Goldman Sachs in committing financial and ethical crimes at an astounding level.

Body Count; Criminal Territory; Goldman Actions Crosses; naked capitalism.

naked capitalism Wed 2009-11-25 11:13 EST

If the Fed is looking to inflate away problems, what should Asia do?

Edward Harrison of Credit Writedowns

Andy Xie thinks the Fed is on an inflationary path. Last month, he wrote an article in Caijing which says that `stagflation lite' is the Federal Reserve's preferred outcome. What's interesting is his recent article about the need for China and Japan to join forces under an ASEAN umbrella, rejecting the APEC umbrella shared with the U.S.

Asia; Fed; inflate away problems; looking; naked capitalism.

naked capitalism Wed 2009-11-25 10:14 EST

Ivy Zelman: ``Home prices are going back down''

Edward Harrison of Credit Writedowns

This is a post I wrote overnight about rising delinquencies and shadow housing inventory. I am not convinced house prices in the U.S. are headed higher permanently...The Mortgage Bankers Association is reporting that nearly one in ten households with mortgages are at least one payment behind. That is a record, my friends...Look, the fake recovery is now in full swing. But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk's post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don't have any money, so they don't pay mortgages.

Go; home prices; Ivy Zelman; naked capitalism.

naked capitalism Thu 2009-11-19 10:33 EST

Guest Post: Herding the Sheep

George Washington of Washington&apos;s Blog

Financial insider and commentator Yves Smith wrote an essay last week entitled ``MSM Reporting as Propaganda'' arguing that the government has been using propaganda to make people think that things are getting better, no one is angry, and -- therefore -- no one should get upset...Is Smith right? And even if she is, isn't ``propaganda'' too strong a word?...Even if true, propaganda is too strong a word for attempts to convince people that important issues are boring, that no one else is angry about them, and that everything is normal. Perhaps ``herding the wayward sheep'' would be better . . .

Guest Post; Herd; naked capitalism; sheep.

naked capitalism Tue 2009-10-27 12:18 EDT

Guest Post: Capitalism, Socialism or Fascism?

George Washington of Washington&apos;s Blog

What is the current American economy: capitalism, socialism or fascism? ...Nouriel Roubini writes ``We're essentially continuing a system where profits are privatized and...losses socialized.'' Nassim Nicholas Taleb says ``the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren.'' Nobel prize winning economist Joseph Stiglitz calls it ``socialism for the rich'' ...leading journalist Robert Scheer writes: ``What is proposed is not the nationalization of private corporations but rather a corporate takeover of government. The marriage of highly concentrated corporate power with an authoritarian state that services the politico-economic elite at the expense of the people is more accurately referred to as ``financial fascism'''' ...Italian historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because ``the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social'' ...one of the best definitions of fascism -- the one used by Mussolini -- is the ``merger of state and corporate power`` ...Nobel prize-winning economist George Akerlof co-wrote a paper in 1993 describing the causes of the S&L crisis and other financial meltdowns...[Looting is the] common thread [when] countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust...Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations ...Whether we use the terminology regarding socialism-for-the-giants (''socialized losses''), of fascism (''public and social losses''), or of looting (''left the government holding the bag for their eventual and predictable losses''), it amounts to the exact same thing. [kleptocracy] Great comments, including Joseph: Three core ideas characterize the myth of our society: 1. Free market; 2. Capitalism; 3. Democracy. The conceptual error that people make is to think that they are compatible, or indeed represent aspect of the same thing. In fact they are all deeply antagonistic towards each other. It is the miracle of post-war society that we managed to hold them in balance for so long. That balance has now been destroyed. A simple example of the contradiction, and the one that the over-socialised right finds most confusing, is the contradiction between capitalism and the market. Capitalism is a system of ownership; the market is a system of distribution. The perfect world for the capitalist is one in which they are price setters in terms of the commodities they produce and labour they employ -- ie a state of monopoly. Each individual capitalist seeks the destruction of the market. What has occurred over the past year is not corruption; it is the triumph of capitalism. The market and democracy have been defeated. Not socialism, not fascism,...

capitalism; Fascism; Guest Post; naked capitalism; social.

Credit Writedowns Fri 2009-10-23 09:00 EDT

The next crisis is already under way

Wolfgang Munchau of the Financial Times wrote a very important comment piece in today's Financial Times. In it he said that central banks are targeting asset prices to avoid the brunt of cyclical downturns. This policy is inducing asset bubbles and creating a more volatile real economy with unpredictable negative consequences...Munchau invokes Hyman Minsky's model of financial instability to help explain how this sets us up for a volatile future because traditional macroeconomic theory is inadequate for understanding what got us to this point. In essence, the idyllic state of economic and price stability we know as ``the Great Moderation'' is really just a financialization of the economy. However, a large financial sector leads to excessive dependence on asset prices to fuel growth, which in turn leads to an accumulation of debt...

credit writedowns; Crisis; way.

Thu 2009-09-17 09:31 EDT

Why capitalism fails - The Boston Globe

Stephen Mihm

Mainstream economics rediscovers Hyman Minsky; ``Instability,'' he wrote, ``is an inherent and inescapable flaw of capitalism.''...Minsky drew his own, far darker, lessons from Keynes's landmark writings, which dealt not only with the problem of unemployment, but with money and banking...Minsky argued that Keynes's collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff...Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers' and companies' growing dependence on debt, and the growing use of leverage within the financial system... Minsky...argued for a ``bubble-up'' approach, sending money to the poor and unskilled first. The government - or what he liked to call ``Big Government'' - should become the ``employer of last resort,'' he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

Boston Globe; Capitalism Failed.

Calculated Risk Mon 2009-09-14 12:05 EDT

A Moment with Minsky

CalculatedRisk

Stephen Mihm at the Boston Globe looks at Hyman Minsky...``Instability,'' Minsky wrote, ``is an inherent and inescapable flaw of capitalism.''

Calculated Risk; Minsky; Moment.

Bruce Krasting Thu 2009-09-03 18:21 EDT

US Treasury on Agency MBS -- Don't Buy It!

Bruce Krasting

The office of Inspector General, Department of Treasury released a report on 8/6/09 on the failure of the National Bank of Commerce. NBC went toast on 1/16/2009. The principal source of its collapse was its investments in Fannie Mae Preferred Stock. They owned $98mm of that swill. When they wrote it off they had no tier-one equity left and had to be shuttered... This report is a kick in the head for everyone involved. Fannie and Freddie look bad. Who would want to own the GSE paper with this warning from Treasury? It makes Treasury look silly. They hold the Government Pref. issued by the Agencies. If they guy down the hall is saying don't buy the debt he is certainly saying don't buy the equity. The Fed looks the worst of the lot in light of this. They are in the process of buying $1.25 Trillion of Agency MBS. I wonder what the Treasury IG would have to say about that level of concentration.

Agency MBS; Bruce Krasting; buy; Treasury.

naked capitalism Tue 2009-09-01 13:10 EDT

Twenty-Five Years to Work Off the Debt Overhang?

T. S. Eliot was right. Human beings cannot stand very much reality. As much as I have an appetite for bearish views (I figure the optimist case gets disproportionate air time), the headline of Ambrose Evans-Pritchard's latest piece, ``Our quarter-century penance is just starting,'' is grim even by the standards of the bearish faithful. Great comment by DownSouth, quoting Martin Luther King and Reinhold Niebuhr to the effect that by delegating to elites what should be the role of labor unions and grass-roots organizations. Niebuhr wrote: ``when collective power, whether in the form of imperialism or class domination, exploits weakness, it can never be dislodged unless power is raised against it'' ``Before we can fix the economy, the polity must be repaired first.''

debt overhang; naked capitalism; working; years.

Steve Keen's Debtwatch Sun 2009-08-30 20:48 EDT

Debtwatch No. 38: The GFC--Pothole or Mountain?

Cassander

``The Marxian view is that capitalistic economies are inherently unstable and that excessive accumulation of capital will lead to increasingly severe economic crises. Growth theory, which has proved to be empirically successful, says this is not true.'' wrote Economics Nobel Prize winner Edward C. Prescott. Prescott also claimed ``the Great Depression was a conscious choice by American workers to enjoy more leisure, in response to unspecified changes in the labour market'' Apparently debt played no role. The capitalistic economy is stable, and absent some change in technology or the rules of the economic game, the [...]

38; Debtwatch; GFC; Mountain; Potholes; Steve Keen's Debtwatch.