Economics by Analogy

Simon Johnson of MIT and The Baseline Scenario draws attention to recent claptrap from Larry Summers (who seems capable of little more):

“Most Observers” Do Not Agree With Larry Summers On Banking

By Simon Johnson

What is the basis for major policy decisions in the United States? Is it years of careful study, using the concentration of knowledge and expertise for which this country is known and respected around the world? Or is it some unfounded assertions, backed by no data at all?

At least in terms of the White House policy towards megabanks, it is currently “no discussion of data or facts, please”.

Speaking on the Lehrer NewsHour last week, Larry Summers said, with regard to the Brown-Kaufman SAFE banking act – which would restrict the size of our largest banks (putting them back to where they were a decade or so ago):

“Most observers who study this believe that to try to break banks up into a lot of little pieces would hurt our ability to serve large companies, and hurt the competitiveness of the United States.”

“But that’s not the important issue, they believe that it would actually make us less stable. Because the individual banks would be less diversified, and therefore at greater risk of failing because they wouldn’t have profits in one area to turn to when a different area got in trouble.

“And most observers believe that dealing with the simultaneous failure of many small institutions would actually generate more need for bailouts and reliance on taxpayers than the current economic environment.”

I’ve looked into these claims carefully and really cannot find any hard evidence supporting Summers’s position – and therefore US policy. To be sure, there have been assertions made along these lines by a few people.

My thoughts:

“…they believe that it would actually make us less stable. Because the individual banks would be less diversified….”

Summers statements like these make it painfully clear that he is making stuff up as he goes along to serve his pre-determined conclusion. It is trivially false that mere size provides a stabilizing buffer. For example, so and so can have one million shares in one company or one million shares in one million companies. Mere size has nothing to do with it.

I would guess that Summers, like many economists, is fond of analogies, since the mathematics of economics is actually quite weak. (First, real economic systems, as should by now be all too clear, are radically non-linear, which is why major players like Goldman Sachs jealously guard their masters of computational methods. Second, the simplifications economists routinely champion are, in the real world, gross over-simplifications, throwing the baby out with the bath water.)

The analogy Summers tacitly relies upon is that with greater size, there is greater inertia. But then the analogy is a little too apt. Greater size results in less innovation, less agility, less flexibility to respond to change or the unexpected.

(How’s that paragraph for mixing metaphors?!)

The thing is, Summers (and Geithner, Bernanke, Paulson, Congress and Obama) like big banks. Big Is Beautiful! Having big financial institutions in the economic world is like having big guns, big bombs, big ships in the military. We can make others cower. Never mind that, again pursuing an analogy, there are a great many examples from history of the smaller, more agile foe, outdoing the bigger. Of course, Summers & Co. are hoping for an economic blitzkrieg — large and lightning fast.

Economic Treason?

At what point does an official's abrogation of duty cease to be mere incompetence and rise to the level of crime? At what point does a public official's crimes rise to the level of treason, particularly when those crimes seem entirely domestic in scope?

"Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort."

So reads the Constitution. George W. Bush gave us a new definition of "enemy," one President Obama has yet to reject. Nevertheless, it is little more than rhetoric to charge Treasury Secretary Timothy Geithner with treason. To do so seriously, we would have to suppose that the Oligarchs of Wall Street are enemies of the United States. That case could be made. They have enriched themselves at the expense of 300 million Americans. But we know that case will never be made by anyone other than lefty ranters like yours truly.

As president of New York Federal Reserve, Geithner was merely a conniving, grovelling servant of the American Oligarchs. Now he is conniving, grovelling servant endorsed, abetted, and presumably directed by President Obama. (Obama is playing the political plausible deniability well by just keeping largely silent, except for the occasional pitch for stocks.)

This administration, a public 'champion' of transparency, has recently been forced, by lawsuit, to make its and Bush's scheming public. So we now know who Geithner, a public servant, really served.

The New York Times reports,

Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation’s economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked.

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

[...]

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription. Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

And more often than not, Mr. Geithner has been a leading architect of those bailouts, the activist at the head of the pack. He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner.

Today, Mr. Geithner is Treasury secretary, and as he seeks to rebuild the nation’s fractured financial system with more taxpayer assistance and a regulatory overhaul, he finds himself a locus of discontent.

Even as banks complain that the government has attached too many intrusive strings to its financial assistance, a range of critics — lawmakers, economists and even former Federal Reserve colleagues — say that the bailout Mr. Geithner has played such a central role in fashioning is overly generous to the financial industry at taxpayer expense.

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

[...]

[F]or all his ties to Citi, Mr. Geithner repeatedly missed or overlooked signs that the bank — along with the rest of the financial system — was falling apart. When he did spot trouble, analysts say, his responses were too measured, or too late.

In 2005, for instance, Mr. Geithner raised questions about how well Wall Street was tracking its trading of complex financial products known as derivatives, yet he pressed reforms only at the margins. Problems with the risky and opaque derivatives market later amplified the economic crisis.

As late as 2007, Mr. Geithner advocated measures that government studies said would have allowed banks to lower their reserves. When the crisis hit, banks were vulnerable because their financial cushion was too thin to protect against large losses.

In fashioning the bailout, his drive to use taxpayer money to backstop faltering firms overrode concerns that such a strategy would encourage more risk-taking in the future. In one bailout instance, Mr. Geithner fought a proposal to levy fees on banks that would help protect taxpayers against losses.

The bailout has left the Fed holding a vast portfolio of troubled securities. To manage them, Mr. Geithner gave three no-bid contracts to BlackRock, an asset-management firm with deep ties to the New York Fed.

To Joseph E. Stiglitz, a Nobel-winning economist at Columbia and a critic of the bailout, Mr. Geithner’s actions suggest that he came to share Wall Street’s regulatory philosophy and world view.

[...]

A bill sent recently by the Treasury to Capitol Hill would give the Obama administration extensive new powers to inject money into or seize systemically important firms in danger of failure. It was drafted in large measure by Davis Polk & Wardwell, a law firm that represents many banks and the financial industry’s lobbying group. Mr. Geithner also hired Davis Polk to represent the New York Fed during the A.I.G. bailout.

And the Military Budget

ABC, NPR, CNN, The New York Times were falling all over themselves to applaud the 'drastic change' in the approach to the Pentagon and the military budget. A four percent reduction was described as "huge", "drastic", etc. Meanwhile, cutting entire social programs is routinely described as 'trimming waste'. It is true, of course, that the Pentagon's gravy train has finally been superceded by something more important — the Bailout for Billionaires. So now we see the true hierarchy in the US — rich fucks first (including our 'representatives'), then the military, then the rest of us sorry shites.

Once again, it took lefties and comedians to get it right. So here is Jon Stewart's take:

The Daily Show With Jon Stewart	M - Th 11p / 10c
Military Budget Cuts
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

The Auto Industry Really Is Shovel Ready

Less than one year ago — June 2008.

President Obama has shown GM CEO Rick Wagoner the door. Surprising. He has the right credentials — a Harvard Business degree and a massively failed company under his belt. At this point, were he in the financial industry, he would be considering an offer to join the Obama administration, the "Team of Rivals" aka "The League of Harvard Super Best Friends".

Evidently, as Times editorialist William Holstein put it, Obama "did not believe G.M. had moved fast enough in facing up to global competition". That's it, right there. The executives at Goldman Sachs, Citigroup and AIG may be lying, cheating, thieving con artists, but, damn, it's all in the spirit of competition, and boy did they move fast. They were figuring how much bailout money would go to bonuses before the ink of Obama's signature was dry. No exec can make funny money like a Wall Street exec . . . at the expense of, well, whomever (meaning, Us).

By contrast, GM and the other auto manufacturers have a huge huge drawback — unionized workers, at good 'ol fashioned American manufacturing jobs, the kind that form the bedrock of a nation's economy. Totally unsuited for Our Brave New Economy where we all sell each other life insurance, grossly over-priced homes and obscure, substanceless financial instruments in a never ending war of all against all to make more money this week than last. (Remember, there is no such thing as making too much money. Dow 36,000 and all that. Wot wot.)

Conservatives will love love love this. Force GM to declare bankruptcy. Bust those damn unions. Get rid of those damn contracts! Save money. Get workers's wages down to something reasonable, like . . . I don't know . . . $15 per day, like in Mexico.

(But Larry Summers told us a contract is inviolate . . . . Well, only if it's ten or twenty million for one person. The kind of person this nation, or at least its oligarchs, pay attention to.)

US Adviser Chuckles Romer 'Incredibly Confident" of Recovery

Christina Romer, head of the White House's economic advice council, told Fox TV "we will be seeing signs the economy is turning around". She is "incredibly confident" the US economy will recover within 12 months. Says "private forecasters" expect we will "bottom out this year". She failed to say whether the "private forecasters" work for AIG. Here, the BBC account:

A key adviser within US President Barack Obama's administration says she is "incredibly confident" the US economy will recover within 12 months.

Christina Romer, head of the White House's economic advice council, told Fox TV "we will be seeing signs the economy is turning around".

She also told CNN that the US recession would "bottom out" in 2009, predicting economic growth later this in the year.

[...]

Speaking on CNN, Ms Romer said she had "every expectation, as do private forecasters [emphasis mine], that we will bottom out this year and actually be growing again by the end of the year".

[....]

"Incredible" is the word here. But let's give her a shot. (No, not the kind you want to give AIG, Shitigroup and Goldman Sucks.) The clock is running. Let's see if on April 1, 2010 -- April Fool's Day -- unemployment is decreasing, foreclosures are decreasing, housing precises have stabilized, etc.

What? You don't think that's what Chuckles has in mind? (Yes, 'Chuckles'. Watch the video -- see if she isn't always smiling -- the mark of a liar.)

You think Chuckles means the stock market will be recovering? That billionaires will be back to billions? Yeah, that's what I think too.

Why the Bonuses Do Matter

The public is in a fervor over the millions bailout recipients, especially AIG, continue to dole out to precisely those individuals and firms who manufactured the financial disaster and then conspired, with the aid of Timothy Geithner, Hank Paulson, and Ben Bernanke, to conceil the truth from the very people — the taxpayers — now funding the bailout. The newest detail is that the total given out by AIG is more, $50 million more, than the $165 million now widely reported, according to Connecticut's attorney general.

A real question here is whether AIG — 'too big to fail' — is leveraging that position to con the government out of more money to funnel on to Goldman Sachs, Citigroup and others. Frank Rich, one of several New York Times columnists who sounds a good deal more liberal than a year or two ago, put it this way: AIG "has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad." [1]

Still another question, raised by many pundits of many stripes, is whether the bonus issue is bogus, whether it is a diversion from the more serious issue of the billions AIG is passing along.

The bonuses should be taken seriously, if for no other reason than that the con artists at AIG, Goldman, Citigroup do so. The executives at AIG, Goldman and all the others are motivated by one thing only — money. Any blather they offered about serving stockholders has been conclusively proven false. (It had already been proven false years ago in the US business culture driven by management and the demands of management as opposed to those of owners, namely stockholders.)

Nor are the executives driven by the intricacies of economic problem-solving, or they would not now be working so hard to find ways to keep those bonuses while conceiling the fact from the public and the government (or most of the government, since we now know that Timothy Geithner, Sen. Christopher Dodd and others did know about the bonus boondoggle [2]).

Hank Paulson, Timothy Geithner and their ilk are largely of a piece with this ethos. Paulson was smack dab in the middle of it as an exec at Goldman Sachs. Geithner comes out of an environment populated by willing slaves — lionizing, idolizing the Paulsons, Rubins, etc., much like Alan Greenspan or any of that fundamentally conservative wealth-is-virtue school.

This country has for some thirty years effectively been governed with0ut question by the demands of wealth. The US has always held wealth to be the finest repository of power. European nations and others had monarchs, sometimes not the most wealthy, who commanded the greatest power. Ages ago, religious institutions held the power. But the US broke with all that, exalting money as the greatest good. Indeed, George Washington may well have been the wealthiest person in the colonies at the time of the American Revolution. He was certainly one of the wealthiest.

(It would be interesting to poll people at random simply asking them to name a great American from the turn of the last century, or from 50 years ago. From the time of the revolution, they would almost certainly mention Washington. From the Civil War, Lincoln. That was the time of power in government. But then the US began to assume to role of world's leading industrial and economic power. So from 1900, who?)

Deregulation is the most obvious instantiation of the driving priniciple of Wealth as the Greatest Virtue. Trickle down 'theory'. The pattern of compensation in our private and public institutions. Our culture, with its unalloyed reverence for wealth and fame, further supports this conclusion. The titans of Wall Street may not be the flashiest. Athletes and actors enjoy that privilege, but the oligarchs are the economic decision makers, and their motive is money money money.

The meaning of their lives has one measure. To deny them the vast sums they clearly think they have a right to, regardless of the quality of their labor, is the greatest possible punishment short of actual imprisonment. It is wholly appropriate that We the People force this much from an Obama administration that is again proving itself too spineless or too corrupt to hold to account this nation's greatest criminals.

---

NOTES

1. Rich's Times piece, by the way, is a beautiful example of the power of internet journalism. It is thick with cross-links to supporting stories. For example, Republican blowhards like Mitch McConnell now call for curbs on greedy executives. Not long ago, he and others were dead set against them. These are the same Republicans who opposed tooth and nail any Obama stimulus measure, then went home and took credit for the very thing they had opposed.

2. From CNN (emphasis mine): "Dodd told CNN . . . that he was responsible for language added to the stimulus bill to make sure that already-existing contracts for bonuses at companies receiving federal bailout money were honored. A Treasury Department official told CNN earlier that the Obama administration pushed for the language.

"Dodd initially denied he had anything to do with adding the provision.

"Treasury Secretary Timothy Geithner [told CNN] that his department asked Dodd to make the changes."

Backlash for Bloomberg?

March 16th’s New York Times has a story on populist opposition to the bailout (penned by Adam Nagourney who is evidently re-emerging after is miserable excuse for journalism during the election campaign):

The Obama administration is increasingly concerned about a populist backlash against banks and Wall Street, worried that anger at financial institutions could also end up being directed at Congress and the White House and could complicate President Obama’s agenda.

As my seven-year-old daughter would say, “Duuuh!” (said with that perfect bi-syllabic inflection that gives the edge that added sharpness).

So the “Team of Rivals”, better termed the “Team of Super Harvard Friends” or the “Bailout League” (both names following the form of superhero TV cartoons), is beginning to connect the dots:

• Initially obscure candidate, Obama, soars to presidency by galvanizing public sentiment following eight years of criminal ‘leadership’ and sixteen years of gross disregard for the benefits of careful regulation;

• Obama, having gained presidency, immediately proceeds to put in place a ‘team of rivals’ that amounts to no more than a rivalry between Bush economics and Clinton economics, or Harvard on Wall Street economics and Chicago in the classroom.

• That team then continues an already unpopular Bush-Bernanke-Geithner-Paulson (BPGP) scheme, perserving massive bailouts with no punishment of any kind whatsoever for exactly those people who manufactured the crisis.

• Worse, that team offers little more than a verbal slap on the wrist when the very same architects of collapse further reward themselves with bonuses, vacations, etc.

• Last, the shock and awe that The People might find something objectionable in this, that The People are not the dimwitted sheep that privileged Harvard and Chicago grads are encouraged to think they are.

Let’s be blunt. This is a president who, now in office, has abandoned very nearly every measure that gave him any appeal in the first place. He has toadied up to the very Republicons who gave us this calamitous, criminal war. He has persevered in bailing out kickbacks to those who lead the funding drive for him (most notably Goldman Sachs).

He has offered one and only one real carrot to The People, namely a promise of universal healthcare. But even on that count, he has already strictly ruled out the one solution that a large majority of Americans know is the way to go — single payer. He has done this because it would deny wealthy insurers the means to strangle to death, both figuratively and literally (by denial of care), the people insured in name only.

Similarly, despite the fact that over 70% of Americans want to see Bush administration war criminals investigated, Obama offers nothing but evasions and lame excuses for why it might not be prudent to do so. And thus, not only the rest of the world, but many Americans too come to see American justice for what it really is — a two-tiered system of punishments for the common citizens and rewards no matter what for the elite.

As unemployment skyrockets (especially if we consider real unemployment, as opposed to the figure popularized by the government and obediently parroted by the media), Obama proposes “shovel-ready” projects. As already noted by this ranter, anyone who has seen a cattle farm knows what is shovel-ready in heaps.

Worse, Obama and his Team Captain Lawrence Summers are echoing Bush: “Buy! Buy! Buy!” as if a soaring stock market would do anything at all to get people into paying jobs.

In New York City, we should be seeing some evidence of concern among Bloomberg boosters. But no. No concern for Bloomberg — despite his cozy relationship with Wall Street and his long record of advocating deregulation — because he is more than rich enough to squash any opponent. And even were he not so, his backroom bargains with the likes of City Council Speaker Christine Quinn, while not the violently corrupt machine politics of an older New York, are more than sufficient to undermine any real democracy in New York City.

Just as President Obama is ignoring a core principle of democracy nationwide, so too is Michael Bloomberg in New York: Public Officials Serve the People. Obama and Bloomberg are public servants, despite what they may think. In a true democracy, the fear of electoral loss might mitigate against the anti-democratic sentiments of its leaders. But nationwide the Democrats and Republicans have a well-established system of one hand washing the other. And citywide, Mayor Bloomberg doesn’t even make a token effort to conceal his contempt for the commoner. He’s too wealthy to care.

Our American Lifeboat Problem

In moral philosophy the lifeboat problem is a clean way of presenting the needs of the many outweighing the needs of the few. What do you do if you find yourself one of a handful of people in a lifeboat, say eight? There is food enough only to keep six alive until an island is reached. Two must be sacrificed for the majority to survive. What do you do? Is it ethical to take the lives of a few to save the many?

This is no idle philosophical thought experiment. It has been faced in the past: by the members of the Donner Party as they crossed the Sierra Nevada in the winter of 1846-47; the survivors of Uruguayan Air Force Flight 571 after their crash in the Andes in October, 1972; and by many military men in combat throughout history.

This is arguably the form of the problem the United States now faces. The solution currently being ineptly implemented by Timothy Geithner and Ben Bernanke involves the very opposite of the standard lifeboat solution. The well-geing of hundreds of millions of Americans are being sacrificed to serve the well-being the limited number of Wall Street executives and shareholders who are the immediate beneficiaries of US taxpayer generosity.

The Standard Claim is that the financial system must be saved if the economic system of the nation as a whole is to avoid a Hobbesian war of all against all. Whether this is indeed true and what it says about the nature and grave injustice of American Capitalism is the subject of another essay.

For the purposes of this inquiry, the truth of the Standard Claim is irrelevant. Let us take it that the financial system of the United States must indeed be bailed out in some sense, that it must be re-capitalized from some source.

The Obama Administration has taken it as an article of faith that the American people collectively must be the source of any funds for a bailout. A growing spectrum of critics from Alan Greenspan on the right to Paul Krugman and Joseph Stiglitz on the liberal end argue for nationalization.

Which of these two approaches is appropriate is also largely irrelevant to the subject of this essay.

There is an alternative source of funds, whether or not the Obama or the Nationalization approach is the way to go. The proper source of funds is the that population which has most benefited from the greed and crimes of the past 30 years.

Before the current market declines the wealthiest 15 (fifteen) Americans alone had a combined worth of over $300 billion. The combined worth of the wealthiest 400 Americans is in the neighborhood of $1.5 trillion. The combined wealth of the most fortunate 1000 or 2000 exceeds that by still more.

Why not demand of those who have benefitted most — arguably at our expense — the greatest financial sacrifice? A graduated scheme could be managed, leaving all of these fabulously wealthy people a great deal wealthier than the vast majority of us.

Obama Shills for Wall Street

Today, March 2nd, President Obama waded into the waters of Wall Street traders saying that price to earnings ratios indicate it's a good time to buy if investing for the long term.

What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you've got a long-term perspective on it.

Wall Street didn't buy it. And the American people are a helluva lot smarter than any money-grubbing asshole on Wall Street. The catch is that the "long-term perspective" now needed is one that exceeds the life-expectancy of any living American. You're buying for your grandchildren folks (if you're under 20, that is).

But why shouldn't Obama turn penny stock pusher? The Wall Street 'experts' have proven to be anything but, so why not get the nation's top lawyer in on the game? The catch is, of course, that another fact proven in recent years is that performance of the stock markets has surprisingly little to do with the performance of the economy. Averages like the Dow have been adjusted, fiddled, finagled to immunize them against economic bad news, most particularly by removing firms from the average that do not perform suitably. Now, the entire market is doing so badly (it's not entirely immune) that there is no way but down.

But for Obama to jump in sounds more like a Hail Mary. "Puhleeze puhleeze buy stocks. Give us some good news."

This may be sadly reflective of the advice Obama is getting from Summers, Geithner and Bernanke — the Team Of Rivals. The Team of Rivals is not really in the tradition of Lincoln, but the Republicrat tradition of the past 30 years. It is the Team of Bush & Clinton. Torture, extraordinary rendition, responsibility on civil rights — Bush. Stupid economy — Clinton.

Or perhaps it is only a Team of Softball Rivals, the kind that organized between business buddies — Goldman Sachs versus A.I.G. — to play in Central Park during the warm weather.

One way or another, Obama is getting bupkis from his 'team'. It's quite amazing that his proposed budget is as daring as it is. Perhaps that is an attempt to mollify voters even the blindest of whom can see that the 'bailout' is the largest kickback to slovenly, shit-for-brains, billionaire leeches in history.

Nationalization!

"Are you aware it is private property?"

— Sir Howard Kingsley Wood responding to Leo Avery (Member of Parliament)
in late 1939 after Avery suggested bombing
arms dumps in Germany's Black Forest

Bernanke Helps Stocks Snap Back
Bank stocks soared, leading the broader market higher Tuesday after Federal Reserve Chairman Ben Bernanke made the stongest comments yet against nationalizing major Wall Street firms.

— Wall Street Journal, Feb. 24, after markets closed

Bernanke calms nationalisation fears
Stress tests of big US banks that start this week are unlikely to lead to any of them being seized by regulators and nationalised outright, Federal Reserve chairman Ben Bernanke told Congress on Tuesday.
His comments provided the clearest signal yet that US authorities hope to support major banks as going concerns in the private markets, taking equity stakes as necessary to shore up their capital in what would amount to partial nationalisations.

— The Financial Times, Feb. 24, after markets closed

Just whom do Ben Bernanke, Timothy Geithner and most importantly Barack Obama think they serve? The answer should be, "The People". While Obama & Co. pay lipservice to this, and while they may actually believe they are first and foremost concerned with the commoners, I get very little sense that this is their real concern.



With Bush, Cheney, Yoo, Addington, Rice, and the gang of war criminals, there was little doubt. They stopped just shy of expressly rejecting democratic principles. The rejection of democracy seems today to be the defining characteristic of the Republican party. The election, if it can be called that, of 2000. The rerun in 2004 (with Ohio the focal point of malfeasance). Rudolf Giuliani's abortive attempt to suspend elections following 9/11. Michael Bloomberg's end-run around the unambiguous will of New Yorkers.

Democracy be damned. That is the mantra of the Republican party.

But Democrats? Well, the road to hell is paved with good intentions, and it is far from clear that their intentions are even all that good.

What if the solution is nationalization? On what grounds then, is nationalization pre-emptively excluded by Obama? It is at least plausible that the explanation is that the real power in the US rejects nationalization — the rich, the oligarchs, who would actually lose, for a change — in the event banks were seized.

What work does the rigid opposition to nationalization do? Whom does it serve? The owners, of course. Nationalization would eliminate any question of We the People being hosed by the John Thains, Ken Lewises, and so on (and on and on) — the legion of billionaires who have spent decades lining their pockets at our expense.

Similarly, nationalization of the health care system would benefit We the People at the expense of the managers and stockholders of multi-billion dollar insurance companies. And so single payer healthcare or national health, adopted around the world, remains forbidden territory in the US.

Whatever the best solution to these problems and others, we can be certain of one thing: If economics is a science, then what we are seeing is not economics, but dogma.

Science cannot proceed by ruling out in advance solutions the researchers (or the funders) don't like. "Solve the problem of what orbits what, but you cannot consider any answer where the Earth is not at the center of the universe." Sound scientific?

That is the approach the Obama administration and all of the US government is now taking. It as close as we might see to a textbook example of dogma driving decisions. Dogma and the veiled threats of Wall Street and corporate executives.

Since the question is no longer, "What will be best for the US economy?" (It has been replaced by, "What will be best for the wealthiest of the wealthy?") The big question now is, "Can the threshold level of contentment be maintained?" As John Kenneth Galbraith wrote years ago in The Culture of Contentment, the great innovation of the New Deal years was to establish for Americans a level of well-being that kept people content. Can this contentment be preserved, or has the US proceeded so far along the road to true Oligarchy that the commonwealth can be ignored in the service of privilege and wealth?

Mayor of Lansing Michigan Hammers Fox News Flunky

Trillions and Trillions (O, Carl Sagan, Where Are You Now...)

The New York Times has a nice little summation of the extraordinary sums being handed to Wall Street and others to keep billionaires fat out of the fire, and (if you buy the bull) our fat, too — except that, once all is said and done, the billionaires will have taken all the fat and several pounds of our flesh. So We the People are snared in a Catch 22 and the elite are guaranteed to win.

So far We the People are in the hole for 9 trillion dollars — $30,000 for every man, woman and child in the United States of America. When do you think the retirement age will be lofted up to 75?


(The Times graphic is interactive and a great deal more informative.)

Submitted for Your Consideration: A Hypothetical Question About a Conflict of Interest Faced by Our Government — Serve the People or Serve the Elite

We are on the threshold of a drastic change in the structure of American democracy — a tipping point in economics and politics. If we reject the demands of the corporate elite, they fail, we suffer for a time, then recover and democracy may survive. If, as now appears to be happening, the corporate elite are rewarded for their attacks upon the well-being of the People, then the current decline, the "L" as some are terming it, will likely be permanent. We will see a future where much higher unemployment is permanent (masked as it has been by a careful management of the figures), the majority of those employed will see a lower but still acceptable standard of living (contentment), and real control will far more clearly reside in the hands of the American oligarchs.

GM and Chrysler are back with their hands out for more of Our money. As I write this, before markets open on Monday, 23 February, futures are up on the hope that the Obama administration will give more of Our money to Citigroup and Bank of America. Cerberus Capital Management, 80% owner of Chrysler has said that it has no intention of pumping any of its $24 billion into its car maker. No point sending good money after bad, they guess. But We the People, having little or no say in our 'democratically elected' government will stand and watch as Obama, Geithner, Bernanke and company piss more away down the drain of corporate incompetence and corruption.

All of this is, after just six months or so, old hat to the average American. But here's a question: How many among Us believe that the Obama Administration is actually acting on our behalf? How many believe that Obama & Co. actually desire our well-being, that our lot be improved after all the bailouts and stimuli are done?

Here's a hypothetical question. Let us suppose that leading government figures believed that they had a choice between two incompatible outcomes:

(1) A stimulus and bailout package that would aid the average American at the expense of the banks and corporations, and

(2) An alternative package that would aid the banks and corporations at our expense.

Let us suppose further that the a failure of American economic power would lead to a failure of American dominance around the world, a dominance already shaken by years (more than just the Bush years) of unjustified, violent actions abroad, one-sided approaches to international conflicts, and indifference to global concerns (like environmental ones) in the service of short-term American profit.

Might the government then choose to mortgage the next three or four generations of Americans' livelihoods in order to preserve the global position of the executives and companies from whose ranks have come very nearly all of Obama's cabinet officers and advisers?

A conspiracy theory, you say? No. Just the logic of interest satisfaction. The trickle-down theory expressly endorsed by Reaganites, Greenspaners, Chicago and Harvard scholars is really just a narrow restatement of the top-down economic logic that has dominated the United States for decades. For the overwhelming majority of us to live well, the highest echelons of decision makers in corporate America must live well first. That is, if We the People are living well, then it must be the case that corporate America is doing well and its decision makers are living likewise.

The opposite need not hold. Corporate executives and even their corporations can do very well without We the People doing well at all. Indeed, as events of the past year have proven, corporate executives can do very well while even their own corporations do poorly. The logic of interest satisfaction is a one-way street.

The hullabaloo about 'globalization' was certainly not about the benefits to All of Us. It was rather about the wonders of IBM or Microsoft or Pfizer or whomever doing very well by outsourcing labor to other countries. Taken to its extreme, it would be entirely possible for a corporation owned and headquartered in the US to outsource most or even all of its 'work' overseas. The corporation would do perfectly well without employing any Americans beyond the executives and their support staff.

It is no wonder that the very same advocates of 'globalization' of capital have for the most part opposed globalization of or free trade in labor. While Citigroup may outsource its customer support to India, We the People are largely barred from going here or there to find work. Why? If We the People started leaving en masse (as Europeans did from 150 to 80 years ago so so) the US might suffer a real drain, and we are still (for the time being) needed as a sink — as the consumption engin, buying up goods manufactured by so much outsourced labor. (And, by the way, labor has been outsourced since long before the removal of programming or customer service to India or Russia or where ever. Sweat shops in China or elsewhere are the outsourcing of blue collar labor, an outsourcing ignored because it was far removed from the eyes of American journalists and powerbrokers.)

We the People are dependent on the corporate structure for our commonweal. But there is no parallel dependency of the corporate hierarchy on us. So, in the near term, we can be dispensed with. If We the People see fifteen or twenty percent unemployment, so what? (And real unemployment, as measured before all Reagan and post-Reagan fudging kicked in, is already up around 18%.) The Dow is performing just fine, American Idol is still up in the ratings, and the remaining 80% of the population is buying enough to sustain executive bonuses.

Bread and circuses. Keep a threshold percentage of the population contented, or diverted, and the rest can go to hell. Moreover, if the carrot of contentment is insufficient, the suffering of that 20% will make up the difference as a stick.

We are on the threshold of a drastic change in the structure of American democracy — a tipping point in economics and politics. If we reject the demands of the corporate elite, they fail, we suffer for a time, then recover and democracy may survive. If, as now appears to be happening, the corporate elite are rewarded for their attacks upon the well-being of the People, then the current decline, the "L" as some are terming it, will likely be permanent. We will see a future where much higher unemployment is permanent (masked as it has been by a careful management of the figures), the majority of those employed will see a lower but still acceptable standard of living, and real control will far more clearly reside in the hands of the American oligarchs.

Bailout by Yes-Men

Timothy Geithner, Hank Paulson, Robert Rubin, & Co. did not get ahead by saying things people did not want to hear. As in any strongly authority-driven culture, they worked to please authority. Thinking unconventionally, sticking out, saying what is unpopular is anathema.

The New York Times ran a story on February 9th ("Why Analysts Keep Telling Investors to Buy") which fits well into this framework. The buy buy buy mentality is more complicated since there are issues of conflicts of interest etc. But a basic problem is that bad news is never welcome. People don't seek it out. And messengers dread delivering it.

But now we are in a time when, one, bad news must be delivered. And, two, unconventional thinking is a must. As long as the ship was sailing on steady seas under a steady wind, it was easy to make money and for the Rubins, Greenspans, Paulsons to claim credit.

But in these times, their minds are too small to grasp the nature of the problem. They are neither capable or willing. And more important, they are deeply unwilling to risk their own fortunes, in either money or prestige. "Failing upward", as is common on Wall Street, is all about putting obedience and conformity before substance, thought, invention. This is not to say that the native talent is absent. They are as gifted with native intellect as any other. But they have thrown most of it over the side in the service of wealth or approval.

One of Geithner's few purported pluses was that he had not worked for years in the bellies of the beasts — Goldman Sachs, Lehman, Citigroup, and so on. He worked in the beast of Greenspan's design, the Fed. The supposition was that Geithner made a choice of public service. But who knows? Maybe he just didn't have what it took to get a job at Goldman Sachs. He studied government and Asian studies at Dartmouth — not irrelevant, but neither a subject obviously involving any study of business or economics (certainly no mathematics or anything comparably rigorous, not that Wall Street shows much command of math). Then the CIA farm league at Johns Hopkins, the School of Advanced International Studies with international economics and East Asian studies.

Who can say. Geithner is unlikely to tell us what jobs he was rejected for. But he failed up into Secretary of the Treasury. Likewise, Larry Summers failed up from Harvard (where he distinguished himself with his abrasiveness, ignorance and outright bigotry).

Sadly, President Obama seems so far to be a conformist, too. Again, like his peers, he clearly has an excellent mind. But his "team of rivals" betrays an utter unwillingness to challenge what John Kenneth Galbraith originally called the conventional wisdom.

Some Thoughts and Questions on Economic Issues

What is the Right Frame of Mind?
Do you approach problems like those now sinking the US with an "optimistic" point of view? If you approach the problem with the assumption that it cannot be solved, chances are pretty good you will find a way not to solve it. Conversely, if you are unrealistically 'optimistic', you are likely to miss the mark.

There are two kinds of optimism. The first, optimism that a solution exists. This is the reasonable optimism. The second, an optimism about whatever particular solution you are wedded to.

This second kind is the one that the Obama Administration is exhibiting, lead for the time being by Timid Timothy Geithner: "We are going to take aggressive measures. Aggressive. Take action. Yes, can do. Do now. Action." All said while slowly backing away, preparing for the "Run Away!"

Articles of Faith
If we were lucky, we would be trying to draw attention to the assumptions Obama, Geithner, Summers, and others are making unwittingly. But this Team of Rivals has made clear that they are quite consciously not going to challenge particular assumptions:

1. No public ownership. The US will not nationalize banks, will not seize control.
2. Management is just fine. The con-artists who constructed this Ponzi scheme will remain in place.
3. Tax cuts! This is the Great Republicon Truth and President Obama has jumped right on. But people who are too poor or losing too much to owe any tax in the first place won't benefit from tax cuts. Should be obvious and is, but the tax cuts are the ever-promised kickback to the wealthy who bankroll junkets for members of Congress, provide cushy jobs post-term-in-office, etc.

More to come. . . .

Would You Hope for the Best?

If a neurosurgeon told you, "We're hoping for the best," what would you do? That is the advice of President Obama, Timid Timothy Geithner and Larry 'Deregulator' Summers.

Martin Wolf offers an excellent essay in The Financial Times, reproduced here nearly in its entirety:

Why Obama’s new Tarp will fail to rescue the banks
By Martin Wolf
February 10 2009

Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a “no brainer”.

The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.

Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.

If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.

By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.

The Bail In

Paul Krugman has a nice essay in today's (Monday, 9 February) New York Times. Roughly, his point is that Obama's campaign to cooperate, to compromise, or to capitulate, is making any stimulus package weaker.

It's a predictable strategy. While campaign, Obama had to please voters. President Obama has to please managers. Thus a 'stimulus' that is going to help the better off far more than the average. Tax incentives to buy houses that are still overvalued. Promises to place a "floor" beneath bad assets — in substance a promise of profit to investors, profit at Our — We the People's — expense.

It is predictable because key Dogmas of American Economy, articles of faith, remain unchallenged, unquestioned, even unremarked but for the likes of the late John Kenneth Galbraith and a handful of others.

That business, in this case the banking institutions of the United States, must remain in private hands goes unchallenged.

That the wealthy have a right to profit and indeed to ever increasing profit — a right guaranteed by We the People — goes unchallenged.

That We the People exist to Serve the Privileged goes unchallenged.

That We the People — We the Voters — serve those by law elected to serve us goes unchallenged.

That those in power, whether in the corporate boardroom or in the elected office, are naturally talented, naturally gifted, to carry out their roles goes unchallenged.

That they the privileged must, by virtue of their unique and natural talents, be better compensated than We the People, and indeed that they must be compensated even as we go poor, goes unchallenged.

Unchallenged are all the articles of faith which have lead us to the very point we find ourselved today.

Now We the People will pay for the Bail In — the direct, popular financial compensation of exactly those who created this mess. Water will be bailed into the sinking ship, courtesy of the dogma of tax cuts tax cuts tax cuts and no public ownership, no public control.

John Thain - MIT and Harvard Grad

Elite Lad Eases Marble Turd Into $35,000 Toilet Bowl

John Thain poses on the floor of America's World's Biggest Toilet Bowl.

Once again, one of the best and the brightest steps forward to remind us that you really have to go to one of the elite schools to prove just how dumb, corrupt, venal, criminal you are. Just how smart do you have to be to spend $35,000 on a toilet, $1.2 million on one office? You have to be Harvard smart. And that is mighty smart, by jimminy. It's George Bush smart, Antonin Scalia smart, Robert Rubin smart. Smart enough to blow trillions and trillions on nuthin' at all. (Trillions and trillions. They got Carl Sagan beat by a mile.) George W. Bush, John Thain, Antonin Scalia, Robert Rubin - Harvard, Yale men all - with a healthy representation of MIT, Chicago, Stanford, etc.

Which comes first? The sheer stupidity or the gross venality? Are these smart people who get too arrogant or fucking morons who have an easy road to privilege. I personally think that most people are fairly intelligent, given the opportunity. Sadly, most of the most never have a snowball's chance in hell. But a rich, white boy sidling his pimply ass into a seat at Harvard? Like, say, William Weld, former Governor of Massachusetts, onetime national contender. Got his political ass kicked and went on and upward to set up a money laundering operation at a diploma mill. Now that's the kind of stupid you really need a Harvard degree for. You need to go to a 'leadership institution' to manage that.

As for John Thain, MIT undergrad and HBS grad (Harvard Business School to those not privy to Cambridge-speak). Well, John Thain, super-genius, wiley bankster, favorite to take the reins at Shitigroup (umbrella logo conceived by elite designer Paula Scher) deemed it essential to blow $1.2 million on renovations to his office, including $35,000 on a toilet bowl.

And you thought it took the Pentagon to spend money like that.

But, hey, things are looking up. Obama's got Larry Summers, Timothy Geithner, Austan Goolsbee & Co. on the job.

Whoops.

And for those who may wonder . . .

Just what does a $35,000 toilet bowl look like? Well, my comrades, my droogs, I still looketh. The best so far? $2,300 for a Kohler contraption. I will update you inquirying types when I have Innnnformation.

As of 4:55pm Eastern Time, Sunday, 1 February, 2009, We Have Struck you-know-what:

Bloomberg Blows Our Wad

We the People have been tapped by the Feds to bail out the billionaires. Now in New York City, Michael Bloomberg, candidate Mayor For Life, will tap regular New Yorkers to bail out the city. Fine. We bear a collective (though not necessarily equal) responsibility to get ourselves out of this mess.

But one group is exempt -- Mikey's peers -- the millionaires and billionaires, the very people at the heart of the maelstrom in the first place.

Bloomberg proposes cutting teachers, cops, firefighters. He proposes raising sales taxes and cutting property tax rebates. But NO increase in taxes for the wealthiest.

What makes this doubly hypocritical is that the wealthiest already enjoy the lowest tax rates. The IRS has released figures showing that the wealthiest 400 Americans averaged $263 million income in 2006 -- most of it as capital gains taxed at a rate of 17%, far below what many average Americans pay. Yet both Mayor Bloomberg and New York Governor Paterson have expressly opposed raising taxes for those most able to pay. Instead they embrace hammering those least able. Brilliant. American democracy at its truest.

How to Make Money and Screw People

Forthcoming from Rotting Ideas Press: How to Make Money and Screw People, from the gliterati who brought you The Bonus, The Crash, and The Bailout. Pre-order your copy and get a free t-shirt!

Partial contents to include:

Better Business Advisory Boutique by Dick Fuld. The former chief executive of Lehman Brothers plans a comeback with a small advisory firm to harness his contacts in US companies once the dust settles on Lehman’s bankruptcy.

Fall and Fall Again. Robert Rubin tells how you too can be called on as an advisor to presidents even after conceiving one of the greatest financial disasters in economic history.

Effective Toadying on the Way to the Crash. Timothy Geithner, Neel Kashkari and others offer advice on Wall Street's most time-honored practice: saying yes clearly while having one's nose buried in the boss's ass.

How to Get into Harvard. An essential entry guide to the university key to destroying whole economies (even more than the Chicago School of economics!) Greatly enhance your odds of getting an advisory role in the new and improved Obama Administration.

How to Be a 'Brilliant' Criminal. Henry Kissinger, while not an economist, can provide unique insight into committing monstrous crimes while remaining a darling of universities, news media and governments around the world.

Stay Rich! Rob Others! Bernard Madoff shows the cost-effective way to the tried and true method of American corporate criminality. Commit crimes with tiny penalties while netting yourself billions! This is the finest instance of the law and economics thesis we've seen. Learn how to profit legally through criminal activity with minimal costs to yourself and friends.

And more more more! The best insider info on how to rob from the poor and give to . . . yourself!