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Financial Skeptic Bulletin, April 2011

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[Apr 05, 2011] Blacklisted Economics Professor Found Dead NC Publishes His Last Letter

Brilliant satire. April 1 joke, but the fools are not people who thought this was real economics (if any). Hat Tip to Yves Smith...
Apr 04, 2011 | naked capitalism
Professor Outis Philalithopoulos was found dead in his home three days ago; the coroner’s report cited natural causes that were left unspecified. Unfortunately, all of the professor’s academic work has disappeared; the only trace left appears to be the following letter, which he sent to an admirer shortly before his death. The understandably concerned recipient of the letter has shared its contents with Naked Capitalism, and has insisted that her identity be protected.

Dear * * *,

Reading your generous letter was an unexpectedly encouraging experience. I rarely feel that others truly understand the purport of my theories, but when I see a high school student such as yourself navigate her way through the vilifications that surrounds my work, it makes me want to redouble my efforts to explain my ideas to a larger audience.

How did you become the most courageous economics professor of our time? Really, you are far too kind. I never thought of myself as anyone out of the ordinary while working as a young PhD on technical questions in Public Choice theory. As you probably know, Public Choice is the pathbreaking theory that demystified the decisions of politicians, showing that they act rationally in order to maximize their own economic benefits.

Soon after receiving tenure, it occurred to me that we were being profoundly inconsistent. While we had correctly criticized the previous mainstream view that politics involved benevolent efforts to serve the common good, we had failed to apply the same rigor to the community of academic economists. As a result, we were modeling both economic and political actors as self-interested utility-maximizing agents, while continuing to see economics professors as idealistic pursuers of truth. I decided to correct this oversight by developing my theory of Academic Choice, in which economists are theorized as rational agents who continually seek to maximize their future earnings potential.

The way I would describe Academic Choice theory is that it is “the sociology of economists, without romance.” Is this right? What an insightful comment. As you say, Academic Choice theory is a descriptive project, with no normative orientation. We apply a critical approach in order to counterbalance pervasive earlier notions of economists as scientific heroes struggling against popular ignorance in order to serve the common good.

What would you identify as the central insights of Academic Choice theory? The theory begins by identifying three principal ways in which economists try to maximize their utility. First, they receive salaries from universities, which can be increased if their course enrollment increases. Course enrollment is primarily driven by students with future careers in business and the financial sector, so an economist has an incentive to propound theories that CEOs and financial institutions find attractive. Even if adoption of these theories leads to substantial public costs, these costs will not be shouldered by the economist personally. Second, by developing such theories an economist can open the door to future wealth as a lobbyist or consultant. Third, the support of economists is critical to creating and maintaining special privileges for the financial services industry and for top corporate officers. By threatening to withdraw this support, economists can engage in rent-seeking. I call this last practice academic entrepreneurship.

Is it really plausible that economists threaten top banks that in the absence of some kind of payoff, they will change the theories they teach in a direction that is less favorable to the banks? There are certainly cases in history of the following sequence:

a. Economist E espouses views that are less favorable to certain special interest groups S. Doing so threatens the ability of S to extract rent from the public.
b. Later, E changes his view, thereby withdrawing the prior threat.
c. Still later, E is paid large amounts of money by representatives of S in exchange for services that do not appear particularly onerous.

For example, let E = Larry Summers and let S = the financial services industry. In 1989 E was (a) a supporter of the Tobin tax, which threatened to reduce the rent extracted by S. This threat was apparently later withdrawn (b), and in 2008 E was paid $5.2 million (c) in exchange for working at the hedge fund D. E. Shaw (an element of S) for one day a week.

However, it is naturally more difficult to witness the negotiations in which specific threats were appeased with specific future payouts. This is a problem that also bedevils Public Choice theory, in which it is likewise difficult to show exactly how a particular politician is remunerated in exchange for threatening businesses with anti-business legislation. The theory assures us that such negotiations occur, although they are difficult to observe directly. Perhaps further theoretical advances will help us to close this gap.

Isn’t it offensive to assume that economists, for motives of personal gain, shade their theoretical allegiances in the directions preferred by powerful interest groups? How could it ever be offensive to assume that a person acts rationally in pursuit of maximizing his or her own utility? I’m afraid I don’t understand this question.

Is there a “behavioral” version of Academic Choice theory, in which the basic premises are enriched by the possibility that economists sometimes act irrationally? Great question. One of my students developed just such a theory – he postulated that economists sometimes do act benevolently, but they have access to limited information and are subject to cognitive biases. Under these assumptions, he proved that economists would produce theories that are flawed in similar ways to what is independently predicted by Academic Choice.

However, while his dissertation was unquestionably a valuable contribution to the literature, I am personally convinced that the original Academic Choice theory is more empirically realistic. Studies have shown that many people do act irrationally, but not economists – to the extent possible, their decision-making conforms to the model of Homo economicus.

If the theories of economists are harmful to the general welfare, why doesn’t someone try to persuade the public that these theories are mistaken? Collective action in this sense is infeasible. If we instead consider the efforts of a single individual, the cost in terms of time and effort of discrediting an economic theory is substantial, while the benefits are dispersed over many people and so are comparatively small. In any case, the efforts of one person are unlikely to be decisive in swinging the consensus of economists away from a given erroneous theory. It follows logically that the rational decision for an intellectual consumer is to be inactive on this front, and even to be ignorant of the flaws in economic theory.

It might be thought that when economic theories are marred by particularly glaring problems, the public would notice. However, the consequence may simply be to select for economic theories that are particularly difficult for the public to evaluate, without implying any increase in the aggregate accuracy of such theories.

Do you simply assume based on the theory that people are generally ignorant about mistakes in economic theories, or are there other reasons why you would think this? Public Choice scholar Bryan Caplan was able to prove empirically that democracy subsidizes irrational beliefs. He looked at one political issue after another and found that the views of voters are very different from the mainstream views of economists and are therefore obviously irrational. I would love to be able to prove that intellectual consumers are ignorant of biases in economic theories with an equal degree of rigor, but so far have not thought of a way. See, however, the response to your next question.

The core claim of Academic Choice is that valid economic theories are an underprovided public good, due to a combination of academic entrepreneurship and rational public ignorance. Is this merely a prediction of the mathematical models, or is there real world evidence of this claim? Originally I did arrive at this result as a logical consequence of the theoretical model; however, the prediction has since been corroborated through empirical investigations.

Consider the following seven propositions. All of them have been effectively promoted and publicized by academic economists:

P1. (e.g. Greenspan) It is unnecessary to worry about deception in financial markets since market discipline will make sure that dishonest agents are permanently ostracized.
P2. (Clarke) A person whose income is 100 times as large as that of another person has contributed exactly 100 times as much to the general welfare.
P3. (First Welfare Theorem) Corporations, if left to themselves, will always provide employment to everyone and produce an economy featuring constant recession-free growth.
P4. (Arrow-Debreu) A necessary condition for this ideal economy is the availability of arbitrarily complicated securities that reference cash flows in all times, in all places, and in all ways imaginable.
P5. (Borrowing at the Risk-Free Rate) Economic institutions should be designed under the assumption that whenever a firm or bank tries to obtain a low interest loan, it succeeds.
P6. (1997/2008) If a Third World country has a banking crisis, bedrock principles of economics dictate that its largest banks should be allowed to fail and be acquired by U.S. and European banks. However, if the U.S. has a banking crisis, bedrock principles of economics dictate that its largest banks should be saved through massive subsidies from the public.
P7. (EMH, etc.) It is impossible for investment funds to beat the market. However, the current capital market system centered around funds trying to beat the market is this most perfect system conceivable by human beings.

As a bright high school student like yourself can clearly see, the list consists entirely of statements that are obviously wrong, and several of them are internally inconsistent. If economists were simply confused, we would expect to find no pattern in these statements. Instead, as predicted by Academic Choice, statements P1-P7 all directly enable rent-seeking by certain influential minorities (financial sector employees and corporate executives). Moreover, P1-P7 have also helped to generate market discontinuities with significant public costs, among which the recent global financial crisis.

Some of your critics have insinuated that the true aim of your research is to restore faith in the possibilities of democracy. How do you respond? I confess feeling rather hurt by this accusation. Let me explain to you, though, the reasons for this misunderstanding. A generation of Public Choice economists had proposed guidance by economic theories as an efficient alternative to the mistakes inherent in democratic processes, or in other words, to political market imperfections. Academic Choice suggests, however, that once one introduces “academic” market imperfections, we may need to confront the possibility that far from correcting political failures, the authority of economists may actually prove to be a source of further distortions in the economy, leading to what I call the “academic dissipation of value.”

This much is correct. However, to make the leap to assuming that I intentionally created Academic Choice theory in order to favor democracy is malicious and unfair – it is just like claiming that the main goal of the founders of Public Choice was to discredit politics.

What kinds of proposals could help to minimize value destruction by academic economists? You are quite right that from the point of view of the public this issue looms large. Even in most Western democracies, more than half of the total GDP is allocated according to principles promoted by agents subject to Academic Choice dynamics, i.e. economists. One simple remedy to the large negative externalities generated through their academic entrepreneurship could be to shrink the size of the sector of academic economists.

Another approach is indicated by the game theoretic insight that winning strategies in competitive games usually involve a random element. Following this principle, ever since antiquity trials have been decided by juries who are chosen by lot. We should therefore strongly consider periodically repopulating economics departments with people selected at random.

How are your personal relations with your economist colleagues? When I began to develop Academic Choice theory, I fully expected resistance from historians of science, since I knew they would see me as trespassing on their terrain. But I was heartbroken when I realized that colleagues in my own departments now regarded me with something akin to hatred. I tried to help them to see the elegance of my mathematical models and proofs, but their hostility continued unabated: no one would publish my articles, and even my most promising graduate students were refused jobs everywhere. I could not understand how my attempt to extend the reach of economic theory had led to this rancor, and my only solace was to remind myself that Howard Roark in The Fountainhead had also been misunderstood by colleagues who did not understand his individualistic dream of creating beauty.

But nonetheless, I persevered, and one day it dawned on me that the reactions of my colleagues were actually a startling confirmation of Academic Choice theory. After all, economists are very familiar with the free rider problem, whereby individuals take advantage of group benefits without contributing anything. In order to guard against free riders, economists had instituted the tenure process and the journal review process. And since my theories could conceivably weaken the ability of economists to extract rent in the future, they had classed me as a free rider and were attempting to impose costs on me!

Now that I have realized this, even the most malevolent stares of my colleagues are unable to disturb my sense of inner peace – for I realize that every attempt to disincentivize me from my chosen career path is yet another vindication of the explanatory potential of economic models.

If economists are generally self-interested utility maximizers, how can one explain your own passion to pursue the truth at all costs? I confess that your question has forced me to reconsider many things. Indeed, after thinking about the financial outcomes associated with my career, it seems hard for me to avoid the conclusion that I myself constitute a refutation to Academic Choice!

Trying to address this paradox has led to the humbling realization that I am a flawed example of Homo economicus. In fact, I suffer from a cognitive bias known as harmonization bias – i.e., my personal utility function is distorted by virtue of ascribing positive value to harmony between the real world and my economic theories.

My initial reaction to this disturbing discovery was fear that the validity of Academic Choice could be compromised – what if other economists also suffer from harmonization bias? Thankfully, the disorder appears to be rare in the community, and so Academic Choice theory remains applicable to the real world.

Would you recommend a research career in Academic Choice theory? There are certainly a few obstacles. You would have to resolutely conceal your interest in Academic Choice during your entire educational career, at least until you receive tenure. Once you reveal your true passion, you would have to accept both relative poverty and ceaseless acrimony on the part of your colleagues.

Academic Choice is certainly not for everyone –at the very least, it is necessary to suffer from harmonization bias. In light of these considerations, I had begun to accept that the chances of ever finding another student willing to study Academic Choice were slim. Still, your brilliant and lively letter has led me to question my pessimism.

Wouldn’t it be marvelous to see new faces in Academic Choice! The theory is full of beautiful unsolved problems that doubtless stand only in need of a fresh examination. Maybe harmonization bias is not as rare among people in general as it is among economists. Maybe I should try to offer a scholarship for younger students. What do you think?

Good luck with your senior research report and all the best,

Selected Comments

Bryan Caplan

reminded of an old article by Michael Kinsley, “A Public Choice Analysis of Public Choice Analysis.”

Brick:

Re-reading I am starting to think it is an april fools especially since there is no information anywhere about the professor and the name sort of seems a joke. It is well done with reference to Ayn Rand although the author could have said Homo reciprocans instead of harmonization bias.

Still Bryan Capan is a real person.
http://econfaculty.gmu.edu/bcaplan/

Actually academic choice theory is a real field of study.
http://psycnet.apa.org/?fa=main.doiLanding&uid=1994-47157-001

Digoweli
This is a very clever letter. Thanks, but Clifford Geertz got there first and he’s real. Several years ago, at the Institute for Advanced Studies, he proposed coming up with an Anthropology of Western Science and using the institute as the study example. They refused telling him that they were not a culture but were “true objectivity.” Also the Theater Critic Walter Kerr did a brilliant book on this in the 1960s called “The Decline of Pleasure.” Scribners Digoweli
Sungam
Well, 39 results and plenty of content farms. I’d chalk this one up as a success.

It’s a great article and I would chalk it up as an April Fool as in this day and age I would expect even a blacklisted Professor to leave more of a trace online.

Btw the Psychnet article talks about something rather different. And hence cleared for general consumption. :op

Mia
“Outis”=”Nobody” As in, what Odysseus called himself after he poked the poor old Cyclops’s eye out.
“Philalithopoulos”=”Son of love of stone”? “-poulos” is son of, but the “Philalitho-” part is unclear or maybe just random Greek. “Lithos” is rock or stone, and since “Philosophy”=”Love of Wisdom”, “philolitho-” would be “Love of stone.” Or it could be formed by analogy to “Philadelphia”=”Brotherly Love”, in which case it would be “Stony Love”? But the “a” in “Philadelphia” comes from the root “adelphos,” so it’s possible to read it as “Philo-” + “-alitho-” which would be “love of no stone,” but that seems unlikely.

Learning Classical Greek makes you quite the pedant.

Cro
This was actually pretty fun. And no one can complain it was too difficult to see through for what it was. I’m personally glad ‘Choice Theory’ and ‘Academic Choice Theory’ are being highlighted to members of ANY forum where mounds of academic theories are used and debated. I spent a summer in Mexico once reading Randall Collins’ ‘The Sociology of Philosophies’. A brilliant piece which revolutionized how I saw academia.

I’d suggest it to anyone. The first roughly 80 pages are all you need to understand the theory in depth, but the remaining bulk are actually worth the grind. I at least don’t complain much anymore about academics of any stripe being political with their work, I simply expect it as an extension of their professional academic lives and personal belief systems. They’re just like anyone else, and we can’t expect them not behave that way. We simply have to be aware of the fact and integrate that into our own decision-making when we choose who and what to believe.

Is there any other good work out there on ‘Academic Choice Theory’?

LAS
We need an Outis Philalithopoulos endowed chair at every university and college.

The Outis chairs shall publicly honor corporate entities, politicians and economists of the year who best illustrate predicted outcomes from the general theories of Outis. For example, politicians calling for the privatization of Medicare should be strong contenders for one of the 2011 prizes.

Now here’s the beauty of it… Because their own theories are so rewarding in and of themselves, honored recipients of an Outis prize need not be extended any actual prize money or banquet to flourish. The Outis scholars get to keep all the endowed cash.

These Outis chairs could be highly efficient positions to maintain.

alex:

Are you from the “More Truth is Said in Jest” department? Tongue-in-cheek though your post may be (or may not be) such chairs would indeed constitute a public good.

Phil Henshaw:
While the tale is full of truth and wonderful story telling the idea that anyone would “do away with” an academic, with that name and leaving only one scrap of paper, for becoming an outcast in his own profession, is purely hilarious. Sounds more like a case of transient multiple personality…:-)

There’s a further larger mystery exposed none the less, that indeed all academic disciplines are cellular organisms of (to be uncharitable and stay in step with the present discussion) based on self-congratulatory myth making. The further mystery is that, virtually all of nature is built around cellular organization of that same kind, developing according to whatever advances the internal designs of that cell of organization. That includes cultures, communities families, businesses, ecologies, storms etc.. That this is oddly such a visible pattern but not yet recognized by science generally is something I’ve been studying for some time, and has given me a nice set of discoveries.

I find them a bit hard to share with people, having to do with studying cultures as whole systems, but some are fairly easy to appreciate. The majority of our personal environmental impacts come from the energy the world needs to use to follow our instructions, coming from delivering what we spend money on, and outsourcing untraceable resource uses all over the world to do it, for example. Only a small part comes from our visible technology uses that are what people presently count.

There are various others described in my recent papers at http://www.synapse9.com/phpub.htm. The great confusion that the natural cellular design of knowledge communities causes is discussed both in the top paper there and in “What Wandering Minds Need to Know”, a group of very short essays on it.
http://www.synapse9.com/issues/WanderingMinds.htm

Firean:

“Lithopoulos” is a genuine surname, and there are persons with this name within the economics world; eg. Erik Lithopoulos, Savvas Lithopoulos.
Work it from there.

melior
harmonization bias – ascribing positive value to harmony between the real world and my economic theories.

Other academics have tried less troublesome but equally creative ways to achieve this harmony; e.g. the professor interviewed in Inside Job, who used a simple technical method (he explained as “a typo”) to moderate the reality-dissonant tone of his research listed on his CV by changing his report title from “Financial Stability in Iceland” to “Financial Instability in Iceland”.

Mark P.
“For example, let E = Larry Summers and let S = the financial services industry. In 1989 E was (a) a supporter of the Tobin tax, which threatened to reduce the rent extracted by S. This threat was apparently later withdrawn (b), and in 2008 E was paid $5.2 million (c) in exchange for working at the hedge fund D. E. Shaw (an element of S) for one day a week.”

Nice!

Eubulides:

For a serious analysis of the professional economist[s] as rent seekers see:

http://www.uned.es/dpto_log/jpzb/docs/2002%20ECONOMISTS,%20TRUTH%20SEEKERS%20OR%20RENT%20SEEKERS.pdf

Rest

[Apr 27, 2011] Why Does Reputation Count for So Little on Wall Street

April 27, 2011 | naked capitalism

There is a very peculiar article by Steven Davidoff up at the New York Times: “As Wall St. Firms Grow, Their Reputations Are Dying.” It asks a good question: why does reputation now matter for so little in the big end of the banking game? As we noted on the blog yesterday, a documentary team was struggling to find anyone who would go on camera and say positive things about Goldman, yet widespread public ire does not seem to have hurt its business an iota.

Selected Comments

craazyman:

I don’t believe it’s inconceivable that some financiers want Wall Street to be reigned in — although certainly not all, for sure.

They don’t need the money they make for any useful and healthy life purpose. So they operate in the throes of an addiction. And they know they are controlled by their addiction, and so they hate themselves, like addicts will, for their lack of self-control. They also see what their addiction is doing to the nation and the world, and guilt collides with craving, making the addiction even more disturbing.

And so they hate their actions, they hate the world that lets them act, and they dehumanize the victims who suffer from it as a third means of rebellion — in that instinctive blood-level way that the strong hate the weak.

I doubt it is a very happy life they lead, seeking continuous distractions from the baubels of riches and ego, racing headlong at the gigantic void.

ambrit:

Dear Drip; The independant and nonconforming elements of society are always disproportionatly sanctioned as an “easy” way of enforcing the primacy of the top tier elites. It is always easier to demonize a group than tolerate it. Tolerance suggests alternate views of social organization, and thus threatens the elites “elite” status. Such narrow minded thinking generally leads to spectacular social meltdowns via systemic collapse. That’s the beauty of it all. Today, socio-economic practicioners do the hard work of searching for models and methods to reduce this wild “boom and bust” cyclic system. All while working for people who don’t want to understand, much less do anything signifigant about it. Oh my, what’s a poor semi sentient bipedal critter to do?

Justicia:

If investors keep throwing their money at them regardless of their lack of ethics or integrity, then the banksters win. The sad truth is most investors don’t care as long as they think they’re getting good returns. Despite getting burned repeatedly, they still invest in the fraud economy. Pension fund fiduciaries — even the ones that are supposedly “responsible investors” (check out the PRI website)– are still clients of Goldman et al.

LeeAnne:

 a documentary team was struggling to find anyone who would go on camera and say positive things about Goldman, yet widespread public ire does not seem to have hurt its business an iota.

There are no people in the equation, and Wall Street is Santa Claus to the people they actually hang out with. So, what’s to care about? The guy with the most pricey toys wins.

As for wanting to be reined it, it should be obvious that in a land with no rules, killers, thieves and liars rise to the top.

Even their minions making millions might wish they could relate to a higher self in their work. But of course, there’s always the charitable event to tell yourself you actually care.

 

[Apr 26, 2011] Paul Krugman Let’s Take a Hike

Economist's View

roger

This isn't one of Krugman's better efforts. Why should the federal government increase taxes on the middle class? The fact is, the federal budget could be taken care of, in its entirety, by cuts to the military and raising taxes on the wealthiest one percent to the 70 percent recommended by Robert Reich, and by increasing taxes on the other part of the top ten percent accordingly. No need to hunt for pennies among the middle class at all.

The problem with the lower 80 percent is that they are not greedy and envious enough. A political party, or movement, that represented their true interests would break decisively with the shared sacrificers and put the sacrifice where it belonged.

Reich's proposal is much the best out there: http://www.huffingtonpost.com/robert-reich/why-we-should-raise-taxes_b_823822.html
Some bits:

"My proposal to raise the marginal tax to 70 percent on incomes over $15 million, to 60 percent on incomes between $5 million and $15 million, and to 50 percent on incomes between $500,000 and $5 million, has generated considerable debate."

reserve programs deemed essential by the middle class, and not raise taxes on the middle, is to tax the top.

"In fact, a Democratic president should propose a major permanent tax reduction on the middle class and working class. I suspect most of the public would find this attractive. But here again, the only way to accomplish this without busting the bank is to raise taxes on the rich."

The reason "progressives" are headed for the ash heap is that they can't get their trust fund heads around such a crazy idea. Hence, they promise Americans in general that they will get the same or crappier services and they will pay more for them. Then they wonder why Americans vote for rightwingers. It is pathetic. There is nothing the matter with Kansas, honey. Those folks can add

Julio:

Actually, roger, I think we all believe in "shared sacrifice". It's just that now, well, it's their turn.

I think part of the discussion has to be to point out, repeatedly, how the middle class has been robbed by government policies, and all we need to do, in the first place, is reverse those policies.

Rune Lagman:

Completely agree; just like raising the retirement age. Raising the retirement age increases labor supply in a labor market that already lacks 20 Million jobs.

One, very easy, way to spend the unused capacity, that's currently wasting away, is to LOWER the retirement age.

Another way to spend the unused capacity, that's currently wasting away, is Medicare for all.

Another way to spend the unused capacity, that's currently wasting away, is renewable energy.

Another, very easy, way to spend the unused capacity, that's currently wasting away, is less taxes on the middle class.

Another, very easy, way to spend the unused capacity, that's currently wasting away, is a higher minimum wage.

Why aren't economists like Paul Krugman and Mark Thoma (our host) talking about what's really needed?
 

Lobbyist Ben Dover:

Nanoo-Nanoo wrote:

Basic ethical behavior is lost for now not only among the captains of industry but by extension those who purportedly are representatives of you and me in governance. The promise of our land is also lost as a result. Not the entitlement of the "American Dream" but the opportunity to live life as one chooses and create ones on destiny. Only by our own will and abilities can we as a nation of people change this, it won't be through our representatives since they are anything but representatives.

Some of us have been waiting for a long time. Still a long time away till real positive change takes place, probably not in my life time.

nova

Some of us have been waiting for a long time. Still a long time away till real positive change takes place, probably not in my life time.

Ben, the odds are we live long enough to see the flames from the grass fire but not the green that will come after.

tg

wreck a currency =wreck a country

wreck a country= wreck a currency

Tom Stone:

Ethical behavior Is a survival tool. It is necessary for groups to function in times of stress and thus for individuals, especially children, to survive. It is deeply ingrained in our behavioral patterns. I would guess that about 15-20% of humans are ethical no matter what, 60% swing back and forth depending on their society's bent and 15-20% are mostly without any ethical foundation. In a small town like mine,i can and have slowly built a network of ethical friends and acquaintances, if and when TSHTF I will be in better shape than any loners.

righteo

Tom, 15-20% are ethical, 80-85% are not.

ResistanceIsFeudal:

Black Star Ranch wrote:

righteo Tom, 15-20% are ethical, 80-85% are not.

and 1% are psychopaths.

Tom Stone:

ResistanceIsFeudal wrote:

and 1% are psychopaths.

I would put that figure higher, closer to 5% in my experience. It is a spectrum, some are more extreme.

nova:

 RiF,

Probably 2% with some borderline cases thrown in. America is like the showers in the gym. It breeds some nasty shit down by the drain.

Nanoo-Nanoo:

Tom Stone wrote:

Ethical behavior Is a survival tool.

Its more than that in modern society. It is a functional trust be it from your physician, to your lawyer, to your merchant, to your grocer, to your dairy, to every aspect of life. What was forgotten is that no man is an island, we all exist via cooperative effort. It was captured though and basterdized so that even the lowliest of the low cannot live without the extraction; risking known and unknown of the cheats and liars.

If it doesn't change, then we aren't just talking about markets, we're talking about the very survival of our species since we are treading now in new territory from biologic manipulation to particular means of extraction for energy and food which without firm ethics and very bright lines in applications threatens us profoundly. I might add, its a global problem, not just a native one.

[Apr 26, 2011] So How Exactly Does Buffett Get Information Like This

finance provides other functions besides the creation of fictitious capital via sociologically baseless mathematical formulas;
naked capitalism

nonclassical

Here’s what we know, courtesy of Robert Johnson-ex-Senate banking committee designee=oversight:

http://www.newdeal20.org/wp-content/uploads/2009/10/raj-revised-testimony1.pdf 

We know from a variety of people derivatives valued circa $880 Billion, 2001, and $600 Trillion, 2007-this within Robert Johnson’s expose’.

We also know 6 U.S. “investment banks” control 95% of these derivatives.

We also know the entire U.S. economy=circa $6.5 Trillion per year, and entire world economy $65 Trillion per year.

Gore Vidal stated (therefore) we are in a 20-30 year economic demise, and will never be the “same”-whatever that may mean..

Paul Tioxon:

Finance decoupled from the real economy produces money, as you say, paper profits without corresponding wealth that anyone can see or hear or feel but only count, as in $600 TRILLION. If we view money as language, a binding cultural phenomena, we may be able to see these geometrically increasing profits approach asymptote as the equivalent of St Anselm’s argument for the existence of God. It is something we can talk about and even logically agree, but after it is proposed, it is no more than empty words.

If you can conceive of a supreme and omnipotent trading strategy, and this strategy can produce all of the money in an infinite amount, its capacity to create money will exceed the actual material wealth of nations with economies. But if the all of the measurable productive capacity of the nations of the world is actually one tenth of the the supreme and omnipotent trading strategy, which produces an infinite amount of money, what is the value of the money when it exceeds the value of the world economy?

Meaningless, but not worthless. It has worth, because it is still recognized culturally as money, for all debts public and private. What would happen if we eliminated this meaningless sector altogether and just got by the on wealth we actually produce, instead of the money we make when we talk back and forth in investment banking trades that is a decouple meta-system consisting only of money?

Mark:

@Hubert – well said. the thing is that finance provides other functions besides the creation of fictitious capital via sociologically baseless mathematical formulas; supposedly ‘efficiently’ allocates capital to productive sources away from declining industries, intermediates btwn lenders&borrowers, allows consumption to be moved temporally, supports price formation and allocates risk (currency, interest rate, default, etc).

but finance’s functionality, and not its dis-functionalities (which we all witnessed many a times) is in part b/c of the frameworks in place i.e. international monetary frameworks…so eliminating this useless sector means retooling them which is necessary if we want to stop living in such volatile conditions prone to crises

Paul Tioxon:

I was referring to the Magnetar Trade (A supreme and Omnipotent Trading Strategy), and similar metaphysical finance. Not finance that can be retooled or even recognized as banking which helps to build homes and factories, highways and skyways, and internet world wide webs. There was a reason why future options trades were banned by Germany for so long, it’s voodoo investing.

Matt:

You can get a better feel for the derivative situation by looking up the OTC and DTCC derivative reports. The bulk of derivatives are in FOREX and interest rate swaps. Credit derivatives such as credit default swaps are dominated by government securities (read PIGS) with much smaller amounts in companies and MBS and CDOs etc.

Since counting both buy and sell side is a double count, the DTCC claims the total outstanding credit default swaps is about 33 Trillion, with the net being less than 1 Trillion. As an exercise you can read the derivative community’s clearing of the Lehmann brothers derivative positions. Unless credit default contracts were super senior contracts that must be fulfilled before the bankruptcy judge gets involved, it is hard to see how there could be such a large derivative industry. So don’t think a derivative contract is junior or equal to any other commitment.

[Apr 26, 2011] Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets!

April 24, 2011 | naked capitalism

You heard it first in the blogopshere. From the New York Times:

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”

attempter:

the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs

1. That was never the Fed’s intention. (That’s a literally standard NYT lie, where the proclaimed intentions of elites are systematically represented as reported facts.)

2. If a government truly wanted to create jobs, imagine what $600 billion in direct stimulus could do. (Obama’s corporatist version was mostly just a bailout by other means.)

You will the end, you will the means. Since this government never wills anything but corporatist means which are proven failures at anything other than robbery, it follows that corporate robbery is the end it intends. QE and the rest of the Bailout are the ultimate proof.

Jim Haygood:

The Federal Reserve’s experimental effort … has … reduced the cost of American exports

Gotta love the way the MSM’s PR flacks spin the positive. Instead of focusing on exports, which concern few Americans other than farmers, the NYT stenographer could have written that ‘the Federal Reserve’s goofball experiment has blown gasoline prices to over $4.00 a gallon.’

But then El Barbudo (The Bernank) would be unhappy. And it’s not every day that you get a client who can print the money to pay his bills.

Naturally the incurious NYT never explores the question of why a bank cartel should be licensed to counterfeit currency.

foosion:

Lowering unemployment just raises labor costs, which is bad for corporate profits. No one in power supports that.

Higher equity markets, on the other hand, put money into the pockets of those who run things.

The public elected Republicans last November, an obvious endorsement of these policies.

Francois T:

“The public elected Republicans last November, an obvious endorsement of these policies.”

Obvious? Far from it when one look at the participation rate by demographic. In a nutshell, About the same number of Republicans voted in 2010 than in 2006. The big difference is that the Democrats were far less numerous in 2010 than in 2006.

Endorsement it was not.

ambrit:

Friends;
It’s another example of the Law of Unexpected Consequences. The main result of QE and QE2 looks to be, from down here in the trenches, a deep reinforcement of the publics natural distrust of “those in power.” This is exploitable, but is a most dangerous double edged sword. Notice how everyone is talking about ‘Obamas Wars’ and ‘Obamas Economy,’ the reality of their true origins notwithstanding?

nonclassical:

Ambrit,

what ARE the “realities” inherent in origin of Obama’s misdeeds?

eric anderson

Obama always embraced the Afghan war. And he owns it now, having done a thorough review, drafting a new roadmap. (See Obama’s War by Bob Woodward) But there are no other Obama wars. Only a new “kinetic military action.” (howls of derisive laughter)

As for the economy, Obama grasped the steering wheel of the kleptocracy, and drove it faster in the direction it was already going. Tell me why he does not deserve to own whatever happens to the economy from here on? Man, I remember the time he wouldn’t vote to extend the debt ceiling. What a difference a few years makes. I remember when he said he wasn’t elected to serve a bunch of fat cat bankers. If that doesn’t make the contents of your stomach start to rise to the back of your throat, I don’t know what…

rd

The QE’s have coincided with a massive increase in credit card interest rates: http://money.cnn.com/2011/01/28/pf/credit_cards_interest_rates/index.htm 

The increase is actually due to the banks response to legislation about credit cards, so it just further exemplifies how Bernanke’s QE policies are completely untethered to the real world of consumers and business.

Bernanke can QE all he wants, but if the end result is higher credit card interest rates, dropping house prices without significant mortgage rate and property tax reductions, increasing gas and food prices, and little change in unemployment, then there is no way in hell that he is going to get American consumers and domestic business off the mat.

Instead, we are getting this propaganda war going on about how important it is to maintain low taxes on the wealthy, especially the financial sector (e.g. carried interest tax policies for fee income). If I recall, Hoover and Mellon reduced the top income tax rate to 24% from over 70% back in about 1929 – that worked out well for everyone I believe.

Bernanke is sowing the seeds of the next financial crisis as he is pumping wads of money into speculative frenzies that are not based on real economic activity. I think in the next financial crisis, we should permit the financial sector to experience capitalism at its finest – we need to allow them to fail, probably through nationalizing the firms temporarily to prevent a disorderly Lehman type of bankruptcy.

We have been watching all of those quaint scenes from the Middle East with thousands of people marching in the streets over unemployment and inflation, occasionally getting machine gunned by their governments. It is important to remember that it took similar events in 1932, like the military rousting the Bonus Army, to create the environment where Glass-Steagal could be passed. By that point, even the remaining wealthy knew that something had to change. I hope that out politicians do not have to create a repeat of 1931-1933 in order to get rational policy making back on track, but I am not optimistic.

alex:

Bernanke is sowing the seeds of the next financial crisis as he is pumping wads of money into speculative frenzies that are not based on real economic activity. I think in the next financial crisis, we should permit the financial sector to experience capitalism at its finest – we need to allow them to fail, probably through nationalizing the firms temporarily to prevent a disorderly Lehman type of bankruptcy.

Hear, hear!

Capitalism for the “capitalists” (a term various parasites flatter themselves with) is a great idea.

YankeeFrank:

Theoretically, nationalization of the major banks with replacement of all upper management with honest business people (an oxymoron today?) combined with real reform should be enough. Apparently such rational behavior is not possible in our society without a total collapse, so its a truism to say that without total collapse of the financial system there is zero chance of reform and recovery.

confused:

“The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.”

I’m sorry, I don’t get the connection.

FED buys Treasury bonds (ie loans THE Treasury money). From where did the FED get the money to loan to “THE Treasury — an agency of the Federal Government”? From its savings? From its member banks? From its printing press? but, I digress…

Anyway, now the Federal Government has some money to fund “Banks” (or some other entities) that lend to companies? I don’t think that companies can apply to THE Treasury directly for a loan, can they?

No, I am pretty sure that THE Treasury’s money is distributed to the various Federal Agencies (DOD, DOE, DOI, DOEd, DOC, DOHHS, DOHS, DOHUD, DOJ…etc.) to pay their various contractors and consultants plus a few direct employees and their overhead probably according to the plan spelled out in the Federal budget.

An area of confusion that I have is understanding the mechanism that ties the various QEs to the Federal budget.

By shoveling money into the agencies’ contract and consulting firms, who then buy from various parts of the US economy to fulfill their government contracts, the FED will indirectly stimulate the economy and pump up corporations’ dividends and stock values. At the same time, it seems, that all of this new money will have some effect on the debasement of the currency, eventually.

Still don’t understand the mechanism that allows “companies to borrow money at lower interest rates”. Could someone connect those dots for me?

Cedric Regula

It’s Crowding Out Theory in reverse. The Fed bought (monetized with the printing press, for whatever the term of the bond is… they get the money back and can throw it away when the bond matures) an amount that equates to about the entire USG deficit. It’s large, the Treasury is only collecting about half the annual Federal budget in taxes.

The government would have had to sell that to either domestic or foreign buyers, which include banks and foreign central banks. That would have put some upward pressure on rates. Jim Hamilton figured 17 basis points effect(down) for QE1 , but that was during a deflationary, flight to safety period, when everyone wants to buy Treasuries.

Until the markets and foreign investors cry foul of course. Then the game doesn’t work anymore. China just started making noises again about “diversifying” out of 2 trillion of their 3 trillion in Treasury holdings. We have to wait and see if they are just blowing smoke again. But PIMCO sold all theirs already. Some signs Japan may reduce their large holdings too.

Jackrabbit :

And as Marshall Auerback has pointed out, the idea of a fixed dollar amount of purchases was bizarre. There was no way of knowing what if anything it would accomplish. It would have made more sense for the central bank to set a rate target (say for whatever longer-dated maturity it chose to target) and buy whatever it took to keep that level.

But a rate target would’ve meant that anyone holding Treasuries could sell them to the Fed at historically low rates. Imagine China selling $1T T-Bonds to the Fed (shorting or executing swaps as necessary).

Furthermore, the Fed could not tighten any longer, and even driving down medium-term rates by 50bp (a VERY costly endeavor) would not have helped much. A better strategy – which I believe QE2 is based on – was to raise interest rates so that banks have a greater incentive to lend.

Thus, as structured, QE2 *IS* “printing money” but it comes with a promise to mop up the excess in the future (as the bonds mature, or via unwinding before maturity). While disingenuously talking DOWN yields, the Bernanke’s QE2 was _bound_ to hike them. Further, while more loans would be better for the economy (especially if it sparked a RE recovery), the banks would benefit regardless of the effects on the real economy. (Aside: I think the Fed and Tsy are hot for bank equity offerings before the 2012 elections. Nothing says “healthy banking sector” like a successful equity offering)”

I think the above best explains a) why QE2 is “only” $600b, b) why the Fed did not target a rate, and c) why rates rose dramatically after QE2 began. It also dovetails with the concerns, expressed well before QE2, regarding low bank lending volume and Geithner’s focus on increased bank capital as the best protection against TBTF systemic risk.

Bernanke had to give a compelling reason for QE2 and he chose to say that it would increase employment via lower rates (note: some pointed out at the time that rates were already at historic lows but jobs were, nevertheless, hard come by) because it was politically inconvenient to tell the truth: that QE2 was designed to incentivize bank lending by giving them a higher return on the loans they make.

QE2 might’ve worked better if the robosigning/MERS scandal had not occurred. We may see QE3 if: a) stocks and T-yields fall after QE2 (a return to pre-QE2 conditions); and/or b) mortgage market uncertainties are resolved.

political economist:

I have a question on terminology. Why do you call this the “Bernanke put” when the Fed is buying bonds not options to sell?

Cedric Regula:

It’s just a loose analogy to options trading. It means the Fed comes to the rescue. The Greenspan Put was Greenspan slashing rates whenever anything bad happened anywhere in the world. Benrnanke likes buying anything that remotely resembles a credit instrument. Someday, Janet Yellen will be buying bad loans on Somalian pirate ships off Citi’s balance sheet.

[Apr 24, 2011] Robert De Niro To GOP, Donald Trump 'How Dare You!'

Lightwins
I am not a republican­, nor am I a democrat. As far as I am concerned its apples and oranges. Both parties are controlled by the same Elite and Big Money. Everyone thinks that Obama has "good intentions­" and is "trying." Maybe that's true, I don't know. But it is obvious that he is powerless to make any real change. Has the economic situation, war spending, etc. gotten better under Obama? What is the difference really between him and Bush? He may have better intentions than Bush did, but is should be obvious to the American people by now that the President is not the one in power.

[Apr 18, 2011] Why the Fed Has Upped the Ante in Money Pumps (Hint: the System is Crumbling a La 2008 Again)

Phoenix Capital Research

04/18/2011 - 21:48

If you think that somehow the Fed’s money pumps will keep the system afloat and stop another 2008 type even from occurring, consider that we’ve gone from $50 billion to $200 billion per month in money pumps… and we’re still seeing sharp sell-offs occur. Indeed, at some point, and I cannot say specifically when, the Fed will lose control of the system.

When that happens, the Crisis that follows will make 2008 look like a PICNIC.

[Apr 18, 2011] Why the Right-Wing Bullies Will Hold The Nation Hostage Again and Again

April 9, 2011

When I was a small boy I was bullied more than most, mainly because I was a foot shorter than than everyone else. They demanded the cupcake my mother had packed in my lunchbox, or, they said, they’d beat me up. After a close call in the boy’s room, I paid up. Weeks later, they demanded half my sandwich as well. I gave in to that one, too. But I could see what was coming next. They’d demand everything else. Somewhere along the line I decided I’d have a take a stand. The fight wasn’t pleasant. But the bullies stopped their bullying.

I hope the President decides he has to take a stand, and the sooner the better. Last December he caved in to Republican demands that the Bush tax cut be extended to wealthier Americans for two more years, at a cost of more than $60 billion. That was only the beginning — the equivalent of my cupcake.

Last night he gave away more than half the sandwich — $39 billion less than was budgeted for 2010, $79 billion less than he originally requested. Non-defense discretionary spending — basically, everything from roads and bridges to schools and innumerable programs for the poor — has been slashed.

The right-wing bullies are emboldened. They will hold the nation hostage again and again.

In a few weeks the debt ceiling has to be raised. After that, next year’s budget has to be decided on. House Budget Chair Paul Ryan has already put forward proposals to turn Medicare into vouchers that funnel money to private insurance companies, turn Medicaid and Food Stamps into block grants that give states discretion to shift them to the non-poor, and give even more big tax cuts to the rich.

There will also be Republican votes to de-fund the new health care law.

“Americans of different beliefs came together,” the President announced after agreement was reached. It was the “largest spending cut in our history.” He sounded triumphant. In fact, he’s encouraging the bullies onward.

All the while, he and the Democratic leadership in Congress refuse to refute the Republicans’ big lie — that spending cuts will lead to more jobs. In fact, spending cuts now will lead to fewer jobs. They’ll slow down an already-anemic recovery. That will cause immense and unnecessary suffering for millions of Americans.

The President continues to legitimize the Republican claim that too much government spending caused the economy to tank, and that by cutting back spending we’ll get the economy going again.

Even before the bullies began hammering him his deficit commission already recommended $3 of spending cuts for every dollar of tax increase. Then the President froze non-defense domestic spending and froze federal pay. And he continues to draw the false analogy between a family’s budget and the national budget.

He is losing the war of ideas because he won’t tell the American public the truth: That we need more government spending now — not less — in order to get out of the gravitational pull of the Great Recession.

That we got into the Great Recession because Wall Street went bonkers and government failed to do its job at regulating financial markets. And that much of the current deficit comes from the necessary response to that financial crisis.

That the only ways to deal with the long-term budget problem is to demand that the rich pay their fair share of taxes, and to slow down soaring health-care costs.

And that, at a deeper level, the increasingly lopsided distribution of income and wealth has robbed the vast working middle class of the purchasing power they need to keep the economy going at full capacity.

“We preserved the investments we need to win the future,” he said last night. That’s not true. The budget he just approved will cut Pell grants to poor kids, while states continue massive cutbacks in school spending — firing tens of thousands of teachers and raising fees at public universities. The budget he approved is cruel to the nation’s working class and poor.

It is impossible to fight bullies merely by saying they’re going too far.

[Apr 18, 2011]  Civility is the Last Refuge of Scoundrels

Economist's View

lambert strether

Well, yes, this is "the media critique" circa 2003 - 2006 and so far as I can tell, this won't happen, ever: (1) because the right works the press; (2) the people who own the press have turned it into a pervasive mis- and disinformation system that would make Joseph Goebbels proud (see, for example, Judy Miller on Iraq) -- and they like it that way; (3) reporters go along to get along.

Lee A. Arnold:

The President must be laughing to himself. By kicking-off his campaign with a rallying cry to protect the safety net while judiciously cutting the long-term deficits, he also goaded the Republicans into doubling-down on their own ideology and voting, as a unified block, to empty granny’s purse then kick her out onto the street!

Give it around another 72 hours to sink in.

You will recall that the necessary game, since before the last election, has been to make the Republicans do just this. I have been writing it here since last June: Take the Republicans at their literal word. The strategy should be to force the Republicans to come up with the spending cuts to match their tax cuts, in the same Congressional bills. The stark nature of this outcome would force a wedge between the Tea Party and the Republican leadership, and also force a wedge between the Republican Party and the rest of the country. Force the country to see just what the Republicans want: tax cuts for the rich so they can gamble again on deregulated Wall Street, and balance the budget on the backs of granny and the teachers. The basic aim should be to make the electorate see this, and thus to put the Republicans out of business.

(That could be a good name for a music band: Granny and the Teachers. I Googled it; so far, there is no ontology.)

(Liberals keep saying to themselves, “What do you mean, take the Republicans at their word! Oh they don’t really mean it—they don’t really care about deficits! You can’t possibly respond to them in kind! That will NEVER work!” etc. etc. ad nauseum because liberals apparently like to shoot themselves in the foot with bullets full of their own brain-vomit. Who cares what the Republicans actually believe? To turn that around: believe me, they don’t care about what YOU believe! Could you try to be a little more fatuous and self-defeating? [—this note on whining stupid liberals, maybe discard it?]—[nah, leave it in. The incredibly stupid pathetic leftwing whingying liberals and progressives who show up in comments here and at Baker, Benen, DeLong, Drum, Ezra’s, and Quiggin at Crooked (to meander in lexicographic order) are gobstricken and offended and lovelornlike because Obama has to act like a politician. —All truly great bloggers, I don’t mean to gainsay. My hat is off to everyone of you. In fact I sort of love you though only in a man-cavey way. The problems is that most of your commenters are fantasists and can’t see what is directly in front of them, to, like, grab an affordance and actuate an intention. Though it does seem that all you bloggers had the attitude to keep insisting that the TeaParty is not important—as if that should make ANY goddam difference at all.])}

But I did think the plan would be difficult! Little did I suspect that the Republicans would walk right into the trap!

Looking back on it, perhaps they were first goaded by the failure of their normal rhetoric on the Sunday morning talk shows back in September, when McConnell, Kyl, Boehner, et alia were struck speechless on camera by the interviewers’ refusals to agree that tax cuts “pay for themselves.” It totally interrupted their blabber for, like, 60 hexideciseconds! This happened on at least three different shows! What a sight! Do you suppose they were so stunned when clobbered upside-the-head, that they figured they had to invent a budget?

Note however that there is a true and terrible history leading up to this horrifying state of affairs. Short version, teh Republicans are in their death-throes. Okay it may take a million years like the dinosaurs, but this looks like an evolutionary cul-de-sac. They have two long-term problems: (1) Their ideology, Reaganomics, has intellectually imploded on the shores of reality, indeed upon a profusion of mixed metaphors, and they cannot formulate coherent explanations for things, and so they rely upon the Luntz-teased emotions of fear, uncertainty, and resentment. (2) Then they have to sell it to the far right, who are their only reliable voters.

Driving a wedge into this mess is therefore a good idea, if you really want Truth, Justice, and the American Way.

A obvious major misstep was the decision by McConnell and Boehner, after Obama’s election, to go into a mode of total obstruction for political gain. I suppose it seemed only fair, since the Democrats had previously decided to block Bush’s Social Security privatization efforts—though I like to refer to it as the Democrats “coming to their senses.” So it might have been tit-for-tat, but this Republican obstructionism was politically shortsighted. Instead, they should have taken credit for the 1/2 of the ideas in the healthcare reform which are in fact Republican, and it would have taken the wind out of the sails of the liberals. As I wrote, at the time. Instead they chose a rhetorical path to certain self-destruction, however long it might take for reality to catch up with them, and they decided to lie about the likely effects, both budgetary and medicinal, of the healthcare reform.

Well, it was enough to win the November election. After all, Americans are oftentimes dunces. But within a few months, Gov. Walker of Wisconsin, elected with Koch money and receiving phony Koch calls, decided to balance the budget on the backs of the teachers and the cops they are married to, thereby setting a new world’s record in public-opinion turnaround! That was a good hoot! I was walking around, going Hoot! Hoot!

But who could have hoped for what came next? Ryan’s budget proposal is an astonishing political gift to the Democrats. Let’s everybody move to Skid Row! The idea of appearing on Wednesday and going, like, “Nyah-Nyah, Nyah-Nyah-Nyah, we are SO not doing this!” must have been irresistible to the President. But it actually goes further: Obama’s speech is among other things evidence that he may see that a stable, dominant center-left coalition is almost within reach. To kick it off with his re-election campaign is almost too much fun.

The way forward? Let it be known to all people that we don’t have to destroy Medicare or the safey-net to fix the deficits. That is all bull. And be sure to explain this to the Independents, who are unaware. The CBO’s most recent Long-Term Budget Outlook showed that the Democrats have already reduced the long-term deficits by 2/3rds, IF Congress sticks to the current plans and lets the Bush Tax Cuts expire. And those savings may be more, nobody knows. Or are we going to reassure the “bond market” by throwing the U.S. into a social cataclysm? How does that work, exactly? In every case, piecemeal reduction of the long-term deficits is the best way into the future. And meanwhile, what will be Ryan’s CBO score? And why would future Congresses stick to it, when the Republicans won’t stick to Obamacare? As soon as you try to follow the logic, the Republican plan not only destroys the future, it destroys thinking itself. According to all the polls, we have 70% of the people in favor of keeping Social Security and Medicare, taxing the rich, a public option available in healthcare, saving the environment, etc. etc. etc. Use this, now. The mainstream media may be pillars of sophistry and lazy blabber, but if they see a scientific proof, like the Sunday talk show hosts refusing any longer to accept that tax cuts pay for themselves, then they will in fact come forward and say so, without fear of losing invites to cocktail parties. Use this, now. Once you get all the ducks lined up, then it high time to push it all in front of the Republican Party, and make them fall over it. Also, always remember to ask the Republicans if they support universal health coverage. They don’t like to answer that question, ever. And wear your galoshes, it is going to get deep.

Destroy the Republican Party! The world will be grateful.

Simon:

The Republican plan won't work because it is way to contractionary. With so much capital offshored, there is none for the "invester" to invest in America. Hence, it piles up at the top rungs while the other rungs suffer.

Which leaves Wall Street speculation. Yeah, get rid of the bailouts, doesn't matter. They will speculate for profit, reorganize after the crash and speculate again. History has demonstrated this over and over. I doubt though, they could survive long enough with the kind of mess it would create for the middle class.

The only way the current global model will work if the capital at the top is taxed reinvested or wages rise with that capital excess. Either that, or we go my way into re-patronization of capital back to the homeland whether "they" want it or not.

 

[Apr 18, 2011] US Uncut Stages Flashmob at Bank of America Over Its Failure to Pay US Income Taxes

Funny protest against banksters tax avoidance...  It you keep a BoA account or card right now, try only keep minimal funds in it. Collectively we can make a dent
naked capitalism

Courtesy US Uncut:

rps:

….Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country?… Should its influence become concentered, as it may under the operation of such an act as this, in the hands of a self-elected directory whose interests are identified with those of the foreign stockholders, will there not be cause to tremble for the purity of our elections in peace and for the independence of our country in war? Their power would be great whenever they might choose to exert it…..

Experience should teach us wisdom. Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of Government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by act of Congress. By attempting to gratify their desires we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of the Revolution and the fathers of our Union. If we can not at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy….”

Veto Message of the Bill on the Bank of the United States Andrew Jackson July 10, 1832

 

[Apr 18, 2011] ETFs as Source of Systemic Risk « naked capitalism

April 18, 2011

Daniel de Paris:

A valuable post.

“Most investors probably assume that an ETF is more or less a mutual fund”

Sure. ETFs are – in many ways – a part of the global Ponzi. And the Ponzi is not only on the banking side. The so-called “investor” is quite often not one. A significant percentage of these investors (sic) are highly leverage bet makers as well.

An investor is investing their own saved money. Not Bernanke-pumped liquidity.

Risk is on both sides.

 

[Apr 17, 2011] A deficit of courage By Peter Morici

Asia Times

It's the same old story: when the Democrats get the reins they increase spending by a dollar, and when the Republicans seize back control they can manage to slice the excess by 50 cents.

What is more comical are the means the GOP present for restoring fiscal sanity.

Healthcare costs are running away in the United States - Americans pay 18% of gross domestic product for healthcare, while the Germans and Dutch pay only 12% to accomplish outcomes as good or better.

Americans simply pay much more for drugs, health insurance administration and malpractice than do the Europeans, but each interest group has enough congressmen or a president in their vest pocket to keep real reform at bay.

Now, Republican wunderkind and House budget chairman Paul Ryan proposes block grants to the states to cut Medicaid spending, and vouchers for poor folks so they can negotiate better prices for doctors visits, hospital stays and drugs.

Absolute sophistry!

It is incomprehensible that poor folks can do a better job of negotiating with drug and insurance companies than the federal government, and block grants will merely shift the burden of the overspending and cutting from Washington to the states.

I love those brave Republican congressmen - no guts to stand up to special interests, so put it on the backs of the poor and state legislatures.

Bill Black Fiat Justitia Ruat Caelum (Let Justice be Done, Though the Heavens Fall)

April 17, 2011 | naked capitalism

Francois T:

Given the rampant fraud, why is any large international investor still in the USA?

I understand that US pension funds and mutual funds with mandated exposure to the US markets be invested here, but I’m wondering why anyone who doesn’t have to would still have assets here.

Francois T:

Obama is the luckiest politician I’ve ever seen. Despite:

  1. a truly corrupting Secretary of the Treasury
  2. an economic team that has neglected ordinary people
  3. not having given a shit about job creation
  4.  having done everything to prevent fraud investigations and destroy civil liberties

short of another financial catastrophe, he’s gonna get reelected.

May God has mercy on us!

alex:

Don’t ascribe to cleverness what can be explained by mere luck. The fact that the opposition is turning ever more nuts is not due to any clever strategy or tactics on Obama’s part.

DownSouth:

Hacksaw said: “While I, as a conservative independent, would never vote for Obama, I won’t vote for a corporate fascist either.”

Have you seen any evidence that Obama is not a corporate fascist? I certainly haven’t.

kevin de bruxelles:

Obama will get re-elected quite simply because the first rule of two-party politics is that there are certain things that only Democrats can do and other things only Republicans can do. And this is not because these politicians would refuse to follow orders that this is true. The reason is that it could cause confusion for one party to go too far away from the myths they spin. One example of this is that only the Republicans could have championed the Bush tax cuts for the rich just because for the Democrats to do so would have created too much incoherence and would have further stretched the already paper-thin myth of the Democrats being for the little guy. The same was true of Republicans supporting the bailouts in 2008, it was pretty embarrassing for a guy like Kudlow to have to openly support socialism albeit for the rich (he of course privately has no problem with it).

But there is an even deeper second rule that says that there are certain policies that only Democrats can get away with pushing through while there are other policies that only Republicans can get away with. In a hyper-partisan situation, politicians who give the appearance of supporting a certain policy may build up enough political capital with potential opponents of these policies to neutralizing them, in the name of party harmony or electoral gain, and in the end actually push the policy objectives through that they are outwardly against. The classic example is the anti-Communist Nixon opening to China. The current example is Obama destroying Medicare.

Otto von Bismarck always held that parties should take the helm to carry out policies which they opposed.

“If reactionary measures are to be carried, the Liberal party takes the rudder, from the correct assumption that it will not overstep the necessary limits; if liberal measures are to be carried, the Conservative party takes office in its turn from the same consideration.”

Of course in an America dominated by the wealthy, it is mostly reactionary policies that are needed. So for eight years the Republicans, following the first rule above, take the class warfare baton as far to the right as they can. They eventually meet a culminating point where further advance is stymied. This is the time to hand the baton to the do-gooder Democrats like Obama, and eight years later, following the second rule, lo and behold the baton is that much further to the right.

The wealthy realized that if McCain were leading the charge gutting Medicare and Social Security it would create nothing but stalemate. It is so much better to have a Democrat doing the job. Even better someone from a racial minority background so that opponents can be shamed into silence by claims of racism. First, faced with demands for universal health care, Obama instead of expanding (and reforming) Medicare, he chose to create a private alternative, ObamaCare, closely based on RomneyCare. Along the way he sweetened this privatized pot with a few government subsidies to keep the retards on the left from fleeing the plantation. Of course ObamaCare and Medicare are now contradictory, why should some people have a sweet government program and others a shitty privatized one? And so now the Republicans are suggesting expanding ObamaCare by turning people away from Medicare, but of course without those chimerical government subsidies that were never going to happen anyway.

But the process of cutting entitlements (including Social Security) will take time. So expect for the next five years outrageous demands from Republicans combined with heroic efforts by Obama to only meet them seven eights of the way (and in the process saving some token program like Planned Parenthood in order to keep the liberal retards on his side).

All the while, the real problem, the flow of jobs to China, will be ignored.

Anonymous Jones:

I’m confused.

Clinton actually raised the top marginal rate for high income earners, right?

The Republican Party has by and large signed onto a plan to eviscerate Medicare, right?

What exactly am I missing here? How do these facts fit into your paradigm?

Maybe the second is just a “pushing the debate to center-right v. far-right” thing, so that the Ds can sell out. But there are other explanations right, you see that, no? One is that the R ideologues are actually sociopaths and their followers are monumentally gullible and outright delusional and misguided and that the Ds have to live in the “world of reality” (in which the idiots rule) and can’t actually live in the “world of should” (which doesn’t exist. I mean, I’m not trying to defend those weeny Ds, but seriously…

And the first? Seriously? I mean, that happened, right?

kevin de bruxelles:

AJ,

The story of top marginal tax rates perfectly illustrates the point I am trying to make. To understand the Clinton moves within his eight years to raise the top marginal tax rate you have to look at the context of the previous twelve years of Republican rule. In 1980 the top marginal tax rate was 70 %. When Bush I left office they were 31%. That’s a reduction of 39%. In response, Clinton raised the rate to almost 40%. That’s a total of 9%. You can use any analogy you want but you can see the class war is being lost when you lose 30% in any exchange. To finish the story Bush II then reduced them to 35% and Obama has kept them there. Only a loss of 4%!

So in the Reagan Bush I / Clinton exchange the Republicans pushed the baton even beyond what was stable for the system at the time. In fact at one point the rate was 28% and it was Bush I who raised it back up to 31%. This coincided with the first real third party threat in 1992 (one can debate how serious it was) and outrage about the deficit. One can imagine at the time wealthy people were worried about US economic health. So Clinton on the one hand got to keep the Democratic myth going by raising the rate back up a bit, but on the other hand he handed the right a huge strategic victory by basically agreeing to a 30% loss.

On Medicare, Obama had the opportunity in 2009 to expand and reform it and to make it universal. Instead he opted for a privatized alternative, which basically was like saying that Medicare was dead. Now the Republicans are basically calling for Medicare to become ObamaCare. The Democrats will pretend to be shocked, and in the end will maybe be like Clinton was with top marginal rates and push back the Republican overreach demands (these percentages are just for example) for a 39% reduction of Medicare and agree to just a 30% and they can then call it a victory.

nonclassical:

Nixon “opening” China has its’ subtleties: read “Red Star Rogue”..understand Kissinger roles in this, and Vietnam War, Nixon’s false promise to end Vietnam, which caused his election…

“Red Star Rogue”=Hawaii was to have been nuclear attacked by Russian sub disguised as Chinese, to play China off against U.S., who was outspending Russian “cold war” efforts.

kevin de bruxelles:

 AJ,

And just to tie the Clinton years back to the two rules of my previous comment; the tax changes were clearly a straight forward application of the first rule. In fact Bush I’s raising of taxes created a quite similar reaction among the partisan peasants on the right as Bush II’s bailouts did. At that point it was clear that a Democrat had to come in to stop the ideological mask from being stripped away.

Examples of the second rule would be Clinton’s welfare reforms, and his pushing through of NAFTA, and arguably his granting of permanents normal trade relations with China.

One could argue that it was his success in these three areas that convinced the wealthy to go ahead with the move to a 35% rate under Bush.

And so if Obama is successful in, shall we say for reasons of political correctness, heroically holding back the Republican hords and only cuts Social Security and Medicare by half as much as they are demanding, then the next Republican President may indeed have a mandate to get that marginal tax rate back down to 28%.

lambert strether:

Yes, if the tea partiers did not exist, it would be necessary for the Ds to invent them. Sometimes, alas, the enemy of my enemy is also my enemy. It’s just the ratchet effect:

http://smithbowen.net/linfame/stopme/chapter02.html 

this time in especially egregious form.

Externality

“Internationalists of various stripes believe that law stands above and beyond politics. In fact, the use of law depends on power, and is enforced by those who have it against those who do not.” — Legal scholar Eric Posner

http://nationalinterest.org/article/dockets-war-4890?page=3

Regular readers may recall that Posner’s book, Executive Unbound, was discussed here last month. http://www.nakedcapitalism.com/2011/03/links-31311.html

Name (required)

at 6:13 am Bill Black is right to say that ubermensch is generally translated as ‘Superman’. It is, though, a poor translation which illustrates a very significant point.

Nietzsche’s ubermensch is a species as distinct from the ordinary men as a racehorse is from equus in general – it has enhanced traits in specific areas of horsiness (ie speed)yet is otherwise ‘horse’. Specifically, ubermensch demonstrated enhanced ‘human’ traits such as morality, courage, fidelity etc. which given a basic spark or comprehension could be pursued and ‘purified’ just like speed in a horse, through training and breeding – and not like any horse though undertaken quests such as those so beloved by Wagner, and Tolkien.

Many horses will never run on a racecourse as they simply don’t have the breeding, but many of those with the breeding will never do so either as they never respond even to the training sufficiently to achieve ‘racehorsehood’.

So to Nietzsche even breeding wasn’t enough for admission to the ubermensch. It required conscious refinement, pursuit, application and even sacrifice in the rigorous Holy Grail-type self-realisation.

The Superman of Jerry Siegel and Joe Shuster, though, is very much an American creation. Superman, Batman, Spiderman and others of the genre are born with their ’super’ powers, or gain them by accident. Moreover the powers are unique to themselves rather than a potentiality available even to a subset of humanity. Unlike Nietzsche’s ubermensch, Superman has no choice about what he is, merely what he does with what he is.

A Nietzschian elite of ubermensch would be a Council or Order (or Conspiracy?) of ordinary people with perhaps a defining initial racial or cultural characteristic but who had consciously worked towards and achieved a “Masterhood” of generally recognised traits – just as it takes more that just being a white stallion to get into the Spanish Riding School. And the underlying assumption is that it is the initial self-awareness of potential and the supreme effort, discipline and sacrifice which goes into realising it that earns and justifies the rewards of respect, esteem and even power which the attained “Masterhood” demands.

In the US version – Superman – that quest for Masterhood, and the expense of effort, discipline and sacrifice which underpins it and endows the titles with the rewards, is missing. It is too difficult. You are ubermensch by birth or accident, demanding the rewards of being elite without achieving eliteness.

A subtle but damming misunderstanding.

Name (required)
at 6:36 am (Sorry – omitted point)

Black writes – “The elites claim impunity from normal rules on the basis of their purported superiority and because they claim that they are so important that applying the normal rules to them will harm society.”

This is true, but under the Nietzschian ideal of Ubermensch that ’superiority’ and the immunity claimed for it, is claimed to be justified by the ‘earned’ nature of the eliteness – the sacrifices made and disciplines demonstrated in achieving the claimed ’superiority’ are themselves evidence that the normal rules need not be applied just as dentists are an elite who have earned the right to be exempted from the normal rule that no-one goes anywhere near your teeth with a diamond-tipped drill.

America’s Superman, however, can only prove he can be trusted not to abuse his powers by breaking the normal rules only for ‘good’, so proving he can be trusted.

America’s elite have neither earned the right to be trusted, nor proved they can be. Quite the opposite.

Rex
at 7:59 am Irrationality ex uber-rich?

essica

at 9:57 am Thank you for both these posts. I never heard this explained this way. It is like the difference between a scout or early adopter leading the way for the sake of everyone versus an overlord whose advance is everyone else’s limit.
DownSouth
at 10:51 am Name (required) said: “America’s Superman, however, can only prove he can be trusted not to abuse his powers by breaking the normal rules only for ‘good’, so proving he can be trusted.”

That doesn’t sound like any “America’s Superman” I’ve ever heard of. In fact, that “America’s Superman” flies in the face of everything America has traditionally stood for, idealistically speaking at least. Here’s what Martin Luther King had to say on the topic:

[T]he first principle in the movement is the idea that means must be as pure as the end. This movement is based on the philosophy that ends and means must cohere. Now this has been one of the long struggles in history, the whole idea of means and ends. Great philosophers have grappled with it, and sometimes they have emerged with the idea, from Machiavelli on down, that the end justifies the means. There is a great system of thought in our world today, known as communism. And I think that with all of the weakness and tragedies of communism, we find its greatest tragedy right here, that it goes under the philosophy that the end justifies the means that are used in the process. So we can read or we can hear the Lenins say that lying, deceit, or violence, that many of these things justify the ends of the classless society.

My ideal Superman doesn’t “abuse his powers by breaking the normal rules” for any reason. And the reason for this is really quite simple, explained here by Hannah Arendt in The Promise of Politics:

[B]y applying the absolute—-justice, for example, or the “ideal” in general (as in Nietzsche)—-to an end, one first makes unjust, bestial actions possible, because the “ideal,” justice itself, no longer exists as a yardstick, but has become an achievable, producible end within the world.

DownSouth
at 10:06 am I think what gets lost in all this is that Ayn Rand and Alan Greenspan, along with the National Socialists, took Nietzsche and turned him on his head. Whereas the hallmarks of Nietzsche’s superman are, as you say, “morality, courage, fidelity, etc.” the hallmarks of Rand’s, Greenspan’s and the Nazis’ superman are immorality, cowardice, treachery, etc., but most of all greed. This is hardly Nietzsche’s superman. Here’s Nietzsche:

The great man is an end; the great age, for example the Renaissance, is an end. The genius—-in work, in deed—-is necessarily a prodigal: that he spends himself is his greatness….The instinct of self-preservation is unhinged as it were…. They call it “sacrifice”; they extol…his indifference to personal welfare, his devotion to an idea… He gushes forth, he gushes over, he uses himself up, he does not spare himself—-with fatality, disastrously, involuntarily as a river’s overflowing its banks is involuntary.

Black indiscriminately parrots the libertarian-Nazi rendition of Nietzsche’s superman without ever delving into what Nietzsche actually wrote. What Rand, Greenspan and the Nazis call “superman”—-a definition Black accepts uncritically—-Nietzsche without a doubt would consider to be the scum of the earth.

Nietzsche, along with another prominent writer and thinker of his time, Leo Tolstoy, were elitists who placed a great deal of emphasis on what, for lack of a better word, might be called noblesse oblige. They felt it was the only corrective to creeping nihilism. The difference between the two is that Tolstoy’s beliefs where religious based, and Nietzsche’s were secular based.

And regardless of how the “US version” or Hollywood version of superman was created or came about, he has absolutely nothing in common with the superman of the Nazis and libertarians.

alex
at 11:55 am Nietzsche is dead, sayeth God.
stephanie
at 3:17 pm

“The Superman of Jerry Siegel and Joe Shuster, though, is very much an American creation. Superman, Batman, Spiderman and others of the genre are born with their ’super’ powers, or gain them by accident. Moreover the powers are unique to themselves rather than a potentiality available even to a subset of humanity. Unlike Nietzsche’s ubermensch, Superman has no choice about what he is, merely what he does with what he is.

In the US version – Superman – that quest for Masterhood, and the expense of effort, discipline and sacrifice which underpins it and endows the titles with the rewards, is missing. It is too difficult. You are ubermensch by birth or accident, demanding the rewards of being elite without achieving eliteness.”

At the risk of nit-picking: Batman does not have superpowers. He has expensive toys and an attitude problem — and, at least in his Golden Age and NolanVerse incarnations, spends a lot of time in training in order to become ultimate crime-fighter. I’d say if you want a character to illustrate your American version of the ubermensch, Batman might very well be your guy.

John Merryman
at 11:56 am Power does determine law, but it is nature which holds the upper hand in regards to power and human law is foundational to cooperative behavior and leveraging greater power out of the social mass. When it breaks down, we collectively loose power. Those at the top of the pyramid may remain there, but it becomes a much smaller pyramid.
Paul Tioxon

The geo political nation state system has co evolved with the non government organizations of the world wide capitalist system. The sovereignty of the nation state ends at the border and commercial NGOs move freely amidst and among all of the nations. The Real Politik being articulated may be wrong on many levels. Goldman may be prosecutable legally, doable politically and ethically valid. But what is announced by Real Politik with the nation state vis a vis the world capitalist system? Let us assume that Eric Holder is stupid and corrupt, or, let us assume he is smart and incorruptible. If Goldman Sachs is guilty of doing as much damage as outlined by the Senate investigation, during the normal course of business, what could they do if weaponized as a primarily destructive organization committed to not accumulating capital, but instead, destroying its enemies?

It would not matter who or what Eric Holder was or was not, or our system of justice or our national sovereignty, but rather what would be the consequences of prosecuting them to the fullest extent of the law. We are seeing the full extent of the power of Goldman, but what we have not seen is the full measure of the legal system to operate as we understand that it should and can, but some how, so far, it won’t. What are the real reasons for it not operating as it should? If the CIA can assassinate foreign leaders, and domestic ones as well, with total impunity as they have done, what is going on with Goldman? Just what do we have to lose by prosecuting them? Really good golf buddies, campaign donors? There is a lot more money where that came from if they are put out of business and others pick up the slack. When will we see the trial start or if not, when will know for sure the reasons, precisely, that they are untouchable? Apparently, there is a slow but steady investigation at the highest reach of power in the country. It has been going on behind the scene, amidst a lot of other distractions that are substantive political events of real not PR generated gravity. Goldman and Wall St has not gone unnoticed, except by those obsessed with birth certificates, abortions and the fascist nightmare of mandatory health insurance premiums.

Tyrannus Chex

One minor point. The much misunderstood ubermensch didn’t have to obey the normal rules since he obeyed the real rules. In this situation the ubermenchen are the honest bankers who don’t succumb to the temptation to commit fraud even though everyone who does gets away with it. The banksters represent the “last men”–those morally weak blinking idiots that tend to stay on top.

nonclassical
rmine”..do read Yves’, “ECONned”…and
Naomi Klein’s, “The SHock Doctrine-Rise of DIsaster Capitalism”, Kevin Phillips’, “American Dynasty” and “American Theocracy”, “Wall STreet-A History”; William Blum’s “Killing HOpe”, Perkins’ “Confessions of An Economic Hit Man”-information is good…

Jojo

at 3:27 am Financial meltdown – Why hasn’t anyone in the financial industry gone to jail yet? http://www.youtube.com/watch?v=JEK4T1Cs8c8 

Also see: http://www.cjr.org/the_audit/skimpy_coverage_of_levin-cobur.php 

Our government is so corrupted (both Dems & Repubs) that no one is even pretending that there is rule of law anymore! Now the government just openly ignores the will of the people (the majority of which want to see some Wall Street exec’s behind bars) and go on about their primary business of collecting campaign contributions.

It seems all we can do is post rants on blogs (which if you remember form the beginning of the Obama admin, they said that they NEVER read).

We should be taking to the street like the people in the Middle East are doing!

ella

at 8:48 am What continues to puzzle me is that everyone has begun to can the fraud and corruption. That is everyone except our regulators and politicians. Either they are ignorant or deliberately failing to take action.

How long will the public continue to bail out the fraudsters? Why are we responsible for bailing out the system that they destroyed with their greed? Globally, the taxpayers are guaranteeing and paying the debts of the banks. By what law and when did we decide to be liable for their debts while they retain their profits?

Questions that may never be answered.

cke
at 1:01 pm

Fraud and corruption have now become legal. At least one court(in Chicago)has issued a ruling in the case of a now-defunct bank, that the bank had the “right” to act without cause and in bad faith, determined solely by the phrase “at will” in a lending contract, to the exclusion all other evidence. Our legal system has now been co-opted by the elite money interests, with absolute power to destroy financially any business or individual from whom their client wants to steal. In Mr. Black’s own state, a big regional bank’s insiders seem to have been using exactly that legal power game to perpetrate the thefts of commercial properties securing notes at that bank. Without the legal power to sue, and due to the “protection” of such banks by the federal government, such predatory lending practices are rampant. Of course, the snow job is to focus on the foreclosures in home mortgages, not in understanding that people are losing their homes because such predators destroyed their jobs and the businesses that employed them.

Dan Duncan

at 10:13 am A good post, but your argument would be better served through the prism of Godel, as opposed to Nietzsche.

The problem of corruption is NOT a situation where the Elites claim transcendence above normal rules. The problem of corruption is the reverse. The problem of corruption is where interested parties want to “pull down” and nullify the transcendence of normal rules.

The distinction is not trivial, either.

The Problem of the Elite class…this is easy to isolate. “It’s them. It’s the Elite. The Rulers. Replace our Rulers with new rulers and things will get better.”

No they won’t. As Obama has shown it does not matter.

Godel’s work is spot on to our current plight.

Godel specifically postulates about The System. That system can be a math system or a legal system. It does not matter.

The following comes from http://www.myrkul.org/recent/godel.htm :

“Godel then points out that the following statement is a part of the system: a statement P which states “there is no proof of P”. If P is true, there is no proof of it. If P is false, there is a proof that P is true, which is a contradiction. Therefore it cannot be determined within the system whether P is true.

As I see it, this is essentially the “Liar’s Paradox” generalized for all symbolic systems. For those of you unfamiliar with that phrase, I mean the standard “riddle” of a man walking up to you and saying “I am lying”. The same paradox emerges. This is exactly what we should expect, since language itself is a symbolic system.

Godel’s proof is designed to emphasize that the statement P is *necessarily* a part of the system, not something arbitrary that someone dreamed up. Godel actually numbers all possible proofs and statements in the system by listing them lexigraphically. After showing the existence of that first “Godel” statement, Godel goes on to prove that there are an infinite number of Godel statements in the system, and that even if these were enumerated very carefully and added to the postulates of the system, more Godel statements would arise. This goes on infinitely, showing that there is no way to get around Godel-format statements: all symbolic systems will contain them.”

And that is what is happening to our Rule of Law. There is a concerted attempt to pull the rules down and into the system. Once The Rules become part of The System, they cease to be rules which can effectively govern the system.

Godel's Ghost
at 11:05 am Wow. I am stunned. This is a misinterpretation of a misinterpretation of my theory. I would be rolling in my grave if not for the fact that I am now a ghost.

However, the distinction between the meta level and the object level and the principle of non-contradiction, which I didn’t invent could be useful for you.

Susan Truxes
at 11:09 am If I have a choice between Bill Black and Kurt (?) Godel, I think I’ll take Bill Black. Godel was a genius of philosophy who was tormented by inadequate logic. Black is a genius of common sense who can actually get something done.

 Godel died a long paranoid death, having lived most of his life in a mental fetal position. Yes he was smart but so what? I don’t think this is the time for us all to curl up and suck our thumbs.

K Ackermann
at 11:35 am They’re both unique… just like everyone else.
alex
at 12:17 pm “Godel was a genius of philosophy …”

No, Godel was a genius of mathematics and a cut-rate philosopher. More infuriating is that people take his incompleteness theorems, which only address very specific technical mathematical issues, as being generally applicable to philosophy. That’s called reasoning by metaphor, and it’s bogus.

nonclassical
at 3:10 pm jonathan swift-Gulliver, 3rd book, conversation with “whinnies”=

“Is not the purpose of speech to tell one that which IS? If you tell one that which is NOT, you leave them in a worse condition than if you tell them nothing at all-thereby proving humans are irrational…”

doom:

The crooked Bush administration signed the Convention Against Corruption before the GOP got purged by popular disgust, and stuck Dems with commitments and obligations including

Control of corruption is another obligation this state cannot meet. That compact Bush signed to lift up and improve dirty third-world countries? Turns out we’re the dirty third-world country. Central Asian strongmen laugh at us.

This is terminal degeneration of a state. Instead of following this fake election I’ll read Tacitus’ Annals again.

Max424

at 10:38 am I find it a little surprising that people like Bill Black — and Glenn Greenwald! — are still under the impression that Matty Y. is an independent blogger. Nothing could be further from the truth. Yglesias is paid propagandist, period. His marching orders come directly from the White House.

Only two people have been kicked Matt’s blog; myself, and a guy named Alan P. (aka State of Division). The reason? During the opening months of the crisis in the Gulf of Mexico (a taboo subject if ever there was one at the Yglesias Blog), Alan and I had the temerity to openly discussed the crisis (imagine that!), and we courageously (giggle) provided dozens of links to relevant oil spill material (Florida Oil Spill, SkyTruth, Ricky Ott, Dahr Jamail, Rense, George Washington, Naked Capitalism ..wink.. etc.).

There is NO DOUBT in my mind, what Alan and I were doing — making a lock tight case for impeachment, it turns out — was touching nerves, WAY ABOVE Matt’s pay grade, and predictably (and as I predicted, two days before it happened), we got booted.

Note: I knew we were going to get censored, because Matt was getting censored. In all those months of deep, deep crisis — when the oil was blasting out the ocean floor and the Obama administration was up against it — Matt never posted on the Gulf. Not once. Imagine a self-styled “political blogger” who can’t be bothered (yawwwwnnn) to blog about, if not the most important, then certainly the most complex, and intriguing, political event of his young lifetime. Too funny.

Erin
at 11:56 am Yglesias and the Center for American Progress clearly are not as “progressive” as they claim. What true progressive would advocate for war AND advocate not prosecuting control fraud? Anybody that believes there is a meaningful difference between Republicans and Democrats is an idiot. Wake up.

Max424
at 12:22 pm The Republicans and the Democrats are the same. The Republicans and the Democrats are the same.

The Republicans … and the Democrats … are the same. Ok – got it.

Thanks for the info.

Erin

at 2:04 pm Jeremy Scahill said in 2009:

“Reading the Center for American Progress‘ new report supporting President Obama’s escalation of the US war against Afghanistan is a very powerful reminder of how much neoliberals and neocons are alike. This, of course, is not some genius observation, particularly since CAP and the neocons are making it hard to miss, what with their love triangle with the war. Indeed, CAP’s launch event for its report, “Sustainable Security in Afghanistan: Crafting an Effective and Responsible Strategy for the Forgotten Front,” included a leading neocon, Frederick Kagan and was promoted by William Kristol’s new version of the Project for a New American Century, the Foreign Policy Initiative. So, here is part of what we are seeing unfold: Running parallel to the bi-partisan war machine within the official government is a coordinated campaign in the shadow government — the think tanks. Or, as Naomi Klein describes them, the people paid to think by the makers of tanks. CAPs particular role in this campaign appears to be attempting to sell Obama’s war.”

And sell a hands-off approach to Wall St as well…and prosecuting torture…the list goes on…

http://original.antiwar.com/scahill/2009/04/03/obamas-neoliberals-selling-his-afghan-war-one-report-at-a-time/

nonclassical
at 3:16 pm Scahill is becoming more polished-but he misses FACT that “intelligence gathering” industry is now around 60% outsourced to private contractors…

don

at 12:01 pm Yesterday as I drove through the coastal town of Crescent City, in far northern California on my way home, just across the border in Oregon. As I passed the city part to saw around 40 demonstrators carrying signs, one of which said: “No More Socialism”. I could barely contain my laughter.

These were working class people who believed that the government was against them because it is running up higher and higher deficits. Does it ever occur to these people who these deficits support transnational corporations at their expense?

For the sake of stability, real politik is considered a necessary “evil”. No where is this more evident than in the foreign policy arena. Obama was elected on some sort of idealism that contrasted with the realism of the immoral Bush admin. He promised change and a better life. Sound familiar? Reagan promised the same, in a manner of speaking.

So Obama moves from idealism in presentation to realism in practice. At the Treasury is an individual who is complicit in the fraud and surely deserves a prison sentence. But it would be naive to think this would ever happen, just as it is to think that Bush would be imprisoned for his actions that frankly makes Geithner’s pale in comparison.

Someday it may dawn on the people of this country that the government exists to serve the interests of the people of this nation, not a class of wealthy who make millions while the multitude find themselves struggling. Is it any surprise that today, still, the ruling ideas are the ideas of the ruling class?

DownSouth
at 12:53 pm When speaking of foreign policy, the terms “realism” and “idealism” invoke very specific meanings.

Under Casey, idealism temporarily gained prominence, but other than that realism has pretty much reigned supreme for the last several decades. That is until 9/11, after which idealism became dominant, where it remains today. When you think of realism, think Kissinger. When you think idealism, think Cheney, Rumsfeld, Wolfowitz and Perle.

In 2008 the American people voted for a return to realism. That’s what Obama promised. They had grown tired of tilting windmills in so many far-flung places around the globe, and spending untold blood and treasure in the process. However, Obama pulled a bait and switch. He promised a return to realism, but what he delivered was more idealism.

Idealism serves the interests of the security-industrial complex (war, oil, police, surveillance and prison industries) as well as the financial-industrial complex (imposing “democracy” and “free markets,” at the point of a gun, as is always necessary).

JTFaraday
at 3:30 pm I don’t know about that though. Humanitarian interventionist Samantha Power was always Obama’s girl, despite her temporary layoff for calling Hillary Clinton “a monster”:

http://en.wikipedia.org/wiki/Samantha_Power

Meanwhile, his nicey nice acceptance speech contained this jarring note:

“When John McCain said we could just “muddle through” in Afghanistan, I argued for more resources and more troops to finish the fight against the terrorists who actually attacked us on 9/11 and made clear that we must take out Osama bin Laden and his lieutenants if we have them in our sights. John McCain likes to say that he’ll follow bin Laden to the gates of hell—but he won’t even go to the cave where he lives.”

I think this is another case of people wanting from Obama that which Obama was not going to deliver.

John Merryman
at 12:25 pm There are little earthquakes. There are big earthquakes. Just because all you have ever experienced are little earthquakes, doesn’t mean big earthquakes are not going to happen. Especially when the pressure is building and any attempt to release it is stifled. We don’t know what straw will break this camels back because if it was at all obvious, there would be concerted efforts to stifle it. One day though, some fruit peddler is gong to light himself on fire and it will all start to come unglued.

Bruce Wilder
at 12:31 pm “Overleveraged” is a euphemism for fraud, based on one of the most fundamental results in financial economics: Miller-Modigliani. To the extent that one sees the financial crisis attributed to excessive leverage, one is justified in presuming that financial fraud is co-extensively at fault.

I’m surprised that few economists seem to make the logical connection between Miller-Modigliani and Minksy, regarding leverage.

If the economic value of the project is its expected cash flow, then changing the capital structure cannot change the project’s value. Increasing leverage on a promise of increasing the project’s market value ought to be, presumptively, a fraudulent venture, only possible to the extent that salesmanship overcomes truth.

Whereever you see the phrase “overleveraged”, I think an economist could justify a presumptive substitution of the word, “fraudulent finance”, without fear of being often contradicted by detailed facts.

Tao Jonesing
at 1:46 pm “Economics” is another euphemism for fraud. The entire discipline exists to distract society while financial elites pick its pockets.

And “fraudulent finance” is redundant . . .

Bruce Wilder
at 2:17 pm If you figure that a functional financial system might be around 2% of GDP and our financial system is 8+%, then, yes, approximately 3/4s of our financial system is, by implication, dysfunctional and predatory.

Yglesias, representing the neo-liberal complacency which pervades elite “thinking”, suggesting that “stabilizing” a system, which is 3/4s dysfunctional and predatory, is actually pretty mind-boggling.

But, I think lots of people don’t recognize that phrases like “overleveraged” are euphemisms for fraud. The misunderstanding is a source of misapplied complacency.

Eureka Springs
at 2:09 pm The system is completely corrupted, criminals are still in charge/own both parties.

Do something!

Get out of either party… if you are still there… shame on you. If you are a member of or even kind to other members for remaining members of the D or R party you are part of the problem. Demand everyone from Obama to Boehner step down today. Dismantle both of those criminal party organizations. Resist! … be that through tax revolt, or stop paying on liars loans/ inevitable fraudclosure, high credit card rates…. there are countless ways to at the very least limit your participation in the big ponzi. Get out of big banks… even if you have little money.

It is way past time for us to refuse the ponzi instead of just gasping at it.

And never ever give the Yglesias pearl-clutchers of the world a click.

Erin
at 2:44 pm I love you.

Cathy
at 2:57 pm I warned for 10+ years that Wall St. was going to crash because of FRAUD. I said it would happen in about a decade. Everyone said I was Bleeping crazy to say it nicely. My teenage son in the spring of 2008 hit the nail on the head, as he told me “you know how you keep saying Wall St. will crash because of fraud & about the housing being a bubble, well we studied a chapter on the Great Depression & I believe on Sept. 15th this year, it will have started.”

How’s that for predicting? I have said that the economy won’t recover until the criminal banksters are brought to justice. I tried hard with others to keep the bailout from passing because what I read & understood there wasn’t anything in it with teeth, nothing in it to make sure the money wouldn’t go into their own pockets, there was no oversight or even any rules.

Unless they are held accountable I believe the economy can’t recover. It ISN’T recovering now unless it’s Wall Street.

FatCat
at 3:57 pm FatCat here. I honestly don’t understand why all the bitching here, because I had a great year. Just got my tax refund (all 100 million of it), plus a nice 2 billion tax credit for all my good environmental work (I am THE major shareholder in British Petroleum). plus 700 million in subsidies for all my biofuel investments (using top notch Monsanto genetically engineered corn). I also got my fair share (2 billion dollars, to be exact) of America’s.”foreign aid” for all my sales of cluster bombs to Israel and Libya. Plus, I made a handsome 1.5 billion dollars in tax-free bonuses for all my good work on the boards of Goldman Sachs, JP Morgan Chase, Citibank, and Bank of America, as well as United Healthcase, Blue Cross Blue Shield, and, last but not least, AIG. I had a great year, as did all my friends. So why all the bitching?! Please explain yourselves… FatCat

[Apr 17, 2011] summary-for-week-ending-april-15th.html

4/16/2011

Rajesh:

The two most important numbers of the week:

Chinese 12-mo CPI increase: 5.4% Chinese 1st Qtr trade balance: -$1 Billion.

Soaring commodities prices push China's trade balance into the red | Business | The Guardian

Surging prices for commodities - as well as strong demand for imported consumer goods such as cars for China's growing middle classes - were responsible for pushing up the country's import bill. .

Rob Dawg

This always has been a financial crisis affecting the economy. As the financial excesses corrected the general economy reflected this. When massive government intervention stole from the future economy to prop up the financial imbalances mid correction the financial sector reflected this with huge recoveries and record profits.

At the same time the general economy stutter stepped with the temporary removal of the ongoing financial correction. We now face the prospect of

  1. a resumption of the global financial debt correction (thus Greece, Ireland, eventually Spain).
  2. resumption of bubble blown asset price declines,
  3. crushing public debt from "saving" the financial sector,
  4. a debased currency from same, and
  5. structural unemployment from both trade policy and treating capital better than people.

mp

Goldman has cut their Q1 estimate again.

1.75% .

yuan

Max Keiser says we should hang bankers:

YouTube - Max Keiser bravely fends off the financial trolls - Ten O'clock live

I agree (not joking).

skk

yuan wrote:

I agree (not joking).

You could say that. I couldn't possibly comment.

An insightful quote from:

House of Cards - Wikipedia, the free encyclopedia

The House of Cards trilogy was ranked 84th in the British Film Institute list of the 100 Greatest British Television Programmes.[1]

azurite:

barfly wrote:

it's called a social contract, and should not be dependent on charity alone -

(1) Charity was found to be insufficient during the Great Depression, and from what I've seen, it's inadequate now. (2) theoretically, the social safety net was constructed because it represented a common good, that benefited society as a whole, just as maintenance of a certain level of public health does (i.e., prevention of epidemics of TB, measles, etc. through public measures of vaccination, testing, etc) and public ("free" or paid for by taxes) education for children, because widespread literacy is seen to be better for the society/community and, of course, for business. I've certainly read enough on HCN about employers not wanting to train anymore.. (3) again theoretically, gov't, whether local, state or federal, is best situated to collect the funds, administer the programs--it is (again theoretically & to some extent, in reality) much more accountable than many private charities (hard to do a "recall" of the administrators of a charity w/out utilizing the apparatus of gov't--whether it be the courts or the AG's office).

As for religious organizations providing assistance, they do, but sometimes only to members of their own religion and again, how accountable are they? And to whom? The recent problems of the Catholic church suggest that sometimes those institutions bury problems instead of dealing with them despite the cost to the very people they are supposedly helping/instructing. With gov't, there is at least, in theory, a measure of accountability. Recall, anyone? .

[Apr 17, 2011] Stone McCarthy Sees Severe Economic Deterioration In April, And Q2, As A Result Of Japanese Supply Chain Destruction

This is what happens when you misperceive creative destruction as just pure f*&ken destruction.
04/15/2011 | zero hedge

Lately we have heard of occasional documented cases of ear canal bleeding exhibited by people who have been listening too long to morons on TV (and in print) saying that the Japanese economic slow down and supply chain collapse won't have an impact on the US Economy, and will, in fact, be beneficial (it's not pronounced Döuche Bengk).

To our immense satisfaction we have confirmed this latest outbreak of bacillus idioticus is localized (to below Canal street), is so far not airborne, and is merely contained to the water supply on Wall Street. In a note just released by a far more credible source of analytic information than anything coming out from Wall Street in the past 3 years: Stone McCarthy, we discover just why the cut to Q1 GDP is about to be magnified for Q2 (and quite possibly for the rest of the year). From SMRA: "According to Automotive News, Japan's big seven automakers have lost more than half a million units of domestic production.

The most affected automaker is Toyota, which lost 260,000 units since the March 11 earthquake. How about the U.S.? Will U.S. economic output be affected by the supply disruptions to the Japanese auto manufacturers? The answer is unequivocally yes and the economic impact will be quite severe in April and for Q2 as a whole." There, it wasn't that difficult to admit the truth now, was it.

Youri Carma:

http://forum.prisonplanet.com/index.php?topic=205973.0

- Japan shakes semiconductor industry - Wafers, batteries, some chemicals in short supply

- Reuters Poll Indicates Up To 60% Of Japanese Companies Impacted By Production, Supply Chain Disruptions

- Japan turmoil disrupting U.S., Fed survey finds

- Japan power shortages to weigh on growth - One analyst predicts as much as 1% could fall off GDP from cuts

- Michael Ruppert: We Have Until July at Latest Even a Caveman Can See It COLLAPSENET http://youtu.be/KqO64-ipqAM

[Apr 17, 2011] Guest Post Too Much Finance

April 15, 2011 | naked capitalism

jake chase:

The only products of a booming financial sector are rent extraction, asset bubbles, unserviceable debts, oligarchy, job loss, and destruction of what’s left of a middle class. In the Nineteenth Century, the public believed JD Rockefeller was evil incarnate. All he did was rationalize the oil business. It is difficult to believe the economics profession has any purpose but perpetuating stupidity and public confusion. Can GDP measure that too?

markincorsicana:

Has Geithner learned nothing from the financial crisis? St Milton the Friedmanite proved when he slayed the Keynesian dragon with the sword of Rand that all regulations are always bad. Except for the bottom 99% of course, who must be regulated into submission for their own salvation.

steelhead23:

Mark, Geithner is a true believer. He is a high priest of the Friedmanites. As a true believer, facts are irrelevant. Learning is impossible. Much like the hold Rasputin had over the Romanoffs, Geithner holds Obama in his thrall. He must be removed, not educated.

John Merryman:

Finance is the economic circulatory system of society, much as government is the central nervous system of society. We used to put up with monarchies, until they became too self absorbed to serve larger social functions and then we had to develop models of government as a public trust. Finance is reaching the same point. It has gone from the efficient allocation of resources to complete rent extraction and gambling. It was one thing when bankers actually issued their own currencies, but since the public has been made fully responsible for maintaining its value, the public should retain profits from its circulation. This doesn’t necessarily mean making it some subservient sector of the government, as that tends to have its own problems, but possibly some semi-separate bottom up public process of local and state banks as the foundation and regional and national banks built up from them. Like democracy, it would devolve power back to where it is most responsive.

beesymph:

Often overlooked in the debate about the size of the financial system is the distorted incentives built into the workforce. Wall Street has attracted mathematicians, physicists, engineers and others who would otherwise be attracted to jobs in more productive enterprises. The hidden effect is that productive firms in the real economy must pay more to attract individuals with a mathematics and scientific background. I do not see how an over large financial sector improves the overall competitiveness of the American economy.

rd:

 I am fine with the big banks expanding into the emerging markets.

The fastest and most effective way to disembowel our competition is to have these firms set up shop in places like China. One decade, and those countries will be brought to heel with massive financial crises.

Beats the heck out of having to invade them with soldiers.

[Apr 16, 2011] IMF Pledges New Efforts Against Economic Threats

NYTimes.com

... Brazilian Finance Minister Guido Mantega warned that many dangers to the global economy still existed.

"The root causes of the crisis — oversized financial sectors, excessive financial risk-taking, destabilizing cross-border capital flows ... have not been fully addressed," he said in his remarks to the IMF meeting. "Not surprisingly, the recovery remains fragile."

[Apr 15, 2011]   "Media-Perpetuated Tax Myths" by David Cay Johnston

9 Things The Rich Don't Want You To Know About Taxes, by David Cay Johnston:

...As millions of Americans prepare to file their annual taxes, they do so in an environment of media-perpetuated tax myths. Here are a few points about taxes and the economy that you may not know...:

  1. Poor Americans do pay taxes.
  2. The wealthiest Americans don’t carry the burden.
  3. In fact, the wealthy are paying less taxes.
  4. Many of the very richest pay no current income taxes at all. 
  5. And (surprise!) since Reagan, only the wealthy have gained significant income. 
  6. When it comes to corporations, the story is much the same—less taxes.
  7. Some corporate tax breaks destroy jobs.
  8. Republicans like taxes too.
  9. Other countries do it better.

(There is more detail on each point in the article.)

EMichael:

Agreed about Johnston.

The only problem I have with him is that when I read such an article, or one of his books, my blood pressure spikes.

In terms of trolls, the silence will be golden.

Barkley Rosser:

Realist,

Gag, people with monikers that are patently false are really annoying. "Realist" indeed. A few rejoinders, as you pretty much go off the deep end a lot here.

1. So, here you raise the matter of transfers combined with taxes, although the lie that is repeated widely is indeed that "the poor pay no taxes." FICA is highly regressive, and state sales taxes, their leading source of revenue, are also regressive, so they pay plenty of taxes. That said, the overall balance of the combined fisc at all levels is progressive, although the tax system overall is mildly regressive. But is that not an acceptable political outcome that we expect and that society has supported for a long time, that we should provide at least some sort of safety net for the poorest in society? The rich do not need it, certainly not, and they receive full shares of the very largest transfer programs once they get old enough, social security and medicare. Get real, "Realist."

2. Oh, so that the rich can support their own families and do most of the hiring is going to get brought up here? Fact remains that in aggregate the tax system is mildly regressive thanks to fica and state sales taxes overweighting the decreasingly progressive federal income tax. For over 70% of the population, fica is the largest tax they pay.

3. This is vaguely worded, but certain interpretations of it are correct, while others are not. But your ridicule is completely out of place. Are you aware that between 1940 and 1946 the top federal marginal income tax rate exceeded 90%? You were not? How surprised I am, "Realist."

4. This is a fact, and what you cite from your previous remarks does not remotely reply to it, although most of the rich do pay taxes. The point is that some do not, and your denial of this more than anything else shows that you are just delusional, "Realist."

5. This is ridiculous. The reason middle class incomes have gone nowhere is that their real wages have gone nowhere, not that their taxes have gone up. Have you been hanging out with that dictator of the GOP, Grover Norquist? Why is that someone calling himself "Realist" is spouting so many totally factually false statements?

6. You score a little bit here, but not as much as you claim.

7. I think this is a reference to tax breaks for outsourcing.

8. Close call on this one, but given that Norquist has managed to get almost every Republican in the country marching in a robotic lockstep (check out how he cracked on those naughty legislators in California who were going to support Jerry Brown on simply extending some past tax increases as part of dealing with a very serious budget crisis that he cracked on and made sure that they did no such thing, God damn it!), it is amazing that indeed by narrow margins Republicans do support tax increases under dire budgetary circumstances.

9. Well, this can be debated at length, but I shall not do so, and pretty trivial after all the total garbage you have handed out. It would appear that you are the one drinking Kool-Aid, I guess handed out by dear old Grover boy.

roger

Realist does have a point about transfers of wealth. "Depending how poor you are, you receive subsidies for many services such as childcare, healthcare, food, housing, etc."

Similarly, we should view the enormous benefits the wealthy receive from the Government - unlimited loans a la Talf, an insane system of IP protections, regulations that even on the micro level are designed to enrich the richest (for instance, the rules concerning drugs that require doctors to make "prescriptions" before one can acquire them, thus providing a steady stream of revenue to doctors), etc.,etc. in order to judge their tax burden. One will quickly see that the rich, who make minimal investments in buying politicians and floating think tanks, make a considerable return on their investment in keeping the government going as their piggy bank. They would, of course, like to cut their costs and throw them on others, but over the last thirty years, as they've cut their tax burden and their labor costs, and as the working class has paid more out of its pocket then ever, they've had an excellent run.
Eventually, however, the middle class that is the object of such concern trolling by the wealthy (as if they were both paying taxes together, shoulder to shoulder) will discover that their allies are their worst enemies, and act accordingly.

mercury

Obama gave the rich a tax break last December? Repub trolls aren't the problem, the Dempublican Ivy Elite are.

Jahu:

Reagan's Trickle Down Economics is a deep pool for the upper income, which after many years of tweaking, they have almost managed to stop all the leaks.

[Apr 15, 2011] "You'll End Up With Kleptocrats Rather Than Technocrats"

Economist's View
Noah Smith:
...In a well-functioning economy, the government and the private sector complement rather than cannibalize each other. No country's private sector will ever get rich without the infrastructure, schools, research, legal system, police, army, etc. that only the government can and will provide in sufficient quantity. Private businesses should usually not try to take over these functions, just as the government should usually not attempt to build factories, dictate bank lending, or refine petroleum. To maintain this balance, one thing we need is a strong free-market ideology that prevents the government from overstepping its bounds.
But we also need high-quality technocrats in the government - technocrats who are dedicated enough or well-paid enough to resist the efforts of rational, self-interested, profit-seeking businessmen to use the government as a cash cow. If you demonize technocrats, all you'll succeed in doing is in making the technocrat profession a disreputable one. And all that will get you is...low-quality, easily corruptible technocrats! And if you try to respond to the existence of low-quality, easily corruptible technocrats by saying "Aw heck, Nozick was right, let's just drown the whole government in the bathtub," you'll just end up impoverishing your country, and then eventually you'll end up with kleptocrats rather than technocrats, and just watch what happens to your liberty under the kleptocrats.
So to people like Will Wilkinson with strong libertarian instincts, I say: Calm down. Put aside your gut reactions and take a cold serious look at the dangers threatening America's political economy. The danger of Marxism is long past. The danger of becoming a failed state is real and big and increasingly immediate. ...

gordon"

 "...just as the government should usually not attempt to build factories, dictate bank lending, or refine petroleum".

First, why on Earth shouldn't it? Surely the author doesn't believe in the hoary "inefficient bureaucracy" canard. Second, as a matter of fact, the US Govt. subsidises all sorts of economic activity in various ways, which in turn, of course, has a big impact on bank lending. I don't know of any US Govt. oil refineries, but I don't see why there shouldn't be any.

"If you demonize technocrats, all you'll succeed in doing is in making the technocrat profession a disreputable one. And all that will get you is...low-quality, easily corruptible technocrats!"

Gee, you've got such good ones now? Actually that reminds me of the old saw "if you pay peanuts you'll get monkeys". There are times when that's better than egomaniacal, self-obsessed sociopaths.

reason:

This is right, but not quite right either. It forgets that most businesses are (internally) autocratic burocracies as well. Every business also relies on technocrats, and corporate burocracy is often WORSE than government burocracy (because its arbitrariness is not tempered by the need to avoid ruthlessness).

Ron

I am a life-long traditional conservative, not to be confused with a Republican. Traditional conservatives do not give extra credit for ignorance.

kharris:
Yeah, Noah's presentation here just is all shiny with received wisdom. How do we distinguish a "strong free-market ideology" from "a well regulated market system"? One is drenched in years of Chamber of Commerce propaganda, the other is a neutral statement that offers one interpretation of the evidence as we know it. The notion of "free" at work here is, in fact, contrary to the existence of markets. Absent government interference, there are no markets. "Free market" is an oxymoron.

I take Noah's point about technocrats, but the chatter leading up to it is pretty questionable.

Ron:

Traditional conservatives do not share in the Rand Illusion. Traditional conservatives believed in limited government for the same reasons as classical liberals, which is similar to the talk of libertarians from which they get their populist appeal. However, there walk is to implement an oppresive corporatist oligarchy with a subservient state. Long live the King by any name, eh?

Ivan Karamazov:

 It may have to fail before it can be restructured. I do not miss the future.

ilsm:

The truth of this is demonstrated in the military industrial complex. Privatized arsenals gain political clout until they have to be fed. Then we see GAO every year reporting on $1.6T in acquisitions that are boondoggles kept on life support because no one will allow inept private arsenals to go bankrupt.

Ike called it "unwarranted influence" which is as large today as in 1968 when there were real threats and a hot war.

Jeff said in reply to realpc...

1. Many anti-capitalists? In America? Who have any power to implement their goals?

2. One may surely be neither a capitalist nor a Marxist, given the thousands of years of human history before the development of capitalist economic theories or the Marxist/socialist/communist theories which were developed in response.

 realpc said in reply to Jeff...

All human societies in all eras have combined free enterprise and communalism, to varying degrees. In all of nature there is both competition and cooperation, and this is necessarily true for all species, including humans.

It makes no sense to think a successful society could be entirely competitive or entirely cooperative.

"One may surely be neither a capitalist nor a Marxist, given the thousands of years of human history before the development of capitalist economic theories or the Marxist/socialist/communist theories which were developed in response."

What else can one be, except some combination of both?

stefn

 "End up with kleptocrats..."? We are awash in kleptocracy. Did just one of the Wall Street thieves go to jail? Eisenhower warned about the military-industrial complex. Today it's the financial-federal complex that gets the money and keeps the money. They are the one percent that spends money only to persuade fifty percent that somehow and someday they will become part of the one percent, mathematics aside.

realpc

I don't think 50 percent of Americans are dreaming they will be in the top 1 percent. Most are dreaming, realistically, that they will do ok. They don't necessarily mind if the top 1 percent is extremely rich.

As for kleptocrats, I agree they are out of control. But you should differentiate between rich people who are honest and rich thieves.

OhNoNotAgain

"But you should differentiate between rich people who are honest and rich thieves."

Do the honest rich people even care ? They sure don't act like it, because I don't see too many storming Washington, demanding the heads of the rich thieves. They better get on the ball, or they might find themselves being lumped in with the thieves more and more...

CaffinatedOne

The quote makes it sound like the degradation of government function, making it (more) subservient to corporate/monied interests, and more specifically replacing technocrats with kleptocrats in the service of the above is a bug and not a feature.

Though it will likely make us all collectively poorer and damage to an extent the ability of the ownership class to make more, it seems that they're fairly confident that they'll come out on top in case of a rewriting of the social contract.

Given widespread apathy, a less than worthless, co-opted media, and an incentive structure which ultimately makes politicians of both major parties subservient to them, their confidence might not be misplaced.

stefn:

Fine. Some rich are good. And yet no one in the financial realm went to jail. And no one on government made even the tiniest effort to put them there. At what point do we begin worrying about the accountability of the rich as a class? Is it like Lot's bargain? Does the existence of one good rich person let the rest off the hook?

As for the fifty percent, it's amazing how often it votes against it's best interests. Wouldn't it be doing more "OK" with pensions, medical benefits, a progressive tax system, the occasional union, a forty hour week, maybe even jobs that pay the bills? How to explain the fifty percent throwing all this away without a squirm, much less a struggle? And these almost the children of those who fought and died to give these gifts.

Simon

You people are just liberals worshipping bizzare intellectual terms such as "free markets".

They don't exist and never will exist. Stop trying to force them to exist

realpc said in reply to Simon...

"The role of government is no different than any tribal leader. It is about leading and directing. Building and creating assets for its peoples."

Yes but tribes are limited in size, and all members share the same beliefs and goals. Conservatives want to limit the central government, not the state governments. Even our states are much too big to be tribes, and their citizens have widely different belief systems. But at least they are somewhat smaller and more manageable than the entire nation.

A nation is a collection of tribes that bands together for defense. I think that's what the American founders had in mind for the federal government.

Extreme libertarians are anarchists, but conservatives should not be confused with extreme libertarians. Conservatives are sometimes accused of being authoritarian, and at other times are accused of being anarchists.

Actually, conservatives (in general, not saying they are all alike), understand the need for leadership, and the need for people to cooperate and help each other. They just believe, rightly I think, that it must happen on a smaller scale.

The European countries that progressives admire so much are much smaller and more homogeneous than the US.

[Apr 12, 2011] Are ETFs Really Safe? by Andrew Bogan

Zero hedge/Casey Research

Dr.Andrew Bogan is a managing member of Bogan Associates, LLC in Boston, Massachusetts. He has spoken at many international investor conferences – his specialty being global equity investing – and has been interviewed on live television for CNBC's Strategy Session.

In an attempt to understand the relatively new but wildly popular Exchange Traded Funds (ETFs), Dr. Bogan did extensive research into the structures used by ETF operators, with a special focus on the potential risks that might arise should they be faced with large and sudden liquidations. Given that there are about 2,000 ETFs in existence, with assets totaling over $1 trillion, we thought it appropriate to find out what Dr. Bogan has learned in his research.

David Galland: Our primary goal today is to give readers a better understanding of exchange-traded funds (ETFs) and the risks that come with them. Speaking personally, I've been in this business for a long time, and I find anything that grows as quickly as ETFs have a bit worrisome.

To begin, maybe you could just talk a little about the difference between an ETF and a traditional stock or bond mutual fund.

Andrew Bogan: Yes. Shares in a traditional mutual fund, whether it's an index fund or has a managed portfolio, don't trade in the open market. If you want to own shares, you buy them from the fund. If you want to get rid of your shares, you sell them to the fund.

A traditional mutual fund takes its shareholders' capital and invests it directly on a one-to-one basis in stocks or bonds and holds those securities in custody. Thus it's always 100% reserved, meaning that the securities it owns correspond exactly to the shares its investors own. If you want your capital back, the fund can deliver it to you either in kind or in cash, depending on market conditions.

That's not the case with an ETF. Shares in an ETF trade in the open market, which is where retail investors buy and sell them. An ETF also issues and redeems shares every day, like a mutual fund. But, unlike a mutual fund, it does so only through "authorized participants," which are brokers, market-makers and other institutions.

DG: Jumping right to the point, has there ever been a problem with an ETF?

AB: ETFs have operated pretty well historically, but the mechanics of share issuance and redemption also creates some unique differences that we believe may lead to unintended consequences.

There already have been a few problems with ETFs, some more significant than others. The Flash Crash on May 6 of last year showed some structural issues with ETFs and perhaps with our whole market system for equities as well. It's hard to decide where to draw the line, but a lot of securities departed from their perceived value during the Flash Crash by very large amounts. The reasons are still not completely understood, although the SEC has made a reasonable effort to understand what happened.

Another incident occurred in September 2008, when the Lehman and AIG mess was upon us. The commodity ETFs run by ETF Securities, Ltd., in London halted trading when AIG's solvency came into question. The funds were investing in derivative contracts, including swap agreements, some of which were with AIG. It was only the Federal Reserve pumping in tens of billions of dollars that prevented those products from going. Bailing out AIG averted a disaster for the funds, and they continued to trade the next day.

DG: So, the issue with the ETF securities fund was more around the derivatives the fund held, not the structure of the fund itself?

AB: In that particular case, it was around the derivative contracts that underlay the fund, although that kind of arrangement is very common with European ETFs. Even equity index ETFs in Europe tend to be structured that way, and that's also not uncommon with a lot of the foreign stock ETFs as well – including some of those traded here in the United States.

I think it's a clear example where you have a counterparty risk wrapped inside the fund that could be very significant in bad circumstances.

DG: In the case of the Flash Crash, your research paper pointed out that even though ETFs represent only 11% of the listedsecurities in the U.S., 70% of the canceled trades during the Flash Crash involved ETFs. Is there an explanation for that?

AB: Some clarity is starting to emerge from work done by the SEC and others. But from our perspective, those statistics are quite alarming. There's no good reason 70% of canceled trades would be in ETFs while only 11% of listed securities are ETFs. And even though ETFs trade more actively, they don't represent 70% of all trading volume. So any way you look at it, they were badly overrepresented among the canceled trades, i.e., overrepresented among the most extremely off-priced trades.

From the perspective of financial theory, that makes absolutely no sense. ETFs are meant to be index-fund trackers. They’re meant to represent a whole basket of shares, and yet these very securities that are meant to be diversified actually fell more than their underlying stocks during the Flash Crash, more often and more deeply.

That's quite worrisome; it tells you that in a crisis environment ETFs don't behave the way financial logic suggests they ought to, which suggests to me that the theory is incomplete. People haven’t really looked closely enough at what the unintended consequences of ETF issuance and redemption mechanics are, and what the realities are in stressful market conditions.

DG: At this point, more than half the American Stock Exchange's daily volume is ETFs, which is quite a number. These things have only been around for, what, less than 20 years. Yet from everything I've read, it seems they’re not very well understood, even by you guys. Which is saying something because you’ve spent a lot of time looking at them, and there are still blank spots in your knowledge about how they actually operate.

AB: Absolutely, and I think that's an important point. We understand the mechanics of how an equity trades and from where it derives its value and how it's priced in the market. The mechanics for mutual funds are well understood also. The challenge with ETFs is that the process of issuing and redeeming shares that also are trading is much more complicated than a lot of people want to talk about. It allows for some unintended consequences, particularly in connection with short-selling, which became an important factor only in the last decade.

DG: Let’s talk about the process of creating new shares. If I'm running an ETF that is designed to mimic the S&P 500 index and I have a lot of people who want to own my fund, I can simply issue new shares based upon the flow of stocks into my fund, right?

AB: Shares can be created at the end of any day if someone delivers a basket of underlying stocks to the ETF through an authorized participant. And shares that are not wanted in the marketplace can be redeemed in kind for the underlying stocks – or in some cases cash. That's all been carefully structured and works smoothly. The issue is what happens when short-selling dominates the trading.

People have been short-selling ETFs up to shocking levels, like 100% short, 500% short, sometimes over 1,000% short. That's in a world where stocks like Apple are 1% short, or IBM is 1.4% short, or General Electric is 0.5% short. You really don’t see traditional stocks with short positions anything like this, so clearly something is fundamentally different. The difference is that ETF short-sellers – including hedge funds, dealers and arbitragers – are confident they can always create the shares needed to cover, so they see less risk of being squeezed.

DG: But in a traditional short-selling situation, you typically have to borrow the shares before you can short them.

AB: Yes, and that's true here too. But if you look at the Securities Settlement Failure data, ETFs are very oddly overrepresented, so it does look like there is some short-selling that happens before the shares are borrowed. But that's a small matter. The problem is that there is no limit to the amount of short-selling you can theoretically do while still having borrowed the shares. It simply requires the same share to have been borrowed, short-sold, borrowed from the new owner and short-sold again down a daisy chain. That's how you get these arbitrarily large short interest figures.

The short-selling involves new buyers coming in without the shares being created at all, and that's the fundamental asymmetry in the short-selling that we're most concerned about.

DG: Let's get to that, because you have retail investors, for lack of a better word, and you’ve got the hedge funds. I suppose they could both own the same fund, but for completely different reasons; a hedger to hedge another bet, and a retail investor to pursue a certain goal, but the net result is that the short interest is still way out of whack from what you'd expect to see in a traditional stock. I suspect this is something that most of the retail investors are unaware of. So, where is the potential for the ETFs to get into trouble?

AB: The trouble could come from a number of different angles.

One concern is that the huge short interest building up essentially leaves the ETF as a fractionally reserved stock ownership system. If you have a fund, for example, that is 500% net short, then for every one holder of an actual share there are five other investors who own IOUs for the shares. Their real shares have been lent out and short-sold to someone else – usually without the original owner's knowledge, unless they read and still remember the margin agreement they signed when they opened the account 10 years ago.

For the ETF itself, it means that the fund holds only 15% of the underlying securities implied by the gross number of fund shares that investors think they own. The other 85% isn't totally missing, it just isn't held by the fund.

Morningstar commented that the money is all there, it's just in hidden plumbing in the financial system, and we agree with that exactly. The question is, how many investors understood they were storing their money in the hidden plumbing?

DG: So walk us through what might happen if there were large-scale redemptions. Let's just say that for whatever reason, people decided this was the time to get out of a particular fund. How do things get unwound?

AB: Redemptions have to flow through an authorized participant, which is usually a broker or market-maker, and it's only that institutional layer that can actually redeem. If for some reason a significant portion, say, half or 80% or so, of the total fund ownership wanted to redeem and get the underlying stocks from the ETF through the authorized participant layer, you would fundamentally have a crisis in a fractional-reserve system.

The ETF could not deliver the underlying stocks to all the would-be redeemers. The investors who really owned just an IOU on shares that had been lent to short-sellers wouldn't have a direct claim on the fund, so their demand to redeem would force an unwinding of the short-sales.

DG: So it seems that it's not so much the fund that might have a problem. The fund is only liable for the shares it has issued. The risk seems to lie in the counterparties – the brokers or the investors that brokers lent shares to.

AB: Right. Essentially you have just that. You have quite a bit of counterparty risk here, because if you think your shares can be redeemed and then the fund halts redemptions because they’re running out of the underlying stocks, you're stuck. Normally ETF shares are redeemable through the authorized-participant channel, but an ETF or any other institution that issues something that is redeemable but fractionally reserved could be hit with a run, like a bank run.

Now the big question is, in practice, would this happen? It's up to everyone to form their own conclusion, but interestingly the first argument we heard when we began looking into ETFs was that this was just a theoretical topic and that there would never be a really big redemption in a large ETF. But we have since learned that's actually not the case, because a giant redemption in IWM, one of the largest ETFs, occurred in 2007.

Now we think that 2007, being one of the best markets for equities since maybe the late ‘90s, was a pretty forgiving time to test the crashworthiness of an ETF that runs into a massive, unexpected redemption. But IWM was redeemed from millions of shares outstanding down to something on the order of 150,000 shares, and in one day, and that's because somebody tried to crash the fund.

DG: Was that a really lousy fund, and somebody just said, "Enough, I'm going to punish you guys and get out of it,” or –

AB: Oh, no, no, IWM is one of the largest and most liquid ETFs in the entire market. It's the Russell 2000 iShares ETF. It is the poster child of why ETFs are great. But even so, what's interesting is that the first argument we got from industry insiders was that our misgivings are nonsense, growing out of some theoretical conversation about what might happen but is never going to happen, and now we're being told it already has happened and nothing broke too badly, so what are we worried about.

DG: Let’s stick with this potential problem of a huge bunch of redemptions. People say, "Oh my god, I've got to get out of my ETFs," and there is a wholesale run on the funds. Because of the way ETFs are structured, it would seem that if they post net redemptions for a day, that the broker that had lent fund shares to short-sellers would just force the borrowers to buy back and cover their obligations.

AB: That's exactly right, but remember, for an ETF to create units requires someone to deliver the underlying stocks, so there's somebody who's on the hook to buy those stocks en masse all at the same time.

DG: No matter what has happened to the price in the interim.

AB: Yes, which gives rise to the question of who's on the hook and what's their creditworthiness when they get put on the hook. Have their prime brokers really been keeping appropriate track, as they’re required to do and on most days have done, of the creditworthiness of those, say, hedge funds or other kinds of short-sellers?

DG: Because you're not talking about small amounts of money.

AB: No. In fact, in one ETF, IWM again, short positions recently amounted to 14 billion dollars. That's not an enormous amount for the capital markets, but it's a pretty significant amount with respect to 2,000 small stocks. If there were a run, actually doing that unwind and getting those 14 billion dollars' worth of extra ETF shares would require buying 14 billion dollars’ worth of Russell 2000 stocks. If you didn’t want to be more than, say, 10% of volume, it would take 40 trading days to buy all you needed.

So we think that if you actually had a very sudden redemption run on IWM, there is a real likelihood of a short squeeze occurring in the Russell 2000. We don’t expect that at any particular time, it's just something that could happen if enough things went wrong.

The short position in an ETF like IWM being over 100% means that a large amount of the money investors think they have placed in Russell 2000 stocks has in fact been lent to hedge funds and other short-sellers. You take that across the entire ETF industry and you're looking at about 100 billion dollars in short interest – money that did not go into the underlying shares or gold or whatever the ETF represents. It was instead lent to hedge funds. It has been deposited in a shadow banking system where ETFs allow short-sellers to borrow money from institutional and retail investors.

DG: And what are they doing with that money?

AB: Well, no one knows. Presumably they invest it in what they think is going to make a better return than what they shorted, because you can't score the 10% or 20% those guys are all trying to make every year by buying the index. So it's anybody's guess.

DG: One question that Terry Coxon asked as I prepared for this interview was whether there is any way for the marketplace to let the fund's share price deviate for long from NAV?

AB: The tracking of an ETF's price with the fund's NAV, which historically has been extremely close, is totally dependent on an arbitrage mechanism. The arbitrager can make money by continuously pushing the price of the ETF toward its NAV. The question is... what NAV? What they mean by NAV is a value per share outstanding of the fund's underlying stocks. But of course you have this huge implied ownership through short-selling, and the short-sellers' shares are not being counted in the shares outstanding number.

DG: A lot of our readers have money in GLD, which is the ETF that invests in physical gold. You've looked at GLD, and it's based upon the premise that as investors pour money in, the operators of GLD turn around and buy physical gold and store it. And likewise with redemptions, they just sell the gold. My understanding is that there isn't anywhere near the same level of short interest on GLD.

AB: The short position in GLD isn't nearly as large as it is for some equity funds – but we have looked at GLD, and it has the same structural issues, just to a lesser extent, at least for now. The short interest in GLD has fluctuated around 20 million shares. Now, GLD is a pretty big fund. With 20 million shares short, it is roughly 95% fractionally reserved. So for all the investors who think they own the underlying physical gold, the fund actually has 95% of it in the vaults.

But GLD does not have to stay at 95% fractionally reserved. If there were a massive wave of short-selling in GLD, you could end up with a very significant fractional-reserve situation. If that were followed by heavy redemptions, you'd have the same kind of problem I described earlier – not enough gold to redeem all the shares.

DG: Could they just say, "From here on, we're not issuing any more shares"? Would that stop the short-selling?

AB: Not necessarily, because, you know, the short-sellers are selling – in fact, it would probably exacerbate the short-selling. So as long as a fund is issuing shares, aggregate buying demand can be satisfied by expanding the fund. If they stop issuing shares, aggregate demand would get satisfied by short-sales of existing shares. So, if anything, closing the issue window should make the problem worse, not better.

DG: Working through the mechanics of this, let's say gold drops by a few hundred bucks. Say, for instance, that there is some major change in the market along the lines of when Volcker raised interest rates back in '79-'80. And at that point a lot of short-sellers say, "Okay, this is it for gold," they pile on, they start shorting the hell out of GLD, and now all of a sudden you’ve got a real problem because the fractional aspect of it balloons, if you will.

AB: Well, you don’t necessarily have an immediate problem. It depends on the market conditions and the level of panic. You certainly would have a ballooning fractional-reserve situation, meaning that the reserves held in actual gold versus the implied ownership by people who think they own GLD (even though the shares have been hypothecated by the broker) will shrink. Those investors may believe they are still entitled to the metal, but the reserve of gold held on their behalf starts to shrink very quickly under those conditions.

The bigger challenge might be if there were an actual redemption wave. If that happened when GLD was already substantially fractionally reserved, then you're back to an 1800s gold bank problem. Fractionally reserved banks can be hit with a run.

DG: Right. Is there anything else that would make this whole "house of cards" collapse? Suppose a highly visible ETF stumbles and is unable to meet redemptions, or they just have to postpone redemptions. That might be the sort of trigger that could really send people off.

AB: You know, one of the big risks, by the way, that no one has really discussed much, is if an ETF were to have a big redemption run in panicky market conditions and halted redemptions. Halting redemptions is a complicated decision, because it breaks the symmetry that allows the arbitragers to go long or short both the basket of stocks and the ETF shares to move price toward NAV.

So it's quite possible that if redemptions were halted for any length of time, the arbitragers wouldn't be keeping the share price in line with NAV. We already know from the Flash Crash that significant price departures from NAV are quite possible for ETFs.

DG: Knowing what you do, I mean, obviously you deal on an institutional level with your money-management firm, do you own ETFs personally?

AB: We do not. We do not own any ETFs either personally or on behalf of the funds we manage.

DG: Is it because of the research you’ve done or just because it's not what you guys do?

AB: I would say it's primarily because it's not part of our strategy, but obviously we did the research because we were interested in understanding the product better.

DG: So, any advice for readers? Is there a short interest over which a person should be concerned about his holdings?

AB: Well, I don’t know if I could set a threshold, but I would certainly encourage people to make sure they know what the short interest is in any fund they are considering. That's a metric that is starting to become more accessible. Since we published in September, some of the ETF sponsors, like BlackRock, have begun reporting on ETF short interest, which I think is terrific – kudos to those guys. We would like to see better transparency and disclosure, so that institutional and retail investors alike are aware of the counterparty risks that are "hidden in the plumbing," to use Morningstar's term, and are aware of the actual and somewhat complicated mechanics of the products that they’re buying.

DG: Do the ETFs with a mandate to magnify an index 2 or 3 times (e.g., RSW) have an elevated level of risk, due to the additional leverage?

AB: The underlying "assets" from which these funds get their NAV are derivatives to begin with, which introduces another layer of counterparty risk – one that has already experienced serious problems. We find it surprising that packaging complex derivatives in an exchange-listed security (the ETF) seems to remove all of the sophisticated investor standards usually applied to derivatives trading by SEC, CFTC, etc. 

One ETF recently launched in the U.S. is PEK, the Market Vectors China A Shares ETF. This is another great example of where the industry is headed.

It is illegal for most foreign investors – except a few licensed global institutions – to buy A shares on Shanghai or Shenzhen, China's two mainland stock markets, and Market Vectors is not one of the exceptions. So instead of owning A shares, the ETF owns swaps with brokers that are licensed in China to own A shares. The fund holds the swaps as its underlying "assets." So PEK is an NYSE-listed China A shares ETF that does not own a single Chinese A share.

If PEK were to become significantly short in the secondary market, it would mean a fractional-reserve ownership of a derivative representing a basket of stocks that would be illegal for nearly all of the ETF's investors to own directly. More confusing still is what it means to be short PEK in the first place, since it has historically been illegal to be short A shares in China at all.

In essence, ETFs are being used to package and securitize products that are at best poorly understood and in some cases are used to circumvent securities regulations. An example closer to home is when the SEC briefly banned short-selling of essentially all financial stocks in 2008. The financial-sector ETFs were not on the list, so many hedge funds kept right on shorting financials using those ETFs. 

DG: Certainly a lot to think about here. Any other questions I forgot to ask about, but that I should have?

AB: No, I think that was a pretty good coverage of a little bit of work we've done.

DG: Is there a good publication that would help people better understand the mechanics of the ETFs, because it is obviously very complicated, something that people might want to be able to study?

AB: Always the best place to look is in the fund's prospectus. The prospectuses are long and impenetrable, because they’re written by the legal team, but they really do have a tremendous amount of information. If you can float through one of them, I think it's definitely to your advantage.

DG: Thank you for your time.

[Apr 10, 2011] Joseph Stiglitz- "Of the 1%, by the 1%, for the 1%"

Economist's View

Fred C. Dobbs:

http://t.co/VUHX4KX  via @vanityfair

'Of the 1%, by the 1%, for the 1%' - Joseph Stiglitz

Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret. ...

Lafayette:

PUBLIC SQUALOR

{Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret. ...}

Well put.

Have we been brainwashed to think that ours is the best of all possible democracies, just because it was one of the first?

It is still Work in Progress - especially after the regression made by cutting drastically income taxes on the rich during the reckless Reagan Administration.

We have favored Free Enterprise at the price of Public Squalor

cm:

Land of the free ... enterprise

[Apr 09, 2011]  What is Real Research

Economist's View

The highlight of the first evening's proceedings was a conversation between Harvard's Larry Summers, till recently President Obama's chief economic advisor, and Martin Wolf of the Financial Times. Much of the conversation centered on Mr. Summers's assessments of how useful economic research had been in recent years. .... Mr Summers was ... measured, refusing to be drawn into making blanket statements for the sake of being controversial. (He's tried that and found it doesn't always go down well, he quipped. Later, he added that he was "one of the few people who went to Washington to get away from politics".) But in its own way, his assessment of recent academic research in macroeconomics was pretty scathing.

For instance, he talked about all the research papers that he got sent while he was in Washington. He had a fairly clear categorization for which ones were likely to be useful: read virtually all the ones that used the words leverage, liquidity, and deflation, he said, and virtually none that used the words optimizing, choice-theoretic or neoclassical (presumably in the titles or abstracts). His broader point—reinforced by his mentions of the knowledge contained in the writings of Bagehot, Minsky, Kindleberger, and Eichengreen—was, I think, that while it would be wrong to say economics or economists had nothing useful to say about the crisis, much of what was the most useful was not necessarily the most recent, or even the most mainstream. Economists knew a great deal, he said, but they had also forgotten a great deal and been distracted by a lot.

OhNoNotAgain said in reply to beezer...

Exactly. And, even when there is hyperbole, it's in the right direction (towards the truth).

The field of economics is so bizarre to someone like myself in the field of software development. Software development, as a profession, has long ago accepted the fact that human beings are doing the development and, subsequently, there will, be bugs and design issues. Therefore, much of the last 20 years has been spent on improving quality through automated testing and build systems that systematically verify software before it is released. Economics seems to be too intertwined with money and politics and is too easily hijacked for other purposes, moving it completely away from being systematically verifiable. To use the software analogy, it would be like the large and fictional "software maintenance developers' association" encouraging bugs in software in order to swell their ranks, with the parallel decline in the public opinion of the entire software development profession in general.

cm said in reply to OhNoNotAgain...

"it would be like the large and fictional "software maintenance developers' association" encouraging bugs in software in order to swell their ranks"

You don't say. It is more likely that a different force is at work, at least in corporate software groups - the "bug trackers, process architects, and program managers guild" that derives its employment from having to manage a steady stream of various "issues". Where I have some insight, it seems a number of your "maintenance developers" are trying to join *that* guild instead.
 

Paine:

Some genius some where on the blogs apropos the lacunae in the contemporary main stream Theortical paradigm said  [that] in the long run everything ibecomes part of the neoclassical canon

But we live in a series of short runs

The copernuicus Ptolemy observation

Ought to suggest to all of us just how penetrating and concentrating Lary's evil mind can be. Went to Washington to escape politics. The man can fly circlers around say Paul krugman or Joe stgilitz. He reminds me of Oppenheimer. I'd put him in charge of any poli Econ manhattan project if I could trust the filthy bastard

Robert Waldmann

Great minds think alike. Especially if they are quoting each other without giving credit. I strongly doubt the claim that the Ptolomaic model outperformed the Copernican model. A model of simple circular orbits around the Sun is almost exact (the orbits of visible planets are barely eccentric at all). Copernicus's model (which definitely had more epicycles than Ptolomy's) outperforms the simple circles model

Whether a Ptolomaic model outperformed Copernicus's model, that possibility was mentioned (as a guess not a claim of fact) by N Gregory Mankiw roughly 25 years ago.

Of course, Prof. Mankiw wasn't discussing DSGE. He was discussing the rational expectations revolution prominently featuring the Lucas supply function. By a very odd coincidence, the Lucas supply function is about to turn 50 (it was presented by Muth in 1961). Oddly, it doesn't seem to be more useful for forecasting than the IS-LM model just yet.

The logic appears to be that something must be a revolutionary advance, because it gives worse predictions than preceding models. It will not be possible to find an example from the history of science as it actually happened.

Of course, Summers has no respect for DSGE models. He was just adding Ballance http://bit.ly/eiy9po . This is the man who once told me (and I quote) "You know my view. In the history of economic theory, the day in which they came up with the idea of the utility function wasn't an especially good day." He also once said "Real analysis. Isn't that mostly about the difference between less than and less than or equal to ?"

Kievite:

I am not sure that actual result of Larry Summers activities both academic and political can be viewed positively.

His activity with the current administration was part of selling the house to financial oligarchy practiced by Obama administration. In general Obama administration record is a real shame if we compare it with Roosevelt administration handing of the crises. And Larry was a part of the problem not a part of the solution.

And I think Paine is naive to see him superior to Paul Krugman and, especially, to Joe Stiglitz. In a way Larry meteoritic rise was the story of nepotism. In a mandarinate that sure is US economic profession that's a tremendous help for any person in climbing to the top. Neither Krugman nor Stiglitz has had those boosters attached.  Also Stiglitz was always an independent thinker. Krugman is more corrupt and stands somewhere in between Summers and Stiglitz.

His activities with Harvard endowment characterize him as in certain way, no matter how we interpret them. His role in economic rape of Russia and subsequent defense of criminal behavior of Andrei Shleifer also characterize him in certain way. His role in Brooksley Born's affair is shameful. He really acted as a hired killer. His stint in hedge fund D. E. Shaw also characterize him in a certain way.

All those mentioned activities suggest that he is not an academic, he is a corrupt political hack within the academy, typical Harvard Mafiosi, and always was. What appeals to him is not the progress of science but money and personal power. And economic is just a tool for achieving this power. No more no less...

I see him no less corrupt then Mankiw.

[Apr 09, 2011] Market investors loath to weigh real challenges to U.S. economy by Kevin Rafferty

Rally might continue, but if not baby boomer will again face declines in 401K accounts...
The Japan Times Online

...Robert Reich, secretary of labor in President Bill Clinton's administration laments: "Why aren't Americans being told the truth about the economy? We're heading in the direction of a double-dip, but you would never know it if you listened to the upbeat messages coming out of Wall Street and Washington."

He is worried about declining consumer confidence. The Reuters/University of Michigan survey showed a 10 percent decline in March, while a separate publication by the Conference Board of its index of consumer confidence showed that it had fallen to a five-month low. Rising fuel and food prices, now totaling 23 percent of the average person's income, plus static or falling wages, and falling house prices are taking their toll on expectations.

The U.S. economy is expected to grow by between 2.5 and 2.9 percent this year, but Reich contends "that's even less than peanuts. The deeper the economic hole, the faster the growth needed to get back on track. By this point in the so-called recovery we'd expect growth of 4 to 6 percent."

He points out that in 1934, emerging from the Great Depression, the U.S. grew by 7.7 percent and followed this was 8 percent and then a whopping 14.1 percent in 1936.

But there is no sign now of that sort of growth, and the ending of the government stimulus means the prospect that the economy will begin to slow as the government economic booster rockets are being removed. American state and local governments are cutting spending by $110 billion, while the federal government will cut $30 billion from the budget, or more if the Republican have their way.

Economists who are firmly in the center are also worried about the growing imbalances in the U.S. economy. The Dow Jones is rising and Wall Street is optimistic because U.S. corporate profits have been good, and rose to a record $1.678 trillion annualized rate in the fourth quarter of last year, according to the commerce department. Profits jumped by 29.2 percent in 2010, the largest annual gain since 1948.

Critics also complain that big nonfinancial conglomerates are increasingly making more money abroad and paying little U.S. taxes on it. In contrast to falling consumer confidence, the Business Roundtable's economic outlook index, surveying the views of 142 chief executives, is at its highest point since it began in 2002.

How long can the U.S. go on with the growing disparities is the $14 trillion question, which is the size of the U.S. gross domestic product, and also the size of U.S. debts.

Kevin Rafferty is editor in chief of PlainWords Media, a group of journalists interested in economic development issues.

[Apr 09, 2011] who-won-the-budget-battle

 "The Aristocracy remains in control. " Obama is a complete fake, he is better Republican, then Clinton was. "Whether Democrat or Republican, we are smoothly seduced into the “loneliness at the top” view of Obama, which as Geertz commented, always points to an autocratic state behind the curtains....
April 09, 2011

save_the_rustbelt

This year's budget still has record spending and a record deficit, which makes me wonder why it isn't more stimulative.

Any thoughts?

Min

As for the stimulus, two and a half years ago I did an internet search for the historical combination of recession and financial panic. It took fifteen minutes to discover that recovery has been slow from that combination, taking several years.

Paulson said that the bank bailout was so that the banks could start lending again. On average it has taken two years before banks started lending again. That may be happening now. To me this suggested that a robust recovery would require sustained stimulus over time.

Instead, both the Bush and the Obama administration were mainly concerned with preventing disaster. Bush only had a few months, but Obama should have made the economy and unemployment high priority. The Obama stimulus should have been written to continue until unemployment fell below 6% or 5%.

David Welker:

save_the_rustbelt,

(1) The spending is not enough to make up for the GDP output gap.

(2) Increases in spending due to automatic stabilizers such increased unemployment benefits and the stimulus have been offset by cuts in spending at the state level. Also, unemployment benefits are not enough to make up for income lost when people lose their jobs, so the net effect is still a decrease in aggregate demand.

(3) Most of the increase in deficits has been caused by a massive decrease in revenue due to a poorly performing economy and the continuation of the Bush tax cuts, not due to spending increases.

anciano:

Clifford Geertz has the answer. He's dead, but his 1981 book, Negara: The Theatre State In Nineteenth-Century Bali tells us much more about the 'crisis' than the breathless comments of analysts like Wolf Blitzer, Tom Friedman and David Green. Geertz wrote about the 19th century precolonial government of Bali, how the king appeared to be powerful while fronting for the big landowners and that most of his actions served to reinforce myths and symbols that stabilized the state and distracted peasants from the tremendous inequality of Bali. His job was to put on a good show. Of course, we are much smarter than the Balinese but in fact we attend to the show via modern digital media. President Obama has chosen the role of great compromiser, but his compromises fatten up Big Finance. He tells us of his December tax cut for the rich, but forgets to mention the fact that it was coupled to a punishing tax increases for the poorest Americans (because the Making Work Pay tax credit was abolished).

Whether democratic or Republican, we are smoothly seduced into the “loneliness at the top” view of Obama, which as Geertz commented, always points to an autocratic state behind the curtains. Crying John Boehner seems shrill; he desperately pulled out a last minute compromise- or was that desperation scripted? Inept Harry Reid seems to have a minor part at first. Whose factotum is he? Maybe there’s a clue in his fervent thanking Chamber of Commerce CEO Tom Donahue last night. Now the COC didn’t want a government shutdown (bad for business you know) they wanted tax shuts and reduced socials pending- keep your eye on that ball to see if they get their wishes.

Questions about who won reflect the dominance of the sports page in American life. Important long-term issues like climate change and increasing inequality are kept off stage. Paul Ryan’s preposterous budget won’t get adopted but the train of tax cuts and unfunded social services will continue rolling quietly in the background and big finance will grow in size and scope – the policies which the COC quietly favors, a genteel version of the tea party rhetoric, are now decimating Ireland and Britain but neither the media nor the voters want to pay attention to foreign affairs. After all our theatre state offers us our own lonely man (The Big O), our hardheaded small business paragon (Crying John) and our stumbling fool (Poor ole Harry). The Aristocracy remains in control.

Sean

The Republicans won, easily, and America lost.

Obama's statements on the deal are rather disgusting in themselves:

"But beginning to live within our means is the only way to protect those investments that will help America compete for new jobs -- investments in our kids’ education and student loans; in clean energy and life-saving medical research. We protected the investments we need to win the future."

The first part makes no sense: When inequality is so high in this country that the vast majority of people make just enough to get by, and often not even that much, we turn to credit in order to keep the economy growing (ie., like student loans) because if demand doesn't increase, the economy stagnates. That's what happened in the 80's, real wages stagnated, but easy credit tended to hide those things. By slowing the recovery, which is what this deal will do, Obama will make it much harder for people to "live within their means" and much more likely that they'll seek out credit. This is all never-to-mind the fact that the people who now must "live within their means" are not at all the same people who caused the crisis, so there is an inherent fairness problem that Obama seems not to care about any more.

But the worst part about this statement is how he turns what will become hundreds of thousands of lost jobs and less demand for the economy, a complete capitulation on the Democrats' part to even more than the Republicans originally wanted, and real pain that will be caused for millions of people into the dumbest campaign slogan of the modern era - "win the future." This is not a time for sloganeering; don't spit on my shoes and tell me it's raining (I cleaned this one up for the blog, Mark).

Last, if you gave me the following lines from Obama's statement completely out of context and didn't tell me who said them, I couldn't possibly believe that they would be coming from the mouth of a Democrat, it would just be too absurd:

"A few months ago, I was able to sign a tax cut for American families because both parties worked through their differences and found common ground. Now the same cooperation will make possible the biggest annual spending cut in history."

[Apr 06, 2011] It's The Plutocracy, Stupid by MJ Rosenberg

Political Correction

I received an email from a Capitol Hill aide who thinks my criticism of AIPAC, the powerful pro-Israel lobby, is overly simplistic. He doesn't dispute the fact that AIPAC has a disproportionate influence on our Middle East foreign policy. He argues, however, that AIPAC is no different than other powerful special interest lobbies.

I think his whole email is worth a read:

I work on Capitol Hill and I disagree with you about AIPAC. You make it seem as if AIPAC is the only lobby that gets what it wants through threats of cutting off campaign contributions, as if only AIPAC dictates legislation through intimidation.

WRONG! My colleague who handles the Israel issue confirms your analysis. But it's no different on the domestic issues I cover. The issues of jobs, health, taxes, the environment, regulation to protect kids' health, oil drilling, workers' safety, education, guns...they are all dictated by lobbies just as overbearing as AIPAC. All we do up here is cater to rich, selfish people and their special interests. And their interest is cutting all social programs so we can keep cutting taxes to make them even richer.

True, most of them don't brag as much as AIPAC but that doesn't make them any better or worse, just smarter (AIPAC gets more negative attention because of its swagger). Big deal. The public is getting screwed eight ways to Sunday by special interests and AIPAC is just one of them. Don't mislead your readers into thinking it is unique. Not only is it not unique, it's insignificant in the sense that it's not the guys robbing the poor to put money in their own pockets. They own US Middle East policy. But the real fat cats own everything else.

I agree with everything my correspondent writes. The American democracy we learned about in school no longer exists. It's been sold to the highest bidders. And the highest bidder is not, as the Tea Partiers like to say, "We The People."

Bill Moyers, the highly respected longtime PBS commentator and President Lyndon Johnson's lieutenant in creating Great Society legislation like Medicare and the Voting Rights Act, calls the American political system of today a "plutocracy" — that is, one that is governed by the few and for the few.

Last November, Moyers delivered a speech at Boston University (the Howard Zinn Memorial Lecture) explaining how this plutocracy was created. Suffice it to say that it was no accident. (You should read the Moyers speech here or watch it here. It is simply the best explication by anyone of how we got to this miserable moment in our history.)

Moyers explains the loss of American democracy like this:

The Gilded Age returned with a vengeance in our time. It slipped in quietly at first, back in the early 1980s, when Ronald Reagan began a "massive decades-long transfer of national wealth to the rich." ... The trend continued under George W. Bush — those huge tax cuts for the rich, remember, which are now about to be extended because both parties have been bought off by the wealthy — and by 2007 the wealthiest 10% of Americans were taking in 50% of the national income. Today, a fraction of people at the top today earn more than the bottom 120 million Americans.

Over the past 30 years, with the complicity of Republicans and Democrats alike, the plutocrats, or plutonomists ... have used their vastly increased wealth to assure that government does their bidding. ...

Moyers concluded:

Everyone knows millions of Americans are in trouble. As Robert Reich recently summed it the state of working people: They've lost their jobs, their homes, and their savings. Their grown children have moved back in with them. Their state and local taxes are rising. Teachers and firefighters are being laid off. The roads and bridges they count on are crumbling, pipelines are leaking, schools are dilapidated, and public libraries are being shut.

Why isn't government working for them? Because it's been bought off. It's as simple as that. And until we get clean money we're not going to get clean elections, and until we get clean elections, you can kiss goodbye government of, by, and for the people. Welcome to the plutocracy.

Moyers, not surprisingly, is spot-on. And so is my correspondent who complains about my emphasis on AIPAC. My only defense is that my job is limited to foreign policy issues. If my job description were different, I'd be happy to write about the undue influence that the Chamber of Commerce and the Koch Brothers have within the halls of Congress. It's just that on the Middle East issue, the big foot money lobby is AIPAC, and it has no competition.

But I am not going to argue that AIPAC, or any foreign policy lobby, does anything like the damage done to this country by corporate interests. The "greed lobby" at the national and state levels has successfully implemented policies that take money from the poor and middle class and put it in the pockets of their friends (the rich and super-rich). AIPAC, for all its faults, does not lobby for legislation to make its members rich. (They don't get a kickback from the Israel aid package.)

None of this, however, makes me feel any friendlier to AIPAC and its satellite organizations. The policies they inflict on America are deeply damaging to our national interests. It is just that, right now, AIPAC is part of an infinitely larger problem: a thoroughly corrupted political system.

But it is far from alone. There are hundreds of AIPACs, many infinitely more powerful than AIPAC itself, and they are turning the American dream into an American nightmare. From now on, I'll be more careful about putting AIPAC's sins in their unholy context.

[Apr 06, 2011] More Journalists Dignifying “TARP Was a Success” Propaganda

"The wages of sin are death, and the sins of the banks (unbelievable risk-taking) is being paid for by the death of the American middle class."
naked capitalism

steelhead23:

I sure wish Yves would respond to your thoughtful post, but she likely won’t. I somewhat disagree that TARP hasn’t cost the American public. Indeed, the monies lent to the banks may all get repaid, but that is only the tip of the public assets at risk. It is only marginally useful to single out TARP for review of the policy melange TPTB enacted to deal with the bank-caused crisis. Let us recall that Treasury picked up most of AIG, then the FED stepped in and bought virtually all the CDOs AIG had reinsured. The FED also maintained Zirp, accepted junk at its overnight windows, extended those overnight windows into months, offered payments on excess reserves, etc. Hence, the FED ate the bank’s losses, gave them huge bennies, and so the banks have been able to pay off their TARP loans. Meanwhile, commodities and equities have soared while the economy is mired in doldrums. The wages of sin are death, and the sins of the banks (unbelievable risk-taking) is being payed for by the death of the American middle class. And oh yeah, it is the wealth of those very same TBTF banks that is paying the lobbyists seeking to derail Dodd-Frank et alia. So, damn right, I am concerned about the moral hazard the entire myth of TBTF has wrought.

jim:

The cost of the near collapse was a severe recession, with significant increases in unemployment. And, as a consequence of those two factors (declining GDP and employment), there was a huge ballooning of the federal government’s fiscal deficit, as so called automatic stabilizers kicked in (unemployment insurance, food stamps and other anti-poverty program spending authorized long before the Obama Administration came into office) that increased spending YOY by $200 billion at the same time that tax revenues declined with the downturn in economic activity by $200 billion, creating an incremental $400 billion of deficit (even before the Obama Stimulus Plan).

But, and this is the important point, almost all of the $8 trillion of Fed, FDIC and Treasury support for the financial industry (including TARP) has or will be repaid. That’s what the Treasury Department is now saying (or spinning, as Yves would have it.) The expansion of the Fed’s balance sheet with QE1 and QE2 remain outstanding (and those are not trifling sums) but all of the other extraordinary “bailout” programs have either been terminated or been repaid or are on their way to being repaid.

That fact (that the “bailout” is unlikely to cost the Federal Government anything) is so inconsistent with the “banker bailout” narrative the left and libertarians have been plying the last two years that they remain incredulous even as the fact comes into clearer focus with the passage of time.

But there’s more: if the Government is actually made whole then perhaps the crisis wasn’t – as Yves and others would have you believe – so much a “balance sheet solvency” crisis, but a classic liquidity crisis resulting from a run and panic, not in the insured deposit system (since that has been protected by government guaranties since the 30s) but in the Shadow Banking System where financial institutions borrowed short so as to invest long on a highly levered basis. A liquidity crisis can look like balance sheet insolvency in the immediate wake of its wreckage, as the fire sale of assets to meet short term debt maturities forces asset prices down, causing further liquidations, that forces prices down further, in a so called adverse feedback loop. But, over the last two years as the short and long term credit markets have come back (even as an enormous number of subprime/alt A mortgages have foreclosed or become delinquent), the RMBS securities and underlying mortgage prices have rallied: one only has to look at how far back the AAA tranches of the 2004, 2005 and 2006 vintage private label RMBS have come in price over the past two years to realize that the severe price dislocations from the fire sales in the 3rd and 4th quarter of 2008 and 1rst and 2nd quarter of 2009 were not representative of “fair value”.

Which is not to deny that some pretty crappy mortgages were sold and securitized at the top of the housing market or that the housing market was way overbought by 2005, fueled by abundant, cheap credit. Nor is it to deny that a whole lot of pain has been felt since as the deleveraging has ensued. But to hold up folks who bought homes at the top with no money down and got foreclosed upon when they couldn’t meet their mortgage payments as paragons of virtue whom policy should protect while decrying the bailout of the banks who lent them the money seems an odd way to find a moral in this sordid tale of greed and speculation. If frauds were committed, folks should go to jail. But if this was banker greed and individual speculators BOTH preying (directly in the case of the banks and indirectly in the case of the borrowers) on the Government’s safety nets, it is hard to see anyone but the taxpayer as the potential loser in all this.

And if the taxpayer is going to be made whole for all the banker bailouts, then, well, the tale is a lot more subtle than the black and white morality tale that the mainstream press and their blogger critics have been debating. It goes all the way back to a better understanding of the joint venture between the public and the private sector that banking has always been and re-thinking whether the risks that a trillion dollar sized bank will inevitably take (and the friends it can buy in Congress to allow them to do so) are the kinds of risks the public in this partnership should underwrite or whether banks of that size are too big to control let alone to fail.

The Swedish solution left Sweden with two really big banks when all four of their banks failed in the early 90s. We made six out of twelve during the Fall of 2008. Perhaps our representative democracy would be better off turning those 6 into 60 to protect itself against undue concentrations of wealth and influence and our economy better off by protecting itself against undue concentrations of risk taking by six highly correlated pools of capital.

Hugh:

Gee, wherever to begin? The banks are still insolvent. They are being allowed to mark their assets to other than market values. MERS, the massive frauds in RMBS CDOs, and in foreclosures is still all out there and has not been resolved. Then there are the worthless HELOCs they are carrying at full value. And there is the trillion dollars plus in dreck that the Fed is holding.

Also I don’t understand your concept of paying back. Banks could borrow money from the Fed at ZIRP then turn around and buy Treasuries or count it in their reserves and get paid interest on it either way. Or they could use it to blow the bubbles we are seeing in stocks and commodities. Bubble money is only good until the bubble bursts and then the losses will simply be larger than they were before or dumped on ordinary Americans, because that is where your argument really falls apart. Have the bankers paid us back for the housing collapse? For the loss of millions of jobs? For the losses in retirement accounts? For the high federal deficits they have engendered? For the hits to state and local budgets?

It is like someone deliberating torching a city paying a parking fine and in your view this makes it all even.

kievite:

I am not sure that TBTF banks and government are separate independent structures as implied in many posts in this discussion. And what is called “capture” might be a more complex scheme of interdependence.

The question is: Can we discuss the relationship of TBTF and government using implicit assumption that those two are separate entities as if, say, JP Morgan is a regular private company like, say, Adobe ?

I would say no. It looks more like TBTF not only control the government, but are at the same time a hidden arm of the government (kind of financial death squads ?) and the international role of TBTF is so vital and important that the US government just can’t afford to address the misbehavior in the domestic market without huge “collateral damage”. That automatically excludes any attempt to deal with the crisis like Sweden.

I think the government views TBTF much like in famous FDR quip about Nicaragua’s dictator, “Somoza may be a son of a bitch, but he’s our son of a bitch.”

In this sense famous slogan of 2008 demonstrations against Wall Street fat cats “jump f**kers” despite its obvious relevance and elegance is addressed to just one head of two headed beast.

Nathanael:

“Instead, we have bond vigilantes driving policy when”

Correction, Yves: *invisible* bond vigilantes, as Krugman calls them. There are no actual bond vigilantes; actual bond traders are happily buying Treasuries at negative real interest rates, as we all know.

Nathanael:

Simon Johnson wrote:

“Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy…..

….Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country.”

This is not so advanced or unusual as all that.

The most advanced form of this was created by medieval (and some pre-medieval) monarchs, with the idea that what was good for your liege-lord was good for you. They kept this up for well over 1200 years continuously, despite the fact that the lords often treated their underlings, quite simply, as slaves. The Christian Church was used as a tool for this mind control.

Compared to that the current financiers are pikers.

marc fleury:

I hope NC readers don’t mind my belaboring the issue of the TARP’s phony success, but every time I see the Administration’s propaganda parroted I feel compelled to weigh in.

NO, I DO mind… in find your constant “belaboring” just tiresome and it discredits you… it is why I have stopped reading NC months ago very frankly…

Frank

TARP, the acronym for Troubled Asset Relief Program was suppose to address the mortgages within the insured bundled mortgage credit swaps designed to fail (designed so to collect the insurance on the failed swap when it did fail) although most did not know that the swaps were designed to fail at the time. What started out as “Trouble Assets” became “Toxic Assets” which morphed into “Damned Toxic Assets” (DTA’s) that just would not go away; hence the damned toxicity. Most of TARP was suppose to address the assets directly by addressing the mortgages within the swaps; but, that path was never really started. Instead, Henry Paulson began purchasing the DTA’s (still “trouble assets” at this time) from the banks because the credit swaps through a legally fraudulent rating system were located in banking reserves that received waivers in 2001 to be held as hedge funds rather as than liquid capital (cash) as the law required. The debt instrument grade was suppose to be AA or better; however, the mortgage credit sways rated as junk individually became AA or better when grouped due to a group rating being equal to the highest debt instrument within the group rather than a weighted average of the group. Henry Paulson soon found out that there was not enough TARP money to buy up the DTA’s; thus, convinced Fannie Mae, Freddie Mac, and various Public pension funds to buy up these worthless swaps outside of TARP. As of yet, no money had went to directly addressing the mortgages within the credit swaps as TARP was originally targeted to do.

In addition, the lending institutions had been lending at a ratio of 37:1 ($37 lent to every $1 in the now hedge fund reserve) while the Federal Reserve was creating currency at 9:1. When the DTA’s began to fail as designed, the banks could not be liquidated via the RTC because the reserve as hedge funds did not have the capital required for controlled resolution because they were not liquid and the assets had deteriorated to the point of worthlessness leaving the only course of the Federal Reserve to create new currency to the tune of $23 trillion.

It was only after the infusion of $23 trillion and the buy up of DTA’s that the banks could finally address the mortgages themselves; but, only did so in an halfhearted manner. Most of the newly infused funds went to consolidation of the banking sector and what little that did go to address the mortgage issue was done so without lowering rates, with high refinance fees, and no lengthening of the term of the mortgage, all of which is needed to lessen the debt burden resulted in refinance payments equal to or greater than before the refinance. As a result, there was a high recidivism rate of failures (around 60% second defaults) which the large banks used as an argument against continued refinancing. Counter to the large bank assertions, small banks who did make the necessary adjustments reduced the recidivism rate to 19%; a figure confirmed by a study. Rather than follow the path provided by the study, the small banks were allowed to be gobbled by the large banks and refinancing remained as a voluntary function.

Where we are today is that the DTA’s still reside within the Federal Reserve, Fannie Mae, Freddie Mac, and public pension funds (which is one of the reasons for the public pension fund shortfall). Since TARP was suppose to address the “Troubled Assets” (now “Damned Toxic Assets”) and the assets still exist in their troubling toxic state, TARP cannot be considered a success by any measure. The money paid back to TARP did not come from DTA resolution; but, from the $23 trillion infused to compensate for the currency shortage to cover credit short fall. The banks are not whole by any means, the reserve still exists as hedge funds, the banks are not lending; but, investing, and the DTA’s sit like mines waiting to go off which all means that TARP was a failure and not a success by any measure.

[Apr 05, 2011] Blacklisted Economics Professor Found Dead NC Publishes His Last Letter

Brilliant satire. April 1 joke, but the fools are not people who thought this was real economics (if any). Hat Tip to Yves Smith...
Apr 04, 2011 | naked capitalism

Bryan Caplan

reminded of an old article by Michael Kinsley, “A Public Choice Analysis of Public Choice Analysis.”

Brick:

Re-reading I am starting to think it is an april fools especially since there is no information anywhere about the professor and the name sort of seems a joke. It is well done with reference to Ayn Rand although the author could have said Homo reciprocans instead of harmonization bias.

Still Bryan Capan is a real person.
http://econfaculty.gmu.edu/bcaplan/

Actually academic choice theory is a real field of study.
http://psycnet.apa.org/?fa=main.doiLanding&uid=1994-47157-001

Digoweli
This is a very clever letter. Thanks, but Clifford Geertz got there first and he’s real. Several years ago, at the Institute for Advanced Studies, he proposed coming up with an Anthropology of Western Science and using the institute as the study example. They refused telling him that they were not a culture but were “true objectivity.” Also the Theater Critic Walter Kerr did a brilliant book on this in the 1960s called “The Decline of Pleasure.” Scribners Digoweli
Sungam
Well, 39 results and plenty of content farms. I’d chalk this one up as a success.

It’s a great article and I would chalk it up as an April Fool as in this day and age I would expect even a blacklisted Professor to leave more of a trace online.

Btw the Psychnet article talks about something rather different. And hence cleared for general consumption. :op

Mia
“Outis”=”Nobody” As in, what Odysseus called himself after he poked the poor old Cyclops’s eye out.
“Philalithopoulos”=”Son of love of stone”? “-poulos” is son of, but the “Philalitho-” part is unclear or maybe just random Greek. “Lithos” is rock or stone, and since “Philosophy”=”Love of Wisdom”, “philolitho-” would be “Love of stone.” Or it could be formed by analogy to “Philadelphia”=”Brotherly Love”, in which case it would be “Stony Love”? But the “a” in “Philadelphia” comes from the root “adelphos,” so it’s possible to read it as “Philo-” + “-alitho-” which would be “love of no stone,” but that seems unlikely.

Learning Classical Greek makes you quite the pedant.

Cro
This was actually pretty fun. And no one can complain it was too difficult to see through for what it was. I’m personally glad ‘Choice Theory’ and ‘Academic Choice Theory’ are being highlighted to members of ANY forum where mounds of academic theories are used and debated. I spent a summer in Mexico once reading Randall Collins’ ‘The Sociology of Philosophies’. A brilliant piece which revolutionized how I saw academia.

I’d suggest it to anyone. The first roughly 80 pages are all you need to understand the theory in depth, but the remaining bulk are actually worth the grind. I at least don’t complain much anymore about academics of any stripe being political with their work, I simply expect it as an extension of their professional academic lives and personal belief systems. They’re just like anyone else, and we can’t expect them not behave that way. We simply have to be aware of the fact and integrate that into our own decision-making when we choose who and what to believe.

Is there any other good work out there on ‘Academic Choice Theory’?

LAS
We need an Outis Philalithopoulos endowed chair at every university and college.

The Outis chairs shall publicly honor corporate entities, politicians and economists of the year who best illustrate predicted outcomes from the general theories of Outis. For example, politicians calling for the privatization of Medicare should be strong contenders for one of the 2011 prizes.

Now here’s the beauty of it… Because their own theories are so rewarding in and of themselves, honored recipients of an Outis prize need not be extended any actual prize money or banquet to flourish. The Outis scholars get to keep all the endowed cash.

These Outis chairs could be highly efficient positions to maintain.

alex:

Are you from the “More Truth is Said in Jest” department? Tongue-in-cheek though your post may be (or may not be) such chairs would indeed constitute a public good.

Phil Henshaw:
While the tale is full of truth and wonderful story telling the idea that anyone would “do away with” an academic, with that name and leaving only one scrap of paper, for becoming an outcast in his own profession, is purely hilarious. Sounds more like a case of transient multiple personality…:-)

There’s a further larger mystery exposed none the less, that indeed all academic disciplines are cellular organisms of (to be uncharitable and stay in step with the present discussion) based on self-congratulatory myth making. The further mystery is that, virtually all of nature is built around cellular organization of that same kind, developing according to whatever advances the internal designs of that cell of organization. That includes cultures, communities families, businesses, ecologies, storms etc.. That this is oddly such a visible pattern but not yet recognized by science generally is something I’ve been studying for some time, and has given me a nice set of discoveries.

I find them a bit hard to share with people, having to do with studying cultures as whole systems, but some are fairly easy to appreciate. The majority of our personal environmental impacts come from the energy the world needs to use to follow our instructions, coming from delivering what we spend money on, and outsourcing untraceable resource uses all over the world to do it, for example. Only a small part comes from our visible technology uses that are what people presently count.

There are various others described in my recent papers at http://www.synapse9.com/phpub.htm. The great confusion that the natural cellular design of knowledge communities causes is discussed both in the top paper there and in “What Wandering Minds Need to Know”, a group of very short essays on it.
http://www.synapse9.com/issues/WanderingMinds.htm

Firean:

“Lithopoulos” is a genuine surname, and there are persons with this name within the economics world; eg. Erik Lithopoulos, Savvas Lithopoulos.
Work it from there.

melior
harmonization bias – ascribing positive value to harmony between the real world and my economic theories.

Other academics have tried less troublesome but equally creative ways to achieve this harmony; e.g. the professor interviewed in Inside Job, who used a simple technical method (he explained as “a typo”) to moderate the reality-dissonant tone of his research listed on his CV by changing his report title from “Financial Stability in Iceland” to “Financial Instability in Iceland”.

Mark P.
“For example, let E = Larry Summers and let S = the financial services industry. In 1989 E was (a) a supporter of the Tobin tax, which threatened to reduce the rent extracted by S. This threat was apparently later withdrawn (b), and in 2008 E was paid $5.2 million (c) in exchange for working at the hedge fund D. E. Shaw (an element of S) for one day a week.”

Nice!

Eubulides:

For a serious analysis of the professional economist[s] as rent seekers see:

http://www.uned.es/dpto_log/jpzb/docs/2002%20ECONOMISTS,%20TRUTH%20SEEKERS%20OR%20RENT%20SEEKERS.pdf

[Apr 03, 2011] Put the Banksters on Trial

The Nation

Paula

Danny Schechter wrote a piece called "The Wall Street Crime Syndrome" Ten Reasons Why the Banksters "Get Away With It" on 3/1/11 where he quotes a convicted financial criminal, Sam Antar, who appears in Schecter's film "Plunder". Antar says,

"We have no respect for the laws. We consider your codes of ethics and your laws, weaknesses to be exploited in the execution of our crimes. So the prosecutors, hopefully most prosecutors, are honest if they're playing by the set of the rules; they're hampered by the illegal constraints. The white-collar criminal has no legal constraints. You subpoena documents, we destroy documents; you subpoena witnesses, we lie. So you are at a disadvantage when it comes to the white-collar criminal. In effect we're economic predators. We're serial economic predators; we impose a collective harm on society; time is always on our side, not on the side of justice.

This is a description of a sociopath. They have no conscience, cannot empathize, think in terms of black and white, the ends justifies the means, they lie, and will use your fears to manipulate you.

In Martha Stout's book "The Sociopath Next Door" she sites a study that found the four in every 100 people have these tendencies according to studies

[Apr 01, 2011] Excess Liquidity & Cheap Money Runs Rampant on Wall Street By Dian L. Chu,

EconMatters

If one studies markets trading during the week, one thing becomes glaringly obvious-- there is too much cheap money sloshing around markets these days (See Chart Below). You no longer have healthy, two-sided markets in most asset classes.

This is not a good thing for true market based price discovery, and ultimately leads to the creation of market bubbles. There are so many bubbles today that once QE2 ends, and the tightening cycle begins, investors are going to lose a lot of money.

Gold, Silver, and Oil, for the most part, trade as one giant asset class these days against the US Dollar. Copper used to be in this asset group, but China decided it wasn`t going to buy Copper at these high prices, and the buying stopped in a very dramatic fashion. Eventually, Copper no longer could sustain the $4.65 a pound pace once China called the traders bluff.

The Middle East turmoil has far less to do with the current price of Oil. The market has no supply disruptions, and Saudi Arabia didn`t materialize into the much hyped unrest contagion story. However, the US Dollar Index weakens by 30 cents and Gold goes up $15 and Crude goes up $2.50 in just one trading session.

The US Dollar weakness is one thing, as we have had dollar weakness before. The real difference these days is the juice in terms of excess cash that needs a place to go, i.e., sloshing around financial institutions, responds and exacerbates market moves on a daily basis.

This results in any dip being bought up in almost any market, and this quarter, it has finally reached a head with equities alone having their best quarter since 1998--wasn`t that around the time of another famous bubble created around the mania of the internet?

Obviously, the Federal Reserve has overstayed their welcome again and is too late in responding to market conditions. The very thing they promised they would be able to correct this time after the last bubble they helped create with such low interest rates stemming from a monetary policy initiative that made house flipping a State sponsored sport.



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The Last but not Least


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Last modified: September 12, 2017