Financial Sector Induced Systemic Instability of Economy
While I believe in usefulness of capital markets, it is clear that they are double edge sword and
that banks "in a long run" tend to behave like
Mr. Capone may have something to say about danger of banks :-).That means that growth of
financial sector represents a direct threat to the stability of the society. Positive feedback loops
creates one financial crisis after another with the increasing magnitude leading up to a collapse of
financial system like happened in 1927 and 2008.
"Minsky's financial instability hypothesis depends critically on what amounts to a sociological
insight. People change their minds about taking risks. They don't make a one-time rational
judgment about debt use and stock market exposure and stick to it. Instead, they change their
minds over time. And history is quite clear about how they change their minds. The
longer the good times endure, the more people begin to see wisdom in risky strategies."
The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our
Economic Future, by Robert Barbera
The flaw with Capitalism is that it creates its own positive feedback loop, snowballing to
the point where the accumulation of wealth and power hurts people — eventually even those at the
top of the food chain. ”
Banks are a clear case of market failure and their employees at the senior level have
basically become the biggest bank robbers of all time. As for basing pay on current revenues
and not profits over extended periods of time, then that is a clear case of market failure !
The banksters have been able to sell the “talent” myth to justify their outsized pay
because they are the only ones able to deliver the type of GDP growth the U.S. economy needs in
the short term, even if that kills the U.S. economy in the long term. You’ll be gone, I’ll be
Unfortunately, many countries go broke pursuing war, if not financially, then morally (are
the two different? – this post suggests otherwise).
I occurs to me that the U.S. is also in
that flock; interventions justified by grand cause built on fallacy, the alpha and omega of failure.
Is the financial apparatchik (or Nomenklatura, a term I like which, as many from the Soviet era,
succinctly describes aspects of our situation today) fated also to the trash heap, despite the
best efforts of the Man of the hour, Ben Bernanke?
While I believe in usefulness of capital markets, it is clear that they are double edge sword and
that banks "in a long run" tend to behave like
Mr. Capone may have something to say about danger of banks :-).That means that growth of financial
sector represents a direct threat to the stability of the society (Keynesianism
and the Great Recession )
Without adult supervision, as it were, a financial sector that was already inherently unstable
went wild. When the subprime assets were found to be toxic since they were based on mortgages on
which borrowers had defaulted, highly indebted or leveraged banks that had bought these now
valueless securities had little equity to repay their creditors or depositors who now came after
them. This quickly led to their bankruptcy, as in the case of Lehman Brothers, or to their being
bailed out by government, as was the case with most of the biggest banks. The finance sector
froze up, resulting in a recession—a big one—in the real economy.
Neoliberal revolution, or, as Simon Johnson called it after "quite coup" (Atlantic),
brought political power to the financial oligarchy deposed after the New Deal. Deregulation
naturally followed, with especially big role played by corrupt Clinton administration. Positive feedback loops creates one financial crisis after another with the
increasing magnitude. "Saving and loans" crisis followed by dot-com crisis of 2000, which in
turn followed by the collapse of financial system in 2008, which looks somewhat similar to what
happened in 1927. No prominent financial honcho, who was instrumental in creating "subprime
crisis" was jailed. Most remained filthy rich.
Unless the society puts severe limits on their actions like was done during New Deal,
financial firms successfully
subvert the regulation mechanisms and take the society hostage. But periodic purges with relocation
of the most active promoters of "freedom for banks" (aka free market fundamentalism) under the smoke
screen of "free market" promotion does not solve the problem of positive feedback loops that banks create
by mere existence. That's difficult to do while neoliberal ideology and related neoclassical economy
dominates the society thinking (via brainwashing), with universities playing especially negative
role -- most of economics departments are captured by neoliberals who censor any heretics. So year
after year brainwashing students enter the society without understanding real dangers that
neoliberalism brought for them. Including lack of meaningful employment opportunities.
Of course, most of high level officers of leading finance institutions which caused the crisis of
2008-2009 as a psychological type are as close to gangsters as one can get. But there is
something in their actions that does not depend on individual traits (although many of them
definitely can be classified as psychopaths), and is more related to their social position.
This situation is somewhat similar to Bolsheviks coup d'état of 1917 which resulted in capturing
Russia by this ideological sect. And in this sense quite coupe of 1980 is also irreversible in
the same sense as Bolsheviks revolution was irreversible: the "occupation" of the country by a
fanatical sect lasts until the population rejects the ideology with its (now apparent) utopian
Bolshevism which lasted
75 years, spend in such zombie state the last two decades (if we assume 1991 as the year of death of
Bolshevism, its ideology was dead much earlier -- the grave flaws in it were visible from late 60th,
if not after the WWII). But only when their ideology was destroyed both by inability to raise the standard of living
of the population and by the growing neoliberal ideology as an alternative (and a new, more powerful then Marxism high-demand
cult) Bolsheviks started to lose the grip on their power in the country. As a result Bolsheviks lost the power
only in 1991, or more correctly switched camps and privatized the country. If not inaptness of their
last General Secretary, they probably could last more. In any case after the ideology collapsed, the
USSR disintegrated (or more correctly turn by national elites, each of which wanted their peace of
The sad truth is that the mere growth of financial sector creates additional positive feedback loops
and increases structural instability within both the financial sector itself and the society at large.
Dynamic systems with strong positive feedback loops not compensated by negative feedback loops are unstable.
As a result banks and other financial institution periodically generate a deep, devastating crisis.
This is the meaning of famous Hyman Minsky phrase "stability is destabilizing".
In other words, financial apparatchiks (or Financial Nomenklatura, a term from the Soviet era, which
succinctly describes aspects of our situation today) drive the country off the cliff because they do
not have any countervailing forces, by the strength of their political influence and unsaturable
greed. Although the following
analogy in weaker then analogy with dynamic systems with positive feedback loops, outsized financial
sector can be viewed in biological terms as cancer.
known medically as a malignantneoplasm, is a broad group of
diseases involving unregulated
cell growth. In cancer,
cells divide and grow
uncontrollably, forming malignant tumors, and invading nearby parts of the body. The cancer may also
spread to more distant parts
of the body through the lymphatic system
or bloodstream. Not all tumors
are cancerous; benign tumors
do not invade neighboring tissues and do not spread throughout the body. There are over 200 different
known cancers that affect humans.
Like certain types of cancer they depend of weakening "tumor suppressor genes" (via "Quiet
coup" mechanism of acquiring dominant political power) which allow then to engage in uncontrolled growth, destroying
healthy cells (and first of all local manufacturing).
The other suspicion is the unchecked financialization always goes too far and the last N
percent of financial activity absorbs much more resources (especially intellectual resources) and
creates more potential instability than its additional efficiency-benefits (often zero or negative) can justify. It is hard
to imagine that a Hedge Fund Operator of the Year does anything that is even remotely socially useful to justify his
enormous (and lightly taxed) compensation. It is pure wealth redistribution up based on political domination
of financial oligarchy. Significant vulnerabilities within the shadow banking system and
derivatives are plain vanilla socially destructive. Yet they persist due to inevitable political power
grab by financial oligarchy (Quiet coup).
Again, I would like to stress that this problem of the oversized financial sector which produces
one devastating crisis after another
is closely related to the problem of a positive feedback loops. And the society in which banks are given
free hand inevitably degrades into "socialism for banks" or "casino
capitalism" -- a type of
neoliberalism with huge
inequality and huge criminality of top banking officers.
Whether we can do without private banks is unclear, but there is sound evidence that unlike growth
of manufacturing, private financial sector growth is dangerous for the society health and perverts society
goals. Like cult groups the financial world does a terrific job of "shunning" the principled individuals
and suppressing dissent (by capturing and cultivating neoliberal stooges in all major university
departments and press),
so self-destructing tendencies after they arise can't be stopped within the framework of
neoliberalism. In a way financial
firm is like sociopath inevitable produces its trail of victims (and sociopaths might be useful in battles exactly due
to the qualities such as ability to remain cool in dangerous situation, that make them dangerous in the normal course of events).
This tendency of society with unregulated or lightly regulated financial sector toward self-destruction
was first formulated as "Minsky instability hypothesis" --
and outstanding intellectual achievement of American economic Hyman Minsky (September 23, 1919 –
October 24, 1996). Who BTW was pretty much underappreciated (if not suppressed) during his lifetime because his views
were different from orthodox (and false) neoclassic economic theory which dominates US universities,
Like flat Earth theory was enforce by Catholic church before, it is fiercely enforced by an army of well paid neoliberal economics, those
Jesuits of modern era. Who prosecute heretics who question flat Earth theory even more efficiently then
their medieval counterparts; the only difference is that they do not burn the literally, only
Former Washington University in St. Louis economics professor Hyman P. Minsky had predicted the
Great Recession decades before it happened. Hyman Minsky was a real student of the Great
Depression, while Bernanke who widely is viewed as a scholar who studied the Great Depression, in
reality was a charlatan, who just tried to explain the Great Depression from the positions of
neo-classical economy. That's a big difference.
Minsky instability hypothesis ("stability is destabilizing" under capitalism) that emerged from
his analysis of the Great Depression was based on intellectual heritage of three great thinkers in
economics (my presentation is partially based on an outstanding lecture by Steve Keen Lecture 6 on Minsky, Financial
Instability, the Great Depression & the Global Financial Crisis). We can talk about
three source of influence, there authors writing of which touched the same subject from similar
positions and were the base of Hyman Minsky great advance in understanding of mechanics of
development of financial crisis under capitalism and the critical role of financial system in it
(neoclassical economics ignores the existence of financial system in its analysis):
Minsky didn't follow the conventional version of Marxism . And it was dangerous for him to
do so due to McCarthysm. Even mentioning of Marx might lead to strakism fromthe academy those years.
McCarthy and his followers in academy did not understand the difference between Marx great analysis
of capitalism and his utopian vision of the future. Impliedly this witch hunt helped to establish
hegemony of neoclassical economy in economic departments in the USA.
While Minsky did not cited Marx in his writings and did use Marx's Labor Theory of Value his
thinking was definitely influenced by Marx’s critique of finance. We now know that he read and
admired the Capital. And that not accidental due to the fact that his parents were Mensheviks -- a
suppressed after Bolshevik revolution more moderate wing of Russian Social Democratic Party that
rejected the idea of launching the socialist revolution in Russia -- in their opinion Russia
needed first to became a capitalist country and get rid of remnants of feudalism. They escaped from
Soviet Russia when Mensheviks started to be prosecuted by Bolsheviks.
And probably the main influence on Minsky was not Marx's discussion of finance in Volume I of Capital
with a "commodity" model of money, but critical remarks scattered in Volumes II & III
(which were not edited by Marx by compiled posthumously by Engels), where he was really critical of
big banks as well as Marx's earlier works (Grundrisse,
Theories of Surplus Value) where Marx was scathing about finance:
"A high rate of interest can also indicate, as it did in 1857, that the country is undermined
by the roving cavaliers of credit who can afford to pay a high interest because they pay it out
of other people's pocket* (whereby, however, they help to determine the rate of interest
for all) and meanwhile they live in grand style on anticipated profits.
The second source on which Minsky based his insights was Irving Fisher. Irving Fisher’s
reputation destroyed by wrong predictions on stock market prices. In aftermath, developed theory to
explain the crash and published it in his book "The Debt Deflation Theory of Great
Depressions". His main points are:
Neoclassical theory assumed equilibrium but any real world equilibrium will be short-lived
"New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any
variable is almost always above or below the ideal equilibrium."
Theoretically... there must be—over-or under-production, over- or under-consumption,..., and
over or under everything else.
It is as absurd to assume that, for any long period of time, the variables in the economic
organization, or any part of them, will "stay put," in perfect equilibrium, as to assume that the
Atlantic Ocean can ever be without a wave." (1933:339)
According to Fisher two key disequilibrium forces that push economic into the next economic
crisis are debt and subsequent deflation
The "two dominant factors" which cause depressions are "over-indebtedness to start with and
deflation following soon after"
"Thus over-investment and over-speculation are often important; but they would have far less
serious results were they not conducted with borrowed money.
That is, over-indebtedness may lend importance to over-investment or to over-speculation. The
same is true as to over-confidence.
I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles
its victims into debt." (Fisher 1933: 341; emphasis added!)
A chain reaction when overconfidence leads to over-indebtedness: Debt liquidation leads to
Joseph Schumpeter was Joseph Schumpeter has more positive view of capitalism than the other two. He authored the theory
of creative destruction as a path by which capitalism achieves higher and higher productivity.
He capitalism as necessarily unstable, but for him this was a positive feature --
instability of capitalism the source of its creativity. His view of capitalism was highly dynamic
and somewhat resembles the view of Marx (who also thought that capitalism destroys all previous
order and create a new one):
Entrepreneurs profit by disrupting "equilibrium" of system
Finance plays essential role here by enabling entrepreneurs
To Schumpeter, entrepreneurs are people with good ideas but no money
To turn ideas into disruptive products or processes they resort to borrowing from banks
Boom caused by investment phase of entrepreneurs. New entrepreneurs undermine old or rival
products. Successful entrepreneurs repay debt, reducing money supply
In this sense the success (boom) carry the seeds of the subsequet bust because with the
success of "pioneers" draw other into thi same market and banks are more willing to finance them
seeing the success of pioneers. But when too many similar products are financed and hit the
market they create the glut and entrepreneurs who ere late to the party are unable to pay the
debts and go bankrupt desire the fact that might have superiors products (but not superior
enough). Slump caused when excessive products hit the market and there are not enough buyers.
Debt deflation follows.
Unlike Marx, who thought that the periodic crisis of overproduction is the source of
instability (as well as gradual absolute impoverishment of workers), Minsky assumed that the
key source of that instability of capitalist system is connected with the cycles of business
borrowing and fractional bank lending, when "good times" lead to excessive borrowing leading to high
leverage and overproduction and thus to eventual debt crisis (The
Alternative To Neoliberalism ):
Minsky on capitalism:
He followed Marx stating that "capitalism is inherently flawed, being prone to booms, crises
This instability is due to characteristics the financial system must possess and will
inevitably acquire, if it is to be consistent with full-blown capitalism.
Such a financial system will be capable of both generating signals that induce an accelerating
desire to invest and of financing that accelerating investment." (Minsky 1969b: 224)
“The natural starting place for analyzing the relation between debt and income is to take
an economy with a cyclical past that is now doing well.
The inherited debt reflects the history of the economy, which includes a period in the not
too distant past in which the economy did not do well.
Acceptable liability structures are based upon some margin of safety so that expected cash
flows, even in periods when the economy is not doing well, will cover contractual debt payments.
As the period over which the economy does well lengthens, two things become evident in board
rooms. Existing debts are easily validated and units that were heavily in debt prospered; it paid
to lever." (65)
It becomes apparent that the margins of safety built into debt structures were too great.
ans should be reduced...
As a result, over a period in which the economy does well, views about acceptable debt
structure change. In the dealmaking that goes on between banks, investment bankers, and businessmen,
the acceptable amount of debt to use in financing various types of activity and positions increases.
This increase in the weight of debt financing raises the market pnce of capital assets and
increases investment. As this continues the economy is transformed into a boom economy... ” (65)
This transforms a period of tranquil growth into a period of speculative excess
“Stable growth is inconsistent with the manner in which investment is determined in an economy
in which debt-financed ownership of capital assets exists, and the extent to which such debt financing
can be carried is market determined.
It follows that the fundamental instability of a capitalist economy is upward.
The tendency to transform doing well into a speculative investment boom is the basic instability
in a capitalist economy." (65)
The idea of Minsky moment is related to the fact that the fractional reserve banking periodically
causes credit collapse when the leveraged credit expansion goes into reverse. And mainstream economists
do not want to talk about the fact that increasing confidence breeds increased leverage. So financial
stability breeds instability and subsequent financial crisis. All actions to guarantee a market rise,
ultimately guarantee it's destruction because greed will always take advantage of a "sure thing" and
push it beyond reasonable boundaries. In other words, marker players are no rational and assume
that it would be foolish not to maximize leverage in a market which is going up. So the fractional
reserve banking mechanisms ultimately and ironically lead to over lending and guarantee the subsequent
crisis and the market's destruction. Stability breed instability.
That means that fractional reserve banking based economic system with private players (aka capitalism)
is inherently unstable. And first of all because fractional reserve banking is debt based. In
order to have growth it must create debt. Eventually the pyramid of debt crushes and crisis hit. When
the credit expansion fuels asset price bubbles, the dangers for the financial sector and the real economy
are substantial because this way the credit boom bubble is inflated which eventually burst. The damage
done to the economy by the bursting of credit boom bubbles is significant and long lasting.
«When credit growth fuels asset price bubbles, the dangers for the financial sector and
the real economy are much more substantial.»
So M Minsky 50 years ago and M Pettis 15 years ago (in his "The volatility machine") had it
right? Who could have imagined! :-)
«In the past decades, central banks typically have taken a hands-off approach to asset
price bubbles and credit booms.»
If only! They have been feeding credit-based asset price bubbles by at the same time weakening
regulations to push up allowed capital-leverage ratios, and boosting the quantity of credit as
high as possible, but specifically most for leveraged speculation on assets, by allowing vast-overvaluations
on those assets.
Central banks have worked hard in most Anglo-American countries to redistribute income and
wealth from "inflationary" worker incomes to "non-inflationary" rentier incomes via hyper-subsidizing
with endless cheap credit the excesses of financial speculation in driving up asset prices.
John Kay in his January 5 2010 FT column very aptly explained the systemic instability of financial
The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The
first phase was the emerging market defaults of the 1990s. The second was the new economy boom and
bust at the turn of the century. The third was the collapse of markets for structured debt products,
which had grown so rapidly in the five years up to 2007.
The manifestation of the problem in each phase was different – first emerging markets, then
stock markets, then debt. But the mechanics were essentially the same. Financial institutions
identified a genuine economic change – the assimilation of some poor countries into the global economy,
the opportunities offered to business by new information technology, and the development of opportunities
to manage risk and maturity mismatch more effectively through markets. Competition to sell
products led to wild exaggeration of the pace and scope of these trends. The resulting herd enthusiasm
led to mispricing – particularly in asset markets, which yielded large, and largely illusory, profits,
of which a substantial fraction was paid to employees.
Eventually, at the end of each phase, reality impinged. The activities that once seemed so profitable
– funding the financial systems of emerging economies, promoting start-up internet businesses, trading
in structured debt products – turned out, in fact, to have been a source of losses. Lenders had to
make write-offs, most of the new economy stocks proved valueless and many structured products became
unmarketable. Governments, and particularly the US government, reacted on each occasion by
pumping money into the financial system in the hope of staving off wider collapse, with some degree
of success. At the end of each phase, regulators and financial institutions declared that
lessons had been learnt. While measures were implemented which, if they had been introduced five
years earlier, might have prevented the most recent crisis from taking the particular form it did,
these responses addressed the particular problem that had just occurred, rather than the underlying
generic problems of skewed incentives and dysfunctional institutional structures.
The public support of markets provided on each occasion the fuel needed to stoke the next crisis.
Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern
is one of cycles of increasing amplitude.
I do not know what the epicenter of the next crisis will be, except that it is unlikely to involve
structured debt products. I do know that unless human nature changes or there is fundamental change
in the structure of the financial services industry – equally improbable – there will be another
manifestation once again based on naive extrapolation and collective magical thinking. The recent
crisis taxed to the full – the word tax is used deliberately – the resources of world governments
and their citizens. Even if there is will to respond to the next crisis, the capacity to do so may
not be there.
The citizens of that most placid of countries, Iceland, now backed by their president, have found
a characteristically polite and restrained way of disputing an obligation to stump up large sums
of cash to pay for the arrogance and greed of other people. They are right. We should listen to them
before the same message is conveyed in much more violent form, in another place and at another time.
But it seems unlikely that we will.
We made a mistake in the closing decades of the 20th century. We removed restrictions that
had imposed functional separation on financial institutions. This led to businesses riddled
with conflicts of interest and culture, controlled by warring groups of their own senior employees.
The scale of resources such businesses commanded enabled them to wield influence to create a – for
them – virtuous circle of growing economic and political power. That mistake will not be easily remedied,
and that is why I view the new decade with great apprehension. In the name of free markets, we created
a monster that threatens to destroy the very free markets we extol.
While Hyman Minsky was the first clearly formulate the financial instability hypothesis, Keynes
also understood this dynamic pretty well. He postulated that a world with a large financial
sector and an excessive emphasis on the production of investment products creates instability both in
terms of output and prices. In other words it automatically tends to generate credit and asset bubbles.
The key driver is the fact that financial professionals generally risk other people’s money and due
to this fact have asymmetrical incentives:
They get big rewards when bets go right
They don’t have to pay when bets go wrong.
This asymmetry is not a new observation of this systemic problem. Andrew Jackson noted it in much
more polemic way long ago:
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used
the funds of the bank to speculate in the breadstuffs of the country.When you won,
you divided the profits amongst you, and when you lost, you charged it to the bank. You tell
me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families.
That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand
families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out,
and by the grace of the Eternal God, will rout you out.”
This asymmetrical incentives ensure that the financial system is structurally biased toward
taking on more risk than what should be taken. In other words it naturally tend to slide to
the casino model, the with omnipresent reckless gambling as the primary and the most profitable mode
of operation while an opportunities last. The only way to counter this is to throw sand into the
wheels of financial mechanism: enforce strict regulations, limit money supplies and periodically
jail too enthusiastic bankers. The latter is as important or even more important as the other two because
bankers tend to abuse "limited liability" status like no other sector.
Asset inflation over the past 10 years and the subsequent catastrophe incurred is a way classic behavior
of dynamic system with strong positive feedback loop. Such behavior does not depends of personalities
of bankers or policymakers, but is an immanent property of this class of dynamic systems. And the main
driving force here was deregulation. So its important that new regulation has safety feature which make
removal of it more complicated and requiring bigger majority like is the case with constitutional issues.
Another fact was the fact that due to perverted incentives, accounting in the banks
was fraudulent from the very beginning and it was fraudulent on purpose. Essentially accounting
in banks automatically become as bad as law enforcement permits. This is a classic case of control fraud
and from prevention standpoint is make sense to establish huge penalties for auditors, which might hurt
healthy institutions but help to ensure that the most fraudulent institution lose these bank charter
before affecting the whole system. With the anti-regulatory zeal of Bush II administration the
level of auditing became too superficial, almost non-existent. I remember perverted dances with
Sarbanes–Oxley when it
was clear from the very beginning that the real goal is not to strengthen accounting but to earn fees
and to create as much profitable red tape as possible, in perfect Soviet bureaucracy style.
Deregulation also increases systemic risk by influencing the real goals of financial
organizations. At some point of deregulation process the goal of higher remuneration for the top brass
becomes self-sustainable trend and replaces all other goals of the financial organization. This
is the essence of Martin Taylor’s, the former chief executive of Barclays, article
- Innumerate bankers were ripe for a reckoning in the Financial Times (Dec 15, 2009), which is worth
reading in its entirety:
City people have always been paid well relative to others, but megabonuses are quite new.
From my own experience, in the mid-1990s no more than four or five employees of Barclays’ then
investment bank were paid more than £1m, and no one got near £2m. Around the turn of the
millennium across the market things began to take off, and accelerated rapidly – after a pause in
2001-03 – so that exceptionally high remuneration, not just individually, but in total, was paid
out between 2004 and 2007.
Observers of financial services saw unbelievable prosperity and apparently immense value
added. Yet two years later the whole industry was bankrupt. A simple reason underlies this:
any industry that pays out in cash colossal accounting profits that are largely imaginary will go
bust quickly. Not only has the industry – and by extension societies that depend on it – been
spending money that is no longer there, it has been giving away money that it only imagined it had
in the first place. Worse, it seems to want to do it all again.
What were the sources of this imaginary wealth?
First, spreads on credit that took no account of default probabilities (bankers have been
doing this for centuries, but not on this scale).
Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments.
Third, profits conjured up by taking the net present value of streams of income stretching
into the future, on derivative issuance for example.
In the last two of these the bank was not receiving any income, merely “booking revenues”.
How could they pay this non-existent wealth out in cash to their employees? Because they had
no measure of cash flow to tell them they were idiots, and because everyone else was doing it.
Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues”
did not actually consist of money.
In the next phase instability is amplified by the way governments and central banks respond to crises
caused by credit bubble: the state has powerful means to end a recession, but the policies it uses give
rise to the next phase of instability, the next bubble…. When money is virtually free – or, at least,
at 0.5 per cent – traders feel stupid if they don’t leverage up to the hilt. Thus previous bubble and
crash become a dress rehearsal for the next.
Resulting self-sustaining "boom-bust" cycle is very close how electronic systems with positive feedback
loop behave and cannot be explained by neo-classical macroeconomic models. Like with electronic
devices the financial institution in this mode are unable to provide the services that are needed.
Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed:
rather, it was a system that created the illusion of stability while simultaneously creating the
conditions for an inevitable and dramatic collapse.
...our whole financial system contains
the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of
Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to
craft policies that could blunt the collateral damage caused by financial crises. But with a growing
number of economists eager to declare the recession over, and the crisis itself apparently behind
us, these policies may prove as discomforting as the theories that prompted them in the first place.
Indeed, as economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready
to reckon with the full implications of what he saw.
And he understood the roots of the current credit bubble much better that neoclassical economists like
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled
by the rise of far riskier borrowers - what [Minsky] called speculative borrowers,
those whose income would cover interest payments but not the principal; and those he called
“Ponzi borrowers,” those whose income could cover neither, and could only pay their bills
by borrowing still further.
As these latter categories grew, the overall economy would shift from a conservative but profitable
environment to a much more freewheeling system dominated by players whose survival depended not on
sound business plans, but on borrowed money and freely available credit.
Minsky’s financial instability hypothesis suggests that when optimism is high and ample
funds are available for investment, investors tend to migrate from the safe hedge end of the Minsky
spectrum to the risky speculative and Ponzi end. Indeed, in the current crisis, investors tried to raise
returns by increasing leverage and switching to financing via short-term—sometimes overnight— borrowing
late to learn?):
In the church of Friedman, inflation was the ol' devil tempting the good folk; the 1980s seemed
to prove that, let loose, it would cause untold havoc on the populace. But, as Barbera notes:
The last five major global cyclical events were the early 1990s recession - largely occasioned
by the US Savings & Loan crisis, the collapse of Japan Inc after the stock market crash of 1990,
the Asian crisis of the mid-1990s, the fabulous technology boom/bust cycle at the turn of the
millennium, and the unprecedented rise and then collapse for US residential real estate in 2007-2008.
All five episodes delivered recessions, either global or regional. In no case was there a significant
prior acceleration of wages and general prices. In each case, an investment boom and an associated
asset market ran to improbable heights and then collapsed. From 1945 to 1985, there was no recession
caused by the instability of investment prompted by financial speculation - and since 1985 there
has been no recession that has not been caused by these factors.
Thus, meet the devil in Minsky's paradise - "an investment boom and an associated asset market [that]
ran to improbable heights and then collapsed".
According the Barbera, "Minsky's financial instability hypothesis depends critically on what amounts
to a sociological insight. People change their minds about taking risks. They don't make a one-time
rational judgment about debt use and stock market exposure and stick to it. Instead, they change
their minds over time. And history is quite clear about how they change their minds. The longer the
good times endure, the more people begin to see wisdom in risky strategies."
Current economy state can be called following Paul McCulley a "stable disequilibrium" very similar
to a state a sand pile. All this pile of stocks, debt instruments, derivatives, credit
default swaps and God know corresponds to a pile of sand that is on the verse of losing stability.
Each financial player works hard to maximize their own personal outcome but the "invisible hand" effect
in adding sand to the pile that is increasing systemic instability. According to Minsky, the longer
such situation continues the more likely and violent an "avalanche".
The late Hunt Taylor wrote, in 2006:
"Let us start with what we know. First, these markets look nothing like anything I've ever encountered
before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness,
the light-speed at which information moves, the degree to which the movement of one instrument triggers
nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary
to price them speak to the reality that we are now sailing in uncharted waters.
"... I've had 30-plus years of learning experiences in markets, all of which tell me that
technology and telecommunications will not do away with human greed and ignorance. I think
we will drive the car faster and faster until something bad happens. And I think it will come, like
a comet, from that part of the night sky where we least expect it."
Banking was once a dangerous profession. In Britain, for instance, bankers faced
“unlimited liability”--that is, if you ran a bank, and the bank couldn’t repay depositors or other
creditors, those people had the right to confiscate all your personal assets and income until you
repaid. It wasn’t until the second half of the nineteenth century that Britain established
limited liability for bank owners. From that point on, British bankers no longer assumed
much financial risk themselves.
In the United States, there was great experimentation with banking during the 1800s, but those
involved in the enterprise typically made a substantial commitment of their own capital. For
example, there was a well-established tradition of “double liability,” in which stockholders were
responsible for twice the original value of their shares in a bank. This encouraged stockholders
to carefully monitor bank executives and employees. And, in turn, it placed a lot of pressure on
those who managed banks. If they fared poorly, they typically faced personal and professional ruin.
The idea that a bank executive would retain wealth and social status in the event of a self-induced
calamity would have struck everyone--including bank executives themselves--as ludicrous.
Enter, in the early part of the twentieth century, the Federal Reserve. The Fed was founded in
1913, but discussion about whether to create a central bank had swirled for years. “No one can carefully
study the experience of the other great commercial nations,” argued Republican Senator Nelson Aldrich
in an influential 1909 speech, “without being convinced that disastrous results of recurring financial
crises have been successfully prevented by a proper organization of capital and by the adoption of
wise methods of banking and of currency”--in other words, a central bank. In November 1910, Aldrich
and a small group of top financiers met on an isolated island off the coast of Georgia. There, they
hammered out a draft plan to create a strong central bank that would be owned by banks themselves.
What these bankers essentially wanted was a bailout mechanism for the aftermath of speculative
crashes -- something more durable than J.P. Morgan, who saved the day in the Panic of 1907
but couldn’t be counted on to live forever. While they sought informal government backing and substantial
government financial support for their new venture, the bankers also wanted it to remain free of
government interference, oversight, or control.
Another destabilizing fact is so called myth of invisible hand which is closely related to the myth
about market self-regulation. The misunderstood argument of Adam Smith , the founder of modern
economics, that free markets led to efficient outcomes, “as if by an invisible hand” has played a central
role in these debates: it suggested that we could, by and large, rely on markets without government
intervention. About "invisible hand" deification, see
The Invisible Hand, Trumped by Darwin - NYTimes.com.
The moment in the financial system when the quantity of debt turns into quality and produces yet
another financial crisis is called Minsky moment. In other words the “Minsky moment” is the time
when an unsustainable financial boom turns into uncontrollable collapse of financial markets (aka
financial crash). The existence of Minsky moments is one of the most important counterargument against
financial market self-regulation. It also expose free market fundamentalists such as "former
Maestro" Greenspan as charlatans. Greenspan actually implicitly admitted that he is and that it was
he, who was the "machinist" who helped to bring the USA economic train off the rails in 2008
via deregulation and dismantling the New Deal installed safeguards.
Here how it is explained by Stephen Mihm in
Boston Globe in 2009
in the after math of 2008 financial crisis:
“Minsky” was shorthand for Hyman Minsky, an American macroeconomist who died over a decade
ago. He predicted almost exactly the kind of meltdown that recently hammered the global
economy. He believed in capitalism, but also believed it had almost a genetic weakness.
Modern finance, he argued, was far from the stabilizing force that mainstream economics
portrayed: rather, it was a system that created the illusion of stability while simultaneously
creating the conditions for an inevitable and dramatic collapse.
In other words, the one person who foresaw the crisis also believed that our whole financial system
contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable
flaw of capitalism.”
Minsky believed it was possible to craft policies that could blunt the collateral damage caused
by financial crises. As economists re-embrace Minsky’s prophetic insights, it is far from clear that
they’re ready to reckon with the full implications of what he saw.
Minsky theory was not well received due to powerful orthodoxy, born in the years after World War
II, known as the neoclassical synthesis. The older belief in a self-regulating, self-stabilizing
free market had selectively absorbed a few insights from John Maynard Keynes, the great economist
of the 1930s who wrote extensively of the ways that capitalism might fail to maintain full employment.
Most economists still believed that free-market capitalism was a fundamentally stable basis for an
economy, though thanks to Keynes, some now acknowledged that government might under certain circumstances
play a role in keeping the economy - and employment - on an even keel.
Economists like Paul Samuelson became the public face of the new establishment; he and others
at a handful of top universities became deeply influential in Washington. In theory, Minsky could
have been an academic star in this new establishment: Like Samuelson, he earned his doctorate in
economics at Harvard University, where he studied with legendary Austrian economist Joseph Schumpeter,
as well as future Nobel laureate Wassily Leontief.
But Minsky was cut from different cloth than many of the other big names. The descendent of immigrants
from Minsk, in modern-day Belarus, Minsky was a red-diaper baby, the son of Menshevik socialists.
While most economists spent the 1950s and 1960s toiling over mathematical models, Minsky pursued
research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky
was closer to the counterculture than to mainstream economics. He was, recalls the economist L. Randall
Wray, a former student, a “character.”
So while his colleagues from graduate school went on to win Nobel prizes and rise to the top of
academia, Minsky languished. He drifted from Brown to Berkeley and eventually to Washington University.
Indeed, many economists weren’t even aware of his work. One assessment of Minsky published in 1997
simply noted that his “work has not had a major influence in the macroeconomic discussions of the
last thirty years.”
Yet he was busy. In addition to poverty, Minsky began to delve into the field of finance, which
despite its seeming importance had no place in the theories formulated by Samuelson and others. He
also began to ask a simple, if disturbing question: “Can ‘it’ happen again?” - where “it” was, like
Harry Potter’s nemesis Voldemort, the thing that could not be named: the Great Depression.
In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist
of the 20th century. But where most economists drew a single, simplistic lesson from Keynes - that
government could step in and micromanage the economy, smooth out the business cycle, and keep things
on an even keel - Minsky had no interest in what he and a handful of other dissident economists came
to call “bastard Keynesianism.”
Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt
not only with the problem of unemployment, but with money and banking. Although Keynes had never
stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument
that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some
magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a
This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now
famous for documenting capitalism’s ceaseless process of “creative destruction.” But Minsky spent
more time thinking about destruction than creation. In doing so, he formulated an intriguing theory:
not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability
that would set the stage for monumental crises.
Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he
noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers
and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans
are almost always paid on time, businesses generally succeed, and everyone does well. That success,
however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope
of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled
by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would
cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose
income could cover neither, and could only pay their bills by borrowing still further. As these latter
categories grew, the overall economy would shift from a conservative but profitable environment to
a much more freewheeling system dominated by players whose survival depended not on sound business
plans, but on borrowed money and freely available credit.
Once that kind of economy had developed, any panic could wreck the market. The failure of a single
firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide
attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create
an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse
first, as they lost access to the credit they needed to survive. Even the more stable players might
find themselves unable to pay their debt without selling off assets; their forced sales would send
asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start
to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that
depended on the now-collapsing financial system.
From the 1960s onward, Minsky elaborated on this hypothesis. At the time he believed that this
shift was already underway: postwar stability, financial innovation, and the receding memory of the
Great Depression were gradually setting the stage for a crisis of epic proportions. Most of what
he had to say fell on deaf ears. The 1960s were an era of solid growth, and although the economic
stagnation of the 1970s was a blow to mainstream neo-Keynesian economics, it did not send policymakers
scurrying to Minsky. Instead, a new free market fundamentalism took root: government was the problem,
not the solution.
Moreover, the new dogma coincided with a remarkable era of stability. The period from the late
1980s onward has been dubbed the “Great Moderation,” a time of shallow recessions and great resilience
among most major industrial economies. Things had never been more stable. The likelihood that “it”
could happen again now seemed laughable.
Yet throughout this period, the financial system - not the economy, but finance as an industry
- was growing by leaps and bounds. Minsky spent the last years of his life, in the early 1990s, warning
of the dangers of securitization and other forms of financial innovation, but few economists listened.
Nor did they pay attention to consumers’ and companies’ growing dependence on debt, and the growing
use of leverage within the financial system.
By the end of the 20th century, the financial system that Minsky had warned about had materialized,
complete with speculative borrowers, Ponzi borrowers, and precious few of the conservative borrowers
who were the bedrock of a truly stable economy. Over decades, we really had forgotten the meaning
of risk. When storied financial firms started to fall, sending shockwaves through the “real” economy,
his predictions started to look a lot like a road map.
“This wasn’t a Minsky moment,” explains Randall Wray. “It was a Minsky half-century.”
Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers
that rereading Minsky’s 1986 “masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my
mind on this crisis.” Others joined the chorus. Earlier this year, two economic heavyweights - Paul
Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel Prize-winning
Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read
Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying
to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky
were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a
terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another
depression [won’t] cure.”
But does Minsky’s work offer us any practical help? If capitalism is inherently self-destructive
and unstable - never mind that it produces inequality and unemployment, as Keynes had observed -
After spending his life warning of the perils of the complacency that comes with stability - and
having it fall on deaf ears - Minsky was understandably pessimistic about the ability to short-circuit
the tragic cycle of boom and bust. But he did believe that much could be done to ameliorate the damage.
To prevent the Minsky moment from becoming a national calamity, part of his solution (which was
shared with other economists) was to have the Federal Reserve - what he liked to call the “Big Bank”
- step into the breach and act as a lender of last resort to firms under siege. By throwing lines
of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial
system. It failed to do so during the Great Depression, when it stood by and let a banking crisis
spiral out of control. This time, under the leadership of Ben Bernanke - like Minsky, a scholar of
the Depression - it took a very different approach, becoming a lender of last resort to everything
from hedge funds to investment banks to money market funds.
Minsky’s other solution, however, was considerably more radical and less palatable politically.
The preferred mainstream tactic for pulling the economy out of a crisis was - and is - based on the
Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized
labor - by building a new high-speed train line, for example.
Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled
first. The government - or what he liked to call “Big Government” - should become the “employer of
last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It
would be paid to workers who would supply child care, clean streets, and provide services that would
give taxpayers a visible return on their dollars. In being available to everyone, it would be even
more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone
who was able to work. Such a program would not only help the poor and unskilled, he believed, but
would put a floor beneath everyone else’s wages too, preventing salaries of more skilled workers
from falling too precipitously, and sending benefits up the socioeconomic ladder.
While economists may be acknowledging some of Minsky’s points on financial instability, it’s safe
to say that even liberal policymakers are still a long way from thinking about such an expanded role
for the American government. If nothing else, an expensive full-employment program would veer far
too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics
are apt to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says
Wray. “They would make capitalism better.”
But not perfect. Indeed, if there’s anything to be drawn from Minsky’s collected work, it’s that
perfection, like stability and equilibrium, are mirages. Minsky did not share his profession’s quaint
belief that everything could be reduced to a tidy model, or a pat theory. His was a kind of existential
economics: capitalism, like life itself, is difficult, even tragic. “There is no simple answer to
the problems of our capitalism,” wrote Minsky. “There is no solution that can be transformed into
a catchy phrase and carried on banners.”
It’s a sentiment that may limit the extent to which Minsky becomes part of any new orthodoxy.
But that’s probably how he would have preferred it, believes liberal economist James Galbraith. “I
think he would resist being domesticated,” says Galbraith. “He spent his career in professional isolation.”
The positive feedback loop in inherent the environment dominated by large transnationals
which funnel their excess cash into the financial system to speculate on asset appreciation.
As analysis in "The
Endless Crisis" suggests ( updating the classic 1960s analysis of the U.S. economy given by Paul
Sweezy and Paul Baran in "Monopoly Capital.") that the global economy is controlled by large
oligopolistic firms. Which boost their profits by lowering their costs and suppressing wages(on global
scale), using computerization, automation and relocating production to cheap-labor countries such
as China. Wage suppression in turn created permanent weak global demand. Which in turn dry
ups investment opportunities in expansion of existing manufacturing facilities. That forces transnationals
to funnel their excess cash into the financial system to speculate on asset appreciation. As
a result we have "permanent recession" punctuated by boom and bust cycles in financial markets.
Nature of leverage is such that it always represent a positive feedback loop. And leverage
is the essence of
banking operations. In the absence of negative control loops in a form of regulation,
purges, exiles, etc, financial system eventually loses stability which demonstrate itself in financial
crisis. Deep financial crisis often are followed by stagnation and can turn into social crisis.
The economy finds itself in a "stagnation-financialization trap" in which the only way to stimulate
growth is through the financialization process which leads to the next bubble and the next financial
crisis. Policy makers in Western countries are ready and willing to lead the world off this
cliff: "Restoring the conditions for finance-led expansion has now become the immediate object of
economic policy in the face of a persistently stagnation-prone real economy."(Foster and McChesney,
p 47). The authors add, "Not only have financial crises become endemic, they have also been growing
in scale and global impact." (Foster and McChesney, 43)
It is very difficult to gain a greater understanding of the broad social forces at play that
are shaping the financial sector, but self-destructing tendencies of the latter can be established
beyond reasonable doubt. And the problem here is not with people, although, again, I would
like to stress that a lot of financial actors are as close to psychopaths/sociopaths as one
can get. But people are better then institutions as Prince Kropotkin once remarked. The problem
is with reshaping of institutions via weakening of regulations (up to the total absence of thereof).
Regulations represent genome that guides growth and proliferation of organizational entities much
like cells in human organism. Bad genome creates cancer cells that kills the host. This
analogy with financial sector converting into cancer under a weak regulatory regime is less superficial
that one might think from the first sight. Some see the cycle in which financial sector undermines
economy the following way:
Boost Phase of Credit Expansion. Banks became dominant political force and start to
dictate the government policy.
Deregulation. Banks create for the themselves the "most favorable entity" regime including
access to government funds and taxation. Here revolving door greatly helps (see
Corruption of Regulators)
Overextended Credit Expansion and Over Capacity (dot-com bubble)
Growing Malinvestment ( there are no alternatives and one burst bubble is simply replaced
by the next. For example, dot-com bubble with the housing bubble in the case of the USA)
Impaired Debt and Policy Decisions, such as bailout of TBTF at taxpayer expense and
great cost for the economy. Please note that at this point banks have total political control,
so they essentially bail themselves out at the expense of the society.
Stalled Consumption due to shrinking of middle class and high structural unemployment.
The growing bills are passed on plebs. Cheap Money are Offered as the only Panacea Available.
Shrinking Loans and another round of Bank Speculation, this time in natural resources.
Search for Yield from Shrinking Pool of Productive Assets. Increasingly speculative
investments with high risk
Stagnation - Over-indebted economy, massive overcapacity with limited growth.
The growth of nationalism and protectionism (ref. 1920's -> 1930's). Military Keynesianism.
Oligarchy don't hesitate to sacrifice millions of plebeians in the subsequent wars that always
In financial markets, socially-responsible, rational behavior isn’t optimal. That makes
reckless, self and society endangering behavior not a deviation, but a norm. That makes finance a
close relative to organized crime. In this respect Jefferson famous quote "I believe that banking
institutions are more dangerous to our liberties than standing armies" is really prophetic.
Instability is an immanent feature of dynamic systems with positive feedback loops. Financial
sector introduces a dangerous positive feedback loop into economy precipitating bubbles and subsequent
crisis. Despite artful packaging, the banking industry game is very simple, namely, they
take outsized, leveraged risks and when they work out, pay themselves handsome rewards, and when
they don’t, dump them on the taxpayer. That's why asJohn Kenneth Galbraith aptly noted "Finance
is the Achilles' heel of capitalism." While there are multiple levels and multiple meaning
on each level of this statement, instability of dynamic systems with positive feedback
loops is a fundamental property of such systems and it cannot be changed by any superficial
measures not related to the strength of feedback loop.The "inherently procyclical"
nature of the financial systemimplies thatthat perceptions of value and risk develop in parallel. Bankers always suffer from a blindness
to future dangers that are intrinsic to the system because that stand in a way of getting outsized
profits. The better the economy is doing, the higher the ratings issued by the rating agencies,
the laxer the guidelines for approving credit, the easier it becomes to borrow money and the greater
the willingness to assume risk.
Wall Street execs have been whining for two years that to reduce pay incentives and bonuses
would cost the firms their best talent. The government’s response should be YES! That’s precisely
the idea. Finance was once a means to an end: the growth of the real economy. Banking once served
industry and services. Now finance has become the end, and the real economy is subservient
to financial services (it’s no surprise that after the crisis, over-the-counter derivatives
trading quickly climbed back up to more than $600 trillion). “At some point in our recent past,
finance lost contact with its raison d’être,” European Central Bank chief Jean Claude Trichet
said earlier this year. “Finance developed a life of its own…Finance became self-referential.”
Computers brought innovations into financial markets, but at the same time greatly strengthened
and enhanced positive feedback loops inherent in financial sector. In other words
they make financial players much more dangerous for society then before. Our present system
could not exist without Web-based brokers, indexes, CDO’s, tranches, MERS, high speed trading. Computers
also have allowed dramatic increase of complexity, which often is used to hide the most dangerous
and the most reckless behavior of financial players. Computers are become an integral part of the
feedback and add gain (amplification) to the loop. The gain from computers is not bad by itself but
the trend to remove all controls or attenuations while adding this gain is bound to cause instability.
HFT seems to me one of the more obvious and stupid examples.
Complexity and luck of transparency are central to financial services firm rent seeking.
Those opportunities dramatically increases with computerization of finance and invention of complex
financial instruments. It is interesting that other industries can be allowed to teeter and
fall - steel, railroads, automobiles - but banks are considered sacrosanct. If they are, then
they should be public utilities, but good luck with this idea in captured Congress.
Megabanks automatically become an instrument for acquiring and keeping political influence
for its management ("silent coup"). Financial sector became viewed by the elite as a
solution to stagnation of industrial production and the way to fend of international competitors
playing of the US role of suppliers of global currency. As a result financial sector became a formidable
political force. Like senator Durbin put it:
And the banks -- hard to believe in a time when we're facing a banking crisis that many of
the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the
That compensates their inefficiency in internal market. Investment banks understand pretty well
that the best investment with highest return is an investment in political capital.
Saving oversized banks, however, may ruin a country’s public finances (Gros
and Micossi 2008). Take the example of Ireland; this country provided extensive financial
support to its large banks and subsequently had to seek financial assistance from the EU and the
IMF in 2010. The public finance risks posed by systemically large banks suggest that such banks
should be reduced in size.
Further evidence against big banks can be found from studies on banking technologies. Berger
and Mester (1997) estimate the returns to scale in US banking using data from the 1990s, to find
that a bank’s optimal size, consistent with lowest average costs, would be for a bank with around
$25 billion in assets. Amel et al. (2004) similarly report that commercial banks in North
America with assets in excess of $50 billion have higher operating costs than smaller banks. These
findings together suggest that today’s large banks, with assets in some instances exceeding $
1 trillion, are well beyond the technologically optimal scale.
Flawed incentives. The relationship between the rating agencies and big banks is a perfect
case study of flawed incentives and positive feedback loop within financial sector. Agencies
were unduly influenced (aka "were puppets of") by the institutions whose products they were grading.
Financial markets never play a purely passive role; they seek a political role and always
try to actively affect so-called fundamentals they are supposed to reflect. Their lobbying
efforts and regulatory capture are part of positive feedback loop that increases risks and
instability of the financial system. They tend to convert economy into what is using analogy
with military industrial complex can be called the crony capitalist financial-regulatory complex.That means that the necessary contraction of hypertrophied financial sector requires difficult
political changes which captured political establishment is unable to pursue on their own, so changes
often come packaged with violence. As Soros stated:
"These two functions that financial markets perform work in opposite directions. In
the passive or cognitive function, the fundamentals are supposed to determine market prices. In
the active or manipulative function market, prices find ways of influencing the fundamentals.
When both functions operate at the same time, they interfere with each other. The supposedly independent
variable of one function is the dependent variable of the other, so that neither function has
a truly independent variable. As a result, neither market prices nor the underlying reality is
fully determined. Both suffer from an element of uncertainty that cannot be quantified.
I call the interaction between the two functions reflexivity. Frank Knight recognized
and explicated this element of unquantifiable uncertainty in a book published in 1921,
but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored
it. That is what made them so misleading."
The Fiat-based currencies has additional built-in instability risks in comparison with gold
based currencies. This is not to say that gold based currencies are better. But the
ability of the US to run record current-account deficits over the past several decades is one such
effect, the effect impossible in gold standard currency environment and the US political elite (Republican
and Democrats alike) became increasingly comfortable with overconsumption. (The
World’s Financial System Has Become Unstable):
Leading Bush administration officials used to talk of the US current-account deficit being
a “gift” to the outside world. But, honestly, the US has been overconsuming – living far beyond
its means – for the past decade. The idea that tax cuts would lead to productivity gains and would
pay for themselves (and fix the budget) has proved entirely illusory. ...
[T]he net flow of capital is from emerging markets to the US – this is what it means to have
current-account surpluses in emerging markets and a deficit in the US. But the gross flow of capital
is from emerging market to emerging market, through big banks now implicitly backed by the state
in both the US and Europe. From the perspective of international investors, banks that are “too
big to fail” are the perfect places to park their reserves – as long as the sovereign in question
remains solvent. But what will these banks do with the funds?
When a similar issued emerged in the 1970’s – the so-called “recycling of oil surpluses” –
banks in Western financial centers extended loans to Latin America, communist Poland, and communist
Romania. That was not a good idea, as it led to a massive (for the time) debt crisis in 1982.
We are now heading for something similar, but on a larger scale. The banks and other financial
players have every incentive to load up on risk as we head into the cycle; they get the upside
(Wall Street compensation this year is set to break records again) and the downside goes to taxpayers.
Financial deregulation logically leads to over-trading and under-investment creating bubbles
and converting the economy into casino capitalism. The recent the ‘flash crash’ as a clear example
of the bubble and subsequent fragility such over-trading can create. Excessive trading in securities
increases instability of the economic system and creates perverted incentives for many economic actors.
The effect is similar to how drugs and alcohol chemically alter the personality, increasing the value
of instant gratification. As Hyman Minsky noted:
“In a world of businessmen and financial intermediaries who aggressively seek profit, innovators
will always outpace regulators; the authorities cannot prevent changes in the structure of portfolios
from occurring. What they can do is keep the asset-equity ratio of banks within bounds by setting
equity-absorption ratios for various types of assets. If the authorities constrain banks and are
aware of the activities of fringe banks and other financial institutions, they are in a better
position to attenuate the disruptive expansionary tendencies of our economy.”
-- Hyman Minsky, 1986
Growth of inequality connected with emergence of hypertrophied financial sector is another
positive feedback loop. Outsized pay in financial sector attracts talent and this talent
is used for destructive (or at least non-constructive) purposes. This is the situation similar to
the poor countries problem with mafia. What is so destabilizing isn’t just the high guaranteed pay
if you can break in (even though that is a huge part of it) but the allure of obscene sums of money
if you can make it to the top.
The share of US national income going to the top 1 per cent of the income distribution has risen
from 15 to 25 per cent over the past decade, mostly because of the growth in size and profitability
of the financial sector. This payments to the top percentile is a tax paid by the population (similar
to what population paid to royalty and church in middle ages) as a whole for the questionable
benefits of living in the casino capitalism economy. While the key to growth of inequality was financial
sector it also complemented by several additional trends:
Dramatic increase of renumeration of top management in all types of companies : by
increasing number of sociopath in higher echelons of financial institutions and second by destroying
morale of the firm which makes reckless moves more probable.
Due to regulatory capture. Concentrated wealth makes it easier to buy deregulation
to free itself up even more. At the same time concentrated wealth of financial sector finds fewer
productive investment outlets and naturally migrates into destructive speculation, including creating
huge speculative global capital flows. A positive feedback loop in which increase of income inequality
increase "financization" of the economy looks like:
Increase of income inequality ->
Inadequate effective demand in non-financial economy ->
Inadequate investment opportunities in non-financial economy ->
Investments flowing into parasitic financial “creativity”...
Regulatory capture, especially complete capture of the Fed (with NY Fed widely considered
to be a branch of Goldman Sachs) and SEC nullifies enforcement and creates another positive
feedback loop. "Revolving doors" provide an excellent opportunity to buy influence without overt
corruption. One recent example is Peter Orzag accepting position in Citi (Why
Citigroup) And that means that while on the job ambitious people might try to avoid to aggravate
banks. But without strong regulatory oversight banks very quickly convert themselves into wonder
machines that provides astronomic returns to brass and selected employees, high returns to
creditors, while at the end of each cycle causing huge losses to taxpayers. Banks must keep up
with their competitors, and if one does some wonder trick with somebody else money, they all must
do it to stay in business. That is why regulation is so vital in this highly competitive sector.
One cannot be virtuous as a commercial entity with obligations to shareholders and customers under
brothel rules. That why Greenspan
as an apostle of deregulation was so destructive for the US economy. This is another positive feedback
loop that feeds on itself. In search of profits which became more scares as financization takes life
out of real economy, financial firms are prone to subvert safeguards and endanger the very society
in which they operate ("financial terrorism effect". Wealth permits financial sector
to remove "sand in the wheels": vital for stability negative feedback loops in form of regulation
and, what is actually more important, strict law enforcement of existing regulations. Here
is a quote from Yves Smith post
Should the Fed Be Independent-
But there has been another thread mixed in with this: resentment at the Fed salvaging the banking
industry, with contingent and real costs, in the form of higher inflation, per
Alford’s and Leijonhufvud’s analysis. Now that many of those actions may indeed have been
the best among a set of bad choices (although I suspect economic historians will conclude the
Fed cut rates too far too fast). However, the big issue is that they involved consequences of
such magnitude that they should not have been left to the Fed. I was amazed, and was not alone,
when Congress did not dress down the Fed in its hearings on the Bear rescue for the central bank’s
unauthorized encroachment into fiscal action (ie., if any of the $29 billion in liabilities assumed
by the Fed in that rescue comes a cropper, the cost comes from the public purse). So the frustration
isn’t merely about outcomes, it’s about process, about the sense of disenfranchisement. And that
will only get worse as this crisis grinds along.
The proliferation of speculative side bets in the form of naked credit default swaps and other
derivatives can have significant negative effects on economic fundamentals such as the terms of financing,
the patterns of project selection, and the incidence of corporate and sovereign default. The
existence of zero-sum side bets on default has major economic repercussions. It has strangulating
effect starving real economy of funds as investors who are optimistic about particular company or
state instead of funding it sell protection. This diverts their capital away from potential borrowers
and channels it into collateral to support speculative positions. Naked CDSs are insurance policies
bought against some other persons property. Such as, I buy a policy against your house. Insurance
companies do not write such policies because I might decide to burn your house down. But even if
we assume that there will be no intentional damage to other’s property, we still are encouraging
diverting of funds. See
Guest Post Economic consequences of speculative side bets – The case of naked CDS « naked capitalism.
They also can create artificial demand. Conservative analyses indicates that in the peak years of
2006 and early 2007, Magnetar’s program drove the demand
for roughly 35% of subprime bonds. That fact refutes the claim that all derivatives, futures,
options and swaps are zero sum game: one person loss is another person gain.
By its nature investment banking is constantly tempted to move into grey zone and then slide
into criminal behavior. There is a profound similarity between investment bankers
and hedge funds "Masters of the Universe" and hackers. Investment bankers play a similar role in
financial system as hackers play in computer networks: they are engaged in systemic effort to undermine
existing laws and security controls. But there one important difference: investment bankers are often
obscenely rich and can buy themselves freedom after being caught. That's why criminal law should
consider financial sector crimes similar to the organized crime. "Algorithmic Terrorism”
( HFT) is one example (Nanex
- Market Crop Circle Of The Day). Nobody went to jail (yet). When you see the kind of losses
we have seen on AAA rated securities for example it is almost certainly there was there was some
kind of fraud involved. In fact growth of investment banking tend to be accompanied by large scale
fraud so this would not be unusual.
Tremendous political power that finance sector acquired due to outsized profits is channeled
toward lobbing that is socially and economically disruptive. Externalities produced by
unregulated banking sector are dangerous for society, but at the same time political power of the
financial sector created a lock in which prevents any meaningful correction. Classic Greek Tragedy
necessary follows. Regulators – and their superiors in the legislative and executive branches
– were captured both intellectually and via implicit form of corruption known as revolving doors.
"To a surprising degree, economic misfortune has correlated with low top marginal tax rates. The
top marginal tax rate at the time of the 1929 crash was 24%. After his election, Roosevelt promptly
raised it to 63% and then to 94%, and one could easily make the case that it was this rise, rather
than financial regulation, that played the primary — though certainly not the only — role in curbing
abuses by attacking greed at its source, without, by the way, damaging the economy. Roosevelt essentially
taxed away big money."
Disincentivizing greed - Page 3 - Los Angeles Times
For financial sector stability is destabilizing. Minsky financial instability hypothesis
can be simplified to the general statement that in any economy with large financial sectorstability is destabilizing as financial firms try to exploit the stable regime to extract
additional profit by increasing leverage and making excessively risky bets which serves as a tax
on real economy, strangulating it and creating the necessity for even more risky bets and higher
leverage. In the latter case large firms also implicitly transfer their risks to larger society (via
The cost of financial intermediation is ultimately a tax on commerce.Outsized,
predatory financial services sector poses real danger to viable businesses, to business expansion,
and to general economic productivity. Large part of activity of financial sector, especially
connected with securitized products, futures, options and derivatives is parasitic: "Banks tend to
make profits – or more accurately, extract rents – out of all proportion to any contribution they
make to the wider economy." Excessive rents weaken the real economy similar to cases
when parasite weakens the host (The
Banking Oligarchy Must Be Restrained For a Recovery to Be Sustained ). In addition to the
overhang of unindicted and undeclared fraud which is widespread due to regulatory capture, distorting
the clearing of the markets, an oversized financial sector essentially make the sum of government
tax and Wall street tax a real drag on the economy. The percentage of financial sector profits to
corporate profits recently peaked at 41%. This suggests that the scope of parasitic financial activity
is a real killer for the economy.
Weakly regulated banks tend to become classic cases of market failure and their employees
at the senior level have basically become the biggest bank robbers of all time. This tremendous
transfer of wealth is inherent in growth of financial sector. The best way to rob bank is to own
Academia serves as the Fifth column of the financial sector. The financial system can
brainwash society via control of corrupt academia in classic Lysenkoism scenario. Here is relevant
quote from The Quiet
Wall Street’s seductive power extended even (or especially) to finance and economics
professors, historically confined to the cramped offices of universities and the pursuit of Nobel
Prizes. As mathematical finance became more and more essential to practical finance, professors
increasingly took positions as consultants or partners at financial institutions. Myron Scholes
and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at
the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the
end of the decade. But many others beat similar paths. This migration gave the stamp of academic
legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.
Reaganomics (and later Rubonomics) confused ends with means... As Stiglitz noted,
. ... a financial sector is a means to a more productive economy, not an end in itself. (Financial
a better measure of well-being). Attempt to convert the USA into new Switzerland on the
strength of dollar as a reserve currency was doomed from the beginning due to the country size constrains.
Highly leveraged economies are prone to deep and prolong crisis. "The lesson of history,
then, is that even as institutions and policy makers improve there will always be a temptation to
stretch the limits. ... If there is one common theme to the vast range of crises ... it is that excessive
debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses
greater systemic risks than it seems during a boom. ... Highly indebted governments, banks, or corporations
can seem to be merrily rolling along for an extended period, when bang -- confidence collapses, lenders
disappear and a crisis hits. ... Highly leveraged economies ... seldom survive forever ... history
does point to warnings signs that policy makers can look to access risk -- if only they do not become
too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries,
'This time is different' Carmen Reinhart and Kenneth Rogoff (cited from
The first thing to understand is that attempt to weaken positive feedback looks via regulation, approach
that can be called “regulation as a Swiss knife” does not work without law enforcement and criminal
liability for bankers, as there is an obvious problem of corruption of regulators. In this sense the
mechanism of purges might be the only one that realistically can work.
In other words it’s unclear who and how can prevents the capture of regulators as financial sector
by definition has means to undermine any such efforts. One way this influence work is via lobbing for
appointment of pro-financial sector people in key positions. If such "finance-sector-selected" Fed chairman
does not like part of Fed mandate related to regulation it can simply ignore it as long as he is sure
that he will be reappointed. That happened with Greenspan. After such process started it became
irreversible and only after a significant, dramatic shock to the system any meaningful changes can be
instituted and as soon as the lessons are forgotten work on undermining them resumes.
In essence, the Fed is a political organization and Fed Chairman is as close to a real vice-president
of the USA as one can get. As such Fed Chairman serves the elite which rules that country, whether
you call them financial oligarchy or some other name. Actually Fed Chairman is the most powerful unelected
official in the USA. If you compare this position to the role of the Chairman of the Politburo
in the USSR you’ll might find some interesting similarities.
In other words it is impossible to prevent appointment of another Greenspan by another Reagan without
changes in political power balance. And the transition to banana republic that follows such appointment
is irreversible even if the next administration water boards former Fed Chairman to help him to write
his memoirs. That means that you need to far-reaching reform of political system to be able to
regulate financial industry and you need to understand that the measures adopted need vigilant protection
as soon as the current crisis is a distant history.
Several other source of financial instability were pointed out by others:
The logic of markets gets extended to “fictitious commodities” – land, labor, and money.Polanyi (1944) famously zeroed in on the way that the logic of markets gets extended to
“fictitious commodities” – land, labor, and money – and the way that society reacts defensively
to that illegitimate extension. Today, arguably, it is the logic of finance that has been so extended,
turning everything it touches into an asset with a speculative price.
Excessive accumulations of financial wealth – “other people’s money” – tend to undermine democratic
political forms.Brandeis (1914) thought that excessive accumulations of financial
wealth – “other people’s money” – tend to undermine democratic political forms (among other
problems). Today, arguably TBTF financial institution threaten democracy.
There are some outstanding lectures and presentation on YouTube on this topic. Among them:
Playing Games with Drugs at the Wall Street Journal
A column * in the Wall Street Journal by Dana P. Goldman
and Darius N. Lakdawalla presents a case for high drug prices
by making an analogy to the salaries of major league baseball
players. They ask what would happen if the average pay of
major league players was cut from $4 million to $2 million.
They hypothesize that the current crew of major leaguers
would continue to play, but that young people might instead
opt for different careers, leaving us with a less talented
group of baseball players. Their analogy to the drug market
is that we would see fewer drugs developed, and therefore we
would end up worse off as a result of paying less for drugs.
This analogy is useful because it is a great way to
demonstrate some serious wrong-headed thinking. It also leads
those of us who had the privilege of seeing players like Bob
Gibson, Sandy Koufax, Henry Aaron, and Willie Mays in their
primes to wonder if there somehow would have been better
players 50 years ago if the pay back then was at current
But the issue is not just how much we should for
developing drugs, but how we should pay. Suppose that we paid
fire fighters at the point where they came to the fire. They
would assess the situation and make an offer to put out the
fire and save the lives of those who are endangered. We could
haggle if we want. Sometimes we might get the price down a
bit and in some occasions a competing crew of firefighters
may show up and offer some competition. Most of us would
probably pay whatever the firefighters asked to rescue our
This could lead to a situation where firefighters are very
highly paid, since at least the ones who came to rich
neighborhoods could count on payouts in the millions or even
tens of millions of dollars. Suppose someone suggested that
we were paying too much for firefighters' services and argued
that there we could drastically reduce what we pay for a
service we all recognize as tremendously important. Well,
Goldman and Lakdawalla would undoubtedly respond with a Wall
Street Journal column telling us that fewer people will want
to be firefighters.
But this is really beside the point. Just about everyone
agrees that it does not make sense to be determining
firefighters' pay when they show up at the fire. We pay them
a fixed salary. While they sit around waiting most of the
time, occasionally they provide an incredibly valuable
service saving valuable properties from destruction or even
more importantly saving lives.
No one thinks that firefighters get ripped off because
they don't walk away millions of dollars when they save an
endangered family. They get paid their salary (which we can
argue whether too high or too low) for work that we recognize
as dangerous, but which will occasionally result in enormous
benefits to society.
In the case of developing drugs, we are now largely in the
situation of paying the firefighters when they show up at the
burning house. As a result of historical accident, we rely on
a relic of the medieval guild system, government granted
patent monopolies, to finance most research into developing
new drugs. These monopolies allow drug companies to charge
prices that are several thousand percent ** above the free
This leads to all the corruption and distortion that one
would expect from a trade tariff of 1000 or even 10,000
percent. These markups lead drug companies to expend vast
resources marketing their drugs. They also frequently
misrepresent the safety and effectiveness of their drugs to
maximize sales. They make payoffs to doctors, politicians,
and academics to enlist them in their sales efforts. And,
they use the legal system to harass potential competitors,
often filing frivolous suits to dissuade generic competitors.
This system also leads to a large amount of wasted
research spending. This is in part because competitors will
try to innovate around a patent to share in the patent rents.
In a world of patent monopolies it is generally desirable to
have competing drugs, however if the first drug was selling
at its free market price, it is unlikely that it would make
sense to spend large amounts researching the development of a
second, third, and fourth drug for a condition for which an
effective treatment already exists, rather than researching
drugs for conditions for which no effective treatment exists.
Patent monopolies also encourage secrecy in research, as
drug companies disclose as little information as possible so
that they prevent competitors from benefiting from their
research. This also slows the research process.
The obvious alternative would upfront funding, just like
firefighters are paid a fixed salary for their work. Under
this system a condition of the funding would be that all the
research findings are posted on the web as quickly as
practical to maximize the ability of the scientific community
to benefit. We already do this to some extent with the $32
billion a year that goes to the National Institutes of
Health, although this amount would likely have to be doubled
or even tripled to make up for the research currently
supported by government granted patent monopolies. (I outline
a system for this in my book "Rigged: How Globalization and
the Rules of the Modern Economy Have Been Structured to Make
the Rich Richer" *** - it's free.)
Anyhow, it would be good if we could be having a debate
about how we finance drug research rather than just telling
silly stories about baseball players salaries. Bernie
Sanders, Elizabeth Warren, Al Franken, Sherrod Brown and
thirteen other senators have already introduced a bill that
would have the government pick up the tab on some clinical
trials and then putting the rights to successful drugs in the
public domain so they can be sold at generic prices. The bill
also has a patent buyout fund that would accomplish the same
It is absurd that we charge people hundreds of thousands
of dollars for life-saving drugs that cost a few hundred
dollars to produce. Too bad the Wall Street Journal has so
little creativity that it cannot even imagine an alternative
to a grossly antiquated institution when it comes to
financing prescription drug development.
These are dark times for free marketeers. Voters are only
lukewarm about the virtues of capitalism; the Grenfell
disaster is widely regarded as showing the case for greater
regulation; and, as Sam Bowman says, even the Tories "have
totally failed to make a broad-brush case for free markets."
I share some of their disquiet. Flawed as they are,
markets have virtues as selection and information-aggregation
What, then, can be done to strengthen the case for
There's one thing that's crucial – equality of power. For
free markets to have public acceptance, the worst-off must
have bargaining power. Without this, "free" markets merely
become a device for exploitation.
Imagine, for example, that we had overfull employment
and/or high out-of-work benefits. Workers would then be able
to reject low wages and bad working conditions. Market forces
would then deliver higher wages and good, safer, conditions
simply because employers that didn't offer these wouldn't
have any workers. Equally – though it's harder to imagine –
if we had an abundance of housing, landlords who offered
shoddy or dangerous accommodation would either have to
refurbish their property to acceptable standards or suffer a
lack of tenants.
We wouldn't, therefore need "red tape." The market would
raise working and living standards.
We don't need thought experiments to see this. We have
empirical evidence too.
Philippe Aghion and colleagues have shown that there's a
negative correlation across countries between unions density
and minimum wage laws. Countries with strong unions have less
stringent minimum wage laws – because greater bargaining
power reduces the need for such laws. Remember that the UK
adopted minimum wages in the 1990s, when unions had been
emasculated. In the 60s and 70s, when unions were strong, the
market raised wages.
Also, there is a negative correlation across developed
countries between inequality (as measured, imperfectly, by
Gini coefficients) and business freedom. Egalitarian Denmark
and Sweden, for example, score better on the Heritage
Foundation's index of freedom than the unequal US. There's a
simple reason for this. Working people want what they regard
as a fair deal. If they can't get it through bargaining in
free markets, they'll seek it through politics and
The inference here is, for me, obvious. If you are serious
about wanting free markets you must put in place the
conditions which are necessary for them – namely, greater
bargaining power for tenants, customers and workers. This
requires not just strong anti-monopoly policies but also
policies such as a high citizens income, full employment and
In short, free markets require egalitarian policies. Free
marketeers who don't support these are not the friends of
freedom at all, but are merely shills for exploiters.
"Egalitarian Denmark and Sweden, for example, score better on
the Heritage Foundation's index of freedom than the unequal
US. There's a simple reason for this. Working people want
what they regard as a fair deal. If they can't get it through
bargaining in free markets, they'll seek it through politics
Hillary Clinton famously said "we're not
Denmark" to distinguish herself from the "unserious" Bernie
Sanders in the primary debates.
She was trying to appeal to meritocratic Democrats and
Republicans. As Josh Marshall wrote of yesterday's special
"The district is relatively diverse for a GOP district and
educated and affluent. In other words, it's made up of just
the kind of Republicans who proved most resistant to Trump."
Hillary was trying to appeal to the affluent and
indoctrinated and educated meritocrats. The "non-deploreables."
And she lost. Corbyn running on an anti-austerity platform
and a manifesto that pointed more in the direction of Denmark
pulled off a biggest swing in votes since 1945.
Of course the center left, PGL and Krugman were silent
about Corbyn's great showing and complained about people who
wanted to discuss it. But it's okay to discuss the
disappointing outcome in yesterday's special election.
Free markets need "a comprehensive socialization of
"In some other respects the foregoing theory
is moderately conservative in its implications. For whilst it
indicates the vital importance of establishing certain
central controls in matters which are now left in the main to
individual initiative, there are wide fields of activity
which are unaffected. The State will have to exercise a
guiding influence on the propensity to consume partly through
its scheme of taxation, partly by fixing the rate of
interest, and partly, perhaps, in other ways. Furthermore, it
seems unlikely that the influence of banking policy on the
rate of interest will be sufficient by itself to determine an
optimum rate of investment. I conceive, therefore, that a
somewhat comprehensive socialisation of investment will prove
the only means of securing an approximation to full
employment; though this need not exclude all manner of
compromises and of devices by which public authority will
co-operate with private initiative. But beyond this no
obvious case is made out for a system of State Socialism
which would embrace most of the economic life of the
community. It is not the ownership of the instruments of
production which it is important for the State to assume. If
the State is able to determine the aggregate amount of
resources devoted to augmenting the instruments and the basic
rate of reward to those who own them, it will have
accomplished all that is necessary. Moreover, the necessary
measures of socialisation can be introduced gradually and
without a break in the general traditions of society"
Also historically moronic,
since China had become increasingly isolationist from the 16th century on. This is not to
say that China has not been deliberately annoying their neighbors lately, especially in the
South China Sea, however. Clearly China has been extending its influence, mostly
economically, around the world, especially in Africa, for a couple of decades now, but I do
not see this as any different from what we do in the same regions. It is certainly not
nearly as troubling as what Russia has been doing under Putin.
In Final Oliver Stone Interview, Putin Predicts When Russia-US Crisis Ends
Jun 20, 2017 | www.forbes.com
But with Trump in the White House, the Trump-Putin conspiracy theory is one reality TV
show the news media can't shake. Stone's love for foreign policy intrigue at least makes
him a Putin kindred spirit here. America's age old fear of the Russians, has made Putin
public enemy number one and Stone his sounding board. For some unhappy campers, like John
McCain, Putin has " no moral equivalent " in the United States. He's a dictator , a war
criminal and tyrant .
"You've gone through four U.S. presidents: Clinton, Bush, Obama and now Trump. What
changes?" Stone asks him.
"Almost nothing. Your bureaucracy is very strong and it is that bureaucracy that rules
the world," he says. Then, solemnly, "There is change...when they bring us to the cemetery
to bury us."
In the last installment of the Putin interviews, the Russian leader admitted to liking
Trump. "We still like him because he wants to restore relations. Relations between the two
countries are going to develop," he said. It's a sentence very few in congress would say,
and almost no big name politicians outside of Trump would imagine saying on television. On
Russia, you scold. There is no fig leaf.
In a recent sanctions bill in the senate, only Republicans Rand Paul and Mike Lee voted
against it, making for a 97-2 landslide in favor of extra-territorial sanctions against
Russian companies, namely oil and gas.
Stone asked him why did he bother hacking the Democratic National Committee's emails if
he believed nothing would change on the foreign policy front.
STONE: Our political leadership and NATO all believe you hacked the election.
PUTIN: We didn't hack the election at all. It would be hard to imagine any country, even
Russia, being capable of seriously influencing the U.S. election. Someone hacked the DNC,
but I don't think it influenced the election. What came through was not a lie.
They were not trying to fool anybody. People who want to manipulate public opinion will
blame Russia. But Trump had his finger on the pulse of the Midwest voter and knew how to
pull at their hearts. Those who have been defeated shouldn't be shifting blame to someone
else....We are not waiting for any revolutionary changes.
Just then, editors cut to a video of Trump talking about Putin.
TRUMP: I hope I get along with Putin. I hope I do. But there is a good chance that I
PUTIN: It almost feels like hatred of a certain ethnic group, like antisemitism. They
are always blaming Russians, like antisemites are always blaming the Jews.
The editors then flashed to footage of John McCain on the floor of the Senate ranting
and raving about Putin. Then Joseph Biden in the Ukrainian parliament, ranting about
Russia. Putin tells Stone all of this is unfortunate. He thinks their view is"old world."
He reminds Stone that Russia and the U.S. were allies in World War I and World War II. It
was Winston Churchill that started the Cold War from London, despite having respect for
Russia's strongman leader at the time, the real dictator, Joseph Stalin.
"It is critically important to bring this debate into the open. For too long, climate advocacy
and policy has been inflected by a hope that the energy transformation before us can be achieved
cheaply and virtuously - in harmony with nature. But the transformation is likely to be costly.
And though sun, wind and water are likely to account for a much larger share of the nation's energy
supply, less palatable technologies are also likely to play a part."
Eduardo Porter on the debate as to whether 100% of our energy needs can be met by renewables.
OK - it may involve certain costs increasing this from a mere 10% to something closer to 100%
even if we do not entirely get to 100%. But not trying would be very costly.
One thing that certainly annoys me about this, is that to me the incentives must be wrong.
I see the German railway building solar banks on perfectly good land (which could for instance
grow trees), and the railways rolling past large numbers of houses with south-facing roofs and
no solar panels.
I see electric cars being built without solar panels on the roof, parked in the sun. I sort
of wonder - something is wrong here, why?
I read in the scientific American that people are thinking of locating solar panels to provide
shade to irrigation canals. Or we could use solar panels to provide weather protection to bike
lanes (shade + rain + snow protection). There are so many two-fers out there - why are we missing
all these opportunities?
One thing that certainly annoys me about this, is that to me the incentives must be wrong.
I see the german railway building solar banks on perfectly good land (which could for
instance grow trees), and the railways rolling past large numbers of houses with south-facing
roofs and no solar panels.
I see electric cars being built without solar panels on the roof, parked in the sun.
I sort of wonder - something is wrong here, why?
I read in the scientific American that people are thinking of locating solar panels to
provide shade to irrigation canals. Or we could use solar panels to provide weather protection
to bike lanes (shade + rain + snow protection). There are so many two-fers out there - why
are we missing all these opportunities?
We Are Inches From A New World War, And Clintonists Are To Blame
Published June 20, 2017 by Caitlin Johnstone
"This is your fault, Clinton Democrats. You created this, and if our species is plunged into
a new world war or extinction via nuclear holocaust, it will be your fault. You knuckle-dragging,
vagina hat-wearing McCarthyite morons made this happen."
Five takeaways from Iran's missile strike in Syria
Tehran's strike was targeted at Islamic State but it also puts US bases in the region on notice
and exposes the flimsiness of the Trump Administration's Middle East policy
From all accounts, the missiles hit their target with devastating precision. Simply put, Iran
has notified the US that its 45,000 troops deployed in bases in Iraq (5,165), Kuwait (15,000),
Bahrain (7,000), Qatar (10,000), the UAE (5,000) and Oman (200) are highly vulnerable.
Hell truck bombs aimed at marine barracks aren't any longer on Iran's to do list . Even thru
their junior partners Hezbollah
Assad might want them to clobber a syrian Kurd stronghold. But not even that gets the green light
by the mad mullahs of Teheran
The Syrian government is pushing against the Israeli supported branch of al Qaeda in the Daraa
governate. Israelis interest is the Golan which it grabbed in 1973.
While in al Tanf, Syria in the middle of no where related to fighting ISIS US F-15E shot down
an armed drone allegedly attacking the US run training center for future jihadis who will go after
the US and Europe like bin Laden. All the conditions for US tied down supporting evil like 1964..........
There is probably a silver lining in the alliance of neocons and liberal interventionists (which
actually are the same as DemoRats -- Clinton's wing of Democratic party) attempt to impeach Trump
on faked charges.
It might delay the war. Looks like Trump is hell bent to crush Iran.
Which is a theocratic state, but still not as bad as KAS and some other US allies in the region.
" This pattern suggests that existence of unions, one way or another, may be less important for
economic outcomes than the way in which those unions function. "
This is a typical neoliberal Newspeak. Pretty Orwellian.
In reality atomization of workforce and decimation of unions is the explicit goal of neoliberal
Neoliberalism war on organized labor started with Reagan.
Neoliberalism is based on unconditional domination of labor by capital ("socialism for rich,
feudalism for labor").
American scholar and cultural critic Henry Giroux alleges neoliberalism holds that market forces
should organize every facet of society, including economic and social life, and promotes a social
Darwinist ethic which elevates self-interest over social needs.
That means maintaining the unemployment level of sufficiently high level and political suppression
of workers rights to organize.
A new class of workers, facing acute socio-economic insecurity, emerged under neoliberalism.
It is called 'precariat'.
Neoliberal policies led to the situation in the US economy in which 30% of workers earn low
wages (less than two-thirds the median wage for full-time workers), and 35% of the labor force
is underemployed; only 40% of the working-age population in the U.S. is adequately employed.
The Center for Economic Policy Research's (CEPR) Dean Baker (2006) argued that the driving
force behind rising inequality in the US has been a series of deliberate, neoliberal policy choices
including anti-inflationary bias, anti-unionism, and profiteering in the health industry.
Amazon, Uber and several other companies have shown that neoliberal model can be as brutal
as plantation slavery.
Central to the notion of the skills agenda as pursued by neoliberal governments is the concept
of "human capital."
Which involves atomization of workers, each of which became a "good" sold at the "labor market".
Neoliberalism discard the concept of human solidarity. It also eliminated government support of
organized labor, and decimated unions.
Under neoliberalism the government has to actively intervene to clear the way for the free
"labor market." Talk about government-sponsored redistribution of wealth under neoliberalism --
from Greenspan to Bernanke, from Rubin to Paulson, the government has been a veritable Robin Hood
The New York Times steps up its anti-Russia campaign
The CIA's principal house organ, the New York Times, published a lead editorial Sunday on the
investigation into alleged Russian meddling in the 2016 US presidential election that is an incendiary
and lying exercise in disinformation aimed at whipping up support for war with Russia.
Not a single one of the reports in the Times or Post is the product of a genuine investigation
by journalists. Instead, the main reporting on the "Russian hacking" affair consists of taking
dictation from unidentified intelligence officials. In not a single case did these officials offer
evidence to substantiate their claims, invariably made in the form of ambiguous phrases like "we
assess," "we believe," "we assess with high confidence," etc. Such claims are worth no more than
previous assertions that Iraq possessed weapons of mass destruction-a lie used to justify a war
that has killed more than one million people.
WASHINGTON, June 15 – Sen. Bernie Sanders (I-Vt.) issued the following statement Thursday after
he voted against a bill that would impose new sanctions on Iran and Russia:
"I am strongly supportive of the sanctions on Russia included in this bill. It is unacceptable
for Russia to interfere in our elections here in the United States, or anywhere around the world.
There must be consequences for such actions. I also have deep concerns about the policies and
activities of the Iranian government, especially their support for the brutal Assad regime in
Syria. I have voted for sanctions on Iran in the past, and I believe sanctions were an important
tool for bringing Iran to the negotiating table. But I believe that these new sanctions could
endanger the very important nuclear agreement that was signed between the United States, its partners
and Iran in 2015. That is not a risk worth taking, particularly at a time of heightened tension
between Iran and Saudi Arabia and its allies. I think the United States must play a more even-handed
role in the Middle East, and find ways to address not only Iran's activities, but also Saudi Arabia's
decades-long support for radical extremism."
A rival foreign power launched an aggressive cyberattack on the United States, interfering
with the 2016 presidential election and leaving every indication that it's coming back for more
- but President Trump doesn't seem to care.
The unprecedented nature of Russia's attack is getting lost in the swirling chaos of recent
weeks, but it shouldn't be. American intelligence agencies have concluded that Russia took direct
aim at the integrity of American democracy, and yet after almost five months in office, the commander
in chief appears unconcerned with that threat to our national security. The only aspect of the
Russia story that attracts his attention is the threat it poses to the perceived legitimacy of
his electoral win.
If not for the continuing investigation into possible collusion between the Trump campaign
and the Russians - and whether Mr. Trump himself has obstructed that investigation - the president's
indifference would be front-page news.
So let's take a moment to recall the sheer scope and audacity of the Russian efforts.
Under direct orders from President Vladimir Putin, hackers connected to Russian military intelligence
broke into the email accounts of...
Why critique this campaign against Russia
As if the kremlin may to have interfered and even collaborated with trump operatives to do it
Anything less would be dereliction of duty by a great powers leadership
Point out the motivation
Which is indeed a new forward policy on Russian containment by the deep state
As we now call the corporate planted cultivated and coddled security apparatus
With its various media cut thrus cut outs and compadres
Yes the NYT and the WP
Both are working with the deep state
Once called the invisible government
Much as they have in he past
Why I like he color revolution analogy
These media titans are working with the DS
Because they want to topple trump like they wanted to topple Nixon
And to a lesser extent wobble Reagan
Important, incisive perspective or argument, but a direction seldom taken. A Cold War sort of
atmosphere makes us wary of using any such argument, and we have been forming a Cold War environment
for several years now. This atmosphere by the way involves the way in which China is generally
regarded, and I believe colors economic analysis even among academics.
Republicans are embarrassing Democrats by showing them how
legislation gets passed with a bare majority...when Democrats
could barely get anything done with a filibuster proof
Moral of the story? Democrats under Obama didn't
really want to get much done. Rather, they preferred to do
nothing and blame Republicans instead. Worse, now that
Republicans want to destroy what precious little Democrats
managed to accomplish, Democrats are just standing around,
frozen like deer in the headlights, clueless as to how to use
their 48 votes.
"Republicans are embarrassing Democrats by showing them how
legislation gets passed with a bare majority...when Democrats
could barely get anything done with a filibuster proof
Not only that.
Neoliberal stooges like Krugman now shed crocodile tears
after pushing Sanders under the bus.
They essentially gave us Trump and now have an audacity to
complain. What a miserable hypocritical twerp this Nobel
Where is the DemoRats "Resistance" now? Are they fighting
against the war in Syria on behave of Israel and Gulf states?
Protesting sanctions against Cuba? Complaining about the
record arms sale with Saudi Arabia (with its possible 9/11
No, they are all on MSNBC or CNN dragging out a stupid
investigation all the while pushing Russia to war. And
congratulating themselves with the latest Russian sanctions
designed to block supplies of Russian gas to Western
I want to repeat this again: Neoliberal Democrats created
Trump and brought him to the victory in the recent
"... The argument for a higher inflation target is NOT straightforward, once you understand two things. First interest theory is axiomatically false.#1 Because of this monetary policy never had sound scientific foundations. Second the same holds for fiscal policy.#2 ..."
"... The argument AGAINST higher inflation is that it REDUCES employment. Given the overall situation, the ONLY sensible policy is to increase the average wage rate, such that the rate of change of the wage rate is greater than the rate of change of productivity, because this increases employment. This is a SYSTEMIC necessity and has NOTHING to do with social policy. Employment is co-determined by the relationship between average wage rate, price and productivity. This relationship should automatically produce full employment but does not. ..."
Economic bungee jumping without cord: Comment on Simon
Wren-Lewis on 'Raising the inflation target'
You say: "The
argument for a higher inflation target is straightforward,
once you understand two things. First the most effective and
reliable monetary policy instrument is to influence the real
interest rate in the economy, which is the nominal interest
rate less expected inflation. Second nominal short term
interest rates have a floor near zero (the Zero Lower Bound,
The argument for a higher inflation target is NOT
straightforward, once you understand two things. First
interest theory is axiomatically false.#1 Because of this
monetary policy never had sound scientific foundations.
Second the same holds for fiscal policy.#2
Let us assume for a moment that, for whatever reasons,
neither monetary nor fiscal policy is applicable. So, given
investment expenditures of the business sector and the
expenditure ratio of the household sector, the only
alternative left is to directly influence the macroeconomic
The argument AGAINST higher inflation is that it
REDUCES employment. Given the overall situation, the ONLY
sensible policy is to increase the average wage rate, such
that the rate of change of the wage rate is greater than the
rate of change of productivity, because this increases
employment. This is a SYSTEMIC necessity and has NOTHING to
do with social policy. Employment is co-determined by the
relationship between average wage rate, price and
productivity. This relationship should automatically produce
full employment but does not.
Standard employment theory is false.#4 The proposal to get
the economy going by increasing price inflation is the direct
result of the complete lack of understanding how the market
Are China and the United States Headed for War?
Professors, pundits, and journalists weigh in on a heated
By Ian Buruma
Overheated topics invariably produce ill-considered
books. Some people will remember the time, in the late
nineteen-eighties, when Japan was about to buy up America
and conquer the world. Many a tidy sum was made on that
premise. These days, the possibility of war with China is
stirring emotions and keeping publishers busy. A glance at
a few new books suggests what scholars and journalists are
thinking about the prospect of an Asian conflagration; the
quality of their reflections is, to say the least,
The worst of the bunch, Graham Allison's "Destined for
War," may also be the most influential, given that its
thesis rests on a catchphrase Allison has popularized,
"Thucydides's Trap." Even China's President, Xi Jinping,
is fond of quoting it. "On the current trajectory,"
Allison contends, "war between the U.S. and China in the
decades ahead is not just possible, but much more likely
than currently recognized." The reason, he says, can be
traced to the problem described in the fifth century
B.C.E. in Thucydides' account of the Peloponnesian War.
Sparta, as the established power, felt threatened by the
rising might of Athens. In such conditions, Allison
writes, "not just extraordinary, unexpected events, but
even ordinary flashpoints of foreign affairs, can trigger
Allison sees Thucydides' Trap in the wars between a
rising England and the established Dutch Republic in the
seventeenth century, a rising Germany versus Britain in
the early twentieth century, and a rising Japan versus the
United States in the nineteen-forties. Some historical
tensions between rising powers and ruling ones were
resolved without a catastrophic war (the Soviet challenge
to U.S. dominance), but many, Allison warns, were not. And
there's no disputing China's steep military and economic
rise in recent decades. Its annual military budget has,
for most of the past decade, increased by double digits,
and the People's Liberation Army, even in its newly
streamlined form, has nearly a million more active service
members than the United States has. As recently as 2004,
China's economy was less than half that of the United
States. Today, in terms of purchasing-power parity, China
has left the United States behind. Allison is so excited
by China's swift growth that his prose often sounds like a
mixture of a Thomas Friedman column and a Maoist
propaganda magazine like China Reconstructs. Rome wasn't
built in a day? Well, he writes, someone "clearly forgot
to tell the Chinese. By 2005, the country was building the
square-foot equivalent of today's Rome every two weeks."
Allison underrates the many problems that could slow
things down quite soon...
America's Collision Course With China
By JUDITH SHAPIRO
EVERYTHING UNDER THE HEAVENS
How the Past Helps Shape China's Push for Global Power
By Howard W. French
DESTINED FOR WAR
Can America and China Escape Thucydides's Trap?
By Graham Allison
The Chinese superpower has arrived. Could America's
failure to grasp this reality pull the United States and
China into war? Here are two books that warn of that
serious possibility. Howard W. French's "Everything Under
the Heavens: How the Past Helps Shape China's Push for
Global Power" does so through a deep historical and
cultural study of the meaning of China's rise from the
point of view of the Chinese themselves. Graham Allison's
"Destined for War: Can American and China Escape
Thucydides's Trap?" makes his arguments through historical
case studies that illuminate the pressure toward military
confrontation when a rising power challenges a dominant
one. Both books urge us to be ready for a radically
different world order, one in which China presides over
Asia, even as Chinese politicians tell a public story
about "peaceful rise." The books argue persuasively that
adjusting to this global power shift will require great
skill on both sides if conflagration is to be avoided.
French says in his exhaustively researched and
fascinating account of geopolitics, China style, that the
Chinese era is upon us. But, he asks, "How will the coming
China-driven world look?" To what extent will China
support the international order that emerged when it was
suffering humiliation at the hands of foreign powers? What
are the drivers and motivations for the new ways China
projects its power? How best should its neighbors and its
rival North American superpower respond?
French, a former reporter for The Washington Post and
The New York Times, argues that China's historical and
cultural legacy governs its conduct of international
relations, a legacy that sits uncomfortably with the
Western notions of equality and noninterference among
states. China's relations with its neighbors in Japan and
Southeast Asia were for millenniums governed by the
concept of tian xia, which held that everything "under the
heavens" belonged to the empire. A superior civilization
demanded deference and tribute from vassal neighbors and
did not hesitate to use military force. China's testy
relationship with Vietnam became fraught whenever a
Vietnamese leader dared to demand equal footing with a
Chinese emperor; the Japanese claim to divine origins was
American and British writing about China now, strikes me
as writing about a country that is invented rather than
the country I would like to think I know. I find the
writing distressing, nonetheless there are the articles
from the New Yorker and New York Times.
The Amazon-Walmart Showdown That
Explains the Modern
NYT - Neil Irwin - June 16
With Amazon buying the high-end grocery chain Whole Foods,
something retail analysts have known for years is now
apparent to everyone: The online retailer is on a collision
course with Walmart to try to be the predominant seller of
pretty much everything you buy.
Each one is trying to become more like the other - Walmart
by investing heavily in its technology, Amazon by opening
physical bookstores and now buying physical supermarkets. But
this is more than a battle between two business titans. Their
rivalry sheds light on the shifting economics of nearly every
major industry, replete with winner-take-all effects and huge
advantages that accrue to the biggest and best-run
organizations, to the detriment of upstarts and second-fiddle
That in turn has been a boon for consumers but also has
more worrying implications for jobs, wages and inequality.
To understand this epic shift, you can look not just to
the grocery business, but also to my closet, and to another
retail acquisition announced Friday morning. ...
I wouldn't call it confidence. Any line or mode of business
can be grown only to a certain size. At some point S-curve
effects and scale complexity lead to diminishing returns,
even if the business is managed as well as it can be. Also in
some cases there may simply not be enough demand for the one
or few things the company does.
Then companies have to
branch out into other ways of business, typically outside
their current activities. Sometimes there is synergy,
sometimes not, and it's just about buying market and revenue
with the imagination one can manage it better to a higher
rate of profit.
Henry Ford - progressive? Seriously? He did this in order to
get workers to put in more effort. In other words - good for
the bottom line. Something call efficiency wages. We would
provide you with a reading list but we know you would not
actually read any of it. You never do.
How can something as simple as inflation be so difficult
to solve? If inflation were simply a matter of "too much
money chasing too few goods," then one would expect that the
government could control the money supply and consequently
control the inflation. The government has failed to act in
this way and unless one subscribes to a sadistic theory of
government, its failure suggests that there are non-monetary
or "real` causes embedded in our political and economic
This study provides some insight into the nature of those
real causes, and develops a strategy to combat inflation.
Part of that strategy includes monetary restraint; however.
to be politically acceptable, monetary restraint must be made
more efficient. Some method must be developed to translate
quickly a decrease in the growth of the money supply into a
decrease in the price level, not into a decrease in
employment and output.
The method suggested by this report is an incentive based
incomes policy or incentive anti-inflation plan. These
policies minimize government intervention in the market
economy while channeling restrictive monetary policy into
anti-inflation incentives rather than into anti-production
incentives. They provide the necessary supply side incentives
to stop inflation.
Incentive anti-inflation plans take various forms. Many of
the arguments for and against such policies have incorrectly
interpreted the methodology and goals of these policies.
Specifically, these policies are not designed to solve
inflation by themselves, but instead must function as
complements to, rather than substitutes for, the appropriate
monetary and fiscal policy. These proposals are not meant to
replace the market with government regulation; they recognize
the market's advantages and use market incentives to check
inflation programs as strong as, and no stronger than, the
pressures for inflation.
To function properly, incentive anti-inflation plans must
be supported by an effective legal structure, an enforcement
mechanism and a general public acceptance that the plans are
fair. These are difficult requirements but all markets need
these foundations. There is a fundamental difference between
the government's role in establishing a legal framework and
its role in directly regulating market decisions.
Anti-inflation incentive plans require only the former....
Ford paid workers more to be able to squeeze more assembly
line output from them with limited risk of turnover, as
leaving for another job would mean a pay cut. He also had
ideas about intervening in their home lives.
But is not an analogy. What we see is a set of steps taken directly from Gene Sharp textbook
on the subject.
I'm not saying the Russians didn't try to tamper with the election, by discrediting already
discredited neoliberal establishment (Although, as any patriotic American, I strongly doubt they
can tamper as well as we can.)
But the set of steps we observed was the plot to appoint a Special Prosecutor, who later is expected
to sink Trump. After the Special Prosecutor was appointed Russia changes does not matter, and
more "elastic" charge of "obstruction of justice" can be used instead.
Also note the heavy participation of two heads of intelligence agencies (Clapper and Brennan)
and State Department officials in the plot.
"... According to what I saw, the only high profile economists to support Corbyn were Stiglitz, Piketty, and Dillow. These rest of the librul commentariat shunned Corbyn, apparently hoping that his progressive campaign would just disappear. ..."
"... Tutition used to be free in the UK. Then they decided that those lazy students needed to have some skin in the game and suddenly tuition was 1000 pounds. Then a few years later it was 9000 pounds and all the college grads there now have US-level student debt. ..."
"... A big reason Corbyn's a commie is because he wants to abolish tuition to bring the UK back to its communist past of 1997 and give young people the same deal all the people in charge had. ..."
Someone finally brought the dreaded dragon of austerity and neoliberalism to its knees. Conservatives
are holding onto power by a thread. Tony B.liar has been repudiated. Time for joy!
Or is it? Instead of exulting, austerity-hating libruls here are reacting with sullen silence.
At the New York Times, it is not morning, but time for mourning. They still seem still barely
able to include the word 'Corbyn' in the 'fit to print' category.
pgl, who never had a nice thing to say about Corbyn, claimed yesterday that he favored him...but
only after the exist polls showed the inevitability of his success.
According to what I saw, the only high profile economists to support Corbyn were Stiglitz,
Piketty, and Dillow. These rest of the librul commentariat shunned Corbyn, apparently hoping that
his progressive campaign would just disappear.
As for Krugman, Jeffrey Sachs noted two years ago: "It is truly odd to read Paul Krugman rail,
time and again, against the British government. His latest screed begins with the claim that "Britain's
economic performance since the financial crisis struck has been startlingly bad." He excoriates
Prime Minister David Cameron's government for its "poor economic record," and wonders how he and
his cabinet can possibly pose "as the guardians of prosperity."
Hmm. In recent months, Krugman has repeatedly praised the US economic recovery under President
Barack Obama, while attacking the United Kingdom's record. But when we compare the two economies
side by side, their trajectories are broadly similar, with the UK outperforming the United States
on certain indicators." Opposition to austerity seemed to have a distinctly partisan character.
All this changed after Corbyn became Labour leader. Krugman's attacks on Conservatives suddenly
stopped. Austerity seemed to have lost its toxicity. Krugman had absolutely no comment on this
UK election, refusing to talk at all about the anti-austerity candidate. It is probably just as
well, since support from a compromised librul commentariat could only have damaged Corbyn's credibility.
As Robert Kuttner said 20 years ago, "Krugman is the conservatives ideal liberal." It appears
that he has a lot of company...libruls who claim to oppose austerity but can't muster the courage
to support an anti-austerity candidate.
No actual figures, but presumably there was big yute turnout in the UK Everyone will now claim
that a non-commie Labour leader like that nice Ed Miliband would OF COURSE have done as well as
Joseph Stalin Lenin Marx Corbyn, and in fact BETTER, but that's bullshit.
That nice Ed Miliband couldn't do in 2015, and I'm not sure who the "unnamed generic normal
Labour candidate" would otherwise be. Theresa May's incompetent evil helped, but Corbyn staved
off what was supposed to have been a Labour extinction election and while there will still likely
be a Tory-led government, it will be pretty fragile. A coalition with a bunch of bigoted religious
nutters from Northern Ireland who aren't on board with May's Brexit plans.
Labour went after The Kids Today and got them to the polls. Wasn't enough to win, but the polling
outfit predicting a likely hung parliament was considered to be "insane" even just a few days
Tutition used to be free in the UK. Then they decided that those lazy students needed to
have some skin in the game and suddenly tuition was 1000 pounds. Then a few years later it was
9000 pounds and all the college grads there now have US-level student debt.
A big reason Corbyn's a commie is because he wants to abolish tuition to bring the UK back
to its communist past of 1997 and give young people the same deal all the people in charge had.
In 2015, Miliband said he'd cut them. To just SIX THOUSAND POUNDS. Maybe if he'd gone all the
"When you have a former head of the FBI, a deeply respected person"
That's funny. Can you spell 9/11. He served as President George W. Bush's deputy attorney general
(D.A.G.), in the aftermath of 9/11. So he is the the one who got Saudi officials off the hook.
Former Democratic Sen. Bob Graham, who in 2002 chaired the congressional Joint Inquiry into
9/11, maintains the FBI is covering up a Saudi support cell in Sarasota for the hijackers.
He says the al-Hijjis' "urgent" pre-9/11 exit suggests "someone may have tipped them off" about
the coming attacks.
Graham has been working with a 14-member group in Congress to urge President Obama to declassify
28 pages of the final report of his inquiry which were originally redacted, wholesale, by President
George W. Bush.
"The 28 pages primarily relate to who financed 9/11, and they point a very strong finger
at Saudi Arabia as being the principal financier," he said, adding, "I am speaking of the kingdom,"
or government, of Saudi Arabia, not just wealthy individual Saudi donors.
Sources who have read the censored Saudi section say it cites CIA and FBI case files that
directly implicate officials of the Saudi Embassy in Washington and its consulate in Los Angeles
in the attacks - which, if true, would make 9/11 not just an act of terrorism, but an act of
war by a foreign government.
– From the New York Post article: How the FBI is Whitewashing the Saudi Connection to 9/11
Was Comey's "second thought" announcement after Hillary email investigation a naked political
And what about his very strange announcement about Wiener computer containing Hillary classified
WSJ - Del Quentin Wilber, Shane Harris and Paul Sonne - June
WASHINGTON-President Donald Trump's firing of former FBI
Director James Comey is now a subject of the federal probe
being headed by special counsel Robert Mueller, which has
expanded to include whether the president obstructed justice,
a person familiar with the matter said.
Mr. Mueller is examining whether the president fired Mr.
Comey as part of a broader effort to alter the direction of
the Federal Bureau of Investigation's probe into Russia's
alleged meddling in the 2016 presidential election and
whether associates of Mr. Trump colluded with Moscow, the
Mark Corallo, a spokesman for Mr. Trump's personal lawyer,
Marc Kasowitz, denounced the revelation in a statement. "The FBI leak of information regarding the president is
outrageous, inexcusable and illegal," Mr. Corallo said.
Peter Carr, a spokesman for Mr. Mueller, declined to
comment. The special counsel's pursuit of an obstruction of
justice probe was first reported Wednesday by the Washington
Mr. Mueller's team is planning to interview Director of
National Intelligence Dan Coats and National Security Agency
Director Mike Rogers as part of its examination of whether
Mr. Trump sought to obstruct justice, the person said.
The special counsel also plans to interview Rick Ledgett,
who recently retired as the deputy director of the NSA, the
While Mr. Ledgett was still in office, he wrote a memo
documenting a phone call that Mr. Rogers had with Mr. Trump,
according to people familiar with the matter. During the
call, the president questioned the veracity of the
intelligence community's judgment that Russia had interfered
with the election and tried to persuade Mr. Rogers to say
there was no evidence of collusion between his campaign and
Russian officials, they said. Russia has denied any government effort to meddle in the
U.S. election. Mr. Ledgett declined to comment, and officials
at the NSA didn't respond to a request for comment. An aide
to Mr. Coats declined to comment.
Mr. Coats and Mr. Rogers told a Senate panel June 7 that
they didn't feel pressured by Mr. Trump to intervene with Mr.
Comey or push back against allegations of possible collusion
between Mr. Trump's campaign and Russia. But the top national
security officials declined to say what, if anything, Mr.
Trump requested they do in relation to the Russia probe.
"If the special prosecutor called upon me to meet with him
to ask his questions, I said I would be willing to do that,"
Mr. Coats said June 7. Mr. Rogers said he would also be
willing to meet with the special counsel's team.
Mr. Comey told a Senate panel on June 8 that Mr. Trump
expressed "hope" in a one-on-one Oval Office meeting that the
FBI would drop its investigation into former national
security adviser Michael Flynn, who resigned under pressure
for making false statements about his conversations with a
Russian diplomat. Mr. Trump has denied making that request.
Mr. Comey said during the testimony that it was up to Mr.
Mueller to decide whether the president's actions amounted to
obstruction of justice. The former FBI director also said he
had furnished the special counsel with memos he wrote
documenting his interactions with the president on the
At a June 13 hearing at a House of Representatives panel,
Deputy Attorney General Rod Rosenstein declined to say who
asked him to write a memo justifying Mr. Comey's firing. The
White House initially cited that memo as the reason for the
termination, and Mr. Trump later said in an NBC interview
that he also was influenced by the Russia investigation. Mr.
Rosenstein said he wasn't at liberty to discuss the matter.
"The reason for that is that if it is within the scope of
Director Mueller's investigation, and I've been a prosecutor
for 27 years, we don't want people talking publicly about the
subjects of ongoing investigations," Mr. Rosenstein said.
"Mr. Comey said during the testimony that it was up to Mr.
Mueller to decide whether the president's actions amounted to
obstruction of justice."
Comey probably lied. This was probably the plan hatched
from the very beginning of this color revolution by Comey and
other members of anti-trump conspiracy such as Brennan: to
raise Russiagate or anything else to the level which allow to
appoint special prosecutor and to sink Trump using this
mechanism, because digging by itself produces the necessary
Obstruction of justice is the easiest path to remove
Trump, a no-brainer so to speak, the charge which can be used
to remove any any past and future US president with
The other, more Trump-specific, is of financial deals
within the Trump empire. Especially his son-in-law deals.
In this sense Trump is now hostage like Clinton previously
was. He can fight for survival, by unleashing some war, like
Clinton did with Yugoslavia.
Which probably is OK for neocons because war for them is
the first, the second and the third solution to any problem.
But as a result the US standing in the globe probably will
be further damaged.
BTW, in your zeal to republish this neocon propaganda, do
you understand that Hillary was a head of one of those 17
intelligence agencies in the past?
The State Department's Bureau of Intelligence and Research (INR)
has ties to the Office of Strategic Services from World War
II, but was transferred to State after the war. INR now
reports directly to the Secretary of State, harnessing
intelligence from all sources and offering independent
analysis of global events and real-time insight.
Headquarters : Washington, D.C.
Mission : This agency serves as the Secretary of State's
primary advisor on intelligence matters, and gives support to
other policymakers, ambassadors, and embassy staff.
Budget : $49 million in 2007, according to documents
obtained by FAS.
This all drama makes no sense for me. Trump folded. He
proved to be not a fighter. The attempt to bring members of
his family close to White house is a huge liability for him
now in view of possible digging of the past of his son in law
by the special Prosecutor. Who is recruiting the most rabid
Hillary hacks for the job ;-).
But the key question is what DemoRats will gain with the
current vice president elevated to the new level?
Other then a blowback from the remaining part of Trump
supporters. Pat Buchanan was talking about civil war
recently, which is probably exaggeration, but the probably
direction of reaction is probably right:
You are a typical retired "frustrated underachiever". Nothing
new here and your replies fits the pattern perfectly well.
You probably should not comment things that you have no
formal training. I do believe that you are unable to define
such terms as "neocon", "Bolshevism", "Trotskyism" and
"jingoism" without looking into the dictionary. Judging from
your comments this is above your IQ.
Of cause, such twerps as you are always lucking in
Internet forums, so you are just accepted here as the
necessary evil. But you do no belong here. No way. Neither in
economic or political discussions.
You can add nothing to the discussion. Actually your
political position is the position of a typical neocons and
as such is as close to betrayal of American Republic as one
can get. If the American people had their way, all our "Neocon
overlords" would be in federal prison or Guantanamo Bay, and
all their assets seized to pay down the heinous 20 trillion
debt their lies and wars have created. Because interests of neocons are not interests of the 300
million of US population. That's why people elected Trump
with all his warts.
It is sleazy idiots like you who get us into the current
mess. And please tell your daughters that you betrayed them
as well -- you endanger them and their children, if they have
any. Of course for retired idiots like you nuclear holocaust
does not matter. But it does matter for other people. Is it
so difficult to understand?
Agree, add JohnH and you see a disinformation team. One goal
is to undermine the credibility of this blog, so skipping
over their entries is what I recommend, unless you want to
learn fifth column techniques. Quess that is interesting, but
it is trolldpm!
The choir of losers continues to sing: 'Putin and Trump
colluded' ...just like the right wing sang that Bill Clinton
was guilty of all sorts of heinous crimes. And what did they
finally get on Bill? Monica.
They're just lone cranks. If you think they're a
disinformation team, you're paranoid. There are a lot of
crazy people out there. If you don't understand that fact you
need to get out more.
EMichael and PGL love to scold the
cranks as much as possible b/c it makes their establishment
line sound reasonable. I agree with you. I just ignore them.
At least they're keeping busy instead of harassing people
BTW, now I think Trump is probably going down. He floats idea
of firing Mueller. Mueller tells press they're investigating
Trump. Meanwhile the Republicans are passing Trumpcare. Trump
is moving to replace Yellen. So Mueller will have this list
of things Trump and his campaign did. Will Republicans vote
to remove Trump? Will it depend upon how the public reacts?
Perhaps they are just attempting to hasten the descent of the
Democratic Party establishment consensus towards its
inevitable rock bottom, the condition at which all addicts
must finally arrive before they are forced to admit that they
are the authors of their own failure and the only ones
capable of their own rescue.
"Big Ships Account for 80 Percent of Shipping's CO2"
By Paul Benecki...2017-06-13...20:16:44
"At Nor-Shipping 2017, researchers with DNV GL released a study that points to the difficulty
of reducing the industry's CO2 output below current levels. The problem is structural: big cargo
vessels emit 80 percent of shipping's greenhouse gases, but they're also the industry's most efficient
ships, and squeezing out additional improvements may be a challenge.
Just 35 percent of the fleet – mostly large bulkers, tankers and container ships – is responsible
for 80 percent of shipping's fuel consumption, according to Christos Chryssakis, DNV GL's group leader
for greener shipping. Unfortunately, these are already the fleet's most efficient vessels per ton-mile.
"This is a paradox, but if we want to reduce our greenhouse gas emissions, we actually have to improve
the best performers," Chryssakis says."...
Similar situation with trucking, but in the USA around one half of gas consumption goes into
private cars. So by improving efficiency of private fleet by 100% you can cut total consumption
only by 25%. All this talk about electrical cars like Tesla Model 3 right now is mostly cheap talk. They
by-and-large belong to the luxury segment.
The Shiller 10-year price-earnings ratio * is currently 29.86,
so the inverse or the earnings rate is 3.35%. The dividend yield
is 1.90%. So an expected yearly return over the coming 10 years
would be 3.35 + 1.90 or 5.25% provided the price-earnings ratio
stays the same and before investment costs.
Against the 5.25% yearly expected return on stock over the
coming 10 years, the current 10-year Treasury bond yield is 2.13%.
The risk premium for stocks is 5.25 - 2.13 or 3.12%.
Brad has a fine little logic ox calculation
This is his best side
The deflection point in his zero lower bound graph
That shows a fed helpless as the real rate climbs as the
deflation rate climbs ...
and his little set of equations that generate
A run away deflation
Using a Harmless looking Taylor rule
with too low...for his logic toy system...
(2%) A target inflation rate
The neutral rate of the system is dwelling down around one
In a depressed economy, with short-term nominal
at their zero lower bound, ample cyclical unemployment, and
increased government purchases would be neither offset by the
authority raising interest rates nor neutralized by
Then even a small amount of hysteresis-even a small shadow
cast on future
potential output by the cyclical downturn-means, by simple
expansionary fiscal policy is likely to be self-financing.
Even if it is not, it is
highly likely to pass the sensible benefit-cost test of
raising the present value
of future potential output. Thus, at the zero bound, where
the central bank
cannot or will not but in any event does not perform its full
role in stabilization
policy, fiscal policy has the stabilization policy mission
that others have
convincingly argued it lacks in normal times. Whereas many
have assumed that the path of potential output is invariant
to even a deep
and prolonged downturn, the available evidence raises a
strong fear that
hysteresis is indeed a factor. Although nothing in our
analysis calls into question
the importance of sustainable fiscal policies, it strongly
suggests the need
for caution regarding the pace of fiscal consolidation.
Yes yes my fellow home makers
If macro conditions are right ...
even a small Amount of hysteresis can turn the project into a
self financing gig
Fiscal Policy in a Depressed Economy
By J. Bradford DeLong and Lawrence H. Summers
In a depressed economy, with short-term nominal interest
rates at their zero lower bound, ample cyclical unemployment,
and excess capacity, increased government purchases would be
neither offset by the monetary authority raising interest
rates nor neutralized by supply-side bottlenecks. Then even a
small amount of hysteresis-even a small shadow cast on future
potential output by the cyclical downturn-means, by simple
arithmetic, that expansionary fiscal policy is likely to be
self-financing. Even if it is not, it is highly likely to
pass the sensible benefit-cost test of raising the present
value of future potential output. Thus, at the zero bound,
where the central bank cannot or will not but in any event
does not perform its full role in stabilization policy,
fiscal policy has the stabilization policy mission that
others have convincingly argued it lacks in normal times.
Whereas many economists have assumed that the path of
potential output is invariant to even a deep and prolonged
downturn, the available evidence raises a strong fear that
hysteresis is indeed a factor. Although nothing in our
analysis calls into question the importance of sustainable
fiscal policies, it strongly suggests the need for caution
regarding the pace of fiscal consolidation.
Thus, at the zero bound, where the central bank cannot or
will not but in any event does not perform its full role in
stabilization policy, fiscal policy has the stabilization
policy mission that others have convincingly argued it lacks
in normal times....
-- DeLong and Summers
[ I find such a rationale for fiscal policy to foster
growth only convincing in a limited and possible even
politically self-defeating way, and would argue the rationale
importantly undervalues fiscal policy as a growth driver. The
paper is clear and important though as a beginning rationale
for fiscal policy use. ]
I find such a rationale for fiscal policy to
foster growth only convincing in a limited and possibly even
politically self-defeating way, and would argue the rationale
importantly undervalues fiscal policy as a growth driver. The
paper is clear and important though as a beginning rationale
for fiscal policy use.
Macroeconomics: The Simple and the Fancy
By Paul Krugman
Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down,
as I read it, as an appeal for researchers to stay close to the ground. That's definitely good
advice for young researchers.
But what about economists trying to provide useful advice, directly or indirectly, to policy
makers, who need to make decisions based on educated guesses about the whole system? Smith says,
"go slow, allow central bankers to use judgment and simple models in the meantime." That would
be better than a lot of what academic macroeconomists do in practice, which is to castigate central
bankers and other policymakers for not using elaborate models that don't work. But is there really
no role for smart academics to help out in this process? And if so, what does this say about the
utility of what the profession does?
The thing is, those simple models have done pretty darn well since 2008 - and central bankers
who used them, like Ben Bernanke, did a lot better than central bankers like Jean-Claude Trichet
who based their judgements on something else. So surely at least part of the training of macroeconomists
should prepare them to be helpful in applying simple models, maybe even in making those simple
Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy"
"In economics I like a man to have mastered the fancy theory before I trust him with simple
theory because high-powered economics seems to be such an excellent school for the skillful
use of low-powered economics."
OK, can anyone make that case about modern macroeconomics? With a straight face? In practice,
it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic
general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics,
largely IS-LM and its derivatives.
I don't want to make a crude functional argument here: research that advances knowledge doesn't
have to provide an immediate practical payoff. But the experience since 2008 has strongly suggested
that the research program that dominated macro for the previous generation actually impaired the
ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists
useless at the simple stuff.
A more modest program would, in part, help diminish this harm. But it would also be really
helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium
theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain
aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary
and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that demonstrates the relationship
between interest rates and real output, in the goods and services market and the money market
(also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity
preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous
equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model
explains changes in national income when the price level is fixed in the short-run; second, the
IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not
only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.
The model was developed by John Hicks in 1937, and later extended by Alvin Hansen, as a mathematical
representation of Keynesian macroeconomic theory. Between the 1940s and mid-1970s, it was the
leading framework of macroeconomic analysis. While it has been largely absent from macroeconomic
research ever since, it is still the backbone of many introductory macroeconomics textbooks.
A number of readers, both at this blog and other places, have been asking for an explanation
of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among
insiders, and probably a bit baffling to normal human beings (which is why I have been labeling
my posts "wonkish").
[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if
you keep reading.]
So, the first thing you need to know is that there are multiple correct ways of explaining
IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple
directions, any one of which is a valid starting point.
My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible
views about what determines interest rates. One view says that the interest rate is determined
by the supply of and demand for savings – the "loanable funds" approach. The other says that the
interest rate is determined by the tradeoff between bonds, which pay interest, and money, which
doesn't, but which you can use for transactions and therefore has special value due to its liquidity
– the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally
not as much as less liquid assets.)
How can both views be true? Because we are at minimum talking about *two* variables, not one
– GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds
and liquidity preference hold at the same time....
Yes, this is PK at his best, clear and understandable, and with his professional standing backing
up his explanations. Being a layman, I have learned a lot about economics, and its use to analyze
proposed legislation, from his columns and blogs.
A number of readers, both at this blog and other places,
have been asking for an explanation of what IS-LM is all
about. Fair enough – this blogosphere conversation has been
an exchange among insiders, and probably a bit baffling to
normal human beings (which is why I have been labeling my
[IS-LM stands for investment-savings, liquidity-money --
which will make a lot of sense if you keep reading.]
So, the first thing you need to know is that there are
multiple correct ways of explaining IS-LM. That's because
it's a model of several interacting markets, and you can
enter from multiple directions, any one of which is a valid
My favorite of these approaches is to think of IS-LM as a
way to reconcile two seemingly incompatible views about what
determines interest rates. One view says that the interest
rate is determined by the supply of and demand for savings –
the "loanable funds" approach. The other says that the
interest rate is determined by the tradeoff between bonds,
which pay interest, and money, which doesn't, but which you
can use for transactions and therefore has special value due
to its liquidity – the "liquidity preference" approach. (Yes,
some money-like things pay interest, but normally not as much
as less liquid assets.)
How can both views be true? Because we are at minimum
talking about *two* variables, not one – GDP as well as the
interest rate. And the adjustment of GDP is what makes both
loanable funds and liquidity preference hold at the same
Start with the loanable funds side. Suppose that desired
savings and desired investment spending are currently equal,
and that something causes the interest rate to fall. Must it
rise back to its original level? Not necessarily. An excess
of desired investment over desired savings can lead to
economic expansion, which drives up income. And since some of
the rise in income will be saved – and assuming that
investment demand doesn't rise by as much – a sufficiently
large rise in GDP can restore equality between desired
savings and desired investment at the new interest rate.
That means that loanable funds doesn't determine the
interest rate per se; it determines a set of possible
combinations of the interest rate and GDP, with lower rates
corresponding to higher GDP. And that's the IS curve.
Meanwhile, people deciding how to allocate their wealth
are making tradeoffs between money and bonds. There's a
downward-sloping demand for money – the higher the interest
rate, the more people will skimp on liquidity in favor of
higher returns. Suppose temporarily that the Federal Reserve
holds the money supply fixed; in that case the interest rate
must be such as to match that demand to the quantity of
money. And the Fed can move the interest rate by changing the
money supply: increase the supply of money and the interest
rate must fall to induce people to hold a larger quantity.
Here too, however, GDP must be taken into account: a
higher level of GDP will mean more transactions, and hence
higher demand for money, other things equal. So higher GDP
will mean that the interest rate needed to match supply and
demand for money must rise. This means that like loanable
funds, liquidity preference doesn't determine the interest
rate per se; it defines a set of possible combinations of the
interest rate and GDP – the LM curve.
And that's IS-LM:
The point where the curves cross determines both GDP and
the interest rate, and at that point both loanable funds and
liquidity preference are valid.
What use is this framework? First of all, it helps you
avoid fallacies like the notion that because savings must
equal investment, government spending cannot lead to a rise
in total spending – which right away puts us above the level
of argument that famous Chicago professors somehow find
convincing. And it also gets you past confusions like the
notion that government deficits, by driving up interest
rates, can actually cause the economy to contract.
Most spectacularly, IS-LM turns out to be very useful for
thinking about extreme conditions like the present, in which
private demand has fallen so far that the economy remains
depressed even at a zero interest rate. In that case the
picture looks like this:
Why is the LM curve flat at zero? Because if the interest
rate fell below zero, people would just hold cash instead of
bonds. At the margin, then, money is just being held as a
store of value, and changes in the money supply have no
effect. This is, of course, the liquidity trap.
And IS-LM makes some predictions about what happens in the
liquidity trap. Budget deficits shift IS to the right; in the
liquidity trap that has no effect on the interest rate.
Increases in the money supply do nothing at all.
That's why in early 2009, when the Wall Street Journal,
the Austrians, and the other usual suspects were screaming
about soaring rates and runaway inflation, those who
understood IS-LM were predicting that interest rates would
stay low and that even a tripling of the monetary base would
not be inflationary. Events since then have, as I see it,
been a huge vindication for the IS-LM types – despite some
headline inflation driven by commodity prices – and a huge
failure for the soaring-rates-and-inflation crowd.
Yes, IS-LM simplifies things a lot, and can't be taken as
the final word. But it has done what good economic models are
supposed to do: make sense of what we see, and make highly
useful predictions about what would happen in unusual
circumstances. Economists who understand IS-LM have done
vastly better in tracking our current crisis than people who
Dynamic stochastic general equilibrium modeling is a branch
of applied general equilibrium theory that is influential in
contemporary macroeconomics. The DSGE methodology attempts to
explain aggregate economic phenomena, such as economic
growth, business cycles, and the effects of monetary and
fiscal policy, on the basis of macroeconomic models derived
from microeconomic principles.
"expertise in high-powered macroeconomics - mainly meaning
dynamic stochastic general equilibrium - positively
incapacitates its possessors from the use of low-powered
macroeconomics, largely IS-LM and its derivatives."
A 21st-Century Marxism: The Revolutionary Possibilities of
the "New Economy"
by Chris Wright
" Marx was mainly an analyst of capitalism, not a prophet
or planner of socialism or communism. He did, however,
predict socialist revolution, even arguing that it was
inevitable and would inevitably take the form of a
"dictatorship of the proletariat."
This dictatorship, supposedly, would implement total
economic and social reconstruction even in the face of
massive opposition from the capitalist class, in effect
drawing up blueprints to plan out a "new society" that would,
somehow, on the basis of sheer political will, overcome the
authoritarian and exploitative legacies of capitalism.
Through necessarily coercive means, the government would
somehow plan and establish economic democracy, in the long
run creating the conditions for a "withering away of the
state." How such a withering away would actually happen was
left a mystery; and none of Marx's followers ever succeeded
in clearing the matter up."
"By shunning candidates like Bernie and Corbyn, the American librul commentariat has
been exposed for what it is--corrupted by wealthy, powerful interests."
And what do you expect? DemoRats are just different marketing of Republican Party platform,
not a different product.
The problem is the neoliberals control MSM and control the government, including FBI and all
intelligence agencies. So it is an uphill battle.
And taking into account how swiftly intelligence agencies dismantled "Occupy Wall Street" movement
by branding them as "domestic terrorists" I am not optimistic. Any viable opposition will be like
a bug under microscope.
Please note that the working hypothesis about the recent elections is that "change we can believe
in" Obama (who has had remarkably good relations with the CIA, unlike several other presidents)
spied on Trump and bugged Trump Tower using British intelligence agencies capabilities to avoid
detection after the elections. Later some of this material was leaked to damage Trump and Obama
have spent several months outside the USA just in case.
Neoliberalism is a flavor of corporatism (corporate socialism) and George Orwell remark applies
to it, especially in regard to the disproportionate power of intelligence agencies demonstrated
"By bringing the whole of life under the control of the State, Socialism necessarily gives
power to an inner ring of bureaucrats, who in almost every case will be men who want power for
its own sake and will stick at nothing in order to retain it."
That also means that the USA on world arena is a reactionary force which represents a genuine
threat to democracy in any smaller or less powerful country, as it interferes in domestic politics
to pursue its hegemonic aspirations.
In this sense the rise of economic power of China, which might provide some counterbalance
to the USA and independent foreign policy of Russia under Putin, who refuses to act as the USA
vassal (which Russia was under Yeltsin), are positive developments.
That's why the USA neocons and their stooges in MSM hate Russia so much. To hate China the
same way would less politically incorrect as this is as close to racism as we can get :-).
"... the experience since 2008 has strongly suggested that the research program that dominated macro for the previous generation actually impaired the ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists useless at the simple stuff. ..."
Macroeconomics: The Simple and the Fancy
By Paul Krugman
Noah Smith has a nice summation * of his critique of
macroeconomics, which mainly comes down, as I read it, as an
appeal for researchers to stay close to the ground. That's
definitely good advice for young researchers.
But what about economists trying to provide useful advice,
directly or indirectly, to policy makers, who need to make
decisions based on educated guesses about the whole system?
Smith says, "go slow, allow central bankers to use judgment
and simple models in the meantime." That would be better than
a lot of what academic macroeconomists do in practice, which
is to castigate central bankers and other policymakers for
not using elaborate models that don't work. But is there
really no role for smart academics to help out in this
process? And if so, what does this say about the utility of
what the profession does?
The thing is, those simple models have done pretty darn
well since 2008 - and central bankers who used them, like
Bernanke, did a lot better than central bankers like Trichet
who based their judgements on something else. So surely at
least part of the training of macroeconomists should prepare
them to be helpful in applying simple models, maybe even in
making those simple models better.
Reading Smith, I found myself remembering an old line **
from Robert Solow in defense of "fancy" economic theorizing:
"In economics I like a man to have mastered the fancy
theory before I trust him with simple theory because
high-powered economics seems to be such an excellent school
for the skillful use of low-powered economics."
OK, can anyone make that case about modern macroeconomics?
With a straight face? In practice, it has often seemed that
expertise in high-powered macroeconomics - mainly meaning
dynamic stochastic general equilibrium - positively
incapacitates its possessors from the use of low-powered
macroeconomics, largely IS-LM and its derivatives.
I don't want to make a crude functional argument here:
research that advances knowledge doesn't have to provide an
immediate practical payoff. But
the experience since 2008
has strongly suggested that the research program that
dominated macro for the previous generation actually impaired
the ability of economists to provide useful advice in the
moment. Mastering the fancy stuff made economists useless at
the simple stuff.
A more modest program would, in part, help diminish this
harm. But it would also be really helpful if macroeconomists
relearned the idea that simple aggregate models can, in fact,
Dynamic stochastic general equilibrium modeling is a branch
of applied general equilibrium theory that is influential in
contemporary macroeconomics. The DSGE methodology attempts to
explain aggregate economic phenomena, such as economic
growth, business cycles, and the effects of monetary and
fiscal policy, on the basis of macroeconomic models derived
from microeconomic principles.
general equilibrium is
The problem with
economics is that they
are very bad
See, for example an
Economists Didnt See
the Great Recession
Coming by Prof Steve
Uploaded on Jul 12,
did not see the Great
Recession coming, and
when you look at their
theories, it's no
favourite model prior
to the crisis goes by
the name of "Dynamic
Equilibrium", or DSGE.
These models imagined
that the entire
economy could be
modeled as a single
decades ago that even
a single market can't
be modeled that way. I
explain this proof
while outlining the
fundamental truth that
IS–LM model, or Hicks–Hansen model, is a macroeconomic tool
that shows the relationship between interest rates and real
output, in the goods and services market and the money market
(also known as the assets market). The intersection of the
"investment–saving" (IS) and "liquidity preference–money
supply" (LM) curves is the "general equilibrium" where there
is simultaneous equilibrium in both markets. Two equivalent
interpretations are possible: first, the IS–LM model explains
changes in national income when the price level is fixed in
the short-run; second, the IS–LM model shows why the
aggregate demand curve shifts. Hence, this tool is sometimes
used not only to analyse the fluctuations of the economy but
also to find appropriate stabilisation policies.
Three Takeaways From Bernie Sanders' Speech At The
"He may not be the leader of the free
world, but to the 4,000 activists gathered at The
People's Summit in Chicago, Sen. Bernie Sanders reigns
The former presidential candidate and senator from Vermont headlined the progressive activist
conference Saturday night, drawing whoops, hollers, and standing ovations from the crowd that fought
alongside him on the road to the White House. Sanders' new calling: turning the 'resistance' movement
into action in the face of a president he's called a "fraud."
Sanders took aim at President Trump, the Democratic Party, and the outsized role of corporations
in American politics, hitting the major themes from his campaign stump speech and introducing some
A friend of the president says Donald Trump is
considering "terminating" special counsel Robert Mueller.
Newsmax CEO Chris Ruddy tells Judy Woodruff of "PBS
NewsHour": "I think he's considering perhaps terminating
the special counsel. I think he's weighing that option."
The White House did not immediately respond to
questions about Ruddy's claims.
Under current Justice Department regulations, such a
firing would have to be done by Attorney General Jeff
Sessions' deputy, Rod Rosenstein, not the president-
though those regulations could theoretically be set aside.
The top Democrat on the House Intelligence Committee,
Rep. Adam Schiff (D-Calif.) fired back at reports that
President Trump is considering firing FBI special counsel
Robert Mueller with a simple message to the president:
"Don't waste our time." ...
Adam Schiff ✔ @RepAdamSchiff
If President fired Bob Mueller, Congress would
immediately re-establish independent counsel and appoint
Bob Mueller. Don't waste our time.
IMHO only neocons want Trump's removal. And it was them
who instigated Russiagate using Gene Sharp recipes of
color revolution. Classic, textbook attempt to
But neocon's Russiagate "color revolution" is very
dangerous for the USA move. Which suggests that they lost
their minds (which is very true about McCain and Hillary,
to name a few).
Please note that in 2014 the USA population was already
extremely anti-Russia biased: 64% of BBC poll respondents
viewed Russia negatively(not that I trust BBC in this area
;-). But now the percentage might either approach this
estimate or be even higher.
This is a recipe for war between those two countries.
BTW neoconservatism is neoliberal interpretation of
Trotskyism, which advocates "Permanent War".
Like neofascism it glories militarism (in the form of
New American Militarism as described by Professor
Bacevich), emphasizes confrontation, and regime change in
countries hostile to the interests of global corporation
and which are a barrier of spread of neoliberalism and
extension of global, US dominated neoliberal empire.
Sedition is overt conduct, such as speech and organization, that tends toward insurrection
against the established order. Sedition often includes subversion of a constitution and incitement
of discontention (or resistance) to lawful authority.
Sedition may include any commotion, though not aimed at direct and open violence against
the laws. Seditious words in writing are seditious libel. A seditionist is one who engages
in or promotes the interests of sedition.
"I wonder if it has ever occurred to the Democrat party brass that once the great Russian/Trump
treason snipe-hunt comes up empty they may face consequences."
What are you talking about? The Russia/Trump connection has been made just not to the level of treason or Impeachment,
yet, and it may not rise to that level.
However, the Trump directed WH cover-up of Russian Election involvement has risen to the level
of Obstruction of Justice and only time will tell if the Republicans in Congress will Impeach
Trump and the Senate Convict. Geez, pay attention, get your facts ordered and don't make leaps of nonsense about DEMs doing
their jobs as the Loyal Opposition since the GOP Leadership refuses to do its job to protect the
nation, its people, and the US Constitution.
Forget RussiaGate for the moment. Forget James Comey's upcoming testimony before the Senate
intelligence committee. Forget all the conspiratorial speculation that Donald Trump is the
plaything of Russian President Vladimir Putin.
In strictly foreign policy terms, Trump's election is not really working out so well for
the Kremlin. The sanctions against Russia are still in place, and Congress wants to make them
even more punitive. Nikki Haley is lambasting Putin and his policies from her perch at the
United Nations. Various investigations into the compromising ties of the Trump team represent
a significant speed bump in the administration's efforts to restart relations with Russia.
"... "Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become. ..."
Interesting post at Digitopoly by Shane Greenstein
"Here is my two cents: these three researchers may have just put the nail in the coffin
of using production-side measures of the free economy-and that is not really all that bad. GDP
is a measure of total production. It was ever meant to be a measure of how well-off society has
More to the point, maybe it is time to focus on the demand-side measures of free goods. In
other words, you get a lot more for your Internet subscription, but nothing in GDP reflects that.
For example, the price index for Internet services should reflect qualitative improvement in user
experiences, and needs to improve."
While introduction of the concept of GDP and systematic its measurement (with all its warts, especially
in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism
and, especially, false equivalence between GDP growth and growth of the standard of living of
population are dangerous neoliberal myths.
We should fight neoliberal cult of GDP.
Simon Kuznets, the economist who developed the first comprehensive set of measures of national
income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses
of National Income Measurements":
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are subject
to this type of illusion and resulting abuse, especially since they deal with matters that are
the center of conflict of opposing social groups where the effectiveness of an argument is often
contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of economic
welfare. But in the latter case additional difficulties will be suggested to anyone who wants
to penetrate below the surface of total figures and market values. Economic welfare cannot be
adequately measured unless the personal distribution of income is known. And no income measurement
undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of
effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred
from a measurement of national income as defined above.
In 1962, Kuznets stated:
Distinctions must be kept in mind between quantity and quality of growth, between costs and
returns, and between the short and long run. Goals for more growth should specify more growth
of what and for what.
"... What supply-demand-equilibrium economists never understood is that the price mechanism DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF down - employment down - and so on. In other words, the market economy is inherently unstable. ..."
Comment on Bradford DeLong on 'RETHINK 2%'
"In order to tell the politicians and practitioners
something about causes and best means, the economist needs the true theory or else he has not much
more to offer than educated common sense or his personal opinion." (Stigum)
The fact of the matter is that economists do NOT have the true theory. More precisely, economists
do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism, Keynesianism,
Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent,
and all got profit wrong.
Because of this economic policy guidance never had sound scientific foundations. This holds also
for the RETHINK 2% letter to the Federal Reserve Board of Governors#1 which in turn is based on Josh
Note for a start that Josh Bivens does not mention profit ― the pivotal variable of economics
― once. From this follows that his underlying profit theory is false. And from this in turn follows
that his whole argument is false. ALL models that do not explicitly define macroeconomic profit are
The elementary version of the correct objective, systemic, behavior-free, macrofounded employment
equation is shown on Wikimedia.#3 This equation says ― among other things ― that an increase of the
factor cost ratio rhoF=W/PR leads to higher employment. The ratio rhoF embodies the price mechanism.
In order to focus on the crucial point imagine the FED has the means to directly influence the
price P and increases it by 2%, all other variables unchanged. The correct macroeconomic employment
equation tells us that employment falls. Bad move.
Next try. The FED sets the change of price to zero and instead increases the wage rate W by 2
%. The correct macroeconomic employment equation tells us that employment rises. Good move.
What supply-demand-equilibrium economists never understood is that the price mechanism DESTABILIZES
the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down
- rhoF down - employment down - and so on. In other words, the market economy is inherently unstable.
#4 Standard employment theory is false. The proposal to get the economy going by increasing price
inflation is the direct result of the complete lack of understanding how the market economy works.
Trump's Blunders Fuel Mideast Conflicts
President Trump's simplistic siding with Saudi Arabia and
Israel – and his callous reaction to a terror attack on
Iran – are fueling new tensions in the Middle East,
including the Qatar crisis.
By Alastair Crooke
Have "MbS" and "MbZ" overreached themselves? It is
still early in the Saudi-led blockade of Qatar, but yes,
it seems so. And in so doing, the hubris of Mohammad bin
Salman (MbS), the Saudi defense minister and the powerful
son of Saudi King Salman, and Mohammed bin Zayed (MbZ),
the crown prince of Abu Dhabi and supreme commander of the
UAE Armed Forces, will change the region's geopolitical
President's Trump's (flawed) base strategic premises
(and narratives) that Iran is the ultimate source of all
instability in the region, and that the smacking down of
Qatar, a major patron of Palestinian Hamas, per se, was a
good thing, and should be applauded, bear direct
responsibility for the direction in which regional
geopolitics will now flow.
President Trump returned from his first overseas trip
convinced that he had unified the United States' historic
Arab allies, and dealt a strong blow against terrorism. He
did neither. He has been badly informed.
The fissure between Qatar and Saudi Arabia is an old,
storied affair, which harks back to longstanding al-Saud
angst at the original British decision to empower the al-Thani
family in their Qatar foothold in an otherwise all-Saudi
fiefdom. But if we lay aside, for a moment, the airing of
the long list of Saudi and UAE contemporary complaints
against Qatar, which for most part, simply serve as
justification for recent action, we should return to the
two principles that fundamentally shape the al-Saud
mindset and strategy – and which lie at the heart of this
current spat with Qatar.
The Reactionary Saudis ....
[ What appears to be a reasonable explanation of the
dispute between Saudi Arabia and Qatar that President
Trump has encouraged and applauded. ]
SIPRI Military Expenditure Database
2017 Fact Sheet (for 2016) [Wikipedia]
1 US $611.2B annually 3.3% of GDP
2 China $215.7B 1.9%
3 Russia $69.2B 5.3%
4 Saudi Arabia $63.7B 10%
5 India $55.9B 2.5%
6 France $55.7B 2.3%
7 UK $48.3B 1.9%
8 Japan $46.1B 1%
9 Germany $41.1B 1.2%
10 South Korea $36.8B 2.7%
This 2.5% calculated vs GDP which includes oversized FIRE
sector. As such it is somewhat deceptive. Along the lines:
look how little we spend on defense.
The reality is different.
For 2015 total budget was 3.97 trillion. Military budget
was 637 billions. That's 16%. And part of military budget is
hidden (Department Of Energy, three letter agencies, etc.)
So we can assume that 2 out of each ten dollars goes to
defense. That's a serious hit and that might help to explain
crumbling infrastructure in the USA. Might be a symptom of
British-style overextension of the empire.
I would say precious metals are subject to tighter physical
constraints (first of all, availability) than most of what
have been considered "fiat" currencies.
"fiat" coin has been produced from cheaper metals, e.g. iron,
aluminum, or brass. Forgery-resistant paper currency is not
cheap, but probably still cheaper than precious metals.
All that is beside the point - today's currencies are only
virtual accounting entries (though with a not so cheap
supervision and auditing infrastructure attached to enforce
scarcity, or rather limit issuance to approved parties).
Gold and silver prices are
determined by labor costs of production.
Cartels act to limit global supply to push prices above
labor costs, but even the Cartels have trouble resisting
selling into the market when the price far exceeds labor cost
of the marginal unit of production.
In today's political economy, the barrier to entry is rule
of law which requires paying workers to produce without
causing harm to others. The lowest cost new gold production
is all criminal, involving theft of gold from land the miners
have no property rights, done by causing harm and death to
bystanders, with protection of the criminal operations coming
from criminals who capture most of the profit from the
Estimates vary, but some believe 90% of all gold mined in
5000 years is still held by humans as property. If a method
of extracting gold from sea water at a labor cost of $300 an
ounce, the "destruction of wealth" would be many trillions of
All that's needed is a method of processing sea water that
could be built for $300 per ounce of lifetime asset life. A
$300 million in labor cost processing ship that kept working
for 30 years producing over that 30 years a million ounces of
gold would quickly drive the price of gold to $350-400. If it
doesn't, a thousand ships would be quickly built that would
add a billion ounces to the global supply in 30 years
representing 1/6th global supply after 5000 years.
Unless gold suddenly gained new uses, say dresses that
every upper middle class women had to have, and that cost
more than $300 an ounce to return to industrial gold, such
production would force the price of gold to or below labor
However, a dollar coin plated one atom thick in 3 cents of
gold will always have a value of a dollar's worth of labor.
The number of minutes of labor or the skills required for
each second of labor can change, but as long as the dollar
buys labor, it will have a dollar of value.
If robots do all the work, then a dollar becomes
meaningless. A theoretical economy of robots doing all the
work means a car can be priced at a dollar or a gigadollars,
but the customers must be given that dollar or that
gigadollars, or the robots will produce absolutely nothing.
Robots producing a million cars a month which no one has the
money to buy means the cars cost zero. To simply produce cars
that are never sold means the marginal cost is zero.
Money is a rationing mechanism to control the use and
distribution of scarce economic resources. Labor (of various
specializations) is a scarce resource, or the scarcest
resource commanding the highest price, only if other
resources are more plentiful.
There are many cases where
labor, even specialized labor, is not the critical
bottleneck, and is not the majority part of the price. E.g.
in the case of patents where the owner can charge what the
market will bear due to intellectual property enforcement. Or
any other part of actual or figurative "toll collection" with
ownership or control of critical economic means or
infrastructure. That's pure rent extraction.
Some things cost a lot *not* because of the labor involved
- a lot of labor (not spent on producing the actual good) can
be involved because the obtainable price can pay for it.