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IMF as the key institution for neoliberal debt enslavement

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One of "innovations" of neoliberalism was extension known since Ancient Greece concept of debt slavery to the whole countries.

Here is description based on Debt bondage - Wikipedia, the free encyclopedia

Debt bondage (also known as debt slavery or bonded labor) is a person's pledge of their labor or services as security for the repayment for a debt or other obligation. The services required to repay the debt may be undefined, and the services' duration may be undefined. Debt bondage can be passed on from generation to generation.

Debt bondage has been described by the United Nations as a form of "modern day slavery" and the [3]  Most countries are parties to the Convention, but the practice is still prevalent in South Asia. Debt bondage in India was legally abolished in 1976 but remains prevalent.

Debt bondage was very common in Ancient Greece. In ancient Athens, Solon forbade taking out loans using oneself as a security and ended such debts.

Europe

Classical antiquity

Debt bondage was "quite normal" in [4]  The poor or those who had fallen irredeemably in debt might place themselves into bondage "voluntarily"—or more precisely, might be compelled by circumstances to choose debt bondage as a way to anticipate and avoid worse terms that their creditors might impose on them.[5] In the Greco-Roman world, debt bondage was a distinct legal category into which a free person might fall, in theory temporarily, distinguished from the pervasive practice of slavery, which included enslavement as a result of defaulting on debt. Many forms of debt bondage existed in both ancient Greece and [6].

Debt bondage was widespread in ancient Greece. The only city-state known to have abolished it is Athens, as early as the Archaic period under the debt reform legislation of [7] Both enslavement for debt and debt bondage were practiced in [8]  By the Hellenistic period, the limited evidence indicates that debt bondage had replaced outright enslavement for debt.[8]

The most onerous debt bondage was various forms of paramonē, "indentured labor." As a matter of law, a person subjected to paramonē was categorically free, and not a slave, but in practice his freedom was severely constrained by his servitude.  Solon's reforms occurred in the context of democratic politics at Athens that required clearer distinctions between "free" and "slave"; as a perverse consequence.

The selling of one's own child into slavery is likely in most cases to have resulted from extreme poverty or debt, but strictly speaking is a form of chattel slavery, not debt bondage. The exact legal circumstances in Greece, however, are far more poorly documented than in ancient Rome.

Nexum was a debt bondage contract in the early Roman Republic. Within the Roman legal system, it was a form of mancipatio. Though the terms of the contract would vary, essentially a free man pledged himself as a bond slave (nexus) as surety for a loan. He might also hand over his son as collateral. Although the bondsman might be subjected to humiliation and abuse, as a legal citizen he was supposed to be exempt from corporal punishment. Nexum was abolished by the Lex Poetelia Papiria in 326 BC, in part to prevent abuses to the physical integrity of citizens who had fallen into debt bondage.

Roman historians illuminated the abolition of nexum with a traditional story that varied in its particulars; basically, a nexus who was a handsome but upstanding youth suffered sexual harassment by the holder of the debt. In one version, the youth had gone into debt to pay for his father's funeral; in others, he had been handed over by his father. In all versions, he is presented as a model of virtue. Historical or not, the cautionary tale highlighted the incongruities of subjecting one free citizen to another's use, and the legal response was aimed at establishing the citizen's right to liberty (libertas), as distinguished from the slave or [11]

Cicero considered the abolition of nexum primarily a political maneuver to appease the common people (plebs): the law was passed during the Conflict of the Orders, when plebeians were struggling to establish their rights in relation to the hereditary privileges of the patricians. Although nexum was abolished as a way to secure a loan, debt bondage might still result after a debtor defaulted.

While serfdom under feudalism was the predominant political and economic system in Europe in the High Middle Ages, persisting the Austrian Empire till 1848 and the Russian Empire until 1861 ([12]  debt bondage (and slavery) provided other forms of unfree labour.

Americas

For more details on indentured servitude in the American colonies, see Indentured servant.

Asia

The Indian indenture system was an ongoing system of indenture, based on debt bondage, by which perhaps two million Indians were transported to various colonies of European powers to provide labour for the (mainly sugar) plantations. It started from the end of slavery in 1833 and until 1920.

Current status

See also: Human trafficking

According to the Anti-Slavery Society:

Pawnage or pawn slavery is a form of servitude akin to bonded labor under which the debtor provides another human being as security or collateral for the debt. Until the debt (including interest on it) is paid off, the creditor has the use of the labor of the pawn.[15]

Debt bondage has been described by the United Nations as a form of "modern day slavery"[3] and is prohibited by international law. It is specifically dealt with by article 1(a) of the United Nations 1956 Supplementary Convention on the Abolition of Slavery. It persists nonetheless especially in developing countries, which have few mechanisms for credit security or bankruptcy, and where fewer people hold formal title to land or possessions. According to some economists, for example Hernando de Soto, this is a major barrier to development in those countries because, for example, entrepreneurs do not dare take risks and cannot get credit because they hold no citation needed

Researcher Siddharth Kara has calculated the number of slaves in the world by type, and determined that at the end of 2006 there were 18.1 million people subject to debt bondage.[16]

In India, the rise of Dalit activism, government legislation starting as early as 1949,[17] as well as ongoing work by NGOs and government offices to enforce labour laws and rehabilitate those in debt, appears to have contributed to the reduction of bonded labour there. However, according to research papers presented by the International Labour Organization, there are still many obstacles to the eradication of bonded labour in India.[19]


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[Jul 11, 2017] Lee Camp Enjoy The Trump Show While Wall Street Pillages The Country

Notable quotes:
"... This is when the mainstream media did what they do best – they acted as the white blood cells attacking the infection in the system. (And I'm sure I'm not the first to use that analogy.) In this case the "infection" was activists calling attention to the full-blast destructive tendencies of capitalism. ..."
"... A small tax on all financial transactions would be a start in slowing down the crazy money-go-round that is strangling our real economy. ..."
"... At some point we need Wall Street ..."
"... just as truckers and pilots need to pass random drug and alcohol tests, congress kriters and strategic wall street participants should also be required to subject themselves to such monitoring and testing ..."
"... At some point we need Wall Street ..."
"... Gary Gensler's study, when he headed the CFTC, found that over 90% of so-called hedge trades were pure speculation. ..."
"... From 1914 to 1966, there was a transaction tax, begun with the Revenue Act of 1914, ended during the Johnson Administration. ..."
"... The media don't like Trump and they didn't much like Occupy either. So one should be clear about who is doing the distracting. While Trump certainly is a boorish person who rubs women in particular the wrong way, it's likely that's not what is motivating the rabid opposition. Commonsensical pronouncements about getting along with Russia or rolling back globalism strike at the heart of a plutocracy that seems to have the country in a death grip. Trump may not have been a very sincere or motivated reformer but clearly Sanders would have met with the same circus of distraction (the stories about his wife a shot across the bow). ..."
"... Consider the fate of Muammar Gadiffi. Ruler of the wealthiest an most socially progressive country in Africa. Liked to wear weird clothes and hang out in a tent in the desert with his harem. Made the mistake of meddling in regional power politics, and the fatal mistake of trying to organized a gold-based currency for trade in oil. His fate was to have his country torn apart with the active support of the CIA, NSA and other US spook agencies. And to die with a bayonet up his ass while Secretary of State Hillary Clinton watched on a live spy satellite camera and chortled madly. https://www.youtube.com/watch?v=dR45C6Vw8uM ..."
"... Getting people into debt is the whole point. If not willingly, by force if necessary. Debt keeps the mopes working. Debt works better than abject slavery because the oppressive nature of the practice is more easily rationalized by the perpetrators. Christianity once objected to usury for good reason. ..."
"... This dual arrangement, private elite money and Government need works so well for both parties because all the upside goes to the wealthy. The wealthy are shielded form the horrors of dishing out violence to achieve ones goals -- that task is relegated to the Government, while the Government is free from accountability- they can always get more "money" from the elite because they control all the wealth. ..."
"... That is the extreme tragedy of Privatization. The real wealth of the nation and potential of its people are squandered in a financial shell game. ..."
Jul 11, 2017 | www.nakedcapitalism.com

Donald Trump is the best thing to happen to Wall Street in twenty years. This is because since the moment he took the oath of office, no one has so much as uttered a word about Wall Street....

... ... ...

During the 2011/ 2012 Occupy movement, for the first time in years the entire country took a critical eye to the institution that was running our economy (by "running" I mean "dry humping"). The nation FINALLY cared that this institution was steadily extracting all of the wealth and resources and giving it (in an unmarked bag) to a tiny percentage of men and women (mainly men) who smelled impeccable. Even those citizens who were wrongly disgusted by Occupy still felt that Wall Street was exploiting the American people at a jaw-dropping pace. And they got angry. The country got angry. FINALLY – at long last – everyone got ANGRY.

This is when the mainstream media did what they do best – they acted as the white blood cells attacking the infection in the system. (And I'm sure I'm not the first to use that analogy.) In this case the "infection" was activists calling attention to the full-blast destructive tendencies of capitalism. The media piled on the protesters as if those activists were the ones sucking every last penny out of the American people. This, along with a healthy dose of militarized police and FBI infiltration , is how Occupy ended up maligned and imprisoned. The white blood cells then moved on to step three of Operation Protect Wall Street (step one is ignore the protests, step two is attack the protesters). Step three is the same as step one – "ignore," which is akin to silencing. We saw these identical steps with Standing Rock. Most protest movements don't get past step one; the mainstream media ignores them to see if they'll simply go away, and it usually works. In fact until social media came along, it almost always worked. But now the internet has allowed for an alternate path to public awareness (and an alternate path to AMAZING photos of cats partaking in a variety of very un-catlike tasks). And this is why crushing net neutrality is something the FCC and Wall Street are drooling over. But I digress.

Jim A. , July 11, 2017 at 8:10 am

At some level, we need Wall Street, just like we need a liver. But a swollen, bloated and inflamed liver is NOT a sign of health, and is indeed a dangerous. Wall Street has become a huge drag on the economy rather than an aid to it. Our economy is now structured to give Wall Street far more money than it can find actual, productive uses for. Instead of being used to build new plants and research new products, most of that money just goes into "financial products," that blow asset bubbles or stock repurchases, or leveraged buyouts, Low rates have fueled large levels of inflation in the monetary supply, but because little of that has been seen in wages, it hasn't had much effect on the prices of consumer products, Instead, it has pushed up asset prices, which in turn concentrates wealth every more. Which the wealthy, and their sycophants confuse with actual "growth" in the economy.

A small tax on all financial transactions would be a start in slowing down the crazy money-go-round that is strangling our real economy.

PKMKII , July 11, 2017 at 9:05 am

More like a tumorous liver, one that's come to see the other organs as superfluous. Heart, brain, digestive system, they're nice, but if sacrificing them means more for the liver, well TINA! We don't help the body perform, we are the body.

bdy , July 11, 2017 at 9:40 am

At some point we need Wall Street

Anyone care to elaborate? Cause me and mine do just fine down at the credit union. If Santa Monica wants to tunnel under downtown for the new Bio-Luminescent Fungus Park do they really have to borrow the funds from the vampire squids? Isn't Bank of Santa Monica just as capable of hitting the discount window after the fact to shore up reserves? What am I missing that makes an NYC clearing house for lottery tickets that profit the .1% so vital?

Vatch , July 11, 2017 at 11:08 am

The credit union won't be able to fund the construction of a new school or sewer system. They won't be able to fund a business that wants to expand. If you want to sell some of your stock to pay for your child's college education, you don't call your friends and neighbors and ask them to buy your stock. You sell it through a broker, who is part of the Wall Street network.

What we don't need is a lot of fancy options, elaborate asset backed securities like collateralized debt obligations, and credit default swaps. We certainly don't need high frequency trading. Wall Street is infested with those.

alex morfesis , July 11, 2017 at 11:47 am

the american credit union system is not much different than the german financial cooperatives and landesbank system except the germans get to use it to build a stable economic model, where here in the us, the credit union system is attacked as some form of "fidelismo"

http://www.abfjournal.com/articles/brave-new-world-community-banks-credit-unions-enter-syndication-market/

"in my hand I have a list of" .

https://www.bvr.de/About_us/Cooperative_Financial_Network

somehow, the whole euro thingee system only cheerleads for german use of its system and does not seem to encourage (other than perhaps the WIR in switzerland) anyone else being "european" enough to enjoy the "german advantage"

http://www.reuters.com/article/us-banking-germany-landesbanken-idUSBRE98G06720130917

there have been fannie/freddie type of conduits previously for credit unions to recycle capital lending capacities but those were the first to be shut down to eliminate competition with wall street

http://www.business.unr.edu/faculty/liuc/files/fin415/WSJ_01292009.pdf

http://news.cuna.org/articles/print/36683

credit unions can do all types of big projects

directly or via some form of syndication

they can also be formed for and by businesses to provide local capital they do not have to be just "consumer" deposit cycling organizations there are technically no restrictions on their growth

there is the acela vanity press which goes in a circle in respects to what a credit union is and what it does and how large a parcel of the citizenry in fact are members and have funds deposited and cycled through said credit unions

Vatch , July 11, 2017 at 12:38 pm

credit unions can do all types of big projects

directly or via some form of syndication

Wouldn't that syndication be something resembling Wall Street? (without all of the ridiculous derivatives, high frequency trading, and outlandish bonuses, of course)

alex morfesis , July 11, 2017 at 1:15 pm

just as truckers and pilots need to pass random drug and alcohol tests, congress kriters and strategic wall street participants should also be required to subject themselves to such monitoring and testing

can easily make a strong argument "for" derivatives, cds, cdo, squareds rectangulars and octoganals too even high frequency churning

the technical word is prudence within reason and for a small percentage beyond the market needs to keep market flows available and ready for moments of capital drying up

currency markets at trillions of dollars per day are perhaps just a convenient vehicle to "make bribery great again"

would argue there is now and has been for quite some time a very massive substance abuse problem in the capital markets which feed into the myopia of "allowable excesses"

more funds are given away to charities in this great american enterprise than is "thrown away/invested" in enterprise start ups

300 billion per year to charity vs less than 100 billion per year in start ups

the systems are all in place in this vast imperium for the small shmoes to do many things perhaps not enough transactional attorneys in the right places to make it work and happen in a consistent and sustainable manner, but the tools are all there however

we have our capital allocations all [family blogged] up

Hiho , July 11, 2017 at 1:06 pm

God, and why on the earth would someone agree with wall street funding schools or sewer systems. That is the duty of the government. Not even bondholders or private creditors are really needed once you understand that banks also create money from thin air.

Anon , July 11, 2017 at 1:37 pm

And the Wall Street route (selling Bonds), instead of using taxation, usually costs the locals a premium of 40% over the actual cost of the project. And the beneficiaries are the 1% who can afford to purchase those Bonds.

sgt_doom , July 11, 2017 at 1:50 pm

You need to have a serious question with the Clinton/Rodham family about this, since it really exploded under their watch.

Reagan did establish the Office for Privatization within the OMB, but he didn't do enough to suit the Heritage Foundation, which evidently loves their Clintons!

Vatch , July 11, 2017 at 2:00 pm

Hiho: City, county, and state/provincial governments can't create money, and sometimes there are necessary projects which require a lot more money than can be raise by taxes in just one year. Whether the money comes from bond sales or from bank loans, the governments will use taxes to pay the money back over a period of 20, 30, or 40 years. Since the local savings banks may not have the resources to make a lot of those loans, a bond market is needed.

Anon: It's not just the one percenters who benefit from buying bonds. There are also plenty of pension funds and mutual funds, and those benefit more than just the one percenters.

A vast amount of abusive behavior has occurred in the financial industry, but that doesn't change the fact that the industry does provide some value.

No Way Out , July 11, 2017 at 1:09 pm

At some point we need Wall Street

We need Wall Street to recycle back into the economy the huge sums of money that rise to the top of the human chain like crap rises to the top of a cesspool.

Either that, or we could reinstate the 90% marginal rate, properly tax capital gains in inheritances, and institute a wealth tax with a hard cap on how much a person could possess. We could also disallow the ownership of corporations by other corporations (since they are after all human beings), and make corporate officers indictable for any felonies their corporations committed which they did not report. And we could stop pretending that an economy needed more than 300 million people to function efficiently, and that human beings can pull themselves up by the bootstraps on $8/hour.

sgt_doom , July 11, 2017 at 1:53 pm

Recently read Survival of the Richest by Donald Jeffries, and he has a wonderful chapter there on the great American populist, Huey Long.

Long's tax reform program in his Share The Wealth project was most intelligent.

John Wright , July 11, 2017 at 10:04 am

While the country does need Wall Street to help allocate resources, a link I've posted before to NC has one observer (Paul Woolley) suggesting the US/UK financial industry is 2 to 3 times larger than optimum.

Essentially, the USA could downsize its financial industry by 50-66% and be better off

see: http://www.newyorker.com/magazine/2010/11/29/what-good-is-wall-street

See "I asked Woolley how big he thought the financial sector should be. "About a half or a third of its current size," he replied.""

But as we watch the Bush-Obama-Trump financial industry friendly administrations operate, the likelihood of "right sizing" the financial industry seems very remote.

In my view, only another financial massive crisis can precipitate any reform/resizing, it will not arise in the current financial industry fed political process otherwise.

justanotherprogressive , July 11, 2017 at 10:09 am

"to help allocate resources"????
Yea, they are good at that, aren't they? Oddly enough, that allocation seems to be to only a select few ..is that what allocation means?

Then bank robbers are also good at allocating resources

John Wright , July 11, 2017 at 11:15 am

It's a stretch, bu imagine you subtract the portion of Wall Street responsible for the Housing Bubble, Auto Bubble, Student loan bubble, Commercial property bubble, Internet bubble, LBO/Private Equity funding, and stock buyback funding, the remaining subset of Wall Street could be providing some societal value.

One could argue that crowd funding could lessen the size of even this residue.

So a portion of Wall Street may be useful for funding infrastructure and research/development in the future.

But rightsizing never seems to be appropriate for Wall Street.

Jim A. , July 11, 2017 at 10:58 am

Oh at this point I suspect that it is far larger than 2-3 times optimum size. I'd wager that the reason for that 2-3 estimate isn't so much that they get the optimum size wrong as that they underestimate the current size of Wall Street.

justanotherprogressive , July 11, 2017 at 10:07 am

"At some level, we need Wall Street"?
The biggest employer in my town is privately owned – it doesn't need Wall Street (and oddly enough, that company didn't suffer during the "recession", go figure .). There are many many small businesses in this country – they don't need Wall Street
I don't need Wall Street

Wall Street has been putting out its propaganda for so long that people are buying into it without thinking. Actually Wall Street needs us to keep buying and going into debt to survive but they've somehow convinced us that they are doing us a favor by keeping us in debt .

Hiho , July 11, 2017 at 1:10 pm

Exactly.

On top of that and contrary on what many people think, wall street does not fund industry. Industry funds wall street.

Thor's Hammer , July 11, 2017 at 10:14 am

"At some level we need Wall Street–" like we need a metastatic cancer. A neutron bomb that destroyed its core and sought out all its tentacles would be more appropriate.

What we need is an actual marketplace that evaluates asset allocation from the standpoint of how well it serves the citizens of the world and how well it supports the biosphere and ecosphere within which they live. Capitalist markets serve or evolve into casinos for the ultra-rich who control them. Central planned economies without the guiding hand of markets become calcified skeletons that are every bit as dysfunctional as capitalist markets.

in order for a market system to be sustainable it would have to be based upon a generally accepted wisdom about the human role in the ecosphere. And it would have to reflect a systemic decentralization of power that prevents the drive to domination that characterizes all of human social history.

Are humans smarter than yeast?

Thor's Hammer , July 11, 2017 at 2:49 pm

When this post was submitted there were only three posts before it. Why is is now 2/3 of the way down the list of 48?

Outis Philalithopoulos , July 11, 2017 at 3:19 pm

Look at the time stamps. The post order is a tree order (node, then branches), with posts on the same tree level ordered by time stamp. That means that if originally there are two posts, and then twenty people respond later to the first post, the second post will become the twenty-first.

Alex Morfesis , July 11, 2017 at 12:58 pm

The new york state stock transfer/transaction tax exists & has existed but has been handed back as a 100% tax refund since felix the Cheshire car crushed the municipal govt unions in the late 70's

TSB-M-82-(6)M

Depending on who you ask, the amount not collected each year is ten to twenty billion (yes with a B)

10 to 20 billion per year rebated to wall street for 25 years

well be reasonable

Times square is still a mrss and the abandoned piers on the west side of Manhattan and all those empty factory buildings that faith hope consolo just can't seem to get any retail enterprises into

Half a trillion bux

you can't have nice things

Because because

just because

RickM , July 11, 2017 at 8:43 am

Why a small tax on financial transactions? How about a flat 1%, instead of the 0.1% I read about in the usual sources? That sounds about right. Besides, I hear flat taxes are the best!

Vatch , July 11, 2017 at 10:56 am

I believe the thinking behind a small transaction tax is that it will not impede legitimate securities transactions, such as the purchase of some shares of stock for retirement. If the transaction tax is too large, it affects people on main street. But even a small transaction tax will have an effect on the high frequency trading that hedge funds and giant banks indulge in thousands or even millions of times per day. Ordinary investors have no possibility of beating the algorithmic high frequency traders, so to make things a little more fair, the high frequency traders should pay a tax on every transaction. This tax should not be large enough to harm the ordinary investors.

Jim A. , July 11, 2017 at 11:01 am

And if that HFT was just dueling algorithms in a cage match, it would be a zero-sum game. But the reason that it is profitable is that much of it constitutes automated "front running."

Anon , July 11, 2017 at 1:50 pm

This tax should not be large enough to harm the ordinary investors.

Who are these ordinary investors? What percent of transactions do they make? How do their transactions fare when their trades only have to be made within 48 hours of placement. (Arbitrage anyone?!)

sgt_doom , July 11, 2017 at 2:00 pm

Bulltwacky!

Gary Gensler's study, when he headed the CFTC, found that over 90% of so-called hedge trades were pure speculation.

From 1914 to 1966, there was a transaction tax, begun with the Revenue Act of 1914, ended during the Johnson Administration.

Vatch , July 11, 2017 at 2:07 pm

Right. So a small transaction tax will either inhibit the speculation, or raise money for the government. Either way it's a good thing.

José , July 11, 2017 at 4:55 pm

There's this interesting proposal on transaction taxes to stabilize the financial system – by Professor Marc Chesney from the University of Zürich (I translated from the original German):

"Micro taxes on electronic payments – This would also be a technically simple solution to stabilize the system. In Switzerland, there are about one hundred thousand billions of Swiss francs in electronic payments per year. That is, one plus 14 zeros. This is about 160 times the Swiss GDP. Taking 0.2 percent of this, one would have had in tax receipts two hundred billion francs a year, more than all present-day taxes in Switzerland, that do not exceed 170 billion Swiss francs per year.

That is, theoretically one could, in place of all other taxes, of almost all other taxes, just pay this micro tax every time that you get a bill electronically paid. Like, every time you go to the restaurant, to the hairdresser. Every time you go to the ATM, for example, to get 100 francs, you could pay 20 Rappen (cents) in taxes. It would be a simple measure and we would have much less of a headache with the annual tax declaration. In fact, we could also, in theory, use this micro tax for – quite simply – abolishing the annual tax declaration. So, it would be a simple, and cheap, measure. And yet we do not talk about this possibility."

Carolinian , July 11, 2017 at 8:51 am

The media don't like Trump and they didn't much like Occupy either. So one should be clear about who is doing the distracting. While Trump certainly is a boorish person who rubs women in particular the wrong way, it's likely that's not what is motivating the rabid opposition. Commonsensical pronouncements about getting along with Russia or rolling back globalism strike at the heart of a plutocracy that seems to have the country in a death grip. Trump may not have been a very sincere or motivated reformer but clearly Sanders would have met with the same circus of distraction (the stories about his wife a shot across the bow).

It's really the power of the media that is Fight Club, the thing nobody is allowed to talk about. Camp himself has come under attack from the NYT. Doubtless Trump understands this which is why he still clings, however ineptly, to Twitter. One can only wonder how long before the web itself comes under assault.

neo-realist , July 11, 2017 at 10:03 am

The mud heaping on Sanders wife, I suspect, is about destroying his credibility for 2020. With all their influential capability, TPTB still believe themselves very threatened by Sanders.

perpetualWAR , July 11, 2017 at 12:49 pm

It's actually enfuriating me the FBI has enough time to investigate Jane, but couldn't find the time to investigate the bank crimes causing 18.2 million unlawful foreclosures.

Audit the REMIC mortgage loan lists for multiply-pledged notes! Then, go after the uncollected billions in tax implications and give the houses back!

Thor's Hammer , July 11, 2017 at 10:37 am

We irrelevant posters in the blogsphere seem to have trouble learning from even the most recent past.

Consider the fate of Muammar Gadiffi. Ruler of the wealthiest an most socially progressive country in Africa. Liked to wear weird clothes and hang out in a tent in the desert with his harem. Made the mistake of meddling in regional power politics, and the fatal mistake of trying to organized a gold-based currency for trade in oil. His fate was to have his country torn apart with the active support of the CIA, NSA and other US spook agencies. And to die with a bayonet up his ass while Secretary of State Hillary Clinton watched on a live spy satellite camera and chortled madly. https://www.youtube.com/watch?v=dR45C6Vw8uM

If that is the response of the Deep State to a perceived threat from a small African country, imagine the measures it would take toward an out-or-control US president who threatens to make peace with the best and most profitable enemy they have ever been able to create.

Disturbed Voter , July 11, 2017 at 12:43 pm

Correct not only is politics war by other means, but finance is war by other means. The banking business is part of the WMD of the Anglo-American Empire. This is what happens when you unleash a predatory species of unparalleled capability on the planet.

jo6pac , July 11, 2017 at 1:09 pm

LOL and sadly so true.

polecat , July 11, 2017 at 2:01 pm

It' not really a laughing matter especially where the Russians & Chinese are uh 'concerned' --

At the ever-increasing rate of establishment insanity, I see a nuclear war in our future, perhaps not too far out, either.

Thor's Hammer , July 11, 2017 at 3:15 pm

I wouldn't exactly call the sounds that come out of the Hildabeast's mouth laughing!-.
https://www.youtube.com/watch?v=dR45C6Vw8uM

Lord Koos , July 11, 2017 at 4:21 pm

Iraq was a similar deal. Any country that attempts to operate outside of the western banking system must be destroyed.

RenoDino , July 11, 2017 at 10:48 am

I'll say again, Trump was elected to break things and he is doing his job perfectly. He is breaking the MSM and all three branches of government. He is destroying the global order and undermining the "democratic" process. Such is the hatred for these institutions, he is only marginally less popular than when he was elected. People may find fault with the way he breaks things, but he is not going for style points. Rather he is the perfect person for the job. He is totally dismissive of his critics, not open to suggestion and completely and utterly unpredictable. He is one of the few people who manages to live life on their own terms. This is an extreme rarity and its importance cannot be stressed enough. It drives his critics completely mad because they reflect on everything they say and do and try to gauge the response to every action.

The last forty years have wrought a society with a glass jaw that Trump intends to break. His antics expose the vulnerabilities inherent in the West's corrupt and hypocritical institutions who are desperately trying to cling to a unreal state of affairs that have become a bigger joke than Trump.

... ... ...

edr , July 11, 2017 at 11:44 am

The country didn't need "Occupy Wallstreet" to focus on Wall Street Corruption.

The loss of people's homes already had the entire country aware and fuming about Wall Street corruption, writing and calling Congress. Occupy's purpose was to convince Legislators, not the public, of the country's existing concerns and get them to break up the Wall Street MegaBanks. And what happened with the whole country fuming???? Nothing!!! 8 years of nothing.

Wall street Derivatives bets are about 2-3x the total of World's cumulative assets!! That's been staring the Fed and Congress in the face since 2008, and they can't figure out there is anything to fix. Worse than the housing crises, which they ALSO REFUSED to see or prevent. 40years of losses in real wages, also purposefully ignored by Congress and the white house.

(And, deciphering the facts behind Media reporting is a full time job.)

Therefore, Trump . why get all in a froth to resolve nothing? Enjoy the show, because nothing else was on offer.

Bill H. , July 11, 2017 at 11:52 am

Wall Street does not create the money that sloshes into it. That money pours into Wall Street from Pharma with its 50%+ profit margins, from "sharing economy" capitalists with 80% profit margins, from health care corporations with 50% profit margins, from IPO's that net the "creators" obscene amounts of money for trivial adventures and from the Federal Reserve for "quantitative easing."

Wall Street is not the problem, it is a symptom of the problem, it feeds on the problem, and it is a distraction from the problem. The problem is corporatism and its control of governance. That is why "Occupy" was such a farce.

sharonsj , July 11, 2017 at 12:05 pm

You're forgetting free credit from the Fed. They have given billions worldwide.

Lord Koos , July 11, 2017 at 4:25 pm

I disagree, Wall Street is an actor that is complicit with big capital and it is definitely a problem. I don't see how you can separate corporatism from Wall St. since they enable each other.

I wouldn't call an authentic grass-roots protest against inequality a farce.

jsn , July 11, 2017 at 7:43 pm

Occupy was a "farce" because bank security colluded with corporate press and the enforcement arms of the surveillance state to present you that image. Hook, line and sinker appears to be your take.

Marbles , July 11, 2017 at 11:55 am

More sky is blue commentary, with no discussion of what to do next.

Re occupy Wall Street?

Stop paying all of your loans and watch the banks implode?

Pin one's hopes on some snowball's chance to elect officials in every office that would use the force of the state to clawback ill gotten gains?

Pray for a computer hacker to create some debt jubilee and reset the clock?

agkaiser , July 11, 2017 at 12:17 pm

Look what happened to Mr. Robot! Yeah, that was all a dream too, wasn't it?

Marbles , July 11, 2017 at 12:47 pm

After the revolution is a topic that needs to be discussed more, not to bring Slavoj Zizek into the discussion.

diptherio , July 11, 2017 at 3:13 pm

Here's one:
https://nextcity.org/daily/entry/directory-worker-cooperatives-worker-owned-businesses

And another:
https://cooperativeeconomy.info/every-commune-is-a-cooperative-self-organisation-and-self-sufficiency-are-progressing-in-rojava/

agkaiser , July 11, 2017 at 12:12 pm

Everybody knows the rich and their banks and corporations pay lower percentages of taxes than the rest of us. Everybody knows many of them pay no taxes at all.

Many of us and our governments borrow money from the rich. We borrow to live a decent life. The governments borrow and do the things like build and repair roads, defense and other things we need in common. Some say we don't have to borrow. Is that really true?

Q: Why do the rich have excess money that they can loan to us and our government?

A: The rich don't pay taxes.

If the governments taxed the excess instead of borrowing it, maybe we could pay lower taxes and have more of our earnings so we wouldn't have to borrow so much either. What do you think?

Jcast23 , July 11, 2017 at 12:13 pm

Jello Biafra made the same point about Trump's tweets a couple of months back:

https://youtu.be/BPwdK9cBhK8

templar555510 , July 11, 2017 at 2:13 pm

Goldman Sachs = Vampire Squid . What more needs to be said ?

Norb , July 11, 2017 at 3:44 pm

Governments colluding with wealthy elites in order to rule the world is what human society is all about at the present time. It has been the driving force for millennia. Wealthy elites and Government are interchangeable terms- thus the problem for poor people.

Getting people into debt is the whole point. If not willingly, by force if necessary. Debt keeps the mopes working. Debt works better than abject slavery because the oppressive nature of the practice is more easily rationalized by the perpetrators. Christianity once objected to usury for good reason.

This dual arrangement, private elite money and Government need works so well for both parties because all the upside goes to the wealthy. The wealthy are shielded form the horrors of dishing out violence to achieve ones goals -- that task is relegated to the Government, while the Government is free from accountability- they can always get more "money" from the elite because they control all the wealth.

That is the extreme tragedy of Privatization. The real wealth of the nation and potential of its people are squandered in a financial shell game.

There is a bigger picture that is obfuscated by necessity. Limits to private ownership are essential to a fair and just society. Some form of common good must be defined.

As for taxes. Taxes are the main tool for social engineering. You either have the opportunity to create a middle class or cement an oligarchy in power. Take your pick on which to support.

Russia! Russia! Down with Socialism and Communism!

Repeat above phrase until your are unconscious.

Crazy Horse , July 11, 2017 at 5:56 pm

If we adopt the perspective of all the other millions of species that have evolved to find a home on this planet, homo sapiens can only be seen as a toxic weed that if left unchecked will destroy their home. Perhaps the bacteria will succeed where saber toothed tigers and grizzly bears failed and save the planet from humans. There certainly is little evidence that the Sapiens will evolve into an intelligent species that can live in harmony with all the other inhabitants.

[Mar 03, 2017] The Brothers John Foster Dulles, Allen Dulles, and Their Secret World War by Stephen Kinzer

Notable quotes:
"... Allen Dulles masterminded the coup that turned Iranian prime minister Mohammad Mossadegh out of office and installed the Shah on the Peacock Throne. Less than a year later he presided over the operation that ousted Guatemalan president Jacobo Arbenz. He set in motion plots to assassinate Gamal Abdel Nasser in Egypt, Sukarno in Indonesia, Ho Chi Minh in Vietnam, Patrice Lumumba in the Congo, and Fidel Castro in Cuba. He delegated to his deputy, Richard Bissell, leadership of the Bay of Pigs invasion of Cuba. ..."
"... Corporate greed is not new but for members of the US Congress and the Administartion to support corporate interests over Americans safety and put money ahead of the protection of the people of our country as well as the people of other nations is a violation of our US Constitution and these people should not be immune from prosecution. G.W. Bush destroyed the infrastructure of an entire country and he killed hundreds of thousand of innocent citizens just so Brown & Root and Halliburton, V.P. Cheney's company, could receive billions of dollars of US taxpayer monies to rebuild the very infrastructure that Bush destroyed that provided the life support for the people of Iraq. ..."
"... George W. Bush asked the question after 9/11-- "Why do they hate us?" The answer he came up with was, "Because of our Freedoms." When you read this book, you come face to face for the real reasons THEY (most of the rest of the world) hate us. It's because these Bush's "freedoms" are only for the United States, no other non-white, non-Christian, non-corporate cultures need apply. ..."
"... The missionary Christian, Corporatism of the Dulles Brothers--John, the former head of the largest corporate law firm in the world, then Secretary of State, and his brother Allen, the head of the CIA all the way from Korea through Vietnam -- constitutes the true behavioral DNA of America-in-the-world. It's enough to make you weep for the billions of people this country has deprived of freedom and security for the last sixty years. ..."
"... This book is, in fact, a MUST READ... for anyone who wants to know what their taxes have paid for in the last half century--for anyone who wants to know just exactly why the rest of the world wants either to attack us or throw us out of their countries. And a must read for anyone who no longer wishes their "representatives" in Washington to keep facilitating the stealing and killing all over the world and call it American Exceptionalism. ..."
"... Foster promptly works on a policy of "rollback" to replace the "containment" policy of Truman and Kennan. ..."
"... The 1953 coup of democratically elected Mohammed Mosaddegh in Iran was similar in the sense that it was made more urgent by Mosaddegh's nationalization of British oil interests after the Brits refused to let Mosaddegh audit their books or negotiate a better deal. ..."
"... Kinzer writes that Foster saw a danger in a country like Iran becoming prosperous and inspiring others toward neutrality that might result in eventual creep toward the USSR, hence he and others like him had to be eliminated. How much the coup was driven to help the UK is unknown. The blowback from intervention in South America and Iran has since come back to haunt the US in the form of skepticism and greater Leftist angst against the US and the 1979 overthrow of the Shah. ..."
"... This type of neutrality was against the Dulles' worldview, and in his memoir, Sukarno lamented "America, why couldn't you be my friend?" after the CIA spent a lot of manpower trying to topple his regime in 1958. There was also the training of Tibetan rebels in Colorado in 1957 and the ongoing plot to assassinate Congo's Lumumba, given with Ike's consent. ..."
"... Allen Dulles' reign at CIA reads like the nightmare everyone worried about "big government" warns you about. Experiments interrogating prisoners with LSD, the purchase to the movie rights of books like The Quiet American in order to sanitize them, planting stories in major newspapers, planting false documents in Joseph McCarthy's office to discredit him, along with the private armies and escapades. Dulles comes under official criticism by Doolittle, who wrote that he was a bad administrator, bad for morale, and had no accountability-- all of which was dismissed by Eisenhower who saw Allen as the indispensible man. ..."
"... When Castro seizes power in Cuba, the Eisenhower Administration made it official policy to depose him. ..."
"... Dulles' last act was on the Warren Commission investigating JFK's assassination. This was problematic because Dulles' goal was to keep CIA assassination operations in Cuba a secret. Kinzer writes of Lyndon Johnson's desire to make Oswald a lone gunman with no political attachments, which brings us to a whole other story. ..."
"... I was surprised that President Eisenhower, whose administration is commonly thought to be one of tranquility, approved toppling governments and assassinating leaders. In some ways, he was the front man, for instance urging Congress to approve funds for "maintenance of national independence" but really for fomenting a coup in Syria and installing a king in Saudi Arabia to get US friendly governments to oppose Gamal Nasser (p. 225). ..."
"... the story of these two scions of an American aristocratic family, who were fully steeped in Calvinistic Protestantism (and it's capitalist ethic) and unquestioningly convinced of American Exceptionalism and it's Manifest Destiny to lead the world and make it safe for democracy and American Business ..."
"... It is an exposition of the quintessential, archetypical American (WASP) mindset, worldview or psychology that has motivated our collective international behavior over the past six or seven decades. ..."
"... All State employees that don't hew the line are regularly fired or transferred to obscure jobs or roles and in place are pro-CIA hardliners. ..."
"... There is much here that further condemns Eisenhower. In many cases he fully supported and endorsed their plans while pretending not to, fully employing the most cynical of strategies; "plausible deniability". ..."
"... Having read the 2012 Eisenhower biography by Jean Edward Smith I was surprised here by the wealth of information that ties Eisenhower more directly to clandestine activities and their purposes. Particularly disappointing is his continues build up for the Bay of Pigs invasion in Cuba after Kennedy's election but before he took office and will little effort to brief the incoming president. Similarly our Vietnam involvement in the 1950's was so deep already as to make a Kennedy pullout far more difficult. ..."
"... There is much here about these issues and the corrupt relationships between the Dulles's prior careers at Sullivan and Cromwell and their support of private interests while working at State and the CIA. ..."
"... At the heart of the story is the unfortunate belief by the brothers that if a country was not totally in agreement with American philosophy they were against us. Any nationalist leaders of a former colonial nation that believed in land reform or neutrality on the international scene had to be evil and must be destroyed. If they were not with us, they had to be communist. This American foreign policy changed the history of the Middle East, Southeast Asia, Africa and Central America. ..."
"... Its interesting to note that Kinzer asserts that on the death of Chief Justice Fred Vinson in 1953, Eisenhower offered the position of Chief Justice to John Foster Dulles. According to Kinzer, Dulles turned it down because he wanted to stay at the State Department. The story has always been that Ike had promised Earl Warren the first seat on the Supreme Court in exchange for his support in the 1952 election - Warren had been out maneuvered by Richard Nixon to get the bid for the vice presidency. How different legal history would have been had John Foster Dulles become Chief Justice! ..."
"... Author Stephen Kinzer explores the unique situation in which the intelligence gathering agency is also an actor. Throughout he illustrates how the relationship of their leaders enabled two agencies that would normally question and check each other, to work in seamless harmony to carry out the covert operations that both saw as primary instruments of American power. Behind them was President Eisenhower who had used covert operations during World War II and who approved their actions. In the end the author posits that the policies were the President's and the brothers were more his servants than his masters. ..."
Amazon.com

Mal Warwickon July 21, 2014

They shaped US foreign policy for decades to come

One of them was the most powerful US Secretary of State in modern times. The other built the CIA into a fearsome engine of covert war. Together, they shaped US foreign policy in the 1950s, with tragic consequences that came to light in the decades that followed. These were the Dulles brothers, Foster and Allen, born and reared in privilege, nephews of one Secretary of State and grandsons of another.

What they did in office

Allen Dulles masterminded the coup that turned Iranian prime minister Mohammad Mossadegh out of office and installed the Shah on the Peacock Throne. Less than a year later he presided over the operation that ousted Guatemalan president Jacobo Arbenz. He set in motion plots to assassinate Gamal Abdel Nasser in Egypt, Sukarno in Indonesia, Ho Chi Minh in Vietnam, Patrice Lumumba in the Congo, and Fidel Castro in Cuba. He delegated to his deputy, Richard Bissell, leadership of the Bay of Pigs invasion of Cuba. Later, out of office, he chaired the Warren Commission on the assassination of John F. Kennedy. "'From the start, before any evidence was reviewed, he pressed for the final verdict that Oswald had been a crazed gunman, not the agent of a national and international conspiracy.'"

Foster Dulles repeatedly replaced US ambassadors who resisted his brother's assassination plots in countries where they served. Pathologically fearful of Communism, he publicly snubbed Chinese foreign minister Chou En-Lai, exacerbating the already dangerous tension between our two countries following the Korean War. The active role he took in preventing Ho Chi Minh's election to lead a united Vietnam led inexorably to the protracted and costly US war there. He reflexively rejected peace feelers from the Soviet leaders who succeeded Josef Stalin, intensifying and prolonging the Cold War. Earlier in life, working as the managing partner of Sullivan & Cromwell, the leading US corporate law firm, Foster had engineered many of the corporate loans that made possible Adolf Hitler's rise to power and the growth of his war machine.

What does it mean now?

At half a century's remove from the reign of the formidable Dulles brothers, with critical documents finally coming into the light of day, we can begin to assess their true impact on US history and shake our heads in dismay. However, during their time in office that spanned the eight years of Dwight Eisenhower's presidency and, in Allen's case, extended into Kennedy's, little was known to the public about about Allen's activities (or the CIA itself, for that matter), and Foster's unimaginative and belligerent performance at State was simply seen as a fair expression of the national mood, reflecting the fear that permeated the country during the most dangerous years of the Cold War.

Diving deeply into recently unclassified documents and other contemporaneous primary sources, Stephen Kinzer, author of The Brothers, has produced a masterful assessment of the roles played at the highest levels of world leadership by these two very dissimilar men. Kinzer is respectful throughout, but, having gained enough information to evaluate the brothers' performance against even their own stated goals, he can find little good to say other than that they "exemplified the nation that produced them. A different kind of leader would require a different kind of United States."

Their unique leadership styles

To understand Foster's style of leadership, consider the assessments offered by his contemporaries: Winston Churchill said "'Foster Dulles is the only case I know of a bull who carries his own china shop around with him.'"

Celebrated New York Times columnist James Reston "wrote that [Foster] had become a 'supreme expert' in the art of diplomatic blundering. 'He doesn't just stumble into booby traps. He digs them to size, studies them carefully, and then jumps.'"

Senator William Fulbright, chair of the Senate Foreign Relations Committee, said Foster "misleads public opinion, confuses it, [and] feeds it pap." "A foreign ambassador once asked Foster how he knew that the Soviets were tied to land reform in Guatemala. He admitted that it was 'impossible to produce evidence' but said evidence was unnecessary because of 'our deep conviction that such a tie must exist.'" (Sounds similar to the attitude of a certain 21st-century President, doesn't it?)

Allen, too, comes up very, very short: "He was not the brilliant spymaster many believed him to be. In fact, the opposite is true. Nearly every one of his major covert operations failed or nearly failed . . . [Moreover,] under Allen's lackadaisical leadership, the agency endlessly tolerated misfits." He left the CIA riddled with "lazy, alcoholic, or simply incompetent" employees.

Stephen Kinzer was for many years a foreign correspondent for the New York Times, reporting from more than fifty countries. The Brothers is his eighth nonfiction book. It's brilliant.

W. J. Haufon June 27, 2014

Without John Foster Dulles There Would Have Been No Hitler and No Nazi Germany!

After the Treaty of Versailles mandated the imposition of incredibly severe monetary reparations on Germany, John Foster Dulles in the 1930s, as a partner in his law firm of Sullivan and Cromwell, assembled a coalition of banks to lend Germany over $1 trillion, (in today's dollars), supposedly for them to pay these reparations. Had Foster not organized these massive bank loans to Hitler's Germany and organized the sale of raw materials such as cobalt to fabricate armor plating to build Germany's war machine, there would have been no Nazi war machine or an Adolf Hitler to kill millions of Americans, ally troops and civilians in a war that would have never happened.

As a reward our government appointed John Foster Dulles as Secretary of State so he could continue his war against democracy by orchestrating the overthrow of democratically elected leaders such as the Prime Minister of Iran to restore the Shah, and then continuing his reign of terror against other democratically elected governments such the CIA overthrow of the President of Guatemala in 1954 by his brother Allen, Director of the CIA, and installing a US controlled puppet President so the United Fruit could continued its monopolistic hold on the banana industry in that country and eventually throughout Central and South America and the Caribbean.

Oh did I mention that JFD was a stockholder in United Fruit. Corporate greed is not new but for members of the US Congress and the Administartion to support corporate interests over Americans safety and put money ahead of the protection of the people of our country as well as the people of other nations is a violation of our US Constitution and these people should not be immune from prosecution. G.W. Bush destroyed the infrastructure of an entire country and he killed hundreds of thousand of innocent citizens just so Brown & Root and Halliburton, V.P. Cheney's company, could receive billions of dollars of US taxpayer monies to rebuild the very infrastructure that Bush destroyed that provided the life support for the people of Iraq.

Our Founding Fathers would never had fought to build a country of democratic principals if they knew that the political representatives in this country would worship money and support corporate greed over American human rights and freedoms.

G.W. Bush said that the attacks on 9-11 were because "they hate our freedoms". What a disgrace for a President to lie and not say it was because we have been interfering and overthrowing democratically elected governments for decades. Shame on you Mr. Bush, but you will meet your Maker one day and you can explain why you killed so many people just so you and your friends could receive billions of dollars in profits. "May God Have Mercy on Your Very Soul"

Mike Feder/Sirius XM and PRN.FM Radio on October 11, 2013

Best Political/Historical Book in Years

You know those reviews clips, headlines or ads that say "Must Read" or, "...if you only read one book this year..."
I have to say, with all the books I've read before and am reading currently, this one is absolutely the most eye-opening, informative and provocative one I've come across in many years.

And--after all I've read about American politics and culture--after all the experts I've interviewed on my radio show... I shouldn't be shocked any more. But the scope of insanity, corruption and hypocrisy revealed in this history of the Dulles brothers is, in fact, truly shocking.

Just when you thought you knew just how bad the United States has been in the world, you come across a history like this and you suddenly become aware of the real depths to which "our" government has sunk in subverting decency, freedom and democracy all over the world.

George W. Bush asked the question after 9/11-- "Why do they hate us?" The answer he came up with was, "Because of our Freedoms." When you read this book, you come face to face for the real reasons THEY (most of the rest of the world) hate us. It's because these Bush's "freedoms" are only for the United States, no other non-white, non-Christian, non-corporate cultures need apply.

The missionary Christian, Corporatism of the Dulles Brothers--John, the former head of the largest corporate law firm in the world, then Secretary of State, and his brother Allen, the head of the CIA all the way from Korea through Vietnam -- constitutes the true behavioral DNA of America-in-the-world. It's enough to make you weep for the billions of people this country has deprived of freedom and security for the last sixty years.

I grew up practically in love with America and the Declaration of Independence. When I was a kid the USA had just beaten the Nazis. I saw the picture of the marines raising the flag at Iwo Jima. I knew men in my neighborhood that had liberated concentration camps.

But they never taught us the real history of America in high school and barely at all in college. If they had given us a clear picture of our true history, there never would have been a Vietnam in the first place--and no Iraq or Afghanistan either; Global Banks wouldn't have gotten away with stealing all our money and crashing our economy and Christian fundamentalist and corporate puppets wouldn't have taken over our government.

Karma is real. You can't steal a whole country, kill and enslave tens of millions of human beings, assassinate democratically elected leaders of countries, bribe and corrupt foreign governments, train the secret police and arm the military of dictators for decades-- You cannot do all this and escape the judgment and the punishment of history.

This book is, in fact, a MUST READ... for anyone who wants to know what their taxes have paid for in the last half century--for anyone who wants to know just exactly why the rest of the world wants either to attack us or throw us out of their countries. And a must read for anyone who no longer wishes their "representatives" in Washington to keep facilitating the stealing and killing all over the world and call it American Exceptionalism.

I'll also add that Stephen Kinzer is also a terrific writer; clear, articulate, factual and dramatic. His inside the inner circle revelations of the Dulles brothers and their crimes is morbidly page-turning.

Chris on October 11, 2013

The Dark-side of American foreign policy

The American people and the world at large still feel the reverberations from the policies and adventures of the Dulles' brothers. They are in part to blame for our difficult relations with both Cuba and Iran. This history helps answer the question, "Why do they hate us?" The answer isn't our freedom, it's because we try to topple their governments.

The Dulles brother grew up in a privileged, religious environment. They were taught to see the world in strictly black and white. Both were well-educated at Groton and the Ivy League schools. Both worked on and off in the government, but spent a significant amount of time at the immensely powerful law firm, Sullivan & Cromwell. They had virtually identical world views but nearly opposite personalities. (John) Foster was dour, awkward, and straight-laced. Allen was outgoing, talkative, and had loose morals.

There's no need for a blow-by-blow of their lives in this review. The core of the book revolves around Foster Dulles as the Secretary of State under Eisenhower and Allen as the Director of the CIA. The center of the book is divided into six parts, each one dealing with a specific foreign intervention: Mossaddegh of Iran, Arbenz of Guatemala, Ho Chi Minh of Vietnam, Lumumba of the Congo, Sukarno of Indonesia and Castro of Cuba.

The Dulles view was that you were either behind the US 110% or a communist, with no room for neutrals. Neutrals were to be targeted for regime change. The author lays out explicitly all the dirty tricks our government tried on other world leaders, from poison to pornography. This dark side of American foreign policy can help Americans better understand our relationships with other countries.

My difficulty with this book is the final chapter. The author throws in some pop-psychology such as; people take in information that confirms their beliefs and reject contradictory information, we can be confident of our beliefs even when we're wrong, etc. The Dulles brothers are definite examples of these psychological aspects. Then the author says the faults of the Dulles brothers are the faults of American society, that we are the Dulles brothers. I felt like a juror in a murder trial during the closing statements, "It's not my client's fault, society is to blame!"

In most of America's foreign adventures, the American people have been tricked with half-truths and outright lies. Further more, these men received the best educations and were granted great responsibility. They should be held to a higher standard than "Oh well, everyone has their prejudices."

I agree with the author that the public should be more engaged in foreign policy and have a better understanding of our history with other nations. However, I think he goes too far in excusing their decisions because they supposedly had the same beliefs as many Americans.

Harry Glasson August 24, 2015

So Eisenhower wasn't really a "do nothing" president, but based on this book, I wish he had done less.

This is the most interesting and important book I have read in the past twenty or more years. Most Americans, myself included, considered John Foster Dulles a great Secretary of State, and few ordinary people knew Allen Dulles or had any idea how the CIA came to be what it is.

Learning the facts as they have been gradually made public by those who were witnesses, and others who researched and wrote about the behavior of the United States during the height of the Cold War has been an enlightening and saddening experience. I was in high school during Eisenhower's first term, in college during his 2nd term, in the Air Force during JFK's time in office and deployed to Key West during the 1962 Cuban Missile Crisis.

My view of America was the same as that of most Americans. I was patriotic. I bought into the fear of Communist world dominance and the domino theory. But there was much that was being done in the name of fighting Communist domination around the world that was monumentally counterproductive, and contrary what we consider to be some of our basic principles.

This book helps fill important gaps in my knowledge. I highly recommend it to anyone who would like to know what really was going on during the Cold War, its impact on where we are today, and Kinzer's take on why it happened that way.

Mcgivern Owen L on August 15, 2015

The Cold War at it Core

This reviewer generally takes careful notes while he reads-the better to compose a future review. In the case of "The Brothers", he was drawn right into the flow of the story.

"The Brothers" covers the period from the late 1940s to the mid -1960s when John Foster Dulles was the powerful Secretary of State and Allen Dulles was the Director of the Central Intelligence Agency. They fermented regime changes in Iran. Guatemala, Indonesia, the Belgian Congo and Iran. And, as many know by now, Cuba as well. The troubles they stirred up in Iran and Cuba persist to this day. The book jacket also states that the Dulles' "led the United States into the Vietnam War..." That statement is unproven within these pages. The Vietnam conflict was vastly too complicated to be reduced to one sentence.

"The Brothers" is sharply written and well documented. There are 55 pages of end notes in a 328 pages of text. Author Kinzer ostensibly turns on the brothers for all their regime changing activities. He then reverses course and arrives at a most sensible elucidation: The brothers Dulles were a product of their times and "exemplified the nation that produced them". A different kind of leader would require a different United States". This reviewer can live with that sentiment.

There was a deadly serious Cold War in session during this period the brothers Dulles were at the core. Author Kinzer deserves credit for capturing the essence of that era as well as he does.

Amazon Customer on August 10, 2015

Informative and entertaining while also scary. Author oversimplifies, omits much about diplomacy besides the Cold War.

This is my third Kinzer book (The Crescent and the Star and Reset), he is a master at spinning off new books from research collected while writing other books. This work peels back the cover on U.S. covert and overt foreign policy in the 1950s and what happens when two brothers have too much power within an Administration that has the public's trust and far too little of its scrutiny. It is a joint biography of John Foster Dulles and Allen Dulles who were Secretary of State (1953-1958) and CIA Director (1953-1961), respectively.

Some reviewers have pointed out that Kinzer tends to oversimplify his message. For example, Eisenhower and Dulles' overthrow of Mohammed Mosadegh, for example, may have had something to do with our needing Britain's support in SE Asia more than simply a crusade to eliminate anyone who was not clearly "for us" or "against the Communists." This book covers some of the territory of Trento's Prelude to Terror, Perkin's controversial Confessions of an Economic Hitman and the similar compilation A Game as Old as Empire. You may not believe what you read here as the facts certainly seem more like fiction. Did the U.S. really (clumsily) secretly spend blood and treasure to try and subvert governments on every continent? How many assassinations and overthrows did Eisenhower surreptitiously give the go-ahead on? Eisenhower essentially comes across as a monster from our 2015 vantage point. But is he any different than a President Obama who is given intelligence and orders drone strikes to assassinate enemies of U.S. foreign policy? You be the judge. This book speaks volumes about what is learned by declassification of documents over time. I will say that I read a great biography on George Kennan last year and there appears to be little overlap; Kennan's foreign policy may have been too dovish for the Dulles, but he had helped create the precursor to the CIA, the Office of Policy Creation, on which both Dulles brothers worked--this connection gets no attention from Kinzer. Much of the diplomatic effort during the Cold War-- which did exist-- at this time are left unmentioned by Kinzer, which is problematic.

The Dulles family grew up with an international mindset. One grandfather (John W. Foster) was an Ambassador (before that title was formalized) to several countries, including Russia, before becoming Secretary of State.The other was a missionary to India. They had other family connections working in diplomacy and such a career seemed just fine to them. Their father was a conservative Presbyterian minister who had an awkward relationship with his wayward children. Kinzer writes that the boys (and their younger sister) essentially saw America as the City on a Hill that was bringing light to the nations through democracy and capitalism.

Studying at Princeton hitched them to the rising star of Woodrow Wilson, who they adored.
Sister Eleanor deserves her own biography, she was a pioneer as a PhD female economist who did relief work in WWI, attended Bretton Woods after WWII, and made her own career in diplomatic service.
John Foster (Foster henceforth) attended the Paris peace conference with Wilson and was disappointed with the outcome, both he and Eleanor arguing along with J.M. Keynes that the German reparations were simply setting the stage for the next European war. At the time, Foster was working in international law for U.S. business interests, and even supposedly ghostwrote a rebuttle to Keynes' book to serve his own interests. Foster's law firm designed the legal arrangements by which U.S. firms could profit off the German reparations, which allowed him to be wealthy even during the Great Depression. He was the more religious of the bunch and was mostly faithful to his wife.

Meanwhile, Allen Dulles was serving in the newly-formed Foreign Service while sleeping with as many women as would have him. In a "What would have been?" moment of history Allen reportedly brushed off meeting Vladimir Lenin, after Lenin supposedly called him just before Lenin went to St. Petersburg for the Russian Revolution, in order to engage in a soiree with a couple of blonde Swiss females. His own sister recounts that he had "at least a hundred" affairs, and his wife approved of some and disapproved of others. A sign of the times, they remain married although she probably miserably. This continued on all through his CIA years and makes one wonder why recent CIA chief David Petraeus had to resign for anything.

Kinzer interestingly calls Wilson out for being a hypocrite, citing his inconsistent application of the doctrine of self-determination. While that doctrine stirred nationalist sentiment in Eastern Europe and the Middle East, Wilson obviously didn't apply it to the Philippines, Hawaii, or other U.S.-occupied territories. Nonetheless, the three sibling Wilson devotees attend the Paris peace talks together. Foster returns to his law firm where he's made a full partner while Allen remains in the Foreign Service until joining the firm himself in 1926.

The author ignores much of Foster's religious interest and involvement in these years. Foster changed his mind several times in life, whether in his religious devotions or from isolationist to interventionist. Interestingly, Foster was a German sympathizer and refused to believe any tales being produced about the Nazis as his firm had many German business interests. Allen disagreed strongly after touring Germany himself, and after Germany began defaulting on its debts the firm severed ties.

Allen Dulles built up his network through the law firm, the Council on Foreign Relations, and his old Foreign Service contacts and made a fortune molding business deals for European connections, including those in Nazi Germany. After the U.S. enters the war, Dulles is recruited by "Wild Bill" for the new OSS, becoming the first OSS officer behind enemy lines, sneaking into Switzerland to do so. He meets with all sorts of characters while feeding intelligence to the U.S., much of which was false, but enough was helpful enough to expand his reputation. Of course, he has many affairs, including a long one with a woman his wife approved of and shared with him. Interestingly, when the Valkyrie operation was launched by German traitors to kill Hitler and restore order, Dulles was the main contact with the U.S. relaying news back to Washington. The participants wanted to sue for peace, but FDR officially rejected the olive branch and Dulles was not allowed to negotiate on any such olive branch. After the War, Truman abolishes the OSS.

Foster helps draft the U.N. Charter and becomes an internationalist, seeing world peace as a Christian ideal. Foster apparently contributed to the "Six Pillars of Peace" outline by the Federal Council of Churches in 1942. He eventually reverses after the Iron Curtain falls, becoming a militant anti-Communist and seeing the USSR as truly and evil empire, the antithesis of everything American. Reinhold Niebuhr eventually pens critiques of Foster as he begins to promote a black-and-white vision of the world.

Both brothers backed the Dewey campaign in 1948, which left them disappointed. However, Dewey appoints Foster Dulles to fill a void in the Senate, which immediately elevates Foster into a higher realm, although he promptly loses the special election for the seat. Nonetheless, he is appointed to the State Department by Truman and impresses people in negotiating the final treaty with Japan in 1950. This makes him a good choice for Secretary of State when Eisenhower is elected in 1952, and Foster promptly works on a policy of "rollback" to replace the "containment" policy of Truman and Kennan.

However, Kinzer also writes that NSC-68, a top secret foreign policy strategy signed by Truman in 1950, was monumental in militarizing the response to the USSR and that the Dulles operated under an NSC-68 mindset. "A chilling decree" according to Kinzer, NSC-68 called for a tripling of defense spending in order to prevent Soviet influence from overtaking the West. Allen Dulles was appointed the first civilian director of the CIA and the die was cast.

The 1950s roll like the Wild West, with Eisenhower signing off on expensive operations, assassinations, and propaganda campaigns at home and abroad. Supposedly, more coups were attempted under Eisenhower than in any other administration, and recently declassified documents show that Dulles' CIA actively engaged in Eisenhower-warranted assassination plots in the Congo and elsewhere. Perhaps Richard Bissell, Eisenhower's enforcer is more to blame than Kinzer allows. The CIA-backed 1954 coup in Guatemala was actually initiated by Truman years earlier, but demonstrated Eisenhower's resolve. "Once you commit the flag, you've committed the country." Dulles' secret armies in Guatemala and the Philippines needed U.S. airpower for support. If the media went with a story exposing operations, or a pilot was shot down, it didn't matter-- the mission must succeed once the U.S. was committed. The CIA even used religious-based propaganda in Guatemala to foment political change, having priests on the CIA payroll publish editorials denouncing Communism.

Guatemala also showed the intersection of U.S. business interests and foreign policy. The coup was encouraged by the United Fruit Company, which had been a client of the Dulles' NY law firm and Allen Dulles had served on its Board of Directors; others in the Eisenhower Administration had ties. While Guatemala's president was democratically elected, he was a leftist, and anyone showing Leftist sympathies was to be eliminated, particularly in the Western hemisphere. The 1953 coup of democratically elected Mohammed Mosaddegh in Iran was similar in the sense that it was made more urgent by Mosaddegh's nationalization of British oil interests after the Brits refused to let Mosaddegh audit their books or negotiate a better deal. Kinzer writes, however, that Foster in particular was unable to see anyone as "neutral." Mosaddegh believed in democracy and capitalism and could have been an ally, but Mosaddegh and others like Egypt's Nasser were nationalists who favored neither the US nor the USSR, but courted deals from both. Kinzer writes that Foster saw a danger in a country like Iran becoming prosperous and inspiring others toward neutrality that might result in eventual creep toward the USSR, hence he and others like him had to be eliminated. How much the coup was driven to help the UK is unknown. The blowback from intervention in South America and Iran has since come back to haunt the US in the form of skepticism and greater Leftist angst against the US and the 1979 overthrow of the Shah.

Ho Chi Minh had initially offered the US an olive branch after WWII and was not opposed to working with US interests, but the more he was rebuffed the more he turned to harder Communism. John Foster Dulles apparently hated the French for abandoning Vietnam, and never forgave them. While Eisenhower did not want to replace the French in Vietnam, he eventually warmed to the idea as Foster promoted the "domino theory" that if one nation fell victim to Communism then others would soon follow and the eventual war would widen. Better to install brutal dictators as in Iran and South Vietnam than let a country fall. Another enemy was Sukarno in Indonesia who was trying to thread the needle between democracy, socialism, nationalism, and Islam. This type of neutrality was against the Dulles' worldview, and in his memoir, Sukarno lamented "America, why couldn't you be my friend?" after the CIA spent a lot of manpower trying to topple his regime in 1958. There was also the training of Tibetan rebels in Colorado in 1957 and the ongoing plot to assassinate Congo's Lumumba, given with Ike's consent.

Allen Dulles' reign at CIA reads like the nightmare everyone worried about "big government" warns you about. Experiments interrogating prisoners with LSD, the purchase to the movie rights of books like The Quiet American in order to sanitize them, planting stories in major newspapers, planting false documents in Joseph McCarthy's office to discredit him, along with the private armies and escapades. Dulles comes under official criticism by Doolittle, who wrote that he was a bad administrator, bad for morale, and had no accountability-- all of which was dismissed by Eisenhower who saw Allen as the indispensible man.

Eventually both John Foster Dulles and Eisenhower become old and unhealthy, Eisenhower suffering a heart attack in 1955 and Foster dying of cancer in 1959. Allen Dulles' libido slows slightly as age takes its toll and he becomes more detached from operations at the CIA, creating a more dangerous situation. When Castro seizes power in Cuba, the Eisenhower Administration made it official policy to depose him. While Dulles was officially in charge at the CIA, he was far detached from the details of the anti-Castro operations which the media had exposed and continued at great risk of failure.

Newly-elected JFK inherits the Bay of Pigs invasion plans and faces a political dilemma: Back off and be accused of sparing Castro since the government was invested in success, or go forward and risk a disaster. Unlike Eisenhower, Kennedy would not consent to air support or other official military measures to help the CIA's army once it landed, dooming the operation. Those closest to the operation begged Dulles and others to cancel the operation to no avail. Dulles was enjoying a speaking engagement elsewhere in the region, giving the appearance of attachment to the operation while being completely oblivious to its failure. The White House forced him to resign in 1961.

Dulles' last act was on the Warren Commission investigating JFK's assassination. This was problematic because Dulles' goal was to keep CIA assassination operations in Cuba a secret. Kinzer writes of Lyndon Johnson's desire to make Oswald a lone gunman with no political attachments, which brings us to a whole other story.

Kinzer concludes the book with armchair psychology, writing that the Dulles brothers succummed to cognitive biases, including confirmation bias. They saw everything in the world as they wanted to, and not as it was. They were driven by a missionary Calvinism and the ideal of American Exceptionalism that clouded their lenses. They also seemed to consider themselves infallible in their endeavors. Ultimately, "they are us," writes Kinzer, which is why it is important to learn from them. The parallels with recent American military and para-military endeavors is also clear, but Kinzer lets the reader make those comparisons.

I learned a great deal from the history of this book, studying the Dulles is an integral part in studying the execution of American foreign policy in the Cold War. Some of the omissions, simplifications, and psychoanalysis mar the book somewhat. 3.5 stars out of 5.

Doug Nort, on April 23, 2015

Too Much Passion;Too Few Facts

This book is marred by Kinzer's repeated overstatements and failures to marshal facts to support his theses about the Dulles brothers.

His failure to persuade me begins early: In the introduction Kinzler wrote of the naming of Washington's Dulles airport: "The new president, John F. Kennedy, did not want to name an ultra-modern piece of America's future after a crusty cold-war militant." He provides no documentation that Kennedy himself thought that. Given that JFK was proud of his own credentials as a cold warrior, it is unlikely that was his objection. It is much more likely his objection (or that of the staffer speaking for him in the matter) was that Foster Dulles was an iconic figure of the Eisenhower administration-which Kennedy and his New Frontiersmen viewed as having made a hash of things-or that he was a stalwart of the Republican Party, or that Dulles disapproved of a Catholic becoming president. Kinzler apparently thinks his sweeping statement is self-evident but it isn't to me.

A few pages later Kinzler gives us another hint that the pages to come will contain sweeping, unsupported generalizations. He wrote "The story of the Dulles brothers is the story of America." My goodness, didn't they share their times with FDR and Ralph Bunche and Dwight Eisenhower and Tom Watson and A. Phillip Randolph and George Marshall and a host of others who, although coming from backgrounds quite different from the brothers Dulles, are just as much the American story? The accomplishments and peccadillos of two brothers with an upper-class pedigree is hardly "the story of America."

Chapter eleven contains several such unsupported or historically blinkered generalizations. At one point (sorry-I'm a Kindle reader, no page numbers), after noting "the depth of fear that gripped many Americans during the 1950s." Kinzler asserts that "Foster and Allen were the chief promoters of that fear." Crowning the brothers as chief fear-mongers ignores some powerful other voices: Khrushchev, Joe McCarthy, General Curtis Lemay, Nixon, Churchill, Drew Pearson, Robert Welch and his John Birch Society-the list could continue.

At another point Kinzler says, "They [the brothers] never imagined that their intervention[s] . . . would have such devastating long-term effects." He cites Vietnam, Iran falling into violently anti-American leadership, and the Congo descending "into decades of horrific conflict." Regarding Vietnam, I think most historians would say that JFK, LBJ, and McNamara bear much, much more responsibility than do the Dulles brothers. As for their Iran and Congo sins, I believe those developments were much more due to unpredictable consequences than to the Dulles' blindness. Yogi is right: "Predictions are hard, especially about the future."

And on the same page (excuse me "location") Kinzler is quite certain that "Their lack of foresight led them to pursue reckless adventures that, over the course of decades, palpably weakened American security." The reader who already believes that will nod and read on while the reader who expects this ringing declaration to be followed by specifics that provide powerful support will read it and say, like the customer in the fast food ad, "where's the beef?"

OK, enough already. Kinzler's writing obviously pushed my buttons and I wouldn't have finished the book but for it being a selection of my book club. I am fine with criticism of people and policies when well-documented-for example Michael Oren's Power, Faith and Fantasy-but I lose patience with book-length op-ed pieces such as The Brothers.

Dale P. Henkenon, April 6, 2015

Cuba Si! Yankee No!

If a work based on Cold War history could construct a case against American (U.S.) exceptionalism, The Brothers by Stephen Kinzler would be a strong candidate. It illustrates the dangers of a coupling of foreign policy and covert operations involving what we now know as regime change.

It is a story of the Dulles brothers and coups arranged by the executive branch triad composed of the President (Ike) and the dynamic duo of the Dulles brothers as Secretary of State and Director of the CIA (without congressional oversight) in Guatemala, Iran, Cuba, Indonesia, the Congo and Vietnam.

It is a story that deserved to be told and it is told well. It is somewhat slow going at the start and one-dimensional but is a captivating read regardless. It is not a rigorous biography or history of the era and the events it depicts. It is driven by the thesis that our actions in the developing world even though driven by anti-communism or American idealism or Christian fundamentalist fervor (all were involved) can have baleful results.

The results can be so bad that Americans are now resented and even hated and have been for generations in large parts of the world. Highly recommended.

R. Spell VINE VOICE on March 28, 2015

Who We Are as Americans in the 50s

Engaging historical perspective that while dragging and repetitive at times, has so much information that frames our world now, and generally NOT in a positive way, that it should be required reading. Yes, I was aware of the name as a 61 yr old. But I was not aware of their roles. Not aware of brothers. Not aware of Allen's involvement in the CIA. Nor aware of their careers at the massive law firm of Cromwell and Sullivan.

But reading this was stunning and made me angry. George Dulles was more responsible for the Cold War than anyone. And documents after the war shows the Soviets were not near as devious as we give them credit for. But our fear painted a view of a hidden enemy bent on our destruction. We missed opportunities with Khrushchev. More importantly and totally unaware to me, these guys we responsible for government overthrows and were actively involved in the 1950s with alienating Vietnam leading eventually to a horrible loss of civilian lives and more importantly to me, American soldiers who were led in to the wrong war at the wrong time.

But let us not forget the documented CIA overthrows of Congo, Guatemala,Indonesia and Iran. Is this America? Well, in the post WWII world, we lost our values and stooped to such tactics.

There are stories here America doesn't study and they should. How the interface of commerce, politics and war can lead to disastrous results that haunt us today.

Read this book to learn. Not all of it will make you proud. Yes, I learned. And yes, I'm angry and ashamed.

Schnitzon February 25, 2015

Allen Dulles May have Inadvertently Saved the US from a Nuclear Holocaust

It is ironic that the Bay of Pigs debacle commissioned by Allen Dulles may have inadvertently prevented the incineration of millions of Americans in a nuclear holocaust. As the author points out when John F. Kennedy assumed the presidency he was told by his predecessor Dwight Eisenhower that the invasion of Cuba by Cuban refugees with support from the US should move forward. As a young, new President of the US, Kennedy did not want to appear weak so when Dulles presented him with the plan seeking his approval Kennedy found himself in a box.

On the one hand Kennedy had doubts regarding the chances for success. On the other hand he wanted to appear strong to the people of the US and the world. This was the first true test of his presidency and legacy. After the abject failure of the operation Kennedy to his credit took full responsibility in his address to the American people but he would never again trust the CIA or the military.

Fast forward tot he Cuban missile crisis. If Kennedy had not experienced the Bay of Pigs failure he probably would have placed more trust in the military and CIA who were vehemently urging him to bomb Cuba at various stages of the crisis. If he had taken the military's advice it would have likely resulted in escalation and possibly nuclear war with Russia. As it turned out Kennedy rejected the advice and negotiated a settlement which saved face for both sides. Kennedy's wisdom born of a past failure saved the day.


Compelling and informative about an era which had a darker ...

OLD1mIKEon February 17, 2015

The Dulles Brothers. They changed History.

Five Stars. Great book. Readable. Well researched, Informative. Highly recommended for someone interested in mid 20th century history or understanding the root cause of the anti-american animosity in certain parts of the world.

The Dulles brothers played pivotal roles in an incredible number of historic events that shaped the 20th century. They exemplified american attitudes and beliefs of their day and were placed in positions to act on these beliefs. The book not only presents their part in history, but also helps us understand the reasoning behind their actions.

I should leave the book review end with the above paragraphs, but I was originally unaware of how many key historical events of the 20th century the brothers participated in and influenced. I find it impossible not to casually speculate on their effect on history. John Foster helped write the Reparation portion of the WWI Treaty of Versailles. Some historians believe German anger over the unfairness of the reparations to be one element causing WWII. John Foster helped write the 1924 Dawes Plan that opened the door to American investment in Germany. Even in 1924 John Foster was obsessed with fighting communism. He saw a strong Germany as an effective stop gap against communistic expansion. Foster used his affiliation with Sullivan & Cromwell and his friendship with Hjalmar Schacht, Hitlers Minister of Economics, to increase American investment in Germany and its industry. Without international investment, Germany probably could not have supported it's military aspirations. Allen and the CIA was instrumental in the 1953 Iranian Coup that overthrew the democratically elected Iranian Government to install the Shaw of Iran. This action and the heavy handed governing style of the Shaw certainly led to some of the anti American resentment in the middle east today and the Iranian (Islamic) Rebellion in 1979. The Iranian Rebellion probably helped elect Ronald Reagan in 1980. In regard to Vietnam. Foster, acting as Eisenhower's Secretary of State, refused to sign the 1954 Geneva Accord. Over considerable objections, John Foster and Allen chose and installed Ngo Dinh Diem as the 1st president of the newly created Republic of South Vietnam. Diem had been a minor official in Vietnam and was Interior Minister for three months in 1933. He had not held a job since. Once in power, Allen's CIA helped keep him there. John Foster continued to support the escalation of our involvement in Vietnam until his death in 1959. Allen took a hands off approach to the Bay of Pigs operation (17 April 1961), but as the Director of the CIA, it was his responsibility. JFK fired him in November 1961. There are JFK Assassination Conspiracy Theory's that include CIA involvement. It is interesting that Lyndon Johnson personally chose Allen to be a member of the Warren Commission. Add U2 Spy Planes, Congo revolts, overthrow of South American leaders, Cuba and a host more. The policies and action of these two men changed global history and probably still effect the beliefs of many today.

Loves the View VINE VOICE on December 2, 2014

Attitude, Access, Ambition and US Foreign Policy

Stephen Kinzer shows how instrumental these brothers were in the design of US foreign policy in the post war years. He shows how their attitudes and personalities were formed, developed, and grew to influence the course of history.

The brothers' learned statecraft at their grandfather's side. John W. Foster, US ambassador to three countries, later served as President Harrison's trouble shooter and Secretary of State. He helped in the overthrow of Queen Liliuokalani in Hawaii and later used his State Department connections to engineer government policy to benefit his corporate clients. Kinzer shows how the brothers benefited from their grandfather's access and came to dual pinnacles of power in shaping US foreign policy: one heading the CIA, the other the Department of State.

The 1950's operations weren't as hidden as I expected. Allen Dulles, in the Saturday Evening Post, beamed with pride for removing Mohammad Mossadegh in Iran and Jacobo Arbenz in Guatemala. He even has copies made of Diego Rivera's critical mural where he is depicted taking money while his brother shakes hands with a local puppet and Eisenhower is pictured on a bomb. Many willingly joined in dirty tricks, for instance Cardinal Spellman wrote a pastoral letter to Guatemalan Catholics calling their President a dangerous communist.

I was surprised that President Eisenhower, whose administration is commonly thought to be one of tranquility, approved toppling governments and assassinating leaders. In some ways, he was the front man, for instance urging Congress to approve funds for "maintenance of national independence" but really for fomenting a coup in Syria and installing a king in Saudi Arabia to get US friendly governments to oppose Gamal Nasser (p. 225).

With today's internet and 24 hour news cycle, can large covert operations such as those against the President Sukarno (the first president of Indonesia who naively looked to the US for help in developing his nation's fledgling democracy) go under the radar? I presume the CIA budget can still hide items such as the $6 million a year paid to the Nazi General Reinhard Gehlen (who should have been tried at Nuremberg (p. 185)).

By preventing compromise when compromise was possible, the brothers and President Eisenhower, prolonged the Cold War into the Khruschev era and sowed the seeds of the Vietnam War. The lack of reflection or personal responsibility is clear in the quote on p. 283 when years later Allen Dulles coolly tells Eric Sevareid regarding the torture and murder of Patrice Lumumba, that " we may have overrated the danger.." How would the Congo be today if the US had left its fledgling democracy alone, and not have installed Mobutu in a leadership position?

The last coup attempt in the book is the Bay of Pigs. It was an Eisenhower approved intervention and there seemed that to be no turning back for Kennedy. Its fiasco signaled the end of Allen Dulles, but not the Cold War since its relic, Vietnam as a domino, was an image deeply ingrained in policy DNA.

In a side story, the brothers show little consideration to their sister, who had to push to have a career. She marginally benefits from the family name. They do not see that they have been born on third base and she on first. In fact, when it is convenient for them, they try to fire her, yet still go to her house for holiday dinners.

Kinzer concludes with recent work in psychology and personality profiling (" blind ourself to contrary positions prepared to pay a high price to preserve our most cherished ideas declarations of high confidence mainly tell you an individual has constructed a coherent story in his mind beliefs become how you prove your identity.." p. 322) that not only characterize the brothers, but a lot of the thinking in the Cold War.

These paradigms are with us today. Too many politicians and their appointees still their job as responding to lobbyists, not just for big business, but for foreign countries with interests contrary to those of the US. Similarly there are those who force their economic ideology on small and helpless countries. The book tells a sobering and troubling story. It is greatly at odds with what is taught in high schools. This book has been out for a year now, and it seems the story told is just more noise in political system. Unfortunately it will make a large event for insiders in Washington to reflect on what we now call "muscular" foreign policy and its results.

Regnal the Caretakeron November 13, 2014

Nasty lawyers and the rise of CIA

These two globo-corporate lawyers dictated USA foreign policy during governance of four presidents: Roosevelt, Truman (he signed CIA into the law in 1947), Eisenhower and Kennedy. They were called 'Cold Warriors' and built Cold War model which rested on the premise that any growing social influence in Third World countries must be resisted because socialist gains are always irreversible. Any nation that tried to stay 'neutral' had to face CIA interventions that did not bring anything positive for populations (notably we learn in details about Guatemala, Iran, Congo, Indonesia, Vietnam and Cuba). Eisenhower times were the worst, when covert capability of CIA grew massively.

Fascinating work by Stephen Kinzer can be easily extrapolated to help explain XXI century behavior of Washington. Not much has changed.

Craig N. Warrenon November 12, 2014

Making the World Safe for Democracy (and American Business).

I've learned more about the development of American foreign policy and international relations in the twentieth (and twenty-first) century, especially since WWII, in reading the story of these two scions of an American aristocratic family, who were fully steeped in Calvinistic Protestantism (and it's capitalist ethic) and unquestioningly convinced of American Exceptionalism and it's Manifest Destiny to lead the world and make it safe for democracy and American Business, than I have anywhere else.

This is more than a biography (or double biography) of two very influential actors in American history, politics and international relations. It is an exposition of the quintessential, archetypical American (WASP) mindset, worldview or psychology that has motivated our collective international behavior over the past six or seven decades.

Digital Rightson June 14, 2014


A "How to Not Run Foreign Policy" Primer

Stephen Kinzer's new book offers a very focused and surgical condemnation of the Dulles brothers foreign policy collaboration in the 1950's that has resulted in a horrid and nightmarish chain of events ever since.

Allen Dulles at CIA, first as a lead operative for covert missions and then as it's second Director and John Foster Dulles as Secretary of State lead foreign policy during the Eisenhower Presidency. The book goes through six operations to overthrow or destabilize governments through that time; Iran, Guatemala, Indonesia, Cuba, Vietnam and the formerly Belgian Congo.

In each case Kinzer shows the limited lens of cold war anti communism that resulted in the Dulles' tunnel vision where grouping all non-Pro American groups as enemies and communists. He equally addresses their lack of personal curiosity and intellect and preference for slogans and absolutism over analysis or objective debate. All State employees that don't hew the line are regularly fired or transferred to obscure jobs or roles and in place are pro-CIA hardliners.

It is painful reading. The objective was to both create the world they wanted while limiting the use of US military personnel to achieve those ends. The short cuts and limited world vision have exacted a terrible price. Sadly there is not a place in the world where their activities resulted in any sustainable success and in fact have lead to perhaps millions of deaths and suspicions and misunderstandings for the next 50 to 60 years.

There is much here that further condemns Eisenhower. In many cases he fully supported and endorsed their plans while pretending not to, fully employing the most cynical of strategies; "plausible deniability".

Having read the 2012 Eisenhower biography by Jean Edward Smith I was surprised here by the wealth of information that ties Eisenhower more directly to clandestine activities and their purposes. Particularly disappointing is his continues build up for the Bay of Pigs invasion in Cuba after Kennedy's election but before he took office and will little effort to brief the incoming president. Similarly our Vietnam involvement in the 1950's was so deep already as to make a Kennedy pullout far more difficult.

There is much here about these issues and the corrupt relationships between the Dulles's prior careers at Sullivan and Cromwell and their support of private interests while working at State and the CIA.

It's grim but the writing is good and the story is well worth knowing.

C. Ellen Connally, May 22, 2014

An amazing tale of intrigue and deception

As we fly in or out of Dulles International Airport, no one gives much thought to the namesake, John Foster Dulles. Sure, he was Secretary of State and some Americans have a vague knowledge of his brother Allan Dulles, director of the CIA and long time super spy and intelligence person. Reading Stephen Kinzer's book, THE BROTHERS reveals the truth about the Dulles brothers and how they changed American and World History.

At the heart of the story is the unfortunate belief by the brothers that if a country was not totally in agreement with American philosophy they were against us. Any nationalist leaders of a former colonial nation that believed in land reform or neutrality on the international scene had to be evil and must be destroyed. If they were not with us, they had to be communist. This American foreign policy changed the history of the Middle East, Southeast Asia, Africa and Central America.

There is much blame put on President Johnson for the War in Viet Nam. But reading THE BROTHERS shows that the roots of the Viet Nam Conflict go back many years. Likewise, the situation in the Middle East. We have to go back and look at the foreign policy that created the tensions that now exist and the men that shaped that foreign policy.

Its interesting to note that Kinzer asserts that on the death of Chief Justice Fred Vinson in 1953, Eisenhower offered the position of Chief Justice to John Foster Dulles. According to Kinzer, Dulles turned it down because he wanted to stay at the State Department. The story has always been that Ike had promised Earl Warren the first seat on the Supreme Court in exchange for his support in the 1952 election - Warren had been out maneuvered by Richard Nixon to get the bid for the vice presidency. How different legal history would have been had John Foster Dulles become Chief Justice!

Kinzer is a masterful story teller. This book is extremely readable and a must read for understanding the history of American foreign policy and how individual people can change.

John Berryon March 13, 2014

What Our History Lessons Didn't Tell Us!

It has been a long time since an author has captured my interest so quickly and made me question everything I have been taught or have learned about our country. Churchill once said Democracy is the worst kind of government except all others. This comment keeps reverberating around in my mind as I read this book. I am one of those people that have flown into Dulles airport countless times, yet never gave a moments thought as to why, what or even if there was a who to the airports name. I grew up during the cold war and I vividly remember the fear of the Big Russian Bear overtaking us with their form of government and the possibility of nuclear war. It would have never crossed my mind that my very own government aided and abetted in promoting this fear in order for us to gain public moral outrage and support for our endeavors. I kept trying to tell myself this was different times, yet the author pointed out countless times where there were those in the known that were summarily dismissed for having counter opinions.Or leaders from our allies that would not support the Dulles brothers opinions and missions that so disagreed with who we told the world we were. Abraham Lincoln once said "Nearly all men can stand adversity, but if you want to test a man's character, give him power". I can think of no better example of failure in handling power than the two Dulles brothers. Not only was I continuously shocked by their gross misuse of power, but I found myself being angry at them as well because of the fear I remember my mother facing as a widower with three children to raise. She needed not to have been this afraid with all the other issues she had to deal with but because of President Eisenhower and the Dulles brothers she had to face this fear as well. Whether or not Mr. Kinzer took liberties with the political agenda's of the leaders we either overthrew or attempted to overthrown does not matter to me at all. The fact that we promoted our country as a free democracy yet we were willing to dance with any leader in the world as long as they did exactly what we wanted them to do is so counter to the way I was raised to believe still leaves me reeling.

Currently in the news President Putin has said in no uncertain terms that the U.S. is responsible for the revolution taking place in the Ukraine. In the past I would have said he is just another Russian bully trying to get his way. After reading The Brothers I now wonder what, if anything, my country had to do with promoting this revolution. I heard our Ukraine Ambassador say almost word for word what I read in this book our ambassador's under the power of The Brother's said back during the cold war. The author tells us that the U.S. with its secret prisons and torture's may have actually invented terrorism.

This author has opened my eyes to a whole new way of thinking and I am so disappointed in opportunities missed and I am so disappointed with our current leaders for having learned apparently nothing from history.

If you love reading history then please buy this book and ask your family to read it as well. Do I believe everything I read, no not usually, but in this case there are just too many facts that distort my view of who we are to dismiss.

James Gallen VINE VOICE on March 4, 2014

An Indepth Study Of American Covert Action

"The Brothers" tells the story of the brothers Dulles, John Foster and Allen, who drove American foreign policy through much of the 1950s. Grandsons of Secretary of State John Foster and nephews of Secretary of State Robert Lansing, the two grew up in an atmosphere mixing high diplomacy with the spirit of Christian Crusaders. Their path to power was linear. At the law firm of Sullivan and Cromwell they represented companies with interests around the world and came to see their clients' interests united with America's. As Foster moved into politics and government service he often brought Allen with him.

Although expected to be Secretary of State in a Dewey Administration, Foster came in with Dwight Eisenhower in 1953. With Allen as Director of Central Intelligence, they formed a team that searched the world for dragons to slay. Guided by a world view of us, American Christian capitalists, against them, Socialist Evil Doers, they identified their foes and went after them. Among their successes were Guatemalan President Árbenz, Iranian Prime Minister Mohammad Mosaddegh and Congolese leader Patrice Lumumba. TYhose who got away included Ho Chi Minh and Fidel Castro. This book is a study of American covert operations in Guatemala, Iran, Vietnam, Indonesia, the Congo and Cuba. Allen's Bay of Pigs operation is a case study of disaster.

Author Stephen Kinzer explores the unique situation in which the intelligence gathering agency is also an actor. Throughout he illustrates how the relationship of their leaders enabled two agencies that would normally question and check each other, to work in seamless harmony to carry out the covert operations that both saw as primary instruments of American power. Behind them was President Eisenhower who had used covert operations during World War II and who approved their actions. In the end the author posits that the policies were the President's and the brothers were more his servants than his masters.

Kinzer portrays the Brothers as men with rigid, narrow outlooks that saw enemies in independent nationalists and conspiracies in disorganized movements. He presents them as two sides of the coin, the molders and reflectors of public opinion. The book is not flattering. It depicts the Dulles brothers as men whose flawed expectations caused many problems for the U.S. and the world by destroying men who America need not have fought. Ultimately he concludes that they were representatives of the people they served and their successes, and failures, are our own. "The Brothers" forces the reader to confront a portion of America's past with its triumphs and shames. Although Kinzer gives his opinions, he provides the facts to permit the reader to form his own. Any serious student of history would do well to delve beneath the surface of our history and appreciate its deep currents and lasting effects.

[Dec 19, 2015] The Washington Post's Non-Political Fed Looks a Lot Like Wall Street's Fed

Notable quotes:
"... Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. ..."
Dec 19, 2015 | Beat the Press

... ... ...

But what is even more striking is the Post's ability to treat the Fed a neutral party when the evidence is so overwhelming in the opposite direction. The majority of the Fed's 12 district bank presidents have long been pushing for a rate hike. While there are some doves among this group, most notably Charles Evans, the Chicago bank president, and Narayana Kocherlakota, the departing president of the Minneapolis bank, most of this group has publicly pushed for higher rate hikes for some time. By contrast, the governors who are appointed through the democratic process, have been far more cautious about raising rates.

It should raise serious concerns that the bank presidents, who are appointed through a process dominated by the banking industry, has such a different perspective on the best path forward for monetary policy. With only five of the seven governor slots currently filled, there are as many presidents with voting seats on the Fed's Open Market Committee as governors. In total, the governors are outnumbered at meetings by a ratio of twelve to five.

Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. Furthermore, it seems determined to use that influence to push the Fed on a path that slows growth and reduces the rate of job creation. The Post somehow missed this story or at least would prefer that the rest of us not take notice.

* https://www.washingtonpost.com/opinions/the-federal-reserve-makes-a-good-judgment-call-in-raising-interest-rates/2015/12/18/7954e1c6-a4f8-11e5-ad3f-991ce3374e23_story.html

-- Dean Baker

[Dec 18, 2015] The Upward Redistribution of Income: Are Rents the Story?

Looks like growth of financial sector represents direct threat to the society
Notable quotes:
"... Perhaps the financialization of the economy and rising inequality leads to a corruption of the political process which leads to monetary, currency and fiscal policy such that labor markets are loose and inflation is low. ..."
"... Growth of the non-financial-sector == growth in productivity ..."
"... In complex subject matters, even the most competent person joining a company has to become familiar with the details of the products, the industry niche, the processes and professional/personal relationships in the company or industry, etc. All these are not really teachable and require between months and years in the job. This represents a significant sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree portable between companies, but some company still had to employ enough people to build this experience, and it cannot be readily bought by bringing in however competent freshers. ..."
December 18, 2015 | cepr.netDean Baker:
Working Paper: : In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period.

This paper argues that the bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

Flash | PDF

RC AKA Darryl, Ron said in reply to Fair Economist, December 18, 2015 at 11:34 AM

"...the growth of finance capitalism was what would kill capitalism off..."

"Financialization" is a short-cut terminology that in full is term either "financialization of non-financial firms" or "financialization of the means of production." In either case it leads to consolidation of firms, outsourcing, downsizing, and offshoring to reduce work force and wages and increase rents.

Consolidation, the alpha and omega of financialization can only be executed with very liquid financial markets, big investment banks to back necessary leverage to make the proffers, and an acute capital gains tax preference relative to dividends and interest earnings, the grease to liquidity.

It takes big finance to do "financialization" and it takes "financialization" to extract big rents while maintaining low wages.

RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron, December 18, 2015 at 11:42 AM
[THANKS to djb just down thread who supplied this link:]

http://www.democraticunderground.com/10021305040

Finance sector as percent of US GDP, 1860-present: the growth of the rentier economy

[graph]

Financialization is a term sometimes used in discussions of financial capitalism which developed over recent decades, in which financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics.

Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument... Financialization also makes economic rents possible...financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics...

Companies are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions. The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt.

Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions and–most serious of all–debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges. ... This diverts spending away from goods and services.

In the United States, probably more money has been made through the appreciation of real estate than in any other way. What are the long-term consequences if an increasing percentage of savings and wealth, as it now seems, is used to inflate the prices of already existing assets - real estate and stocks - instead of to create new production and innovation?

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

pgl said in reply to RC AKA Darryl, Ron, December 18, 2015 at 03:25 PM
Your graph shows something I've been meaning to suggest for a while. Take a look at the last time that the financial sector share of GDP rose. The late 1920's. Which was followed by the Great Depression which has similar causes as our Great Recession. Here is my observation.

Give that Wall Street clowns a huge increase in our national income and we don't get more services from them. What we get is screwed on the grandest of scales.

BTW - there is a simple causal relationship that explains both the rise in the share of financial sector income/GDP and the massive collapses of the economy (1929 and 2007). It is called stupid financial deregulation. First we see the megabanks and Wall Street milking the system for all its worth and when their unhanded and often secretive risk taking falls apart - the rest of bear the brunt of the damage.

Which is why this election is crucial. Elect a Republican and we repeat this mistake again. Elect a real progressive and we can put in place the types of financial reforms FDR was known for.

Peter K. said in reply to RC AKA Darryl, Ron, December 18, 2015 at 11:50 AM

" and it takes "financialization" to extract big rents while maintaining low wages."

It takes governmental macro policy to maintain loose labor markets and low wages. Perhaps the financialization of the economy and rising inequality leads to a corruption of the political process which leads to monetary, currency and fiscal policy such that labor markets are loose and inflation is low.

djb said...

http://www.democraticunderground.com/10021305040

I don't know about the last couple years but this chart indicates a large growth in financials as a share of gdp over the years since the 40's

RC AKA Darryl, Ron said in reply to djb, December 18, 2015 at 12:03 PM
[Anne gave you FIRE sector profits as a share of GDP while this gives FIRE sector profits as a share of total corporate profits.]

*

[Smoking gun excerpt:]

"...The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits-meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent...

[Ouch!]

[Now the whole enchilada:]

http://www.washingtonmonthly.com/magazine/novemberdecember_2014/features/frenzied_financialization052714.php?page=all

If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector-the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities-relative to the rest of the economy.

The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.

The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits-meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent. This isn't just the decline of profits in other industries, either. Between 1980 and 2006, while GDP increased five times, financial-sector profits increased sixteen times over. While financial and nonfinancial profits grew at roughly the same rate before 1980, between 1980 and 2006 nonfinancial profits grew seven times while financial profits grew sixteen times.

This trend has continued even after the financial crisis of 2008 and subsequent financial reforms, including the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Financial profits in 2012 were 24 percent of total profits, while the financial sector's share of GDP was 6.8 percent. These numbers are lower than the high points of the mid-2000s; but, compared to the years before 1980, they are remarkably high.

This explosion of finance has generated greater inequality. To begin with, the share of the total workforce employed in the financial sector has barely budged, much less grown at a rate equivalent to the size and profitability of the sector as a whole. That means that these swollen profits are flowing to a small sliver of the population: those employed in finance. And financiers, in turn, have become substantially more prominent among the top 1 percent. Recent work by the economists Jon Bakija, Adam Cole, and Bradley T. Heim found that the percentage of those in the top 1 percent of income working in finance nearly doubled between 1979 and 2005, from 7.7 percent to 13.9 percent.

If the economy had become far more productive as a result of these changes, they could have been worthwhile. But the evidence shows it did not. Economist Thomas Philippon found that financial services themselves have become less, not more, efficient over this time period. The unit cost of financial services, or the percentage of assets it costs to produce all financial issuances, was relatively high at the dawn of the twentieth century, but declined to below 2 percent between 1901 and 1960. However, it has increased since the 1960s, and is back to levels seen at the early twentieth century. Whatever finance is doing, it isn't doing it more cheaply.

In fact, the second damaging trend is that financial institutions began to concentrate more and more on activities that are worrisome at best and destructive at worst. Harvard Business School professors Robin Greenwood and David Scharfstein argue that between 1980 and 2007 the growth in financial-industry revenues came from two things: asset management and loan origination. Fees associated either with asset management or with household credit in particular were responsible for 74 percent of the growth in financial-sector output over that period.

The asset management portion reflects the explosion of mutual funds, which increased from $134 billion in assets in 1980 to $12 trillion in 2007. Much of it also comes from "alternative investment vehicles" like hedge funds and private equity. Over this time, the fee rate for mutual funds fell, but fees associated with alternative investment vehicles exploded. This is, in essence, money for nothing-there is little evidence that hedge funds actually perform better than the market over time. And, unlike mutual funds, alternative investment funds do not fully disclose their practices and fees publicly.

Beginning in 1980 and continuing today, banks generate less and less of their income from interest on loans. Instead, they rely on fees, from either consumers or borrowers. Fees associated with household credit grew from 1.1 percent of GDP in 1980 to 3.4 percent in 2007. As part of the unregulated shadow banking sector that took over the financial sector, banks are less and less in the business of holding loans and more and more concerned with packaging them and selling them off. Instead of holding loans on their books, banks originate loans to sell off and distribute into this new type of banking sector.

Again, if this "originate-to-distribute" model created value for society, it could be a worthwhile practice. But, in fact, this model introduced huge opportunities for fraud throughout the lending process. Loans-such as "securitized mortgages" made up of pledges of the income stream from subprime mortgage loans-were passed along a chain of buyers until someone far away held the ultimate risk. Bankers who originated the mortgages received significant commissions, with virtually no accountability or oversight. The incentive, in fact, was perverse: find the worst loans with the biggest fees instead of properly screening for whether the loans would be any good for investors.

The same model made it difficult, if not impossible, to renegotiate bad mortgages when the system collapsed. Those tasked with tackling bad mortgages on behalf of investors had their own conflicts of interests, and found themselves profiting while loans struggled. This process created bad debts that could never be paid, and blocked attempts to try and rework them after the fact. The resulting pool of bad debt has been a drag on the economy ever since, giving us the fall in median wages of the Great Recession and the sluggish recovery we still live with.

And of course it's been an epic disaster for the borrowers themselves. Many of them, we now know, were moderate- and lower-income families who were in no financial position to borrow as much as they did, especially under such predatory terms and with such high fees. Collapsing home prices and the inability to renegotiate their underwater mortgages stripped these folks of whatever savings they had and left them in deep debt, widening even further the gulf of inequality in this country.

Moreover, financialization isn't just confined to the financial sector itself. It's also ultimately about who controls, guides, and benefits from our economy as a whole. And here's the last big change: the "shareholder revolution," started in the 1980s and continuing to this very day, has fundamentally transformed the way our economy functions in favor of wealth owners.

To understand this change, compare two eras at General Electric. This is how business professor Gerald Davis describes the perspective of Owen Young, who was CEO of GE almost straight through from 1922 to 1945: "[S]tockholders are confined to a maximum return equivalent to a risk premium. The remaining profit stays in the enterprise, is paid out in higher wages, or is passed on to the customer." Davis contrasts that ethos with that of Jack Welch, CEO from 1981 to 2001; Welch, Davis says, believed in "the shareholder as king-the residual claimant, entitled to the [whole] pot of earnings."

This change had dramatic consequences. Economist J. W. Mason found that, before the 1980s, firms tended to borrow funds in order to fuel investment. Since 1980, that link has been broken. Now when firms borrow, they tend to use the money to fund dividends or buy back stocks. Indeed, even during the height of the housing boom, Mason notes, "corporations were paying out more than 100 percent of their cash flow to shareholders."

This lack of investment is obviously holding back our recovery. Productive investment remains low, and even extraordinary action by the Federal Reserve to make investments more profitable by keeping interest rates low has not been able to counteract the general corporate presumption that this money should go to shareholders. There is thus less innovation, less risk taking, and ultimately less growth. One of the reasons this revolution was engineered in the 1980s was to put a check on what kinds of investments CEOs could make, and one of those investments was wage growth. Finance has now won the battle against wage earners: corporations today are reluctant to raise wages even as the economy slowly starts to recover. This keeps the economy perpetually sluggish by retarding consumer demand, while also increasing inequality.

How can these changes be challenged? The first thing we must understand is the scope of the change. As Mason writes, the changes have been intellectual, legal, and institutional. At the intellectual level, academic research and conventional wisdom among economists and policymakers coalesced around the ideas that maximizing returns to shareholders is the only goal of a corporation, and that the financial markets were always right. At the legal level, laws regulating finance at the state level were overturned by the Supreme Court or preempted by federal regulators, and antitrust regulations were gutted by the Reagan administration and not taken up again.

At the institutional level, deregulation over several administrations led to a massive concentration of the financial sector into fewer, richer firms. As financial expertise became more prestigious than industry-specific knowledge, CEOs no longer came from within the firms they represented but instead from other firms or from Wall Street; their pay was aligned through stock options, which naturally turned their focus toward maximizing stock prices. The intellectual and institutional transformation was part of an overwhelming ideological change: the health and strength of the economy became identified solely with the profitability of the financial markets.

This was a bold revolution, and any program that seeks to change it has to be just as bold intellectually. Such a program will also require legal and institutional changes, ones that go beyond making sure that financial firms can fail without destroying the economy. Dodd-Frank can be thought of as a reaction against the worst excesses of the financial sector at the height of the housing bubble, and as a line of defense against future financial panics. Many parts of it are doing yeoman's work in curtailing the financial sector's abuses, especially in terms of protecting consumers from fraud and bringing some transparency to the Wild West of the derivatives markets. But the scope of the law is too limited to roll back these larger changes.

One provision of Dodd-Frank, however, suggests a way forward. At the urging of the AFL-CIO, Dodd-Frank empowered the Securities and Exchange Commission to examine the activities of private equity firms on behalf of their investors. At around $3.5 trillion, private equity is a massive market with serious consequences for the economy as a whole. On its first pass, the SEC found extensive abuses. Andrew Bowden, the director of the SEC's examinations office, stated that the agency found "what we believe are violations of law or material weaknesses in controls over 50 percent of the time."

Lawmakers could require private equity and hedge funds to standardize their disclosures of fees and holdings, as is currently the case for mutual funds. The decline in fees for mutual funds noted above didn't just happen by itself; it happened because the law structured the market for actual transparency and price competition. This will need to happen again for the broader financial sector.

But the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can't just be strip-mined for a small sliver of capital holders; we'll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.

[Whew!]

Puerto Barato said in reply to RC AKA Darryl, Ron,
"3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5"
~~RC AKA Darryl, Ron ~

Growth of the non-financial-sector == growth in productivity

Growth of the financial-sector == growth in upward transfer of wealth

Ostensibly financial-sector is there to protect your money from being eaten up by inflation. Closer inspection shows that the prevention of *eaten up* is by the method of rent collection.

Accountants handle this analysis poorly, but you can see what is happening. Boiling it down to the bottom line you can easily see that wiping out the financial sector is the remedy to the Piketty.

Hell! Financial sector wiped itself out in 008. Problem was that the GSE and administration brought the zombie back to life then put the vampire back at our throats. What was the precipitating factor that snagged the financial sector without warning?

Unexpected
deflation
!

Gimme some
of that

pgl said in reply to djb...

People like Brad DeLong have noted this for a while. Twice as many people making twice as much money per person. And their true value to us - not a bit more than it was back in the 1940's.

Rock O Sock O Choco said in reply to djb... December 18, 2015 at 06:26 PM

JEC - MeanSquaredErrors said...

Wait, what?

Piketty looks at centuries of data from all over the world and concludes that capitalism has a long-run bias towards income concentration. Baker looks at 35 years of data in one country and concludes that Piketty is wrong. Um...?

A little more generously, what Baker actually writes is:

"The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to **this** rapid rise in inequality, as for example argued by Thomas Piketty." (emphasis added)

But Piketty has always been very explicit that the recent rise in US income inequality is anomalous -- driven primarily by rising inequality in the distribution of labor income, and only secondarily by any shift from labor to capital income.

So perhaps Baker is "correctly" refuting Straw Thomas Piketty. Which I suppose is better than just being obviously wrong. Maybe.

tew said...

Some simple math shows that this assertion is false "As a result of this upward redistribution, most workers have seen little improvement in living standards" unless you think an apprx. 60% in per-capita real income (expressed as GDP) among the 99% is "little improvement".

Real GDP 2015 / Real GDP 1980 = 2.57 (Source: FRED)
If the income share of the 1% shifted from 10% to 20% then The 1%' real GDP component went up 410% while that of The 99% went up 130%. Accounting for a population increase of about 41% brings those numbers to a 265% increase and a 62% increase.

Certainly a very unequal distribution of the productivity gains but hard to call "little".

I believe the truth of the statement is revealed when you look at the Top 5% vs. the other 95%.

cm said in reply to tew...

For most "working people", their raises are quickly eaten up by increases in housing/rental, food, local services, and other nondiscretionary costs. Sure, you can buy more and better imported consumer electronics per dollar, but you have to pay the rent/mortgage every months, how often do you buy a new flat screen TV? In a high-cost metro, a big ass TV will easily cost less than a single monthly rent (and probably less than your annual cable bill that you need to actually watch TV).

pgl said in reply to tew...

Are you trying to be the champion of the 1%? Sorry dude but Greg Mankiw beat you to this.

anne said...

In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period....

-- Dean Baker

anne said in reply to anne...

http://www.census.gov/hhes/www/income/data/historical/household/

September 16, 2015

Real Median Household Income, 1980 & 2014


1980 ( 48,462)

2014 ( 53,657)


53,657 - 48,462 = 5,195

5,195 / 48,462 = 10.7%


Between 1980 and 2014 real median household income increased by a mere 10.7%.

anne said in reply to don...

I would be curious to know what has happened to the number of members per household....

http://www.census.gov/hhes/www/income/data/historical/household/

September 16, 2015

Household Size

2014 ( 2.54)
1980 ( 2.73)

[ The difference in household size to real median household incomes is not statistically significant. ]

anne said in reply to anne...

http://www.census.gov/hhes/www/income/data/historical/families/index.html

September 16, 2015

Real Median Family Income, 1948-1980-2014


1948 ( 27,369)

1980 ( 57,528)

2014 ( 66,632)


57,528 - 27,369 = 30,159

30,159 / 27,369 = 110.2%


66,632 - 57,528 = 9,104

9,104 / 57,528 = 15.8%


Between 1948 and 1980, real median family income increased by 110.2%, while between 1980 and 2014 real median family income increased by a mere 15.8%.

cm said...

"protectionist measures that have boosted the pay of doctors and other highly educated professionals"

Protectionist measures (largely of the variety that foreign credentials are not recognized) apply to doctors and similar accredited occupations considered to be of some importance, but certainly much less so to "highly educated professionals" in tech, where the protectionism is limited to annual quotas for some categories of new workers imported into the country and requiring companies to pay above a certain wage rate for work visa holders in jobs claimed to have high skills requirements.

A little mentioned but significant factor for growing wages in "highly skilled" jobs is that the level of foundational and generic domain skills is a necessity, but is not all the value the individual brings to the company. In complex subject matters, even the most competent person joining a company has to become familiar with the details of the products, the industry niche, the processes and professional/personal relationships in the company or industry, etc. All these are not really teachable and require between months and years in the job. This represents a significant sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree portable between companies, but some company still had to employ enough people to build this experience, and it cannot be readily bought by bringing in however competent freshers.

This applies less so e.g. in medicine. There are of course many heavily specialized disciplines, but a top flight brain or internal organ surgeon can essentially work on any person. The variation in the subject matter is large and complex, but much more static than in technology.

That's not to knock down the skill of medical staff in any way (or anybody else who does a job that is not trivial, and that's true for many jobs). But specialization vs. genericity follow a different pattern than in tech.

Another example, the legal profession. There are similar principles that carry across, with a lot of the specialization happening along different legislation, case law, etc., specific to the jurisdiction and/or domain being litigated.

[Dec 11, 2015] Why Its Tricky for Fed Officials to Talk Politically

"There is no reason for central banks to have the kind of independence that judicial institutions have. Justice may be blind and above politics, but money and banking are not." Economic and politics are like Siamese twins (which actually . If somebody trying to separate them it is a clear sign that the guy is either neoliberal propagandists or outright crook.
Notable quotes:
"... I think FED chairman is the second most powerful political position in the USA after the POTUS. Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of purely economic (like many other things are camouflaged under neoliberalism.) ..."
"... I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career many times. ..."
"... This kind of debate seems to be a by-product of the contemporary obsession with having an independent central bank, run according to the fantasy that there is such a thing as a neutral or apolitical way to conduct monetary policy. ..."
"... A number of commenters and authors have recently pointed out that inequality may not just be an unrelated phenomenon to monetary policy, but actually, in part at least, a byproduct of it. ..."
"... The theory is that the Fed in the Great Moderation age has been so keen to stave off even the possibility of inflation that it chokes down the vigor of recoveries before they get to the part where median wages start rising quickly. The result is that wages get ratcheted down with the economic cycle, falling during recessions and never fully recovering during the recoveries. ..."
"... Two Things: (i) The Fed should be open and honest about monetary policy. No one wants to return to the Greenspan days. (ii) Brad Delong is a neoliberal hack. ..."
"... As to why risk a political backlash in the piece, the short answer is: to invoke the debate on whether politics or fact (science) is going to dominate. Because they can't both. See: Romer. Let's have this out once and for all. ..."
Dec 11, 2015 | Economist's View
anne said...
Fine column, with which I agree. Federal Reserve policy as such is difficult and contentious enough to avoid wandering to social-economic analysis or philosophy from aspects of the Fed mandate.

As for the use of the word "hack" in referring to Janet Yellen, that needlessly insulting use was by a Washington Post editor and not by columnist Michael Strain.

anne -> RW (the other)...

As Brad notes, many Fed Chairs before Yellen have opined on matters outside monetary policy so why is Yellen subject to a different standard?

[ Fine, I have reconsidered and agree. No matter how the headline was written, the headline was meant to be intimidating and was willfully mean and that could and should have been made clear immediately by the writer of the column. ]

likbez -> anne...

"Federal Reserve policy as such is difficult and contentious enough to avoid wandering to social-economic analysis or philosophy from aspects of the Fed mandate."

Anne,

I think FED chairman is the second most powerful political position in the USA after the POTUS. Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of "purely economic" (like many other things are camouflaged under neoliberalism.)

That's why Greenspan got it, while being despised by his Wall-Street colleagues...

He got it because he was perfect for promoting deregulation political agenda from the position of FED chair.

pgl -> likbez...

Greenspan was despised on Wall Street? Wow as he tried so hard to serve their interests. I guess the Wall Street crowd is never happy no matter how much income we feed these blow hards.

anne -> likbez...

So it is quintessentially high-power political position masked with the smokescreen of "purely economic" (like many other things are camouflaged under neoliberalism.)

[ I understand, and am convinced. ]

Peter K. said...

I respectfully disagree. Republicans are always working the refs and despite what the writer from AEI said, they're okay with conservative Fed chairs talking politics. They have double standards.

Greenspan testified to Congress on behalf of Bush's tax cuts for the rich. Something about how since Clinton balanced the budget, the financial markets had too little safe debt to work with. (maybe that's why they dove into mortgaged-backed securities). But tax cuts versus more government spending? He and Rubin advised Clinton to drop his middle class spending bill and trade deficit reduction for lower interest rates. That's economics which have political outcomes.

So if the rightwing is going to work the the refs, so should the left. We shouldn't unilaterally disarm over fears Congress will gun for the Fed. There should be more groups like Fed Up protesting.

The good thing about Yellen's speech is that it's a signal to progressives that inequality is problem for her even as she is raising rates in a political dance with hawks and Congress.

The Fed is constantly accused of increasing inequality so it's good Yellen is saying she thinks it's a bad thing and not American.

Bernie Sanders is right that for change to happen we'll need more political involvement from regular citizens. We'll need a popular movement with many leaders.

The Fed should be square in the sights of a progressive movement. A high-pressured economy with full employment should be a top priority.

Instead I saw Nancy Pelosi being interviewed by Al Hunt on Charlie Rose the other night. Hunt asked her about Yellen raising rates.

Pelosi said no comment as she wasn't looking at the data Yellen was and didn't want to interfere. The Fed should be independent, etc. Perhaps like Thoma she has the best of motives and doesn't want to motivate the Republicans to go after the Fed and oppose what she wants.

Still I felt the Democratic leadership should be committed to a high-pressure economy. Her staff should know what Krugman, Summers etc are saying. What the IMF and World Bank are sayings.

She should have said "they shouldn't raise rates until they see the whites of inflation's eyes" as Krugman memorably put it. She should have said that emphatically.

We need a Democratic Party like that.

Instead Peter Diamond is blocked from becoming a Fed governor by Republicans and Pelosi is afraid to comment on monetary policy.

Peter K. -> Peter K....

A longer reply from DeLong:

http://www.bradford-delong.com/2015/12/must-read-i-would-beg-the-highly-esteemed-mark-thoma-to-draw-a-distinction-here-between-inappropriate-and-unwise-in-m.html

Must-Read: I would beg the highly-esteemed Mark Thoma to draw a distinction here between "inappropriate" and unwise. In my view, it is not at all inappropriate for Fed Chair Janet Yellen to express her concern about excessive inequality. Previous Fed Chairs, after all, have expressed their liking for inequality as an essential engine of economic growth over and over again over the past half century--with exactly zero critical snarking from the American Enterprise Institute for trespassing beyond the boundaries of their role.

But that it is not inappropriate for Janet Yellen to do so does not mean that it is wise. Mark's argument is, I think, that given the current political situation it is unwise for Janet to further incite the ire of the nutboys in the way that even the mildest expression of concern about rising inequality will do.

That may or may not be true. I think it is not.

But I do not think that bears on my point that Michael R. Strain's arguments that Janet Yellen's speech on inequality was inappropriate are void, wrong, erroneous, inattentive to precedent, shoddy, expired, expired, gone to meet their maker, bereft of life, resting in peace, pushing up the daisies, kicked the bucket, shuffled off their mortal coil, run down the curtain, and joined the bleeding choir invisible:

Mark Thoma: Why It's Tricky for Fed Officials to Talk Politically: "I think I disagree with Brad DeLong...

pgl -> Peter K....

"my point that Michael R. Strain's arguments that Janet Yellen's speech on inequality was inappropriate are void, wrong, erroneous..."

DeLong is exactly right here. Strain's argument has its own share of partisan lies whereas Yellen is telling the truth. Brad will not be intimidated by this AEI weasel.

sanjait said...

Why would Yellen not talk about inequality? It's an important macroeconomic topic and one that is relevant for her job. It's both an input and an output variable that is related to monetary policy.

And, arguably I think, median wage growth should be regarded as a policy goal for the Fed, related to its explicit mandate of "maximum employment."

But even if you think inequality is unrelated to the Fed's policy goals, that doesn't stop them from talking about other topics. Do people accuse the Fed of playing politics when they talk about desiring reduced financial market volatility? That has little to do with growth, employment and general price stability.

likbez -> sanjait...

I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career many times.

Sandwichman said...

I think I disagree with Mark Thoma's disagreement with Brad DeLong. Actually, ALL economic discourse is political and efforts to restrain the politics are inevitably efforts to keep the politics one-sided

Dan Kervick said...

This kind of debate seems to be a by-product of the contemporary obsession with having an "independent" central bank, run according to the fantasy that there is such a thing as a neutral or apolitical way to conduct monetary policy.

But there really isn't. Different kinds of social, economic and political values and policy agendas are going to call for different kinds monetary and credit policies. It might be better for our political health if the Fed were administratively re-located as an executive branch agency that is in turn part of a broader Department of Money and Banking - no different from the Departments of Agriculture, Labor, Education, etc. In that case everybody would then view Fed governors as ordinary executive branch appointees who report to the President, and whose policies are naturally an extension of the administration's broader agenda. Then if people don't like the monetary policies that are carried out, that would be one factor in their decision about whom to vote for.

There is no reason for central banks to have the kind of independence that judicial institutions have. Justice may be blind and above politics, but money and banking are not. Decisions in that latter area should be no more politics-free than decisions about taxing and spending. If we fold the central bank more completely into the regular processes of representative government, then if a candidate wants to run on a platform of keeping interest rates low, small business credit easy, bank profits small, etc., they could do so without all of the doubletalk about the protecting the independence of the sacrosanct bankers' temple.

We could also then avoid unproductive wheel-spinning about that impossibly vague and hedged Fed mandate that can be stretched to mean almost anything people want it to mean. The Fed's mandate under the political solution would just be whatever monetary policy the President ran on.

likbez -> Dan Kervick...

"The Fed's mandate under the political solution would just be whatever monetary policy the President ran on"

Perfect !

Actually sanjait in his post made a good point why this illusive goal is desirable (providing "electoral advantage") although Greenspan probably violated this rule. A couple of hikes of interest rates from now till election probably will doom Democrats.

Also the idea of FEB independence went into overdrive since 80th not accidentally. It has its value in enhancing the level of deregulation.

Among other things it helps to protect large financial institutions from outright nationalization in cases like 2008.

Does somebody in this forum really think that Bernanke has an option of putting a couple of Wall-Street most violent and destructive behemoths into receivership (in other words nationalize them) in 2008 without Congress approval ?

Dan Kervick -> Sanjait ...

Sanjait, with due respect, you are not really responding to the reform proposal, but only affirming the differences between that proposal and the current system.

Yes, of course fiscal policy is "constrained" by Congress. Indeed, it is not just constrained by Congress but actually made by Congress, subject only to an overridable executive branch veto. The executive branch is responsible primarily for carrying out the legislature's fiscal directives. That's the point. In a democratic system decisions about all forms of taxation and government spending are supposed to be made by the elected legislative branch, and then executed by agencies of the executive branch. My proposal is that monetary policy should be handled in the same way: by the elected political branches of the government.

You point out that under current arrangements, central banks can, if they choose, effect large monetary offsets to fiscal policy (or at least to some of the aggregate macroeconomic effects of those policies). I don't understand why any non-elected and politically unaccountable branch of our government should have the power to offset the policies of the elected branches in this way. Fiscal and monetary policy need to be yoked together to achieve policy ends effectively. Those policy ends should be the ones people vote for, not the ones a handful of men and women happen to think are appropriate.

JF -> Dan Kervick...

"In a democratic system" is what you wrote.

It is more proper to refer to it as republicanism. The separation of powers doctrine, underlying the US constitution, is a reflection of James Madison's characterization in the 51st The Federalist Paper, and it is a US-defined republicanism that is almost unique:

"the republican form, wherein the legislative authority necessarily predominates."

- or something like that is the quote.

In the US framers' view, at least those who constructed the re-write in 1787 and were the leaders - I'd say the most important word in Madison's explanation is the word "necessarily" - this philosophy has all law and policy stemming from the public, it presumes that you can't have stability and dynamic change of benefit to society without this.

Arguably, aristocracies, fascists, totalitarians, and all the other isms, just don't see it that way, they see things as top-down ordering of society.

The mythology of the monetary theorizing and the notions about a central bank being independently delphic has some of this top-down ordering view to it (austerianism, comes to mind). Well, I don't believe in a religious sense that this is how it should be, nor do you it seems.

It will be an interesting Congress in 2017 when new legislative authorities are enacted to establish clearer framing of the ministerial duties now held by the FRB.

Are FED officials scared that this will happen, and as a result they circle the wagons with their associates in the financial community now to fend off the public????

I hope this is not true. They can allay their own fears by leading not back toward 1907, in my opinion.

Of course, I could say where I'd like economic policies to go, and do here often, but this thread is about Yellin and other FED officials.

I recognize that FRB officials can say things too, and should, as leaders of this nation (with a whole lot of research power and evidence available to them their commentary on political economics should have merit and be influential).

Thanks for continuing to remind people that we govern ourselves in the US in a US-defined republican-form. But I think the people still respect and listen to leadership - so speak out FED officials.

JF -> Dan Kervick...

But Dan K, then you'd de-mythologize an entire wing of macroeconomics in a wing referred to as monetary theory based on a separate Central Bank, or some non-political theory of money.

Don't mind the theory as it is an analytic framework that questions and sometimes informs - but it is good to step back and realize some of the religious-like framing.

It is political-economy.

Peter K. -> pgl...

Yellen really lays it out in her speech.

"The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.2 It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."

And even links to Piketty in footnote 42.

"Along with other economic advantages, it is likely that large inheritances play a role in the fairly limited intergenerational mobility that I described earlier.42"

42. This topic is discussed extensively in Thomas Piketty (2014), Capital in the 21st Century, trans. Arthur Goldhammer (Cambridge, Mass.: Belknap Press). Return to text

Sanjait said...

A number of commenters and authors have recently pointed out that inequality may not just be an unrelated phenomenon to monetary policy, but actually, in part at least, a byproduct of it.

The theory is that the Fed in the Great Moderation age has been so keen to stave off even the possibility of inflation that it chokes down the vigor of recoveries before they get to the part where median wages start rising quickly. The result is that wages get ratcheted down with the economic cycle, falling during recessions and never fully recovering during the recoveries.

Do I believe this theory? Increasingly, yes I do. And seeing the Fed right now decide to raise rates, citing accelerating wage growth as one of the main reasons, has reinforced my belief.

A Boy Named Sue said...

Two Things: (i) The Fed should be open and honest about monetary policy. No one wants to return to the Greenspan days. (ii) Brad Delong is a neoliberal hack.

A Boy Named Sue -> A Boy Named Sue...

I do admit, Delong is my favorite conservative economist. He is witty and educational, unlike most RW hacks.

Jeff said...

As to "why risk a political backlash" in the piece, the short answer is: to invoke the debate on whether politics or fact (science) is going to dominate. Because they can't both. See: Romer. Let's have this out once and for all.

[Dec 10, 2015] Special Report Buybacks enrich the bosses even when business sags

Notable quotes:
"... Most publicly traded U.S. companies reward top managers for hitting performance targets, meant to tie the interests of managers and shareholders together. At many big companies, those interests are deemed to be best aligned by linking executive performance to earnings per share, along with measures derived from the company's stock price. ..."
"... But these metrics may not be solely a reflection of a company's operating performance. They can be, and often are, influenced through stock repurchases. In addition to cutting the number of a company's shares outstanding, and thus lifting EPS, buybacks also increase demand for the shares, usually providing a lift to the share price, which affects other performance markers. ..."
"... Pay for performance as it is often structured creates "very troublesome, problematic incentives that can potentially drive very short-term thinking." ..."
"... As reported in the first article in this series, share buybacks by U.S. non-financial companies reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial companies found that together, buybacks and dividends have surpassed total capital expenditures and are more than double research and development spending. ..."
"... "There's been an over-focus on buybacks and raising EPS to hit share option targets, and we know that those are concentrated in the hands of the few, and that the few is in the top 1 percent," said James Montier, a member of the asset allocation team at global investment firm GMO in London, which manages more than $100 billion in assets. ..."
"... The introduction of performance targets has been a driver of surging executive pay, helping to widen the gap between the richest in America and the rest of the country. Median CEO pay among companies in the S P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010, according to data firm Equilar. ..."
"... At those levels, CEOs last year were paid 303 times what workers in their industries earned, compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based nonprofit. ..."
finance.yahoo.com

NEW YORK(Reuters) - When health insurer Humana Inc reported worse-than-expected quarterly earnings in late 2014 – including a 21 percent drop in net income – it softened the blow by immediately telling investors it would make a $500 million share repurchase.

In addition to soothing shareholders, the surprise buyback benefited the company's senior executives. It added around two cents to the company's annual earnings per share, allowing Humana to surpass its $7.50 EPS target by a single cent and unlocking higher pay for top managers under terms of the company's compensation agreement.

Thanks to Humana hitting that target, Chief Executive Officer Bruce Broussard earned a $1.68 million bonus for 2014.

Most publicly traded U.S. companies reward top managers for hitting performance targets, meant to tie the interests of managers and shareholders together. At many big companies, those interests are deemed to be best aligned by linking executive performance to earnings per share, along with measures derived from the company's stock price.

But these metrics may not be solely a reflection of a company's operating performance. They can be, and often are, influenced through stock repurchases. In addition to cutting the number of a company's shares outstanding, and thus lifting EPS, buybacks also increase demand for the shares, usually providing a lift to the share price, which affects other performance markers.

As corporate America engages in an unprecedented buyback binge, soaring CEO pay tied to short-term performance measures like EPS is prompting criticism that executives are using stock repurchases to enrich themselves at the expense of long-term corporate health, capital investment and employment.

"We've accepted a definition of performance that is narrow and quite possibly inappropriate," said Rosanna Landis Weaver, program manager of the executive compensation initiative at As You Sow, a Washington, D.C., nonprofit that promotes corporate responsibility. Pay for performance as it is often structured creates "very troublesome, problematic incentives that can potentially drive very short-term thinking."

A Reuters analysis of the companies in the Standard & Poor's 500 Index found that 255 of those companies reward executives in part by using EPS, while another 28 use other per-share metrics that can be influenced by share buybacks.

In addition, 303 also use total shareholder return, essentially a company's share price appreciation plus dividends, and 169 companies use both EPS and total shareholder return to help determine pay.

STANDARD PRACTICE

EPS and share-price metrics underpin much of the compensation of some of the highest-paid CEOs, including those at Walt Disney Co, Viacom Inc, 21st Century Fox Inc, Target Corp and Cisco Systems Inc.

... ... ...

As reported in the first article in this series, share buybacks by U.S. non-financial companies reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial companies found that together, buybacks and dividends have surpassed total capital expenditures and are more than double research and development spending.

Companies buy back their shares for various reasons. They do it when they believe their shares are undervalued, or to make use of cash or cheap debt financing when business conditions don't justify capital or R&D spending. They also do it to meet the expectations of increasingly demanding investors.

Lately, the sheer volume of buybacks has prompted complaints among academics, politicians and investors that massive stock repurchases are stifling innovation and hurting U.S. competitiveness - and contributing to widening income inequality by rewarding executives with ever higher pay, often divorced from a company's underlying performance.

"There's been an over-focus on buybacks and raising EPS to hit share option targets, and we know that those are concentrated in the hands of the few, and that the few is in the top 1 percent," said James Montier, a member of the asset allocation team at global investment firm GMO in London, which manages more than $100 billion in assets.

The introduction of performance targets has been a driver of surging executive pay, helping to widen the gap between the richest in America and the rest of the country. Median CEO pay among companies in the S&P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010, according to data firm Equilar.

At those levels, CEOs last year were paid 303 times what workers in their industries earned, compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based nonprofit.

SALARY AND A LOT MORE

Today, the bulk of CEO compensation comes from cash and stock awards, much of it tied to performance metrics. Last year, base salary accounted for just 8 percent of CEO pay for S&P 500 companies, while cash and stock incentives made up more than 45 percent, according to proxy advisory firm Institutional Shareholder Services.

...In 1992, Congress changed the tax code to curb rising executive pay and encourage performance-based compensation. It didn't work. Instead, the shift is widely blamed for soaring executive pay and a heavier emphasis on short-term results.

Companies started tying performance pay to "short-term metrics, and suddenly all the things we don't want to happen start happening," said Lynn Stout, a professor of corporate and business law at Cornell Law School in Ithaca, New York. "Despite 20 years of trying, we have still failed to come up with an objective performance metric that can't be gamed."

Shareholder expectations have changed, too. The individuals and other smaller, mostly passive investors who dominated equity markets during the postwar decades have given way to large institutional investors. These institutions tend to want higher returns, sooner, than their predecessors. Consider that the average time investors held a particular share has fallen from around eight years in 1960 to a year and a half now, according to New York Stock Exchange data.

"TOO EASY TO MANIPULATE"

Companies like to use EPS as a performance metric because it is the primary focus of financial analysts when assessing the value of a stock and of investors when evaluating their return on investment.

But "it is not an appropriate target, it's too easy to manipulate," said Almeida, the University of Illinois finance professor.

...By providing a lift to a stock's price, buybacks can increase total shareholder return to target levels, resulting in more stock awards for executives. And of course, the higher stock price lifts the value of company stock they already own.

"It can goose the price at time when the high price means they earn performance shares … even if the stock price later goes back down, they got their shares," said Michael Dorff, a law professor at the Southwestern Law School in Los Angeles.

Exxon Corp, the largest repurchaser of shares over the past decade, has rejected shareholder proposals that it add three-year targets based on shareholder return to its compensation program. In its most recent proxy, the energy company said doing so could increase risk-taking and encourage underinvestment to achieve short-term results.

The energy giant makes half of its annual executive bonus payments contingent on meeting longer-term EPS thresholds. Since 2005, the company has spent more than $200 billion on buybacks.

ADDITIONAL TWEAKS

While performance targets are specific, they aren't necessarily fixed. Corporate boards often adjust them or how they are calculated in ways that lift executive pay.

[Dec 04, 2015] German Financialization and the Eurozone Crisis

Notable quotes:
"... Bundenstalt für Finanzdienstleistungsaufsicht ..."
naked capitalism
Many studies of the Eurozone crisis focus on peripheral European states' current account deficits, or German neo-mercantilist policies that promoted export surpluses. However, German financialization and input on the eurozone's financial architecture promoted deficits, increased systemic risk, and facilitated the onset of Europe's subsequent crises.

Increasing German financial sector competition encouraged German banks' increasing securitization and participation in global capital markets. Regional liberalization created new marketplaces for German finance and increased crisis risk as current accounts diverged between Europe's core and periphery. After the global financial crisis of 2008, German losses on international securitized assets prompted retrenchment of lending, paving the way for the eurozone's sovereign debt crisis. Rethinking how financial liberalization facilitated German and European financial crises may prevent the eurozone from repeating these performances in the future.

After the 1970s, German banks' trading activity came to surpass lending as the largest share of assets, while German firms increasingly borrowed in international capital markets rather than from domestic banks. Private banks alleged that political subsidies and higher credit ratings for Landesbanks, public banks that insured household, small enterprise, and local banks' access to capital, were unfair, and, in response, German lawmakers eliminated state guarantees for public banks. Landesbanks, despite their historic role as stable, non-profit, providers of credit, consequently had to compete with Germany's largest private banks for business. Changes in competition restructured the German financial system. Mergers and takeovers occurred, especially in commercial banks and Landesbanks. German financial intermediation ratios-total financial assets of financial corporations divided by the total financial assets of the economy-increased. Greater securitization and shadow banking relative to long-term lending increased German propensity for financial crisis, as securities, shares, and securitized debt constituted increasing percentages of German banks' assets and liabilities.

Throughout this period, Germany lacked a centralized financial regulatory apparatus. Only in 2002 did the country's central bank, the Bundesbank, establish the Bundenstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority, known as BaFin), which consolidated the responsibilities of three agencies to oversee the whole financial sector. However, neither institution could keep pace with new sources of financial and economic instability. German banking changes continued apace and destabilizing trends in banking grew.

German desire for financial liberalization at the European level, meanwhile, helped increase potential systemic risk of European finance. Despite some European opposition to removing barriers to capital and trade flows, Germany prevailed in setting these preconditions for membership in the European economic union. Germany's negotiating power stemmed from its strong currency, as well as French, Italian, and smaller European economies' desire for currency stability. Germany demanded an independent central bank for the union, removal of capital controls, and an expansion of the tasks banks could perform within the Economic and Monetary Union (EMU). The Second Banking Coordination Directive (SBCD) mandated that banks perform commercial and investment intermediation to be certified within the EMU; the Single Market Passport (SMP) required free trade and capital flows throughout the EMU. The SMP and SBCD increased the scope of activity that financial institutions throughout the union were expected to provide, and opened banks up to markets, instruments, and activities they could neither monitor nor regulate, and hence to destabilizing shocks.

Intra-EMU lending and borrowing subsequently increased, and total lending and borrowing grew relative to European countries' GDP from the early 1990s onward. Asymmetries emerged in capital flows between Europe's core, particularly the UK, Germany, and the Netherlands, to Europe's newly liberalized periphery. German banks lent increasing volumes to EMU member states, especially peripheral states. Though this lending on a country-by-country basis was a small percentage of Germany's GDP, it constituted larger percentages of borrowers' GDPs. In 2007, Germany lent 1.23% of its GDP to Portugal; this represented 17.68% of Portugal's GDP; in 2008, Germany lent 6% of its GDP to Ireland; this was 84% of Irish GDP. Germany, the largest European economy, lent larger percentages of its GDP to peripheral EMU nations relative to its lending to richer European economies. These flows, more potentially disruptive for borrowers than for the lender, reflected lack of oversight in asset management. German lending helped destabilize European financial systems more vulnerable to rapid capital inflows, and created conditions for large-scale capital flight in a crisis.

Financial competition increased in Europe over this period. Financial merger activity first accelerated within national borders, and later grew at supra-national levels. These movements increased eurozone access to capital, but increased pressure for banks to widen the scope of the services and lending that they provided. Rising European securitization in this period increased systemic risk for the EMU financial system. European holdings of U.S.-originated asset-backed securities increased by billions of dollars from the early 2000s until shortly before 2008. German banks were among the EMU's top issuers and acquirers of such assets. As banks' holdings of these assets increased, European systemic risk increased as well.

European total debt as a percentage of GDP rose in this period. Financial debt relative to GDP grew particularly sharply in core economies; Ireland was the only peripheral EMU economy with comparable levels of financial debt. Though government debt relative to GDP fell or held constant for most EMU nations, cross-border acquisition of sovereign debt increased until 2007. German banks acquired substantially larger portfolios of sovereign debt issued by other European states, which would not decrease until 2010. Only in 2009 did government debt relative to GDP increase throughout the eurozone, as governments guaranteed their financial systems to minimize the costs of the ensuing financial crisis.

The newly liberalized financial architecture of the eurozone increased both the market for German financial services and overall systemic risk of the European financial system; these dynamics helped destabilize the German financial system and economy at large. Rising German exports of goods, services, and capital to the rest of Europe grew the German economy, but divergence of current account balances within the EMU exposed it to sovereign debt risk in peripheral states. Potential systemic risk changed into systemic risk after the subprime mortgage crisis began. EMU economies would not have subsequently experienced such pressure to backstop national financial systems or to repay sovereign loans had German banks not lent so much or purchased so many sovereign bonds within the union. Narratives that fail to acknowledge Germany's role in promoting the circumstances that underlay the eurozone crisis ignore the destabilizing power of financial liberalization, even for a global financial center like Germany.

susan the other, December 3, 2015 at 1:06 pm

This is very interesting. It describes just how the EU mess unfolded beginning in 1970 with deregulation of the financial industry in the core. Big fish eat little fish. It is as if for 4 decades the banks in Germany compensated their losses to the bigger international lenders by taking on the riskier borrowers and were able to do so because of German mercantilism and financial deregulation. Like the German domestic banks loaned the periphery money with abandon, and effectively borrowed their own profits by speculating on bad customers. As German corporations did business with big international banksters, who lent at lower rates, other German banks resorted to buying the sovereign bonds of the periphery and selling CDOs, etc. The German banks were as over-extended looking for profit as consumers living on their credit cards. Deregulation enriched only the biggest international banks. We could call this behavior a form of digging your own grave. In 2009 the periphery saw their borrowing costs threatened and guaranteed their own financial institutions creating the "sovereign debt" that the core then refused to touch. Hypocrisy ruled. Generosity was in short supply. The whole thing fell apart. Deregulation was just another form of looting.

washunate, December 3, 2015 at 1:28 pm

German losses on international securitized assets prompted retrenchment of lending, paving the way for the eurozone's sovereign debt crisis.

I agree with the general conclusion at the end that German financialization is part of the overall narrative of EMU, but I don't follow this specific link in the chain of events as described. The eurozone has a sovereign debt crisis because those sovereign governments privatized the profits and socialized the losses of a global system of fraud. And if we're assigning national blame, it's a system run out of DC, NY, and London a lot more than Berlin, Frankfurt, and Brussels.

Current and capital account imbalances cancel each other out in the overall balance of payments. As bank lending decreases (capital account surplus shrinks) then the current account deficit shrinks as well (the 'trade deficit'). The problem is when governments step in and haphazardly backstop some of the losses – at least, when they do so without imposing taxes on the wealthy to a sufficient degree to pay for these bailouts.

[Dec 02, 2015] Wolf Richter: Financially Engineered Stocks Drag Down S P 500

All this neoliberal talk about "maximizing shareholder value" is designed to hide a redistribution mechanism of wealth up. Which is the essence of neoliberalism. It's all about executive pay. "Shareholder value" is nothing then a ruse for getting outsize bonuses but top execs. Stock buybacks is a form of asset-stripping, similar to one practiced by buyout sharks, but practiced by internal management team. Who cares if the company will be destroyed if you have a golden parachute ?
Notable quotes:
"... By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street . ..."
"... IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. ..."
"... Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R D and capital expenditures. They're all doing it. ..."
"... Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period. ..."
"... This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion. ..."
"... Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery. ..."
"... Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining. ..."
"... But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered. ..."
"... Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how buy backs affect executive pay. "Shareholder value" is more often than not a ruse? ..."
"... Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s). ..."
"... On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement? ..."
"... buybacks *can* be asset-stripping and often are, but unless you tie capital allocation decisions closer to investment in the business such that they're mutually exclusive, this is specious and a reach. No one invests if they can't see the return. It would be just as easy to say that they're buying back stock because revenue is slipping and they have no other investment opportunities. ..."
"... Perhaps an analysis of the monopolistic positions of so many American businesses that allow them the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more a result than a cause of dysfunction, but certainly not always bad. ..."
"... One aspect that Reuters piece mentions, but glosses over with a single paragraph buried in the middle, is the fact that for many companies there are no ( or few) reasons to spend money in other ways. If capex/r d doesn't give you much return, why not buy out the shareholders who are least interested in holding your stock? ..."
"... Dumping money into R D is always risky, although different industries have different levels, and the "do it in-house" risk must be weighed against the costs of buying up companies with "proven" technologies. Thus, R D cash is hidden inside M A. M A is up 2-3 years in a row. ..."
November 21, 2015 | naked capitalism

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

Magic trick turns into toxic mix.

Stocks have been on a tear to nowhere this year. Now investors are praying for a Santa rally to pull them out of the mire. They're counting on desperate amounts of share buybacks that companies fund by loading up on debt. But the magic trick that had performed miracles over the past few years is backfiring.

And there's a reason.

IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R&D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. And its stock is down 38% since March 2013.

Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R&D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R&D and capital expenditures. They're all doing it.

"Activist investors" – hedge funds – have been clamoring for it. An investigative report by Reuters, titled The Cannibalized Company, lined some of them up:

In March, General Motors Co acceded to a $5 billion share buyback to satisfy investor Harry Wilson. He had threatened a proxy fight if the auto maker didn't distribute some of the $25 billion cash hoard it had built up after emerging from bankruptcy just a few years earlier.

DuPont early this year announced a $4 billion buyback program – on top of a $5 billion program announced a year earlier – to beat back activist investor Nelson Peltz's Trian Fund Management, which was seeking four board seats to get its way.

In March, Qualcomm Inc., under pressure from hedge fund Jana Partners, agreed to boost its program to purchase $10 billion of its shares over the next 12 months; the company already had an existing $7.8 billion buyback program and a commitment to return three quarters of its free cash flow to shareholders.

And in July, Qualcomm announced 5,000 layoffs. It's hard to innovate when you're trying to please a hedge fund.

CEOs with a long-term outlook and a focus on innovation and investment, rather than financial engineering, come under intense pressure.

"None of it is optional; if you ignore them, you go away," Russ Daniels, a tech executive with 15 years at Apple and 13 years at HP, told Reuters. "It's all just resource allocation," he said. "The situation right now is there are a lot of investors who believe that they can make a better decision about how to apply that resource than the management of the business can."

Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period.

This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion.

Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery.

Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining.

"Serving customers, creating innovative new products, employing workers, taking care of the environment … are NOT the objectives of firms," sais Itzhak Ben-David, a finance professor of Ohio State University, a buyback proponent, according to Reuters. "These are components in the process that have the goal of maximizing shareholders' value."

But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered.

Citigroup credit analysts looked into the extent to which this is happening – and why. Christine Hughes, Chief Investment Strategist at OtterWood Capital, summarized the Citi report this way: "This dynamic of borrowing from bondholders to pay shareholders may be coming to an end…."

Their chart (via OtterWood Capital) shows that about half of the cumulative outperformance of these buyback queens from 2012 through 2014 has been frittered away this year, as their shares, IBM-like, have swooned:

Mbuna, November 21, 2015 at 7:31 am

Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how buy backs affect executive pay. "Shareholder value" is more often than not a ruse?

ng, November 21, 2015 at 8:58 am

probably, in some or most cases, but the effect on the stock is the same.

Alejandro, November 21, 2015 at 9:19 am

Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s).

On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement?

Jim, November 21, 2015 at 10:42 am

More nuance and less dogma please. The dogmatic tone really hurts what could otherwise be a fine but more-qualified position.

"Results of all this financial engineering? Revenues of the S&P 500 companies are falling for the fourth quarter in a row – the worst such spell since the Financial Crisis."

Eh, no. No question that buybacks *can* be asset-stripping and often are, but unless you tie capital allocation decisions closer to investment in the business such that they're mutually exclusive, this is specious and a reach. No one invests if they can't see the return. It would be just as easy to say that they're buying back stock because revenue is slipping and they have no other investment opportunities.

Revenues are falling in large part because these largest companies derive an ABSOLUTELY HUGE portion of their business overseas and the dollar has been ridiculously strong in the last 12-15 months. Rates are poised to rise, and the easy Fed-inspired rate arbitrage vis a vis stocks and "risk on" trade are closing. How about a little more context instead of just dogma?

John Malone made a career out of financial engineering, something like 30% annual returns for the 25 years of his CEO tenure at TCI. Buybacks were a huge part of that.

Perhaps an analysis of the monopolistic positions of so many American businesses that allow them the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more a result than a cause of dysfunction, but certainly not always bad.

NeqNeq, November 21, 2015 at 11:44 am

One aspect that Reuters piece mentions, but glosses over with a single paragraph buried in the middle, is the fact that for many companies there are no ( or few) reasons to spend money in other ways. If capex/r&d doesn't give you much return, why not buy out the shareholders who are least interested in holding your stock?

Dumping cash into plants only makes sense in the places where the market is growing. For many years that has meant Asia (China). For example, Apple gets 66% (iirc) of revenue from Asia, and that is where they have continued investing in growth. If demand is slowing and costs are rising, and it looks like both are true, why would you put even more money in?

Dumping money into R&D is always risky, although different industries have different levels, and the "do it in-house" risk must be weighed against the costs of buying up companies with "proven" technologies. Thus, R&D cash is hidden inside M&A. M&A is up 2-3 years in a row.

[Nov 30, 2015] Secular stagnation and the financial sector

Notable quotes:
"... Surely the answer is "risk transfer" ..."
"... Is what you're saying here is that, by extending a lot of credit, the financial sector allowed households to maintain consumption in the face of a permanent decline in income (at least relative to expectation)? That's an important part of the story, I agree. ..."
"... the FIRE sector in particular, are parasitic on the economy. ..."
"... Perhaps financialization isn't so much a thing-in-itself as the mechanism through which wealth concentrates in periods of slow growth? ..."
"... As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts." ..."
"... Did Cuba, Venezuela, Argentina and North Korea do better than the financialized economies of the world? Did the hand of the State in Russia, China and other countries secure better outcomes than the global financial sector in countries that allowed it to operate (albeit with heavy regulation)? ..."
"... The financial system can engage in usury, lending money with no connection to productive investment, by simply creating a parasitic claim on income. There are straightforward ways of doing this: credit cards with high rates of interest or payday lending. There are slightly more complicated approaches: insurance that by design doesn't pay off for the nominal beneficiary. ..."
"... "The biggest economic policy decision of the last thirty years has been the decision to de-socialise a lot of previously socially insured risks and transfer them back to the household sector (in their various capacities as workers, homeowners and consumers of healthcare). The financial sector was obviously the conduit for this policy decision." ..."
"... My feeling (based on nothing but intuition) is that the answer is (d). The government is a tool of moneyed interests. I know, it sounds awfully libertarian, but it is what it is. And I can't foresee any non-catastrophic end to it. ..."
November 29, 2015 | Crooked Timber

In my last post on private infrastructure finance and secular stagnation, I suggested a bigger argument that

The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn't produce much in the way of new private investment.
This isn't an original idea. The Bank of International Settlements put out a paper earlier this year arguing that financial sector growth crowds out real growth. But how does this work and what can be done about it? I'm still organizing my thoughts on this, so what I have are some ideas rather than a fully formed argument.

First, if the financial sector is unproductive, how can it be so large and profitable in a market economy?

There are a few possible explanations

(a) As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts.

(b) Tax evasion: the global financial sector allows corporations to greatly reduce their tax liabilities. Most of the savings in tax is captured in the financial sector itself, but the amount flowing to corporations is sufficient to offset the high costs of the modern financial sector, relative to (for example) old-style bank finance and simple corporate structures financed by debt and equity

(c) Volatility: the financialization of the economy has produced greatly increased volatility (in exchange rates, asset prices and so on). The financial sector amplifies and profits from this volatility, partly through regulatory arbitrage, and partly through entrenched and systematic fraud as in the LIBOR and Forex scandals.

(d) Political capture: The financial sector controls political outcomes in both traditional ways (political donations, highly revolving door jobs for future and former politicians) and through the ideology of market liberalism, which is perfectly designed to support policies supporting the financial sector, while discrediting policies traditionally sought by other parts of the corporate sector, such as protection for manufacturing industry. The shift to private finance for infrastructure, discussed in the previous post is part of this. The construction part of the infrastructure sector (which was always private) has suffered from the reduced flow of projects, but the finance part (previously managed through government bonds) has benefited massively.

The result of all this is that the financial sector benefits from an evolutionary strategy similar to that of an Australian eucalypt forest. Eucalypts are both highly flammable (they generate lots of combustible oil) and highly fire resistant. So eucalypt forests are subject to frequent fires which kill competing species, and allow the eucalypts to extend their range.

dsquared 11.29.15 at 1:24 pm

Surely the answer is "risk transfer". The biggest economic policy decision of the last thirty years has been the decision to de-socialise a lot of previously socially insured risks and transfer them back to the household sector (in their various capacities as workers, homeowners and consumers of healthcare). The financial sector was obviously the conduit for this policy decision. Their role is to provide insurance to the rest of society and this is what they did – in fact, they provided too much of it, with too little capital which is why they went bust, and why their bankruptcy was so disastrous (there's nothing worse than an insurer bankruptcy, because it hits you with a big loss at exactly the worst time). I think c) above is particularly unconvincing, as the biggest stylised feature of the period of financialisation was the Great Moderation – in fact, the financial sector stored up volatility that would otherwise have been experienced by other people, including the intermediation of some genuinely historically massive imbalances associated with the industrialisation of China, and stored it up until it couldn't hold any more and exploded.

I also don't think LIBOR and FX fit into that pattern at all very well either. Financial systems have two kinds of problem, which is why they often have two kinds of regulators. They have prudential problems and conduct problems. Both LIBOR and FX were old-fashioned profiteering and cartel arrangements, which could happen in any industry (hey let's talk about drug pricing and indeed university tuition some time). In actual fact, as I wrote a while ago, it's only LIBOR that can really be considered a scandal – FX was very much more a case of customers who wanted the benefits of tight regulation but didn't want to pay for them, and were lucky enough to find a political moment in which the time was right for an otherwise very unpromising case.

In other words, the answer to all your questions is "leverage". That's why financial systems grew so fast, that's why they're associated with poor economic performance, and that's why they tend to show up in periods of secular stagnation – a secular stagnation is almost defined as a period during which people try to maintain their standard of living by borrowing. Of course, if the financial sector had been required to hold enough equity capital in the first place, it would never have grown so big in the first place, and we could all be enjoying the thirteenth year of the post-dot-com bust[1] in relative contentment.

[1] I am never going to shut up about this. The real estate bubble was a policy-created bubble. It was blown up in real time and intentionally, by a Federal Reserve which wanted to cushion the blow of the tech bust. If the financial sector had refused to finance it, the financial sector would have been trying to run a monetary policy directly opposed to that of the central bank.

John Quiggin 11.29.15 at 1:55 pm 2

I agree that risk transfer is a big deal. On the other hand, it's not obvious that the financial sector did a lot to insure households against most of the additional risk, or that the Great Moderation corresponded to a reduction in the volatility faced by households. On the first point, despite massive financial innovation since 1980, the set of financial instruments easily available to households hasn't changed all that much. Most obviously, there's no insurance against bad employment and wage outcomes and home equity insurance hasn't really happened either.

Is what you're saying here is that, by extending a lot of credit, the financial sector allowed households to maintain consumption in the face of a permanent decline in income (at least relative to expectation)? That's an important part of the story, I agree.

The secular stagnation framing of the question leads me to think more about why investment hasn't responded to monetary policy rather than directly about households.

Eggplant 11.29.15 at 2:04 pm, 3

(e) Principle-agent problem.
(f) Implicit government backing allowing the underpricing of risk.

dsquared 11.29.15 at 2:32 pm. 4

Yeah, that's my point – the massive extension of credit to households was the financial sector's role in the big policy shift. At the end of the day, although we might with the benefit of hindsight agree that "subprime mortgages with no income verification at teaser rates" were a pretty stupid product that should never have been offered, they were a brand new financial product that had never been offered to households before! Even the example you mention – "insurance against bad employment and wage outcomes" – was sort of sold, albeit that what I'm referring to here is Payment Protection Insurance in the UK, which sort of underlines that it wasn't done well or responsibly.

I guess my argument here is that it's the combination of deregulation and stagnation that was necessary to create the 2000s policy disaster. But if we hadn't had the bad products we got, we'd have had something else go wrong, probably outside the regulated sector. Because the high debt levels were a policy goal (or at least, were the inevitable and forseeable consequence of trying to do demand management without fiscal policy), and as I keep saying in different contexts, you can't get to a stupid debt ratio by only doing sensible things.

The secular stagnation framing of the question leads me to think more about why investment hasn't responded to monetary policy rather than directly about households.

Isn't the answer to this just the definition of a Keynesian recession? Investment hasn't responded to monetary policy because there's no interest rate at which it makes sense to produce goods that can't be sold.

DrDick 11.29.15 at 2:32 pm 5

Capital generally, and the FIRE sector in particular, are parasitic on the economy. They provide some minimal benefits if kept strongly in check, but quickly become destructive if allowed to grow unchecked, as they have now.

Eggplant 11.29.15 at 2:37 pm 6

(g) Rising inequality leading to an ever increasing savings glut, providing the financial industry with a target-rich environment.

yastreblyansky 11.29.15 at 3:22 pm, 7

Dumb outsider thought, turning Eggplant @6 upside down: What about r > g? Perhaps financialization isn't so much a thing-in-itself as the mechanism through which wealth concentrates in periods of slow growth?

T 11.29.15 at 3:31 pm, 8

"But if we hadn't had the bad products we got, we'd have had something else go wrong, probably outside the regulated sector."

A more sophisticated version of the widely debunked theory that Fannie and Freddie blew up the housing sector by giving loans to poor people. Rule 1: It's never ever the bankers' fault. Rule 2: see Rule 1. At least d-squared has been consistent…

Or maybe there has been a systematic continuous effort to use political influence to garner rents by gutting both the regulatory and judicial constraints on their behavior. http://www.nytimes.com/2015/11/30/us/politics/illinois-campaign-money-bruce-rauner.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news

yastreblyansky 11.29.15 at 3:35 pm, 9

Or rather through which rent-claimers concentrate wealth (@t) bringing long-term low growth.

bjk 11.29.15 at 3:43 pm, 10

Which direction is financialization heading? It looks to be decreasing. The mutual fund industry is in terminal decline, losing market share to ETFs. There are fewer financial advisors today than in 2008, yet the number of millionaires has increased. Stock trading has broken a 40 year trend of increasing volumes. Electronic and exchange trading of bonds and derivatives is increasing, driving down margins. Bots have driven human traders out of jobs (Dark Pools has a good account of this). Banks are earnings low single digit returns in their trading divisions, which suggests they will be shut down if things don't improve. It looks like finance is doing a good job of shrinking itself, with a little help from Elizabeth Warren.

T 11.29.15 at 4:50 pm, 16

There were several issues and arguments posed in the OP. I'm addressing this:

"First, if the financial sector is unproductive, how can it be so large and profitable in a market economy?
There are a few possible explanations

(a) As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts."

D-squared response is of course it's the risk transfer. That flat out contradicts JQ, but d-squared is a master of the straight face. And then he proceeds - "there has been a decision to desocilaize"; "the financial sector was obviously the conduit for this policy decision"; and "the real estate bubble was a policy-created bubble."

So JQ, here's your answer of FIRE's ascendancy from an insider: You know me and my friends were standing around just doing nothin' and then these policy guys come around. Next thing ya know, we've doubled our share of GDP and put our bosses in the top 0.01%. Who woulda known? Crazy shit, huh? Hey and if anyone asks, tell 'um "risk transfer." And if they press, tell 'um "secular stagnation." In fact, tell 'um frickin' anything. It just wasn't our fault.

Rakesh Bhandari 11.29.15 at 4:51 pm, 17

I know that I shall have to read John Kay's Other People's Money at some point. I am wondering what people make of the old the then Marxist Hilferding's concept of promoters' profit as a way to understand some financial sector activity. I posted this here a few years back.

Here's his example, and I am trying to figure out to the extent that it throws light on the recent activity of Wall Street.

Start with an industrial firm with a capital of 1,000,000 marks that makes a profit of 150,000 marks with the average profit of 15 percent.

With an interest rate of 5% straight capitalization of income of 150,000 marks will have an estimated price of 3,000,000 marks (150,000/.05=3,000,000 marks)

A deduction of 20,000 marks for the various administration costs and directors fees would make the actual payment to shareholders 130,000 rather 150,000 marks

A risk premium of, say, 2% would be added to a fixed safe rate of interest of 5% in estimating the actual stock price

So what, then, is the stock price (130,000/.07)? 1,857,143 or roughly 1,900.000 marks

This 900,000 is free after deducting the initial investment of 1,000,000 marks

The balance of 900, 000 marks appears as promoters' profit which arises from the conversion of profit-bearing capital into interest bearing capital.

In 1910, Hilferding called this promoters profit, an economic category sui generis; it is earned by the promoter by selling of stocks or the securitizing of income on the capital market.

For Hilferding the investment bank, which promotes the conversion of profit-bearing to interest-bearing capital, claims the promoters profit.

The analysis seems pertinent to the securitization process today, and I would love to hear Henwood's and others' thoughts about this.

As Roubini and Mihm have pointed out, we have seen the securitization of mortgages, consumer loans, student loans, auto loans, airplane leases, revenues from forests and mines, delinquent tax liens, radio tower loans, boat loans, state revenues, the royalties of rock bands!

We have seen, in their words, an explosion in the selling of future income of dependable projected revenue streams such as rents or interest payments on mortgage payments as securities.

That securitization been driven by investors' quest for yield lift given the low rate of interest, itself the result of the global savings glut and Fed policy.

And it seems that Wall Street, with the connivance of the credit agencies, was able to appropriate value from the purchasers of securities by understating the risk premia.

The risk premium and promoters' profit are inversely correlated so there is a strong incentive to understate the former. This is what Hilferding did not say, but seems worth emphasizing today.

Aaron Brown 11.29.15 at 5:43 pm. 18
I sincerely do not understand your point here. I'm not arguing, just asking for clarification:

(a) As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts.

For one thing, I don't see that the two bubbles and one bust of 1996 – 2015 are self-evidently worse than the more numerous bubbles and busts of 1976 – 1995. You might say the 2008 brush with Great Depression outweighs the hyperinflation and multiple deep recessions of the earlier era, but certainly the Internet and housing bubbles were more productive and less threatening than the commodity, Japan, emerging debt and other bubbles. Anyway, it's a close enough comparison that someone could certainly keep a straight face while saying that in the last 20 years financial volatility inflicted less real economic damage than in the preceding 20 years.

But the bigger issue is no one claims the financial system encourages steady growth. Creative (bubble) destruction (bust) is the rule. It is command economies that outlaw bubbles and busts–and inflation and unemployment–at the cost of unproductive employment, empty shelves, stifled innovation, loss of freedom and other consequences.

If you want to argue that the financial system did not earn its profits in the last 20 years, it seems to me you have to argue that economic growth was slow, or that more people in the world are in poverty today, or that there was not enough innovation; not that the ride was too volatile. Did Cuba, Venezuela, Argentina and North Korea do better than the financialized economies of the world? Did the hand of the State in Russia, China and other countries secure better outcomes than the global financial sector in countries that allowed it to operate (albeit with heavy regulation)?

It is certainly possible to argue that we could have had more growth and innovation and poverty reduction; and less volatility; with some third way that's better than both our current financial system and the alternatives practiced in the world today. But that point is not so obvious that any defender of the global financial system must be joking.

Why do you think the booms and busts of the last 20 years are such a clear and damning indictment of the financial system that the point needs no further elaboration?

Bruce Wilder 11.29.15 at 6:11 pm, 19

The financial system can engage in usury, lending money with no connection to productive investment, by simply creating a parasitic claim on income. There are straightforward ways of doing this: credit cards with high rates of interest or payday lending. There are slightly more complicated approaches: insurance that by design doesn't pay off for the nominal beneficiary.

There are really complicated ways of doing this: derivatives, for example, which blow up (and as an added bonus, undermine the informational efficiency of financial markets).

I keep thinking of Piketty's r > g: the ever-accumulating pile of money rising like a slow, but unstoppable tide. It has to be invested or "invested" - that is, it can buy the assembly of resources into productive capital assets that represent financial claims on the additional income generated by business innovation and expansion . . . OR . . . it can be used to finance the parasitic and predatory manipulations of an emergent neo-feudalism.

Where the secular stagnation thesis is not pure apologetic fraud, I would interpret it as saying, there are currently few opportunities to invest in additional productive "real" capital stock. For technological reasons, the new systems require much less capital than the old systems, so when an old telephone company replaces its expensive copper wire with fiber optics and cellphone towers, it may be able to fund a large part of the transition out of current cash-flow, even while maintaining the value of the bonds that once represented investment in a mountain of copper, but are now just rentier claims on an obsolete world.

In the brave new world, a handful of companies, who have lucked into commercial positions with high rents, throw off a lot of cash. So, the Apples and Intels do not need to be allocated new capital, but their distribution of cash to people who don't need it, is generating a lot of demand for "financial product". The rest of the business world is just trying to manage a slow decline, able to throw off modest amounts of cash, desperate to find sources of political power that might yield reliable rents, but without opportunities to innovate that would actually require net investment in excess of current cashflows from operations.

So, the financial system is just responding to this enlarged demand for non-productive investment in financial products that generate return from parasitic extraction.

In the interest of parasitic extraction, the financial system pursues the politics of neoliberal privatization as a means of generating financial products to satisfy demand.

Does that sound like a plausible narrative?

Dipper 11.29.15 at 6:30 pm, 20

re volatility, the thing you really want to worry about is liquidity. Pre-crash banks could warehouse risk and so provide liquidity. One consequence was volatility was recorded because liquid markets allowed prices to be observed.

Regulators have observed the conflict of interest caused by banks providing a financial service but also participating in the markets with their own money, and have acted to restrict banks from holding risk for proprietary trading (the Volcker rule). This is fine, but there has been a noticeable decrease in liquidity in what were once deep markets. The EURCHF un-pegging in Jan this year is a good example of reduced liquidity resulting in a massive move. There may well be more of this to come.

Sebastian H 11.29.15 at 6:34 pm, 21
"The biggest economic policy decision of the last thirty years has been the decision to de-socialise a lot of previously socially insured risks and transfer them back to the household sector (in their various capacities as workers, homeowners and consumers of healthcare). The financial sector was obviously the conduit for this policy decision."

I can't tell if you are arguing with John or agreeing with him. Is this agreement with his d) [the political capture explanation]? I don't know very much about the deep history of financial regulation, but I'm fairly certain that most voters have never put desocialization of risk in their top 5 concerns. Is it possible that the financial sector was the obvious conduit because they were among the important authors of the ideas?

MisterMr 11.29.15 at 6:50 pm, 22

Previously commented here as Random Lurker.

In my opinion, finance had a passive role in the build up of the crisis.
Others have said similar things uptread, however this is my opinion:

1) the wage share of GDP depends largely on political choices; since the late seventies there has been a trend of a falling wage share more or less everywhere, as countries with a lower wage share are more competitive on the world market.
2) a falling wage share means a rising profit share, and "capitalists" tend to reinvest part of their profits, so a falling wage share caused a worldwide saving glut.
3) this worldwide saving glut caused an increased financialisation and a bubbling up of the price of some assets, particularly those assets whose supply is inelastic (for example, the value of distribution chains or of famous consumer brands).
4) this in turn causes an increased volatility of financial markets, and worse financial crises.

This situation is what we perceive as a secular stagnation, and IMHO depends mostly on a low worldwide wage share.
Unfortunately, I have no idea of how to reach an higher wage share, and I don't think "the market" has any mechanism to push up said wage share.

Rakesh Bhandari 11.29.15 at 7:08 pm, 23

Bruce,
What you are saying makes sense to me. Steven Pressman has also raised the question of how r is to be maintained with "an abundance of capital and its need for high rates of return." (Understanding Piketty's Capital in the Twenty First Century).

It's almost as if Piketty in his criticism of the rentier has a rentier's disregard for how the returns are actually to be made. To the extent that he considers production it is through marginal productivity theory. Piketty claims that marginal rate of substitution of capital for labor will remain above unity (and too bad Piketty dismissed the Cambridge Capital critique because Ian Steedman has used Sraffian theory to show the possibilities of high profits in even a fully automated economy).

Of course as Pressman implies, this "technical" view may blind us to the higher exploitation that may be necessary for returns to continue to remain high as capital becomes more abundant. Pressman also implies that Piketty also does not consider how finance can make higher rates of return by making higher-interest loans to weaker parties while having them absorb most of the risk (this would be your second kind of investment).

Search for the several paragraphs on the rentier in this section. It is remarkable that no one has yet compared Piketty's criticism of the rentier to this.
https://www.marxists.org/archive/bukharin/works/1927/leisure-economics/introduction.htm

felwith 11.29.15 at 8:31 pm, 24

" I don't know very much about the deep history of financial regulation, but I'm fairly certain that most voters have never put desocialization of risk in their top 5 concerns."

Of course not, but there are actors here other than "the public" and "the banks". In this case, I'm pretty sure Daniel is referring to the destruction of unionized middle class jobs with pensions and cheap-to-the-worker health insurance, which was carried out by their employers. While I doubt I could pick a bank owner out of a lineup filled out with captains of industry, they aren't actually interchangeable.

Peter K. 11.29.15 at 9:43 pm, 25

@1 Dsquared:

"Of course, if the financial sector had been required to hold enough equity capital in the first place, it would never have grown so big in the first place, and we could all be enjoying the thirteenth year of the post-dot-com bust[1] in relative contentment."

Secular stagnation to me just means not enough macro (monetary/fiscal) policy to keep up aggregate demand for full employment and target inflation.

Monetary and fiscal policy is being blocked by politics partly because filthy rich financiers are buying their way into politics:

http://www.nytimes.com/2015/11/30/us/politics/illinois-campaign-money-bruce-rauner.html

The question about Dsquare's alternate history I would have is: what is the response of fiscal and monetary policy to the "domestication" of the financial sector via higher capital requirements and leverage regulations, etc.?

If fiscal and monetary policy keeps the economy at a high-pressure level with full employment and rising wages, I don't see why secular stagnation is a problem.

But politics is blocking fiscal and monetary policy. Professor Quiggin talks of "massive" monetary policy, but it wasn't massive given the need. (It was massive compared to past recoveries.) It was big enough to avoid deflation despite unprecedented fiscal austerity. It wasn't big enough to hit their inflation target in a timely matter.

Ze K 11.29.15 at 9:53 pm, 27

My feeling (based on nothing but intuition) is that the answer is (d). The government is a tool of moneyed interests. I know, it sounds awfully libertarian, but it is what it is. And I can't foresee any non-catastrophic end to it.

[Nov 26, 2015] Incorporating the Rentier Sectors into a Financial Model

Notable quotes:
"... Finance is not The economy ..."
"... In the real world most credit today is spent to buy assets already in place, not to create new productive capacity. Some 80 percent of bank loans in the English-speaking world are real estate mortgages, and much of the balance is lent against stocks and bonds already issued. ..."
"... Debt-leveraged buyouts and commercial real estate purchases turn business cash flow (ebitda: earnings before interest, taxes, depreciation and amortization) into interest payments. Likewise, bank or bondholder financing of public debt (especially in the Eurozone, which lacks a central bank to monetize such debt) has turned a rising share of tax revenue into interest payments. ..."
"... even government tax revenue is diverted to pay debt service ..."
"... Contemporary evidence for major OECD economies since the 1980s shows that rising capital gains may indeed divert finance away from the real sector's productivity growth (Stockhammer 2004) and more generally that 'financialization' (Epstein 2005) has hurt growth and incomes. Money created for capital gains has a small propensity to be spent by their rentier owners on goods and services, so that an increasing proportion of the economy's money flows are diverted to circulation in the financial sector. Wages do not increase, even as prices for property and financial securities rise – just the well-known trend that we have seen in the Western world since the 1970s, and which persists into the post-2001 Bubble Economy. ..."
economistsview.typepad.com

RGC said in reply to JF... November 25, 2015 at 08:34 AM

Incorporating the Rentier Sectors into a Financial Model

Wednesday, September 12, 2012

by Dirk Bezemer and Michael Hudson

As published in the World Economic Association's World Economic Review Vol #1.

.......

2. Finance is not The economy

In the real world most credit today is spent to buy assets already in place, not to create new productive capacity. Some 80 percent of bank loans in the English-speaking world are real estate mortgages, and much of the balance is lent against stocks and bonds already issued. Banks lend to buyers of real estate, corporate raiders, ambitious financial empire-builders, and to management for debt-leveraged buyouts. A first approximation of this trend is to chart the share of bank lending that goes to the 'Fire, Insurance and Real Estate' sector, aka the nonbank financial sector. Graph 1 shows that its ratio to GDP has quadrupled since the 1950s. The contrast is with lending to the real sector, which has remained about constant relative to GDP. This is how our debt burden has grown.

Graph 1: Private debt growth is due to lending to the FIRE sector: the US, 1952-2007

Source: Bezemer (2012) based on US flow of fund data, BEA 'Z' tables.

What is true for America is true for many other countries: mortgage lending and other household debt have been 'the final stage in an artificially extended Ponzi Bubble' as Keen (2009) shows for Australia. Extending credit to purchase assets already in place bids up their price. Prospective homebuyers need to take on larger mortgages to obtain a home. The effect is to turn property rents into a flow of mortgage interest. These payments divert the revenue of consumers and businesses from being spent on consumption or new capital investment. The effect is deflationary for the economy's product markets, and hence consumer prices and employment, and therefore wages. This is why we had a long period of low cpi inflation but skyrocketing asset price inflation. The two trends are linked.

Debt-leveraged buyouts and commercial real estate purchases turn business cash flow (ebitda: earnings before interest, taxes, depreciation and amortization) into interest payments. Likewise, bank or bondholder financing of public debt (especially in the Eurozone, which lacks a central bank to monetize such debt) has turned a rising share of tax revenue into interest payments. As creditors recycle their receipts of interest and amortization (and capital gains) into new lending to buyers of real estate, stocks and bonds, a rising share of employee income, real estate rent, business revenue and even government tax revenue is diverted to pay debt service. By leaving less to spend on goods and services, the effect is to reduce new investment and employment.

Contemporary evidence for major OECD economies since the 1980s shows that rising capital gains may indeed divert finance away from the real sector's productivity growth (Stockhammer 2004) and more generally that 'financialization' (Epstein 2005) has hurt growth and incomes. Money created for capital gains has a small propensity to be spent by their rentier owners on goods and services, so that an increasing proportion of the economy's money flows are diverted to circulation in the financial sector. Wages do not increase, even as prices for property and financial securities rise – just the well-known trend that we have seen in the Western world since the 1970s, and which persists into the post-2001 Bubble Economy.

It is especially the case since 1991 in the post-Soviet economies, where neoliberal (that is, pro-financial) policy makers have had a free hand to shape tax and financial policy in favor of banks (mainly foreign bank branches). Latvia is cited as a neoliberal success story, but it would be hard to find an example where rentier income and prices have diverged more sharply from wages and the "real" production economy.

The more credit creation takes the form of inflating asset prices – rather than financing purchases of goods and services or direct investment employing labor – the more deflationary its effects are on the "real" economy of production and consumption. Housing and other asset prices crash, causing negative equity. Yet homeowners and businesses still have to pay off their debts. The national income accounts classify this pay-down as "saving," although the revenue is not available to the debtors doing the "saving" by "deleveraging."

The moral is that using homes as what Alan Greenspan referred to as "piggy banks", to take out home-equity loans, was not really like drawing down a bank account at all. When a bank account is drawn down there is less money available, but no residual obligation to pay. New income can be spent at the discretion of its recipient. But borrowing against a home implies an obligation to set aside future income to pay the banker – and hence a loss of future discretionary spending.

3. Towards a model of financialized economies

Creating a more realistic model of today's financialized economies to trace this phenomenon requires a breakdown of the national income and product accounts (NIPA) to see the economy as a set of distinct sectors interacting with each other. These accounts juxtapose the private and public sectors as far as current spending, saving and taxation is concerned. But the implication is that government budget deficits inflate the private-sector economy as a whole.

http://michael-hudson.com/2012/09/incorporating-the-rentier-sectors-into-a-financial-model-3/

pgl said in reply to anne...

Peter Dorman's excellent rebuttal of John Harwood:

http://econospeak.blogspot.com/2015/11/tax-policy-and-magic-investment-channel.html

[Nov 21, 2015] Wolf Richter: Financially Engineered Stocks Drag Down S P 500

All this neoliberal talk about "maximizing shareholder value" and hidden redistribution mechanism of wealth up. It;s all about executive pay. "Shareholder value" is nothing then a ruse for getting outsize bonuses but top execs. Who cares if the company will be destroyed if you have a golden parachute ?
Notable quotes:
"... IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. ..."
"... Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R D and capital expenditures. They're all doing it. ..."
"... Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period. ..."
"... This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion. ..."
"... Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery. ..."
"... Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining. ..."
"... But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered. ..."
"... Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s). ..."
"... On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement? ..."
"... "Results of all this financial engineering? Revenues of the S P 500 companies are falling for the fourth quarter in a row – the worst such spell since the Financial Crisis." ..."
November 21, 2015 | naked capitalism

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

Magic trick turns into toxic mix.

Stocks have been on a tear to nowhere this year. Now investors are praying for a Santa rally to pull them out of the mire. They're counting on desperate amounts of share buybacks that companies fund by loading up on debt. But the magic trick that had performed miracles over the past few years is backfiring.

And there's a reason.

IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R&D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. And its stock is down 38% since March 2013.

Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R&D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R&D and capital expenditures. They're all doing it.

"Activist investors" – hedge funds – have been clamoring for it. An investigative report by Reuters, titled The Cannibalized Company, lined some of them up:

In March, General Motors Co acceded to a $5 billion share buyback to satisfy investor Harry Wilson. He had threatened a proxy fight if the auto maker didn't distribute some of the $25 billion cash hoard it had built up after emerging from bankruptcy just a few years earlier.

DuPont early this year announced a $4 billion buyback program – on top of a $5 billion program announced a year earlier – to beat back activist investor Nelson Peltz's Trian Fund Management, which was seeking four board seats to get its way.

In March, Qualcomm Inc., under pressure from hedge fund Jana Partners, agreed to boost its program to purchase $10 billion of its shares over the next 12 months; the company already had an existing $7.8 billion buyback program and a commitment to return three quarters of its free cash flow to shareholders.

And in July, Qualcomm announced 5,000 layoffs. It's hard to innovate when you're trying to please a hedge fund.

CEOs with a long-term outlook and a focus on innovation and investment, rather than financial engineering, come under intense pressure.

"None of it is optional; if you ignore them, you go away," Russ Daniels, a tech executive with 15 years at Apple and 13 years at HP, told Reuters. "It's all just resource allocation," he said. "The situation right now is there are a lot of investors who believe that they can make a better decision about how to apply that resource than the management of the business can."

Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period.

This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion.

Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery.

Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining.

"Serving customers, creating innovative new products, employing workers, taking care of the environment … are NOT the objectives of firms," sais Itzhak Ben-David, a finance professor of Ohio State University, a buyback proponent, according to Reuters. "These are components in the process that have the goal of maximizing shareholders' value."

But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered.

Citigroup credit analysts looked into the extent to which this is happening – and why. Christine Hughes, Chief Investment Strategist at OtterWood Capital, summarized the Citi report this way: "This dynamic of borrowing from bondholders to pay shareholders may be coming to an end…."

Their chart (via OtterWood Capital) shows that about half of the cumulative outperformance of these buyback queens from 2012 through 2014 has been frittered away this year, as their shares, IBM-like, have swooned...

... ... ...

Selected Skeptical Comments

Mbuna, November 21, 2015 at 7:31 am

Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how buy backs affect executive pay. "Shareholder value" is more often than not a ruse?

ng, November 21, 2015 at 8:58 am

probably, in some or most cases, but the effect on the stock is the same.

Alejandro, November 21, 2015 at 9:19 am

Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s).

On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement?

Jim, November 21, 2015 at 10:42 am

More nuance and less dogma please. The dogmatic tone really hurts what could otherwise be a fine but more-qualified position.

"Results of all this financial engineering? Revenues of the S&P 500 companies are falling for the fourth quarter in a row – the worst such spell since the Financial Crisis."

Eh, no. No question that buybacks *can* be asset-stripping and often are, but unless you tie capital allocation decisions closer to investment in the business such that they're mutually exclusive, this is specious and a reach. No one invests if they can't see the return. It would be just as easy to say that they're buying back stock because revenue is slipping and they have no other investment opportunities.

Revenues are falling in large part because these largest companies derive an ABSOLUTELY HUGE portion of their business overseas and the dollar has been ridiculously strong in the last 12-15 months. Rates are poised to rise, and the easy Fed-inspired rate arbitrage vis a vis stocks and "risk on" trade are closing. How about a little more context instead of just dogma?

John Malone made a career out of financial engineering, something like 30% annual returns for the 25 years of his CEO tenure at TCI. Buybacks were a huge part of that.

Perhaps an analysis of the monopolistic positions of so many American businesses that allow them the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more a result than a cause of dysfunction, but certainly not always bad.

[Nov 21, 2015] Ilargi The Great Fall Of China Started At Least 4 Years Ago

Notable quotes:
"... The biggest market in the world today is derivatives, money making money without a useful product or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making useful products and providing useful services is nearly irrelevant even today. ..."
"... "When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything." ..."
"... This problem of debt vs income seems to reflect the ongoing financialization (extraction, not to be confused with financing) of the global economy rather than a focus on capital development of people and the social and productive infrastructure. ..."
"... The "new model" was inefficient (too many fingers in the pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with reverse amortization), and critically dependent on rising home prices. Even leaving aside the pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion of the capital development of the economy. It left behind whole neighborhoods of abandoned homes as well as new home developments that could not be sold. ..."
"... In my understanding, the Great Depression was an implosion of the credit system after a period of over investment in productive capacity. The investors failing to pay the workers enough to buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom! ..."
"... China still has implicit state control of the banking sector, they may still have the political will to make any bad debt disappear with the puff of a fountain pen. That option is always available to a sovereign. ..."
"... They specialized in mass production the way agribusiness has here, where the production is not where the consumption is. It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The economic results in the grain belt would not be pretty. Ditto China. ..."
"... Except that China ain't Iowa, they can create a middle class as big as Europe and US combined. ..."
"... It's just anathema for the ruling class to give the little guys a break. ..."
"... The global glut of oil and other resources can't just be attributed to rising production in "tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and other metals as inputs. What I want to know is the extent of the cover-up, and what the global economy really looks like. ..."
"... We are not competent to forecast the future yet. Even the weather surprises us. Its also the case that people who do have relevant data are quite likely to convert that into profit rather than share it. ..."
"... It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation. I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market. ..."
"... Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman? ..."
Nov 20, 2015 | naked capitalism
Keith, November 20, 2015 at 7:41 am

We shouldn't be too surprised at falling commodity prices.

Using raw materials to make real things is all very 20th Century, financial engineering is the stuff of the 21st Century.

When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything.

Central Bank inflated asset bubbles will provide for all.

The biggest market in the world today is derivatives, money making money without a useful product or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making useful products and providing useful services is nearly irrelevant even today.

We are nearly there.

fresno dan, November 20, 2015 at 10:59 am

"When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything."

+1000
Ah, that glorious day when we're all rich, rich, RICHer than Midas from interest, dividends, and rents!!!
Just to amuse myself, I intend to be a dog poop scooper – and pick up some pocket change of 1 million dollars a poop…

MyLessThanPrimeBeef, November 20, 2015 at 12:37 pm

Money making money.

Be careful.

It's like 'light seeking light doth light of light beguile.'

Money seeking money and money will be of money beguiled.

skippy, November 20, 2015 at 8:29 am

Who cares about Brent when transport is going poof….

financial matters, November 20, 2015 at 8:45 am

This problem of debt vs income seems to reflect the ongoing financialization (extraction, not to be confused with financing) of the global economy rather than a focus on capital development of people and the social and productive infrastructure.

I liked how Wray and Mazzucato linked the two in their Mack the Turtle analogy.

"Underlying all of this financialization was the homeowner's income-something like Dr. Seuss's King Yertle the Turtle-with layer upon layer of financial instruments, all of which were supported by Mack the turtle's mortgage payments. The system collapsed because Mack fell delinquent on payments he could not possibly have met: the house was overpriced (and the mortgage could have been for more than 100% of the price!), the mortgage terms were too unfavorable, the fees collected by all the links in the home mortgage finance food chain were too large, Mack had to take a cut of pay and hours as the economy slowed, and the late fees piled up (fraudulently, in many cases as mortgage servicers "lost" payments).

The "new model" was inefficient (too many fingers in the pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with reverse amortization), and critically dependent on rising home prices. Even leaving aside the pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion of the capital development of the economy. It left behind whole neighborhoods of abandoned homes as well as new home developments that could not be sold."

Mission Oriented Finance

Carlos, November 20, 2015 at 9:34 am

Interesting, the supposition here is that China is heading for a depression similar to the Great Depression.

In my understanding, the Great Depression was an implosion of the credit system after a period of over investment in productive capacity. The investors failing to pay the workers enough to buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom!

China could well be headed down that road, there isn't enough money getting into the pockets of ordinary Chinese that's for sure. Elites everywhere just can't bring themselves to give a break for those at the bottom.

China still has implicit state control of the banking sector, they may still have the political will to make any bad debt disappear with the puff of a fountain pen. That option is always available to a sovereign.

Then again they may just realize in time, someone needs to be paid to buy all the junk.

James Levy, November 20, 2015 at 12:51 pm

They were counting on us and the Europeans, but we've let them down. The race to the bottom erased the global middle class that could buy Chinese consumer products.

They specialized in mass production the way agribusiness has here, where the production is not where the consumption is. It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The economic results in the grain belt would not be pretty. Ditto China.

Carlos, November 21, 2015 at 1:54 am

So the corn growers need to eat more corn, that's my logic.

Except that China ain't Iowa, they can create a middle class as big as Europe and US combined.

It's just anathema for the ruling class to give the little guys a break.

James Levy, November 20, 2015 at 12:56 pm

The global glut of oil and other resources can't just be attributed to rising production in "tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and other metals as inputs. What I want to know is the extent of the cover-up, and what the global economy really looks like.

susan the other, November 20, 2015 at 2:22 pm

Where were you in 2011? I was here reading NC. One of the Links posted was a graph of the abrupt shutdown of China's economy – It was a cliffscape.

Very long vertical drop off. So dramatic I could hardly believe it and I said I was having trouble catching my breath. Another commenter said it looked like a tsunami. Of exported deflation as it turns out.

Things have been extreme since 2007 when the banksters began to fall; 2008 when Lehman crashed (just after the Beijing Olympics, how convenient for China…) and credit shut down. China was doin' just fine until then. In spite of the irrational mess in global capitalist eonomix.

The only way to remedy it was to shut it down I guess. That's really not very fine-tuned for a system the whole world relies on, is it?

ewmayer, November 20, 2015 at 6:09 pm

Related, this Pollyanna-ish laff-riot op-ed from Ross Gittins, the economics editor of the Sydney Morning Herald:

Don't buy the China doom and gloom stories just yet

Proceeds from the laughable assumption that official China economic numbers 'may not be as reliable as we'd like' rather than being 'persistently and hugely faked,' (especially during slowdowns) and ignores that the housing-market slowdown and huge unsold-RE-overhang will also necessarily be accompanied by a price crash, hence a huge amount of toxic debt being exposed – really basic boom/bust dynamics.

And no demographic boom coming to the rescue, either. (But he does repeatedly invoke the magic 'service economy boom' mantra mentioned by Ilargi.) Thankfully most of the commenters rightly take the author to task.

MyLessThanPrimeBeef, November 20, 2015 at 6:32 pm

Not too long ago, some here were still not buying the doom and gloom stories.

I don't have if they have been persuaded otherwise since.

RBHoughton, November 20, 2015 at 7:50 pm

Couple of thoughts:

Firstly, its only China's buying that stops oil falling even further Sr Ilargi.

Secondly its a Peoples' Republic – employment must be maintained.

We are not competent to forecast the future yet. Even the weather surprises us. Its also the case that people who do have relevant data are quite likely to convert that into profit rather than share it.

Don't worry, be happy. It will be OK.

ewmayer, November 21, 2015 at 2:29 am

Tangential Friday night funny: What's in a name?

Received a small airmail parcel today containing some replacement attachments for my Dremel moto-tool … package was addressed from Shenzen, specifically the "Fuming Manufacturing Park".

Wade Riddick, November 21, 2015 at 4:57 am

It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation. I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market.

Ggg, November 21, 2015 at 6:53 am

Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman?

[Nov 18, 2015] Can Anything Stop Companies From Loading Up on Debt UBS Says No.

Notable quotes:
"... When it comes to the hubris of corporate chief financial officers, who have been more than happy leveraging up balance sheets in order to reward shareholders, the analysts didn't mince words. We find that corporate CFOs historically are inherently backward-looking when setting corporate financing decisions, relying on past extrapolations of economic activity, even when current market pricing suggests future investment returns may be lower, they wrote. ..."
"... That leaves downgrades by credit-rating agencies as one catalyst that could spark a turn in the cycle; downgrades of corporate credit have already exceeded upgrades this year at some of the bond graders. ..."
"... Might the rating agencies spoil the party? they asked. In the end we believe strong economic interests will overwhelm rationale considerations. Rating agencies remain heavily dependent on new issuance activity, face significant competitive pressures (as issuers will select two of three ratings) and appear unconcerned with where we are in the credit cycle (e.g., see Moody's latest conference call). ..."
"... With UBS having taken all those potential catalysts firmly off the table, that leaves just fundamentals to worry about. Who, for the past few years, has been worrying about those? [Sarcasm? - Editor] ..."
finance.yahoo.com

It's no secret that companies have been taking advantage of years of low interest rates to sell cheap debt to eager investors, locking in lower funding costs that have allowed them to go on a spree of share buybacks and mergers and acquisitions.

With fresh evidence that investors are becoming more discerning when it comes to corporate credit as they approach the first interest rate rise in the U.S. in almost a decade, it's worth asking whether anything might stop the trend of companies assuming more and more debt on their balance sheets.

... ... ...

For a start, they note that higher funding costs are unlikely to dissuade companies from continuing to tap the debt market since, even after a rate hike, financing costs will remain near historic lows. "The predominant reason is the Fed[eral Reserve] is anchoring low interest rates," the analysts wrote.

When it comes to the hubris of corporate chief financial officers, who have been more than happy leveraging up balance sheets in order to reward shareholders, the analysts didn't mince words. "We find that corporate CFOs historically are inherently backward-looking when setting corporate financing decisions, relying on past extrapolations of economic activity, even when current market pricing suggests future investment returns may be lower," they wrote. "Several management teams have been on the road indicating higher funding costs of up to 100 to 200 basis points would not impede attractive M&A deals, in their view."

Higher market volatility has often been cited as one factor that could knock the corporate credit market off its seat...

That leaves downgrades by credit-rating agencies as one catalyst that could spark a turn in the cycle; downgrades of corporate credit have already exceeded upgrades this year at some of the bond graders. Here, Mish and Caprio offered some stunningly blunt words. "Might the rating agencies spoil the party?" they asked. "In the end we believe strong economic interests will overwhelm rationale considerations. Rating agencies remain heavily dependent on new issuance activity, face significant competitive pressures (as issuers will select two of three ratings) and appear unconcerned with where we are in the credit cycle (e.g., see Moody's latest conference call)."

With UBS having taken all those potential catalysts firmly off the table, that leaves just fundamentals to worry about. Who, for the past few years, has been worrying about those? [Sarcasm? - Editor]

"Bottom line, we struggle to envision an end to the releveraging phenomenon-absent a substantial correction in corporate earnings and/or broader risk assets," concluded the UBS analysts.

[Nov 15, 2015] Election 2016 Democratic debate transcript Clinton, Sanders, OMalley in Iowa

Hillary tried to play the gender card and the 9/11 card in an attempt to escape to accusation (actually a provable fact) that she is a Wall Street sheel. "Why has Wall Street been the major campaign contributor to Hillary Clinton?" Sanders asked loudly, concluding that big contributors only give because "They expect to get something. Everybody knows it."
...Clinton asserted that under her bank-regulation plan, if Wall Street institutions don't play by the rules "I will break them up."
Sanders minced her defense into peaces: "Wall Street play by the rules? Who are we kidding?! The business model for Wall Street is fraud," Sanders fired back.
A short time later, the moderators got a tweet calling her out for "invoking 9/11" to justify taking donations from Wall Street. One tweeter said they'd never seen a candidate "invoke 9/11 to champion Wall Street. What does that have to do with taking big donations," Clinton was asked.
Sanders said that there's no getting around the fact that Wall Street has become a dominant political power and its "business model is greed and fraud, and for the sake of our economy major banks must be broken up."
Bernie compared himself to Ike, scoring one of the few real laugh lines of the night. CBS News moderator Nancy Cordes asked Sanders how he's going to pay for expensive programs such as his tuition-free college plan. By taxing the wealthy and big corporations, he says. Asked how much of a tax hike he's planning to stick them with, he responded, "We haven't come up with an exact number yet … But it will not be as high as the number under Dwight D. Eisenhower which was 90%," Sanders said of the Republican president.
"I'm not that much of a socialist compared to Eisenhower," Sanders concluded, to guffaws from the crowd.
CBS News

JOHN DICKERSON:

Senator Sanders, let me just follow this line of thinking. You've criticized then Senator Clinton's vote. Do you have anything to criticize in the way she performed as secretary of state?

BERNIE SANDERS:

I think we have a disagreement. And-- the disagreement is that not only did I vote against the war in Iraq, if you look at history, John, you will find that regime change-- whether it was in the early '50s in Iran, whether it was toppling Salvador Allende in Chile or whether it was overthrowing the government Guatemala way back when-- these invasions, these-- these toppling of governments, regime changes have unintended consequences. I would say that on this issue I'm a little bit more conservative than the secretary.

JOHN DICKERSON:

Here, let me go--

MARTIN O'MALLEY:

John, may I-- may I interject here? Secretary Clinton also said that we left the h-- it was not just the invasion of Iraq which Secretary Clinton voted for and has since said was a big mistake, and indeed it was. But it was also the cascading effects that followed that.

It was also the disbanding of-- many elements of the Iraqi army that are now showing up as part of ISIS. It was-- country after country without making the investment in human intelligence to understand who the new leaders were and the new forces were that are coming up. We need to be much more far f-- thinking in this new 21st century era of-- of nation state failures and conflict. It's not just about getting rid of a single dictator. It is about understanding the secondary and third consequences that fall next.

JOHN DICKERSON:

Governor O'Malley, I wanna ask you a question and you can add whatever you'd like to. But let me ask you, is the world too dangerous a place for a governor who has no foreign policy experience?

MARTIN O'MALLEY:

John, the world is a very dangerous place. But the world is not too dangerous of a place for the United States of America provided we act according to our principles, provided we act intelligently. I mean, let's talk about this arc of-- of instability that Secretary Clinton talked about.

Libya is now a mess. Syria is a mess. Iraq is a mess. Afghanistan is a mess. As Americans we have shown ourselves-- to have the greatest military on the face of the planet. But we are not so very good at anticipating threats and appreciating just how difficult it is to build up stable democracies and make the investments in sustainable development that we must as the nation if we are to attack the root causes of-- of the source of-- of instability.

And I wanted to add one other thing, John, and I think it's important for all of us on this stage. I was in Burlington, Iowa and a mom of a service member of ours who served two duties in Iraq said, "Governor O'Malley, please, when you're with your other candidates and colleagues on-- on stage, please don't use the term boots on Iraq-- on the ground. Please don't use the term boots on the ground. My son is not a pair of boots on the ground."

These are American soldiers and we fail them when we fail to take into account what happens the day after a dictator falls. And when we fall to act with a whole of government approach with sustainable development, diplomacy and our economic power in-- alignment with our principles.

BERNIE SANDERS:

But when you talk about the long-term consequences of war let's talk about the men and women who came home from war. The 500,000 who came home with P.T.S.D. and traumatic brain injury. And I would hope that in the midst of all of this discussion this country makes certain that we do not turn our backs on the men and women who put their lives on the line to defend us. And that we stand with them as they have stood with us.

JOHN DICKERSON:

Senator Sanders, you've-- you've said that the donations to Secretary Clinton are compromising. So what did you think of her answer?

BERNIE SANDERS:

Not good enough. (LAUGH) Here's the story. I mean, you know, let's not be naive about it. Why do-- why over her political career has Wall Street a major-- the major-- campaign contributor to Hillary Clinton? You know, maybe they're dumb and they don't know what they're gonna get. But I don't think so.

Here is the major issue when we talk about Wall Street, it ain't complicated. You got six financial institutions today that have assets of 56 per-- equivalent to 50-- six percent of the GDP in America. They issue two thirds of the credit cards and one third of the mortgages. If Teddy Roosevelt, the good republican, were alive today you know what he'd say? "Break them up. Reestablish (APPLAUSE) (UNINTEL) like Teddy Roosevelt (UNINTEL) that is leadership. So I am the only candidate up here that doesn't have a super PAC. I'm not asking Wall Street or the billionaires for money. I will break up these banks, support community banks and credit unions-- credit unions. That's the future of banking in America.

JOHN DICKERSON:

Quick follow-up because you-- you-- (APPLAUSE) Secretary Clinton, you'll get a chance to respond. You said they know what they're going to get. What are they gonna get?

BERNIE SANDERS:

I have never heard a candidate, never, who's received huge amounts of money from oil, from coal, from Wall Street, from the military industrial complex, not one candidate, go, "OH, these-- these campaign contributions will not influence me. I'm gonna be independent." Now, why do they make millions of dollars of campaign contributions? They expect to get something. Everybody knows that. Once again, I am running a campaign differently than any other candidate. We are relying on small campaign donors, $750,000 and $30 apiece. That's who I'm indebted to.

BERNIE SANDERS:

Here's-- she touches on two broad issues. It's not just Wall Street. It's campaigns, a corrupt campaign finance system. And it is easy to talk the talk about ending-- Citizens United. But what I think we need to do is show by example that we are prepared to not rely on large corporations and Wall Street for campaign contributions.

And that's what I'm doing. In terms of Wall Street I respectfully disagree with you, Madame Secretary in the sense that the issue is when you have such incredible power and such incredible wealth, when you have Wall Street spending five billion dollars over a ten year period to get re-- to get deregulated the only answer that I know is break them up, reestablish Glass Steagall.

JOHN DICKERSON:

Senator, we have to get Senator O'Malley in. But no-- along with your answer how many Wall Street-- veterans would you have in your administration?

MARTIN O'MALLEY:

Well, I'll tell you what, I've said this before, I-- I don't-- I believe that we actually need some new economic thinking in the White House. And I would not have Robert Rubin or Larry Summers with all due respect, Secretary Clinton, to you and to them, back on my council of economic advisors.

HILLARY CLINTON:

Anyone (UNINTEL PHRASE).

MARTIN O'MALLEY:

If they were architects, sure, we'll-- we'll have-- we'll have an inclusive group. But I won't be taking my orders from Wall Street. And-- look, let me say this-- I put out a proposal-- I was on the front line when people lost their homes, when people lost their jobs.

I was on the front lines as the governor-- fighting against-- fighting that battle. Our economy was wrecked by the big banks of Wall Street. And Secretary Clinton-- when you put out your proposal (LAUGH) on Wall Street it was greeted by many as quote/ unquote weak tea. It is weak tea. It is not what the people expect of our country. We expect that our president will protect the main street economy from excesses on Wall Street. And that's why Bernie's right. We need to reinstate a modern version of Glass Steagall and we should have done it already. (APPLAUSE)

KATHIE OBRADOVICH:

And I will also go after executives who are responsible for the decisions that have such bad consequences for our country. (APPLAUSE)

BERNIE SANDERS:

Look, I don't know-- with all due respect to the secretary, Wall Street played by the rules. Who are we kidding? The business model of Wall Street is fraud. That's what it is. And we-- we have-- (APPLAUSE) and let me make this promise, one of the problems we have had I think all-- all Americans understand it is whether it's republican administration or democratic administration we have seen Wall Street and Goldman Sachs dominate administrations. Here's my promise Wall Street representatives will not be in my cabinet. (APPLAUSE)

BERNIE SANDERS:

But let's-- let me hear it-- if there's any difference between the secretary and myself. I have voted time and again to-- for-- for the background checks. And I wanna see it improved and expanded. I wanna see them do away with the gun show loophole. In 1988 I lost an election because I said we should not have assault weapons on the streets of America.

We have to do away with the strong man proposal. We need radical changes in mental health in America. So somebody who's suicidal or homicidal can get the emergency care they need. But we have-- I don't know that there's any disagreement here.

MARTIN O'MALLEY:

John, this is another one of those examples. Look, we have-- we have a lot of work to do. And we're the only nation on the planet that buries as many of our people from gun violence as we do in my own state after they-- the children in that Connecticut classroom were gunned down, we passed comprehensive-- gun safety legislation, background checks, ban on assault weapons.

And senator, I think we do need to repeal that immunity that you granted to the gun industry. But Secretary Clinton, you've been on three sides of this. When you ran in 2000 you said that we needed federal robust regulations. Then in 2008 you were portraying yourself as Annie Oakley and saying that we don't need those regulation on the federal level. And now you're coming back around here. So John, there's a big difference between leading by polls and leading with principle. We got it done in my state by leading with principle. And that's what we need to do as a party, comprehensive gun--

MARTIN O'MALLEY:

John, there is not-- a serious economist who would disagree that the six big banks of Wall Street have taken on so much power and that all of us are still on the hook to bail them out on their bad debts. That's not capitalism, Secretary Clinton-- Clinton, that's crummy capitalism.

That's a wonderful business model if you place that bet-- the taxpayers bail you out. But if you place good ones you pocket it. Look, I don't believe that the model-- there's lots of good people that work in finance, Secretary Sanders. But Secretary Clinton, we need to step up. And we need to protect main street from Wall Street. And you can't do that by-- by campaigning as the candidate of Wall Street. I am not the candidate of Wall Street. And I encourage--

BERNIE SANDERS:

No, it's not throwing-- it is an extraordinary investment for this country. In Germany, many other countries do it already. In fact, if you remember, 50, 60 years ago, University of California, City University of New York were virtually tuition-free. Here it's a new (?) story.

It's not just that college graduates should be $50,000 or $100,000 in debt. More importantly, I want kids in Burlington, Vermont, or Baltimore, Maryland, who are in the six grade or the eighth grade who don't have a lot of money, whose parents that-- like my parents, may never have gone to college. You know what I want, Kevin? I want those kids to know that if they study hard, they do their homework, regardless of the income of their families, they will in fact be able to great a college education. Because we're gonna make public colleges and universities tuition-free. This is revolutionary for education in America. It will give hope for millions of young people.

BERNIE SANDERS:

It's not gonna happen tomorrow. And it's probably not gonna happen until you have real campaign finance reform and get rid of all these super PACs and the power of the insurance companies and the drug companies. But at the end of the day, Nancy, here is a question. In this great country of ours, with so much intelligence, with so much capabilities, why do we remain the only (UNINTEL) country on earth that does not guarantee healthcare to all people as a right?

Why do we continue to get ripped off by the drug companies who can charge us any prices they want? Why is it that we are spending per capita far, far more than Canada, which is a hundred miles away from my door, that guarantees healthcare to all people? It will not happen tomorrow. But when millions of people stand up and are prepared to take on the insurance companies and the drug companies, it will happen and I will lead that effort. Medicare for all, single-payer system is the way we should go. (APPLAUSE)

BERNIE SANDERS:

Well-- I had the honor of being chairman of the U.S. Senate Committee on Veteran Affairs for two years. And in that capacity, I met with just an extraordinary group of people from World War II, from Korea, Vietnam, all of the wars. People who came back from Iraq and Afghanistan without legs, without arms. And I've been determined to do everything that I could to make VA healthcare the best in the world, to expand benefits to the men and women who put their lives on the line to defend (UNINTEL).

And we brought together legislation, supported by the American Legion, the VFW, the DAV, Vietnam Vets, all of the veterans' organizations, which was comprehensive, clearly the best (UNINTEL) for veterans' legislation brought forth in decades. I could only get two Republican votes on that. And after 56 votes, we didn't get 60. So what I have to do then is go back and start working on a bill that wasn't the bill that I wanted.

To (UNINTEL) people like John McCain, to (UNINTEL) people like Jeff Miller, the Republican chairman of the House, and work on a bill. It wasn't the bill that I wanted. But yet, it turns out to be one of the most significant pieces of veterans' legislation passed in recent history. You know, the crisis was, I lost what I wanted. But I have to stand up and come back and get the best that we could.

JOHN DICKERSON:

All right, Senator Sanders. We end-- (APPLAUSE) we've ended the evening on crisis, which underscores and reminds us again of what happened last night. Now let's move to closing statements, Governor O'Malley?

MARTIN O'MALLEY:

John, thank you. And to all of the people of Iowa, for the role that you've performed in this presidential selection process, if you believe that our country's problems and the threats that we face in this world can only be met with new thinking, new and fresh approaches, then I ask you to join my campaign. Go onto MartinOMalley.com. No hour is too short, no dollar too small.

If you-- we will not solve our nation's problems by resorting to the divisive ideologies of our past or by returning to polarizing figures from our past. We are at the threshold of a new era of American progress. That it's going to require that we act as Americans, based on our principles. Here at home, making an economy that works for all of us.

And also, acting according to our principles and constructing a new foreign policy of engagement and collaboration and doing a much better job of identifying threats before they back us into military corners. There is new-- no challenge too great for the United States to confront, provided we have the ability and the courage to put forward new leadership that can move us to those better and safer and more prosperous (UNINTEL). I need your help. Thank you very, very much. (APPLAUSE)

BERNIE SANDERS:

This country today has more income and wealth inequality than any major country on earth. We have a corrupt campaign finance system, dominated by super PACs. We're the only major country on earth that doesn't guarantee healthcare to all people. We have the highest rate of childhood poverty. And we're the only in the world, (UNINTEL) the only country that doesn't guarantee paid family and medical leave. That's not the America that I think we should be.

But in order to bring about the changes that we need, we need a political revolution. Millions of people are gonna have to stand up, turn off the TVs, get involved in the political process, and tell the big monied interests that we are taking back our country. Please go to BernieSanders.com, please become part of the political revolution. Thank you. (CHEERING) (APPLAUSE)

[Nov 12, 2015] Oil Industry Needs Half a Trillion Dollars to Endure Price Slump

Notable quotes:
"... I agree. Excellent point on the frack log, but at some point with the reduced rate of drilling the frack log will dwindle. Let's take the Bakken where we have the best numbers, Enno estimates around 800 DUC wells (rough guess from memory), to make things simple let's assume no more wells are drilled because prices are so low. If 80 wells per month are completed the DUCs are gone in July 2016. Now the no wells drilled is probably not realistic. If 40 wells per month are drilled (though at these oil prices I still don't understand why) the 800 DUCs would last for 20 months rather than only 10 months, so your story makes sense at least for the Bakken. ..."
"... One thing to be careful with the fracklog, is that not all of these will be good wells. ..."
"... I agree that high cost will be likely to reduce demand. The optimistic forecasts assume there will be low cost supply judging by the price scenarios. For AEO 2013 Brent remains under $110/b (2013$) until 2031 and only reaches $141/b (2013$) in 2040. ..."
"... "Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years. ..."
"... U.S. drillers account for 20 percent of the debt due in 2015, ..."
peakoilbarrel.com

ChiefEngineer , 11/09/2015 at 2:46 pm

Saudi Arabia will not stop pumping to boost oil prices

http://www.cnbc.com/2015/11/09/

"Mr Falih, who is also health minister, forecast the market would come into balance in the new year, and then demand would start to suck up inventories and storage on oil tankers. "Hopefully, however, there will be enough investment to meet the needs beyond 2017."

Other officials also estimated that it would probably take one to two years for the market to clear up the oil market glut, allowing prices to recover towards $70-$80 a barrel."

Greenbub, 11/09/2015 at 2:54 pm

Chief, that link went dead, this might be right:
http://www.cnbc.com/2015/11/09/reuters-america-update-1-saudi-arabia-sees-robust-oil-fundamentals-as-rival-output-falls.html

Ron Patterson, 11/09/2015 at 4:40 pm

From your link, bold mine:

"Non-OPEC supply is expected to fall in 2016, only one year after the deep cuts in investment," he said.

"Beyond 2016, the fall in non-OPEC supply is likely to accelerate, as the cancellation and postponement of projects will start feeding into future supplies, and the impact of previous record investments on oil output starts to fade away."

I thought just about everyone was expecting a rebound in production by 2017?

AlexS, 11/09/2015 at 7:50 pm
Ron, Dennis

The EIA. IEA. OPEC and most others expect non-OPEC production, excluding the U.S. and Canada to decline in 2016 and the next few years due to the decline in investments and postponement / canceling of new projects. Production in Canada is still projected to continue to grow, but at a much slower rate than previously expected.

Finally, U.S. C+C production is expected to rebound in the second half of 2016 due to slightly higher oil prices ($55-57/bbl WTI). Also, U.S. NGL production proved much more resilient, than C+C, despite very low NGL prices.

Non-OPEC ex U.S. and Canada total liquids supply (mb/d)
Source: EIA STEO October 2015

Dennis Coyne, 11/10/2015 at 9:10 am

Hi AlexS,

Thanks. I don't think oil prices at $56/b is enough to increase the drilling in the LTO plays to the extent that output will increase, it may stop the decline and result in a plateau, it's hard to know.

On the "liquids" forecast, the NGL is not adjusted for energy content as it should be, each barrel of NGL has only 70% of the energy content of an average C+C barrel and the every 10 barrels of NGL should be counted as 7 barrels so that the liquids are reported in barrels of oil equivalent (or better yet report the output in gigajoules (1E9) or exajoules(1E18)). The same conversion should be done for ethanol as well.

AlexS, 11/10/2015 at 9:54 am

Dennis,

Note that not only the EIA, but also the IEA, OPEC, energy consultancies and investment banks are projecting a recovery in US oil production in the later part of next year.

That said, I agree with you that $56 WTI projected by the EIA may not be sufficient to trigger a fast rebound in drilling activity. However there is also a backlog of drilled but uncompleted wells that could be completed and put into operation with slightly higher oil prices.

Most shale companies have announced further cuts in investment budgets in 2016, so I think it is difficult to expect significant growth in the U.S. onshore oil production in 2H16.

If and when oil prices reach $65-70/bbl, I think LTO may start to recover (probably in 2017 ?). I think that annual growth rates will never reach 1mb/d+ seen in 2012-14, but 0.5 mb/d annual average growth is quite possible for several years with oil prices exceeding $70.

Dennis Coyne, 11/10/2015 at 1:33 pm

Hi AlexS,

I agree. Excellent point on the frack log, but at some point with the reduced rate of drilling the frack log will dwindle. Let's take the Bakken where we have the best numbers, Enno estimates around 800 DUC wells (rough guess from memory), to make things simple let's assume no more wells are drilled because prices are so low. If 80 wells per month are completed the DUCs are gone in July 2016. Now the no wells drilled is probably not realistic. If 40 wells per month are drilled (though at these oil prices I still don't understand why) the 800 DUCs would last for 20 months rather than only 10 months, so your story makes sense at least for the Bakken.

I have no idea what the frack log looks like for the Eagle Ford. If its similar to the Bakken and they complete 130 new wells per month, with about 61 oil rigs currently turning in the EF they can drill 80 wells per month, so they would need 50 wells each month from the frack log. If there are 800 DUCs, then that would last for 16 months.

The economics are better in the Eagle Ford because the wells are cheaper and transport costs are lower, but the EUR of the wells is also lower (230 kb vs 336 kb), the well profile has a thinner tail than the Bakken wells. I am not too confident about the EIA's DPR predictions for the Eagle Ford, output will decrease, but perhaps they(EIA) assume the frack log is zero and that only 75 new wells will be added to the Eagle Ford each month. If my guess of 150 new wells per month on average from Sept to Dec 2015 is correct, then decline from August to Dec 204 will only be about 100 kb/d and 255 kb/d from March to Dec 2015 (155 kb/d from March to August 2015).

Toolpush, 11/11/2015 at 12:45 pm

Dennis,

One thing to be careful with the fracklog, is that not all of these will be good wells. It is fair enough that companies like EOG will have some good DUCs, (should there be a "k" in that?) in their fracklogs. But as the fracklog is worked through, I am sure there will be a some very ugly DUCklings, that nobody wants to admit to.
How many fall into this category, will be anybodies guess, but not all DUC, will turn out to be beautiful swans?

Dennis Coyne, 11/10/2015 at 1:57 pm

Hi AlexS,

On the predictions of the EIA and IEA, they also expect total oil supply to be quite high in 2040. For example the EIA in their International Energy Outlook reference case they have C+C output at 99 Mb/d in 2040.

Their short term forecasts are probably better than that, but my expectation for 2040 C+C output is 62 Mb/d (which many believe is seriously optimistic, though you have never expressed an opinion as far as I remember).

So I take many of these forecasts with a grain of salt, they are often more optimistic than me, others are far more pessimistic, the middle ground is sometimes more realistic.

AlexS, 11/10/2015 at 9:08 pm
Dennis,

You said above that estimated URR of all global C+C (ex oil sands in Canada and Venezuela) is 2500 Gb. And about 1250 Gb of C+C had been produced at the end of 2014. So the remaining resources are 1250 Gb.

BP estimates total global proved oil reserves as of 2014 at 1700 Gb, or 1313 excluding Canadian oil sands and Venezuela's extra heavy oil. Their estimate in 2000 was 1301 Gb and 1126 Gb. Hence, despite cumulative production of 419 Gb in 2001-2014, proved reserves increased by 187 Gb, or 400 Gb including oil sands and Venezuela's Orinoco oil. Note that BP's estimate is for proved (not P+P) reserves, but it includes C+C+NGLs. My very rough guess is that NGLs account for between 5% and 10% of the total.

You may be skeptical about BP's estimates, but the fact is that proved reserves or 2P resources are not a constant number; they are increasing due to new discoveries and technological advances.

BTW, the EIA's estimate of global C+C production increasing from 79 mb/d in 2014 to 99 mb/d in 2040 implies a cumulative output of 836 Gb, about 2/3 of your estimate of remaining 2P resources of C+C or BP's estimate of the current proved reserves. Given future discoveries and improvements in technology, I think that further growth of global oil production to about 100 mb/d by 2040 should not be constrained by resource scarcity.

What can really make the EIA's and IEA's estimates too optimistic is not the depleting resource base, but the high cost of future supply, political factors and/or lower than expected demand.

Dennis Coyne, 11/11/2015 at 11:05 am
Hi AlexS,

Thanks.

You are quite optimistic. Note that I add 300 Gb to the 2500 Gb Hubbert Linearization estimate to account for reserve growth and discoveries.

The oil reserves reported in the BP Statistical review are 1312 Gb. Jean Laherrere estimates that about 300 Gb of OPEC reserves are "political" to keep quotas at appropriate levels with respect to "true" reserve levels. So the actual 2P reserves are likely to be 1010 Gb. Some of the cumulative C+C output is extra heavy oil so the cumulative C+C-XH output is 1240 Gb so we have a total cumulative discovery (cumulative output plus 2P reserves) of 2250 Gb through 2014.

My medium scenario with a URR of 2800 Gb of C+C-XH plus 600 Gb of XH oil (3400 Gb total C+C) assumes 550 Gb of discoveries plus reserve growth.

What do you expect for a URR for C+C?

Keep in mind that at some point oil prices rise to a level that substitutes for much of present oil use will become competitive, so oil prices above $175/b (in 2015$) are unlikely to be sustained in my view.

In a wider format below I will present a scenario with what extraction rates would be needed for my medium scenario to reach 99 Mb/d in 2040.

Dennis Coyne, 11/11/2015 at 4:20 pm
Hi Alex S,

I agree that high cost will be likely to reduce demand. The optimistic forecasts assume there will be low cost supply judging by the price scenarios. For AEO 2013 Brent remains under $110/b (2013$) until 2031 and only reaches $141/b (2013$) in 2040.

Depleting resources will raise production cost to more than these prices and demand will be reduced due to high oil prices. There will be an interaction between depletion and the economics of supply and demand. It will be depletion that raises costs, which will raise prices and reduce demand.

AlexS, 11/11/2015 at 4:41 pm
It will be depletion of low-cost reserves that raises marginal costs and prices. High-cost reserves may be abundant, but prices will rise.
AlexS, 11/09/2015 at 7:55 pm
corrected chart:

TechGuy, 11/10/2015 at 10:19 am
Oil Industry Needs Half a Trillion Dollars to Endure Price Slump
http://www.bloomberg.com/news/articles/2015-08-26/oil-industry-needs-to-find-half-a-trillion-dollars-to-survive

"Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years.

U.S. drillers account for 20 percent of the debt due in 2015, Chinese companies rank second with 12 percent and U.K. producers represent 9 percent."

[These are just the bonds that have yields higher than 10%]

[Its very unlikely that prices will recover in time to save many of the drillers, and even if prices recover, even $75 oil will not help since they need $90 to break even to service the debt. Also not sure who is going to buy maturing debt so it can be rolled over. Even if prices slowly recover, there is likely to be fewer people willing to loan money drillers.]

Watcher, 11/10/2015 at 5:18 pm
Don't bet on it. Probably be even better if the price declines more. Apocalypse will not be permitted.

[Nov 11, 2015] Four US Firms With $4.8 Billion In Debt Warned This Week They May Default Any Minute

Zero Hedge

agent default

It's not just the oil. The oil is convenient to point at because the US can pretend that they got SA to cause the drop in order to stick it to Russia. Makes the US look really smug. Meanwhile the truth is, copper down, zinc down, iron ore down, you name it down.

Baltic Dry almost crashing, soft commodities gone to hell. I guess SA can also influence these markets as well.

[Nov 11, 2015] Questions for Monetary Policy

Notable quotes:
"... Looking at the recent moves in exchange rates based on a simple switch in expectation of whether or not the Fed would raise rates in December or wait one or two meetings its seems obvious that the markets are not very good at anticipation. So I would not put much money on the ability of the markets to anticipate the trajectory and endpoint of raising rates - or the ability of anybody to guess where the exchange rates will go next. ..."
"... The drop in hours worked data in the productivity report is very confusing. ..."
"... I think lower oil prices has lead to a stronger consumption boost than initially thought. ..."
economistsview.typepad.com
James Bullard, president of the St. Louis Fed, says there are five questions for monetary policy:

The five questions

  • What are the chances of a hard landing in China?
  • Have U.S. financial market stress indicators worsened substantially?
  • Has the U.S. labor market returned to normal?
  • What will the headline inflation rate be once the effects of the oil price shock dissipate?
  • Will the U.S. dollar continue to gain value against rival currencies?

I would add:

Anything else?

sanjait said in reply to Anonymous...

Markets move based on expectations of both economic fundamentals and the Fed's reaction function. So both can create surprises.

In this case, a relatively stronger than expected US economy could push the dollar up quite a bit. The central bank would be expected to dampen but not eliminate this effect, even without changing their perceived reaction function.

DeDude said in reply to Anonymous... , November 10, 2015 at 02:35 PM

Looking at the recent moves in exchange rates based on a simple switch in expectation of whether or not the Fed would raise rates in December or wait one or two meetings its seems obvious that the markets are not very good at anticipation. So I would not put much money on the ability of the markets to anticipate the trajectory and endpoint of raising rates - or the ability of anybody to guess where the exchange rates will go next.

What we can say is that the strengthening of the US$ that has happened recently will hurt the economy - whether it will hurt enough to slow the Fed is anybodies guess. Whether those guesses have already been baked into the exchange rates is impossible to predict.

Bert Schlitz said...

On Angry Bear, there is a post about 3rd quarter hours and Spencer's remark:

"The drop in hours worked data in the productivity report is very confusing.

The employment shows several measures of hours worked and they increased in the third quarter from 0.5% to 1,08 for aggregate weekly payrolls.

Something is really change.

The productivity report also had unit labor cost rising more than prices,
This implies falling profits, what the S&P 500 shows."

Basically wages accelerated rapidly in the 3rd quarter. The BLS didn't start catching up to it until October. My guess the hours drop and employment picks up trying to hold down costs. However, this will probably only level off things off for a few quarters, which would be good enough to profits catch back up until the labor market becomes so tight, they simply have no choice but to raise prices and hours worked surge again. Classic mid-cycle behavior (which Lambert should have noticed).

This is what triggered the 3rd quarter selloff and inventory correction. That foreign stuff was for show. I think lower oil prices has lead to a stronger consumption boost than initially thought.

am said...

Clicked on this link for the answers but it is 34 blank pages, so i'll go for:
1. No, they'll just devalue when need be to soften the landing. I think they will do another one before the end of the year.
2. No idea.
3. Near it if you believe the Atlanta Fed. They have a detailed analysis on their blog.
4. 2.2 if you believe the St Louis Fed, end of December for the oil price decline washout from the system. So inflation will creep up by the end of the year.
5. Yes and more so if they raise the rate.
6. No. because it will just be oil led not wages (see 4).
Anything else: the weather with apologies to PeterK.

anne said...

I am really having increasing trouble understanding, how is it that having a Democratic President means making sure appointments from the State or Defense Department to the Federal Reserve are highly conservative and even Republican. Republicans will not even need to elect a President to have conservatives strewn about the government:

http://www.latimes.com/business/la-fi-neel-kashkari-federal-reserve-minneapolis-20151110-story.html

November 10, 2015

After failed GOP bid to be California's governor, Neel Kashkari will head Minneapolis Fed
By Jim Puzzanghera - Los Angeles Times

anne said in reply to anne...

Neel Kashkari is another Goldman Sachs kid, what would you expect?

anne said in reply to anne...

http://www.nytimes.com/2015/11/11/business/ex-treasury-official-kashkari-named-minneapolis-fed-president.html

November 10, 2015

Neel Kashkari, Ex-Treasury Official, Named Minneapolis Fed President
By BINYAMIN APPELBAUM

Neel Kashkari is the third new president of a regional reserve bank named this year, and all three previously worked at Goldman Sachs.

[ Really, well, creepy comes to mind. ]

[Nov 11, 2015] Valentin Katasonov - Banks Rule the World, but Who Rules the Banks (II)

Notable quotes:
"... do not just own shares in American banks, they own mainly voting shares. It these financial companies that exercise the real control over the US banking system. ..."
Strategic Culture Foundation
Financial holding companies like the Vanguard Group, State Street Corporation, FMR (Fidelity), BlackRock, Northern Trust, Capital World Investors, Massachusetts Financial Services, Price (T. Rowe) Associates Inc., Dodge & Cox Inc., Invesco Ltd., Franklin Resources, Inc., АХА, Capital Group Companies, Pacific Investment Management Co. (PIMCO) and several others do not just own shares in American banks, they own mainly voting shares. It these financial companies that exercise the real control over the US banking system.

Some analysts believe that just four financial companies make up the main body of shareholders of Wall Street banks. The other shareholder companies either do not fall into the key shareholder category, or they are controlled by the same 'big four' either directly or through a chain of intermediaries. Table 4 provides a summary of the main shareholders of the leading US banks.

Table 4.

Leading institutional shareholders of the main US banks

Name of shareholder company Controlled assets, valuation (trillions of dollars; date of evaluation in brackets) Number of employees
Vanguard Group 3 (autumn 2014) 12,000
State Street Corporation 2.35 (mid-2013) 29,500
FMR (Fidelity) 4.9 (April 2014) 41,000
Black Rock 4.57 (end of 2013) 11,400

Evaluations of the amount of assets under the control of financial companies that are shareholders of the main US banks are rather arbitrary and are revised periodically. In some cases, the evaluations only include the companies' main assets, while in others they also include assets that have been transferred over to the companies' control. In any event, the size of their controlled assets is impressive. In the autumn of 2013, the Industrial and Commercial Bank of China (ICBC) was at the top of the list of the world's banks ranked by asset size with assets totaling $3.1 trillion. At that point in time, the Bank of America had the most assets in the US banking system ($2.1 trillion). Just behind were US banks like Citigroup ($1.9 trillion) and Wells Fargo ($1.5 trillion).

[Nov 09, 2015] Supervising Culture and Behavior at Financial Institutions

Notable quotes:
"... Organizational culture and behavior is a critical factor in the success of any business. The intense emphasis most American businesses place on numbers to the exclusion of almost any other consideration is a major contributor to the vast amount of corporate control fraud we have witnessed in the past decade or so. ..."
"... One of the fundamental tenets of Reaganism/Libertarianism is that "The Ends Justify the Means." The financial sector is not the only institution in our civilization that is failing due to this mind-set. The best form of regulation is simply holding up a mirror to a firm or agency and asking questions such as, "In this organization, when is it OK to lie?" ..."
Nov 09, 2015 | naked capitalism

John Zelnicker, November 7, 2015 at 9:49 am

Fascinating research. Thanks for posting this, Yves.

Organizational culture and behavior is a critical factor in the success of any business. The intense emphasis most American businesses place on numbers to the exclusion of almost any other consideration is a major contributor to the vast amount of corporate control fraud we have witnessed in the past decade or so.

Unfortunately, I don't see any of these executive psychopaths putting themselves through the self-assessment that is one of the necessary steps mentioned in the study. At least, not voluntarily.

Sluggeaux, November 7, 2015 at 11:39 am

Important.

One of the fundamental tenets of Reaganism/Libertarianism is that "The Ends Justify the Means." The financial sector is not the only institution in our civilization that is failing due to this mind-set. The best form of regulation is simply holding up a mirror to a firm or agency and asking questions such as, "In this organization, when is it OK to lie?"

[Oct 31, 2015] No Real Chance of Another Financial Crisis - Silly

Notable quotes:
"... The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only someone truly secure in their thinking, or forsworn to some strong ideological interpretation of reality or bias if we are truly honest, dare not salute it. ..."
"... But it makes the point which I have made over and again, that all of the economic models are faulty and merely a caricature of reality. And therefore policy ought not to be dictated by models, but by policy objectives and a strong bias to results, rather than the dictates of process or methods. In this FDR had it exactly right. If we find something does not stimulate the broader economy or effect the desired policy objective, like tax cuts for the rich, using that approach over and over again is certainly not going to be effective. ..."
"... Economics are a form of social and political science. And with the political and social process corrupted by big money, what can we expect from would be philosopher kings. ..."
"... The interconnectedness of the global system with its massive and underregulated TBTF Banks, the widespread and often fraudulent mispricing of risk, all make cause for a financial system to be fragile. In this thinking Nassim Taleb is far ahead of the common economic thought as a real systems thinker. The Fed is not a systemic thinking organization because they are owned by the financial status quo, and real systemic reform rarely comes from within. ..."
"... So Mr. Baker, rather than looking for the bubble, lets say we have a fragile system still disordered and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk for short term profits, manipulating markets, and distorting the processes designed to maintain a balance in the economy. Rather than hold out for a new bubble as your criterion, perhaps we may also consider that the patient is still on full life support after the last bubble and crisis. Why do we need to find a new source of malady when the old one is still having its way? ..."
"... A new crisis does not have to happen. This is the vain comfort in these sorts of black swan events, being hard to predict. But they can be more likely given the right conditions, and I fear little will be done about this one until even those who are quite personally comfortable with things as they are begin to feel the pain, ..."
"... neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously. ..."
"... If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story... ..."
jessescrossroadscafe.blogspot.com

I like Dean Baker quite well, and often link to his columns. On most things we are pretty much on the same page.

And to his credit he was one of the few 'mainstream' economists to actually see the housing bubble developing, and call it out. Some may claim to have done so, and can even cite a sentence or two where they may have mentioned it, like Paul Krugman for example. But very few spoke about doing something about it while it was in progress. The Fed was aware according to their own minutes, and ignored it.

The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only someone truly secure in their thinking, or forsworn to some strong ideological interpretation of reality or bias if we are truly honest, dare not salute it.

Am I such a person? Do I actually see a fragile financial system that is still corrupt and highly levered, grossly mispricing risks? Or am I just seeing things the way in which I wish to see them?

That difficulty arises because economics is no science. It involves judgment and principles, and weighs the facts far too heavily based upon 'reputation' and 'status.' And of course I have none of those and wish none.

But it makes the point which I have made over and again, that all of the economic models are faulty and merely a caricature of reality. And therefore policy ought not to be dictated by models, but by policy objectives and a strong bias to results, rather than the dictates of process or methods. In this FDR had it exactly right. If we find something does not stimulate the broader economy or effect the desired policy objective, like tax cuts for the rich, using that approach over and over again is certainly not going to be effective.

Economics are a form of social and political science. And with the political and social process corrupted by big money, what can we expect from would be 'philosopher kings.'

The housing bubble was no 'cause' of the latest financial crisis. More properly it was the tinder and the trigger event. The S&L crisis was just as great, if not greater. Why then did it not bring the global financial system to its knees?

The interconnectedness of the global system with its massive and underregulated TBTF Banks, the widespread and often fraudulent mispricing of risk, all make cause for a financial system to be 'fragile.' In this thinking Nassim Taleb is far ahead of the common economic thought as a real 'systems thinker.' The Fed is not a systemic thinking organization because they are owned by the financial status quo, and real systemic reform rarely comes from within.

I see the same fragility which existed from 1999 to 2008 still in the system, only grown larger, global, and more profoundly influencing the political processes.

The only question is what 'trigger event' might set it spinning, and how great of a magnitude will it have to be in order to do so. The more fragile the system, the less that is required to knock it off its underpinnings.

And a crisis is not a binary event. There is the 'trigger' and the dawning perception of risks, and the initial responses of the political, social, and regulatory powers.

There is no point in debating this, because the regulators and powerful groups like the Fed are caught in a credibility trap, which prevents them from seeing things as they are, and saying so.

So Mr. Baker, rather than looking for the bubble, let's say we have a fragile system still disordered and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk for short term profits, manipulating markets, and distorting the processes designed to maintain a balance in the economy. Rather than hold out for a 'new bubble' as your criterion, perhaps we may also consider that the patient is still on full life support after the last bubble and crisis. Why do we need to find a new source of malady when the old one is still having its way?

I think if one exercises clear and open judgement, they can see that we have stirred up the same pot of witches brew that has made the system fragile and vulnerable to an exogenous shock, and has kept it so.

A new crisis does not have to happen. This is the vain comfort in these sorts of 'black swan' events, being hard to predict. But they can be more likely given the right conditions, and I fear little will be done about this one until even those who are quite personally comfortable with things as they are begin to feel the pain,

The problem is not a 'bubble.' The problem is pervasive corruption, fraud, and lack of meaningful reform. The 'candidate' is the financial system itself, with its outsized hedge funds and the TBTF Banks with their serial crime sprees and accommodative regulators in particular.

And if one cannot see that in this rotten system with its brazenly narrow rewarding of a select few with the bulk of new income, then there is little more that can be said.

Neil Irwin, a writer for the NYT Upshot section, had an interesting debate with himself about the likely future course of the economy. He got the picture mostly right in my view, with a few important qualifications.

"First, his negative scenario is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff, but it's frankly a little silly. The basis of the last financial crisis was a massive amount of debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks the economy needs this sort of basis.

If a lot of people are speculating in the stock of Uber or other wonder companies, and reality wipes them out, this is just a story of some speculators being wiped out. It is not going to shake the economy as a whole. (San Francisco's economy could take a serious hit.)

Anyhow, financial crises don't just happen, there has to be a real basis for them. To me the housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in the largest market in the world. Perhaps there is another bubble out there like this, but neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously.

If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story...

Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad story to most of the country. It may not be as dramatic as a financial crisis that brings the world banking system to its knees, but it is far more likely and therefore something that we should be very worried about."

Dean Baker, Debating the Economy with Neil Irwin, 31 October 2015

[Oct 27, 2015] OECD Chief Economist: Its Time To Temper The Frothiness In Markets

www.zerohedge.com
"... if you look at what is supporting equity prices - how much of that support is coming from real economic activity versus from using stock buybacks, using cash on balance sheet for stock buybacks, or mergers and acquisitions, to reduced competition in the marketplace.

These are the sort of stories that if there were a small increase in interest rates, you would temper some of that frothiness.

Eliminating the incentive to engage in that kind of activity seems to me to be a good idea... There would be a proportion of the population that would have less capital gains - but they've been enjoying very big capital gains, and it is a narrow segment of the population."

[Oct 16, 2015] Wolf Richter Debt Fueled Stock Buybacks Now Eating into Earnings

"... This is Naked Capitalism fundraising week. 329 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in financial realm. Please join us and participate via our Tip Jar , which shows how to give via check, credit card, debit card, or PayPal. Read about why we're doing this fundraiser , what we've accomplished in the last year , and our second target , funding for travel to conferences and in connection with original reporting. ..."
"... These companies – according to JPMorgan analysts cited by Bloomberg – have incurred $119 billion in interest expense over the 12 months through the second quarter. The most ever. ..."
"... last thing ..."
"... As recently as 2012, companies were refinancing at interest rates that were 0.83 percentage point cheaper than the rates on the debt they were replacing, JPMorgan analysts said. That gap narrowed to 0.26 percentage point last year, even without a rise in interest rates, because the average coupon on newly issued debt increased. ..."
"... "Increasingly alarming" is what Goldman's credit strategists led by Lotfi Karoui called this deterioration of corporate balance sheets. And it will get worse as yields edge up and as corporate revenues and earnings sink deeper into the mire of the slowing global economy. ..."
"... But it isn't working anymore. Bloomberg found that since May, shares of companies that have plowed the most into share buybacks have fallen even further than the S P 500. Wal-Mart is a prime example. Turns out, once financial engineering fails, all bets are off. Read… The Chilling Thing Wal-Mart Said about Financial Engineering ..."
"... It spelled out in Micheal Hudson's – Killing the Host. Economics and investment banking wraps itself in the persona as the engine of growth when, in fact, it is the engine of dis-employment, stagnate wages, declining manufacturing, inflated property prices which raise the cost of food production and everything else including forcing a majority to spend more of their income on debt service leaving less for anything beyond subsistence living. ..."
"... "trillions are wasted and misdirected into useless financial "engineering" as opposed to real world engineering" ..."
"... I read yesterday that less than 6% of Bank financing is now going to real tangible assets – the balance goes in various forms to intangible goodwill ..."
"... Tony Soprano called it a "bust up" – take over a business and use the brand to skim the profits, buy goods and services and roll them out the backdoor and declare BK and then buy it back for pennies on the dollar. ..."
"... 35 years ago, I spent a day at Ngorongoro Crater in Tanzania with a driver in a rover by myself watching the Hyenas take down a sick Buffalo culling him out in a gang, working the animal for hours, as he shuffled along until he fell and ten….. finally ate him in a ferocious climax. The most fascinating part of the entire trip. ..."
"... Now there is a big fat tax deductible expense, and down the road, "value" is created when companies are bought for the tax carry forward losses. Win, win win. ..."
"... Is a company that eliminates thousands of jobs via automation or outsourcing worthy of the public's credit? ..."
Oct 16, 2015 | naked capitalism
This is Naked Capitalism fundraising week. 329 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in financial realm. Please join us and participate via our Tip Jar, which shows how to give via check, credit card, debit card, or PayPal. Read about why we're doing this fundraiser, what we've accomplished in the last year, and our second target, funding for travel to conferences and in connection with original reporting.

Yves here. As anyone who has been in finance know, leverage amplifies gains and losses. Big company execs, apparently embracing the "IBG/YBG" ("I'll Be Gone, You'll Be Gone") school of management, apparently believed they could beat the day of reckoning that would come of relying on stock buybacks to keep EPS rising, regardless of the underlying health of the enterprise. But even in an era of super-cheap credit, investors expect higher interest rates for more levered businesses, which is what you get when you keep borrowing to prop up per-share earnings. As Richter explains, the chickens are starting to come home to roost.

Companies with investment-grade credit ratings – the cream-of-the-crop "high-grade" corporate borrowers – have gorged on borrowed money at super-low interest rates over the past few years, as monetary policies put investors into trance. And interest on that mountain of debt, which grew another 4% in the second quarter, is now eating their earnings like never before.

These companies – according to JPMorgan analysts cited by Bloomberg – have incurred $119 billion in interest expense over the 12 months through the second quarter. The most ever. With impeccable timing: for S&P 500 companies, revenues have been in a recession all year, and the last thing companies need now is higher expenses.

Risks are piling up too: according to Bloomberg, companies' ability pay these interest expenses, as measured by the interest coverage ratio, dropped to the lowest level since 2009.

Companies also have to refinance that debt when it comes due. If they can't, they'll end up going through what their beaten-down brethren in the energy and mining sectors are undergoing right now: reshuffling assets and debts, some of it in bankruptcy court.

But high-grade borrowers can always borrow – as long as they remain "high-grade." And for years, they were on the gravy train riding toward ever lower interest rates: they could replace old higher-interest debt with new lower-interest debt. But now the bonanza is ending. Bloomberg:

As recently as 2012, companies were refinancing at interest rates that were 0.83 percentage point cheaper than the rates on the debt they were replacing, JPMorgan analysts said. That gap narrowed to 0.26 percentage point last year, even without a rise in interest rates, because the average coupon on newly issued debt increased.

And the benefits of refinancing at lower rates are dwindling further:

Companies saved a mere 0.21 percentage point in the second quarter on refinancings as investors demanded average yields of 3.12 percent to own high-grade corporate debt – about half a percentage point more than the post-crisis low in May 2013.

That was in the second quarter. Since then, conditions have worsened. Moody's Aaa Corporate Bond Yield index, which tracks the highest-rated borrowers, was at 3.29% in early February. In July last year, it was even lower for a few moments. So refinancing old debt at these super-low interest rates was a deal. But last week, the index was over 4%. It currently sits at 3.93%. And the benefits of refinancing at ever lower yields are disappearing fast.

What's left is a record amount of debt, generating a record amount of interest expense, even at these still very low yields.

"Increasingly alarming" is what Goldman's credit strategists led by Lotfi Karoui called this deterioration of corporate balance sheets. And it will get worse as yields edge up and as corporate revenues and earnings sink deeper into the mire of the slowing global economy.

But these are the cream of the credit crop. At the other end of the spectrum – which the JPMorgan analysts (probably holding their nose) did not address – are the junk-rated masses of over-indebted corporate America. For deep-junk CCC-rated borrowers, replacing old debt with new debt has suddenly gotten to be much more expensive or even impossible, as yields have shot up from the low last June of around 8% to around 14% these days:

US-junk-bonds-CCC-2014_2015-10-15

Yields have risen not because of the Fed's policies – ZIRP is still in place – but because investors are coming out of their trance and are opening their eyes and are finally demanding higher returns to take on these risks. Even high-grade borrowers are feeling the long-dormant urge by investors to be once again compensated for risk, at least a tiny bit.

If the global economy slows down further and if revenues and earnings get dragged down with it, all of which are now part of the scenario, these highly leveraged balance sheets will further pressure already iffy earnings, and investors will get even colder feet, in a hail of credit down-grades, and demand even more compensation for taking on these risks. It starts a vicious circle, even in high-grade debt.

Alas, much of the debt wasn't invested in productive assets that would generate income and make it easier to service the debt. Instead, companies plowed this money into dizzying amounts of share repurchases designed to prop up the company's stock and nothing else, and they plowed it into grandiose mergers and acquisitions, and into other worthy financial engineering projects.

Now the money is gone. The debt remains. And the interest has to be paid. It's the hangover after a long party. And even Wall Street is starting to fret, according to Bloomberg:

The borrowing has gotten so aggressive that for the first time in about five years, equity fund managers who said they'd prefer companies use cash flow to improve their balance sheets outnumbered those who said they'd rather have it returned to shareholders, according to a survey by Bank of America Merrill Lynch.

But it's still not sinking in. Companies are still announcing share buybacks with breath-taking amounts, even as revenues and earnings are stuck in a quagmire. They want to prop up their shares in one last desperate effort. In the past, this sort of financial engineering worked. Every year since 2007, companies that bought back their own shares aggressively saw their shares outperform the S&P 500 index.

But it isn't working anymore. Bloomberg found that since May, shares of companies that have plowed the most into share buybacks have fallen even further than the S&P 500. Wal-Mart is a prime example. Turns out, once financial engineering fails, all bets are off. Read… The Chilling Thing Wal-Mart Said about Financial Engineering

Wolf Richter is a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.


TomDority, October 16, 2015 at 8:01 am

One wonders where all that "investment" goes…pretty much into the CEO's pockets and investors pockets because banks do not create money by investing in real legitimate capital formation or producing anything tangible…..i

It spelled out in Micheal Hudson's – Killing the Host. Economics and investment banking wraps itself in the persona as the engine of growth when, in fact, it is the engine of dis-employment, stagnate wages, declining manufacturing, inflated property prices which raise the cost of food production and everything else including forcing a majority to spend more of their income on debt service leaving less for anything beyond subsistence living.

These trillions are wasted and misdirected into useless financial "engineering" as opposed to real world engineering….at the expense of a habitable peaceful planet. Soon, I hope, this dislocation will be corrected. As I have said before, a good start would be to tax that which is harmful (unearned income and rent seeking) and de-tax that which is helpful – real capital formation, infrastructure and maintenance of a habitable planet and the absolutely necessary biodiversity that sustains us.


david, October 16, 2015 at 8:57 am

"trillions are wasted and misdirected into useless financial "engineering" as opposed to real world engineering"

I read yesterday that less than 6% of Bank financing is now going to real tangible assets – the balance goes in various forms to intangible goodwill

this is not "useless" from the standpoint of those who direct this game.

Tony Soprano called it a "bust up" – take over a business and use the brand to skim the profits, buy goods and services and roll them out the backdoor and declare BK and then buy it back for pennies on the dollar.

the money is used for dividends and buybacks all that money is accumulated by the LBO firms and management to maneuver the situation / process to the point of the bust up – this time they are all going simultaneously for the exit even the most high end S&P firm – the HY prices are deteriorating quickly beyond energy related as % LTV goes higher – before 82′ the LTV of Fortune Cos. was way below 20% – 35% was considered max –

the same characters / groups will be formed to get to 51% to buy and control the bonds at 20-30% on the dollar in BK and take the assets.

35 years ago, I spent a day at Ngorongoro Crater in Tanzania with a driver in a rover by myself watching the Hyenas take down a sick Buffalo culling him out in a gang, working the animal for hours, as he shuffled along until he fell and ten….. finally ate him in a ferocious climax. The most fascinating part of the entire trip.

USA, USA, USA !

cnchal, October 16, 2015 at 9:38 am

. . .Now the money is gone. The debt remains. And the interest has to be paid,. . .

Now there is a big fat tax deductible expense, and down the road, "value" is created when companies are bought for the tax carry forward losses. Win, win win.

Just Ice, October 16, 2015 at 10:53 am

"Companies with investment-grade credit ratings …"

With government-subsidized private credit creation, the whole concept of "creditworthiness" is suspect. Example, is Smith-Wesson "credit-worthy" to many Progressives? Yet, it's their credit, as part of the public, that would be extended should S&W take out a bank loan.

Is a company that eliminates thousands of jobs via automation or outsourcing worthy of the public's credit?

[Oct 14, 2015] The Financial Sector is Too Big

October 9, 2015 | naked capitalism

By Philip Arestis Professor and Director of Research at the Cambridge Centre for Economic & Public Policy and Senior Fellow in the Department of Land Economy at the University of Cambridge, UK, and Professor of Economics at the University of the Basque Country and Malcolm Sawyer, Professor of Economics, University of Leeds. Originally published at Triple Crisis

Has the financial sector become too large, absorbing too many resources, and enhancing instabilities? A look at the recent evidence on the relationship between the size of the financial sector and growth.

There has been a long history of the idea that a developing financial sector (emphasis on banks and stock markets) fosters economic growth. Going back to the work of authors such as Schumpeter, Robinson, and more recently, McKinnon, etc., there have been debates on financial liberalisation and the related issue of whether what was relevant to financial liberalisation, namely financial development, "caused" economic development, or whether economic development led to a greater demand for financial services and thereby financial development.

The general thrust of the empirical evidence collected over a number of decades suggested that there was indeed a positive relationship between the size and scale of the financial sector (often measured by the size of the banking system as reflected in ratio of bank deposits to GDP, and the size of the stock market capitalisation) and the pace of economic growth. Indeed, there have been discussion on whether the banking sector or the stock market capitalisation is a more influential factor on economic growth. The empirical evidence drew on time series, cross section, and panel econometric investigations. To even briefly summarise the empirical evidence on all these aspects is not possible here. In addition, the question of the direction of causation still remains an unresolved issue.

The processes of financialisation over the past few decades have involved the growing economic, political and social importance of the financial sector. In size terms, the financial sector has generally grown rapidly in most countries, whether viewed in terms of the size of bank deposits, stock market valuations, or more significantly in the growth of financial products, securitisation, and derivatives as well as trading volume in them. This growth of the financial sector uses resources, often of highly trained personnel, and inevitably raises the question of whether those resources are being put to good use. This is well summarised by Vanguard Group founder John Bogle, who suggests, "The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings. What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It's a waste of resources" (MarketWatch, Aug. 1 2015).

Financial liberalisation and de-regulation were promoted as ways of releasing the power of the financial sector, promoting development of financial markets and financial deepening. The claims were often made by the mainstream that financial liberalisation had removed "financial repression" and stimulated growth. Yet, financial liberalisation in a country often led to banking and financial crises, many times with devastating effects on employment and living standards. Financial crises have become much more frequent since the 1970s in comparison with the "golden age" of the 1950s and 1960s. The international financial crisis of 2007/2008 and the subsequent Great Recession were the recent and spectacular crises (though the scale of previous crises such as the East Asian ones of 1997 should not be overlooked). The larger scale of the financial sector in the industrialised countries has been accompanied (even before 2007) with somewhat lower growth than hitherto. As the quote above suggests there has not been an upsurge of savings and investment, and indeed many would suggest that the processes of financialisation dampen the pressures to invest, particularly in research and development. Has the financial sector become too large, absorbing too many resources, and enhancing instabilities?

An interesting recent development has been a spate of research papers coming from international organisations and many others, which have pointed in the direction that indeed the financial sector in industrialised countries have become too big-at least when viewed in terms of its impact on economic growth. (See Sawyer, "Financialisation, financial structures, economic performance and employment," FESSUD Working Paper Series No. 93, for a broad survey on finance and economic performance.) These studies rely on econometric (time series) estimation and hence cover the past few decades-which suggests that their findings are not in any way generated by the financial crisis of 2007/2008 and the Great Recession that followed.

A Bank of International Settlements study concluded that "the complex real effects of financial development and come to two important conclusions. First, financial sector size has an inverted U-shaped effect on productivity growth. That is, there comes a point where further enlargement of the financial system can reduce real growth. Second, financial sector growth is found to be a drag on productivity growth." Cournède, Denk,and Hoeller (2015) state that "finance is a vital ingredient for economic growth, but there can also be too much of it." Sahay, et al. (2015) find a positive relationship between financial development (as measured by their "comprehensive index") and growth, but "the marginal returns to growth from further financial development diminish at high levels of financial development―that is, there is a significant, bell-shaped, relationship between financial development and growth. A similar non-linear relationship arises for economic stability. The effects of financial development on growth and stability show that there are tradeoffs, since at some point the costs outweigh the benefits."

There are many reasons for thinking that the financial sector has become too large. Its growth in recent decades has not been associated with facilitating savings and encouraging investment. It has absorbed valuable resources which are largely engaged in the trading in casino-like activities. The lax systems of regulation have made financial crises more likely. Indeed, and following the international financial crisis of 2007/2008 and the great recession a number of proposals have been put forward to avoid similar crises. To this day, nonetheless, the implementation of these proposals is very slow indeed (see, also, Arestis, "Main and Contributory Causes of the Recent Financial Crisis and Economic Policy Implications," for more details).

See original post for references

MartyH, October 9, 2015 at 10:28 am

Now that Michael Hudson's Killing the Host has been available for a while, one suspects a Picketty-like effect with folks "discovering" that Taibbi's Giant Vampire Squid characterization of Goldman-Sachs (one of many) wasn't funny.

blert, October 9, 2015 at 5:24 pm

It's a squid that squirts RED INK - onto everyone else.

susan the other, October 9, 2015 at 11:03 am

This is a great and readable essay. Sure sounds like Minsky. And even Larry Summers when he advocates for more bubbles. And Wolfgang Schaeuble said repeatedly that "we are overbanked." We just don't know how to do it any other way. When everything crashes it's too late to regulate. Unless Larry knows a clever way to regulate bubbles.

JTMcPhee, October 10, 2015 at 8:40 am

The Banksters' refrain:

"Don't regulate you,
Don't regulate me!
Regulate that guy over behind that tree…"

MY scam is systemically important!

Just Ice, October 10, 2015 at 3:34 pm

"We just don't know how to do it any other way. " STO

Yet there is another way, an equitable way :) Dr. Michael Hudson himself says that industry should be financed with equity, not debt.

Leonard, October 10, 2015 at 3:53 pm

Susan
There is way to manage bubbles before they get out of control. This article explains how. Go to wp.me/WQA-1E

ben, October 9, 2015 at 11:17 am

Wasted resources are way higher than the Vanguard example. They misdirect resources especially into land and issue new money as debt.

RepubAnon, October 10, 2015 at 11:29 pm

They think that they make their living by "ripping the eyes out of the muppets" – so they're opposed to regulations which would protect the muppets' eyes.

I look at the financial industry as sort of like sugar for the economy – the right amount is good for you, but too much will kill you.

Just Ice, October 9, 2015 at 12:35 pm

"The lax systems of regulation have made financial crises more likely."

Actually, it's the near unlimited ability of the banks to create deposits ("loans create deposits" but also debts) that causes large scale financial crises. And what is the source of this absurd ability of the banks? ans: government privileges including deposit insurance instead of a Postal Savings Service or equivalent and a fiat (the publics' money) lender of last resort.

Besides, regulations typically do not address the fundamental injustice of government subsidized banks – extending the publics' credit to private interests.

Synoia October 9, 2015 at 12:53 pm

There is something very wrong about money creation from loans. I'm not arguing that this is incorrect, I'm looking at money creation being a burden on the citizenry. I cannot see how this will end well, because of the asymmetric nature, money creation only benefits the banks, of the burden of money creation.

Just Ice October 9, 2015 at 1:40 pm

"There is something very wrong about money creation from loans."

More precisely, there is something very wrong about being driven into debt by government-subsidized private credit creation. Source of the rat race? Look no further.

zapster October 10, 2015 at 9:32 am

It's the bank-money vs. government money situation. The hysteria over "The Deficit (gasp)" insures that none of us have cash and must borrow to live. The bankers won.

Just Ice October 10, 2015 at 1:56 pm

"It's the bank-money vs. government money situation." zapster

More precisely, who gets to create the government's money since it is taxation* that drives the value of fiat. But it's an absurd situation since obviously the government ALONE should create fiat, not a central bank for the benefit of banks and other private interests, especially the wealthy.

As for the private sector, let it create its own money solutions and my bet is that we'll have a much more equitable (pun intended) society as a result.

The problem then is taxation. How does one tax someone's income in Bitcoins, for example? How does one preclude tax evasion? Unavoidable taxes such as land taxes (except for a homestead exemption) are one possibility.

*As well as the need to pay the interest on the debt the government subsidized banking cartel drives us into.

Yves Smith Post author October 10, 2015 at 5:17 pm

*Sigh*. The government alone does control the money supply in a fiat currency issuer. The government hasn't bothered to do so actively because the only time it DID try doing that (under Reagan and Thatcher) they found out, contra Friedman, that money supply growth bore no relationship to any macroeconomic variable. Monetarism was a failed experiment.

readerOfTeaLeaves October 9, 2015 at 10:58 pm

I happened upon a great link - about the probable origins of interest. Here's the link: http://viking.som.yale.edu/will/finciv/chapter1.htm

Scroll down to "The Idea of Interest". This author posits that back in the (ancient, herding) day, people lent cattle. I lend you my cow, your bull impregnates her, and I get a part of the calf.

What the author probably didn't understand, but is known to those of us interested in the history of metallurgy, is that there was a belief that metals 'grew' - after all, plants grew from the ground, vines grew from the ground, trees and bushes also grew from the ground. It was not a great stretch to suppose that metals also grew within the ground, and back in those ancient days they expected the same kind of 'growth' from metals that happened with agricultural products.

Perhaps if I ever get to retire, I can read Hudson's entire work, and possibly he covers this topic. But I do think that it is time for the rest of us to rethink the nature of money - particularly in an emerging digital era.

cnchal October 10, 2015 at 10:42 am

Thanks for that link. Here is a little nugget that relates to today.

The legal limit on interest rates for loans of silver was 20% over much of Dumuzi-gamil's life, but Marc Van De Mieroop demonstrates how Dumuzi-gamil and other lenders got around such strictures - they simply charged the legal limit for shorter and shorter term loans! Curiously, while mathematics during this era was extraordinarily advanced, the government failed to understand, or at least effectively regulate the close link between time and money.

Sound familiar. It's more like the banksters regulate government.

As for compound interest, it seems to be the most diabolical human invention yet, as it infers exponential growth without limits.

Here is Keynes discussing compound interest in his speech "Economic Possibilities for our Grandchildren" (1930)

From the earliest times of which we have record – back say to two thousand years before Christ – down to the beginning of the eighteenth century, there was no very great change in the standard of life of the average man living in the civilized centres of the earth. Ups and downs certainly. Visitations of plague, famine, and war. Golden intervals. But no progressive, violent change. Some periods perhaps 50 per cent better than others – at the utmost 100 per cent better – in the four thousand years which ended (say) in A.D. 1700.

This slow rate of progress, or lack of progress, was due to two reasons – to the remarkable absence of important technical improvements and to the failure of capital to accumulate.

The absence of important technical inventions between the prehistoric age and comparatively modern times is truly remarkable. Almost everything which really matters and which the world possessed at the commencement of the modern age was already known to man at the dawn of history. Language, fire, the same domestic animals which we have today, wheat, barley, the vine and the olive, the plough, the wheel, the oar, the sail, leather, linen and cloth, bricks and pots, gold and silver, copper, tin, and lead – and iron was added to the list before 1000 B.C. – banking, statecraft, mathematics, astronomy, and religion. There is no record of when we first possessed these things.

At some epoch before the dawn of history – perhaps even in one of the comfortable intervals before the last ice age – there must have been an era of progress and invention comparable to that in which we live today. But through the greater part of recorded history there was nothing of the kind.
The modern age opened, I think, with the accumulation of capital which began in the sixteenth century. I believe – for reasons with which I must not encumber the present argument – that this was initially due to the rise of prices, and the profits to which that led, which resulted from the treasure of gold and silver which Spain brought from the New World into the Old. From that time until today the power of accumulation by compound interest, which seems to have been sleeping for many generations, was reborn and renewed its strength. And the power of compound interest over two hundred years is such as to stagger the imagination.

Let me give in illustration of this a sum which I have worked out. The value of Great Britain's foreign investments today is estimated at about £4,000 million. This yields us an income at the rate of about 6 1/2 per cent. Half of this we bring home and enjoy; the other half, namely, 3 1/2 per cent, we leave to accumulate abroad at compound interest. Something of this sort has now been going on for about 250 years.

For I trace the beginnings of British foreign investment to the treasure which Drake stole from Spain in 1580. In that year he returned to England bringing with him the prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the syndicate which had financed the expedition. Out of her share she paid off the whole of England's foreign debt, balanced her budget, and found herself with about £40,000 in hand. This she invested in the Levant Company – which prospered. Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England's subsequent foreign investment. Now it happens that £40,000 accumulating at 3 1/2 per cent compound interest approximately corresponds to the actual volume of England's foreign investments at various dates, and would actually amount today to the total of £4,000 million which I have already quoted as being what our foreign investments now are. Thus, every £1 which Drake brought home in 1580 has now become £100,000. Such is the power of compound interest !

From the sixteenth century, with a cumulative crescendo after the eighteenth, the great age of science and technical inventions began, which since the beginning of the nineteenth century has been in full flood – coal, steam, electricity, petrol, steel, rubber, cotton, the chemical industries, automatic machinery and the methods of mass production, wireless, printing, Newton, Darwin, and Einstein, and thousands of other things and men too famous and familiar to catalogue.

What is the result? In spite of an enormous growth in the population of the world, which it has been necessary to equip with houses and machines, the average standard of life in Europe and the United States has been raised, I think, about fourfold. The growth of capital has been on a scale which is far beyond a hundred-fold of what any previous age had known. And from now on we need not expect so great an increase of population.

This reminds me of the huge fortunes growing at compound interest today.

Take the Gates Foundation as an example.

From Wikipedia: It had an endowment of US$42.3 billion as of 24 November 2014.

If this were to grow at a compound interest rate of 7.2% annually, it would double every ten years, and in one hundred years would be $43 trillion dollars and in two hundred years $44,354 trillion or $44.354 quadrillion. It's as if Bill and Warren are playing a practical joke on the world, as their compound interest monster swallows every available dollar.

I wonder what a loaf of bread will cost in two hundred years?

nigelk October 9, 2015 at 3:20 pm

Fractional-reserve banking is anathema to human dignity itself. What was it Gandhi said about "wealth without work"…?

griffen October 9, 2015 at 12:56 pm

Top heavy might be the marginally better angle to take here. Although I recently left the state (N Texas, Dallas), Texas banks are being merged or acquired left and right. On some occasions it is necessary if very small institutions are unable to compete, unable to meet a decent ROE bogey (6.0% ROE is sorta low), or just unable to fend off progress.

Other occasions the larger regional and national banks can just win on scale.

Noni Mausa October 9, 2015 at 1:10 pm

I have long thought about the banking system as a beating heart. Of course it needs fuel, like the rest of the body, but when a heart gets larger and larger, and contains more and more blood, and uses more and more fuel, the rest of the body never fares well.

"Surging bank profits" is never a headline that makes me happy.

Carla October 9, 2015 at 11:43 pm

Yes, congestive heart failure kills the host - this is a great analogy - Thanks!

anders October 9, 2015 at 2:01 pm

The real question is: why was it that the "creation of wealth" had to turn to the financial sector. IMHO it's because the productive sector is lesser and lesser able to produce surplus value. So that free capital istn't attracted to it. Of course in the financial sector there isn't any value created at all.

Just Ice October 9, 2015 at 3:33 pm

" IMHO it's because the productive sector is lesser and lesser able to produce surplus value. "

Yes, because of unjust wealth distribution; the host has finally been exhausted. With meta-materials, nano-technology, genetic engineering, better catalysts, etc. and with practical nuclear fusion on the horizon (because of new superconducting materials) mankind has probably never been on the verge of creating so much value as now but can't because of lack of effective demand, not for junk but for such things as proper medical and dental care while the wealthy have more than they know what to do with.

blert October 9, 2015 at 5:22 pm

Is the sky blue ?

Decades of 'political – solvency' insurance has permitted 'the blob' to overwhelm all.

&&&

If all of society played Poker … would anything be produced ? THAT'S the aspect that has metastasized. It's not proper to term it the 'financial sector' - gambling// speculation emporium… now you're talking. When the government chronically intervenes to bail out highly sophisticated fools…. Jon Corzine is the result. - And he's not even the target of law enforcement !!!!

equote October 10, 2015 at 7:40 am

"A business that makes nothing but money is a poor business." -- Henry Ford

sd October 10, 2015 at 4:18 pm

Financial liberalisation and de-regulation were promoted as ways of releasing the power of the financial sector, promoting development of financial markets and financial deepening.

Release the Kraken comes to mind.

[Oct 04, 2015] Nonsense on data revisions

"... I was surprised how well the BBC political correspondent and ex-Tory Party student Nick Robinson came out in his economic reporting compared to the woeful stuff that those BBC correspondents claiming some sort of economic expertise faired. ..."
"... they are all of the neo-liberal religion; group-thinkers ..."
Oct 04, 2015 | mainlymacro.blogspot.com
mainly macro
Anonymous, 1 October 2015 at 01:04
When I reread my collection of BBC articles for the period 2008-15, some of which I have reposted on this blog in the past, I was surprised how well the BBC political correspondent and ex-Tory Party student Nick Robinson came out in his economic reporting compared to the woeful stuff that those BBC correspondents claiming some sort of economic expertise faired.

Since 2008, Robert Peston, Stephanie Flanders, Hugh Pym, and Andrew Neil have had terrible economic crises, and it must be more than just governmental pressure that has produced such concentrated ineptitude.

acorn, 1 October 2015
Alas, they are all of the neo-liberal religion; group-thinkers. Peston has never understood the difference between a currency issuing government and a currency using non-government sector. Hence, government financial accounts are totally different to a households financial accounts.

They all think that the government has to tax and/or borrow "money", before it has any to spend. Never stopping to think where the people it taxed or borrowed from, got such "money" in the first place.

Politicians and the IFS peddle the same myth. Liars and fakers the lot of them. Stick with the accountants.

http://www.icaew.com/en/about-icaew/newsroom/press-releases/2015-press-releases/fall-in-tax-receipts-hinders-progress-in-deficit-reduction-says-icaew

[Oct 03, 2015] Oil Bulls Lose Faith in Recovery as Russia Adds to Global Glut

Looks like Bloomberg is becoming Fox of economic and financial news...
"Other countries, such as Russia, are pumping at full tilt" looks like a lie. Russia production might be cur if additional tax on oil producers is restored by government.
I also like ""The U.S. producers are the only ones doing their part to reduce the global glut," -- another lie. shale producers are uncompetitive at this level f prices and some can't even serve their debt. the same is true for oil sands. They are cutting all corners, endangering the environment.
There is no return to "cheap oil" regime despite period of overinvestment that was bright by prices above $80 per barrel.
The fact that "Retail investors which pulled $393 million in September" just confirm that they are a food for Wall Street sharks... Moreover investment in oil ETFs with their complex "futures based" algorithms of matching oil price is in itself probably a sign of not being too intelligent. The game on this table of Wall Street casino is a for professionals and HFT robots, not for lemmings (aka retail investors).
"... U.S. crude output is down 514,000 barrels a day from a four-decade high reached in June, Energy Information Administration data show. The number of rigs targeting oil in the U.S. dropped to a five year low, Baker Hughes Inc. said Oct. 2. ..."
Oct 03, 2015 | Bloomberg Business

Hedge funds trimmed bullish oil bets for the first time in six weeks, losing faith in a swift recovery as Russia boosted output to the highest since the Soviet Union collapsed.

Speculators reduced their net-long position in West Texas Intermediate crude by 9.1 percent in the week ended Sept. 29, according to data from the Commodity Futures Trading Commission. Longs dropped from a 12-week high while shorts increased.

U.S. crude output is down 514,000 barrels a day from a four-decade high reached in June, Energy Information Administration data show. The number of rigs targeting oil in the U.S. dropped to a five year low, Baker Hughes Inc. said Oct. 2. WTI traded in the tightest range since June last month as China's slowing economy and the highest Russian output in two decades signaled the global glut will linger.

"The U.S. producers are the only ones doing their part to reduce the global glut," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. "Other countries, such as Russia, are pumping at full tilt. The cutbacks by shale producers here aren't going to have much impact, especially given the slowing global economy."

... ... ...

Russian oil output rose to a post-Soviet record last month as producers took advantage of the weak ruble to push ahead with drilling. The nation's production of crude and condensate climbed to 10.74 million barrels a day, 1 percent more than a year earlier and topping a record set in June, according to data from the Energy Ministry's CDU-TEK unit.

... ... ...

Investors pulled $393 million in September from United States Oil Fund, the largest U.S. exchange-traded product that tracks crude futures, the biggest withdrawal since April.

See also:

[Sep 29, 2015] World set for emerging market mass default, warns IMF - Telegraph

"... Exactly what was engineered, the oligarchs of the US Neoliberal Empire will now be able to pick up "emerging market" assets for pennies on the dollar increase their already vast holdings and secure Neoliberalism - or more correctly Neo-feudalism in fancy dress. ..."
"... We have seen the Neoliberals do this kind of empire building for the last 30 years first the Savings and Loan "crisis" in the 1990s which transferred over 300 billion in middle class assets into the hands of the Bass brothers and a few other oligarchs including the Cargill family at the time the largest transfer of wealth in peace time. ..."
"... The Great Neoliberal Empire of the Exceptionals has a big big appetite which will not be satisfied until the own the entire planet and rather than 4 billion people living on $2 a day it will be 7.3 billion. The Neoliberal world view [is one] of a few thousand oligarchs and Bangladesh as the rest of the world. ..."
Sep 29, 2015 | telegraph.co.uk

TheBoggart

"The International Monetary Fund (IMF) has issued a double warning over higher US interest rates, which it said could trigger a wave of emerging
market corporate defaults"

https://www.youtube.com/watch?...

blueba • 7 hours ago

Exactly what was engineered, the oligarchs of the US Neoliberal Empire will now be able to pick up "emerging market" assets for pennies on the dollar increase their already vast holdings and secure Neoliberalism - or more correctly Neo-feudalism in fancy dress.

We have seen the Neoliberals do this kind of empire building for the last 30 years first the Savings and Loan "crisis" in the 1990s which transferred over 300 billion in middle class assets into the hands of the Bass brothers and a few other oligarchs including the Cargill family at the time the largest transfer of wealth in peace time. Then a few more small transfers and the the big "crisis" of 2007-8 which is ongoing and where close to a trillion in assets were consolidated in the hands of oligarchs.

First load on the debt with money created out of thin air by banks, then foreclose after the phony "bubble" bursts. Then walk away Scott free with the assets.

The Great Neoliberal Empire of the Exceptionals has a big big appetite which will not be satisfied until the own the entire planet and rather than 4 billion people living on $2 a day it will be 7.3 billion. The Neoliberal world view [is one] of a few thousand oligarchs and Bangladesh as the rest of the world.

[Sep 26, 2015] The Table Is Set For The Next Financial Crisis

"... The $3.5 trillion of QE, six years of 0% interest rates for Wall Street (why are credit card interest rates still 13%?), and $8 trillion of deficit spending by the Federal government have provided the outward appearance of economic recovery, as the standard of living for most Americans has declined significantly. ..."
Sep 26, 2015 | Zero Hedge
The housing market peaked in 2005 and proceeded to crash over the next five years, with existing home sales falling 50%, new home sales falling 75%, and national home prices falling 30%. A funny thing happened after the peak. Wall Street banks accelerated the issuance of subprime mortgages to hyper-speed. The executives of these banks knew housing had peaked, but insatiable greed consumed them as they purposely doled out billions in no-doc liar loans as a necessary ingredient in their CDOs of mass destruction.

The millions in upfront fees, along with their lack of conscience in bribing Moody's and S&P to get AAA ratings on toxic waste, while selling the derivatives to clients and shorting them at the same time, in order to enrich executives with multi-million dollar compensation packages, overrode any thoughts of risk management, consequences, or the impact on homeowners, investors, or taxpayers. The housing boom began as a natural reaction to the Federal Reserve suppressing interest rates to, at the time, ridiculously low levels from 2001 through 2004 (child's play compared to the last six years).

... ... ...

Greenspan created the atmosphere for the greatest mal-investment in world history. As he raised rates from 2004 through 2006, the titans of finance on Wall Street should have scaled back their risk taking and prepared for the inevitable bursting of the bubble. Instead, they were blinded by unadulterated greed, as the legitimate home buyer pool dried up, and they purposely peddled "exotic" mortgages to dupes who weren't capable of making the first payment. This is what happens at the end of Fed induced bubbles. Irrationality, insanity, recklessness, delusion, and willful disregard for reason, common sense, historical data and truth lead to tremendous pain, suffering, and financial losses.

Once the Wall Street machine runs out of people with the financial means to purchase a home or buy a new vehicle, they turn their sights on peddling their debt products to financially illiterate dupes. There is a good reason people with credit scores below 620 are classified as sub-prime. Scores this low result from missing multiple payments on credit cards and loans, having multiple collection items or judgments and potentially having a very recent bankruptcy or foreclosure. They have low paying jobs or no job at all. They do not have the financial means to repay a large loan. Giving them a loan to purchase a $250,000 home or a $30,000 automobile will not improve their lives. They are being set up for a fall by the crooked bankers making these loans. Heads they win, tails the dupe gets kicked out of that nice house onto the street and has those nice wheels repossessed in the middle of the night.

The subprime debacle that blew up the world in 2008 was created by the Federal Reserve, working on behalf of their Wall Street owners. When interest rates are set by central planners well below levels which would be set by the free market, based on risk and return, it creates bubbles, mal-investment, and ultimately financial system disaster. Did the Fed, Wall Street, politicians, and people learn their lesson? No. Because we bailed them out with our tax dollars and have silently stood by while they have issued $10 trillion of additional debt to solve a debt problem. The deformation of our financial system accelerates by the day.

The $3.5 trillion of QE, six years of 0% interest rates for Wall Street (why are credit card interest rates still 13%?), and $8 trillion of deficit spending by the Federal government have provided the outward appearance of economic recovery, as the standard of living for most Americans has declined significantly. With real median household income still 6.5% BELOW 2007 levels, 7.3% BELOW 2000 levels, and about equal to 1989 levels, the only way the ruling class could manufacture a fake recovery is by ramping up the printing presses and reigniting a housing bubble and an auto bubble. They even threw in a student loan bubble for good measure.

... ... ...

The entire engineered "housing recovery" has had a suspicious smell to it all along. The true bottom occurred in 2009 with an annual rate of 4 million existing home sales. An artificial bottom of 3.5 million occurred in 2010 after the expiration of the Keynesian first time home buyer credit that lured more dupes into the market. The current rate of 5.31 million is at 2007 crash levels and on par with 2001 recession levels. With mortgage rates at record low levels for five years, this is all we got?

What really smells is the number of actual mortgage originations that have supposedly driven this 35% increase in existing home sales. If existing home sales are at 2007 levels, how could mortgage purchase applications be 55% below 2007 levels? If existing home sales are up 35% from the 2009/2010 lows, how could mortgage purchase applications be flat since 2010?

New home sales are up 80% from the 2010 lows, but before you get as excited as a CNBC bimbo over the "surging" new home sales, understand that new home sales are still 60% BELOW the 2005 high and 25% below the 1990 through 2000 average. So, in total, there are 1.5 million more annual home sales today than at the bottom in 2010. But mortgage originations haven't budged. That's quite a conundrum.

As you can also see, the median price for a new home far exceeds the bubble highs of 2005. A critical thinking individual might wonder how new home sales could be down 60% from 2005, while home prices are 15% higher than they were in 2005. Don't the laws of supply and demand work anymore? The identical trend can be seen in the existing homes sales market. The median price for existing home sales of $228,700 is an all-time high, exceeding the 2005 bubble levels. Again, sales are down 30% since 2005. I wonder who is responsible for this warped chain of events?

AlaricBalth

This FRED chart I have posted, which corresponds with the effective Fed Funds Rate chart in the article, will show exactly what a daunting problem the the US and the Federal Reserve is being forced to deal with. I have overlaid the Labor Force Participation Rate with M2 Velocity of Money, each beginning in 1960. M2 velocity refers to how fast money passes from one holder to the next. The labor force participation rate is a measure of the share of Americans at least 16 years old who are either employed or actively looking for work. If money demand is high, it could be a sign of a robust economy, with the usual corresponding inflationary pressure.

As you can see, each peaked around 1997-98 and have been in slow decline ever since. Unless the Fed has a plan to increase the LFPR, people are not going to be spending money they just do not have.

Demographically, this is not going to happen. Baby boomers will still be retiring at a rate of 10,000 per day and manufacturing is never coming back to the US until we are a third world country with a cheap labor force.

This is not an issue that can be fixed by political promises. So no matter which political party is in control, this will not be repaired with platitudes. This is a structural macro-economic phenomenon which is caused by demographics and poor long term fiscal planning.

https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1Vst

TeethVillage88s

Anyone have this video?

Elizabeth Warren Video, Late Night with Steven Colbert, 23 Sept 2015.

Defends Dodd-Frank and gave stats to prove the value of CFPB formed, like 650,000 complaints handled, and many changes forced on corporations.

Edit: Looks like CBS didn't release the segment of Elizabeth Warren only, so you have to go through whole show or just the 2:00 minute segment that only shows her saying she is not running for President.

Shame on CBS, as usual.

http://www.cbs.com/shows/the-late-show-with-stephen-colbert/video/jUNG_y...

Apparently I don't have the computer configured to play it anyway.

FreedomGuy

I do not think Wall Street and your local bankers or mortgage brokers are the bad guys here. Frankly, they look at the rules and try to make a living in the mortgage business. They are not angels but neither are they demons and I do not think they purposely write bad business.

I think the Wizard of Evil behind the curtain is first and last the government including a GSE like the Fed. They set this stuff up. You know you can load up Freddie and Fannie with smelly stuff and off-load risk. They hold rates near historic lows so people can buy more.

This drives prices and all the flipping crap and related stuff I hate.

I am in the middle of this. Being an avid reader of ZH I have become a proper pessimist. I did a cash-out refi and am paying off virtually all other loans...or more properly moving them to the tax deductible home loan. I was going to rent and move north because of work but after lots of research, breathtaking price increases and a few other cautions I decided to sit it out.

I am going to see what the economic terrain looks like in 6 months or more.

The thing is you have to play the game as it is, today, not as you think it should be.

marts321

Don't hate the player, hate the game.

TeethVillage88s

Check out the growth of Holding companies.

Financial Business; Credit Market Instruments; Liability, Level
2015:Q1: 14,104.57 Billions of Dollars (+ see more)
Quarterly, End of Period, Not Seasonally Adjusted, TCMDODFS,

Holding Companies; Credit Market Instruments; Liability, Level
2015:Q1: 1,380.52 Billions of Dollars (+ see more)
Quarterly, End of Period, Not Seasonally Adjusted, CBBHCTCMDODFS,
https://research.stlouisfed.org/fred2/series/CBBHCTCMDODFS

U.S.-Chartered Depository Institutions; Credit Market Instruments; Liability, Level
2015:Q1: 669.90 Billions of Dollars (+ see more)
Quarterly, End of Period, Not Seasonally Adjusted, CBTCMDODFS,

Now, we know that in 2007 the Biggest Wall Street banks wanted access to Deposits in the USA. So maybe I don't have the date, could have been planned from Lehman Request date to become a Deposit Bank while an Investment Bank.

So today we have Holding Companies that are allowed to have Deposits while doing commercial and investment work and proprietary trading... and now are 30% Bigger after all the Bailouts and transfer of Taxpayer and Retirement Funds to them.

Holding Companies have Doubled Liability since 3QTR 2007

Wow

TeethVillage88s

Too Bad we don't have Honest Brokers in DOJ, FBI, SEC, FINRA, FTC, GAO, CBO, FED, Treasury, OCC, FSOC, BCFP, CFTC, FDIC, FHFA, SIPC

I'm not sure how you can isolate or focus your condemnation or fault.

  • - Private & Public Pensions, Retirement Funds, Deposit Insurance, The Fact that our Wall Street Banks are Borg connecting to AI Technology,... and Complexity is increasing at an Exponential Rate meaning Risk is Exponential as well
  • - Big Concern -- pay outs for Pension Benefit Guaranty Corporation (federal Trust Fund), 1999 = $1.23 Billion, 2000 = $1.35 Billion, 2001 =$1.37 Billion. Okay, but today 2010 = $5.59 B, 2011 = $5.89 B, 2012 = $5.86 B, 2013 = $5.89 B. There is a continual need to supplement Pensions. 2010 PBGC's deficit increased 4.5 percent to $23 billion (Liabilities beyond assets)
  • - Federal direct student loan program 1999 = $52 Billion, INCREASED to 2013 = $675 Billion. (Risky)
  • - 2013 Total FDIC Trust Fund in Treasuries = $36.9 Billion + $18 billion in the DIF (Risky)
  • - 2013 Total National Credit Union Trust in Treasuries = $11.2 Billion

Edit: This applies, $8.16 Trillion in US Deposits

Total Savings Deposits at all Depository Institutions
2015-09-07: 8,164.3 Billions of Dollars (+ see more)
Weekly, Ending Monday, Not Seasonally Adjusted, WSAVNS,
https://research.stlouisfed.org/fred2/series/WSAVNS

dizzyfingers

"Sociopaths" (psychopaths) rise to the top. They are not like others. http://www.healthguidance.org/entry/15850/1/Characteristics-of-a-Sociopath.html

EndOfDayExit

To all hysterical critics of the FED, what do you suggest they do instead? The rich can do nothing, sit it out, the poor meanwhile will starve and die (and probably riot before they die).

The poor need jobs. Now almost at any cost, because those jobs are few and far in between as we are competing with China. So they do ZIRP, NIRP whatever, something, anything to at least marginally force the rich to spend. For, if people do not spend there will be even less jobs…and less tax revenue collected for the government to run and distribute around… and it all starts going downhill.

The FED is just trying to keep the system at the higher spending point. It does not seem to work very well, but the next option is a direct confiscation and redistribution of assets (to keep those poor jobless souls content). Nobody gives a f* about inequality until it becomes a riot-provoking problem itself. Ugly as it is there is actually logic in what the FED is doing.

Batman11

The globalists rush to take the profits in the good times but run and hide in the bad.

Where is the profit in sorting out the bad times? In the bad times national institutions, Governments and Central Banks, get left to sort out the mess loading the costs onto national tax payers.

When things go wrong nationalism rises as each nation is left to fend for itself. We should know how it works by now, this isn't the first time.

  • 1920s/2000s - high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase
  • 1929/2008 - Wall Street crash
  • 1930s/2010s - Global recession, currency wars, rising nationalism and extremism
  • 1940s/? - Global war

We are nearly there with the Middle East on fire and the two nuclear super-powers at each other's throats.

Maybe next time we will know better, third time lucky.

mianne

Cherry picker, I agree with you : " All our government up here has to do is get out of NATO, disband our version of the CIA, divorce Homeland Security, duty and tax all imports to the hilt, keep our water, electricity and natural resources to ourselves and manufacture our own products... Then you can have all the wars you want in the middle east and we will watch it on television without worrying about whether to be part of the murder brigade or not."

But as for ourselves, as governed by the totalitarian EU whose representatives are non elected by people, but were chosen by the international finance tycoons ( our elected presidents deprived of any power by the supranational non elected entity, US- OTAN driven European Union), we are just powerless slaves .

However we won the referendum ( 52 % ) against the content of the Maastricht-Lisbon European Constitution, but they do not take it into account, submitting us to the ignominious treaty . Democracy ?

[Sep 26, 2015] Paul Krugman Dewey, Cheatem Howe

"... That is brilliant - so Turing Pharmaceuticals is a classical - wait for it - parasitic infection! ..."
"... The point is we should be trying to make our regulation more intelligent (making it encourage not discourage innovation - cheaper and easier to police - less subject to regulatory capture etc.). ..."
Sep 26, 2015 | economistsview.typepad.com

Economist's View

Republicans can't help but side with business, but there are very good reasons for the recent increase in regulatory oversight:
Dewey, Cheatem & Howe, by Paul Krugman, Commentary, NY Times: Item: The C.E.O. of Volkswagen has resigned after revelations that his company committed fraud on an epic scale, installing software on its diesel cars that detected when their emissions were being tested, and produced deceptively low results.
  • Item: The former president of a peanut company has been sentenced to 28 years in prison for knowingly shipping tainted products that later killed nine people and sickened 700.
  • Item: Rights to a drug used to treat parasitic infections were acquired by Turing Pharmaceuticals, which specializes not in developing new drugs but in buying existing drugs and jacking up their prices. In this case, the price went from $13.50 a tablet to $750. ...

There are, it turns out, people in the corporate world who will do whatever it takes, including fraud that kills people, in order to make a buck. And we need effective regulation to police that kind of bad behavior... But we knew that, right?

Well, we used to know it... But ... an important part of America's political class has declared war on even the most obviously necessary regulations. ...

A case in point: This week Jeb Bush, who has an uncanny talent for bad timing, chose to publish an op-ed article in The Wall Street Journal denouncing the Obama administration for issuing "a flood of creativity-crushing and job-killing rules." Never mind his misuse of cherry-picked statistics, or the fact that private-sector employment has grown much faster under President Obama's "job killing" policies than it did under Mr. Bush's brother's administration. ...

The thing is, Mr. Bush isn't wrong to suggest that there has been a move back toward more regulation under Mr. Obama, a move that will probably continue if a Democrat wins next year. After all, Hillary Clinton released a plan to limit drug prices at the same time Mr. Bush was unleashing his anti-regulation diatribe.

But the regulatory rebound is taking place for a reason. Maybe we had too much regulation in the 1970s, but we've now spent 35 years trusting business to do the right thing with minimal oversight - and it hasn't worked.

So what has been happening lately is an attempt to redress that imbalance, to replace knee-jerk opposition to regulation with the judicious use of regulation where there is good reason to believe that businesses might act in destructive ways. Will we see this effort continue? Next year's election will tell.

reason

"Item: Rights to a drug used to treat parasitic infections were acquired by Turing Pharmaceuticals, which specializes not in developing new drugs but in buying existing drugs and jacking up their prices. In this case, the price went from $13.50 a tablet to $750. ..."

That is brilliant - so Turing Pharmaceuticals is a classical - wait for it - parasitic infection!

reason

"So what has been happening lately is an attempt to redress that imbalance, to replace knee-jerk opposition to regulation with the judicious use of regulation where there is good reason to believe that businesses might act in destructive ways. Will we see this effort continue? Next year's election will tell."

Personally, I don't think this is really addressing the key point. You can't actually avoid regulation (the alternative to public regulation - as pushed by say Milton Friedman - ends up being private regulation - which is just as subject to regulatory capture). The point is we should be trying to make our regulation more intelligent (making it encourage not discourage innovation - cheaper and easier to police - less subject to regulatory capture etc.). The policy discussions about this a difficult enough with good faith - but bad faith politics makes this impossible. We need to throw the Gingrich revolution in the dustbin as soon as possible.

[Sep 25, 2015] Big Business Is Economic Cancer, Part I Zero Hedge

It is under state capitalism that TBTF can't exists. Under neoliberalism they rule the country, so the question about cutting their political power of dismantling them is simply naive. Nobody give political power without a fight.
"... Today, with governments which are nothing but literally the junior partners (of Big Business) in government-by-crime-syndicate, these laws might as well no longer exist, as they are practically never enforced. Indeed, an entity must be a political/economic pariah, or simply lacking "connections" if it is unable to sneak some merger or take-over past our totally compliant governments, and their fast-asleep "regulators". ..."
"... There could never be an economic system, or economic argument where "too big to fail" could ever be a rational/legitimate policy. Put another way, no level of short-term economic harm or shock could possibly equal the long-term harm (and insanity) of institutionalized blackmail – which is all that "too big to fail" ever was/is. You must protect us, no matter what we do, no matter what the cost. Utter insanity. Utter criminality. ..."
"... An oligopoly is where a small group of companies dominate/control an entire market or sector. Here it is important to understand that oligopolies are every bit as "evil" as monopolies (in every way), but the oligopoly puts a happy-face on this evil. Oligopolies represent pretend competition. ..."
"... But such corporate extortion via oligopolies/monopolies is certainly not confined to the banking sector. The Oligarchs engage in such extortion (against corrupt governments which require absolutely no arm-twisting) in virtually every sector of our economies, but generally in not quite as extreme a form as what is perpetrated by the Big Banks. ..."
"... Read Schumpeter beginning to end. He recognized the evolution of increasingly larger-scale, boom-and-bust "capitalism" from free-enterprise, entrepreneurial capitalism to industrial capitalism and eventually to various forms of state-capitalism, corporate-statism, or quasi-fascism we have today, or what I refer to as militarist-imperialist, rentier-socialist, or Anglo-American corporate-state. ..."
Sep 25, 2015 | www.zerohedge.com

Today, with governments which are nothing but literally the junior partners (of Big Business) in government-by-crime-syndicate, these laws might as well no longer exist, as they are practically never enforced. Indeed, an entity must be a political/economic pariah, or simply lacking "connections" if it is unable to sneak some merger or take-over past our totally compliant governments, and their fast-asleep "regulators".

Today we have corporate monoliths which are literally orders of magnitude larger than any remotely "optimal" size, with the ultimate and most-obvious examples being those hideously bloated financial behemoths which we now know as "the Big Banks". How ridiculously too-big have the Big Banks gotten?

Even the most-ardent admirer of the Big Banks in the entire media world, Bloomberg, couldn't stop itself from openly salivating about how much "profit" could be had, just by beginning to chop-down the financial fraud-factory which we know as JPMorgan Chase & Co.:

JPMorgan Chase & Co, the biggest U.S. bank by assets, would be worth 30 percent more if broken into its four business segments, an unlikely scenario, an analyst at Stifel Financial Corp.'s KBW unit said.

Note that there is not one word in the article indicating that there couldn't be a lot more profit to be made, by then smashing those pieces into much smaller pieces still. This article simply pointed to the instant profit of 30% which would be available just by beginning to chop-down this obscenely large behemoth, and in the simplest manner possible.

Why would "smaller" be much more valuable, in our forward-looking markets, in the case of smashing JPMorgan down-to-size (or at least beginning that process)? Obviously a major portion of that profit quotient would have to be derived from greater efficiency. Smaller is better.

However, pointing out that even the greatest admirer/biggest cheerleader of the Big Banks has observed how we would all be better off if the Big Banks were smaller is only a start. We then come to the heinous propaganda which the cheerleaders (including Bloomberg) have dubbed "too big to fail".

This is a very simple subject. "Too big to fail" is a pseudo-concept which is entirely antithetical to any economic system which even pretends to adhere to the principles of "free markets". Free markets demand that insolvent entities fail, it is the only way for such free markets to heal, when weakened by the misallocation of assets (such as in the case of insolvent enterprises). No business, or group of businesses could ever be "too big to fail".

There could never be an economic system, or economic argument where "too big to fail" could ever be a rational/legitimate policy. Put another way, no level of short-term economic harm or shock could possibly equal the long-term harm (and insanity) of institutionalized blackmail – which is all that "too big to fail" ever was/is. You must protect us, no matter what we do, no matter what the cost. Utter insanity. Utter criminality.

Understand that our own, corrupt governments embarked upon this criminal insanity long after the equally criminalized government of Japan already proved that too-big-to-fail was a failed policy. Not only could there never be an argument in favor of this criminality, our governments knew it would fail before they ever rubber-stamped this systemic corruption.

But all of these arguments against the insanity of perverting and skewing our economies in favor of Big Business, and against Small Business pale into insignificance compared to the principal condemnation of too-Big Business: the economic "cannibals" known as monopolies and oligopolies.

For readers unfamiliar with these terms because the Corporate media and charlatan economists try to pretend that these words don't exist, a brief refresher is in order. As most readers know, a monopoly is where a single enterprise effectively controls an entire market or sector. While a "monopoly" may be desirable when playing a board-game, in the real world these parasitic entities do nothing but blood-suck, from any/every economy they are able to "corner".

However, the majority of people, even today, are at least partially familiar with the evils of monopolies, thus the ultra-wealthy Oligarchs rarely attempt to perpetrate their systemic theft via these corporate fronts. Instead, they perpetrate most of their organized crime via oligopolies.

An oligopoly is where a small group of companies dominate/control an entire market or sector. Here it is important to understand that oligopolies are every bit as "evil" as monopolies (in every way), but the oligopoly puts a happy-face on this evil. Oligopolies represent pretend competition.

These corporate fronts cooperate as closely as possible in systemically plundering economies. How do monopolies/oligopolies rob from us? The "old-fashioned" way for these blood-suckers to do so was via simple price-gouging. When you have complete control over a sector/market, you can charge any price you want.

However, not surprisingly, the Little People tend to notice when the Oligarchs use their corporate fronts to engage in simple price-gouging. They actually begin to notice the general evil which oligopolies/monopolies represent, and that is "bad for business" (i.e. crime).

Instead, the Oligarch Thieves of the 21st century engage in their robbery-by-corporation in a different, more sophisticated/less-visible manner: via corporate welfare. What other crime can monopolies and oligopolies perpetrate, with overwhelming success? Naked extortion.

As previously explained; "too-big-to-fail" (and now even "too big to jail") is nothing but the most-obvious and most-despicable form of corporate extortion (or simply economic terrorism): give us all the money we want, or we'll blow up the financial sector. Small banks could never perpetrate such a crime (terrorism).

But such corporate extortion via oligopolies/monopolies is certainly not confined to the banking sector. The Oligarchs engage in such extortion (against corrupt governments which require absolutely no arm-twisting) in virtually every sector of our economies, but generally in not quite as extreme a form as what is perpetrated by the Big Banks.

Typically, the extortion which precedes even more Corporate welfare, occurs in this form: give us everything we want, or we will close our factory/business, and you will (temporarily) lose those jobs. Here we don't need to imagine this in the hypothetical, as we have a particularly blatant example of such Corporate extortion/welfare, courtesy of U.S. Steel:

U.S. Steel Canada Inc. is threatening to cease operations in Canada by the end of the year if an Ontario Superior Court judge rejects its request to stop paying municipal taxes, halt payments into pension funds, and cut off health care and other benefits to 20,000 retirees and their dependents. [emphasis mine]

... ... ...

kanoli

Like most of Jeff Nielson's rants, this one is nonsensical. If small business hires more people to produce the same product or service as a big business, they cannot do so at the same or lower price unless they are paying a lower wage.

The problem with big business isn't that it is big - it is their tendency to lobby government for regulations that stifle small business competitors.

If politicians were not for sale, it wouldn't matter whether a business is big or small. Neither would have undue influence on the law.

The problem is regulatory democracy where all laws are constantly subject to fiddling by an elected legislature.

Element

In practice a balanced mix of all sized businesses are necessary in a planetary civilization that trades products globally. Getting the mix 'right' and not having big business get away with preventing competition, or of govt throttling to skim and micro-control is most of the deleterious effect on business, and on human beings in general.

Unfortunately humans have been trained to like Logos, and to buy 'wants' accordingly.

iDroned on a bit,

2c

newnormaleconomics

Read Schumpeter beginning to end. He recognized the evolution of increasingly larger-scale, boom-and-bust "capitalism" from free-enterprise, entrepreneurial capitalism to industrial capitalism and eventually to various forms of state-capitalism, corporate-statism, or quasi-fascism we have today, or what I refer to as militarist-imperialist, rentier-socialist, or Anglo-American corporate-state.

The current state of the evolution of "capitalism" is its advanced, late-stage, financialized, globalized phase.

With Peak Oil, population overshoot, unprecedented debt to wages and GDP, Limits to Growth, climate change, a record low for labor share, decelerating productivity, OBSCENE wealth and income inequality, and increasing geopolitical tensions, growth of real GDP per capita is done, which means that growth of profits, investment, and capital formation/accumulation is done, which in turn means "capitalism" is done.

... ... ...

[Sep 20, 2015] Imperialism on the March: Africa, Syria, and Beyond

"...Draitser examines some of the volatile conflicts on the continent, attempting to trace how they relate to the US-NATO regional and global hegemonic agenda. From there, he provides his analysis of Syria and the US role in the rise of ISIS/ISIL, as well as Washington's militarization of Latin America in order to stifle its independence and growing alliances with the non-western world."
Sep 20, 2015 | stopimperialism.org

Eric Draitser appears on WBAI 99.5 FM (NYC) for part 2 of his interview on imperialism in the world today.

https://www.youtube.com/watch?feature=player_detailpage&v=WZghyoQi3yE

He describes in detail what the US and its neocolonial NATO allies are doing in Africa, with close attention to the grand strategy of militarily checking the economic influence of China. Draitser examines some of the volatile conflicts on the continent, attempting to trace how they relate to the US-NATO regional and global hegemonic agenda. From there, he provides his analysis of Syria and the US role in the rise of ISIS/ISIL, as well as Washington's militarization of Latin America in order to stifle its independence and growing alliances with the non-western world. Finally, Draitser touches on the current situation in Haiti and the grand strategy of containing China through the Asia Pivot and the Trans-Pacific Partnership. All this and much much more in this wide-ranging interview.

[Jul 26, 2015]The great Greece fire sale

"... "Privatisation in Greece right now means a fire sale," political economist Jens Bastian said."
.
"...The Guardian is not the paper you think it is... or would like it to be.
Even if its support for the previous Coalition government wasn't clear enough, the nature of its coverage of Russia, Greece, and lately the Corbyn candidacy, very obviously reveals its true loyalties."

.
"... Privatization will make the Greek economy look like Russia. Mafia State 2.0. The cost of everything will rise as the profiteers stripmine any assets left after the sellout of the Greek people. Those assets deemed unprofitable will be dumped onto the bankrupt state government. Your last paragraph is neocon boilerplate and simply doesn't apply in a situation where pirates move in to clean the bones of their victims. "
July 24, 2015 | The Guardian

Greece needs to sell off €50bn worth of state assets such as airports and marinas quickly as part of its third bailout deal. But is such a plan realistic?

In the early days of the Greek debt crisis, two German politicians came up with a radical solution: Greece should sell off some of its uninhabited islands and property to pay back its creditors. "Sell your islands you bankrupt Greeks! And sell the Acropolis too!" was how the German tabloid Bild summed up their idea.

While selling off ancient monuments was never a serious idea, the privatisation of state assets has always been an integral feature of Greece's international bailouts. Over the past five years, Greece has faltered on promises to sell vital parts of its infrastructure – ports, airports, marinas and waterworks – in exchange for billions of euros in loans.

Privatisation remains a vital element of Greece's latest bailout deal. Under threat of being forced out of the eurozone, Athens agreed to transfer "valuable assets" to an independent fund, with the aim of raising €50bn (£35bn). Half the proceeds will be used to shore up capital reserves at Greek banks; a quarter will be used to repay Greece's creditors, and the remainder will be spent on unspecified investments.

The privatisation fund was the issue that almost forced a Grexit at the marathon 17-hour, all-night summit of European leaders in Brussels earlier this month. "It was the only thing discussed at the summit," recalls one diplomat.

At 6am, as Greece teetered on the brink of leaving the euro, the Greek prime minister, Alexis Tsipras, was still haggling over privatisation details with his counterparts, Angela Merkel and François Hollande.

The idea of the privatisation fund first emerged in a leaked German government paper which argued Greece should leave the eurozone if it did not agree to put €50bn in a Luxembourg fund as collateral for its debts. Although drafted in Berlin, the plan soon found support among Greece's hardline creditors in central Europe and the Baltics.

Tsipras wrung two concessions: the fund would be run from Athens, not Luxembourg, and a tranche of the cash would be earmarked for investments in Greece.

The privatisation fund is likely to remain one of the most contentious issues as Greece and its creditors strive to conclude bailout talks by mid-August.

From the creditors' perspective, Greek privatisation has been failure heaped upon failure. In 2011, international creditors decreed that Athens would raise €50bn by the end of 2015 from selling state assets. By early 2015, only €3.2bn had been raised; none of the most sensitive aspects – airports, ports, railways – had been sold. Neither officials at the European commission nor the International Monetary Fund are taking the €50bn target remotely seriously.

In a devastating analysis of Greece's debt burden published in July, the IMF said it was realistic to assume asset sales would be worth no more than €500m a year – meaning it could take 100 years to raise €50bn.

Gabriel Sterne at Oxford Economics argues that the IMF has failed to learn from its recent history that "less is more" when it comes to setting numerical targets. "It is economics versus faith – 'Somehow we will make this work even if it doesn't add up' – but the economics really doesn't add up."

When Syriza swept to power in January, one of its first actions was to sack the people in charge of Greece's privatisation agency and cancel plans to sell Greece's electricity transmission operator (ADMIE). The sale of other assets – most notably regional airports and the port of Piraeus – had almost been completed, but was thrown into doubt. The government is expected to put up little resistance to the sales now being concluded. Venues purpose-built for the 2004 Athens Olympic games, which have sat derelict and rotting for the past decade, will also be among the assets moved to the fund, alongside state utilities, including the water board and ADMIE.

Both Russia and China have expressed interest in snapping up the state-run railway network, one of the biggest encumbrances on public finances before the debt crisis erupted in late 2009. The Greek state is also rich in buildings bequeathed by individuals to municipalities and the Orthodox Church – properties that are also expected to be included in the fund. Contrary to popular perception, the public sector owns very few islands. The sale last week to Hollywood star Johnny Depp of the Aegean islet of Stroggilo, for a reputed €4.2m, was conducted privately.

While Tsipras has been forced into a humiliating climbdown over the sale of state assets, he has repeatedly branded the entire bailout plan as a bad deal that he doesn't believe in.

Unions with ties to the governing party have already vowed to "wage war" to stop the sale of docks in Piraeus, where the Chinese conglomerate, Cosco, currently manages three piers. With the debt-stricken country on its knees, officials have stressed that the prime minister will fight to ensure the denationalisations are not seen as a fire sale.

However, independent observers fear just that. "Privatisation in Greece right now means a fire sale," political economist Jens Bastian said.

Bastian was one of the officials responsible for privatisation under the European commission's Taskforce for Greece, a body of experts distinct from the troika. He thinks it was a "political mistake" to set a target to raise €50bn from asset sales, in the absence of support from Greek politicians across the political spectrum, from the centre-right New Democracy party, to Pasok on the centre-left and Syriza on the left.

"We have never had a political majority to embrace the idea of privatisation. How are you going to create the political momentum that has been absent in the past years under more difficult conditions today?" he asks.

Greece's creditors share such scepticism. Their answer is tighter controls. The privatisation fund will be managed by Greeks under the close watch of creditors.

The privatisation fund has few precedents, although it has been compared to the Treuhandanstalt, the German agency created in the dying days of the GDR to privatise East German assets shortly before reunification. Greece's former finance minister, Yanis Varoufakis, was one of the first to draw the parallel, although others offer the comparison unprompted. Peter Doyle, a former IMF economist, says the Treuhand offers the closest parallels: the agency had full control over government ministries to sell assets quickly. "The principal task was to sell these things to somebody for cash."

Greek government officials and opposition politicians said it was too early to know how the Greek fund would operate.

"We've got a long way to go before we have a clear picture of what this fund and the privatisation scheme will entail," Anna Asimakopoulou, shadow finance minister with the main opposition New Democracy party, told the Guardian. "But the entire privatisation process will feature large in negotiations because Tsipras is so opposed to them and creditors see them as a good way to raise revenues."

Greece has an urgent need for cash: although the eurozone bailout is meant to be worth up to €86bn, only €50bn is on the table, via the eurozone's bailout fund, the European Stability Mechanism.

Doyle thinks Greece's bailout is underfunded. "The Europeans just don't have enough cash ... and a major way to fill that gap is through privatisation." Officials at the Greek privatisation agency are "going to find their arms very strongly twisted to provide needed cash", he says.

"The privatisation agency is facing a trade off between doing something that is fair and open and following judicial procedures, or something that is going to deliver needed cash."


He fears Greece could be heading down the path taken by Russia in the 1990s, when valuable state assets were sold at knockdown prices to raise urgently-needed cash, creating a new oligarch class in the process.


"The very thing we all think that Greece needs – to get rid of its oligarchy – will in fact be entrenched by privatisation done this way," argues Doyle, who worked on privatisations in the Czech Republic, Slovakia and Poland in the 1990s. The difference between those countries and Greece, he thinks, is that the population and political class in central Europe accepted the idea of privatisation, despite the short-term hardships.

He is convinced the current privatisation plan for Greece is doomed to fail. "The programme was set up to encourage Greece to leave the euro and that plan didn't work, so now we are stuck with the privatisation arrangement that nobody, not even the original creditors, ever intended to happen."

Up for sale

Helliniko Olympic complex

Ports of Piraeus and Thessaloniki

14 regional airports

PPC power company, including ADMIE, the electricity transmission operator

DEPA natural gas company

Hellenic Petroleum
Hellenic Post
Athens Water Supply and Sewerage Company
Xenia Hotels in Rhodes
Marinas of Chios, Pylos and other locations

Source: Hellenic Republic Asset Development Fund


MrShigemitsu -> Byron73 26 Jul 2015 15:49

surely a newspaper like the Guardian

Woah, back up now.... you see, there's your problem right there.

The Guardian is not the paper you think it is... or would like it to be.

Even if its support for the previous Coalition government wasn't clear enough, the nature of its coverage of Russia, Greece, and lately the Corbyn candidacy, very obviously reveals its true loyalties.

It supports the neoliberal status quo - don't kid yourself otherwise.


JaneThomas 25 Jul 2015 22:07

"It's neither more moral nor a matter of just desserts to call for that internal devaluation, that austerity, than it is to call for the currency devaluation. Indeed, I would argue entirely the other way: the currency devaluation will cause a lot less human pain so that's the way the problem should be solved. Thus Greece must leave the euro because that's the way to solve the problem with the least pain."

http://www.forbes.com/sites/timworstall/2015/07/25/greece-really-should-leave-the-euro-the-economics-is-entirely-clear-here/


delaxo kimdriver 25 Jul 2015 17:34

How many Greeks really want Eurozone at any cost can only be seen through a referendum.
Remember that prior to the last referendum of 61-39, the same opinion poll companies were predicting a 50-50 result.
Are they more trustworthy on the Eurozone question?

someoneionceknew Drosophilasrule 25 Jul 2015 17:24

Capital's motivation is to accumulate financial assets i.e. supplying the least possible service/product for the greatest possible return.

delaxo kimdriver 25 Jul 2015 16:32

"the Greek political establishment was held to account by its electorate":
Excuse me but his sounds like a joke, when 61% of the electorate expressed a will that was summarily rejected by the true rulers of the colony.


Alfie Silva kimdriver 25 Jul 2015 16:11

Al well and good in principle and I agree with most of what you say.

However, privatisations are not always the nirvana you make them out to be.

You see it everywhere across Europe; the privatisation of EDP, PT, REN for example in Portugal; customer service is now appalling in these former nationalized industries.

I experienced it first hand in the UK; NORWEB and North West Water becoming United Utilities; service to the public again is appalling.

In the rush to privatise, the need for an ombudsman and guaranteed standards by statute is as necessary as making a return to shareholders.


Moniq Vervoort 25 Jul 2015 12:43

The list of Oligarch Greeks that don t pay tax in Greece should be plastered all over the internet , newspapers , tv , etc

Out of the 100 richest people on Earth right now 8 are Greek , one lady and 7 gents that ought to get a BBC camera and a competent interviewer asking their take on the situation ' back Home'!

That would make more sense that simply flogging the place off to Tom Dick and Harry (IMO)


Ryleigh RedCoat4Ever 25 Jul 2015 09:48

Except they are a nation state, not a household or a company. The ability of one country to intervene in another and seize assets smells of imperialism and colonialism.


deskandchair -> Winhoering 25 Jul 2015 09:20

Another corporatist fantasist:
"Spain and Ireland are reporting good growth rates"
AND soaring poverty and unemployment and mass emigration, really great EZ success stories there NOT.


deskandchair -> whitewolfe 25 Jul 2015 09:17

"Smaller the state less corruption"
More corporatist lies, small state = large corporate power and in which fairy-tale lala land do you imagine there's no corruption in private companies? Indeed, corruption is even MORE COVERT in private companies you dunce.


LibertineUSA 25 Jul 2015 09:06

Making Greece poorer one step at a time. What a triumph of neoliberal economics...for at least the beneficiaries of neoliberal economics. Who just happen to be the same people who own everything and don't want to pay their taxes.


FourtyTwo Drosophilasrule 25 Jul 2015 09:01

Germany already owns fully the Greek telecom company (Deutsche Telekom) and is preparing to secure the purchase of all Greek regional airports (Fraport AG). There are also rumours that Sofina, based in Brussels is after Thessaloniki's water company EYATH (ΕΥΑΘ). Interestingly enough Guy Verhofstadt sits on this company's board. So I grant you it is not just "Germany" but Germany's sphere of influence out to buy Greece. ;)

But even if some Greek oligarchs manage to get a piece of that cake, do you really think that would be anything to be proud of? I hear that Greece's "national contractor" George Bobolas is collaborating with Sofina to get a piece of EYATH. What do you have to say about that?

Everybody knows that the non-paper regarding the Greece Treuhand (let's call a spade a spade, shall we?) was circulated by Schaeuble even before the beginning of the summit meeting and that originally the fund would be based in Luxembourg, be run by non-Greeks and all the money from the privatisations would go to creditors to service the debt. The summit almost collapsed because of this aggressive move as Tsipras abandoned the negotiations in dismay and several more moderate people had to intervene to get him back to the negotiation table. Later we found that the non-paper was known and endorsed by both Merkel and the SPD. So yes, pretty much all of "Germany" was behind that caper.

Joint control of assets (Greek state and private companies) has already been proposed by the Greek government, namely Varoufakis himself, but that was deemed unsatisfactory. And even a neoliberal has to agree that selling off assets at a time of a big depression and uncertainty will effect in their being sold for peanuts with a great loss to the seller and a humongous gain for the buyer. Especially if the assets are monopolies of basic commodities like water which means they are totally risk-free, or related to the country's basic means of revenue, tourism.


Kompe75 hungrycocky 25 Jul 2015 07:59

We knew that Germans and reason coincide....but now with Schaueble everything is possible...they have tradition in electing paranoid leaders


MacNara -> whitewolfe 25 Jul 2015 06:31

You are clearly an ultra-capitalist, while I am not, so it's difficult to talk with you. But like many with a religious belief in capitalism, you don't seem to have much idea how it works.

Let's take your point 1:


Selling them contributes to the government, cash. Cash that the country desperately needs.

No: all this money is going abroad; the Greek government won't see any of it. From the point of view of the Greek government, the sale alone (assuming nothing else happened) would be purely an accounting change with no effect in the real world. So, from their point of view, if they were capitalists it would be best to carry on as is, or declare bankruptcy and have a pre-arranged buyer for the bankrupt company (i.e. themselves).


As long as trains run and electricity is deliver[ed] who cares who owns it?

Well, shareholders seem to, otherwise why would there be stockmarkets? And the reverse is true from the customers' point of view. That is to say, if the company became profitable and the profits went to the Greek state rather than others, then it would make a big difference to the citizens.

And so on for your other three points, which I had also already answered in my original post.

John Bennetts -> whitewolfe 25 Jul 2015 06:02

Total BS, Whitewolf. I expect that putting others down makes you feel bigger.

Name examples of "smaller state less corruption". Where has this worked?

The foreign banks made bad deals, lost the gamble and then pressured their governments, led by Germany, to extract penalties far i n excess of the supposed crime. The whole nation is being pauperised.

But that doesn't matter... they're only olive-sucking Greeks, after all. Not German or French banks. So that's OK.

MacNara 25 Jul 2015 00:02

I don't understand why the idea of management contracts for Greek state-owned industries has not been given an airing.

For example, Deutsche Bahn (German government) could be given a ten or twenty year contract to make the railways profitable, and EDF (French government) could do the same for the power system. And this could be done without privatisation (after all, the German and French equivalents are state-owned).

This would surely have several benefits:

1. When the companies were profitable, they could contribute to Greek government finances.

2. Alternatively, once profit-making, they could be sold off, but not at fire-sale prices as looks likely at the moment.

3. This would be a clear example of the German and French (and other governments') desire to help Greece improve, and not to asset-strip, so it would be a PR win, and a plus for all sides (especially if these contracts were 'at cost' and non-profit).

4. Making these businesses profitable will probably initially involve job losses, wage cuts, and price rises. Keeping them in state ownership would mean that the benefits of these sacrifices by Greeks would be kept in-house (i.e. go to the government and not foreign capitalists or Greek oligarchs) and therefore make it more likely that they would get social acceptance.

Has such a plan really never been discussed? Or is my logic faulty?


deskandchair 24 Jul 2015 23:52

". It is a necessary component of a healthy economy because it ensures private sector efficiency and productivity"

Straight from the '90's handbook and absolute RUBBISH. Look at for example public transport systems privatised in Australia. They're now less efficient (schedules are a joke) rolling stock is older and shoddy and private companies STILL DEPEND on state governments for injections of hundreds of millions of dollars to maintain infrastructure.

Then there's electricity supplies in Aus states that have privatised, over-investment in infrastructure (so they can pump the cost of electricity so while households are using less power, costs far exceed inflation). The same with water, gas etc.

I have yet to see ONE example of privatisation of public assets in Aus that resulted in better service, efficiencies etc etc etc. Privatisation of assets is simply a cash-cow for certain companies to bleed the public dry and am happy to consider any REAL example where this is not so.


Alto Cumulus 24 Jul 2015 22:56

Multinational corporations hire battalions of lawyers precisely to AVOID paying taxes. And foreign governments collude, allowing multinationals and Greek oligarchs to park their money in the Luxemburg, Netherlands, or other tax havens.

So selling of Greece's water utilities or ports does NOT mean the corporate buyers will be compelled to pay taxes in Greece. The burden of tax payment will continue to fall to Greek small businesses and Greek families.

The little taxes the new corporate overlords may pay will be immediately sucked up by Greece's creditors.

Marty Wolf -> psygone 24 Jul 2015 15:30

Privatization will make the Greek economy look like Russia. Mafia State 2.0. The cost of everything will rise as the profiteers stripmine any assets left after the sellout of the Greek people. Those assets deemed unprofitable will be dumped onto the bankrupt state government. Your last paragraph is neocon boilerplate and simply doesn't apply in a situation where pirates move in to clean the bones of their victims.

Olastakarvouna 24 Jul 2015 15:12

Helliniko Olympic complex, and 14 regional airports have already been sold (with only bureaucratic hurdles remaining). So has DEPA the natural gas company, but its sale is being held up by EU regulators. The PPC power company will NEVER be sold (unless you believe that Britain will sell its NHS). The Athens Water Supply and Sewerage Company will also NEVER be sold, as its sale (and that of Thessaloniki water supply co) was deemed unconstitutional a year ago by Greece's highest court. Helena Smith, please try refining your reporting a little bit more.

[Jul 14, 2015] Rich countries accused of foiling effort to give poorer nations a voice on tax

Jul 14, 2015 | The Guardian
Jul 13, 2015 | The Guardian

Aid agencies at Addis Ababa development finance summit claim UK and others have obstructed talks aimed at enabling poor countries to influence UN tax policy.


Aid agencies on Monday accused the world's richest countries, including the UK, of blocking plans to allow poor countries a greater say on UN tax policies.

The upgrade of the UN tax committee to an intergovernmental body was widely seen as a way for less wealthy nations that have struggled to build effective tax systems to influence policy decisions at the UN.

The UK joined the US and several other wealthy countries at the UN financing for development conference in Addis Ababa in a manoeuvre to limit discussions on tax policy at the UN, arguing that the Organisation for Economic Cooperation and Development (OECD) was taking the lead on tax issues.

But a proposal presented to the conference by the OECD, known as a thinktank for the world's 34 richest nations, was also criticised for treating developing countries as an afterthought.

The OECD and the UN Development Programme launched a project entitled tax inspectors without borders to help poorer countries bolster domestic revenues by strengthening the ability of tax authorities to limit tax avoidance by multinationals.

The initiative, which involves providing tax audit experts to work alongside local officials dealing with the affairs of multinationals, has had encouraging results across pilot projects in Albania, Ghana and Senegal. Evidence from Colombia, meanwhile, indicated an improvement in tax revenue from $3.3m (£2.1m) in 2011 to $33.2m in 2014, "thanks to tax audit advice and guidance".

Aid charities believe developing countries should build robust tax systems to prevent them from borrowing heavily and getting into debt, as highlighted in a recent report by the Jubilee debt campaign.


The World Bank has come under heavy fire in the past for encouraging poor countries to cut corporate taxes to boost foreign direct investment. Ethiopia, Mongolia, El Salvador and Puerto Rico are among 38 countries in the report that are slipping dangerously into debt after borrowing on the international money markets to bridge the gap left by large tax shortfalls.

The Addis Ababa conference was expected to produce a series of high-level deals to promote sustainable, self-sufficient development. But the charities fear the UN and the World Bank will promote private finance initiatives that involved either privatisation or greater borrowing to finance investment, improve infrastructure and public services.

Speaking at the conference, a spokeswoman for ActionAid said: "The UK government has positioned itself as a global leader on many aspects of sustainable development, aid and in global efforts to tackle tax avoidance and evasion. It is therefore disappointing that the UK appears to be one of the few governments blocking progress on the important issue of a tax body."

Failure to tackle this question in Addis will not make the urgent need for international tax reform go away. It will simply intensify the challenges ahead for the international community. There is growing recognition that the OECD alone cannot ensure global rules work for all countries, especially the poorest. Blocking agreement on an obvious solution in Addis simply delays the inevitable while putting other critical processes at risk.

Save the Children said the world was "sleepwalking towards failure" at the global finance summit, adding that the UN should create an international body to oversee global tax matters.

A spokesman said: "Tax has never been more under the spotlight as the source of finance for development, but decisions affecting the poorest countries and their ability to recoup money owed to them are taken in an elite club of the most powerful nations. This 20th-century way of doing business is no longer appropriate for the era of sustainable development goals."



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