The Output Gap - A false and Dangerous Theory

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In my last post, I talked about the likelihood of inflation in the U.S. in the near future and I was trying to debunk some of the theories that claim the opposite. I will continue on that note today and talk about one issue that is supposed to make inflation an impossibility during an economic downturn: the output gap.


The “output gap” is a measure of the difference between economic activity in an economy when times are sustainably good, and when there is a downturn. A lot less goods and services are produced during an economic crisis, for obvious reasons, and that is what accounts for the output gap.


Most economists who are currently advising the Obama administration or who are given time in the media are pointing to this output gap. They are saying that the current level of production in the U.S. economy is “unnaturally low”, and hence there is a lot of “slack” in the economy.


This slack, it is thought, can simply be filled in by printing more money, in order to save the economy. Because of the slack, inflation will not be created because the money printing is simply making up for the consumption which has disappeared, but should still be there, it is thought.


In other words, they are saying that the level of production today in the U.S. is not as high as it’s “supposed to be”.


In reality, they are saying that factories are “supposed to” produce more cars, TVs and clothes, and that people are “supposed to” get more haircuts and eat out more often.


But why should this be? Who says that there’s a “natural level” at which consumption should be? Definitely not me…


Please take a look at the model that I drew up in the beginning. This is an illustration of the U.S. economy. The important thing to see in the model is that both consumption and economic output will very likely be lower in 2009 compared to what they were in 2006. My model explains the very simplest of economic linkages: output follows consumption, or put in other words: supply follows demand.


Since the crisis started, demand has gone down rapidly all across the economy. Demand for houses, labor, haircuts and basically everything else has gone down. Naturally, there would be no point in producing any of those things if nobody wants to pay for them, so production goes down.


In order to find out what happened to the demand, what made it go down, one must look at what was fueling it, where the money was coming from.


Maybe the country had an export good, the price of which suddenly dropped like a rock. This recently happened to Russia and its oil. Consumption in Russia consequently went down because a lot of money disappeared.


Maybe the country had a brain drain of people which made key industries less productive. This happened in Zimbabwe when the country expelled its white farmers. A lot of money disappeared, and, incidentally, the Zimbabwean government tried the trusty method of printing money, with less than fabulous results.


There are many ways in which an economy can get in trouble, but no matter what, during times of crises, consumption and output will go down. Where was the money coming from in the U.S.? The answer is: credit.


Wages in the U.S. have been stagnant for over 30 years, and in order to make up for that, Americans have been taking loans to fuel consumption. Credit is the very thing that disappeared in this crisis, and that is what is decreasing demand.


In order for the output gap to be closed without anything radically changing in the economy, credit would have to come back as an economic force just as strong or stronger than before. We all know that that is not going to happen, so where does that leave us?


If there are no prospects of this gap being closed by new credit, then there is no slack in the economy, and money printing will simply be the futile and devastating activity it was in Germany and Zimbabwe.


The gap would have to be closed by something else, such as a more successful export industry. If, by some miracle, the U.S. export industry were to become extremely successful within a matter of months, so that the trade gap could be closed and turned into a surplus, then maybe the theory of the output gap could be relevant. The U.S. would have to stage an unprecedented economic miracle. Somehow I don’t see that as very likely.


The theory of the output gap can be relevant in normal economic times, when simply analyzing small ups and downs. But this theory is wholly irrelevant in a structural crisis or a depression.


In conclusion: the theory of the output gap is false and irrelevant because it is based on a notion of the imminent return of the credit-fueled good times. Using this theory as a justification to print money has been done before, with disastrous inflation as a result.

The economy is not "supposed to be" anything. It is only what you make it in to!




Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Regulatory System as a Competitive Advantage

One of the most central themes in how I think about the interaction between economics and politics is the importance of the rules governing capitalism, in order for capitalism to reach its full potential and serve society in the best way it can.


The case for a well regulated economy is quite simple when you look at the alternatives:


Socialism does not work because no one can ever know enough about human economic behavior in order to plan everything in advance, and an unregulated economy does not work because that leads to monopolies, oligarchies and crime, and makes a democratic process impossible.


The economic crisis has now reached a stage where the role of regulation is becoming apparent for the U.S. financial system. More specifically, I argue that U.S. financial companies are now doomed to failure in competition with foreign financial companies because they have not, and will not, be adequately regulated.


A recent article in the New York Times highlights this problem. The article explains that, as a result of the crisis, the influence of British, German, Swiss and Japanese banks is growing on Wall Street and in the U.S. in general. As Eugene A. Ludwig explains, this could have something to do with regulation:


“What worries me is the competitive edge that non-U.S. banks have vis à vis U.S. banks,” said Eugene A. Ludwig, the comptroller of the currency under President Bill Clinton, who now runs the Promontory Financial Group, a Washington bank consultant group. “Non-U.S. banks generally operate under more coherent regulatory structures than U.S. banks do, which creates imbalances that non-U.S. banks can exploit, especially at a time when their U.S. counterparts are operating under extraordinary constraints.”


In short, the U.S. economy has again reached a stage where it is a wild west-style economic system that is essentially unregulated. The little regulation that exists is highly fragmented, where different financial regulators oppose each other and where financial companies can choose their own regulator, invariably picking the one that enforces the least amount of regulation.


By contrast, financial institutions in the EU operate in a much more comprehensive economic framework in general. A lot of this has to do with the work that was done in anticipation of the introduction of the Euro as the common currency. More specifically, Germany refused to go along with the project unless the German brand of stable capitalism became central to the operation of the Euro zone.


Some of the best examples of this are:


- The European Central Bank has a single mandate: to fight inflation ONLY, and not concern itself with economic growth, and to be wholly independent from politicians. A very helpful international comparison of central banks can be accessed here: http://www.bis.org/publ/mktc01.pdf?noframes=1


- Antitrust laws and fierce enforcements of those laws are meant to ensure that the “too-big-to-fail” problem does not occur.


- Bank capital requirements are higher, and additional credit rating standards are imposed on complex financial products such as mortgage-backed securities.


In addition to these rules, several countries in the EU have other regulatory advantages over those that U.S. companies have, such as:


- A single financial regulator with clear, often internationally harmonized rules (such as Basel I and II, and multiple EU agreements)


- Unlimited liability instead of limited liability. In many countries in the EU, financial executives are personally liable for what happens in their companies. This obviously creates a different risk-taking climate.


- The right of the government to take over non-banking institutions such as mutual fund companies and hedge funds in order to protect investors, much like the FDIC takeover authority in the U.S..


What I have listed above under the heading of “regulatory advantages” may seem like a not so coherent list of issues, but what these things lead to in terms of the role of financial institutions in the economy is one central thing:


A focus on long-term profits instead of short-term profits


It would be very hard to argue that a focus on short-term profits is a good thing from a societal economic perspective, or indeed from any perspective other than that of the individual financiers.


A focus on short-term profits, I argue, leads to large-scale “looting”, which I explained in
this blog post on circular looting.


Needless to say, the focus that American financial institutions have on short-term profits, as a result of the inadequate regulatory framework, is the explanation as to why U.S. companies are being challenged by foreign ones now. U.S. companies are simply not equipped to compete in the long term. When the looting is done, the companies have nothing to show for.


What we are seeing right now is a failure of the central functions of capitalism. Because the system has been under-regulated, if not unregulated, the good dynamics of capitalism where efficiency, choice, competition and innovation are central components have been shoved aside, in favor of outright looting.


Presently, U.S. financial companies appear to be doing better, but make no mistake, this is only an illusion. The suspension of the mark-to-market rule has enabled them to grab numbers out of thin air and make it look like they’re profitable again. Also, because the federal government is lending money to them extremely cheaply, on a highly unsustainable level I might add, these companies are currently experiencing some short-term gains.


As soon as the government realizes that the enormous subsidies cannot go on anymore, U.S. financial companies will start to tumble once again. My guess is that that will happen within 1-2 years.


The New York Times article gives the example of the U.S. auto industry not being able to compete with the Japanese auto industry, which I think is an excellent example. Because the U.S. government failed to implement proper standards for automobiles there was seemingly no need to change anything, you just keep churning out new cars for quick profits.


One day, though, the confidence of the public was used up, and the U.S. auto industry as we knew it died. In a not so distant future, Bank of America will be the new GM, and Deutsche Bank will be the new Volkswagen.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Job That Doesn’t Need Doing - The Structural Crisis of 2009

A structural economic crisis is very different from normal economic crises. With an astonishingly accurate history, they come around just about once every 40 years. When a country slips into a structural crisis, it means that there is really nothing that can be done about it, except to plan for a new future when the crisis is finally over.


Put more simply, a structural crisis means that the way in which a country has previously built its prosperity has come to an end. This is because the country has become dependent on a certain type of industry that has become obsolete, unable to compete or can no longer grow.


The following is a timeline of structural economic crises in America over the last 120 years:


1890 - The Long Depression


For a few decades, the U.S. economy had been growing rapidly as a result of the development of natural resources and huge investments in infrastructure, most notably railroads. This ultimately made the entire economy dependent on the continuation of this rapid growth, because so much money had been invested the driving forces behind it. When the crisis came, mines, railroads, factories and farms closed on a large scale, and unemployment eventually reached close to 20%.


Fast forward 40 years:


1929 - The Great Depression


In my view, the Great Depression was caused by a combination of a tech bubble and a real estate bubble. These bubbles were inflated with the help of too much credit and speculation with borrowed money. The U.S. economy had become dependent on the continuation of these bubbles, and the high value of the stock market, and when that was no longer sustainable, everything came crashing down. The outcomes are well known: unemployment of 25%, bread lines and lost savings.


Fast forward 40 years:


Early 1970s - Oil, Gold and Manufacturing Crisis


Another classic type of structural crisis is when an industry becomes completely unable to compete, seemingly over night. This happened all over the Western world in the early 1970s in the apparel sector. Huge numbers of people used to be employed in this sector prior to this time, but Asian competitors took over the market completely. This was only a part of a series of Asian manufacturing takeovers that continues to this day.


The 1970s crisis was multifaceted, and not as severe in the short term, although it could be argued that it partly set the stage for the next crisis. The 1970s crisis also involved the end of the Bretton-Woods system and the oil embargo.


The most notable long-term outcomes in the U.S., though, was a decline in manufacturing of apparel, steel, ships and many other industrial goods, because American companies were unable to compete with imported goods. This crisis permanently changed the make-up of American employment in general, as manufacturing jobs kept getting lost (in relative terms) even after the crisis had passed.


Fast forward 40 years:


2008 - Subprime/Derivatives/Credit Crisis


Out of the three structural crises I have briefly described, the current crisis is certainly the most similar to the Great Depression. The similarities keep adding up every day, but the most striking similarity is the fundamental causes: a real estate bubble (preceded by a tech bubble), built on too much borrowing and speculation with borrowed money.


Put in other terms, the dependence on Wall Street in particular really unite these two structural crises. Speculation with borrowed money, the government’s vested interest in the continuation of the bubble, ordinary people’s reliance on the bubble itself: the situation today is almost exactly the way it was in the 1930s.

What I'm actually saying by giving the example with the 40-year cycles is that it seems that it takes 40 years for an economy to develop different types of imbalances. These imbalances can take different forms, but all lead to the same thing: a structural crisis.

For a polticial discussion, imbalances that lead to structural crises are very helpful tools in trying to figure out the best way forward for an economy. There are distinct imbalances that can develop both on the left and on the right. Today's crisis is one that developed on the right, and the crisis in the 1970s was a crisis on the left.

Put simply, when an enormous accumulation of capital occurs in the financial sector, or in an oligarchy, a severe imbalance in the economy has developed. That was the case in the 1930s as it is today. This leads to a structural crisis.

Conversely, when the government tries to steer the economy too much in an artificial way, the industry usually becomes uncompetitive. This was the case with the British auto industry in the 1970s and the Swedish shipping industry in the 1980s. This also leads to a strucutural crisis.

What we see in this pattern is another example of a political pendulum swinging back and forth. Judging by this pendulum, the next structural crisis in the U.S. will occur in 2050, and it will be a structural crisis coming from the left.



When an economic system becomes reliant on speculation alone, which is the case now and in the 1930s, I believe that the crisis will be more severe.

Before the Long Depression and the crisis of the 1970s, the U.S. had overextended itself in particular industries, but there was at least something to show for it at the end of the day. There were goods and infrastructure available that people legitimately needed, but a crisis which has Wall Street speculation as its main feature leaves only a black hole.


Financial speculation is a job that doesn’t need doing. It benefits no one in the long run. Speculation inflates bubbles that in the end do a lot more harm than good, particularly to ordinary people who don’t see them coming.


Speculation doesn’t provide a good source of funding for businesses and their new ventures, both venture capitalists and businesses can attest to that. Most importantly, as we have seen now, it can bring down an entire economy if it goes on for long enough.


Whether you are on the left or on the right, financial speculation is your enemy. I believe that the U.S. will fall into a depression either this year or in 2010. History is screaming it from the roof tops.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Geithner's Lies - A Preview

The famous “bank stress tests” are in their final stages right now. On May 4, Geithner is going to present the results, and those are certainly rather predictable.


The tests were created in order for the Treasury to be able to paint as rosy a picture as possible, of the situation that the country’s banks are in. This has not been denied, and in fact, it has been confirmed, although using different words.


“The point of doing this is to avoid a panic, not cause one”, said Geithner recently.


What happens if the government finds something that is worthy of a panic (which it probably has)? That’s where Geithner’s lies and acting skills come in.


Early this week, results of the tests started to leak out. The rumor on Wall Street is that 16 of the 19 major banks are actually insolvent. If that shouldn’t cause a financial panic, I don’t know what should.


I don’t know if this is true, but it certainly could be. Like I said, it’s a rumor.


The government released the details of how the tests were conducted today. This is how the stress test works:


The banks have to figure out what would happen to them if:


1. unemployment went up to 10.3%,


2. home prices fell an additional 22%, and


3. the economy contracted by 3.3% and remained flat in 2010.


Note that the banks are conducting these tests themselves, and it is not exactly in their interest to tell anyone that they’re insolvent. Supposedly, if the government does not find the information coming from the banks to be credible, the banks will have to explain themselves.


In short, there is no independent auditor, only two vested parties who both want to paint a rosy picture and reveal as little as possible.


So, Geithner’s speech on May 4th is rather predictable, no matter what the government finds. In fact, I can give you the short version right here right now, so you won’t have to spend time listening to it on May 4th.


Dear members of the press, (this is Geithner speaking)


For three months, the U.S. government has been conducting stress tests on the nation’s major banks. I’m here today to present the findings of these tests.


The tests were conducted in the most stringent of ways, in order to make sure that the nation’s banking system can hold up in our current economic times. We tested the banks under fictitious, harsh economic scenarios that are very unlikely to become a reality.


Our findings show that despite continuing difficulties in our economic system, and even under a scenario of significant further deterioration, our nation’s banking system remains safe and well capitalized.


In recent months, the banks have taken unprecedented steps to shore up their liquidity positions by writing down legacy assets and by attracting new capital. This, along with an apparent improvement in the overall economic condition of the country, makes it clear to us that our financial system is on the road to recovery.


Blah, blah, blah, banks are great and Wall Street should love me…


Thank you, and no questions please.




I have a strong feeling that the actual speech that Geithner will give, is going to consist of absolute rubbish. Everybody on Wall Street knows he’s lying, but they don’t care, they only care about how convincing his lies are, because that is what will move the market in the weeks to come.


For ordinary people, all this means that even more vital information is being swept under the rug in order to preserve the financial oligarchy, which is the mission that Geithner seems to think that he was given by the American people.




Moreover, I advise that the winner-takes-all voting system should be destroyed.

Wall Street Calls Bank of America's Bluff

On Monday, Bank of America presented a fantastic first quarter result with a profit of $4.2 Billion! In the face of insolvency, losses that amount to 20 years of profits, and purchases of Merrill Lynch and Countrywide that very likely doubled the bank’s exposure to toxic assets, how is this possible??


With such great news, Wall Street must have gone crazy, because Bank of America’s stock went down by 24% the same day. What happened??


The answer is as simple as it is predictable: Bank of America’s report is utterly fraudulent.


I looked at the SEC report myself, and found that a little over $2 Billion of the “gain” is a result of the fact that Bank of America has decided, with no basis in reality, that its toxic assets are now worth a hell of a lot more than what they were only a few weeks ago. They can do this because the rule known as mark-to-market has been repealed.


Also, Bank of America makes reference to other new GAAP rules (rules that govern accounting), which apparently (according to them) enables them to put assets in “special purpose entities”, away from the balance sheet. This is what Enron pioneered, and it is what eventually brought down that company.


I could find no numbers concerning how much had been hidden away from the balance sheet this time, but the bank obviously doesn’t want that to be found. This makes me believe that the real number is very big.


Think of Bank of America as a regular guy. This guy has a yearly salary of $30,000. He has a credit card debt of $2,000. He also owes a loan shark a further $10 Million, and he lives in his aunt’s house.


The guy prepares a loan application to buy his own house, and in it he states that his income is $100,000, that he has a credit card debt of $2,000, and that he already owns his own home.


The only thing that’s accurate in his application is the credit card debt. The reason for that is that it can be checked by the bank. Everything else is pure fantasy.


It is the same way with SEC filings. You can bend the rules so much that SEC reports hardly mean anything anymore. You can’t trust ratings agencies or auditors either, because they get paid by the companies that they are supposed to be scrutinizing.


All this makes Wall Street look at a certain metric: quality of earnings.


“Quality of earnings” is not mentioned very often in financial journalism, probably because it seems to suggest that not all profits are actually a reflection of a company doing well. Quality of earnings describes to what degree the earnings of a company can be attributed to actual sales, as opposed to accounting wizardry.


I have over the last year argued that there has been an alliance between politicians, Wall Street, banks, regulators and the media to cover up the true extent of the financial crisis in order to preserve the financial oligarchy. By doing this, they have been able to uphold the illusion that everything is fine.


Even though Wall Street traders are not saying it out loud, they seem to be breaking ranks. They can no longer push up the prices of bank stocks and other financial stock in the face of such obvious and rampant fraud.


Expect stock markets to go much lower in the coming months.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

What Actually Caused the Great Depression?

During times of economic crises, wacky theories concerning the origin of the crisis tend to spread like wildfire. That was the case during the great depression, and that is the case now. Some people might include my theories in that category, but that is, of course, purely based on ignorance.


At present, there are literally hundreds of theories about the crisis out there, and discussions about the great depression have also resurfaced.


With respect to the great depression in relation to the current crisis, almost all the arguments can be boiled down to the following question:


Was the great depression caused by the easy access to cheap money?


As President Obama has noted, the discussion about the great depression is far from over. The factors behind that crisis are very complex, and far beyond the understanding of most politicians. Obama recently spoke in disbelief about the continued disputes over this.


There are a few things that I believe are beyond discussion:


- The stock market crash set off the depression because so many had so much invested in the market.


- The stock market crash was caused by overly inflated values of stocks.


- The overly inflated values of stocks were caused by an unprecedented amount of speculation with borrowed money.


Following this line of reasoning, the question remains: what causes speculation? If we can nail down what causes large-scale speculation, we might be able to answer what causes depressions.


More specifically, circling back to my initial question, “was the great depression caused by the easy access to cheap money?”, the question becomes:


- Does easy access to cheap money cause large-scale speculation which in turn causes depressions?


The answer to this question can be found more easily than one would think. If you can identify periods of time in history when money was cheap and abundant, and ascertain that rampant speculation always occurred during such times, you have your answer.


A quick look back in history tells us that this is not so. There have been many periods in history when borrowing money was cheap, but when speculation was minimal. This is noted in what is widely considered to be a standard work on the depression, “The Great Crash”, by John Kenneth Galbraith.


During several periods in the 19th century, cheap money was available, but without the result of large-scale speculation. This was also the case in the 1950s and 1960s. So, to say that cheap money alone causes large-scale speculation would be erroneous from a scientific standpoint.


I tend to believe that speculation can trace its roots to something far more basically human. I believe that speculation does not occur just because it CAN occur, but because there seems to be a reason to for people to speculate.


Greed is a human emotion that can never be extinguished. Everyone is guilty of it, and when a human sees an opportunity to make a quick buck without effort, whether this is prudent or not, he or she often takes that opportunity.


The most classic example of speculation is the tulip bulb speculation in Holland in the 16 Hundreds. This business went so far that a single tulip bulb could be worth an entire year’s salary at the time. What this speculation frenzy also featured were contracts with rights to buy bulbs in the future, trading fictitious bulbs that had not yet been grown, and all the other classic speculation behaviors that we see again today.


We may think we’re so advanced today, but greed, this inescapable human emotion, has already conjured up the complicated schemes of speculation many times before in the history of man.


If you can buy a tulip bulb and sell it the next day, and then not have to work for the rest of the year, who wouldn’t do that? If you can buy a house in Florida, sell it within weeks for a comparable profit, how could you resist?


In short, humans need a reason to start speculating, and in the case of the great depression, people got excited about mainly two things which will sound familiar to everyone today: real estate and new technology.


People started buying second homes to be resold shortly afterwards, and stocks in new technologies like radio and automobiles.


Speculation frenzies will probably always exist, but when such a frenzy gets out of control, it can shake the very foundations of society. When too many people start getting in to the frenzy, perhaps even the government (by relying on the stock market to provide basic public services, such as pensions, infrastructure and, of course: jobs), the country becomes utterly dependent on the continuation of the speculative bubble.


A speculative bubble can never be upheld forever, and it can never be re-inflated, so when a bubble of sufficient proportions is created, a country will not be able to avoid a depression.


In the decade before the depression, President Coolidge repeatedly praised the wonders of the stock market. In addition, most of the powerful politicians in Washington, and the members of the Federal Reserve Board, were themselves highly vested in the stock market, and were hence not at all interested in reining it in, even though they could see ominous signs.


It seemed at this time that all of America could become prosperous without any effort on the part of Washington politicians. This is extremely similar to how the Reagan, Clinton and Bush Jr. administrations operated. Hands off, hope for the best and leave the provision of American prosperity to private corporations.


Then as now, the United States was utterly dependent on the upholding of the inflated values of the stock market.


The question then becomes whether the current speculative bubble is large enough to cause a depression. I believe that the answer is, unequivocally: yes.






Moreover, I advise that the winner-takes-all voting system should be destroyed

What the People Want - Crisis Management and Proportional Representation

One of the central premises of this blog is that the will of the people, the voters, is not at all realized in actual political policies in countries, such as the United States, that don’t have proportional representation.


One of the clearest examples of this in history can currently be seen in the differences in the economic crisis management between countries that have proportional representation and those who don’t.


The voters in The United States and Great Britain (which both have the winner-takes-all voting system) are outraged and disgusted by the taxpayer give aways to the financial oligarchy, whereas voters in countries with proportional representation, such as Germany and Sweden, are generally pleased with the political handling of the crisis, even though they suffer greatly in this crisis too.


The winner-takes-all voting system excludes all those voters, often more than 50% of the voters, who do not subscribe to the specific beliefs of the two only parties that exist in this country. By contrast, a system with proportional representation counts every single vote, and if a party gets 10% of the votes, it gets 10% of the seats, hence incorporating the will of all the voters, as opposed to a small number of them.


In addition to this, the United States allows huge political donations to individual politicians in a scheme that can only be described as a “policy purchasing program”. Money for policy; it’s as simple as that.


The Handling of the Economic Crisis in The United States and Great Britain


Since the current economic crisis began last year, the handling of it has been strikingly similar in The United States and Great Britain. It has been based on one central premise alone:


Protect the current financial power structure, and the individual players within it, at any cost to the taxpayers and no matter what the long-terms consequences to the economy are.


It really is as simple as that, because there is virtually no evidence to the contrary. With bailouts, loans, guarantees to AIG, Citigroup, Bank of America, Bear Sterns and many more, the U.S. taxpayers are on the line for over $10 Trillion at this point!


Enormous bailouts of Royal Bank of Scotland, Barclays Bank and many more in Great Britain will eventually cost British taxpayers Trillions of dollars too. All the while banks and other financial companies in both countries are continuing to pay enormous bonuses while successfully opposing financial regulation.


The American and British economies are at this point essentially unregulated. The people in both countries are outraged, and I personally don’t know anyone, nor have I heard anyone outside the corrupt media elite, voice support for the bailout and support of the financial oligarchy.


I don’t have any exact numbers for this, but if I, as a resident of Manhattan working in the financial industry, don’t know anyone who thinks that this is a good idea, I can only imagine what people around the country think about it.


Protesters in Britain have repeatedly smashed the windows of banks, and bank employees have had to hire body guards, so I don’t think the outrage is any smaller there.


The Handling of the Economic Crisis in Germany and Sweden


Although there have been bank bailouts recently in Germany and Sweden, it has been done on a much smaller scale. Banks in both Germany and Sweden had been over extending themselves in lending to Eastern Europe while that part of the continent was trying to re-join Europe after communism.


Both the German and Swedish governments have repeatedly stated that it would be immoral to throw away large amounts of taxpayer money, both for the immediate purposes of taxpayers and the long-term consequences to the economy.


The internal economies in Germany and Sweden were already sufficiently regulated, so in no way are the banks there causing as much of a domestic problem. One could instead look at an industry that is vital to the U.S., Germany and Sweden: the auto industry.


The U.S. has simply given away billions of dollars to companies that are clearly not competitive. Germany’s car companies are very competitive, but the car market in Germany is extremely slow nevertheless. Germany was creative in dealing with this, and gave taxpayers a few thousand dollar to scrap their old car and buy a new one. Sweden will most likely follow this idea.


Sweden refused to bail out SAAB, noting that the company had only been profitable for a handful of years during its 50-year existence. How would Sweden be able to turn around a car company when the biggest automaker in the world could not? It must be noted that the Swedish government in general is not opposed to state-owned companies.


The Swedish government owns many companies that it runs for profit, and created and maintained one of the most successful brands in the world: Absolut Vodka. Who said the government couldn’t run a business?


The Swedish and German governments have, throughout the economic crisis always had the taxpayers’ interests and the future of the country as their first and only priorities.


Small bailouts have occurred, and stimulus in the form of aid to local governments that have run short on cash because of job losses have been paid.


The public outrage that has occurred in Germany and Sweden has largely concerned bonuses, but the big difference is that those bonuses were paid by the companies themselves, not the taxpayers, as in the case of the U.S. and Great Britain.


The policy response to the economic crisis from the winner-takes-all countries has been disastrous, and I personally disagree with almost 100% of what the response has consisted of. The policy is based on the premise that the financial oligarchy must be preserved, taxpayers and country be damned.


The policy response to the economic crisis from the proportional representation countries has been deliberate, responsible, thoughtful with a long-term approach. I agree almost 100% with what has been done in those countries, even though I would not vote for any of the parties currently in power in either country.


This fact describes clearly that the will of the people is not translated into policy in the United States and Great Britain. These two countries are undemocratic and both need vast constitutional overhaul.






Obviously, I advise that the winner-takes-all voting system should be destroyed.

Another Financial Atom Bomb

I simply cannot fathom the stupidity of American lawmakers anymore. For months now, they have been lobbying for mark-to-market accounting to be suspended, cheered on by Wall Street. On Thursday, they got their wish.


The Financial Accounting Standards Board decided on the change after Congressional hearings during which they had been severely pressured by politicians from both parties.


Mark-to-market means that banks have to value their assets at market price. When banks have worthless assets that nobody wants to buy, that used to mean bad news for the bank, as if a fruit stand were full of rotten apples. Not anymore.


Thanks to this change, banks can just make up what they think the assets “should be” worth. This will make it seem as if the banks are doing much better, and we will most likely see a big change already in the first quarter reports that are coming out soon.


This change is nothing short of ridiculous. Is anyone going to believe that the trouble that the banks were in is all of a sudden over? Did the rotten apples become red and shiny again?


Another reason for the change is that Geithner thinks he has come up with a round-about way of giving more taxpayer money to individual bankers. It works like this:


1. the banks are allowed to decide themselves what assets are worth and put that on their books


2. when the recently announced "public-private partnership" to buy toxic assets (to the utter detriment of the taxpayer) will start, the government will be able to grossly overpay for the toxic assets, because by that time these assets will have been marked up dramatically by the banks themselves.

It looks like the government is not overpaying, because they're just paying what's on the books...

3. again, an enormous transfer of wealth from taxpayers to bankers has occured.


The most significant factor in all this is not that one would be well advised to stay away from bank stocks; it is the implications for the whole economy. Until the problems at the banks are exposed, we cannot solve the financial crisis.


What the suspension of the mark-to-market rule will do is to bury the toxic assets even further away from sight of regulators and the public, and enable banks to go on with their zombie existence until its time for the next bailout.


And there will have to be more bailouts as a result of this disastrous policy.


This policy change is, in essence, a complete endorsement of the “Enron Accounting” that has already brought the world financial system to its knees. Why U.S. politicians have decided to legitimize it is totally beyond me, and it is an unbelievable outrage.






Moreover, I advise that the winner-takes-all voting system should be destroyed

Financial Minority Reports

Since taking office, Timothy Geithner has been an absolutely appalling Treasury Secretary with only one strategy: to pamper and protect Wall Street as much as possible with taxpayer money while opposing legislation that would hold Wall Street accountable for having run the economy into the ground.


I was thus highly surprised when he on Thursday came out with a sweeping program to deal with the deadly mess in the financial markets, a program that was meant to deal with both long and short term problems.


The most important suggestion in the program presented by Geithner is the creation of a single regulator, “with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities”.


This may not sound like much on the surface, but it actually deals with some of the central problems in the American financial system, as well as problems in the academic world of economics.


It is a well-known fact that the American economy is a so-called “boom-and-bust” economy. It cannot seriously be denied that this is a result of the fact that the U.S. has an essentially unregulated economy. The lack of a social safety net is also a significant contributing factor.


Geithner’s new, single, regulator would actually, according to him, continuously research the dynamics of boom and bust, and try to prevent the harmful results.


More specifically, the new regulator would try to find out when an asset bubble is building, such as the tech bubble in the 90s, or the housing bubble of today, and then try to stop it in its tracks.


This is critically important, and it is a strategy that can prevent financial crises, similar to the murder prevention strategy in the movie “Minority Report” with Tom Cruise.


In that movie, some type of psychic people called “pre-cogs” can see into the future, and they can see who will commit murders in the future. The would-be perpetrators of murder are then arrested and jailed in advance, so that the murder never actually takes place.


There is no ”pre-cog” needed for the new regulator, nor will anyone have to go to jail for crimes not yet committed, but studying emerging asset bubbles in the economy and acting on the findings will produce a functionally similar result: preventing pain and suffering in the future.


The way this could be done is rather simple. The new regulator would study anomalies in the market. If the price of an asset, say real estate in Florida, starts rising unusually quickly and without a clear reason, that would be a strong indication of a bubble.


This would then be made widely known, the public would be strongly cautioned, and perhaps some temporary legislation could be put into place in that region (temporary changes in zoning laws to prevent over-building maybe). The regulator would immediately look for evidence of predatory lending and other fraud in Florida, and act on anything it would find.


On the other hand, let’s say there were an area in Florida where new and profitable industries were being built. Jobs were being added and the population was growing. At a time like that, it would make perfect sense for real estate values to go up, so an instance like that would be ignored by the regulator after an investigation was done.


Unfortunately, asset bubbles are poorly understood among academic economists in the U.S. today, or at least they are said to be poorly understood. In reality, asset bubbles are products of simple, basic human behavior. To understand asset bubbles, you need to know only 2 things:


1. When everyone else is doing something, people in general will automatically think that it’s a good thing to do. It’s a basic function of being a pack animal.


2. When it seems that there exists a real possibility of making money quickly and easily, even the smartest people get sucked in to, for instance, a speculative bubble. This human tendency is the reason why some of the most successful investors on Wall Street invested their own money with Bernie Madoff.


However, these facts are rarely recognized by American economists because they defy free-market orthodoxy.


Hence, Geithner’s new program of establishing a single regulator is a big step away from the free market orthodoxy that is prevalent among the vast majority of public and academic officials in the United States.


I believe that the program could become an extremely important tool in a sustained economic recovery in the United States.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Geithner Plan - Same Old Crap

Geithner’s new plan was presented with a complexity that seemed engineered to fool people into believing that it was not what it has always been: a direct continuation of Paulson’s original Wall Street give-away plan.


The CEO of an investment firm called “Fusion IQ”, Barry Ritholtz, said it best yesterday when he was commenting on the stock market rally:


“This is the free-money rally. Traders like the fact that there’s a boatload of cash headed their way”


At least he’s being honest about what’s going on. The “boat” is being loaded up with cash by docile American taxpayers, who have never stood up for themselves to claim their rights as citizens.


Now we're seeing the results. J.P. Morgan Chase is, again, planning to expand it's fleet of corporate jets while tent villages are growing across the country and the number of Americans without health insurance is nearing 100 million.


I would like to offer a condensed version of the plan for those who have not kept up with Geithner’s change of vocabulary (which is all it is). The plan has the following features:


- HUGE subsidies for hedge funds and other similar entities to buy toxic assets


- potential for these buyers to get almost all the gain if there eventually is one


- minimal potential for the taxpayers to get any gain if there eventually is one


- minimal risks for these investors if the investments don’t work out


- enormous risks for the taxpayers if the investments don’t work out


- borrowing from the FDIC to finance the hedge fund subsidies. This is a truly desperate move, and one which actually threatens the safety of money in everyone’s bank accounts. The FDIC is already under funded, and this move could be disastrous down the road


The government is really getting desperate. Borrowing from the FDIC is something I never imagined would happen.


By the same token, for the government to buy its own treasury bills, which was announced over the weekend, is a very desperate move, that has only happened in times of really severe crises before (like when the U.S. felt it was going to be attacked with nuclear warheads by the Soviet Union in the 60s).


I’ll make a few predictions: In a couple of years, we will have interest rates above 10%, housing prices 20% lower than today, a stagnant stock market, inflation above 5% and unemployment at sustained high levels.






Moreover, I advise that the winner-takes-all voting system should be destroyed

Circular Looting

Please click on the image to see the model

“Looting” is a concept in economics developed by two American economists called George Åkerlöf and Paul Romer. This term was recently put into the framework of the current crisis by David Leonhardt of the New York Times, and I believe that it is very helpful to do so.

I also believe that there is more to the story than the original concept of financial looting, namely that of collaboration from politicians, which creates a type of perpetual motion of looting that I call Circular Looting.


The concept of looting in economics is rather simple:

It means that corporations that know that they will be bailed out by the government if they are at risk of going bankrupt, act irresponsibly in order to make as much short-term profit as possible, without regard to the long-term consequences.

In other words, corporations “loot” the economy instead of trying to make a profit with an investment strategy that they genuinely think will work. Corporations always know that the looting business strategy will fail eventually, but when it does, it’s the government’s problem.

What comes to mind first is obviously sub prime mortgages. In Vallejo, California, a man whose profession was to be a strawberry picker, was in 2006 approved for a $720,000 mortgage for a house. Needless to say, this man did not meet the traditional requirements for such a large mortgage, and defaulted on the mortgage rather quickly.


This particular mortgage makes for a good example of what has been happening over the last few years. As the strawberry picker signed up for the mortgage, there was a string of people who were given large fees, going all the way back to Wall Street itself.


These fees, and the overall profit from all the investments related to the sub prime market, are what constitutes the “loot” in the looting cycle that has been going on over the last decade or so.


Here’s what most likely happened in the Vallejo example:


- the bank received mortgage origination fees


- the bank sold the mortgage to an investment bank (like Lehman Brothers), and got a fee


- Lehman Brothers packaged the strawberry picker’s mortgage with others, created a “mortgage-backed security” and sold that to Wall Street, and received a fee


- Wall Street traders bought and sold the securities, and received large commissions


Obviously, everybody in the chain knew that a strawberry picker was not going to be able to pay this mortgage, but everyone was making money in the meantime, so the looting was a win-win situation, for a period of time.


This describes how looting is a good idea for corporations that engage in it, while being ready to run for the hills when everything comes falling down. Now we’ll move on to the political connection.


There are not that many companies in the United States that can depend on being bailed out by the government, but the exception to the rule is the financial sector. In other words, large banks, investment banks and any other financial institutions that are deemed to be important enough for the local or national economy, can usually count on being bailed out.


Bailouts don’t only concern the institutions that are considered “too big to fail”, which is evidenced by Åkerlöf and Romer’s report, “Looting”, which describes the looting behavior of smaller, local banks in Texas.


The financial industry in the United States donates enormous amounts of money to virtually all politicians in Congress and those running for President. This has been going on for so many years that it is now a Washington institution.


This behavior obviously creates a dependency on the part of politicians on the financial industry, without which they would not be able to become elected.


This, along with the promise of a bailout when the financial institutions are about to go under, creates an utterly symbiotic relationship between politicians and the financial industry.


This symbiotic relationship is described by the following four stages of the Circular Looting that you can see in the model at the beginning of the text:


1. Donations from the financial industry to every imaginable political campaign.


2. The donations force politicians to create and perpetuate a business friendly climate with low taxes, virtually no financial regulation or oversight, and the absence of labor rights.


3. In such a “business friendly” climate, corporations are free to engage in whatever kind of business they desire, because they are left alone, and because of extremely low taxes, they can reap all the rewards instantly. Looting is created on a massive scale.


4. There is only so much looting that can go on until the market is depleted. Eventually the bubble has to pop, either because of inflated values, or because of exposed fraud. It is then that the politicians come back and help their friends in the financial industry with bailouts.


If looting is to be successful in the end, individuals who are working for the financial institutions must be sure to not invest in their own companies too much, and cash bonuses are essential to the scheme.


What AIG recently did when executives were given bonuses after the bailout had already happened is remarkable. Even after the looting was done, the executives were able to extract bonuses directly from taxpayer money. This must surely be unprecedented prior to this crisis.


Looting, bailouts and political donations make American society eerily reminiscent of the feudal society of Europe during the middle ages, where most people were serfs, and everything and everyone was controlled by the aristocracy.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

AIG Bankrupting Cities Across America?

Although the news about AIG bonuses yesterday was disturbing, it was not nearly as disturbing as some of the other news that came out at the same time.


Up until a few days ago, the names of the institutions that AIG had paid with bailout money were kept secret, but when we found out who they were, there was one category that stood out starkly: municipalities in California.


I decided to do some research on how much money belonging to cities and municipalities AIG is holding. What I found out was frightening.


Municipalities all over the country have evidently handed over money to AIG from their municipal bonds. This means that cities across America are at risk of losing billions of dollars, and risk going bankrupt if AIG does!


AIG states on its website that it directly manages $72 Billion of these assets that belong to cities across America.


At the end of the day, these assets are actually made up of schools, hospitals and libraries in towns everywhere. It is almost for certain that we’re talking about much more than $72 Billion being at risk, which is a staggering number to begin with.


In addition to handing over immense amounts of cash to AIG, cities have been making extremely risky financial bets through Credit Default Swaps, which is evidenced by the payments to municipalities in California, as I mentioned in the beginning.


AIG owes a lot of people money for these swaps and is like a bookmaker who can’t pay the people who all bet money on the winning horse that nobody thought was going to win. The difference here is that all those people who are supposed to be paid money by AIG have decided to keep quiet about it, presumably so as to not create a panic.


With respect to all the cash that was handed over, everyone may not know what the so-called “municipal bond market” is, or how that relates to AIG, but it works something like this:


- individuals or corporations give money to, for instance, the city of Los Angeles for the construction of a school


- Los Angeles promises to pay a 5% return on the money 10 years in the future. That is “the municipal bond”


- Los Angeles hands over the money to AIG, in order for AIG to make that 5% for the bond holders. The section of AIG that does this is called the “Fixed Income” unit


You may realize where I’m going with this: AIG hasn’t exactly been the best or wisest investor over the last few years. AIG is now a black hole of losses, and it almost doesn’t matter how much taxpayer money you put into the company, most people who are owed money by AIG will not be paid.


For now, AIG is on life support with taxpayer money and with the temporary illusion peddled by Washington and Wall Street that everything is going to be just fine. It won’t.


There is a strong possibility that problems with municipal bonds will add a whole new dimension to the crisis, and that cities across America will have to choose between closing schools or paying bond holders when AIG eventually files for bankruptcy.


I have argued before that the main difference between the United States and other industrialized countries is that the U.S. does not safeguard a standard of living for its citizens, and that basic services are, like everything else in this country, a gamble for everyone. If the gambles at 70 Pine Street in New York (the AIG building) don’t work out, kids in California may not go to school.






Moreover, I advise that the winner-takes-all voting system should be destroyed

AIG Can't Believe We're Letting Them Do This

As several newspapers have reported, AIG has as of Sunday, March 15, paid out an additional $165 Million in bonuses to its executives and other employees.


This money is obviously coming right out of the pockets of taxpayers, and the situation has now gone from ridiculous and criminal to something worthy of a march with flaming torches.


When will the American people wake up!!?? The United States is being robbed in the most real sense of the word. The executives of AIG have no intentions of cleaning the mess up, nor could they, nor would they ever even know where to begin.


What is happening now is pure and simple theft, and it is happening as the amount of unemployed Americans is nearing 15% (counting those who have given up looking for work, who are curiously not included in most official statistics), and the number of Americans without health insurance is nearing 100 Million.


America’s big corporations have been laughing working Americans in the face for decades, and are continuing to do so even as those Americans lose their jobs, their homes, their health insurance, their very way of life and hopes for the future.


How far are working and formerly working Americans willing to go in order to protect the incredible transfer of wealth to the top 1% of the population?


How far are they willing to go to stand up for the right of robber barons to rip everyone off by staving off regulation, labor rights and consumer rights?


Pretty far it seems, if you are to believe what the Obama administration is saying. Even though Obama received the strongest of mandates for change in decades, particularly with respect to social justice, he has apparently decided that that mandate meant something completely different.


Obama’s mandate apparently meant galvanizing the rights for robber barons to rob, not giving Americans an actual healthcare alternative (this can be solved by private means alone, according to Obama) and continuing bonus payments to bankers who brought the world economic system down (don’t even think about firing them, they must be retained with bonuses for their great skills…).


AIG has received $170 Billion in taxpayer money already, which is money that will definitely never be seen again. That money went to satisfy claims for a fraction of the speculation insurance payments called “credit default swaps”.


AIG could be on the hook for, literally, trillions of dollars for these swaps. What is important to understand is that AIG has, for a long time, not had any intention of running a successful business.


When you run a successful business, you carefully consider the pros and cons of a certain investment, and act accordingly. AIG, Lehman Brothers, Bear Sterns and many others had a different plan: shuffle money through the company, take a fee, and let the government hold the bag when the party’s over.


The largest banks and financial institutions in the U.S. knew that they would be bailed out when the shit inevitably hit the fan, and that is what Lehman Brothers was counting on, but didn’t receive.


These companies acted accordingly: they enriched themselves for as long as they could, and would run for the hills as soon as it all came crashing down.


AIG is still in the process of being bailed out, so naturally, the executives are still trying to enrich themselves until the very end. They probably can’t believe that we’re still going along with this.


What the hell is wrong with people? Is there nothing left of self-respect in Americans? Is there no sense of justice left? Is there no pride?

It is your duty to claim your right.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

Gordon Brown's Proposals

Last Wednesday, the British Prime Minister Gordon Brown gave a speech to Congress, parts of which were very surprising to me. Brown expressed a need for countries to work together to solve the global crisis, and he also suggested two important new measures:


1. A “Global New Deal”, or “Economic Marshall Plan”, and


2. Making the “shadow banking system” illegal


These two suggestions are actually quite radical, but I have not come across many details of these two suggestions. I will nevertheless attempt to speculate around these ideas.


A Global New Deal is hard to imagine ever coming to fruition. What Brown means by this seems to be that countries should come together and inject vast amounts of money in markets, where needed, in order to save and re-build those markets. Brown also seems to be talking about more tangible investments in industries to spur future growth, hence the mention of the Marshall Plan.


I assume that it would involve many different countries putting large amounts of money into a big pot, and then trying to decide where the money would help the most. Alternatively, if the global new deal involves countries simply coordinating financial rescue actions, it’s a little less hard to imagine, but still unlikely.


The issue of “international bailouts” has come up recently in the EU. Eastern Europe has been attempting to free itself from the chains of communism by creating an entire “subprime economy”. They took loans in foreign currencies such as Euros, Swiss Francs and Swedish Crowns. As Easter European currencies plunged in value, the loans skyrocketed in value.


It was thought to be an understanding in the EU that Eastern Europe could act fiscally irresponsibly in order to re-join Europe as equals, and that Western Europe would help them in case they ran in to trouble. When a number of Eastern European countries, such as Hungary, Romania and Bulgaria asked for an actual bailout, Germany said no. Germany feels a lot of resentment for having given up its own financial stability in order to support stability in the Euro and EU zone, and the country has apparently had enough.


When it comes to trying to convince many different countries to act in solidaric ways during a crisis, I believe there must be a system set up in advance. Otherwise, a country will have to choose between international solidarity or feeding its own population, and the former will obviously take a back seat.


Making the shadow banking system illegal, is quite a radical proposal, especially for the economies of the UK and the U.S.. Brown did not specify what he meant by the “shadow banking system”, but it is clear that he was referring to entities such as hedge funds and investment banks that are providing capital for lending in the economy.


In a way, this is a strange proposal, considering the fact that governments around the world have actively been participating in creating the “shadow banking system”, setting up entities like Fannie Mae and Freddie Mac. Brown seems to be saying that the banking system needs to go back to basics, to the way it was before governments started subsidizing mortgage rates (back 60-70 years ago in most cases).


Whether or not you expressly make the shadow banking system illegal, it is in the process of disappearing anyway. Brown’s comments seem to stem from a newly found clarity in terms of the real role of various financial institutions in the U.K. and the U.S., a clarity that he, like U.S. politicians, did not have when he was Chancellor of the Exchequer.


What Brown is suggesting is, in my mind, sound. If entities other than banks would stop providing enormous amounts of capital for all types of speculation, societies would become less reliant on stock markets, and the housing market would experience less swings. Mortgage rates would definitely become higher. Mortgage rates of over 20% were not too uncommon a few decades ago.


With respect to mortgages, I have for a long time advocated a system of covered bonds for the banks, like the one Germany has. I also believe that the Federal Reserve needs to be made into a government-owned Central Bank with a single, inflation fighting, mandate.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Decoupling America from Wall Street

Wall Street is a barometer for the health of the U.S. economy. Not because it has any credibility in predicting anything related to finances or the economy, but because Americans have allowed their fates to become inextricably shackled to that of Wall Street. All over the country, people are suffering, even starving and dying, as a direct result of the crisis and the societal structure in which Wall Street once flourished.


The commercial media is not reporting on it, but National Public Radio has been covering bread lines in Florida, fenced-in plots of land where people can live in their cars in California, and hundreds of people in the Midwest lining up to receive food packages from Save the Children. This is the reality of the crisis now.


We all know how it started by now. A long time ago, I wrote that institutions like AIG were like black holes, that the amount of debt in the U.S. exceeds the global GDP and so on and so on. Nothing can be done now to save the financial system as we know it, and that realization will come to everyone soon enough. America must start over. The country must be restructured.


The U.S. is not ready for this crisis, and this fact is intimately linked to the creation of the crisis 35 years ago, when America embarked on the road to anarchy under Nixon.


The real winners in the culture wars of the 60s were the libertarians. As cultural issues took over national politics, the traditional core of national politics: income distribution and societal economics, were swept aside, not to be seen again for a long time (at least not from the perspective of those who were not wealthy).


Somehow, the anarchistic libertarian way of organizing society became the norm for the U.S. government. “Every man for himself” and “the law of the jungle”, were not slogans in this process, but they might as well have been.


It was slowly decided that the U.S should follow its own route to prosperity, and one that entailed: no health care system, no elder- or childcare system, no real pension system, no real unemployment benefits, no labor rights, no consumer protection rights, no mass transit, no financial regulation, the world’s lowest taxes etc etc…


How could a country possibly make up for the lack of all these things that all other advanced countries have? The answer is: Wall Street. The free market was thought to be able to take care of all these things, which arguably make up the bulk of societal success and overall well-being of its people.


In other words, Americans didn’t just gamble their savings on Wall Street, they gambled everything. At this point, the country has only two choices: rely on Feed the Children or decouple from Wall Street.


Decoupling from Wall Street means purging the influence of speculation from the daily lives of everyone who does not actively seek it out. It means introducing stability and predictability for Americans who so direly need it. It means guaranteeing prosperity in the richest country in the wolrd. It means:


- providing national health care and collective bargaining for drugs, making private health insurance and expensive drugs obsolete. This would be a huge relief for both the public and corporations


- providing a good pension after a life of work through a national pension plan which is not subject to speculation


- heavily regulating the financial sector, and especially the mortgage sector, so that real estate price swings will be far less likely to occur in the future


- introducing much needed labor rights, including a much higher minimum wage and much stronger job security for everyone who is gainfully employed


- providing as close to free University education as possible, taking away the burden on families to save for college. (in most advanced countries, University is free, unbeknownst to most Americans)


The structural shift is absolutely inevitable. It is only a matter of time before the libertarian anarchy is a thing of the past.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

Upholding the Illusion

Upholding the illusion that America’s financial system is simply going through a crisis which can be resolved is becoming increasingly more difficult for the U.S. government. After an enormous bailout package, a stimulus package worth about 6% of GDP and guarantees of bad assets worth much more than that, the government has nothing to show in terms of recovery.


It is also an illusion that many U.S. financial institutions are not already nationalized. AIG has received $150 Billion from taxpayers. The company has far more in losses, and it will report what is expected to be the biggest losses in U.S. financial history on Wednesday.


AIG has now asked for more taxpayer money, although the government already owns 80% of the company.


Citigroup has received $45 Billion from taxpayers, and is now asking for much more. Citigroup is only worth about a fourth of that, around $10 Billion, so why the hell are there any shareholders left other than the U.S. government?


The U.S. government’s ideological opposition to nationalization has wound up costing American taxpayers 4 or 5 times more than what a nationalization would have cost.


Citigroup’s shares are as I just mentioned worth $10 Billion, yet taxpayers have paid the company $45 Billion just so that the shareholders won’t lose their investments (of which there is only 10% left since Citigroup’s stock lost 90% of its value), and so that the executives won’t have to be fired.


It would have been a lot cheaper to simply buy all the stock. Cheaper yet would have been the only morally sound thing to do: wipe out shareholders and nationalize the bank.


Furthermore, banks are failing across the United States every week now, and the FDIC (which nationalizes such banks every week so that they can be liquidated and/or sold off) has had to hire more staff, and is currently bringing people back from retirement.


The U.S. government also has a secret list of which banks are in serious trouble, and are in imminent danger of failing. Many have called for this list to be made public, but the government refuses.


In addition to all this, the U.S. government is engaging in the sort of “creative accounting’ that played a large role in creating this crisis. It is trying to sweep all the losses of big institutions under the rug by “not estimating assets too conservatively” as Geithner has stated.


What that means is that when the government has given taxpayer money to big banks and other institutions, it has valued their assets much higher than the market (which values them at zero), creating the illusion that these institutions are much better off than they really are.


Also, the government has helped institutions like AIG to set up “special purpose entities” where the company can hide bad assets away from the balance sheet, again creating the illusion that things are much better than they really are. This is what Enron did, and a lot of people went to jail after that…


All these efforts are obviously counterproductive and ultimately detrimental. The government is lying about many things relating to the financial crisis, but most people don’t realize it. Why is the government doing this? Well, I think it feels that it MUST uphold the illusion that the system can indeed go on as it has before. If it cannot, what is the alternative?


They know what the alternative is: a European-style regulated society where citizens are guaranteed a standard of living rather than being left to hope for that standard amidst cycles of boom and bust. In a country where all politicians are either right or right-wing, this is a terrifying prospect.


I recently realized that the upholding of illusions is exactly what Keynes based his theories of spending and crisis management on, and that’s why it makes perfect sense for Keynes’ theories to be back in the spotlight.


It is widely believed that Keynes developed his theories in response to the Versailles Treaty after World War I, and the treatment of Germany in economic terms.


The Versailles Treaty made it so that Germans’ standard of living went lower and lower each year after it was enacted. This, according to Keynes, destroyed confidence among Germans, and the economic crisis started feeding off itself (which is something that was echoed by Ben Bernanke in a speech before Congress today).


So, after the war, Germans were obviously bankrupt. Even so, thought Keynes, they should keep spending, and if they could not, the government should enable them to do so. Even if you don’t have money to spend, you must uphold the illusion that you do, by borrowing money to spend, otherwise the economic crisis will get worse. That is in essence what Keynes thought.


Expressed in that way, Keynesian economics sounds like a really bad case of “keeping up appearances”, don’t you think? Upholding the illusion is what it is all about.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Better Stimulus Package - Research and Education

Obama’s recent stimulus package will help to plug a lot of holes in state budgets across the country. It will also marginally improve the infrastructure situation. However, 40% of the package is made up of tax cuts, and for that and other reasons, I believe that it will be very unsuccessful in actually helping the economy recover.


I believe that the road to economic recovery for the United States is not one of tax cuts or stimulus packages, but one which made this country great in the first place: massive spending on scientific research and education.


I do not believe in trickle-down economics, like the Reagan/Bush/Clinton policies, because that theory is based on a belief that excess money, spent by wealthy individuals, floating around in society, will somehow create wealth for all citizens.


I also do not believe in Keynesian economics, like the stimulus package, because that theory is based on a belief that excess money, spent by the government, floating around in society, will somehow create wealth for all citizens.


You can probably tell where I’m going with this: the basic flaw of both trickle-down and Keynesian economics is that the money that the government spends and/or controls in other ways has no direction or purpose.


I’m not saying that the government should tell people what to spend money on, or that there isn’t a large role for the so-called “invisible hand” for people in society. I’m saying that when the government spends money, it must do so with a specific purpose, and do it well.


There are two important issues to consider when delving deeper into this: economic growth and job creation. These are favorite expressions of politicians, but most politicians have only a vague idea of what they actually mean.


Economic growth occurs when something is added to society. If someone gets up off the couch and starts growing potatoes, he or she has contributed to economic growth. Economic growth does not occur if the government gives someone a tax cut or chooses to spend tax money on road maintenance.


Job creation occurs when someone hires an unemployed person and pays that person’s salary with the revenue from increased production. When the PC was invented and Silicon Valley hired thousands of people, that was a perfect example of actual job creation.


Job creation does not occur when the government hires someone to work on road maintenance or when a company hires someone and pays the salary out of money left over from a recent tax cut. (the government could create jobs by actually starting their own business enterprises, but that is rather unusual).


Hence, both trickle-down and Keynesian economic policies are ineffective for economic growth and job creation, especially in times of crisis. In order to actually spur job creation and economic growth, you need something specific, something new, and American history provides excellent examples.


After World War II, The United States started spending massive amounts of money on higher education and scientific research. Young people were able to go to college for free, and scientific researchers were making strides like never before. This enabled the U.S. to go to the moon, invent vaccines and computers, and become the most industrially and economically powerful country in the history of the world.


In sector after sector, The United States became the world leader with the help of education and research, and this laid the foundation for the immense prosperity that the country still enjoys today. Unfortunately, since Nixon, all that prosperity which was originally created by everyone in society, has been funneled only to the top.


It would be very difficult to make the case that these industrial advances came about as a result of trickle-down, low tax economics. Nor could it be argued that Keynesian economics was behind it, because it was not used.


It is crystal clear that America’s prosperity mainly came about as a result of massive government spending on research and education, and it is to this that we must return.


In order to actually create jobs, and to achieve actual economic growth, the U.S. government should:


- make college education much cheaper, and free for as many people as possible


- fund research into as many areas as possible and help industries with the practical application of research results


- create national standards in the most important school subjects, such as the natural sciences and English


- end the system where local schools depend on local real estate taxes, and centralize funding for schools


These are only a few ideas for a new stimulus package with a real potential to help the American economy, and there are myriads of other things that could be done quite easily. A stimulus package full of tax cuts will do nothing to help the American economy recover, but research and education will.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Government Incompetence and the Creation of the Crisis

The vast majority of severe economic crises start with an unexpected bursting of a speculative bubble. These speculative bubbles are usually very complex, and are made more potent by complex financial instruments that only the people who created them can understand. This is also the idea behind these complex instruments; it will make them seem worth more than they are because people don’t realize what they are made up of.


During crises in the past, governments have always been unable, or in the case of the U.S., unwilling, to keep up with the ever increasing complexity of the financial instruments. In the end, that leads to a situation where nobody knows what anything is worth, so prices can only go down.


In the panic of 1873, which led to the “Long Depression”, speculation in complex bonds relating to railroad construction was a large contributing factor. Before the “Great Depression”, traders were mailing complex trades across state borders in order to evade any financial regulation (which only existed as local law at the time).


In the crises in Sweden and Japan in the 90s, complex financial products related to real estate speculation were almost fully responsible for the crisis, as they are in the crisis in The United States today.


As I mentioned above, governments are usually unable to keep up with financial markets when complex financial products are being created. This is mainly a result of the lack of competence within the government, and a lack of understanding of the financial markets on behalf of its staff. George W. Bush was famous for having repeatedly mixed up inflation and deflation. More importantly, however, the SEC has been largely absent in recent years.


Many traders that I have talked to here in New York, as well as traders in the media, say that they have never once been contacted by the SEC in any capacity over the last decade. This is especially true for the most complex trading, including trading with mortgage-backed securities and CDOs “squared” (don’t ask). Similarly, the ratings agencies were left alone to prosper as they saw fit.


The long-term commitment to self-regulation has obviously contributed a lot to the current situation. And U.S. politicians have failed the country in more ways than one in the creation of this crisis. Self-regulation becomes a vicious cycle in the following way: when the government does not engage in regulating, it loses the capacity and competence to do so.


Hence, after two decades of self-regulation, the U.S. government has no idea what’s going on in the financial markets because they haven’t touched them, studied them or regulated them. The SEC has under 4,000 employees, which I’m guessing is less than the amount of shoe shiners in New York City. Needless to say, this lack of competence is very problematic in trying to deal with this crisis.


An unfortunate “solution” to the problem of not being able to deal with a complex financial crisis has been to bring in the people who created the crisis in order to solve it. Of course, these people have their own agendas, and are easily able to enrich themselves as taxpayers pay money to resolve the crisis. This is the “solution” currently being pursued by Obama and Geithner, which has already turned out to be very detrimental, as taxpayer money has been thrown into a black hole, only to enrich individuals on Wall Street.


The much talked about Swedish solution to the crisis also dealt with this problem. In Sweden, executives were fired, and representatives from the financial industry were not made a part of the team that would clean up the mess, or at least they were included to the smallest extent possible. The Swedish government had to create competence within its agencies in order to deal with the problem and get the best deal for taxpayers. It did so mainly with the help of academia.


The belief that the government can never be competent enough to engage in issues such as these is misguided. When it comes to the IRS, the U.S. government is very competent. The IRS has vast, in-depth knowledge of anything that pertains to taxes, domestically and abroad, and in immensely complex arrangements. I’m not saying that the IRS is perfect, but that the SEC MUST become more like it. The IRS has over 86,000 employees, which is more than 20 times as many as the SEC.


The SEC is, at present, completely incompetent. The people that are advising Obama and Geithner are nothing but self-serving Wall Street insiders, as the people who advised Bush and Paulson also were. The Obama administration and the Treasury need to turn to international and domestic academia (except for those who used to work on Wall Street) and to Sweden, Japan, The IMF and The World Bank for help in resolving this crisis. By gradually building competence, the U.S. can hope to avoid some of these problems in the future.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Taxpayer Bonuses to Failed Bankers... Is Obama Serious??

Chris Dodd is s sneaky fellow. Towards the end of the stimulus package negotiations, he snuck a provision in, severely limiting bonuses for executives receiving taxpayer money through the TARP or in other ways.


Tim Geithner has filled his cabinet with ex-Wall Streeters, so he and the Treasury have been fighting, tooth and nail, against limits on executive pay, just like Paulson did. Dodd’s provision was meant to counter the Treasury.


Now Obama has sided with the Treasury, and is trying to come up with ways for taxpayer money to be paid to these executives.


On Fox News on Sunday, senior Obama adviser David Axelrod said that the administration will: “seek changes in the government's approach to executive compensation”. That can only mean one thing: Obama will refuse to implement to provisions that he will sign into law on Tuesday.


Obama is prepared to break the law in order to give failed bankers million dollar bonuses paid by taxpayers! As someone who supported Obama fully, I am now left speechless, only able to say: are you serious Obama!!??


If a corporation feels like its executives deserve multi-million dollar bonuses and is willing to pay that, I have no problem with that. And if that corporation keeps paying the bonuses even in the face of multi-billion dollar losses, that is also fine with me. It’s just stupid, and I don’t understand why the shareholders accept that.


However, when the corporation receives taxpayer money, it is very much my problem how that money is being spent.


This is a really, really serious crisis. In Florida, there are actual bread lines. In Nevada and California, local governments have designated and fenced in land for people who live in their cars, reminiscent of the “Hoovervilles” of the Great Depression. Food banks are out of food in the Northeast, and the beggars in New York City are no longer mostly made up of addicts.


The President of The United States is currently weighing these problems against the need for multi-million dollar bonuses to failed bank executives. You have to ask yourself if he has lost his mind.


The heat is turning up in the battle for taxpayer money and the continued roll of Wall Street in the American economy. On outlets for Wall Street employees like CNBC and Fox News, the rhetoric is really changing dramatically.


The financial sector seems united in a battle against taxpayers, eerily reminiscent of crises in countries with financial oligarchies and mafia control like South Korea and Russia. The gloves have come off, and the financial oligarchs seem to be winning. People on these networks, such as Larry Kudlow and Charlie Gasparino, are absolutely mocking efforts to use taxpayer money to help taxpayers, as opposed to giving it to individuals on Wall Street.


For decades, The United States has been dictating what countries receiving aid from the IMF should do during bank crises. The advice has always been the same when corrupt countries have been receiving aid: fire bank executives, nationalize banks, and under no circumstances give the banks money with no strings attached.


Now, The United States is going down the very road it has warned against so many times, and the results have already proven to be disastrous. Bankers and other Wall Street executives are demanding taxpayer money while hiding even the slightest hint of the extent of their losses. They have insiders from Goldman Sachs, Citigroup and many other firms in the Treasury, and they are even using TARP money to lobby for these things.


I don’t know what Obama is thinking at this time. What he’s actually doing, though, is taking food from the mouths of starving Americans and putting the money in the pockets of bank executives who have brought down the American financial system.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Road to Sweden, or the Road to Japan

As I have mention before, this crisis is NOT unprecedented, which the U.S. government keeps claiming. The reason that they’re claiming this is partly that they don’t understand it, and partly that they won’t admit how much trouble the banks are in. I can understand the latter to some extent; admitting this would probably create a panic.


The two crises in Sweden and Japan in the 90s had the following attributes:


1. The banks became insolvent because of bad assets


2. The bad assets were hidden off their balance sheets, meaning that they could not be seen by the public or the government


3. The bad assets were made up of complicated financial products related to real estate speculation


Sound familiar? We have here three almost identical crises, and two different approaches in dealing with them: the Japanese way or the Swedish way.


The Japanese way resulted in “Japan’s lost decade”, with huge job losses, capital destruction and an immense waste of taxpayer money. A sustained weakening of the Japanese economy occurred, which harmed Japanese competitiveness greatly.


The Swedish way certainly created short term pain for the country, but the net result of the crisis was an actual profit for the taxpayers, a sustained budget surplus and an eventual lowering of the national debt. In short, the country came out of the crisis stronger than before.


Another thing that, by now, may sound very familiar to Americans, is how the Japanese dealt with their crisis. They did the following: gave the banks hoards of money with no strings attached, bought bad assets, attempted to have a public/private partnership in buying up bad assets (which Geithner just recently suggested), passed multiple stimulus packages and lowered interest rates to zero.


Japan did all this, and everyone now agrees that none of it worked, otherwise they would not have had a “lost decade”…. The country’s crisis was not resolved until they did what Sweden instead did. The Swedish government did the following:


- Ruthlessly combed through the books of the banks to weed out which banks could be saved, and which could not be


- Nationalized the ones that were deemed to be able to survive, and let the weak ones fail


- Wiped out all shareholder value and fired bank management


- The government had to actually learn all there is to know about the assets, so that they could be sold at the highest price. They did not simply let stock market “experts” dole out money to their buddies.


Prior to the rescue, the Swedish Parliament had passed a law giving it the right to do all these things if a bank’s equity in relation to its debts fell below 2%. Many U.S. banks are far below that threshold now.


So, the U.S. government has two very clear alternatives: one that has been proven to work, and one that has been proven to be disastrous. It doesn’t get much clearer than that.


The U.S. government is currently furiously pursuing the disastrous course.






Moreover, I advise that the winner-takes-all voting system should be destroyed.