A rebuttal to China crashing soon

Minxei Pei writes an interesting article in The Diplomat titled "China's Economy: Seizure or Cancer".

In it he outlines a number of the obvious features that have been discussed on this blog about China's overall economy.  He dissects the current situation and asks whether there will be an immediate heart attack that hobbles the beast or a systemic cancer that eventually kills it.

He refers to a "heart attack" scenario where a cascade of events, precipitated by a slowdown and excess debt, cripples China.  In his perspective China's communists will force the banks to defer losses and provide a backstop to prevent further contagion.  He states:

But China is different. Because the banking system is effectively owned and controlled by the state, a banking crisis won’t materialize unless the state itself is insolvent and Chinese depositors have completely lost confidence in the state’s sovereign guarantee of its banks. This unique character of the China’s state-owned financial system is the cause of the country’s inability to allocate capital efficiently. However, in the short term, this structural flaw may turn out to be an asset in averting a seizure of the financial system.

As in the global meltdown of 2008 and earlier banking system upsets in China, this approach has worked.

On a second level, if the economy doesn't crash immediately over the course of the next several months, the author perceives a potential "cancer" in the nature of the communist-capitalist hybrid.

Despite the threat of a seizure in the near term, the greater danger to the Chinese economy is its structural inefficiency, which is deeply imbedded in a state-led development model...

The investments made by the Chinese state may have given the Communist Party a lot of prestige (think of the country’s modern infrastructure and ambitious high-tech plans), but delivers preciously few real benefits to its people. Chinese state-owned enterprises have thrived because of their access to practically free capital, but their efficiency remains abysmal compared with domestic private firms or their Western rivals.

No country can keep pouring unlimited amounts of capital into unproductive infrastructure projects. China doesn't have the ability to keep blowing this current bubble and then dismissing colossal financial losses when the bills come due.  With Europe sinking into recession, America limping along, and much of the emerging market turning negative, there is little reason to believe they can pull the same rabbit out of the hat again.

That hard landing in China is looking a lot more likely!

Data that has been coming out in the past several weeks has shown a distinct contraction in the economy of China.  Unlike previous monthly claims that showed that the country was achieving its predetermined growth numbers, both April and May's numbers look at best underwhelming.  Questions are now being asked if China is in a recession?

Publicly,  April's growth in imports rose a moribund 0.3%, compared to an 11% from the previous period in 2011.  The NY Times is reporting that businesses across the country have reduced consumption of  many products, including commodities such as iron ore and high-end electronics, such as computer chips.  Exports grew only 4.9% in April; half as much as economists had expected.

Preliminary data published by HSBC and the financial information provider Markit for the month of May indicates that the Purchasers Managers Index (PMI) fell to 48.7 in May from 49.3 in April.  Indexes below 50 are considered representative of a contraction.  Whereas the HSBC manufacturing index has been below 50 for seven months.  May exports similarly fell to 47.8 in May, from 50.2 in April. 

China's National Bureau of Statistics has stated that

inflation in consumer prices slowed to 3.4 percent in April from 3.6 percent in March, while producer prices, measured at the factory gate, actually fell 0.7 percent in April from a year earlier.

Chinese government indexes show real estate prices have fallen in a majority the country’s urban markets.  Housing developers have dropped prices and some have reduced activity at constructions sites to a single daytime shift, down from a continuous 24-hour work cycle.  Demand for construction workers has sharply declined.

In a different NY Times article, the plight of local business people in Xi'an, a city of eight million in northwestern China, is highlighted.  Sun Yufang, a wholesale dealer of ovens, ranges, and water heaters,  states that local  residents have nearly stopped redecorating or outfitting apartments.  She elaborates that, “We didn’t really feel the global financial crisis, but this year, we’ve really felt it — I don’t see a solution unless people start buying,”  Likewise, Yian Leilei, a wholesaler of tablecloths and car seat covers, said that "sales nose-dived after Chinese New Year on Jan. 23 and had not recovered."

Jim Walker, founder and managing director of the Hong Kong-based economic research company Asianomics, has said that the, “Property-led growth and infrastructure-led growth is just about finished".  He concludes that more stimulus funding will have limited value, since there is already an excess of infrastructure projects, including transportation projects such as airports. 

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Historically, China's economic data has been of questionable value. Senior politicians and economists within the Chinese government have said that the data, especially that arising from local offices, are frequently massaged to confirm with politburo demands.  For example, Le Keqiang, a senior communist party official, was quoted in 2007 cable released by Wikileaks that China's GDP figures were "man-made."  He explained that he reviewed only three statistics to assess the strength of the Chinese economy:

1. Bank lending
2. Electricity consumption
3. Rail cargo volume 

If one is to evaluate the economy based on these metrics only, the Chinese economy is in very poor shape.  For instance, bank lending has contracted as demand for new loans and projects has declined.  Electricity production is down m/o/m  for April, while freight cargo by rail has flat-lined.  An article on The Atlantic magazine's online site discusses these issues.

The collective declines in imports and exports, a worsening housing market, depressed labor conditions, reduced consumer confidence, and sinking inflation are representative of a serious situation that points towards a fundamental hard landing occurring in the months ahead.

Third world America: Highland Park, Michigan

Is America the richest country in the world?

Ostensibly the claim is made that America is the greatest country in the world.  A continental nation with global commercial centers, successful manufacturing sectors, a productive workforce, and over 8.4 million households with assets greater than 1-Million dollars (excluding their primary residence). According to Bloomberg News, more than 600,000 persons became millionaires in America in 2010.

However, the rest of the country has not been so lucky and many areas remain mired in debt and socio-economic decline.  The state most exemplifying changes in America's fortunes has been Michigan.  Due to the state's dependence on the automotive industry, Michigan never recovered from the initial dot-com recession of 2001.  For the totality of the decade of the zeroes, the state shed jobs, businesses, and people.  Middle class union jobs that were the backbone of the economy were slashed.  The net result was depression level cut-backs in government spending at the municipal and state level.  With decreased taxes, municipalities cut services; including essential services like police, fire-fighters, and ambulances.

An example of this freefall into urban dystopia is the current city of Highland Park.  The small city of eleven thousand lies encapsulated by Detroit and has witnessed a population decline of 33% since 2000.  Until 1995 it was the former home of Chrysler Automotives, which contributed to nearly 50% of the city's tax base at the time. The decade of the zeroes was particularly harsh to metropolitan Detroit and cities like Highland Park.

In a recent Detroit News article, DTE energy was removing street lights, of which 1,400 have already been extracted, as part of "of a settlement that allowed the city to avoid paying $4 million in unpaid bills going back several years."

Residents of the city are unhappy that basic utilities and services, such as luminating city streets and the front of business locations will not be available.  The Detroit News elaborates:

"After they took the street light from in front of my business, someone climbed onto my roof and stole an air conditioning unit," said Bobby Hargrove, owner of Hargrove Machinery Sales on Oakland Avenue, who also claims a police officer asked him for money to beef up his protection. "I feel like I'm being punished — I've always paid my bills on time, but they took the street light anyway."

So this is where America stands.  Broken urban landscapes bereft of basic amenities and services that people had a century ago.  Welcome to third world America.

Roubini says double-dip too!

On the other hand, Paul Krugman isn't talking about double-dips, but a decade long depression.

I've got an expanded blog article titled "Recession Watch: one dip, two dips, ... we all fall down", which includes current macroeconomic data on America's descent into recession and opinions on what this all means by Krugman, Roubini, Joe Stiglitz, and Ken Rogoff.

None of this should be a surprise to those paying attention, but I suspect most people -as usual- aren't.

Stiglitz on stimulating the US economy

Joseph Stiglitz, professor of economics at Columbia University, former Senior Vice President and Chief Economist of the World Bank, and recipient of the 2001 Nobel Memorial Award in Economic Sciences, offers some sound advice to the American political system in how to stimulate the US economy.

He points out the obvious:

First, we must dispose two myths. One is that reducing the deficit will restore the economy. You don’t create jobs and growth by firing workers and cutting spending. The reason that firms with access to capital are not investing and hiring is that there is insufficient demand for their products. Weakening demand — what austerity means — only discourages investment and hiring.

He asks, "How do we  get America back to work now?"

The best way is to use this opportunity — with remarkably low long-term interest rates — to make long-term investments that America so badly needs in infrastructure, technology and education.

We should focus on investments that both yield high returns and are labor intensive. These complement private investments — they increase private returns and so simultaneously encourage the private sector.

Helping states pay for education would also quickly save thousands of jobs. It makes no sense for a rich country, which recognizes education’s importance, to be laying off teachers — especially when global competition is so fierce. Countries with a better educated labor force will do better. Moreover, education and job training are essential if we are to restructure our economy for the 21st century.

The advantage of having underinvested in the public sector for so long is that we have many high-return opportunities. The increased output in the short run and increased growth in the long run can generate more than enough tax revenues to pay the low interest on the debt. The result is that our debt will decrease, our GDP will increase and the debt to GDP ratio will improve.

He also considers the possibility of raising taxes and using that income to invest in the country to stimulate the economy.

Increasing taxes at the top, for example, and lowering taxes at the bottom will lead to more consumption spending. Increasing taxes on corporations that don’t invest in America and lowering them on those that do would encourage more investment. The multiplier — the amount GDP increases per dollar spent — for spending on foreign wars, for example, is far lower than education, so shifting money here stimulates the economy.

There are things we can do beyond the budget. The government should have some influence over the banks, particularly given the enormous debt they owe us for their rescue. Carrots and sticks can encourage more lending to small- and medium-sized businesses and to restructure more mortgages. It is inexcusable that we have done so little to help homeowners, and as long as the foreclosures continue apace, the real estate market will continue to be weak.

The banks’ anti-competitive credit card practices also essentially impose a tax on every transaction — but it is a tax with revenues that go to fill the banks’ coffers, not for any public purpose — including lowering the national debt. Stronger enforcement of antitrust laws against the banks would also be a boon to many small businesses.

Europe's inverted socialism

And most Northern Europeans also seem to believe that the bailouts have gone to lazy Southern Europeans. In fact, their purpose has been to shore up the fragile Northern European financial systems. German banks are among the weakest in Europe; some of them (especially the state-owned landesbanks) are effectively bankrupt. If they were forced to mark down their Southern European debt, they might well collapse in a heap, and the European financial system could grind to a halt. Just as in the United States, the real impact of the European bailout has been to shore up the continent’s banks – not to help the continent’s debtors. The recent downgrading of two of France’s most important banks, due to their holdings of Greek debt, reminds us of how exposed Northern Europe’s financial systems remain. And rumors of a recent IMF report that European banks are over $270 billion short of the capital they need to confront their current problems served to drive the point home.

- Jeffry Frieden, "Europe's Lehman moment"

Europe's financial problems have escalated to the point where a world-wide contagion has become again possible.  Economists and international leaders are sounding alarms that have rarely been spoken in unison, since the inception of the 2008 financial crisis.  Christine Lagarde, the managing director of the International Monetary Fund, said "We have entered into a dangerous phase of the crisis." Her words come at a point where the Greek debt crisis appears to be reaching its climax.  Moody's Investors Service downgraded two of France's top banks, Societe Generale and Credit Agricole, stating that it had concerns about the two banks funding and liquidity profiles, due to their exposure to Greek debt.  A recent analysis indicates that 43 large European banks hold debt in the PIIGS equivalent to 65% of the book value of those institutions. Gretchen Morgenson of the NY Times explains the current situation:

Some of these [European] banks are growing desperate for dollars. Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce. Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.  

As a result several central banks have mounted a coordinated effort to inject US dollars into the financial system to stimulate market confidence.  The Guardian newspaper elaborates:

The Bank of England joined the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce that they would flood money markets with dollars over the coming months.

Gus Faucher, director of macroeconomics at Moody's Analytics, states "The big question is: is this enough in the short term to get us to a longer term solution? There is a potential for a really huge financial crisis in Europe. Things are bad now, but they could get a lot worse."

Many observers are looking at the current European situation and seeing similarities between Lehman Brothers demise and the 2008 crisis.

Adding to the peril is that these banks are funded primarily by short-term investors, like buyers of commercial paper, rather than by depositors, as is more often the case with American banks. This was the same problem faced by Bear Stearns and Lehman Brothers, which collapsed after short-term lenders fled in panic.

Economist Barry Eichengreen says that, "The euro’s survival and, indeed, that of the European Union hang in the balance."  He says long term proposals on restructuring Europe's sovereign debts are not of immediate concern, rather the continent needs to act decisively in stabilizing its banks.  The European Financial Stabilty Facility (EFSF) and even the IMF should be used to re-capitalize Europe's weak banks.  The second move should be to give Greece sufficient room to maneuver by asking its creditors to relax its fiscal targets.  Third, governments need to end this futile dalliance with austerity and proceed with stimulus projects that would create real growth.  He states, "Without growth, tax revenues will remain stagnant, and the capacity to service debts will continue to erode. Social stability, similarly, depends on it."

Economist Paul Krugman at the beginning of this week had some serious words for European governments.  He states, "We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer"  Likewise, he is telling Europe to use the ECB to continue buying up Spanish and Italian debt to contain the risk of default. The moral argument for inaction or worst punishing Europe's peripheral nations and the Mediterranean nations of Spain and Italy, will drive the continent -if not the world- into another economic abyss.

The reality is Greece's debt problems have been growing and not diminishing over the past two years.  The country is not in any position today or in any foreseeable future to repay the totality of its debt.  Under the current regime imposed on the country, Simon Johnson a former IMF chief economist concludes that "The tax revenue needed to service [the Greek] debt would burden businesses and households for decades – enterprising and productive people will move their fortunes and their futures elsewhere in the euro area or to the United States." Throwing billions of dollars at the nation, only to prop up banks in the northern economies of Europe and hoping that the situation will be resolved at a later date, has now been shown to be an unfeasible and irresponsible position.  Europe needs to first stabilize its banking sector immediately and then proceed in an orderly default of Greece's debt. An unorderly default will plunge the entire Eurozone into chaos.  Spain and Italy will face unprecedented pressure, whereas the remaining nations of Portugal, Ireland, and Greece may well face economic collapse.

Recession Watch: one dip, two dips,... we all fall down

The trend lines are undeniable; the US economy is heading into another recession.  Debate between economic analysts entail whether what is occurring is an entirely new recession, a double-dip recession, or the continuation of even larger economic contraction that began initially with the 2008 financial crisis (which some would argue is an extension of the 2001 recession) and has properties that are unlike previous recessions.  Each of these arguments have some validity in explaining the current situation, but all conclude that this new decline, while not likely to be as severe as the 2008 crisis, will last longer in duration and given the current political weaknesses of the major industrial nations, be more difficult to mitigate.

Leaving aside the debt crisis and economic malaise that is occurring in Europe for the moment or the possible hard landing that has been predicted about China and the entailing risks these situations pose to the global economy, America's economic position is clearly weak.

First, the jobs position is dismal.  Last month, zero jobs were added and only a fraction of the jobs necessary to compensate for population growth alone have been achieved in the previous four months.  The NY Times summarizes:

Over the last 50 years, every time that job growth has been as meager as it has been over the last four months, the economy has been headed toward recession, in a recession or in the immediate aftermath of one.

The collapse of job creation is not about businesses fearing regulatory uncertainty, creeping hyper-inflation, or the need for further tax-cuts to stimulate big businesses already bloated corporate coffers, but rather it is due to insufficient aggregate demand.  People without jobs, people forced to take inferior paying jobs, people concerned that they may lose their jobs, people forced to subsidize their spouse, adult children, parents, and/or relatives, and people loaded with debt, aren't engaged in making major purchases, because they can't afford to.  Consider the following:

But the latest indicators suggest that even if the economy does not continue to worsen, it appears to be too weak to add enough jobs each month — roughly 125,000 — even to keep pace with population growth. Anything less, and the share of the population that is employed will continue to fall.

The stimulus program offered by Mr. Obama was insufficient to meet the full demands of the  financial crash of 2008.  This blog has been saying for the past three years (here, here, and here) that the weak recovery was an illusion.  Joseph Stiglitz said back in 2009 that, "We need a larger and better designed stimulus."  Paul Krugman has been waging a public policy crusade to convince the public that a second more robust stimulus is needed.  President Obama, instead of listening to these and similar minded economists, decided to split the difference and offer everyone a little of what they wanted: a little bit of tax cuts and some stimulus over a couple years.  The problem was that while averting a more severe recession, it failed to create enough power to re-inflate the economy to pre-recessionary levels.  Now that the stimulus dollars have been used, the economy is drifting back into negative territory and with a recalcitrant Republican dominated House of Representatives, there is virtually no chance that anything of substance being passed.

Other indicators such as GDP, consumer confidence, consumer consumption, factory employment diffusion index, and housing are all trending downwards.  Volatility in the market place, with abundant talk of debt crises across the western hemisphere, has investors and business worried.  Last month Asian banks cut credit lines to French banks.  Central banks across Europe, Japan, and America have made the unexpected move to offer dollars to European banks to ensure liquidity.

What had been in 2008 a financial crisis has migrated into a sovereign debt crisis.  Nouriel Roubini expands:

We are running out of policy bullets. The policymakers don't have monetary bullets; they don't have fiscal bullets; they cannot even backstop their own financial system. That's why it's more scary than a year ago, two years ago, or three years ago -- when we had all these policy bullets. Now we are running out of them.

***

Ken Rogoff, Harvard professor and former chief economist at the IMF, has said, "the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation."  As a result, Rogoff points out that many policy makers have badly misunderstood the overall problems associated with this second great contraction, as he puts it.  He offers the suggestion that, "If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions."

Solutions to both individual and national debt problems should be addressed as follows:

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries.  For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.

Another approach offered by Rogoff to reduce the painful deleveraging process and years of unnecessary slow growth, would be for central banks to pursue a policy of moderate inflation of 4-6% for several years.

At this stage, none of the policies suggested by Stiglitz, Krugman, Roubini, or Rogoff appear on the table in either Washington DC or the capitals of Europe.  Instead of sustained and ambitious solutions, we are left with blathering idiots telling us of austerity programs that will magically generate confidence, while keeping away the terrible bond vigilantes.  The incompetence and stupidity of our leaders is nearly blinding.

US Poverty Rate at 15-year high

Rotting from the inside out, is how I'd best describe the current circumstances.

The US census bureau came out this week with some further data that shows that the decade of the zeroes was a bust for most people.  The NY Times summarizes:

With the country in its worst economic crisis since the Great Depression, four million additional Americans found themselves in poverty in 2009, with the total reaching 44 million, or one in seven residents. Millions more were surviving only because of expanded unemployment insurance and other assistance.

Professor Lawrence Katz, an economics professor at Harvard, states in this second article, “This is truly a lost decade... We think of America as a place where every generation is doing better, but we’re looking at a period when the median family is in worse shape than it was in the late 1990s."

Everyone was quite happy when they were making a bit more and the music played on; even if the top 1% were making multiples at the time.  Now the day of reckoning has arrived and people are awakening to the real morning in America.  Less opportunities, less income, more social inequality, a middle class in decline, and a federal government that is completely owned and bought for and by corporate interests.  This is the rancid fruit of thirty years of Reaganomics.

The specific details provided by the article, show that the nation is in decline.

• Last year, about 48 million people ages 18 to 64 did not work even one week out of the year, up from 45 million in 2009, said Trudi Renwick, a Census official. 
• According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065, said Sheldon Danziger, professor of public policy at the University of Michigan. 
• The period from 2001 to 2007 was the first recovery on record where the level of poverty was deeper, and median income of working-age people was lower, at the end than at the beginning.
• 22 percent of children are in poverty, the highest percentage since 1993. 
• For a single adult in 2009, the poverty line was $10,830 in pretax cash income; for a family of four, $22,050. 

Given that the Great recession will continue for years, perhaps even throughout this current decade, poverty rates will increase, social unrest will occur, and political mayhem may well ensue in the years to come, unless serious and coordinated changes are made.

A Government for, by, and of the Corporations

Bloomberg News has an end of the year article ("Out of Lehman's Ashes Wall Street Gets Most of What It Wants") and an interview with its lead author,  Christine Harper, on the subversion of  the financial industry reform and the underlying power of the banks over Washington DC's political class.

The past two years have seen the worst economic turn down in the American economy since the Great Depression.  The origins of this downturn emanate nearly exclusively from America's financial industry, which manipulated legislators in the 1990's to abandon historic safeguards and firewalls and then engineered novel methods to expand and grow their balance sheets.  The result was a global recession that destroyed trillions of dollars worth of capital, reduced nations like Iceland, Ireland, and Latvia into economic wastelands, and has crippled growth across the Western world. However, in that same period, the same institutions that caused so much damage and harm to the world have grown richer than ever.

The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America Corp., JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg. Goldman Sachs CEO Lloyd Blankfein, 56, and his top deputies are in line to collect more than $100 million in delayed 2007 bonuses -- six months after paying $550 million to settle a fraud lawsuit related to the firm’s behavior that year. Citigroup, the bank that needed more taxpayer support than any other, has a balance sheet 14 percent bigger than it was four years ago.

The article elaborates on how the Obama administration, from its very inception, was uninterested in challenging the banks. The inclusion of former Clinton era deregulatory stalwarts, like Lawrence Summers, and persons directly responsible for the financial crisis, such as former president of the Federal Reserve bank of NY, Timothy Geithner, lead Simon Johnson, former chief economist at the IMF, to conclude “that the banks were going to get a free pass." Reformers were politely ignored and persons that significantly challenged the status quo "were dismissed as unrealistic, misinformed, advancing ulterior motives or damaging to U.S. competitiveness."

The too big to fail (TBTF) banks are now even bigger and the legislation crafted by congress is incapable of deterring these monopolies from engaging in even more disastrous swindles.  Meaningful changes, such as the re-introduction of Glass-Steagall or even what became known as the Volcker Rule, which would "ban proprietary trading at regulated banks and prohibit them from owning hedge funds and private equity funds" was water-downed, gutted, and then abandoned altogether.

Attempts to reign in the excessive salaries and bonus structures at the big banks were immediately defeated by representatives from both the corrupt Republican and Democratic parties. 

71 percent of Americans said big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, and 17 percent said bonuses above $400,000 should be subject to a one-time 50 percent tax. Only 7 percent of the respondents said they consider bonuses a reflection of Wall Street’s return to health and an appropriate incentive.

Even though a clear majority of citizens wanted the plutocrats pay to be cut for their egregious mishandling of the economy, congress in collusion with the robber-barons would have none of it.

To ensure that none of their paid whores in congress would go off message or engage in populist pandering, lobbying efforts during the 2010 election period were thrown into overdrive.

The biggest financial companies increased their spending on lobbying in the first nine months of 2010 as they sought to influence the legislative outcome, according to Senate records. JPMorgan’s advocacy spending grew 35 percent, to $5.8 million from $4.3 million, while Goldman Sachs’s jumped 71 percent to $3.6 million.

The Dodd-Frank Act for financial industry reform was eventually passed, but:

The law won’t prevent lenders with federally guaranteed deposits from gambling in the derivatives markets, though it will place restrictions on some types of contracts and require more transparent trading and central clearing. It does little to solve the danger posed by leveraged firms reliant on fickle markets for funding.

Two decades of legislative changes have given the banks and the financial industry everything they wanted; yet that was not enough.  Today every American citizen, through the generosity of their political representatives in Washington, is forced to subsidize the incompetence and greed of the bankers.  In return you, joe-public, are given a moribund economy, marginal economic growth, reduced benefits, no retirement, a society with high structural unemployment, and the comforting thought that all those rich motherfuckers on Wall St. are enjoying their vacations in the Hamptons on your dime.

NYT's Book Review of Matt Taibbi's "Griftopia"

The New York Times Sunday Book Review looks at Matt Taibbi's newest publication "Griftopia"

The reviewer summarizes the book with the following:

In “Griftopia,” a relentlessly disturbing, penetrating exploration of the root causes of the trauma that upended economic security in millions of American homes, Taibbi argues that what unfolded was far from accidental. Rather, the nation suffered the equivalent of a hostile takeover of key areas of its commercial life by investment banking houses, while regulators and members of Congress abdicated their responsibilities either because they were influenced by campaign cash or because they believed the fairy tale that unsupervised markets always work best. The result, Taibbi asserts, was a thieves’ paradise — Griftopia.

Taibbi takes on the zombie lie, pushed by right-wing hacks, that the banks were forced to sell subprime mortgages to poor people and that Fannie Mae and Fredie Mac were the root causes of the crisis.

Taibbi persuasively dismisses the argument that the financial crisis was caused by poor people with a taste for real estate, delineating how Wall Street eagerly handed out mortgages to anyone with a pulse, and then used the home loans as the material for a far more lucrative enterprise — the exotic investments known as derivatives. The derivatives market depended upon a steady supply of mortgages. But when too many of the bets went bad, Wall Street persuaded the Treasury to construct bailouts that Taibbi describes as a “labyrinthine financial sewage system designed to stick us all with the raw waste and pump clean water back to Wall Street.”

The book attacks the mindless Tea-Party movement, calls Alan Greenspan the biggest asshole in the universe, delves into America's bubble machine typified by the original vampire-squid, Goldman Sachs, and considers how Obama's health care initiative is nothing less than a boondoggle for the toxic-sludge dealers in big-Pharma and the nickle-and-dime kleptomaniacs in the so-called insurance business.  As emotionally cathartic as it is to find someone who will call the biggest thieves and crooks on the planet, what they truly are. It is Taibbi's constant attack on the enterprises of American capitalism, those revered and sacrosanct temples, in which he viciously and relentlessly dismantles and exposes as being little more than high-end criminal rings, that is most satisfying.

An excellent read.  I hope someone was generous enough to put it under your Christmas tree.

Sen. Sanders on the Greed of the Plutocrats

Charlie Rose interviews Charles Ferguson of the "Inside Job"

http://www.charlierose.com/view/content/11321

The above link is to a recent interview (29 November 2010) between Charlie Rose and Charles Ferguson who produced the well reviewed documentary on the origins of the financial collapse of 2008 and the subsequent global bailout of the financial industry by governments across the world.

He states specifically, "the film is about the systemic corruption of the United States by the financial industry and the consequences of that systemic corruption."

In the interview Ferguson makes it clear that the corruption of America and its legislative and regulatory processes are profound.  He makes the case that much of what happened would not have occurred if the businessmen behind these monolithic investment banks were not so incompetent and blinded by greed and the US government had not abdicated its role, as an agent for fairness, in properly regulating the whole industry.  The actions taken by the government was to save the banks and the elite bankers, while allowing the rest of the population to fend for itself.  The bankers, with the exception of Lehman Brothers, were not made to make any sacrifices.

Ferguson further contends that "massive criminal fraud" was undertaken. Despite the nauseating proclamations by the financial industry and their media stooges, it is clear that both government and the largest corporations in America engaged in what may stand as the largest criminal event of the past quarter century. The reality is that none of these people, given the political climate and entrenched corruption of government, will be held accountable for their actions in destroying trillions of dollars of wealth, eliminating millions of jobs, and pushing families off the cliff.  When ordinary people lose their health care, lose their homes, lose their life savings, and end up destitute, the same people who caused this mayhem will snicker and call the rest of the population parasites!

I've said it numerous times on this blog, that only when people recognize the true nature of corporations in their society and begin to combat the force of coruption through monied politics, will things change.

Arizona's indulgence with the banality of evil

I have been for some years awed by the grotesque indecency and outright evil that presents itself as the norm in the low-tax geezer-vista that is the state of Arizona.  Many will recognize the ongoing battle between locals and illegal immigrants.  My disgust does not entail this well discussed legal tussle and the underlying racial animus prevalent across the state.  Instead, I'd like to draw attention to the mindset and legislative behavior of the state's Republicans, who with their tax-free and minimalist government ideology have created a perfect example of the banality of evil.

I came across this example in the NY Times of the lengths many of the well-heeled denizens of the state will go to, in order to protect their personal fortunes from the local taxman.  Consider the following:

“Arizona is seeing more of the traditional battle of the generations...between some retirees who want taxes — including school taxes — kept low, and most parents who want better support for the schools their kids attend.”

Patrick Flynn, the president of a homeowners group in Troon, AZ in 2007, states that he has no qualms about education, he "just does not like the idea of paying for it."  In this particular exhibition of generational greed and malice, the residents of the district created a bogus local school district with no schools, teachers, or students to prevent their property taxes from being raised.  Families with children must pay adjacent districts to have their children participate in schooling.  As a state senator explains, “The whole purpose of this was to avoid taxes on their million-dollar homes.”

In an earlier post titled "The young must die so Geezers can pay low taxes" I explained how the Governor of Arizona planned to eliminate health coverage for 47,000 low-income children.  In the name of fiscal austerity the legislators gladly abandoned their most vulnerable citizens so that these modern day Merchants of Venice wouldn't have to worry about wasting their well earned shekels on youthful vermin.  The fact that the elderly receive federally subsidized Medicare and have no worries about paying for health care costs is an irrelevance to these hypocrites.  Racial bigotry is used by the citizens of the state to claim that most of the children were the offspring of illegals, who shouldn't be receiving benefits regardless.

What has drawn my particular ire today though is another instance of greed masquerading as fiscal rectitude.  The NY Times has a horrible story of how Arizona legislators have stripped citizens belonging to the state Medicaid program from having life-saving transplants.  Persons who for whatever reason that were waiting for a liver, lung, or other tissue were told to drop dead by their own representatives.

When Alan Grayson, the former congressman for Florida, said in 2009 that the Republican plan for health care reform was, "Don't get sick. That's right, don't get sick."  The MSM and Republicans bemoaned his rhetoric and yet evidence is abundant that he was absolutely correct.  On the floor of the House of Representatives, Grayson offered this scathing critique of the Republican party's program for health care

According to this study, “Health Insurance and Mortality in U.S. Adults” which was published two weeks ago, 44,789 Americans die every year because they have no health insurance. That’s right, 44,789 Americans die every year, according to this Harvard study called “Health Insurance and Mortality in U.S. Adults.” You can see it by going to our website, grayson.house.gov. That is more than ten times the number of Americans who have died in the war in Iraq.

It’s more than ten times the number of Americans who died in 9/11. But that was just once: this is every single year. That’s right: every single year. Take a look at this. Read it and weep. And I mean that – read it and weep because of all these Americans who are dying because they don’t have health insurance.

The state of Arizona offered this pathetic rational for why the government was serving poor and sick citizens a death sentence:

State Medicaid officials said they recommended discontinuing some transplants only after assessing the success rates for previous patients. Among the discontinued procedures are lung transplants, liver transplants for hepatitis C patients and some bone marrow and pancreas transplants, which altogether would save the state about $4.5 million a year.

While many states in the union have reduced or eliminated aspects of health coverage during the Great Recession, Arizona once again goes the extra distance to condemn their citizens to the vagaries of market-based health care; i.e. pay or you fucking die!  The cruelty and lack of any resemblance of ethics of these people is mind-boggling.

The behavior of all levels of government in Arizona is one of maximizing short term financial gains for their most well off citizens, while brutally undermining the health, education, and well-being of large portions of their population.  How is it that the richest country in the world has a health care system that is on par with second-rate industrial nations?  The justifications of the proponents of this lot are always anchored to some bizarre notion of moral indignation that others are getting a free ride, while they -the greediest generation, who never sacrificed, never went to war in the name of democracy and freedom, and who had their entire lives subsidized from birth- continuously demand others do without, what they loudly proclaim is their deserved entitlement.

Galbraith on why the Democrats lost the Election

The original sin of Obama’s presidency was to assign economic policy to a closed circle of bank-friendly economists and Bush carryovers. Larry Summers. Timothy Geithner. Ben Bernanke. These men had no personal commitment to the goal of an early recovery, no stake in the Democratic Party, no interest in the larger success of Barack Obama. Their primary goal, instead, was and remains to protect their own past decisions and their own professional futures.

James K. Galbraith, professor of economics, offers his summation on why the Obama administration and the Democrats in congress, failed to obtain better results in last week's election.

A few commentators, like Kevin Drum over at MotherJones.com, do not believe that even if Obama had pursued a strategy where the economy was this Administration's central objective, that the Democrats would be substantially better off.  Given the people who Obama sought consul from, it seems entirely correct to me that the Democrats would still have lost the house of representatives to the Republicans with such a strategy.  

As a corollary to Drum et al's sentiment, Galbraith elaborates in his opinion piece that Obama upon entering office had a limited understanding of economics, and coupled with a desire to pursue a centrist-right policy that maintained the status quo as much as possible, through the appointment of Clinton leftovers and Wall Street yes-men,  he essentially abdicated the mantel of being an agent of change and became an enabler of of Wall Street's mismanagement.

The obvious conclusion is that if Obama had pursued, as soon as he arrived in office, a bank nationalization program or something more similar to what the British engaged in and what the Swedes did in the early 1990's, he would have been able to dismantle the banking-congressional lobbyist nexus and create national banks capable of effectively lending money to both businesses and the American public a short time after.  Make no doubt that the process would have been bloody, but through inflicting maximum pain on the management and shareholders of the corrupt banks and insurance companies -something that was universally desired by the American public- Obama would have consolidated his record of being a giant-killer and a vanguard for the "little guy."

Instead, the timid and frustratingly feeble performance of Mr. Obama and his pro-business acolytes in the White House, have left his administration and the Democrats vulnerable to attacks from multiple fronts and potentially dead in the water for the next two years.

Krugman on the Limits of American Exceptionalism

Paul Krugman compares America's current mortgage morass, associated with the unfolding home ownership and foreclosure fiasco, to that which was encountered during the Asian financial crisis.

After the Asian financial crisis of 1997-1998, it was often said that a key barrier to recovery was the uncertain state of property rights: so much debt had been run up during the boom, and there had been so many defaults in the bust, that it was no longer clear who owned anything. Plus, these countries lacked clear legal procedures, and in general suffered from insufficient rule of law. All this was said, of course, in a tone of superiority: we Americans had solved such problems.

He also states, America's mortgage crisis dwarfs anything that occurred in Thailand and Indonesia by orders of magnitude. 

The crony-capitalists and casino-players on Wall St. have made a mockery of America's international reputation as a safe and secure center of investment.  Gimmickry, sleight of hand agreements, unequivocal fraud, and legislative and regulatory arbitrage were all employed by the MBA ass-clowns in the banking and mortgage industry to secure profits for themselves without taking into account the long-term risk to either their businesses or the nation.  The end result will be a decade of lost growth for America and given that somewhere within that same period another potentially catastrophic economic collapse may occur, based on historic trends and the belief by many economists that an even larger shock lies in wait given the failure of most governments to adequately address the root causes of the great recession, capitalism as we know it today may collapse.

Please Mind the Gap!

The above chart culled from a posting at Kevin Drum's MotherJones blog, illustrates what has been discussed substantially since the inception of the 2008 global financial meltdown, but has not been widely understood amongst the general population.  If growth averages at or below 2% for the remainder of the decade, unemployment will remain nearly twice at which it was during the 1990's and much of the 2000's.  Similar to Japan's continuing economic malaise, America appears to entering a period of turbulence in which as much as 10-years of marginal or no economic growth will occur.

Both Harvard's Ken Rogoff and Yale's Robert Shiller have also discussed the likelihood that neither America nor much of the Industrialized world will return to pre-recessionary growth levels within the short term.  Based on Rogoff and Carmen Reinhart's 2009 research on economic crisis's over the past 800-years, they state that a "slow, protracted recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis."  Given the weak stimulus package introduced by the Obama administration and the ascent of austerity economics amongst many European nations, there is no reasonable chance that on either side of the Atlantic unemployment will reside, economic output will markedly increase, or that the fiscal situation will improve by 2012.

Shiller notes that in Rogoff and Reinhart's examination, the following rates are derivable:

median annual growth rates of real per capita GDP for advanced countries were one percentage point lower in the decade following a crisis, while median unemployment rates were five percentage points higher.

With the introduction of further uncertainty, whether through China's economy crashing or other yet to be determined causes, the world is faced with grim economic prospects for the foreseeable future.

The Dismal Science Redefined

Current economic theory is less a science than an ideology peculiar to a certain period of history, which may well be nearing an end...

[Economists are] the jilted lovers of the science world – the more rigidly they approach their subject, the more it mocks them with spurious and headstrong behaviour.

Since this blog started, I've been constantly commenting on the dearth of empirical evidence that lies behind many of the attributed economic theories of our time and the persistent irrationality, if not complete fraud, of proponents of modern economics.  Many noted persons who are economists, like Paul Krugman and J. Brad DeLong, have likewise stated how the field has become a self-serving entity, that is in many cases polluted beyond the point of usefulness.  The above quotes, culled from a Globe and Mail newspaper opinion piece by Brian Milner titled "Economists and their fairy tale world of prognostication," is another indictment of the dismal science's ability to actually be a science.  The central basis of any science is its ability to factually explain natural phenomenon, testability of theories, reproducibility of experiments, and its ability to predict future events.  Economics, or at least that set of dogma pedalled in the MSM, doesn't pass any of the above criteria. 

If economists want their profession be taken seriously, then they should start actually calling out those on their side who have perennially gotten it wrong and banish them.

The entire fable of sustainable capitalism is disintegrating all around us like the dreamscape in the movie Inception.  The communists of China, through their mercantile and corrupt practices, are acquiring natural resources across the globe and buying friends everywhere.  The new globalization that peaked in the last decade is slowly devolving.  The financial system that imploded in 2008, has only been patched together with band-aid remedies and awaits further paralysis in the near future.  China, Europe, and America are all betting against the odds, that growth will magically return and the masses will defer sharpening their pitchforks until another day.

Bruce Bartlett Calls Dubya's Tax Cuts Virtually Useless

Bruce Bartlett, a former Republican who served in both the Reagan and George H.W. Bush Administrations, has put forward a critique of the tax cuts implemented under Dubya (aka. George W. Bush)

To summarize, the original Bush tax cuts, although widely stated as a stimulative supply side tax-break, were in fact designed to offset the revenues the federal state was obtaining during the final years of the Clinton administration in the 1990's. A conceit articulated most prominently by Alan Greenspan, who at the time claimed that fiscal surpluses had grown too large.  Instead of creating sound fiscal policies, Mr. Bush's first term tax-cuts, rebates, and tax code "reforms" were determined by the Republican party to create, according to Bartlett, constituencies that would be grateful to the Great Leader's leadership. He outlines:

Bush proposed a doubling of the child credit to $1,000; higher limits on education savings accounts; a new deduction for two-earner couples; allowing a deduction for charitable contributions by those that don’t file itemized returns; a $400 deduction for teachers who buy unreimbursed school supplies; Individual Development Accounts to allow people to save tax-free for retraining; a refundable tax credit for health insurance; and a tax credit for financial institutions that matched savings by those with low incomes. The only supply-side element was a modest reduction in the top statutory income tax rate from 39.6 percent to 33 percent — higher than it had been during Bush’s father’s administration — that would be phased-in over a number of years.

However, in reviewing the actual impact of those tax cuts, Bartlett concludes that it is clear that:

there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor.

As my previous post explains, everything the Bush-bots claimed that they were doing and predicted about the country's fiscal situation turned out to be incorrect.  Despite the hysterical reporting by the toadies of the Republican party and Wall Street in the MSM, the tax cuts provided limited or no economic value.  It is therefore complete nonsense that if America's wealthiest and most affluent aren't given even more perks through the extension of the tax breaks, that the entire country will disintegrate.  The plutocrats are the one's who have destroyed the American middle class through their low tax, militaristic, pro-China globalization trade policies.  In the wake of their recklessness, they have increased poverty, diminished social mobility, and promoted a culture of debt that will retard US economic growth for another decade.  Since they are the one's who have felt the least pain in an economic collapse caused by their antics, they should at least bear some of the burden in returning the nation to solvency.

Quote of the Day: ECB Austerity Proponents are Dunces

The ECB’s arguments look to me like scraping the bottom of the intellectual barrel. The truth is that it is not fear of government bankruptcy, but governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders. The problem is not the hole in the budget; it is the hole in the economy.

- Robert Skidelsky, "Fixing the Right Hole", Project Syndicate

Evaluating the Likelihood of China Crashing

The overall question of China’s economic situation remains enigmatic. Earlier this year several leading experts expressed grave concerns related to the distinct possibility that China would crash. Renowned short-seller James Chanos was the first to publicly state that his company was actively analyzing methodologies to prosper from an anticipated Chinese economic crash. He considers China to be “on a treadmill to hell” because of its addiction to pushing growth through property development. A point belied by the fact that as much as 60% of the country’s GDP is now contingent upon construction related activities.

In February, Ken Rogoff -Harvard Professor, former chief economist at the IMF, and author of the critically received historical economic analysis ‘This Time it is Different’- warned of a collapse of China’s debt-fuelled bubble. Rogoff refutes the conventional arguments offered over the past decade that China cannot have a crash. History he insists provides no example where an emerging market nation did not succumb to a crisis that sent growth plummeting and markets crash. “You’re starting to see that collapse in property and it’s going to hit the banking system,” states Rogoff in Bloomberg BusinessWeek.

In the past couple of months, a tidal-wave of fund managers have turned on China. Marc Faber, publisher of the Doom, Boom, and Gloom report, anticipates that China will have a hard landing by the first half of 2011. Whereas Hugh Hendry, a UK based hedge fund manager, is developing a stand-alone fund that will exploit the upcoming failures of the Chinese economy.

As of this month, the Shanghai stock market remains at its lowest point in sixteen months. Much of China’s GDP growth can be directly correlated to the value of property, which has soared 40% in the past 18 months alone. Despite attempts by the communist government to quietly reign in excessive speculation and overleveraging in the housing and commercial real estate market, unsustainable growth patterns persist. According to Bloomberg, property prices in 70 Chinese cities rose 12.4% in May; the second-fastest pace on record.

A number of analysts are predicting that any correction will not harm the overall Chinese economy. Optimists point to the fact that “Shanghai’s sales of new homes fell 57 percent in the first six months of the year,” implying that an orderly correction shall occur. Bloomberg news posts the assertion of one analyst that China’s property boom is “cash-driven” rather than “leverage-fuelled,” and as a result, the same dynamics that occurred in the US housing market would not be replicated in China.

On the other hand, a report by Fitch rating agency issued earlier this month and discussed in the NY Times,

Said Chinese banks were increasingly engaging in complex deals that hid the size and nature of their lending, obscuring hundreds of billions of dollars in loans and possibly even masking a coming wave of bad real estate and infrastructure loans.

The report also highlights that Chinese regulators have understated loan growth “in the first half of the year, by 28 percent, or about $190 billion.” The level of deception and fraud occurring in the Chinese banking industry, coupled with the financial innovations created to explicitly conceal risk, are the hallmark attributes of an economic system that is in the early spasms of crashing.

Overall, given the inherent conflict of interests of local governments, who have a vested interest in property speculation, infrastructure expansion, and show projects necessary to enhance their reputations and meet growth quotas, it is unreasonable to assume that these same persons and/or entities would voluntarily halt their long established and until now profitable practices. Established corruption, currency manipulation, a lack of transparent legal rights, collusion of state banks with local businessmen, revolting masses, and an ever growing list of skeptics of the “Chinese miracle” portend that even if the property bubble does not crash the economy, there resides many unstable and troubling fault lines that can.