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.

Spanish society in freefall...

Spain currently has a mass unemployment rate of 24.1% and youth unemployment rate (15-24 y/o) that exceeds 50%, up from 18.2% in 2007.  In comparison Italy's youth unemployment is 29%; Portugal is 30%; and 24% of young people in France are without employment.  The Spanish economy has been contracting each of the past two quarters and is officially back in recession.  As the financial sector attempts to wade through the morass of over-development, massive consolidation of the banks and the crippling of credit has occurred.

The root cause of much of this disaster lies in the corrupt nexus between local bankers and regional politicians, which happen in many instances to be one and the same.  Lax lending standards, cheap foreign labor, and easy inflows of European capital all lead to a massive over-development.  The days of cheap credit ended with the financial crash of 2008.  Private debt was absorbed by the balance sheets of the state and ultimately the collective nations of the Eurozone.

Whereas the chicanery that lead to this bloody mess is a story that needs to be told, I'm interested today in discussing the impact on real people and the current generation of people who will have to pay for this economic catastrophe for the rest of their lives.  The decline and hopelessness felt across Spain has been chronicled in a number of newspapers and journals.  Here are some of the highlights.

In the Spanish daily La Pais, a 9-March article titled Generation Nimileuristra described the lives of young people who see opportunities denied and their lives stagnating with either low or no paying jobs.  

In 2005 youth unemployment was about 20%. Now [reaching] 50% while doubling the European average (22.4%) . The best educated generation has the worst outlook since the transition and feels a victim of the excesses of others...

In Spain there are 10,423,798 people between 18 and 34... Their average net income (including the unemployed), is 824 euros per month. And those who are working earn on average 1,318 euros a month (data from the Youth Council of Spain)...  Professions that seemed safe... are not. The Polytechnic University of Valencia followed the first steps in the process of engineers and architects who graduated in 2008: one in four did not reach [jobs with salaries over 1000 euros/month]. And what is worse: the [educated with jobs with salaries under 1000 euros/month] had advanced by 8% compared to graduates a year earlier.

In many cases youth are forced to abandon independence and relocate into their family's homes.

It has been established that even small levels of protracted unemployment in developed countries can have serious implications for the unemployed.  Those include reduced lifetime wages, reduced employment opportunities, and higher mental health issues.  With respect to society at large, depressed wages will promote educated youth emigrate to other jurisdictions, resulting in a brain-drain to the nation.  Undereducated and unemployed male youth on the other hand are statistically more likely to participate in criminal activity.

In many OECD countries the unemployment rate is substantially higher than the general population. An Economist article from Sept-11, 2011 discusses the various disadvantages and impacts under-employment and unemployment will have on these people.

Unemployment of all sorts is linked with a level of unhappiness that cannot simply be explained by low income. It is also linked to lower life expectancy, higher chances of a heart attack in later life, and suicide. A study of Pennsylvania workers who lost jobs in the 1970s and 1980s found that the effect of unemployment on life expectancy is greater for young workers than for old. Workers who joined the American labour force during the Great Depression suffered from a persistent lack of confidence and ambition for decades.

The implications of this situation are severe.  Not only will youth not be entering the work force, they will not be participating in the economy and doing normal things, such as buying cars, homes, furniture. So there is a negative cascade felt across the nation on all levels. Secondly, since they will not be paying taxes, who will bear the burden of maintaining the welfare state that Europeans are so proud of?   As fewer people are contributing to these pay-as-you-go programs, older generations will see a reduction in benefits.

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The financial crisis has lead to governments across Spain to drastically cut programs, services, and cash transfers to lower levels.  A New York Times article elaborates:

Just as Spain’s national and regional governments are struggling with the collapse of the construction industry, overspending on huge capital projects and a pileup of unpaid bills, the same problems afflict many of its small towns.

One town's mayor discusses his small community's problems:

“We lived beyond our means,” Mr. García said. “We invested in public works that weren’t sensible. We are in technical bankruptcy.” Even some money from the European Union that was supposed to be used for routine operating expenses and last until 2013 has already been spent, he said.

The banking upheavals have brought similar troubles to small and medium scale businesses, which represent "60 percent of the economy, and 80 percent of the jobs".  The vicious cycle has resulted in the shuttering of more than 500,000 small business according to the NY Times.  

“The cuts in credit have been so abrupt that some businesses not only lost specific projects they were working on,” said Carlos Ruiz Fonseca, the director of economy and innovation at Cepyme, Spain’s association of small and medium-size companies. “Some companies have just gone out of business.” 

How is any of this supposed to engender confidence in the international markets?  The same banks which are cutting credit lines, reducing exposure to risk, and contracting their businesses are simultaneously being downgraded by the various credit agencies.  Billions of Euros are being requested by the financial sector to keep these debt ridden entities from further collapsing and imploding the entire Spanish economy.

The net result of all these events is a society that is in freefall.  If these trends continue, not only will Europe have generated legions of angry, unemployed persons, they will have created the same foundations that gave rise to the extremists of the last century.

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Update: video link about squatters taking over an vacant apartment complex, built during the construction boom, in Seville

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.

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.

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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.

A decade of hell and the fall of America

The above chart (h/t Economist's View, "How long will it take for the economy to recover?") issued by the CBO describes what should be the central discussion amongst Americans.

While the developed world was on summer vacation, the economies of Europe and America have begun to decline in an alarming fashion.  Europe is scrambling to stabilize its weak perpherial economies. The march of the PIIGS has expanded to the point where Spain and Italy are no longer just question marks.  European banks are seeing formidable potential losses arise from sovereign debt issues.  Credit is tightening up and these same European banks are looking to national governments and the EU for assistance. Indecision amongst Europe's prominent leaders and a growing populist revolt across the continent have contributed to growing unease in the markets. The breakup of the entire European economic union and the failure of the Euro currency is now seriously being considered.

In America, zero jobs were added to the economy last month. Growth for the second quarter (Q2-2011) was revised to 1% (annualized).  Financial institutions like Bank of America are in trouble and Warren Buffett has again been brought, as the non-governmental creditor of last resort, to prop up the ailing bank. The Republicans have inflicted serious damage to the American economy, in their traitorous advancement of no-taxes and no-growth governance.   Obama is floundering in his dismal attempt to appease his corporate backers, while carving out a middle path for his own election.

The above chart should make you terrified.  Although the rose-colored glasses of 3.5% annual growth is being portrayed, it is the green line with 2.5% growth that is most alarming.  The difference of 1% means that America effectively will lumber along for the next decade with little to no growth, unemployment will remain obscenely high, structural unemployment and a permanent underclass will arise, the deleveraging process will take longer, and governments will be unable to adequetely deal with further social or economic problems effectively.  This is the best case scenario we are working with at the moment, taking into account the data and Rogoff and Reinhart's post-crisis modelling.

Now consider that the world heads into a protracted recession, with China crashing shortly afterwards -taking those countries like Canada and Australia that have been dependent on commodity exports with it- and you've got a recipe for global armageddon.  The world stops growing and economies across the planet try to dig themselves out of this hole.  Here too the data suggests as in the case of the Asian and Latin American crises, that a ten year window will be required to get back any reasonable trendline.  The implication is an entire generation of workers see reduced income, mounting debt, and insufficient job opportunities.  How are these countries going to pay for the benefits sold to the baby-boomer generation, when the children of the boomers are unable to find long-term jobs and thus fund those liabilities?

We have come to the end of the line.  All the major economies of the world are now posed to fall and in that cataclysmic descent, we shall venture hopelessly through a decade of stagnation, decline, and possible collapse.

Dick Cheney unrepentant in having destroyed America

Richard Cheney, the 46th vice-president of the USA, is about to release his memoirs next week titled, "In My Time: A Personal and Political Memoir. 

According to a CBS News/New York Times poll conducted when Dick Cheney left office in January 2009 his approval ratings (13%) were less than that of George W. Bush's (22%).  At their departure both men received historic disapproval ratings and continue to be considered by the majority of Americans as having failed to improve America.  The Bush presidency is highlighted by some of the following:

• advancing the unconstitutional notion of a unitary presidency
• repeated and consistent withdrawal from international treaties and agreements
• pushing through the civil rights destroying PATRIOT act
• massive and illegal wiretapping and spying on American citizens
• using torture upon seized enemy combatants and prisoners of war
• the failure to prevent the 9-11 attack on New York City and the Pentagon
• failing to adequately neutralize Osama Bin Laden and Al Qaeda's terrorist network
• pursuing the Iraq war under bogus pretenses and then failing to contain the regional civil war
• the abandonment of New Orleans and its citizens after Hurricane Katrina
• allowing the housing bubble to expand and eventually cause the financial collapse of 2008
• promoting corporate-written legislation that bolstered special interest profits
• promoting a laissez-faire regulatory framework that allowed corporate crime to exponentially grow throughout his two terms
• advancing the interests of oil and gas companies and rejecting sustainable and renewable forms of energy production
• denying climate change was occurring
• doubling the national public debt
• cut taxes for the richest Americans, while expanding the deficit
• cut national science and engineering budgets to pay for his wars and tax cuts
• limited scientific investigations on subjects deemed controversial for religious supporters, such as stem cell studies and environmental assessment studies
• preventing any international agreement that would prevent rises in global warming gases, which in the end may possibly be his greatest failure if even conservative predictions about climate change prove true

Cheney undoubtedly represented the very worst elements of the Bush administration.  Although Bush's approval didn't collapse until after Katrina, Cheney's approval amongst most Americans was in the gutter early into his first term.  His approval was constantly in the twenty-percent area and never improved.  He represented to his base an unapologetic statist who wanted to project American hegemony to its fullest level.  Cheney famously stated that "deficits don't matter!"  He was responsible for pursuing an energy policy that promoted America's addiction to foreign fossil fuels.  And as former Secretary of Defense, he was very familiar with the nature of the Pentagon machinery and sought to project America's military power domestically and across foreign shores.

To the rest of America, Cheney represented a Machiavellian operator.  With his over-the-top rhetoric, war making bravado, riddiculous claims that 3rd world nations with 2nd rate militaries were a threat to America, and his continuous scowl, the public turned on this crypto-fascist.

Reviews of Cheney's memoirs indicate a man who controlled both the president and policies of the Bush presidency in it early years. During the infamous 9-11 attack, Cheney states, despite clear lines of command set forth in the constitution, that it was him and neither Bush nor Rumsfeld who was in command of immediate operations.  At that moment in history, Cheney made it clear that the president of the United States had been unofficially deposed and that he had assumed all the controls of commander-in-chief.

The NY Times review of the book further highlights a man who is completely unrepentant of his actions.  The Times describes the book as being

often pugnacious in tone and in which he expresses little regret about many of the most controversial decisions of the Bush administration — casts him as something of an outlier among top advisers who increasingly took what he saw as a misguided course on national security issues.

So it is clear that as Cheney's policy failures mounted, George W. Bush and others in the Bush administration became progressively unwilling to accept Cheney's worldview and provocations.  In the end, the rift was so great that Bush himself was unwilling to even grant full pardon to Cheney's Chief of Staff I. Lewis Libby for his acts of lying to prosecutors in order to protect Mr. Cheney.

What we know is Mr. Cheney is on his last legs and death is hunting him. This book is an attempt by a dying man to justify his evil by throwing sand in our collective faces. I'm sure Ozymandias would have done the same.

Quote of the day: The Price of Deceit

When you build up large stocks of mistrust and ill will, nothing can happen for a very long time. But when something does happen, it’s much quicker and much worse than anybody could have anticipated. The markets might not be punishing the US government at the moment. But the mistrust and ill will is there, believe me. And when it appears, it will appear with a vengeance.

- Felix Salmon, The damage already done by the debt ceiling debate.

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.

Gretchen Morgenson: Untangling The Complex Foreclosure Mess

Gretchen Morgenson, who writes a must-read weekly column in the NY Times business section goes on NPR to discuss the complete mess the banks and mortgage lending agencies have gotten the entire American economy into, through their initial mortgage securitization programs and now with their shady and illegal foreclosure practices.  To underline the severity of this situation, all 50 states have launched criminal investigations into the unsavory foreclosure activities committed by the banks.  Ms. Morgenson, unlike the hacks at the Wall St. Journal's op-ed pages, is an intelligent and informative journalist, who has been at the forefront in explaining the Great recession and the corpulence underlying America's corporate misdeeds.
 
NPR begins with the following introduction:

Since the housing bust two years ago, when millions of homeowners fell behind on their loans, the foreclosure industry has grown into a multibillion-dollar business. To deal with the thousands of defaulted loans needing to be processed, banks relied on thousands of temporary employees who often had little experience and training to handle the foreclosure paperwork.

This resulted in many mistakes being made throughout the foreclosure process. Reports of sloppy documentation — including the questionable notarization of documents, the loss of key paperwork needed to begin foreclosure proceedings and missing paperwork on original mortgages — temporarily halted foreclosure proceedings across much of the country in early October. It also triggered at least five separate federal investigations into the ways mortgage lenders have handled foreclosures.

The entire broadcast can be heard or downloaded here.

The degree of duplicity, fraud, and ineptitude exhibited by the major players in this decade long fiasco, should make everyone who has a stake in the viability of the American economy, to demand that everyone -politicians, corporations, bankers, loan agents, bond rating agencies, economists, and homeowners- all pay a severe penalty for engaging in what is likely the world's largest instance of criminal fraud.  Nothing else is acceptable, because these same devious pick-pockets will only re-emerge emboldened and unleash another wave of catastrophe upon the financial world if left unpunished.

Open Advice to President Obama

Dear Barack,

I know you don't care what I think, with all those high-paid clowns dispensing all that brilliant strategy to you on how to piss-off those loser hippies who funded, supported, and fought for you across America in 2008, but here it is.

You're a bit like Bubba, in that despite all those flowery speeches about hope or being from a place called hope (who can get it straight anymore) you've given over the past few years, we really don't know what you believe.  I mean, the nihilists and brain-dead masses think you're a Marxist Fascist with ties to Kenyan revolutionaries.  I don't know what that means either, other than interpreting it as an odd way to just call you a nigger.  I've never really thought you were the second coming of FDR, but you were a better option than the Queen corporatist Madam Clinton.  People liked what you had to say and what you represented, but back then it mostly was about voting against eight hard and dismal years under the Bush junta.  However, you waffled and instead of steamrolling what remained of the right wing yahoo's and pushing through a progressive and liberal agenda, you coddled and capitulated to their bizarre demands.  Let's recap:

• Did exactly what Bush said he would do in ending the Iraq war; that being leaving 50K troops to babysit the Shia thugocracy in Baghdad.
• Escalated the Afghan war, which everyone has already admitted is lost.
• Caved into special interests in the health care bill, by eliminating the public option and preventing the  importation of drugs from Canada.
• Created a health care bill that would force individuals to purchase lame health care coverage and subsidise the crooked insurance companies.
• Pushed through a special debt committee, filled with right-wing ideologues and hacks demanding that Social Security be privatized under the guise of bi-partisanship.
• Bailed out your friends and big-donor buddies in the banks, but left the rest of the nation submerged with debt and ever-expanding (and now illegal) foreclosures
• Failed to prosecute any of the major players in the Bush junta for war crimes, crimes against humanity, violations of the Constitution, and numerous illegal acts and unethical behavior
• Advanced the post-911 security-surveillance state to new levels
• Advanced the military-industrial complex in the face of mounting debts and limited resources
• Let Israel make a complete mockery of you, Hillary Clinton, Joe Biden, and your entire administration relating to the Palestinian issue
• Allowed the minority blue dog Democrats to dictate the terms of major legislation, so they could retain their congressional seats (which as every poll indicates, they won't)
• Put in charge Ken Salazar as Secretary of the Interior, effectively creating what others have referred to as Bush's 3rd term with respect to governmental regulation and resource management of public assets
• Colluded with BP to lie to the public on the scope and severity of the Gulf of Mexico oil spill.

People who voted for you, in the deluded belief that government could mend it ways, are looking at a moribund economy, a Democratic Party that is incapable of defending themselves against corrupt Republican and Tea Party slander, and a crypto-fascist uprising funded by the same assholes whose jobs and balance sheets you saved from complete Armageddon.  A lot of people said early on that you were playing three-dimensional chess and were way smarter than the rest of the dolts on the Hill.  It's pretty clear that not only don't you have game, but you're really not as bright as those Harvard and Columbia degrees might imply.

So Barack, if you want to do something meaningful, do yourself a favor and grow a couple, because this nonsense you've been pedalling for the past 21-months is getting tired and no one is going to vote for you if you keep selling the same recycled shit that Bush left behind on the White House's going-out of business sale in November 2008.

Fuck-you very much.

The Lifer.

Ralph Nader on the Foreclosure Mess

Ralph Nader, America's pre-eminent consumer advocate, posts an article relating to the current foreclosure mess and the banks wholesale evasion of legal practices arising from the securitization process.

He begins by saying:

This time the big banks and mortgage servicing companies, with their long, one-sided fine print contracts, may have outsmarted themselves. The newspaper headlines and the network television news are blazing news of the erupting fraudulent foreclosure process. This long-overdue coverage is generating public visibility and suddenly hundreds of thousands of foreclosures may be questioned due to what one commentator delicately called “flawed paperwork.”

He then outlines the mortgage-securitization chain through which, "The matrix of interconnected fine print contracts became too routinely robotized."  Meaning, that the banks disregarded specific requirements, such as notarization, to save themselves money and accelerate the repeated sale of these mortgages to investors across the globe.  Nader quotes the Washington Post on this matter:

“mortgages were created, and sold, sliced and diced, packaged and repackaged so quickly that financial firms had neither the time nor the patience to file paperwork in local courthouses as the loans were traded. By using MERS, lenders were able to reassign loans quickly and cheaply but often the chain of ownership was not accompanied by an official paper trail. …These problems contributed to the use of flawed and fraudulent paperwork, including backdated assignments and forged documents.”

The only reason any of this is coming to light is because consumers were willing to challenge the bankers in court and force them to confirm that they were in fact eligible to serve foreclosure upon those persons home.  It is only when people stand up for themselves and challenge institutional corruption and the status quo, will real changes be made to the system.  Voting for these corporate stooges in congress won't help.  Only by hitting the greedheads in their pocket and forcing them to defend themselves in court will the marauding pirates of casino-capitalism be held at bay.

Dan Gross on Tax Cuts

Daniel Gross over at Slate, has a few key words for those on the kool-aid about retaining the Bush junta's tax cuts.  He makes a number of points on why the entire "discussion" is but an election gimmick executed by Republicans, who have no interest in either fiscal solvency or reasonable management of the federal government.

Barry Ritholtz points out on his blog, The Big Picture, how ridiculous the whole debate has become and highlight's Gross' most salient point:

The bold and confident assertions made about the links between tax rates and economic growth, market performance, and prosperity are almost certainly wrong. Turn on CNBC or look at the Wall Street Journal op-ed page these days, and you'll learn that we must keep tax rates on capital gains, dividends, and income precisely where they are because shifting them to different levels will retard economic growth. Keep this in mind: The people who designed the current, unsustainable tax system promised us that lower marginal rates, and lower taxes on capital and dividends, would boost the economy, promote investment, create jobs, spur market performance, and raise everybody's income. They were wrong. (It's no coincidence that these same people also warned us that raising taxes in 1993 would kill market returns and the economy. They were wrong then, too. They're pretty much always wrong.) As I've pointed out, the years under the current tax regime have been a lost decade. Pick your metric—median income, employment, stock market returns, economic growth—the low-tax '00s sucked. Yet proponents of keeping the tax cuts persist in making the argument: To avoid a repeat of the past decade, we must have the exact same tax policies as we did for the past decade.

In other words, the economic svengali's of the Bush junta and the dimwits of the Republican Party didn't know what they were doing when Clinton was in office, they didn't know what they were talking about when their man Dubya was hectoring us on the benefits of supply-side economics, and they certainly don't have any meaningful insights into the economy now that their very policies and lack of regulation have thrown the entire financial world off kilter.

Quote of the Day: Tom Ricks on 9-11

Tom Ricks is an author and a Pulitzer award winning journalist who has covered the Pentagon and military affairs for the WSJ and the Washington Post.  In his Foreign Policy blog he succinctly summarizes the whole post-9/11 and Iraq debacle in one paragraph:

I've long thought that this country was knocked off balance by 9/11, and that instead of steadying us, as leaders should, President Bush and Vice President Cheney led the panic, and so intensified and lengthened the period of disequilibrium. The Iraq war was one result -- and also a cause -- of the length of this period, because the hundreds of billions of unnecessary spending led to a huge borrowing splurge by the federal government. Essentially China paid for the war, and our children and grandchildren are on the hook to pay it back.

Maybe the sheeple will remember that it was was their own intellectual laziness and dismal understanding of world affairs and economics that led to the election of a president who previously had never left the country, and permitted that same president to pursue two Middle eastern wars while cutting taxes; the latter a first in the history of the republic.  This morasses is as much the fault of the belligerents and corporate toadies in the White House and US congress, as it is the idiotic and feeble minded dolts who consistently failed to ask the right questions and hold those in power in check.  These red-baiting dunces, who decades ago were shrieking of the terror of global communism, have handed the butchers of Tiananmen Square and the communist hierarchy in Beijing the financial and political leverage that forty years of cold-war posturing could not accomplish.

Unfunded Liabilities: A Cost Profile of the Iraq War

Joseph E. Stiglitz (Columbia University) and Linda J. Bilmes (Harvard University) wrote in 2008, "The Three Trillion Dollar War."  It was an attempt to examine and describe the full costs of the Iraq war to the general public and contextualize the implications of the American public's decision to allow the Bush junta unfettered war making authority.  Although the original figures were met with usual hostility from cultural managers and propagandists on the right,  additional studies completed by the Joint Economic Committee of Congress and the non-partisan Congressional Budget Office, concluded that the war would cost American taxpayers at least $3.5 trillion or between $1.4 and $2.2 trillion respectively.

Today they update the assumptions and cost profile of the cost of the Iraq war in a Washington Post opinion piece labelled, "The true cost of the Iraq war: $3 trillion and beyond." They briefly expand on four areas that have developed over the past two years: Afghanistan, the Oil market, the Federal debt, and the financial crisis. I've highlighted the most illuminating sections of the article below.

Afghanistan

The Iraq invasion diverted our attention from the Afghan war, now entering its 10th year... It is hard to believe that we would be embroiled in a bloody conflict in Afghanistan today if we had devoted the resources there that we instead deployed in Iraq. A troop surge in 2003 -- before the warlords and the Taliban reestablished control -- would have been much more effective than a surge in 2010.

Oil

We now believe that a more realistic (if still conservative) estimate of the war's impact on prices works out to at least $10 per barrel. That would add at least $250 billion in direct costs to our original assessment of the war's price tag. But the cost of this increase doesn't stop there: Higher oil prices had a devastating effect on the economy.

Federal Debt

There is no question that the Iraq war added substantially to the federal debt. This was the first time in American history that the government cut taxes as it went to war. The result: a war completely funded by borrowing. U.S. debt soared from $6.4 trillion in March 2003 to $10 trillion in 2008 (before the financial crisis); at least a quarter of that increase is directly attributable to the war. And that doesn't include future health care and disability payments for veterans, which will add another half-trillion dollars to the debt.

Financial Crisis

Saying what might have been is always difficult, especially with something as complex as the global financial crisis, which had many contributing factors. Perhaps the crisis would have happened in any case. But almost surely, with more spending at home, and without the need for such low interest rates and such soft regulation to keep the economy going in its absence, the bubble would have been smaller, and the consequences of its breaking therefore less severe. To put it more bluntly: The war contributed indirectly to disastrous monetary policy and regulations.

All Means to Attract and Distract...

  

As Thomas Frank said in his book What's the matter with Kansas?

These voters are far more concerned with the frustrations and indignities of everyday life than with scholarly rigor or objective material interests, they suffer from old man’s disorder, their deafness to the insincerity of their leaders is a cultural marvel, it is a place where hatred trumps bread, and I have worse to say.

Yes, we know all that, but what will Tiger Woods think!  And more importantly, since Elin was married to the world's greatest sex-freak, will she ever be satisfied with anyone else between the sheets!  Again, what do the sheeple think?

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

Elizabeth Warren: The next Foreclosure Crisis

PBS has an interview with Elizabeth Warren, Chairwoman of the TARP Congressional Oversight Committee, in which she discusses:

1. The value of the newly formed Consumer Financial Protection Bureau (CFPB) in providing Americans with understandable credit card, mortgage, and loan contracts;
2. The upcoming wave of commercial real estate foreclosures. 

http://video.pbs.org/video/1547461509

Tim Geithner (Obama's Treasury tool), has obviously made a number of duplicitous comments about Warren by publically praising her credentals, while putting up internal barrcades to her possible role in the upcoming CFPB agency. As critics of have pointed out, Geithner perceives in Warren a "threat to the very scheme he has utilized to date to hide bank losses, thus keeping the banks solvent and out of bankruptcy court and their existing management teams employed and well-paid." 

On the second issue, Secretary Geithner has publically stated, when questioned by Warren, that he believes there is sufficient management of the overall risks surrounding the commercial real-estate market. As can be seen in the video, Warren civilly implies that Geithner and perhaps the entire Obama financial team are either deluded or incompetent when it comes to effectively discussing the urgency of the problem, the societal ramifications, and realistic solutions, so that the American economy can be made both secure and functioning.  As she says, "The longer you pretend, the longer it takes to get the market where supply and demand match each other."

Paul Krugman on our Current Depression

a significant proportion of the economics profession has spent the last three decades systematically destroying the hard-won knowledge of macroeconomics. It’s truly a new Dark Age, in which famous professors are reinventing errors refuted 70 years ago, and calling them insights.

- Paul Krugman

In the fall of 2007, I read Prof. Paul Krugman's NY Times column with great interest, because in it lay the seeds towards understanding our current calamity.  In it he inveighed against the recklessness of the Bush junta's tax policy and their pro-corporate policies that had boosted big business' bottom-line, but failed to produce any meaningful or sustained growth for ordinary citizens.  The dismal jobs report that emerged earlier that month, in which Krugman referenced, was a precursor to the worst economic turn-down since the Great Depression of 1929.

Likewise in today's NY Times op-ed he re-iterates -what should be obvious to all who never bought the original green-sprouts argument offered by the high-priests of commerce- is that "we’re looking at a lost decade."  He proclaims that given the misaligned interests of governments across the globe, that we are witnessing the solidification of the Third Great Depression of the modern era.

To quote:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs will nonetheless be immense.

With the cumulative failures of modern finance and crony capitalism witness to all and the well anticipated onset of resource scarcity, climate change, and ecological collapse posed to overwhelm all nations, I'm quite confident that Malthusian arguments will dominate this last century of humanity.

Welcome to the beginning of the end...

US Banks Forced to Limit Debt Card Fees

According to the NY Times, legislation was passed by the US Senate several days ago to "impose price controls on debit transactions over the furious objections of the beleaguered banking industry."

The Durbin amendment gives the Federal Reserve new authority to regulate and limit the fees that businesses pay to card companies. It specifically addresses payments processed through the Visa and MasterCard networks. American Express and Discover cards are not covered by the bill...
 
The legislation directs the Fed to cap those fees at a level that is “reasonable and proportional” to the cost of processing transactions. The Nilson Report estimated that last year, fees averaged 1.63 percent of the transaction amount.

A second set of provisions applies to both credit and debit card transactions. Visa and MasterCard impose an all-or-nothing requirement on businesses, requiring them to accept cards even on small transactions, and prohibiting businesses from offering discounts based on the method of payment. The amendment strikes those rules.

Despite the narrative of the Times article, the change in rates is not necessarily a victory for consumers, but  rather a win for businesses (including some very large ones like Amazon.com, Home Depot, and Walmart) over the much reviled banks.   This was a contest between lobbyists for the banks versus lobbyists for retail businesses utilizing debt cards. 

Earlier last year, consumers did achieve a decisive victory through the Credit Card Accountability Responsibility and Disclosure Act of 2009, which includes the following:

• Cardholders Deserve Protections against Arbitrary Interest Rate Increases
• Cardholders Who Pay on Time Should Not Be Penalized.
• Cardholders Should Be Protected from Due Date Gimmicks.
• Cardholders Should Be Protected from Misleading Terms.
• Cardholders Deserve the Right to Set Limits on Their Credit.
• Card Companies Should Fairly Credit and Allocate Payments.
• Card Companies Should Not Impose Excessive Fees on Cardholders.
• Vulnerable Consumers Should Be Protected From Fee-Heavy Subprime Credit Cards.
• Congress Should Provide Better Oversight of the Credit Card Industry.

Overall, these two pieces of legislation firmly limit some of the excessive and predatory actions conducted by the banks upon both consumers and retail operations alike.