Obama and his team voiced outrage after the New York comptroller reported USD 18.4 billion in 2008 bonus payouts to the Wall Street bankers. The simple economic theory behind avoiding government intervention and spending is that such funds will be used inefficiently due to a lack of knowledge of the administrators and/or vested interests of people with the knowledge and influence to direct such funds toward themselves. In the current bailout the latter is being made all the more easy by the refusal of the Federal Reserves to disclose the recipients of the $2 trillion of emergency loans, despite Bloomberg news filing a suit under the Freedom of Information act in a desperate attempt to get this information. However, not even the Freedom of Information act can get the details out of Bernanke and Paulson who only managed to get congress to agree to this huge amount of money with guarantees of transparency. So it's no surprise the money is being pocketed by the former colleagues of Hank Paulson but what is a surprising is that Obama is surprised by this. He's obviously not a naive man. No matter though, it would be good to see him doing something beyond simply handing out a scolding to those concerned. Even if their criminal facilitators, messieurs Bernanke and Paulson are removed, the recipients of the money will keep on taking and lying until the cost of doing so outweighs the benefit and it will take a lot more than scolding.
Connected to all of this, and even more ridiculous, is the justification these banks give for having to pay these bonuses now they have been discovered. The claim is that it's important that such money is paid to prevent these talented bankers from walking out the door with all their expertise. One has to wonder at how people who managed to destroy a decade of savings belonging to their customers, the banks they work for and also deliver the world into the biggest financial disaster since the 1930s are considered to have a talent that is worth paying for. It would be better for any financial institution left standing to see that kind of talent walking out the door. In a sector where job levels are collapsing it's hard to believe that they'd be off anywhere else anyway, bonus or no bonus.
Friday, January 30, 2009
Tuesday, January 27, 2009
Lost Governments
The aim of Economics is to give the best outcome to society for a given amount of resources so governments looks to economic theories to achieve this result. This simple aim becomes quite complex when the different schools of economics compete to influence governmental action. Empirical and mathematical methods are used by some schools to support their claims which makes them more influential in a world with much belief in science and mathematics. Beyond the limitations in the scope of the theory (the minds that conceive it), data analysis and unrealistic simplifying assumptions there is also the social fact that what is understood and implemented by governments is often not even what the theory, rightly or wrongly, was suggesting. Governments are made up of politicians and some economists, from whatever school is being looked to for solutions at the current time, or have the political connections for gaining power.
The story over the past twenty years is that Marxian government planning and intervention of the economy was proven wrong once and for all with the collapse of the Soviet Union. Free market capitalism was declared the clear victor and over the next 15 years assumed it was what was being implemented and was giving the best outcome to society. The fact that the Federal Reserve has been intervening in the market since the late 90s to prop up the vested interests of large investment managers cannot be understood by commentators, who influence politician and the public. These commentators believe, probably because the Federal Reserve deals with money and business, that the Federal Reserve is a free market institution.
Suddenly, now that a big collapse has occurred under the supposed free market system, a new differnt theory must be found. There are only a couple of approaches for resource allocation in economics so some out of fashion school comes back into fashion. As complete free markets were the old story then the new story has to involve more control of the resources by government, which of course suits the politicians who are only too willing to spend money. Luckily there is the Keynesian school of economics which allows for government intervention without using the name of Marx.
In reality though, the collapse was caused by intervention of the Federal Reserve in the market, by overexpanding the supply of money and the bailing out of failed firms (failed due to incorrect business models and shifts in consumer demand [Asia was producing the cars, electronic goods, etc that Western consumers wanted]). However as the wrong culprit has been identified, intervention is being used to save an economy destroyed by intervention and we have ended up with confused politicians. So now we have confused governments who are believing in a hodge-podge of ideas - most recently the US government claiming it was "abandoning free market principles to save the free market"!. The extra years of economic theory since the great depression has only led to confusion, making leaders bereft of logical thinking to address the problems of the real world.
The story over the past twenty years is that Marxian government planning and intervention of the economy was proven wrong once and for all with the collapse of the Soviet Union. Free market capitalism was declared the clear victor and over the next 15 years assumed it was what was being implemented and was giving the best outcome to society. The fact that the Federal Reserve has been intervening in the market since the late 90s to prop up the vested interests of large investment managers cannot be understood by commentators, who influence politician and the public. These commentators believe, probably because the Federal Reserve deals with money and business, that the Federal Reserve is a free market institution.
Suddenly, now that a big collapse has occurred under the supposed free market system, a new differnt theory must be found. There are only a couple of approaches for resource allocation in economics so some out of fashion school comes back into fashion. As complete free markets were the old story then the new story has to involve more control of the resources by government, which of course suits the politicians who are only too willing to spend money. Luckily there is the Keynesian school of economics which allows for government intervention without using the name of Marx.
In reality though, the collapse was caused by intervention of the Federal Reserve in the market, by overexpanding the supply of money and the bailing out of failed firms (failed due to incorrect business models and shifts in consumer demand [Asia was producing the cars, electronic goods, etc that Western consumers wanted]). However as the wrong culprit has been identified, intervention is being used to save an economy destroyed by intervention and we have ended up with confused politicians. So now we have confused governments who are believing in a hodge-podge of ideas - most recently the US government claiming it was "abandoning free market principles to save the free market"!. The extra years of economic theory since the great depression has only led to confusion, making leaders bereft of logical thinking to address the problems of the real world.
Monday, January 19, 2009
Chancers In Charge
What is incredible in the current economic crisis is how many of the people who made decisions that led countries that are feeling the worst effects of the downturn, such as America, Britain and Ireland, are being looked to for solutions. The Alan Greenspan spawned approach of no regulation/intervention at all until something too big to fail must be saved is the worst possible economic model of all. If bailouts are in the model then so must regulation to prevent ridiculous risk taking.
In early 1998 when Brooksley E. Born, the head of Commodity Futures Trading Commission (the federal agency that regulates options and futures trading), began putting forward a proposal for derivatives regulation she was firmly knocked back by Alan Greenspan, Robert Rubin and his protege Laurence Summers. Unbelievably they claimed that her attempts at regulation would actually lead to a financial crisis:
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”
As the derivative market is being blamed for the huge build up in fictious wealth and risk that set the foundation for the crash one must wonder why Summers and Rubin are advisors to Obama. We should thank our lucky stars that Alan Greenspan has retired although unfortunately we are left with his equally clueless pupil Bernanke.
One of the biggest chancers of them all though has to be Gordon Brown who has now found a crisis to cover up his floundering. He is leveraging on his love of crisis and dourness to distract the British people from the reality that he was the one who actually got them into the mess in the first place. As Britain's economy and banking sector began to crash in 2008 we have to wonder at his economic stewardship as chancellor of the exchequer in the preceding decade (2 May 1997 – 27 June 2007). This is all the more laughable when he prided himself from being the chancellor of the party that would take Britain out of the boom bust cycle as he boasted at the Labour party conference in 2000.
Breaking from the chronic and flawed Conservative short-termism and implementing Labour values; planning for the long-term; economic responsibility; building from strong foundations. Determined to protect hard working families from a return to boom and bust.
As invented paper assets are being blamed for this whole mess his understanding of banking has to be questioned with his sell off of gold in 1999. He cost the Britain at least £2 billion then when he sold off more than half of the country's gold reserves at stagnated price levels.
We have to assume that these people did not see any of this coming and just lacked any understanding of economics at a level required for making national and international decisions. As long as they remain in their positions the prospects of a quick resolution to the financial crisis are zero.
In early 1998 when Brooksley E. Born, the head of Commodity Futures Trading Commission (the federal agency that regulates options and futures trading), began putting forward a proposal for derivatives regulation she was firmly knocked back by Alan Greenspan, Robert Rubin and his protege Laurence Summers. Unbelievably they claimed that her attempts at regulation would actually lead to a financial crisis:
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”
As the derivative market is being blamed for the huge build up in fictious wealth and risk that set the foundation for the crash one must wonder why Summers and Rubin are advisors to Obama. We should thank our lucky stars that Alan Greenspan has retired although unfortunately we are left with his equally clueless pupil Bernanke.
One of the biggest chancers of them all though has to be Gordon Brown who has now found a crisis to cover up his floundering. He is leveraging on his love of crisis and dourness to distract the British people from the reality that he was the one who actually got them into the mess in the first place. As Britain's economy and banking sector began to crash in 2008 we have to wonder at his economic stewardship as chancellor of the exchequer in the preceding decade (2 May 1997 – 27 June 2007). This is all the more laughable when he prided himself from being the chancellor of the party that would take Britain out of the boom bust cycle as he boasted at the Labour party conference in 2000.
Breaking from the chronic and flawed Conservative short-termism and implementing Labour values; planning for the long-term; economic responsibility; building from strong foundations. Determined to protect hard working families from a return to boom and bust.
As invented paper assets are being blamed for this whole mess his understanding of banking has to be questioned with his sell off of gold in 1999. He cost the Britain at least £2 billion then when he sold off more than half of the country's gold reserves at stagnated price levels.
We have to assume that these people did not see any of this coming and just lacked any understanding of economics at a level required for making national and international decisions. As long as they remain in their positions the prospects of a quick resolution to the financial crisis are zero.
Friday, January 16, 2009
Nothing New Going On
The character in one of B Traven's novels uses his understanding of the business cycle to achieve a goal and in doing so Traven describes this age old cycle:
"The speed-up of production and the slow-down in delivery played so quietly, gradually and cleverly that not even the sharpest coal competitor dreamed that an historic manoeuvre was going on under their very noses, for this was during months of flush, bored-with-business boom-time, which usually precedes the dawn of a real depression, though rarely apprehended and correctly analysed by busy bankers and aggressive corporations; and if a few clever financial commentators do predict it, they are damned as defeatists, or, worse, as unpatriotic prophets.
And thus,on a quiet business day when all was rosy as a May-time sunset a crash was heard. Just a little one.
But the crash was exactly as hard and as heavy as Collins had predicted it would be, during his many months of cunning preparation.
At first, the blow did not jar the world of big business, for it didn't hurt big business. It was a local blow; it was like tossing a nut of coal onto a slumbering giant, and watching him wake up, yawning contentedly from his sweet dreams of extra dividends.
No hurry. Nobody hurt. The giant isn't angry, for he doesn't even know who or what ended his sleep. But any man with a good nose and a sharp eye could smell a storm coming up. And some of them said so. Perhaps five sharp financial commentators smelt it, and perhaps one of each thousand among millions of readers believed them, and picked up their profits and got out while the going was good, leaving the multitudes of investors to continue adding up their "margin assets" and paper-profits."
(The White Rose, B Traven, 1931)
"The speed-up of production and the slow-down in delivery played so quietly, gradually and cleverly that not even the sharpest coal competitor dreamed that an historic manoeuvre was going on under their very noses, for this was during months of flush, bored-with-business boom-time, which usually precedes the dawn of a real depression, though rarely apprehended and correctly analysed by busy bankers and aggressive corporations; and if a few clever financial commentators do predict it, they are damned as defeatists, or, worse, as unpatriotic prophets.
And thus,on a quiet business day when all was rosy as a May-time sunset a crash was heard. Just a little one.
But the crash was exactly as hard and as heavy as Collins had predicted it would be, during his many months of cunning preparation.
At first, the blow did not jar the world of big business, for it didn't hurt big business. It was a local blow; it was like tossing a nut of coal onto a slumbering giant, and watching him wake up, yawning contentedly from his sweet dreams of extra dividends.
No hurry. Nobody hurt. The giant isn't angry, for he doesn't even know who or what ended his sleep. But any man with a good nose and a sharp eye could smell a storm coming up. And some of them said so. Perhaps five sharp financial commentators smelt it, and perhaps one of each thousand among millions of readers believed them, and picked up their profits and got out while the going was good, leaving the multitudes of investors to continue adding up their "margin assets" and paper-profits."
(The White Rose, B Traven, 1931)
Friday, January 9, 2009
Never as bad as the 1930s - Why Not?
There has been a timeline of confident comments used to argue down anyone who dared to question the senseless financial actions of the federal reserve and Wall St and point out the large black clouds appearing on the horizon. One by one they have slowly been disproved as the global economy moves in a giant wave unfurling itself as it wills despite the worlds central banks and governments.
'Monetary policy is stellar, the US economy has never been wealthier or in better shape'
'The sub prime shake won't extend to the larger economy'
'There is simply a slow down in economic growth but we should skirt recession'
'With the actions the fed has taken we will avoid recession'
'With the action the fed and treasury has taken we will avoid a deep recession'
We have now come to 'no matter what' qualifier.
'No matter what happens it will never be as bad as the great depression'
The obvious question is why not?
The assumption is that the new technology and better economic understanding of the latter part of the 20th century will protect the global economy from falling to great depression levels. When we look at these claims though there must be concerns.
Firstly, the technological advances that generated the 1990s technology bubble were no more of an advance beyond the technological advances of the early 1900s (flight, electricity, radio, cars etc) that generated the 1920s boom.
Secondly, the clear surprise of the US economic authorities at the lack of traction of their policies is beginning to show that all those advances in Macro theory may not have been much of an advancement at all.
Thirdly, those advances had Alan Greenspan expand the monetary supply after the 2001 technology bubble collapse to unprecedented levels which led to distortions and destruction of wealth at new levels.
Fourthly, as a result of these financial policies the US is now entering this dark period as a major debtor nation when it entered the great depression as a major creditor nation.
Already there are signs that a 1920s level downturn is on the cards. Unemployment is the key and granted unemployment reached 25% of the labour force and we're a long way from that. But are we really only at 7% unemployment? As Reuters points out if unemployment were still tallied the way it was in the 1930s, today's jobless rate would be closer to 16.5 percent. They have learned a few tricks about economics along the way!
'Monetary policy is stellar, the US economy has never been wealthier or in better shape'
'The sub prime shake won't extend to the larger economy'
'There is simply a slow down in economic growth but we should skirt recession'
'With the actions the fed has taken we will avoid recession'
'With the action the fed and treasury has taken we will avoid a deep recession'
We have now come to 'no matter what' qualifier.
'No matter what happens it will never be as bad as the great depression'
The obvious question is why not?
The assumption is that the new technology and better economic understanding of the latter part of the 20th century will protect the global economy from falling to great depression levels. When we look at these claims though there must be concerns.
Firstly, the technological advances that generated the 1990s technology bubble were no more of an advance beyond the technological advances of the early 1900s (flight, electricity, radio, cars etc) that generated the 1920s boom.
Secondly, the clear surprise of the US economic authorities at the lack of traction of their policies is beginning to show that all those advances in Macro theory may not have been much of an advancement at all.
Thirdly, those advances had Alan Greenspan expand the monetary supply after the 2001 technology bubble collapse to unprecedented levels which led to distortions and destruction of wealth at new levels.
Fourthly, as a result of these financial policies the US is now entering this dark period as a major debtor nation when it entered the great depression as a major creditor nation.
Already there are signs that a 1920s level downturn is on the cards. Unemployment is the key and granted unemployment reached 25% of the labour force and we're a long way from that. But are we really only at 7% unemployment? As Reuters points out if unemployment were still tallied the way it was in the 1930s, today's jobless rate would be closer to 16.5 percent. They have learned a few tricks about economics along the way!
Subscribe to:
Posts (Atom)