Saturday, September 4, 2010

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The Anti-Fed Revolution

by Anthony Gregory,

End the Fed by Ron Paul
(New York: Grand Central Publishing, 2009), 212 pages.

Through his 2008 presidential campaign, Ron Paul managed to make monetary policy a national political issue. For nearly a century it had been a relatively obscure topic, and throughout my lifetime respectable opinion considered it a fringe inclination even to be interested in it. Certainly, those who questioned the necessity of even having a central bank had long been relegated to the kooky periphery of political discourse.

This all changed with Paul’s campaign, which put restoring sound money at the top of the 21st-century populist libertarian agenda, second only, perhaps, to ending the U.S. military empire. The financial crisis has made Americans from all walks of life dare to question the central banker behind the curtain. Recent polls show that the Federal Reserve is now among the least-trusted federal agencies, with a vast majority of the public supporting a thorough and independent audit. Paul’s efforts to bring about such an audit garnered more than two-thirds support in the House of Representatives, and for the first time, the Fed’s partisans are on the defensive, publishing articles vindicating its expansionary credit during the Bush years, which an increasing segment of the population, including some in the mainstream press, now blame for causing the housing bubble and consequent financial collapse.

Capitalizing upon this rising public distrust of the once-sacred central bank, Ron Paul has written End the Fed, a direct attack on the moral, economic, and legal foundations of the Federal Reserve. Although much of what can be found in the book can be learned elsewhere, no other popular treatment — concise, sharp, accessible, principled, and insightful — fills the niche that End the Fed serves to fill.

Of Paul’s many accomplishments in popularizing the ideals of liberty, his successful advancement of the Austrian school of economics deserves special recognition. End the Fed provides an accessible introduction to the economic thinking of Ludwig von Mises, F.A. Hayek, Murray Rothbard, and others of the Austrian tradition, whose focus on individual human action is arguably the most radical of all the economic disciplines, and the most compatible with principled libertarian political philosophy. They are not one and the same, for economics is a value-free, scientific study of cause and effect, and the use of resources by people pursuing their interests in a world of material scarcity, whereas libertarianism is a political philosophy centered on moral precepts of property rights, with a definitive normative focus.

But the two reinforce each other by employing methodological individualism — the study of human affairs in terms of individual choices and decisions — and together they show that we are not required to choose between a free society and a prosperous one. For helping to bring such a radical and yet intuitively comprehendible outlook to the general public, one that is not burdened by the mathematical esoterica and affinity to central planning that permeate mainstream economics, we owe Ron Paul a debt of gratitude.

Fiat money

Of course, what makes Austrian economics so particularly compelling and important these days is its explanation of the boom-and-bust business cycle. Ludwig von Mises and F.A. Hayek, the latter of whom won the Nobel Prize in 1974 for his work on this topic, explained unsustainable and systemic economic booms in terms of artificially easy credit, which leads to malinvestment in economic projects, especially long-term ones that cannot be justified by current savings. In a free market, interest rates are determined by the willingness of people to forgo spending and instead save their money. When the rates are lowered by the Fed, it discourages saving while simultaneously encouraging borrowing and investing. This leads to a cascade of high wages, massive construction, rising prices, and everything else we associate with booms such as those seen in the 1920s, the Nasdaq bubble, and the skyrocketing housing prices of the Bush era. But eventually, as economic projects must yield a return, the savings are shown not to have been there to justify the investment. Whereas a free market in interest rates harmonizes production and consumption over time, central bank distortions lead to the boom and bust.

The Fed was sold to the public partly on the basis that it would end the business cycle and financial panics forever. But “the data show otherwise,” writes Paul.
Recessions of the twentieth century as documented by the National Bureau of Economic Research include: 1918–1919, 1920–1921, 1923–1924, 1926–1927, 1929–1933, 1937–1938, 1945, 1948–1949, 1953–1954, 1957–1958, 1960–1961, 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007, which is the current panic of which there is no end in sight.
As for the current panic, Paul explains that it follows the Austrian theory of the business cycle perfectly:

The massive inflation that was directed into housing was designed to make people feel better, and consumers once again were enticed to continue their spending spree by borrowing against their home equities, driven up at least nominally by inflationary expectations. Monetary policy was always hostile to savings. Savers were cheated with lower rates of interest....

But prosperity can never be achieved by cheap credit. If that were so, no one would have to work for a living. Inflated prices only deceive one into believing that real wealth has been created. But easy come, easy go. It is fun when the bubbles are forming and many can live beyond their means; it’s a different story when they’re forced to live beneath their means in order to pay for their extravagance....

Artificially low rates of interest orchestrated by the Fed induced investors, savers, borrowers, and consumers to misjudge what was going on. Multiple mistakes were made. The apparent prosperity based on the illusion of such wealth and savings led to misdirected and excessive use of capital.

This conversational and accessible prose is found on every page, explaining crucial economic principles in a way that neither dilutes the fundamentals nor comes off as patronizing or saturated with jargon.

In addition to discussing the credit expansion behind the boom and bust, Paul also addresses the lowered lending standards thanks to the Community Reinvestment Act, Fannie Mae and Freddie Mac, and the general bipartisan agenda of getting Americans into homes that they cannot really afford. He explains the moral hazard that arises when a government promise to bail out financial institutions is always hanging in the background. He rebuts the notion that more regulation could have prevented the crisis.

The ethics of sound money

Invoking the great moral traditions that guide most of us who seek a free society — the great religions of the world, as well as the heritage of American constitutionalism and the secular individualism of Ayn Rand — Paul makes a philosophical case against inflationism, turning a political issue into an ethical one, as is so rarely done these days, especially by politicians.

No great religion advocates governmental fraud in money. All speak of fulfilling one’s promises and obligations and respecting other people’s persons and property.

Putting the moral issue front and center, Ron Paul does not shy away from the implications of the ethics of sound money:
The entire operation of the Fed is based on an immoral principle.... Members of Congress, when they knowingly endorse this system of fraud because of the benefits they receive, commit an immoral act.
And indeed this plays into the power relations and class warfare that inflationism produces. A connected group of politicians, banking elites, military-industrial complex beneficiaries, government contractors, and bureaucrats profit from the inflation that provides them with easy money, but at what cost? The rest of us foot the bill. Those on fixed incomes, those retired living off savings, those who do not work in politically connected careers see the value of their dollars decline. The new money eventually reaches the rest of the public, but not until after it gets to those with high-level political connections. They spend the new money before the prices rise to accommodate the larger money supply. By the time it trickles down, it has lost much of its value. This is an immoral hidden tax on the lower and middle classes, as Paul has stressed throughout his campaign and career.

There are a few chapters in End the Fed filled with information that won’t be found elsewhere. Paul reflects on his personal experiences, giving an account of how his childhood taught him the value of hard work, savings, and the virtue of an honestly earned dollar. He explains how he came to free-market principles and libertarianism through the intellectual influence of the Austrians and others. He tells of how Nixon’s betrayal of sound money and free-market principles inspired him, begrudgingly, to enter politics, not to gain power but to spread a message that is now much more popular than when he started his career. His reflections on reproduced passages of his exchanges with Fed chairmen Alan Greenspan and Ben Bernanke give the reader a glimpse of the mentality of those chief officials. They also reveal the ardent persistence of the author on an issue he recognized was crucial long before so much of America woke up to the fundamental instability of the U.S. financial system last year. For the Ron Paul buff, the autobiographical info is great reading and an important entry into the historical record of our movement of ideas.

The libertarian case, the economic case, the constitutional case, and the philosophical case are all here, as well as some ideas on how to return to a more sensible and morally defensible system of money, credit, and banking. The short list of recommended reading at the end is helpful: it is divided into levels of sophistication to aid all readers and will help to educate a new, larger generation of anti-Fed revolutionaries. Give this book to your skeptical friends and family and keep a copy in your personal libertarian library. In the battle against the rapacious leviathan, defeating the state’s counterfeit machine must be a high priority. This is a great addition to our intellectual ammo, and it couldn’t have come at a better time.

Spy satellite used in the U.S. to Spy on US Citizens


Government Policy Caused America's Unemployment Crisis

Submitted by George Washington on 09/03/2010 15:41 -0500
→ Washington’s Blog

The unemployment rate has risen again for the the first time in 4 months. I predicted a growing, long-term unemployment problem last year.

Indeed, even after the government plays with the numbers to make them look better (using inaccurate birth-death models and other tricks-of-the-trade), this is how the current jobs downturn compares with other post-WWII recessions:

In fact, as demonstrated below, the government's actions have directly contributed to the rising tide of unemployment.

The Government Has Encouraged the Offshoring of American Jobs for More Than 50 Years

President Eisenhower re-wrote the tax laws so that they would favor investment abroad. President Kennedy railed against tax provisions that "consistently favor United States private investment abroad compared with investment in our own economy", but nothing has changed under either Democratic or Republican administrations.

For the last 50-plus years, the tax benefits to American companies making things abroad has encouraged jobs to move out of the U.S.

The Government Has Encouraged Mergers

The government has actively encouraged mergers, which destroy jobs.

For example, the Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry.

This is nothing new.

Citigroup's former chief executive says that when Citigroup was formed in 1998 out of the merger of banking and insurance giants, Alan Greenspan told him, “I have nothing against size. It doesn’t bother me at all”.

And the government has actively encouraged the big banks to grow into mega-banks.

The Government Has Let Unemployment Rise in an Attempt to Fight Inflation

As I noted last year:
The Federal Reserve is mandated by law to maximize employment. The relevant statute states:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals ofmaximum employment, stable prices, and moderate long-term interest rates.

The Fed could have stemmed the unemployment crisis by demanding that banks lend more as a condition to the various government assistance programs, but Mr. Bernanke failed to do so.

Ryan Grim argues that the Fed might have broken the law by letting unemployment rise in order to keep inflation low:
The Fed is mandated by law to maximize employment, but focuses on inflation -- and "expected inflation" -- at the expense of job creation. At its  most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.

Board members expressed concern "that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation." That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting...

Suffering high unemployment in order to keep inflation low cuts against the Fed's legal mandate. Or, to put it more bluntly, it may be illegal.
In fact, the unemployment situation is getting worse, and many leading economists say that - under Mr. Bernanke's leadership - America is suffering a permanentdestruction of jobs.

For example, JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:
[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.
The chief economists for Wells Fargo Securities, John Silvia, says:
Companies “really have diminished their willingness to hire labor for any production level,” Silvia said. “It’s really a strategic change,” where companies will be keeping fewer employees for any particular level of sales, in good times and bad, he said.
And former Merrill Lynch chief economist David Rosenberg writes:
The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for 53.9% of the unemployed — again a record high — and this is a proxy for permanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at least six months with no success rose a further half-percent in August, to stand at 5 million — the long-term unemployed now represent a record 33% of the total pool of joblessness.
And see this.
In fact, the Fed intentionally curbed lending by banks in an attempt to stem inflation, without addressing whether public banks could provide credit.

The Government Has Allowed Wealth to be Concentrated in Fewer and Fewer Hands

As I  pointed out a year ago:
A new report by University of California, Berkeley economics professor Emmanuel Saez concludes that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression.

The report shows that:
  • Income inequality is worse than it has been since at least 1917
  • "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007"
  • "In the economic expansion of 2002-2007, the top 1 percent captured two thirdsof income growth."
As others have pointed out, the average wage of Americans, adjusting for inflation, islower than it was in the 1970s. The minimum wage, adjusting for inflation, is lower than it was in the 1950s. See this. On the other hand, billionaires have never had it better.
As I wrote in September:
The economy is like a poker game . . . it is human nature to want to get all of the chips, but - if one person does get all of the chips - the game ends.

In other words, the game of capitalism only continues as long as everyone has some money to play with. If the government and corporations take everyone's money, the game ends.

The fed and Treasury are not giving more chips to those who need them: the American consumer. Instead, they are giving chips to the 800-pound gorillas at the poker table, such as Wall Street investment banks. Indeed, a good chunk of the money used by surviving mammoth players to buy the failing behemoths actually comes from the Fed...
This is not a question of big government versus small government, or republican versus democrat. It is not even a question of Keynes versus Friedman (two influential, competing economic thinkers).

It is a question of focusing any government funding which ismade to the majority of poker players - instead of the titans of finance - so that the game can continue. If the hundreds of billions or trillions spent on bailouts had instead been given to ease the burden of consumers, we would have already recovered from the financial crisis. 
noted in April:
FDR’s Fed chairman Marriner S. Eccles explained:
As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
When most people lose their poker chips - and the game is set up so that only those with the most chips get more - free market capitalism is destroyed, as the "too big to fails" crowd out everyone else.
And the economy as a whole is destroyed. Remember, consumer spending accounts for the lion's share of economic activity. If most consumers are out of chips, the economy slumps.
And unemployment soars.

As former Secretary of Labor Robert Reich wrote yesterday:

Where have all the economic gains gone? Mostly to the top.


It’s no coincidence that the last time income was this concentrated was in 1928. I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines. The connection is more subtle.

The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.

What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.


THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity.


And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs. By contrast, little has been done since 2008 to widen the circle of prosperity.

So through it's policies encouraging the offshoring of jobs, mergers, decreasing of economic activity to fight inflation, allowing wealth to be concentrated in fewer and fewer hands, and other policy mistakes (like pretending that there is a "jobless recovery"), the government has channeled water away from U.S. jobs, creating a worsening unemployment drought.

Note for Keynesians: As I have repeatedly explained, the government hasn't spent money on the right kind of things to stimulate employmentSee this and this.

Note for followers of Austrian economic theory: I have repeatedly railed against the government artificially propping up asset prices and leverage, so that malinvestments can't be cleared, and we we have a stagnant, zombie economy which prevents job creation

Why Lessons From The First Great Depression Mean The Next Four Months Will Be Very Painful For Stockholders

Published on 09-03-2010

Scott Minerd, CIO of Guggenheim Partners, parses through the years of the Great Depression, and focuses on the pivotal 1936, which contained in it the seeds for the destruction of the period of relative economic growth and stability from 1932 to 1936, and resulted in a plunge in the economy in the second great recession of the Depressionary period: that of 1937 and 1938. While the first period saw “GNP grow at an annualized rate of 10 percent, the Dow rose approximately 20 percent per annum, and unemployment declined from as high as 25 percent in 1933 to as low as 11 percent in 1937″ the second and much more dire phase of 1937-1938 . saw a unprecedented plunge in economic data: “national output declined by 5.4 percent, unemployment skyrocketed from 11 percent back to 20 percent, the Dow Jones Industrial Average declined 49 percent, and four years of healthy price recovery receded into 3 percent annual deflation.” What precipitated the second collapse? “The short answer is that it was a confluence of factors, a perfect storm of monetary and fiscal policy mistakes” yet the immediate catalyst, if one can be defined was “the fiscal policy missteps of the Roosevelt Administration, who, in an effort to balance the budget after six years of deficits, implemented a series of tax increases in 1936 and 1937 that caused output, prices, and income to fall and sent unemployment skyrocketing.” We are currently faced with precisely the same juncture, and unfortunately for America, things now have a far lower probability of occurring “just as they should” in order for the country to emerge in one piece on the other side of the tunnel. Here is why.

First a question – what caused Rooselvelt to flip out and commence on a series of disastrous economic policies? Minerd explains:
In response to such Republican criticism of his fiscal policies, Roosevelt fired back by issuing the following points in the Democratic Party platform of 1936 (my paraphrase, followed by direct excerpts originally published June 23, 1936):
1. Deficit spending was a result of the crisis inherited from the previous Administration: “We hold this truth to be self-evident – that 12 years of Republican leadership left our Nation sorely stricken in body, mind, and spirit; and that three years of Democratic leadership have put it back on the road to restored health and prosperity.”

2. The Democratic Party restored confidence in America, thus the cost of deficit borrowing had declined to extremely low levels: “We have raised the public credit to a position of unsurpassed security. The interest rate on government bonds has been reduced to the lowest level in 28 years.”

3. The Democratic Party would still balance the budget through the austerity of limited growth in government and by higher taxes: “We are determined to reduce the expenses of government…Our retrenchment, tax, and recovery programs thus reflect our firm determination to achieve a balanced budget and the reduction of the national debt at the earliest possible moment.”

Does any of this seem familiar? It shoud, as should the fact that in his several years in office the budget deficit had soared, and the attempt to balance it resulted first and foremost in an explosion in unemployment, as the chart below demonstrates:
What specifically went wrong to cause the 1937-1938 episode?
Someone once asked me what Roosevelt did that was so bad leading up to the recession of 1937-38. The answer I give is simple: “He attempted to balance the budget at the wrong time.” More specifically, he attempted to balance thebudget by increasing tax revenues at a time when the economy was still finding its footing and the Federal Reserve was attempting to reverse policy. Even after the four years of recovery following the Great Depression, when Roosevelt began his series of tax increases unemployment remained over 12 percent, which on its own would be considered the worst labor market in modern U.S. economic history.
If the Roosevelt Administration’s driving purpose was to prove to the world that it could balance the budget, it was successful. In 1937, the budget deficit declined by 1.9 percentage points in relation to GNP. In 1938, that trend continued with the deficit declining another 1.4 percentage points in relation to GNP. By December of 1938 the Roosevelt Administration had essentially achieved its goal of a balanced budget.
But what was the cost of such actions? According to data from BCA Research, the unemployment rate went from 11.2 percent in May of 1937 to 20.0 percent just 14 months later. Data from the Federal Reserve Bank of Minneapolis shows the overall economy contracted 5.4 percent in 1938. The Dow Jones Industrial Average fell 49 percent from March 1937 to March 1938. Two years later, in March of 1939, the equity market remained depressed, still 30 percent below its March 1937 levels. The U.S. economy, which had whipped unemployment down from 25 percent in 1933 to 11 percent in 1937, limped into the 1940s with unemployment hovering just over 15 percent. The silver lining of all this economic carnage? For one month in 1938 the budget deficit was reduced to just $89 billion dollars – nearly, but not quite balanced.
So have we learned anything from the past? And even if we have, will the imminent expiration of the tax cuts be the equivalent of the tax hike the rapidly plunged America into the biggest economic deterioration at the tail end of the Great Depression? Alas, the answer is probably yes.But not before the Fed embarks on a proper QE strategy, one that has the potential to not only spike asset prices as the Primary Dealers bid up everything that is not nailed down, but this would happen in a time of surging unemployment. With the true unemployment rate already in the 20% ballpark as calculated by objective, non-governmental estimates, will the outcome of the tax changes of 2011 result in the biggest economic catastrophe in US history? We should look back in time for the answer…

It’s evident from Chairman Ben Bernanke’s speech in Jackson Hole last week that the Fed stands ready to continue to provide quantitative easing if necessary. I believe it will be necessary since the economic data in the next few months is likely to be pretty ugly and the rhetoric out of Washington is likely to devolve into a nightly news highlight reel of partisan feuding.
Yet despite the Fed’s commitments, some of the same issues that occurred in 1937 loom on the horizon today. For instance, in the first quarter of 2011 the United States faces massive tax increases. Similar to the mid-1930s, many have argued that deficits must be tamed now and that the economy is healthy enough to sustain austerity measures. Under such political pressure, it appears unlikely that even a portion of the Bush tax cuts will be extended.
There are a host of economic forecasts about the potential size of the fiscal drag that would result from a full expiration of the Bush tax cuts. Macroeconomic Advisers, for instance, believes it will subtract 0.9 percentage points off GDP. ISI Consulting thinks it could be even larger, around 1.2 percentage points. Arthur Laffer, the famed supply-side economist, prefers a number significantly larger, predicting as much as 6 percentage points of fiscal drag. Any way you slice it, if estimates for economic growth in 2011 range from 2 to 3 percent, these tax increases could result in flat to anemic growth and elevate the risk of recession due to the slightest bit of economic turbulence.
In addition to the expiration of the Bush tax cuts, there is the additional cost of healthcare reform. While some would argue that healthcare reform is just a transfer payment program, the fact remains that there will be no incremental healthcare benefits available in the next three years. Therefore, the transfer payments, which are intended to be revenue neutral over the next 10 years, actually create a fiscal drag between 2011 and 2013 before becoming modestly stimulative when the benefits become available from 2014 to 2020.
So what does this imminent change to tax expectations mean for investors in practical terms? Very bad things, especially for those who anticipate a run up in stocks into the mid-term elections: “One clear consequence of the repeal of the Bush tax cuts will be an urgency to accelerate taxable income into 2010. This will have a number of impacts on the market, the most direct being a desire to liquidate positions in equities and other financial assets to realize capital gains before the New Year. This will continue to put downward pressure on equities and increase volatility.”

That’s right: equity liquidations, meaning the long expected second major leg down in stocks is at most 4 months away.

There’s more:
Last week, Bernanke also referenced the importance of a “baton pass” from the economic boosts of government spending and inventory replenishing to the more sustainable support of consumer spending. If equity prices decline in conjunction with the renewed pressure on the housing market as tax incentives are removed, the net effect is likely to be an adverse impact to already fragile consumer sentiment and spending. In essence, the economy is in danger of a fumbled baton pass from 2010 to 2011.
In the face of this uncertainty, and in light of the Jackson Hole remarks, it appears Chairman Bernanke and the FOMC will find it necessary to increase their holdings in long-term securities and increase the size of their balance sheet. This will ultimately lead to lower interest rates and a need to maintain low long-term rates for several years in a hope to prop up the housing market by maintaining record low mortgage rates (see my recent commentary on “The Story in Housing”). What remains to be seen is how severe the economic headwinds will be as a result of the fiscal tightening going into 2011, and how dramatically the Fed will move once it reaches the decision to continue to grow its balance sheet.

In the short run, given the amount of purchases that the Fed will have to make, quantitative easing will most likely swamp the amount of incremental borrowing required by the government, which means that financing the deficit won’t be a problem. Ultimately, however, the U.S. economy will come to the end of the road and inflation concerns will reemerge.

Once the market collapse has transpired, then, and only then, once we enter the proverbial revulsion stage in equities, will the stage be set for an actual bull market:
I believe further quantitative easing is likely to take place in the near term. I also believe there is a strong probability that there will be some form of additional fiscal stimulus passed by the government as it yields to mounting pressure to address the nation’s historically high unemployment rate. After these two events take place, the stage should be set for the green shoots of recovery to reappear in 2011. Once these harbingers of economic health appear, the Fed will come under pressure to convince the market that it has a sound exit strategy to unwind its massive balance sheet. Simultaneously, pressure will reemerge for fiscal austerity and deficit reduction.
As we approach the presidential election of 2012, monetary and fiscal policymakers will be faced with their greatest challenge: whether to reverse the emergency policies applied up to that point, and if so, at what pace and timing to conduct such measures. The risks surrounding these decisions are even greater than the risks that surround the near-term policy decisions about further fiscal stimulus and quantitative easing – taking away support is always more difficult than giving it. The dangers will be strikingly similar to the risks that faced the economy in 1936. Remember, it was Roosevelt’s dash to fiscal discipline in 1936 – combined with the Fed’s misguided decision to tighten monetary policy by doubling the required reserve ratio for banks – that resulted in the severe fiscal drag on aggregate demand and economic output that pulled the economy back into a deep recession.
While I remain optimistic that the current economic “soft patch” will not unravel into a full-blown recession, my concern increases when I look ahead to the challenges the economy will face once it regains its footing. The parallels to 1936 grow increasingly striking the closer one looks to 2012, especially if the green shoots of economic recovery take hold between now and then, which I believe they will thanks to additional policy actions later this year and in early 2011. Oddly enough, the foundation for the recession of 1937-1938 was laid in the election year of 1936. The question remains, will the presidential election of 2012 lay the foundation for a parallel series of events? Given the unprecedented monetary and fiscal policies enacted in recent months, as well as those that are likely to be enacted in the near term, the opportunities for future errors of policy judgment loom large. In light of this, whether it’s in relation to 2010 or 2012, the lessons of 1936 are stark and disturbing.
And while America in 1938 and onward was a different country, whose manufacturing industry and thus real economic output potential, was only starting to stretch its wings, further having the rather tragic benefit of World War II as an unprecedented attractor for record economic activity, the current outlook is far more bleak. The US consumer is on average far older, the pension system is on the verge of bankruptcy, the US’ chief export (at least on a relative basis) is services, and the spectre of a war at this juncture would have far more dire ramifications: a small regional conflict that avoids the participation of the superpowers may have a marginal boost to the economy, but likely nowhere near enough. A full blown collapse into another world war leads to consequences too dire to even imagine. Which is why we agree with Minerd, that while the intermediate steps that occurred in the immediately preceding 1937 period are all in line, and which the government will only have itself to blame if it screws up on the transition to a smooth glide slope, the events on the other end of the tunnel look far bleaker.

The Great Jobs Depression Worsens, and the Choice Ahead Grows Starker

Friday, September 3, 2010 by Robert Reich's Blog
by Robert Reich

The Great Jobs Depression continues to worsen.

The Labor Department reports this morning that companies created ony 67,000 new jobs in August. That's down from the 107,000 they created in July. And because the government laid off temporary Census workers, the economy as a whole lost 54,000 jobs.

To put this into perspective, we need 125,000 net new jobs a month just to keep up with the growth of the population and the potential workforce.

Think of it this way. The number of Americans willing and able to work but who cannot find a job hasn't stopped growing since the start of 2008. All told, about 22 million Americans are now jobless. Add in those who are working part-time who'd rather be working full time, and we're up to 25 million.

And because most families depend on two paychecks, the practical impact is almost double.

All this has a negative multiplier on the economy. If families can't pay their bills, their mortgages become delinquent (that's why mortgage delinquencies keep rising), their credit card bills go unpaid (we're seeing a notable rise in credit card defaults), and they can't afford to buy anything other than necessities (hence auto sales have plummeted, new homes sales are down, and retail sales are in the pits).

As a result, more and more businesses decide to lay off workers (or refrain from adding them) because they can't sell the goods and services they produce.

The last time we saw anything on this scale was in the 1930s. The last time we did anything about this on the scale necessary to reverse the trend was in the 1930s and 1940s.

It is not that America is out of ideas. We know what to do. We need massive public spending on jobs (infrastructure, schools, parks, a new WPA) along with measures to widen the circle of prosperity so more Americans can share in the gains of growth (exempting the first $20K of income from payroll taxes and applying the payroll tax to incomes over $250K, for example).

The problem is lack of political will to do it. The naysayers, deficit hawks, government-haters and Social Darwinists who don't have a clue what to do would rather do nothing. We are paralyzed.

If there was ever a time for bold government action it is precisely now. Obama should be storming the country, demanding the largest responses to the jobs emergency in history. He and the Dems should be giving Republicans hell for their indifference to all this.

Instead, Obama is all over the map -- a mosque controversy, an Israeli-Palestinian peace talk (that may take years to complete if ever), a symbolic withdrawal from Iraq, and lots of little tax-cutting ideas.

Senate and House Democrats, meanwhile, are on the defensive. Polls even suggest Dems may lose the House and possibly even the Senate in November.

Business leaders have either gone silent or gone reactionary, as they did in the 1930s.

But the pain and suffering of tens of millions continue. Government revenues continue to drop, and the safety nets and public services they rely on are subject to even more cuts.

Ever wonder why the nation is turning isolationist and xenophobic? Why we're lashing out at undocumented immigrants, even though fewer are here now than a few years ago; why the rise of anti-Islam feeling now, although 9/11 was nine years ago? Why the virulence and hate-mongering on right-wing radio, and the surliness in the blogosphere?

The practical choice we face is this: Either major action to reverse the jobs emergency or years of intolerably high unemployment coupled with demagoguery and scapegoating.

Why the Big Lie About the Job Crisis? And the $10 Trillion Answer

(We need a "Stab a banker in the torso Tuesday" maybe next week? ;-) --jef)


Friday, September 3, 2010 by Huffington Post
by Les Leopold

The August unemployment numbers are ugly, yet again. Nearly 30 million Americans are still jobless or forced into part-time jobs. The Bureau of Labor Statistics official unemployment rate is 9.6%. It's broader and more telling jobless rate (U6) of 16.7% confirms that we're stuck in our own version of the Great Depression. We'll need more than 22 million new jobs to bring us back to full-employment. Happy Labor Day.

To get out of this quagmire we'll have to face up to two fundamental facts:
1. We really are in the midst of a horrific jobs crisis. All the happy talk about the economy being on the road to recovery is just plain old denial. We'll never find jobs for all the people who desperately need them until we recognize that this employment crisis poses a clear and present danger to our republic. Modern capitalist societies require full employment. When we don't have it for long periods of time, chaos ensues. What's missing in Washington is a sense of urgency. Denial is dangerous -- and an insult to the unemployed.

2. We must face up to the real causes of this mess. Unfortunately, a lot of Americans are succumbing to a wrong-headed narrative that has been pushed into our heads:
"We Americans sank ourselves in debt. We consumed more than we produced. We bought homes we couldn't afford and used them as ATMs. Of course Wall Street did its part by offering us mortgages they knew we couldn't really afford. The government also contributed mightily by pushing Fannie and Freddie, the giant housing agencies, to underwrite "politically correct" loans to low-income residents who shouldn't have been buying homes at all. In short, we all are to blame." 
From a flawed narrative always comes a flawed policy prescription:
"The era of excess is over. We need to cut back on spending and borrowing. We need to reduce government debt by raising the Social Security retirement age and cutting social programs We've got to streamline our public sector by laying off public employees and cutting back their lavish pensions. And all workers will have to adjust to an era of intense foreign competition: We've got to reduce our wage and benefit demands if our companies are going to compete globally. We have to live within our means."
In short, we gorged ourselves until the economy crashed. Now we've got to tighten our belts and accept less to get it going again. It's simple and logical and.....dead wrong.

Collective guilt is always seductive. It may even be programmed into our genes. It's possible that prehistoric homo sapiens survived by sharing blame in difficult times. But that soothing instinct does not serve us well today. We need to know the truth behind this crisis if we're going to come close to solving it.

For starters, "we" didn't create this mess. Wall Street did, with the help of politicians who pushed through financial deregulation and an increasingly regressive tax structure that put outrageous sums of money in the hands of a few. Freed from regulations and flooded with money, Wall Street bankers went crazy. And before long, our economy crashed.

It really is that simple. Starting in the late 1970s our country embarked on a grand real-time experiment to "unleash" the economy from government rules and oversight. The theory was that to end the era of "stagflation," we had to cut taxes on the super-rich, freeing them to lead a gargantuan investment boom that would of course lift all boats. At the same time, the financial sector was liberated from its New Deal-era shackles. Yes, those constraints had prevented a financial crash for more than 40 years. But now, argued the best and the brightest, the new world order required a more nimble financial sector. Naturally, the markets could police themselves.

In retrospect it seems like a very bad joke.

Actually, the plan did work beautifully for the top one percent of us. In fact, these excessively wealthy people laughed all the way to the bank. America's distribution of income, which had been reasonably equitable during the post WWII era, flew apart. In 1970 the top 100 CEOs earned about $45 for every dollar earned by the average worker. By 2008 it was $1,081 to one.

With so much wealth in hand, the super-rich literally ran out of tangible goods and service industries to invest in. There simply was too much capital seeking too few real investments. And what a honey pot that proved to be for Wall Street's financial engineers! Freed from any limits on constructing complex new financial products, hedge funds and too-big-to-fail banks and investment houses created an alphabet soup of new securities with the sky-high yields the super-rich craved. The rating agencies abetted the crime by blessing these flimsy products with AA and AAA ratings.

Wall Street built this flim-flam of finance out of junk debt -- like sub-prime mortgages -- which it could pool, slice, and resell for enormous profits. In fact, selling these bogus securities was the most profitable enterprise in the history of Wall Street. Wall Street wrapped credit default swaps and collateralized debt obligations into pretty packages so that they could literally sell the same underlying junk assets again and again. It was through these marvelous feats of financial engineering that a $300 billion sub-prime crisis turned into a multi-trillion dollar catastrophe. (Check out The Looting of America for all the gory details.) And that's how, the big bankers -- not us -- pumped up the biggest housing bubble in history. Wall Street didn't need Fannie or Freddie or low-income homebuyers. It just needed deregulation, a lot of super-rich people with money to burn, and junk debt it could spin into AAA gold.

The whole scheme worked just fine as long as the underlying collateral (our homes) appreciated year after year. But as soon as housing prices peaked, it was game over. The upside-down pyramid of debt and junk financial instruments came crashing down. The entire credit system froze, tearing a gaping hole in the real economy. Eight million jobs were destroyed in a matter of months.

The cause of the crash is no mystery. The Great Depression happened the same way: a skewed distribution of income combined with a deregulated financial sector created a big bubble, and it burst. The only way to break the cycle is to attack those fundamental causes -- we need to move money from the very top of the income ladder to the middle and the bottom, and we need to tie Wall Street up in regulatory knots.

Through steep progressive taxes on the super-wealthy, fair income taxes on hedge funds and transaction fees on Wall Street's proprietary trading, we can keep that bubble from reinflating -- and in the process raise the money we need to put America back to work. With the revenue we collect, we can hire millions of people to weatherize homes and buildings and rebuild our infrastructure. Instead of laying off teachers we can hire more, and provide them with better training and support. We can expand universities and colleges too, and allow people to go to college for free, which will improve our peoples' skills -- and keep young people off the unemployment rolls.

Of course all this would be costly in the short run. But progressive taxes on the super-rich and a windfall tax on Wall Street profits and bonuses would pay for it all, and then some. The American people would understand that it's only fair to require the super-rich (whom we just bailed out) to fund the jobs they helped destroy through their reckless financial gambling. And in the long run, investing in infrastructure and education will make our country richer. Just look at the GI Bill: Giving returning WWII vets a free college education was expensive -- but Congress later found that every dollar spent on the program yielded a return to our economy of $6.90.

Are we really justified in reclaiming this wealth from Wall Street? Well, it's our wealth, isn't it? We just gave it to them. I'm talking about the nearly $10 trillion (not a typo) we shelled out to financial institutions in loans, asset guarantees, market supports, low-interest loans and a myriad of other forms of assistance as part of our rescue of the financial system. Now, thanks to our largess, the bankers are back to making record profits and bonuses again. Even President Obama, who helped engineer the whole deal, is apparently aghast. In his new book Capital Offense, Michael Hirsch quotes Obama at a White House meeting in December 2009:
"Wait, let me get this straight. These guys are reserving record bonuses because they're profitable, and they're profitable only because we rescued them."
During 2009, the worst economic year since the Depression, the top ten hedge fund honchos averaged $900,000 an hour (that's $1.8 billion each per year). And they did it only because we saved their butts from total collapse. Now it's payback time. The bankers owe the American people hard cold cash, not just the promise of a great trickle down in the distant future.

Incredibly, Wall Street executives are howling over every proposal to limit their profits or, god forbid, stick them with part of the bill for all the damage they've caused. They refuse to admit that they've done anything wrong. In fact they feel victimized. They seem to believe that skimming billions from our financial system via taxpayer bailouts is a good thing for everyone. Can they really believe that if we just left them alone, new jobs would flow like wine?

Wall Street billionaire Steve Schwarzman got apoplectic when someone suggested that we close his favorite tax loophole (carried interest which allows him to pay a much lower tax rate than the rest of us). That would be "like when Hitler invaded Poland in 1939," he fumed.

Let's stay with his regrettable analogy. Surely Schwarzman knows that Hitler rode to power in 1932 on the back of Germany's massive unemployment crisis. And surely he knows that a massive jobs programs funded by taxes on the ultra-rich is a far better alternative.

It's time to say "the end" to the "We're all to blame" fairytale. Let's start a new story this Labor Day. It's called, "Put our people back to work."

Ways to Solve the Jobs Problem

Imagine a no-holds-barred "summit" that comes up with ideas to solve both our job and environmental problems. What might it come up with?
by Fran Korten | Friday, September 3, 2010 by YES! Magazine

As the midterm political season heats up, one word on every politician's lips is "jobs." And for good reason. People are hurting-they can't pay their mortgages, send their kids to college, pay their dental bills. Young people are wondering if they have a place in the work world.

So the economic pundits cheer when car sales go up, housing starts rise, consumer confidence strengthens. But as the oily ooze in the Gulf tars yet another beach, we all sense something is terribly wrong. We can't keep tearing up the planet to keep ourselves employed. There must be another way.

So-imagine a no-holds-barred "summit" that comes up with ideas to solve both our job and environmental problems. What might it come up with? Here is my starter list. You can add your own ideas in the comments to this article on the YES! website.

1. More farms, less agribusiness. Agribusiness substitutes chemicals and machinery for labor and employs remarkably few people. Small organic farms are far more productive per acre and bring the people back.

2. More repair, fewer products. Instead of tossing those shoes, that toaster, that computer, let's fix them-and employ repair people in the process.

3. More recycling, less mining. Ray Anderson of the Interface flooring company says we already have enough nylon to meet the world's carpet needs forever. The same may be true for aluminum, steel, copper, and other easily recyclable materials. We just need good systems for recovering them.

4. More renovations, less construction. Our nation has 129 million housing units. We build new ones and let old ones deteriorate. How about renovating what we have and in-filling our cities to use existing sidewalks, gas pipes, water mains, and roads?

"What if we stopped subsidizing advertising with tax breaks and focused on educating people to lead satisfying lives?"

5. More restoration, less destruction. Whether it's forests, Superfund sites, or oil-laced wetlands, it's time to restore. Some restoration can even pay for itself, as in restoration forestry where folks make products from the fire-prone, small-diameter trees normally considered too small to market.

6. More bike paths, fewer highways. They both cost money, but one is good for our health and good for the planet. What's not to like?

7. More local businesses, fewer megastores. Locally owned stores employ more people per goods sold and you can often talk to a decision-maker about your purchase.

8. More dishwashing, fewer throw-aways. What if we got rid of all the disposable containers in fast food restaurants? At my friend Ron Sher's Crossroads Shopping Center near Seattle, the food court vendors share a common crockery supply. No trees needed. It works.

9. More education, less advertising. Let's face it. Advertising is about making us feel inadequate for something we don't yet have. What if we stopped subsidizing advertising with tax breaks and focused on educating people to lead satisfying lives?

10. More clean energy, less fossil fuel. Here we do need new stuff-wind turbines, solar panels, insulation, passenger trains. Politicians are providing some-though not enough-funding for these sources of "green jobs." It's the other items on this list they're not even talking about-but need to.

You may be thinking that my list isn't realistic because these options cost more or depend on government funding. But that's partly because governments subsidize oil, agribusiness, nuclear plants, ports, highways, advertising, and other unhealthy choices.

So the next time you hear a politician talk about jobs, try comparing the solutions offered to this list. By breaking out of the narrow range of options that keeps policy discussions stuck, we can create jobs that not only sustain families, but also build community and restore the living systems of our planet.

Sturdy Walls, Collapsing Job Market

The View From Southampton

Southampton is just another provincial city on the south coast of England. To get to the job center in Southampton you have to pass through the old walls of the city, some of which date back over a thousand years to the time of the Norman conquest. Throughout this period the walls have survived plague, civil war and the aerial blitz of World War 2 which hit the city hard as a result of its status as an important naval port. Let’s just say these walls have stood the test of time, something the British economy and job market is failing to do, rapidly.

As anyone knows who has experienced one, from the U.S.A. to the U.K., the job center can be a depressing place. Today as I entered and took my place in the line it was perhaps 90% filled with the unemployed who were under 30. I have graduated with a First Class Honours Degree in History and cannot find anything that pays near a ‘living wage’. I do not know how others of my generation with little or no qualifications are going to make it through the next few years, although I am sure they will, people find a way to survive.

This recession is reeally hitting the people of my generation. UK unemployment for the 18-24 age group is hovering just below 18%

In a report issued by the International Labour Organisation (ILO) on the effect of the economic crisis on the youth of Europe, as reported by the Telegraph ‘‘In the last quarter of 2009, the number of 15- to 24-year-olds who would like to work but did not seek a job reached 23.7pc in the UK, the highest of all four countries analysed’’. No doubt many on the Right (wrong), including many in the coalition government, will argue that this is because of Britain’s welfare system and its openness to abuse. The reality of the matter is that it is this system and this system alone keeps many of the long term out of work, from going under completely.

One example of the ludicrous state of the job market in Britain today was related to me by a friend and fellow graduate. He had recently applied for a job at the now infamous Royal Bank Of Scotland (RBS). He sailed through the online tests and telephone interview, only to be turned down at the last hurdle because, and get this, he failed a credit check! This, from the same bank who received billions from the TARP fund in the fall of 2008 and a further £25-45 billion($39-70 Billon) in British taxpayer money back in 2009 because of their own credit unworthiness. The same bank whose behaviour and lending practices were one of the main reasons for the credit crunch and subsequent contraction of the job market.

Coupled with this lack of job prospects it is not enough that I and the majority of graduates have left university with a debt of over £20,000 ($31,308). The British government or ‘coalition of the willing’ now want to install a graduate tax that would see graduates continue to pay thousands more for their higher education, an education, which the likes of Cameron, Clegg and Osborne received for free.

Any good tradesman knows that all structures must be built on solid foundations, like the Norman walls of Southampton. If they are not they will eventually collapse and crumble. That is what is happening to the British economy and consequentially to the job market. The public sector is now shut to graduates or anyone for that matter. For graduates today in Britain from the majority of universities outside Oxford and Cambridge the choice for their futures appears to either lay abroad in the rising economies( Vietnam, Brazil, China, India even Rwanda!) Or at home, behind a desk, on the phones selling, carrying plates or on the Dole (British slang for welfare).

Recession is a Depression for America's Seniors

From the Nursing Home to the Poor House

President Obama has U.S. taxpayers paying billions to meet the costly payrolls of 50,000 troops and 190,000 contractors in Iraq while 20-million-plus jobless are looking for work in USA and can't find it.

Among the hardest hit now are more than 2-million people age 55 and over, half of whom have been looking for work for six months or longer. For them, the Great Recession is a no-fooling, deepening Depression.

Many of these seniors have no families to care for them. Others are too proud to ask their families, churches, or relief agencies to help them in their time of need. Even so, many a proud, independent, well-dressed senior is a soup kitchen regular because it's either that or go hungry.

Many seniors have been loyal to a corporation for much or all of their working lives only to discover the corporation has no loyalty to them. Instead, their employer laid them off before the retirement age and hired a younger, cheaper worker to replace them or just shipped their job to an office or plant on foreign soil. Many seniors are right to feel betrayed.

“The unemployment rate for this age group actually reached 7.1 percent in May, the highest it's been since the late 1940s,” writes A. Barry Rand, chief executive officer of the AARP in his September “Bulletin.” That's more than double the 2005 rate of 3 percent.

“African Americans and Hispanics have been hit especially hard,” Rand adds. He points to a Labor Department study showing over-65 workers outnumber teenagers in the workforce for the first time since 1948.

“And AARP's own research finds that more and more of our members want or need to keep working past traditional retirement age,” he writes. That's likely because seniors are living longer and leading healthier lives.

Speaking for the AARP, Rand says, “We believe that anyone 50-plus who wants or needs to work should be able to work. It's not only essential to achieving financial security, it also benefits our economy.”

But what do you do when the private sector fires you and the public sector refuses to spend the money to hire you? Washington knows darn well this country is short nurses, nursing aides, school-teachers, librarians, and clerks, to cite a few occupations. In city and county governments everywhere, employees are being laid off, forced to take furloughs, or are taking mandatory pay cuts while the Federal government spends more than half of every dollar collected from the taxpayers to make war.

Meanwhile, a Supreme Court largely made up of Republican appointees is making it tougher for seniors to fight against employers who wrong them. “In a case involving Iowa resident Jack Gross, the court ruled that evidence indicating age was a factor in job discrimination was no longer enough,” writes Rand. “Now age must be the sole factor.”

While Rand only mentioned teen unemployment in passing, in fact that rate is far higher than for seniors. Writing in The Washington Post, Frank Ahrens said unemployment among black teens hit nearly 50 per cent last November. For some kids, serving as a look-out for drug peddlers is the only job available.

Obviously, Washington needs to rechannel dollars from its foreign adventures to benefit the home front. It needs to repair the highways, upgrade mass transit, revitalize the national parks, and build the public works just as President Roosevelt's “New Deal” did in the Thirties. That blueprint not only got the country on the road back to full employment but the roads and bridges and public schools were built to last and to benefit future generations and they have.

It might also be a good idea to require corporations relocating jobs abroad to pay their laid-off workers 50 percent of salary for the next five years, instead of firing them like dogs or worse. Right now the military-industrial complex is looting America of its wealth and taking the public for a ride----a ride to the poor house.

Labor Day in a Time of Recession

The Hands-On Workers

What does Labor Day mean anymore other than another day off, another store sale and, in some cities, parades ever smaller and more devoid of passion for elevating the well-being of working people?

Philosopher/mechanic Matthew B. Crawford, in his recent, embracing book, Shop Craft as Soulcraft has a thoughtful consideration. He deflates the high-prestige workplace and makes the case for millions of Americans who still make and fix things with their hands.
“I want to suggest we can take a broader view of what a good job might consist of, and therefore what kind of education is important. We seem to have developed an educational monoculture, tied to a vision of what kind of work is valuable and important — everyone gets herded into a certain track where they end up working in an office, regardless of their natural bents.
But some people, including some who are very smart, would rather be learning to build things or fix things. Why not honor that? I think one reason we don't is that we've had this fantasy that we're going to somehow take leave of material reality and glide around in a pure information economy.”
Dr. Crawford has a PhD in political philosophy and is a mechanic who runs Shockoe Moto, an independent motorcycle repair shop in Richmond, Virginia. This gives him a deep sense of skill and broader perspective with which to evaluate these ways of satisfying one’s value of locally-rooted work. He contrasts these traits with the deadening assembly line and computer focused office work, both of which can be outsourced on the whims of a boss.

The Winsted, Connecticut Deck’s Fix-It Shop, operated joyously by an aunt and her nephew, until they retired last year, would have been exhibit A for Dr. Crawford. They fixed hundreds of different products brought to them by the townspeople. Their small shop was filled horizontally and vertically with items donated, about to be fixed or were unfixable by the manufacturers’ design. They could have charged a museum entrance fee for browsing if their shop had more room. Oh, what pride they regularly took in their work.

Electricians, plumbers, carpenters, painters, tailors, car and bike repairers, restorers of stoves, refrigerators, air conditioners, furnaces, locks, windows, sidewalks and streets enjoy a special kind of personal job gratification that is alien to the pre-designed, robotic labors of their friends who come home every day with clean clothes.

I’ve often wondered why the knowledge of tradespeople about the best, middling and worst brands of equipment, products and materials they work with or have to install (such as furnaces) isn’t collected by some magazine or consumer group. After all Angie’s List is surveying what their customers around the country think about the quality of the service.

Along with the repairers, we should recognize the inspectors—millions of them working for government agencies and companies to assure that health and safety laws are observed and quality controls are maintained. They are the meat and poultry inspectors, OSHA and Customs inspectors, sanitation inspectors of food stores and restaurants, motor vehicle inspectors, nuclear, chemical and aircraft inspectors, inspectors of laboratories, hospitals, clinics, building code inspectors and the insurance inspectors assigned to loss prevention duties.

The more conscientious of these inspectors are vulnerable to being over-ridden by their less committed superiors (such as meat inspectors for the U.S. Department of Agriculture) or harassed (inspectors for the U.S. Forest Service on corporately exploited federal timber land.) Sometimes inspectors so commit their conscience to their work that they become whistle-blowers about safety hazards or hanky panky, which too often invites career-ending retaliation.

How little attention we devote to those inspectors who are sentinels for the well-being of the American people. As a result, the courageous are not honored—if only to motivate the young to choose these careers. Moreover, a culture of corruption, that can erode their alertness or burdens them with weak standards to enforce, escapes exposure.

Then there are the near invisibles—the cleaners who do their thankless but essential jobs in hotels, airports, bus and train stations, office buildings, factories, schools, libraries, museums, streets, restaurants and homes.

Strange how we don’t react to cleaners—rarely thanking them or greeting them with salutations. Notice how airline passengers rush past them on the jetway while they wait to clean up the messes under severe time pressure. People who babble incessantly at airports or bus and train stations, while waiting for their departure, ignore the sweepers and dusters, automatically averting their eyes, and almost never acknowledging their work.

Taxi drivers are often tipped and thanked. How many hotel maids, who clean twelve or more soiled rooms and toilets a day, receive any thanks or tips by the guests? Cleaners are among the lowest paid workers, often handle not the safest of chemicals, and receive very little respect or recognition. Their lowly status has to affect their morale and maybe their performance.

Yet what would we do if these workers went on a general strike from the nursing homes to the garbage trucks? We’d feel it a lot more than if the overpaid Wall Street traders went on strike.

One day I was at BWI airport and went to the crowded men’s room. As I entered, the elderly cleaning man erupted in frustration. “I’m sick of this job,” he shouted to no one in particular. “Hour after hour I clean up, come back, see the crap, clean up some more. It never ends,” he wailed. The men who were wiping, flushing, washing, drying and zipping were stunned and silently shuffled out, as if he wasn’t there. I thanked him for his work and candor, calmed him down and gave him a gratuity. The others looked at me blankly as if I was dealing with a ghost they never see as a human being.

Cultures can be astonishing. The hands-on workers who harvest our food, clean up after us, repair our property, look out after our health and safety conditions and serve as nannies to our children receive few honors, status or anywhere near the compensation of those who gamble with our money, entertain us or drive us into wars they don’t fight themselves.

Shouldn’t Labor Day be a time to gather and contemplate such inverted values and celebrate those who toil without proper recognition?

The Stimulus Complex

Hit Me With Your Best Shot

This is the worst Labor Day for American labor in decades, maybe since the Great Depression. Unemployment is at 9.5 percent (as of July), and if we add in the people involuntarily working part time or who have given up looking for work, we get 16.5 percent of the labor force. This means that unemployment plus underemployment has risen by about 14.6 million people since the recession began.

How bad does it have to get before the Congress (and the president) decide that we need another stimulus to get this economy moving? The collapse of home sales in July to the slowest pace on record was a reminder that the market for housing is likely to be depressed for years to come. Home prices have another 15 percent to fall to get back to pre-bubble trend levels. Add that gloom to the labor market and no wonder consumer spending has been weak in this recovery.

You know things are bad when the Chairman of the Federal Reserve – trying to calm the markets, as he attempted last week - makes a speech to his fellow central bankers assuring the world that the Fed has more tools in its toolbox of monetary policies if things get more desperate.

But compared with the elected branches of our government, the Fed has done a lot to counteract this recession. It can and should do more – such as raising its targeted rate of inflation - but right now we need Congress and the president to act.

Fears of a double-dip recession, which is a real possibility, are only part of the story. If the economy limps along at the growth of the last quarter – 1.6 percent – or less, and therefore job creation does not keep up with the growth of the labor force, it will still feel like a recession to most Americans. Even people who are employed will be reluctant to spend because of job insecurity. And businesses will hold back on investment; business investment (not including inventories) is still down 15 percent from its pre-recession peak. The technical definition of recession will not matter, except to the National Bureau of Economic Research. Employment is what matters.

Republicans have successfully promoted the idea that we already tried a stimulus and it didn’t help. There are few, if any, economists who would agree. The non-partisan Congressional Budget Office estimates that between 1.4 and 3.3 million more people were employed by mid-2010, because of the stimulus.

The problem is that there is no stimulus any more, as state and local spending cuts outweigh what little impact remains of federal stimulus on growth. The results of these local budget cuts can be tragic, as on July 20 in San Diego, when a two-year-old child died after a response from emergency medical services was delayed because of fire department cutbacks.

What is the argument against another stimulus? Simply that it will add to our national debt. But what is another few percentage points of debt compared with leaving millions of Americans unemployed, indefinitely, and the risk of a downward spiral that could sink the economy even further? It is better to err on the side of caution – and yes, the side of caution is avoiding the more serious risks.

A national grass-roots non-profit group called Jobs with Justice is organizing a nationwide effort on Sept. 15 to pressure Congress to act. It makes sense to me. Maybe voters should make it a “litmus test” for every Congressional candidate in November: no new stimulus, no vote. If they don’t care enough about our jobs to make a simple commitment like this, they don’t deserve to have a job either.

The Market is Rigged

High Frequency Chicanery

Here's something to munch on from Dennis K. Berman in last week's Wall Street Journal:
"Today, small investors are fleeing the equities markets in droves, according to data from the Investment Company Institute, pulling out a net $34 billion from stock funds so far this year.....They say, "I still feel like someone is screwing feels different than it used to."
Berman traces the problem to its source, the "inscrutable interplay between myriad exchanges and high-frequency traders, whose volume now accounts for an estimated two-thirds of all trading"..."a market that many perceive as tainted and prone to gaming by a cadre of insiders."

That sounds like a long-winded way of saying the market is rigged.

High-frequency trading (HFT) is algorithmic-computer trading that finds "statistical patterns and pricing anomalies" by scanning the various stock exchanges. It's high-speed robo-trading that oftentimes executes orders without human intervention. HFT allows one group of investors to see the data on other people's orders ahead of time and use their supercomputers to buy in front of them. It's called frontloading, and it goes on every day right under the SEC's nose.

In an interview on CNBC, market analyst Joe Saluzzi was asked if the big HFT players were able to see other investors orders (and execute trades) before them. Saluzzi said, "Yes. The answer is absolutely yes. The exchanges supply you with the data, giving you the flash order, and if your fixed connection goes into their lines first, you are disadvantaging the retail and institutional investor."

Frontloading is cheating pure and simple, but rather than go after the "big fish" who run these enormous computerized skimming operations; regulators have been rolling up rogue traders who abscond with the trading code.

Here's a blurp from
"Monday’s arrest of Samarth Agrawal, 26, came nine months after a Goldman Sachs programmer was arrested on similar charges that he, too, stole his employers source code for software, his employer used to make sophisticated, high-speed, high-volume stock and commodities trades.

“The Securities and Exchange Commission is investigating the use of these programs that many believe give their users an unfair advantage over other traders. Nevertheless, stealing the code to these suspect programs remains illegal. ("Second banker accused of stealing high frequency trading code",
Right; so stealing from stock cheats who are gaming the system is against the law? Roger.

Today's market is configured in a way that the only reliable way to make money is by increasing volume and trading on myriad venues. We're talking about gains of mere pennies per trade on zillions of trades. The problem is that--when there's a glitch in the system--the high frequency bullyboys head for the exits taking an ocean of liquidity with them. That leads to a "flash crash" like the one on May 6 when the markets tumbled nearly 1,000 points in a matter of minutes. And, there's nothing to prevent a similar cataclysm from taking place in the future, because nothing's changed. The SEC still has its head in the sand.

There appears to be general agreement about the nature of the problem. (Though see Pam Martens’ The May 6 Stock Crash Revisited and The Big Plunge on this site, AC/JSC) Here's Berman again:
"When BlackRock Inc. surveyed 380 financial advisers earlier this summer about the flash crash, their perceptions said it all: The mayhem had been primarily caused by an "overreliance on computer systems and some types of high frequency trading" strategies that roam the market en masse, looking to pick off pennies of profit." ("A Market Solution That Put Investors in a Fix", Dennis K. Berman, Wall Street Journal)
No one wants to fix the problem, because then the big players would lose boatloads of money, and that just won't do. So the vehicle continues to speed faster and faster down the mountain veering wildly from one side of the road to the other. How long before it jumps the guardrail and plunges to the bottom of the canyon? Stay tuned....

Capital Hill is awash in Wall Street's dirty money, which means that congress will block any law that threatens the main profit-centers of the big banks or brokerage houses. HFT, complex derivatives, securitization and repo transactions will all be preserved in their present state until the next big tremor rumbles through lower Manhattan bringing the markets down in a thunderous roar. Make sure the cuboards are full.

Does Our Economy Really Have to Run on Fraud?

The Angelides Commission Squints Back at the Bank Bailout and the Fall of Lehman

What is the difference between today’s economy and Lehman Brothers just before it collapsed in September 2008? Should Lehman, the economy, Wall Street – or none of the above – be bailed out of bad mortgage debt? How did the Fed and Treasury decide which Wall Street firms to save – and how do they decide whether or not to save U.S. companies, personal mortgage debtors, states and cities from bankruptcy and insolvency today? Why did it start by saving the richest financial institutions, leaving the “real” economy locked in debt deflation?

Stated another way, why was Lehman the only Wall Street firm permitted to go under? How does the logic that Washington used in its case compare to how it is treating the economy at large? Why bail out Wall Street – whose managers are rich enough not to need to spend their gains – and not the quarter of U.S. homeowners unfortunate enough also to suffer “negative equity” but not qualify for the help that the officials they elect gave to Wall Street’s winners by enabling Bear Stearns, A.I.G., Countrywide Financial and other gamblers to pay their bad debts?

There was disagreement last Wednesday at the Financial Crisis Inquiry Commission now plodding along through its post mortem hearings on the causes of Wall Street’s autumn 2008 collapse and ensuing bailout. Federal Reserve economists argue that the economy – and Wall Street firms apart from Lehman – merely had a liquidity problem, a temporary failure to find buyers for its junk mortgages. By contrast, Lehman had a more deep-seated “balance sheet” problem: negative equity. A taxpayer bailout would have been an utter waste, not recoverable.

Lehman CEO Dick Fuld is bitter. He claims that Lehman was unfairly singled out. After all, the Fed lent $29 billion to help JPMorgan Chase buy out Bear Stearns the preceding spring. In the wake of Lehman’s failure it seemed to gain the courage to say, “Never again,” and avoided new collapses by bailing out A.I.G. – saving all its counterparties from having to take a loss.

Was this not a giveaway? .Fuld implied. Why couldn’t the Fed and Treasury do for Lehman what they did with other Wall Street investment firms and stock brokers: let it reclassify itself as a bank so it could pawn off its junk mortgages at the Fed’s discount window for 100 cents on the dollar, sticking taxpayers with the loss? (And by the way, will these firms ever be asked to buy back these mortgages at the price they borrowed against from the government? Or will they be allowed to walk away from their debts in a Wall Street version of “jingle mail”?)

This is the soap opera that Americans should be watching, if only it weren’t conducted in the foreign language of jargon and euphemism. At issue is whether Lehman’s crisis was merely a temporary “liquidity problem,” that time would have cleaned up; or, did the firm suffer a more deep-seated “balance sheet problem” (negative equity), as Federal Reserve Chairman Ben Bernanke claims – a junk balance sheet, composed of assets that not only had no buyers at the time, but had no visible likelihood of recovering their market price even after the $13 trillion the Treasury and Federal Reserve have spent to bail out Wall Street.

Insisting that Lehman should have shared in Washington’s $13 trillion giveaway, . Fuld testified that his firm was just as savable as Countrywide or A.I.G. – or Fannie Mae for that matter. Lehman was perversely singled out, he claims. Was it not indeed as savable as the Fed and Treasury claim the U.S. real estate sector is? Like over-mortgaged homeowners, all it needed was enough time to finish selling off its portfolio, given enough loan support to tide it over.

The problem, of course, is that the securities that Lehman hoped to pawn off were fraudulent junk. American homeowners are victims, not crooks. Wall Street bailed out crooks at Countrywide and its cohorts. The credit-rating agency Fitch has found financial fraud in every mortgage package it has examined. And these are the packages that have made Wall Street rich and powerful enough to gain Washington bailouts to establish them as a new ruling class, bailouts to use for buying up Washington politicians and lawmakers, and for buying out the popular press to tell people how necessary Wall Street financial practice is to “support” the economy and “create wealth.”

Could any other daytime telecast have a more typecast villain than Fuld? A novelist would be hard-put to better personify greed, arrogantly playing bridge with his boss while Lehman burned. Yet his testimony has a certain logic. If the negative equity suffered by a quarter of U.S. homeowners can be saved, as the Fed claims it can, where should the line be drawn?

Or to put this question the other way around, why are ten million American homeowners being treated like Lehman, if the Fed believes that they are as savable as Countrywide and A.I.G.?

Huge sums are at stake, because the bailout has left little for Social Security, and nothing to bail out the insolvent states and cities, or for more stimuli to pull the national economy out of depression.

Most relevant in Fuld’s self-pitying defense before the Angelides Committee is not what he said about his own firm, but his accusation that the Fed and Treasury rescued the rest of Wall Street. Weren’t other firms just as bad? Why was Lehman singled out?

The Fed’s witnesses gave a devastating reply. They drew a clear distinction between a temporary “liquidity problem” and outright negative net worth – the “balance-sheet problem” of insufficient assets to cover one’s debts. Lehman was so badly managed, the Fed claimed, so reckless and arrogant in its belief that it could cheat its customers by selling junk at a huge markup, that it could not have been rescued except by an outright taxpayer giveaway. As the Fed’s Chief Counsel, Scott Alvarez, put matters: “I think that if the Federal Reserve had lent to Lehman … in the way that some people think without adequate collateral … this hearing and all other hearings would have only been about how we had wasted the taxpayers’ money – and I don’t expect we would have been repaid.” Like the city of Oakland, in Gertrude Stein’s derisive phrase, there wasno “there” there.

Included in the hearings’ evidence is an exasperated e-mail sent by Treasury Secretary Hank Paulson’s chief of staff, Jim Wilkinson, on Sept. 9, 2008: “I just can’t stomach us bailing out Lehman. Will be horrible in the press.” Five days later, on Sept. 14, he added that unless a private buyer could be found (e.g., as JPMorgan Chase stepped forward to buy Bear Stearns), “No way govt money is coming in … also just did a call with the WH [White House] and usg [U.S. Government] is united behind no money … I think we are headed for winddown.” (1)

Lehman’s problem was not just temporary illiquidity. It had a fatal balance-sheet problem: Its assets were not worth anywhere near what it owed. So with poetic justice, it was in the same position as the subprime borrowers whose junk mortgages it had underwritten and sold to investors gullible enough to believe Moody’s and Standard and Poor’s AAA ratings. This fraudulent junk was supposed to be as safe as a U.S. Treasury bond. But it turned out to be only as safe as Social Security and state pension promises are in today’s “Big fish eat little fish” world.

Yet . Fuld is correct in pointing out that not only Bear Stearns and A.I.G., but also Morgan Stanley and Goldman Sachs would have failed without state support. So the question remains: Why bail out these firms (and their counterparties!) but not Lehman?

This is too narrow a scope to pose the proper question. What needs to be discussed is the result of Washington arranging for Wall Street to repay its TARP, A.I.G. and other bailout money – including that of Fannie Mae and Freddie Mac – by “earning its way out of debt” at the “real” economy’s expense. Why has Washington refused to write down the bad debts of homeowners, states and cities, and companies facing bankruptcy unless they annul their pension promises to their employees? Why is Washington is treating the American economy like it treated Lehman and telling it to “drop dead”?

The explanation is that a double standard exists. The wealthy get bailed out – the creditors, not the debtors. And even the fraudsters, not their victims.

Sidestepping the Fraud Issue

Recent federal bankruptcy proceedings have exposed Lehman’s deceptive off-balance-sheet accounting gimmicks such as Repo 105 to conceal its true position. No fraud charges have yet been levied, but this is the invisible elephant in the Washington committee rooms. “Everyone was doing it,” so that makes it legal – or what is the same thing these days, non-prosecutable in practice. To prosecute would be to disrupt the financial system – and it is Fed doctrine that the economy cannot survive without a financial system enabled to “earn its way out of debt” by raking off the needed wealth from the rest of the economy?

So the Fed, the Treasury and the Justice Department have merely taken the timid baby step of pointing out that Lehman suffered from such bad management that no firm was willing to buy it out. Barclay’s was interested, but . Fuld was so greedy that he found its offer not rich enough for his taste. So he ended up with nothing. It is a classic morality tale. But evidently not fraud.

The fraud issue lies as far outside the scope of the financial committee meetings as the question of how the economy should cope with its unpayably high mortgage, state and local debts in the face of its inadequately funded pension obligations. Fed Chairman Bernanke testified on Thursday, September 2, that “the market” itself breeds what most people would call fraud. Widening the market for home ownership necessarily involves lowering loan standards, he explained. But as the Lehman failure illustrates, where should we draw the line between “illiquidity” and insolvency on the one hand, and higher risk and outright fraud?

The Fed argues that the economy cannot recover without a solvent financial system. But what about that large part of the financial system based on fraud? Would the economy fall apart without it – without mortgage fraud, without deceptive packaging of junk mortgages, and for that matter without computerized gambling on derivatives? What of the credit-ratings agencies whose AAA writings were as much up for sale as the conscience and honesty of politicians on the Senate and House Banking Committees? Do we really need them?

And does the economy need more credit (that is, debt)? Or does it need jobs? Does it need to un-tax the banks and give tax-favoritism to Wall Street (“capital gains” tax rates) to enable it to earn its way out of debt at the expense of the production-and-consumption economy?

The question that Washington financial committees should be asking (and economics textbooks should be posing) is whether wider home ownership is really dependent on easier and looser lending standards. After all, the effect of easy credit is to enable borrowers to bid up housing prices. Is this really how to make the U.S. economy more competitive – given the fact that industrial labor now typically pays 40 per cent of its wage income for housing?

Or, does the Fed’s easy-money policy deregulation of oversight open the way for asset-price inflation that puts home ownership even further out of reach – except at the price of running up a lifetime of debt to the banks that write the loans on their keyboard at steep markups over their cost of funding from the compliant Fed?

Qui bono?

Who is to benefit from the Fed’s easy money policy – consumers and homeowners, or Wall Street? This is the broad issue that should be discussed. What would have happened without the bailout? (Remember, Republican Congressmen opposed it – before that fatal Friday when “maverick” John McCain rushed back to Washington and said he would not debate . Obama that evening unless Congress approved the bailout of his Wall Street backers.) What if it had been the debtors who were bailed out by a write-down of bad debts, instead of the lenders who had made bad loans and the large institutions that bought them?

The bailout has saddled taxpayers not only with $13 trillion that now must be sacrificed by the economy at large (but not by Wall Street), with the cost of a decade-long depression resulting from keeping the bad debt on the books. This is what rightly should be deemed criminal.

Defenders of Wall Street insist that there was no alternative. And the committee hearings are carefully only listening to such people, because these are very respectable hearings. They are writing mythology, almost as if they are crafting a new religion. In this new ethic, Wall Street financial institutions – “credit creators,” that is, debt creators – are supposed to fund industry, not strip assets or make bad loans. Without rich people, who would “create jobs”? Such is the self-serving logic of Wall Street. For them, Wall Street is the economy. The wealth of a nation is worth whatever banks will lend, by collateralizing the economic surplus for debt service.

What the Angelides Commission really should focus on is whether this is true or false. That would make it a soap opera worth watching. The Fed so far has stonewalled attempts to discover just who was bailed out in autumn 2008? But most important of all is, what dynamic was bailed out? What class of people?

The answer would seem to be, financial firms employing and serving the nation’s wealthiest 1 per cent? Any and all fraudsters among their ranks? (There has not been a single prosecution, as Bill Black reminds us.) Or the remaining 99 per cent of the population – their bank deposits and indeed, their jobs themselves?

Academic textbooks pretend that the economy is all about production and consumption – factories producing the things their workers buy. The distribution of wealth does not appear, nor is it regularly tracked in statistics. But in Washington and at the hearings, the economy seems to be all about lending and debt, all about balance sheets.

I believe that the beneficiaries were fraudsters, and that the system cannot be saved. Trying to save it by keeping the debts in place – and letting Wall Street banks “work their way out of debt” at the U.S. economy’s expense – threatens to lock the economy in a chronic debt deflation and depression.

At issue is the concept of capital. Does money that is made by short-term, computer-driven financial trades qualify as “capital formation” and hence deserving of tax breaks? Are the billions of dollars of “earnings” reported by Wall Street speculators to be taxed at the low 15 per cent “capital gains” rate? That is only a fraction of the income-tax rate that most workers pay – on top of which is piled the 11 per cent FICA wage withholding for Social Security and Medicare that all workers have to pay on their salaries up to the cut-off point of about $102,000. (This cut-off frees from this tax the tens of millions of dollars that hedge fund traders pay themselves.) Or should these trading gains – a zero-sum activity where one party’s gain is, by definition, another’s loss (usually one’s customers) – be taxed more highly than poverty-level income of workers?

A short while ago the Blackstone hedge fund’s co-founder, Stephen Schwarzman, characterized the attempt to tax short-term arbitrage trading gains at the same rate that wage-earners pay as analogous to Adolph Hitler’s invasion of Poland in 1939. It is a class war against fraudsters and criminals – an unfair war as serious as World War II. In Schwarzman’s apocalyptic vision the Democrats are re-enacting the role of Adolph Hitler by mounting a fiscal blitzkrieg to force billionaires to pay as high a tax rate as workers. Are not Wall Street firms doing “God’s work,”as Goldman Sachs chairman Lloyd Blankfein, put it last fall? And if they are, then are not those who would tax or criticize Wall Street “God-killers”?

If religion can be turned on its head like this – where the Invisible Hand of Wall Street (invisible to the Justice Department, at least) is elevated to a faux-Deist moral philosophy – is it any surprise that economic orthodoxy and formerly progressive tax policy are succumbing? The rentiers are fighting back – against the Enlightenment, against Progressive Era tax policy, and against hopes for U.S. economic recovery. Given today’s florid emotionalism when it comes to discussing Wall Street finances, it hardly is surprising that the Angelides hearings do not dare venture into such territory as to ask whether the bottom 90 per cent of the U.S. economy might need to be bailed out with debt relief just as Wall Street’s elites were.

On Thursday, Fed Chairman Bernanke tried to put the financial flow of funds that led up to the crisis in perspective. In his testimony before the Financial Crisis Inquiry Commission he described a self-feeding process that actually started with the U.S. balance-of-payments deficit that made foreigners so flush with dollars. They understandably wanted yields higher than the Treasury was paying, as the Fed was flooding the economy with credit to keep asset prices afloat to save the banks from having to take loan write-downs and admit that debt creation was not really the same thing as Alan Greenspan euphemized in calling it “wealth creation.” So foreign financial institutions became a large but overly trusting market for packaged junk mortgages.

When asked just who was pushing the great explosion of mortgage lending, Bernanke pointed to the mortgage packagers – Wall Street profiting from the commissions and rake-offs it was making by pretending that the loans were not bad. However, he reminded his audience, there also had to be popular demand for housing. People were panicked. They worried that if they did not buy a home back in 2005, they could not afford to buy in the future. And they were cajoled with financial televangelists assuring them that they would always enjoy the option of selling at a profit. But Bernanke said nothing about fraud in all this. To widen the market for home ownership, banks had to write more mortgages, and this required lowering their standards.

So they did it all for us, for “the people” – and the backers of Fannie Mae and Freddy Mac who egged them on.

Where does “lowering loan standards” turn into outright fraud? Has that simply become part of “the market”? This is what the commission seems to fear to address. But it is getting late – already we are in September, and the report is scheduled for December. So is this really going to be “it”? This would be like a soap opera ending in the middle of the desert, with the main protagonists stranded. This seems to be where the Commission is leaving the U.S. economy as it waits for the recommendations of the Joint Commission to Roll Back Social Security, or whatever the name of Obama’s Republicanized Democratic commission is more formally called. The result is more like the cliffhanger of a serial, leaving the viewer to try and imagine how the protagonist – in this case, the economy – will ever manage to be saved.