Category: Economics & Finance

The Bear’s Lair: Let’s Atomize Wall Street

By Martin Hutchinson

Paul Volcker’s proposal that proprietary trading should be spun off from deposit taking banks is a worthwhile step in the direction of stabilizing the financial services business. However when you consider that business in detail, it becomes clear that further breakups are necessary in order to remove the excessive risks from the US economic system.

Volcker became something of a hero to the left for his sponsorship of President Obama’s bank-bashing announcement.  Indeed I was very much hoping that he could ride this new-found enthusiasm through a defeat of Ben Bernanke in his Senate confirmation vote, followed by a more or less unanimous Senate approval of a Volcker nomination to replace him as Fed Chairman. Assuming Volcker hadn’t suffered a Damsacene conversion to sloppy monetary policy while I wasn’t looking, Obama and the left would be suffering buyer’s remorse within about an hour of Volcker’s arrival at the Fed, but by that stage the deed would be done. I was practicing my Dr. Evil laugh for this eventuality, but alas it was not to be.

There are three problems with the current set-up on Wall Street: systemic risk, rent seeking and conflicts of interest. The Volcker proposal addresses the systemic risk problem to a great extent, but does not do much about the other two. For a complete solution we thus need to go further.

Continued...

Posted by Guessedworker on Tuesday, February 2, 2010 at 02:17 PM in Economics & Finance
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Hutchinson on Wall Street and the rent-seekers

A RENT-SEEKERS NIRVANA

By Martin Hutchinson

Goldman Sachs’ income from trading and principal investment rose 90% in the third quarter, while allocated remuneration per employee soared 46% to $527,000 in the first nine months of 2009. Good luck to them, but it shows once again that they and to a lesser extent the rest of Wall Street, are currently playing a different game to the rest of us. The question is, how best to restore the operation of a competitive free market.

Investment banking has changed radically over the last 30 years, and it’s not clear that either regulators or the market fully understand the modern sources of its income. Trading, a fairly peripheral activity 30 years ago, has come to dominate the investment banking income statement, with income arising for investment banks both through acting as intermediary and through “proprietary trading” for their own account.

The immense and unstoppable proliferation of derivatives is the principal factor that has brought this about. After all, total outstanding derivatives contracts at the end of 2008 had a nominal principal amount of $514 trillion, more than ten times Gross World Product. You don’t need to skim very much off the top of a pot of cream that size to make your practitioners very rich indeed. A decade ago, defenders of the derivatives revolution could reasonably claim that the economic value and risk of those contracts was a tiny fraction of the total outstanding. Today, when we have seen multiple examples of credit default swaps paying close to 100% on billions of dollars of obligations, that claim has become laughable; the fraction of risk involved in that $514 trillion isn’t as tiny as all that.

The intellectually curious must wonder what purpose all this activity serves. Defenders of derivatives and trading in general mutter the magic words “hedging” and “liquidity” and expect their questioners to fall back abashed. However there aren’t $514 trillion of exposures to hedge; indeed in a $50 trillion world economy there aren’t even $50 trillion of exposures to hedge. Hence at a very conservative estimate 90% of all derivatives activity serves nobody beyond the dealer community.

Continued...

Posted by Guessedworker on Monday, October 19, 2009 at 08:42 PM in Economics & Finance
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Citizen’s Dividends To Capture Parliamentary Governments

Citizen’s dividends—the replacement of all government transfer programs with a simple cash dividend paid equally to all citizens—is the single-plank political platform that can, in the present climate, be used by a minor party to capture control of virtually any parliamentary government in the West.

The rationale is simple:  Immigrants are not citizens and they would be deprived of public benefits.  This would be immensely popular.  Moreover, it would “empower” the populace to fight for their “entitlement” to their own country in a manner far more effective than any “get out the vote” campaign. 

The response by the political parties now in power—traitors that they are—would, of course, be to fast-track “a path to citizenship” for immigrants, but they would be doing so in an economic environment far from conducive to popular apathy toward such shenanigans.

This can’t work in the United States without the take over of one of the 2 major parties because of the way the electoral system works in the US.  But in parliamentary governments, minor parties can get a foot in the door, as demonstrated by the recent EU elections.  That’s all it takes because once this idea is aired in the halls of power, it will necessarily attract an enormous amount of attention from the usual suspects:

“Isn’t this racist?  Isn’t this inhumane?  Isn’t this xenophobic?  What about refugees?  Why should immigrants pay taxes if they aren’t going to get a citizen’s dividend?”

It would be wonderfully clarifying.

As for the economic effects, I’ll simply point out what should be fairly obvious by now:  The current economic crisis is caused by centralization of wealth to the point that the populace isn’t simply impoverished, but is so deep in debt that the consumer base has collapsed.  This was caused not by “easy money policies of the central banks” but by the subsidy of wealth built into any society that protects property rights by taxing economic activity.  The would-be upwardly mobile pay the bills—not the recipients of the primary government service:  protection of unnatural concentrations of wealth.  Although it is true that this means the proper source of revenue for the citizen’s dividend would be a net asset tax on in place liquidation value—a tax that eliminates taxes on economic activity—it is not essential to political success that such a tax reform be another plank in the platform of the citizen’s dividend party.  That change would come in due course as people were empowered to fight back against centralized wealth’s capture of government.  However, once the tax reform is adopted, the populace would be very motivated to maximize the net in-place liquidation value of the nation’s assets.  They will become keenly interested in the real externalities of immigration, graphically demonstrated in places like California.  They might even start thinking other taboo thoughts about human ecology, sociology, economics and politics.

Posted by James Bowery on Thursday, July 30, 2009 at 04:54 AM in Economics & Finance
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The Bear’s Lair: The Return of Thomas Mun

This is Martin Hutchinson’s current article on Prudent Bear, looking back to the mercantilist origins of China’s current grab for natural resources and pondering alternatives to the kind of future it implies.

GW

THE RETURN OF THOMAS MUN

China’s recent announcement that it would use its $2 trillion of foreign reserves to boost its companies overseas acquisitions tells us that its economic beliefs are neither those of Adam Smith, nor of Karl Marx, but of the 17th Century mercantilist Thomas Mun. It is becoming clear that in economics, unlike in “hard” sciences, old belief systems never die.

Mun (1571-1641) wrote a classic magnum opus “England’s Treasure by Foreign Trade.” Published only after his death in 1664, it was nevertheless very influential. Mun had been a Director of the East India Company, and, unlike earlier theorists, believed that foreign trade was beneficial. However he didn’t hold with any high-falutin nonsense like comparative advantage, or maximization of global economic welfare. For Mun the purpose of foreign trade was to export more than you imported and, consequently, amass a huge store of foreign “Treasure,” which you could then use to found colonies that would take control of natural resources.

To further this objective, countries should: cut back domestic consumption as far as possible; increase the use of land and other domestic resources to reduce imports; encourage the export of goods made with foreign raw materials; and export goods with price-inelastic demand because profits would be greater.

Mun’s theory made sense in the 17th Century economic jungle — and today it obviously makes sense to China. The renminbi, China’s currency, is undervalued, so exports consistently exceed imports. Domestic consumption is kept low and savings high, both of which suppress imports. In industries such as automobiles where consumer demand is inevitable, foreign manufacturers are forced into domestic joint ventures, so that domestic manufacturers can be developed to replace imports. Domestic agriculture and resource extraction efforts are intensive. China has set up free trade zones, in which foreign parts are assembled into goods that are then exported. Finally, the country has amassed a gigantic store of $2 trillion of “Treasure,” which is now to be used to assist in foreign acquisitions. Those acquisitions are not to be on Wall Street, as prime minister Wen Jiabao helpfully explained, but in natural resources, where China can assure itself of exclusive raw materials supplies for decades to come.

Continued...

Posted by Guessedworker on Tuesday, July 28, 2009 at 12:23 PM in Economics & Finance
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Best Defense of the Federal Reserve: Not “Out of Thin Air”

Intellectual honesty requires that one address the strongest, not weakest, arguments of one’s opponent. It is called “Devil’s Advocacy” or “Giving the Devil his Due” but it is not really advocacy, nor really even viewing one’s opponent as “the Devil”.  It is simple intellectual honesty.  Now, admittedly, we live in a very intellectually dishonest world—a world in which we are routinely demonized by a theocratic supremacy utterly uninterested in the truth or freedom—so there is very little reciprocation earned from us.  That is the strongest position of those who would not give the Devil his Due:  Why bother with intellectual honesty?

The answer is simply, that we seek the truth.

With that preliminary out of the way, let me address something that has been bothering me for some time about those who continually go on about the Federal Reserve “creating money out of thin air” as though they are counterfieting.  First, the money they create is backed by the threat of punishment—if you don’t obtain their money for payment of taxes, the government will throw you in prisons to experience “sexual awakening”—hence not “out of thin air”.  Now, everyone who uses the phrase “out of thin air” will more or less agree that this “backing” by a promise not to punish you if you present the Federal Reserve tokens is real but, they will object, there is no point in discussing such fine distinctions.

Yes there is.

There is a relatively strong argument from the supporters of fiat money and fractional reserve banking that gets trotted out for the favored few journalists, economics majors and politicians who are trained to ignore the rest of us.  We, the “Paranoid”—We, the “Kooks”—We, the “Extremists”—We, the People, are not exposed to it—until now.

Imagine a world in which people have taken a step up from barter to issuing IOUs for their goods or services—IOUs which can circulate.  Farmer John issues IOUs that say: “I, Farmer John, owe the bearer of this note 1 dozen eggs.” Tailor James issues IOUs that say:  “I, Tailor James, owe the bearer of this note 1 fitted suit.” These IOUs are traded around the community and a monetary system is established where the currencies have backing that is as real as the credibility of their issuers.  They are “debt money” in the sense that the issuer has made a promise to the bearer but they do not bear interest to anyone in particular.

Now comes the Banker:

The typical argument you hear from the opponents of Fractional Reserve Banking is that the Banker will have a store of gold that he represents with gold certificates that circulate in the community, and that he issues more certificates than he has gold in a blatant act of fraud.  But let’s go back to Farmer John and his eggs for a moment:  Farmer John doesn’t have the eggs.  He has chickens who lay eggs on a regular basis.  If Farmer John has a “run on the henhouse” by the holders of his IOUs, he’ll be accused of having “created IOUs out of thin air” because he won’t be able to service all the demands for his eggs in a timely manner.

Now is it true that the Banker’s main monetary service is the storage of gold for people, hence issuing tokens for more gold than he has in storage is fraud?

No.  That is not the Banker’s main monetary service.

The Banker’s main monetary service is to simplify the monetary system by accepting the IOUs from others and performing 3 services:

1) Evaluate the credibility of the barter tokens issued by Farmer John and Tailor James, etc.
2) Evaluate the liquid value of the goods and/or services offered by Farmer John and Tailor James, etc.
3) Issuing the bank’s IOUs in exchange for IOUs from Farmer John and Tailor James, etc. so that the community has a single currency.

It’s that simple.

Now, one may ask, where does the banker legitimately charge interest here?

Simply:  Sometimes Farmer John fails to provide eggs.  Sometimes Tailor James fails to fit suits.  The banker needs to charge what amounts to an insurance premium based on the credibility of Farmer John’s promises and another premium based on the credibility of Tailor James’s promises, etc.  Hence, the Banker is merely attempting to do what any honest insurance man does:  Cover his, and your, risks in participating in the monetary system under his responsibility.  No Gold need be involved at all.

Now that we better understand the legitimacy of a “central bank”, let us focus on the real problem:

When the bank links up with the tax collecting agencies, as happened in 1913 with the simultaneous passage of the Federal Reserve Act and the 16th Amendment to the US Constitution, it has acquired the government as collection thugs—thugs who will “break your kneecaps” if you don’t pay up.  At some point—and it isn’t well defined exactly when this occurs—the promises for delivery of goods and services cease to be the primary backing for the banker’s notes and the threat of punishment becomes the primary backing.

That’s the real problem with the Federal Reserve.

Posted by James Bowery on Monday, July 13, 2009 at 12:42 PM in Economics & Finance
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Debt and some very modest proposals

By John Rackell

I have been assured by a very knowing American of my acquaintance in London, that a young healthy child well nursed is at a year old a most delicious, nourishing, and wholesome food, whether stewed, roasted, baked, or boiled, and I make no doubt that it will equally serve in a fricassee, or a ragout.

Jonathan Swift: A Modest Proposal for Preventing the Children of Ireland from being a Burden to their Parents or Country, 1729.

Some proposals for solving particular problems of the day may have all the merits of logic on their side, assuming one acquiesces to facile assumptions and glib premises, but their conclusions are so outrageous that the proposal must be treated as satire.  Or God help us.

In our current circumstance of economic crisis – housing bubble burst, busted banks, bankrupt states and municipalities, exploding government liabilities, depression waiting in the wings (or hyperinflation or hyperinflationary-depression) – and those are only the manageable problems, to say nothing of the trashing of the West’s 500 year hegemony and the transfer of wealth and power to Asia, and China in particular – various proposals are being mooted that formerly would have been whispered only by conspiracy theorists or dismissed by sober minded people, or treated as satire.

To wit, the ones I’m familiar with, that the (US) government will force all holders of 401k and IRA plans (private, ‘self-directed’ pension plans for non-US readers) to accept zero-coupon government bonds in exchange for the assets in their accounts; these plans representing perhaps the single largest untapped source of wealth for the US government.

The other modest proposal, and the subject here, is the idea that the US should solve the problems of housing (primarily the vast excess supply of housing relative to current demand – the supply ‘overhang’ ) by giving any foreign person a US green card – i.e. an immigration visa – in exchange for their purchase of a housing unit.

One house, one immigrant – and his extended family.  Very neat. 

Continued...

Posted by Guest Blogger on Thursday, March 26, 2009 at 12:16 AM in Economics & Finance
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Cynicus Economicus - a blog you ought to read

by exPF

Cynicuseconomicus is a UK-centered economics blog, which develops a clear if somewhat pessimistic perspective on the state of the UK and US economies. Its most enjoyable facet is the clear discussion of the technical realities of the current economic situation - interesting to someone who wants to gain an understanding without an advanced economics degree. Things are explained felicitously.

The links on the left hand margin of the blog allow for an easy sequential reading of the past analytical work done on the blog, and one is quickly brought up to speed.

One of the recent revelations posted on Cynicus was the fact that the Bank of England’s policy of “Quantitative Easing” - in fact simply means the creation of money from nothing.  Thus being analogous to the printing of money undertaken by Zimbabwe, or Weimar Germany. He indicates on the blog that Britain is bankrupt and they are basically creating money from nuffin’ in order to finance - well, the status quo, basically.

Posted by Guest Blogger on Tuesday, March 10, 2009 at 10:53 PM in Economics & Finance
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Martin Hutchinson: The financial services rust belt

By Martin Hutchinson

Those who have visited Michigan recently or the Mahoning Valley of Ohio in the 1980s can recognize the symptoms of a rust belt. A hitherto prosperous industry, paying high wages to its employees, has been overtaken by market changes and is forced into harsh downsizing or even bankruptcy. As a result, the lives of many inhabitants degenerate into alcoholism, home foreclosures and welfare.

This time around, the decaying industry is finance, and the rust belt cities are London and New York.

The parallels with the US automobile industry are closer than they look. In the early years of the auto industry, it included both large companies and small specialty manufacturers, the latter being remembered now as producers of “vintage” cars of very high quality. Then the Great Depression wiped out most of the specialty producers, which could not compete with the mass producers’ costs. For the next several decades the business was dominated by a heavily-capitalized oligopoly with extremely highly paid employees, quite high profitability but deteriorating product quality. Finally, it became clear that the oligopoly was uncompetitive and the industry began to shed workers and close plants.

In finance, the early specialty producers were the London merchant banks; for Duisenberg, Packard and Stutz you can substitute Hambros, Warburgs=2 0and Hill Samuel. They too had superb product quality and are remembered with great fondness by their former customers, but were driven out of the business by heavily capitalized competitors, in this case running behemoth high-risk trading desks rather than mass production assembly-line factories. The employees of the well-capitalized behemoths were even better paid than the UAW workforce in the 1950s General Motors. Then gradually product quality began to deteriorate, and bad practices such as “liar loan” securitized mortgages, accounting “mark-ups” of assets that had not been sold and self-deluding risk management crept in.

The main difference between the two cases is that the collapse of the finance sector has taken the form of a sudden Gotterdammerung rather than the steady but inexorable decline characteristic of the US automobile industry. The bottom line is the same: Detroit needs to downsize radically, but so does Wall Street.

Continued...

Posted by Guessedworker on Monday, January 26, 2009 at 09:58 PM in Economics & Finance
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Who’s behind the global financial crisis? The nose knows

Bernard Madoff, another fine member of the tribe and a former Nasdaq stock market chairman, confessed to swindling U.S. $50 billion. But the confession is very strange. One would expect Madoff to claim innocence and take the next flight to Tel Aviv, but he pleaded guilty!

A closer examination reveals the whole affair to be yet another swindle by Jews. Madoff is alleged to have defrauded many financial institutions. Easily half of the investors that he defrauded are professional financial institutions, usually full of Jews. Nobody knows better about Jewish conniving, swindling and general criminality than the Jews themselves, yet the Jews let themselves become a victim of a ponzi scheme? How did the professional investment firms – Hedge funds, banks – not see through the swindle? Among the “big individual losers,” we see names like Holohoax propagandist Steven Spielberg and Master Holohoaxer Elie Wiesel (pronounced Weasel) Foundation for Humanity.

How did the defrauded professional companies authorize investments on the order of hundreds of millions or even billions of dollars without extensive internal checks and controls, involving multiple individuals at the highest levels of their institutions? The defrauded professional institutions could not possibly have failed to audit the investment profile of Madoff’s hedge fund over the past 3-5 years, specifically looking at Madoff’s assets, investment methods and how his fund obtained returns. There’s no way Madoff could have scammed the professionals. And how did Madoff manage to hide such massive swindling from US regulators, traders, accountants, other financial professionals, even his own senior employees for years? Another impossibility.

What’s going on is clear. If a hedge fund goes bust naturally, it’s the investors’ loss, but if it goes bust because of fraud, then the defrauded investors – which in our case are “defrauded investors” – will be able to claim compensation by law, which will be coming from the general public. The “victims” will also get to claim back some taxes on the lost money. Compensation has already been approved, in principle, by a judge, without an examination of the evidence and meticulous documentation of the fraud. After all, Madoff has pleaded guilty and there’s little need to document the fraud. And should anyone attempt to obtain, for the record, the minutiae of the alleged swindle, most of the financial records will be missing.

Here’s something interesting from the daily mail online

The Jews are trying to portray themselves as victims by claiming that there’s one Jewish criminal but lots of Jewish victims, including Jewish ‘welfare and charity’ institutions, i.e., Jewry is not behind this alleged swindle, and that the behavior of a single Jew has led to an explosion of ‘anti-Semitism’ online. I wonder what proportion of the ‘anti-Semitic’ goyim has realized the true nature of the swindle – as documented above – rather than bought into the claim that another Jew swindler was arrested after defrauding people of billions, including many Jews. As the Madoff “investigation” proceeds, expect to see more Jews pop up in the right places...Madoff’s attorney is Dan Horwitz, the Judge that set relaxed conditions for Madoff’s bail is Gabriel Gorenstein, etc.

Continued...

Posted by J Richards on Sunday, December 21, 2008 at 03:10 PM in Economics & Finance,  Global Elitism,  Jewish Diaspora,  Media,  That Question Again
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Banking Crisis

Dr K R Bolton FCIS

The crisis among international finance is, I’m inclined to think at this stage, more a natural cyclic product of parasitism than a manipulated contrivance as in the 1930s Great Depression.

What is interesting is that parasitic finance, or what is historically called usury, operates in the manner of social Darwinism, where even the esteemed Lehmans Bank was not saved by its fellow parasites. Lehmans has historically been up the top of the global cabal of power manipulators beside the likes of Rothschild, et al; but Goldman Sachs, also among this globalist cabal, refused a bail out. A “newer comer”, Merrill Lynch has likewise gone to the wall.

As far as results go, however, the international financial system is becoming increasingly centralised, and you can be sure that none of this cabal will suffer. They will remain part of the world power game, as the interlocking directorates of banks and other corporations ensure the positions of every member of the globalist cabal.

An interesting sidelight is that the same cabal that has promoted Free Trade ideology since the 19th Century (while simultaneously backing Marxism in pre-industrial rural-based spiritual countries such as Russia, as part of a dialectical transition from traditional society to Marxism to parasitic capitalism) has resorted to appealing for state intervention to prop up certain entities, without which the financial fallout would cause wholesale collapse, and perhaps a rerun of the 1930s where Fascism and National Socialism emerged in rebellions against Free Trade and usury.

However, while the Great Depression spawned a variety of alternatives, including Fascism, Corporatism from Portugal and Austria to Brazil, Social Credit and Distributism; and other mass movements often inspired by Catholic social doctrine, such as Father Coughlin’s Social Justice; it seems that decades of ignorance and apathy will ensure that there will be no such upsurge in popular alternatives. Aberrations such as Ron Paul, who sought the Republican nomination for presidency, were quickly reduced to invisibility with the help of an obliging media.

Obama is presented as the man of the people to overcome crises, just as Roosevelt was, and both were backed by the same cabal.

Additionally, the Catholic Church, once a major factor in spawning mass alternatives to both capitalism and socialism, on the basis of Papal encyclicals and historic opposition to usury, has long since abdicated its role as offering any worthwhile alternative other than a banal crypto-Marxism called the social gospel. A notable exception is the Canadian based Pilgrims of St Michael, a social credit movement spawned in the 1930s, which has retained the old crusading zeal that has long since evaporated from all other such movements and parties.

Kerry Bolton is the editor of Restoration Magazine.

Posted by Guest Blogger on Friday, September 19, 2008 at 11:51 AM in Economics & Finance
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So what will a world free of the big five investment banks look like?

Several times over the last few months I’ve considered putting together a post about one or other jaw-dropping new development in the banking crisis.  But then I’ve realised how difficult answering any of the really big questions, as they will affect the lives of our people, really is.  So I restricted myself to one post on the politics of sub-prime and one on the privatisation of profit and the socialisation of risk (a polite way of saying “theft").

Now, with the sudden acceleration of events to completely undreamt of levels of destructiveness, I think it’s time to at least acknowledge the moment.

Prior to the collapse, there were five truly global investment banks cum securities trading and brokerage firms in Wall Street.  Bear Stearns and then, in one momentous day, Lehman Brothers and Merrill Lynch were despatched.  The remaining two seem to be taking on the appearance of dominos:-

“The fear is who is next,” said John O’Brien, senior vice president at MKM Partners LLC in Cleveland. “It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear.”

Shares of Morgan Stanley and larger rival Goldman fell as much as 43 percent and 27 percent, respectively, even after both reported better-than-expected quarterly earnings on Tuesday.

“I’m assuming that Goldman Sachs and Morgan Stanley are lining up dancing partners. They don’t want to be ... this week’s victim,” said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.

... “Seems like the SEC is a day late on the rule ... Morgan Stanley is clearly in the short-sellers’ sights,” said Andrew Brenner, senior vice president at MF Global in New York.

Continued...

Posted by Guessedworker on Wednesday, September 17, 2008 at 07:34 PM in Economics & Finance
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Hutchinson on the murder of US manufacturing

Martin Hutchinson treated his readers at Prudent Bear to a dose of blue collar reality this morning, mourning the technological manufacturing future that a generation of American politicians, financiers and businessmen threw away for short-term gain.
GW

GE’s announcement a week ago that it would accept offers for its appliances business marked the death-knell of yet another US manufacturing business, one among so many in US manufacturing’s long and seemingly unstoppable downtrend since 1980. That decline may seem an inevitable historical trend, and Wall Street’s analysts would claim that the US economy can prosper just fine without it. Yet impartial analysts of the putrefying corpse of US manufacturing capability are forced into an inescapable question: did it die of natural causes or was it murdered?

For the last 30 years, Wall Street’s insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. However the US economy as a whole has continued to thrive, as financial services doubled its share of Gross Domestic Product and grew to provide 40% of the earnings on the Standard and Poors 500 share index. Prosperity was heavily skewed towards the very rich, but the majority of Americans continued to enjoy a general, if halting improvement in living standards.

The collapse of the financial services bubble has however called into question three of Wall Street’s most cherished beliefs about manufacturing:

· First, Wall Street believes that financial services and other services can take the place of manufacturing, and that the United States can remain a prosperous economy thereby.
· Second, it believes that manufacturing tangible products is an intrinsically low-skill and uninteresting operation, so that the US would do much better to specialize in “symbol manipulation.”
· Third, it believes that the decline in US manufacturing was and is inevitable, so that decline would have happened whatever strategies management had adopted, and whatever resources and attention it had devoted to manufacturing activities.

The inevitability of manufacturing’s decline is in some ways the most interesting question, which has not been addressed much elsewhere. Most large-scale events of this nature appear inevitable in retrospect, yet if examined in detail can be shown to have been triggered by a series of decisions that could have gone the other way.

Continued...

Posted by Guessedworker on Monday, June 16, 2008 at 06:25 PM in Economics & Finance
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Hutchinson looks ahead: The draining of national prosperity

By Martin Hutchinson

The first quarter Gross Domestic Product rise of 0.6% was greeted with considerable relief by most Wall Street commentators; they had expected the chaos in the housing market and the banking system to have pushed the US economy into recession. This was unreasonable; the huge monetary stimulus currently being hurled at the economy was always likely to prevent immediate recession, while the fiscal stimulus of the $110bn rebate package is likely to prop it up through July or so. Beyond that, the future becomes less clear: at some stage the monetary and fiscal stimulus must run out.

As I have frequently written, monetary conditions have been pretty lax since 1995. It had been becoming difficult to determine how lax since March 2006, when the Federal Reserve stopped reporting M3 money supply, the measure used by the European Central Bank and other monetarist organizations. However the St. Louis Fed, which for the decade until April was run by the monetarist William Poole, has constructed its own measure of broad money, Money of Zero Maturity, which is a reasonable proxy for M3; it consists of M2 plus institutional money market funds minus small time deposits. Like M3, MZM began to expand excessively in early 1995; in the 13 years to March 2008 it grew at an average annual rate of 8.88%, compared with growth in nominal GDP during that period of 5.25%.

Thus monetary policy, however measured, has been excessively expansionary since 1995, in the sense of expanding the money supply faster than output. As I have written previously, the inflation-creating effect of this excessive monetary expansion has been suppressed for a decade by the Internet, which has had a similar deflationary effect through enabling outsourcing to cheap labor countries that the railroads and refrigeration did in the 1880s through allowing cheap agricultural produce from the Midwest, Canada, Australia and Argentina to be shipped worldwide.

From the beginning of 2008, however, monetary expansion has sharply accelerated. In the three months to April 21, the latest data available, MZM expanded at an annual rate of no less than 28.7%. This extra-rapid expansion is not surprising – the Fed has been terrified that the US financial system was about to collapse, and has been making funding available in large quantities in a variety of ways. Indeed on May 2 the Fed, concerned about the credit card financing market, allowed banks to use credit-card-backed AAA bonds as security for Fed loans – needless to say this involves yet more monetary expansion and further risk to the taxpayer. Monetary stimulus of this extraordinary magnitude will have an effect, it has to.

Continued...

Posted by Guessedworker on Monday, May 5, 2008 at 11:02 PM in Economics & Finance
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Max Keiser on the socialisation of financial risk

Max Keiser, the engaging and extremely well-travelled financial journo at Al Jazeera, on the clear implications of central bank support for dumb and busted speculators:-

The money quote - sorry for the pun - comes right at the end.  “In this globalised financial world the profits have been privatised and the risks have been socialised”.  In other words, the bankers can’t feel the effects of their crazier speculations because government simply shifts the losses to the taxpayer.  In effect, the more crazy the speculation and the more spectacular the losses, the more certain it is that government will insulate the errant banker from the pain he causes.  Government actually condones his most irresponsible speculation.

How sustainable this nonsense is, we are now engaged in discovering.  Economic common sense dictates that it isn’t sustainable at all, and the longer it takes for the cost to return to source, the more likely the financial system will not be able to accomodate it, and will collapse.

Another very good financial dissection by Keiser, this time on what the yen carry trade is doing to Iceland, is available here.

Posted by Guessedworker on Saturday, March 29, 2008 at 11:39 PM in Economics & Finance
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Government bullied sub-prime lenders for the love of anti-discrimination

Recently on an MR thread the question arose as to whether Latinos and blacks were really at the root of the sub-prime crisis.  Here’s Stan Liebowitz, who is the Ashbel Smith professor of Economics in the Business School at the University of Texas at Dallas, with a definitive “yes”.  Thanks to “The Fellist” for the link.

THE REAL SCANDAL

How feds invited the mortgage mess

PERHAPS the greatest scandal of the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.

At the crisis’ core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant’s ability to make payments; no down payment.

Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?

From the current hand-wringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and “progressive” political forces.

Continued...

Posted by Guessedworker on Saturday, February 9, 2008 at 10:32 PM in Economics & Finance
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The Myth of the Rational Voter

I read The Myth of the Rational Voter by Bryan Caplan, 2007, and like many books, the title does not reflect the full extent of the book’s contents. Nevertheless, there are some interesting points addressed in the book that may be of interest to many of you.

One area of interest I have is how to make humans rational, either through breeding or education—whatever it takes. Human rationality is often addressed by the “heuristics and biases” research that tries to uncover how and in what areas humans are often biased through their evolutionary history. One frustrating component to this research is the absence of any generalized set of tests, similar to intelligence testing, which could score how rational a person is. This could be rectified if people were truly scientific materialists, relying entirely on empirical evidence, but it is clear that humans prefer religion, ideology, politically correct dogmas, etc., and reject science when it impinges on their uncritically embraced preferences. A good example is Richard Dawkins’ rejection of a belief in god, while he embraces secular humanism without question.

Continued...

Posted by Matt Nuenke on Sunday, January 20, 2008 at 03:52 PM in Economics & Finance
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Between the Scylla of the crunch and the Charybdis of inflation, and in the Bear’s Lair

The papers have done their share of economic forecasting today.  In particular, The Telegraph ran a bloodcurdling take on the liquidity crisis, filled with lurid fears of downward spirals, super-depressions and the financial system tipping into the abyss.  The sub-prime loans crisis - pretty much a black and Hispanic thing - has “hit a vital nerve of the international financial system”, according to one Swiss central banker.  The article, however, plainly says, “severed a major artery.”

Meanwhile, Martin Hutchinson at Prudent Bear has produced a less hysterical and more technical forecast for 2008.

THE FUTURE OF THE CREDIT CRUNCH

Observers of the credit crunch that has been bedeviling financial markets since August were mostly highly relieved this week when the European Central Bank injected some $500 billion into the world’s banking system via low cost funding and the Fed followed up with $40 billion of its own. This sharply lowered the premium that interbank deposit rates have commanded for the last four months over Treasury bill rates. However in the general rejoicing that the international financial markets were not about to ruin everybody’s Christmas, one question has so far been ignored: How in hell are the ECB and the Fed ever going to get their money back? The financial fate of the world’s taxpayers, as well as the future of the markets themselves, rests on the answer to this question.

Continued...

Posted by Guessedworker on Monday, December 24, 2007 at 11:06 PM in Economics & Finance
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The Bear’s Lair: Spirals of death

Martin has sent me his latest Prudent Bear piece, which deserves the posting here.

GW

Close observers of the US housing finance disaster in recent months will have noted a curious phenomenon. Companies such as Countrywide that were in late August regarded as rock solid have recently passed clearly into the danger zone while those like Fannie Mae and Freddie Mac that were regarded as potential market saviors have come under a cloud. In Britain Northern Rock, whose September bailout was said to be modest, involving little risk to the taxpayer has now turned into an immense 25 billion pound ($51 billion) potential black hole – real money even in the US economy let alone in the much smaller British one. This illustrates a deeply troubling quality of the largest downturns: the tendency for the free market to turn into a death spiral, in which even sound well-run institutions are engulfed.

Death spirals are fairly rare in financial history. The Wall Street Crash of 1929 was perhaps the most virulent example. After the first downturn, the market recovered for several months. Then the collapse of the Bank of the United States in December 1930, together with the further economic damage from the Smoot-Hawley Tariff caused a further collapse in confidence and activity that was concentrated in the banking sector, as relatively solid institutions followed the Bank of the United States into bankruptcy. The Federal Reserve failed to correct for the money supply contraction caused by the bank bankruptcies, leading the US economy further into the pit. The additional shove given by President Herbert Hoover’s 1932 tax increase was almost unnecessary; only the confidence brought by a new president (albeit with equally counterproductive economic policies) brought recovery from 1933. By the time the spiral was over, more than one fourth of the banks in the United States had gone bankrupt and the stock market had bottomed out at one tenth of its peak.

Continued...

Posted by Guessedworker on Tuesday, November 27, 2007 at 12:11 AM in Economics & Finance
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The Bear’s Lair: The decline of Western incomes

A not-so-wealthy West, foreseen by Martin Hutchinson at the mainstream financial bulletin, Prudent Bear.  The piece is a follow-on from his - to mainstream financial minds - sobering prognostications on the matters of outsourcing and migration.

GW

Negative earnings surprises by Pfizer and Caterpillar at the end of last week may indicate a new reality: the income premium for being a Westerner and having access to the centuries of Western intellectual property and business acumen may be sharply diminishing. We can all rejoice as poor and middle income countries are brought up to Western levels of affluence, but our rejoicing will presumably be sharply diminished if we come to realize that much of their gains may be at the expense of our children’s living standards.

The vision of the world of 2050 or 2100, in which the great majority of Third World peoples enjoy more or less Western living standards, has always been a but fuzzy. Thirty years ago, if you had asked people to imagine the world of 2050, all but the most manically environmentalist would have envisaged Third World residents enjoying living standards comparable to those of current Westerners, while the affluent West had reached living standards that could currently be dreamed of only by an affluent few.

The more thoughtful would have recognized that there was simply not enough space for the squirearchical dream of robot servants for all, together with country houses and rolling parklands. However the 18th century customers of Capability Brown didn’t enjoy modern plumbing, found travel impossibly time-consuming and uncomfortable, and had a nasty tendency to die in childbirth at 30 or of flying gout at 50. 2100’s median Western real income of $250,000 or so would have to be spent differently, but the income itself seemed pretty assured, given the continuance of technological development.

That is no longer the case. Elite opinion remains wedded to globalization as the best of possible economic policies, and believes with fanatical devotion that David Ricardo’s Doctrine of Comparative Advantage will ensure that there will be no significant class of people, even in rich countries, who lose out because of it. However it is becoming increasingly obvious to the populace as a whole that globalization produces substantial numbers of losers, particularly among the less well educated inhabitants of Western countries. No amount of cheaper consumer goods will assuage your pain if you have been forced to exchange a $25 an hour factory job for a $8 an hour service job.

I have discussed previously the effect of outsourcing and international migration on living standards at the bottom of the scale. Here I want to examine the extent that the advantages which have traditionally kept Western countries affluent—in particular those of financial capital, intellectual capital and a near-monopoly on innovation—are all losing their power to differentiate living standards.

Continued...

Posted by Guessedworker on Monday, July 23, 2007 at 09:40 PM in Economics & Finance
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The Bear’s Lair: Washing their hands in bubbles

Some grim predictions for the American, Chinese and British economies by Martin Hutchinson, in his latest piece at Prudent Bear.
GW.

The Federal Reserve, the Bank of England and the People’s Bank of China have this week all been faced with the same unpleasant reality: by their irresponsible monetary policies they have enabled gigantic asset bubbles that are redistributing wealth towards the criminal classes and in the long run will impoverish everybody else. Their reaction has been similar; to a large extent they have washed their hands of the problem.

The Bank of England’s response was most rational; it put up interest rates, though only by ¼%, far less than is required to right the foundering ship of Britain’s economy. The People’s Bank of China at least deplored the bubble, though it failed to recognize to what extent its irresponsible monetary policies and suppression of the yuan’s exchange rate had fueled it – but then after all, these people are nominally Communists; one cannot expect them to get it right every time when they are shown so many bad examples from abroad. The Fed on the other hand kept interest rates flat, as it has since last June, while easing its anti-inflationary language slightly – thus essentially acting as enabler to the Wall Street speculators, who had by Friday convinced themselves yet again that interest rates were about to drop.

Continued...

Posted by Guessedworker on Tuesday, May 15, 2007 at 10:11 PM in Economics & Finance
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The Bear’s Lair: The unstructured 21st Century

On a recent thread Karlmagnus invited us to post on Wolfie’s romantic difficulties, for which purpose I have been waiting for the unsavoury denouement.  However, I no longer need worry since the Bear has covered the matter in his latest offering at prudentbear.com.  The President of the World Bank may be pleased to learn that the column does not dwell too long on his love life.  He may be less pleased to learn that it details instead some of the unlovely aspects of the world he is striving so manfully to create.

GW

The decline of established institutions is supposed to be a liberating process, allowing individuals to express themselves fully and society to reach its potential through temporary structures that express its needs and values at a given time. Yet for those of us who are not 28 year old hedge fund traders, the new unstructured world seems likely to be a pretty grim place. “If you want a friend, get a dog” is in the long run an unpleasant way to live life.

The public sector in this respect is less of a problem than the private. The IMF and the World Bank have lost their useful economic role (to the extent they ever had one) but it appears unlikely that they will ever be abolished. The World Bank in particular is currently going through a bout of questioning because of its president Paul Wolfowitz’s crusade against Third World corruption. This is an entirely worthy if unpopular cause that is marred by the World Bank’s arrogance in tying it to handouts of money and by Wolfowitz’s own activity in arranging an overpaid tax-free job for his mistress. (One does not wish to be ungallant, but those wishing to make a salacious meal out of this case cannot have Googled the lady’s photo.)

Continued...

Posted by Guessedworker on Monday, April 16, 2007 at 10:07 PM in Economics & Finance
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The Bear’s Lair: Breaking the BRICs

Not an overly “majoritarian” issue this week.  But Martin Hutchinson’s mini-tour of the global investment hotspots makes a good read, even if you’re poor like me.

Breaking the BRICs

Over the last few years, emerging market investment has been overwhelmingly centered around the concept of the “BRIC” group of emerging economies – Brazil, Russia, India and China. These countries were supposed to be the giants of 2050 and the only emerging markets that a truly Important institutional investor should consider, because of their liquidity. Like most ideas spawned by investment banks (truly original minds are weeded out by the banks’ Darwinian appraisal systems pretty rapidly) this idea was vapid and silly at the time. More interestingly, it is now a recipe for gigantic investment losses. There are economies in the world with excellent medium term prospects, but none of the BRICs qualify.

Continued...

Posted by Guessedworker on Tuesday, March 20, 2007 at 11:47 PM in Economics & Finance
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The Japanese economic model as a refutation of neoliberalism

The following Post-Autistic Economics Review article, from March 2005, is an investigation of Japan’s enduring economic success by Robert Locke.  It was sent to me by Wintermute who urged me to read the whole thing.  It’s long ... some 8,000 words.  So I will not reproduce it in its entirety here.  But if you want to understand how the Japanese function economically, and whether they have a better way of doing things than our market-driven approach, I do urge you to read the article in full at source.

GW

Japan, Refutation of Neoliberalism

No-one wants to talk about Japan these days.  The conventional wisdom is that the bloom went off Japan’s economic rose around 1990 and that the utter superiority of neoliberal capitalism was vindicated by the strong performance of the American economy during the 1990s.  Furthermore, everyone is now convinced that China – whose economy is 1/8 the size of Japan’s – is the rising economic power and therefore the appropriate object of attention.

But Japan is, despite everything, still one of the master keys to understanding the future of the world economy, because Japan is the clearest case study of why neoliberalism is false.  Simply put, Japan has done almost everything wrong by neoliberal standards and yet is indisputably the second-richest nation in the world.

This doesn’t mean that neoliberalism is wholly meritless as an economic theory or as a development strategy, but it does mean that its claim to be the only path to prosperity has been empirically falsified.  Japan’s economy is highly regulated, centrally-planned by the state, and often contemptuous of free markets.  But it has thrived.

What follows is for space reasons necessarily a sketch and exceptions, subtleties, and refinements have been left out.  Facts have been homogenized and caricatured to make structural fundamentals clear.  But a reader who bears this in mind will not be misled, as detail analyses are available elsewhere.

Continued...

Posted by Guessedworker on Saturday, March 17, 2007 at 11:59 PM in Economics & Finance
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The Bear’s Lair: This is what it will look like

On February 28th Karlmagnus, in response to a question about major business managers on PF’s Calcium Imaging thread, ventured the opinion that:-

… since the system is about to collapse, the intellectual outlook of management may be very different at Dow 5000 to what it was at Dow 12000.  No point trying to change their thinking at the top of the bubble; large numbers of the current mob (particularly the investment bankers) will be behind bars by 2012, only peripherally because of their ideas on globalisastion.  Just as 1935’s CEO was a very different animal from 1928’s, so too will 2014’s be very different from today’s.

Requests for elaboration went unanswered.  But evidently, KM had already been at work on this because today the following piece appeared at Prudent Bear.

GW

This is what it will look like

It’s impossible to tell when the world’s stock markets will finally wake up from their easy-money induced stupor, but one thing is clear: when they do so the initial break will look like last Tuesday. A modest event of no apparent global significance will cause a stock market drop that cascades around the world, producing severe declines in other markets. Last Tuesday’s break may or may not have started the climacteric sell-off, but that sell-off cannot be long delayed.

More interesting than the unanswerable question of when precisely a crash will occur is that of which sectors will be worst affected, which relatively unscathed. Current market thinking appears to be that since the crash originated in China, that market is due for a significant downturn, and that emerging markets in general are overpriced and due for a fall. That view fails to reflect an intelligent appraisal of where the true economic vulnerabilities are.

Continued...

Posted by Guessedworker on Monday, March 5, 2007 at 05:29 PM in Economics & Finance
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The Bear’s Lair: Oil - the Sword of Damocles

Here is Martin’s latest offering at PrudentBear.com.  Subject matter: the highly political global oil economy, following on rather neatly from James’ antennae-twitching piece on hyper-inflation.

Since the recent drop in oil prices, the market appears convinced that we have seen the last of their stratospheric rise – the NYMEX oil futures contract remains under $70 per barrel for the next 2 years, for example. However the free market economists’ theory that supply will always arrive to meet demand increases is pretty shaky in the oil sector, and the market looks likely to be wrong.

In conventional analysis, the surge in demand from the emergence of India and China and a strong economy in the West is believed to be temporary.  Prices may be boosted by an unexpected event such as Hurricane Katrina or the Nigerian oil disturbances, but a sustained period of high prices such as in 2005-06 produces additional sources of oil supply. These take time to appear but eventually satisfy demand and drive prices down to their equilibrium level, currently thought to be in the $25-30 per barrel range.

This analysis may be wrong for a number of reasons.  On the demand side, this is not an ordinary economic boom, but has been “turbocharged” in China and India by the Internet’s one-off enabling of outsourcing to those two countries.  Thus the world’s economic growth is heavily concentrated in China and India, particularly China, rather than in the countries of the West and Japan in which oil demand is relatively saturated. 

The Chinese automobile market has grown from 3.2 million vehicles in 2002 to 7 million in 2006, and is now the second largest automobile market in the world, just ahead of Japan, 40% of the size of the U.S. market and 10% of the world market. Naturally the buyers of these vehicles are going to drive them, since gasoline remains a relatively small part of the overall purchase and maintenance cost of an automobile. Hence gasoline demand in China is rising not by the country’s 10% overall economic growth, let alone by the lesser figure that might be expected as usage becomes more efficient, but by something fairly close to the 22% per annum growth rate of Chinese automobile ownership. 

While Chinese gasoline usage still represents a modest share of world oil demand, if even a small part of the oil market is growing structurally by 22% per annum, the normal effect of higher prices in encouraging conservation and reducing consumption may be swamped. Indeed, that appears to be the case; in 2005 world oil demand increased by 1.2 million barrels per day, in spite of an average oil price around 40% higher than in 2004. Almost all that increase in demand was outside the OECD group of wealthy countries.

Continued...

Posted by Guessedworker on Monday, October 23, 2006 at 08:53 PM in Economics & Finance
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