Posts Tagged ‘Economy’
Mendacious Commercials Against Financial Regulation
Annie Lowrey over at The Washington Independent has a nice post deconstructing the latest series of advertisments attacking the financial regulation bill now being debated in the Senate.
I admit I hadn’t seen this lovely bit of propaganda until she drew my attention to it, and it’s interesting to examine the claims it makes. The first rule of propaganda is to attribute to your enemy your own actions and intentions. Thus, the commercial rather cleverly accuses the Senate of setting up an apparatus for “unlimited bailout authority”, and, astoundingly, claims that “Goldman Sachs is in favor of the bill”.
Neither of these statements is true, of course, but the implications go deeper than that. As TPM revealed earlier this week, the sponsors of the ad, a front-organization calling themselves “Stop Too Big to Fail”, are funded entirely by corporate dollars, including, yes, Goldman Sachs. This attempt to dust up public anger against the financial reform bill indicates Wall Street’s fear of it, and their willingness to tell any lie in order to see that the reform bill doesn’t pass.
Not that they really have that much to worry about. As George Washington remarks, the reform bill currently being debated is “All Holes and No Cheese“, noting that:
Dodd’s bill:
- Won’t break up or reduce the size of too big to fail banks
- Won’t remove the massive government guarantees to the giant banks
- And won’t even increase liquidity requirements to prevent future meltdowns
What it will do, however, is set up new protections for consumers, specifically to protect them from predatory lending practices, overdraft fees, byzantine contracts that require a Ph.D to understand, etc. The bill will also (hopefully) enact some barriers to the trade of over-the-counter (unregulated) derivatives, those delightful instruments that got us into this crisis.
As with the health care bill, I feel really ambivalent about this.
On one hand, the Dodd bill does almost nothing to prevent too-big-to-fail, it proposes some watered-down reform on derivatives trading, it doesn’t reduce the size or power of our mega-conglomerate banks, it doesn’t reinstate Glass-Stegall, and it does nothing to rein in the frankly absurd amounts of cash the bank executives make, whether or not they happen to crash the economy
On the other hand, this bill does provide some new consumer protection services, it bans proprietary trading (whatever that is), and it does create a new regulatory body whose specific charge is to watch over our mega-banks (as opposed to the SEC, which has a universal mandate).
Is this good enough? Can we do better? With the flood of Wall Street money flowing into campaign coffers, and with the November election only 6 months away, I’m inclined to say no. Maybe we should take what we can get. And keeping in mind that, unlike the health-care bill which had full industry support, the Dodd bill is being opposed by nearly every major bank, maybe it isn’t so bad after all. If the banks are against it, there must be something good inside this bill.
Update: Also see Nomi Prins’ article in Alternet entitled “Ten Ways The Dodd Bill is Failing on Financial Reform“:
It won’t constrain the Fed’s future bailout operations. It appears to limit the Fed’s ability to lend money freely to firms in trouble by “allowing” its system-wide support only for healthy institutions or systemically important market utilities. But what’s to stop the Fed from designating any company a “systemically important market utility”? That was basically the rationale behind the AIG bailout.
Update II: It’s also important to keep in mind that Chris Dodd, the bill’s sponsor, is heavily funded by some of the most odious Wall Street titans, including Citigroup (who gave him $110,000 this cycle), AIG ($87,000), Merrill Lynch ($61,650), Morgan Stanley ($44,000), and JP Morgan ($37,000). Hooray for transparency!
A New Non-Profit News Venture – Without Millionaire Benefactors!
Alan Mutter over at Newsosaur gives us a great profile of a new non-profit news startup in Minneapolis called MinnPost that seems to be as good a hope as any to revive our failing news economy:
MinnPost, a scrappy news start-up in Minnesota, is beginning to show how to run a sustainable non-profit venture without depending on major philanthropic support.
And it is doing so in two ways: First, by keeping costs low. Second, by raising money almost continuously through such diversified initiatives as advertising, NPR-style user contributions and even an annual gala featuring organic-vodka martinis.
In other words, the highly regarded Minnesota news site is the antithesis of such large-scale journalism projects as Pro Publica, Texas Tribune and Bay Citizen, which at this writing all rely on multimillion-dollar endowments from wealthy individuals and institutions.
MinnPost not only started life without a multimillion-dollar nest egg but also is committed to fully supporting its ongoing operations without major philanthropic donations by 2012, says Joel Kramer, a former editor of the Minneapolis Star Tribune who launched the site in 2007.
Back when Propublica emerged we heard a lot of talk about how its model of non-profit news gathering was a harbinger for the future of news. And while they have given us a series of fantastic investigations, capped most recently by their explosive profile of corrupt hedge fund Magnetar, the uncomfortable fact remained: their business model depended on multi-million dollar grants from wealthy philanthropists. They were, by definition, not a sustainable project.
MinnPost, on the other hand, appears to be the first non-profit whose stated goal is to provide quality journalism free of massive philanthropic donations. They do so by a mixture of low overheads, low operating costs, and good old fashioned reader donations. One of my major criticisms of ProPublica, fantastic though they are, is the obscene six-figure salaries their reporters and editors make. MinnPost does away with these, but (and this should come as a surprise to the Wall Street banks who contend that multi-million dollar bonuses are the only way to secure “talent) the quality of their reporting does not appear to have suffered.
We’re all holding our breath to see what’s going to come of the bloodbath our legacy news media are swimming in (They lost 27% circulation in the past five years), but startups like MinnPost are a genuine ray of hope.
Geithner Turns Halfway Around on Derivatives Regulation
Via Bloomberg, it looks like the Treasury Secretary has backed off on his previous stance that the derivatives market (which got us into this mess) does not need to be regulated. Today he says:
Geithner said the over-the-counter derivatives market should be subject to “substantial supervision and regulation,” while omitting support for the provision that would force banks like JPMorgan Chase & Co. and Bank of America Corp. to wall off trading operations from their commercial banks.
The Obama administration requires that all over-the- counter derivatives dealers and “major market participants” be subject to “conservative capital requirements, conservative margin requirements and strong business conduct standards,” Geithner said.
There is some very tricky parsing of words here that will probably escape most peoples’ attention.
One of the major factors in the credit freeze of 2008 was the widespread proliferation of so-called “over-the-counter” derivatives, which are debt obligations that were traded secretly between banks. Unlike the mortgage industry or the credit card industry, derivatives were largely unregulated and are not traded on an exchange. Thus, banks can package and sell derivatives to one another “over the counter” – that is, without any public record of the transaction having taken place. This became a serious concern in 2008 when Lehman Bros. failed; because the derivatives market was undisclosed, no bank knew how many assets the other banks had, or if the assets they did have were worthless. As such, lending between banks froze overnight – no one knew who was solvent and who was underwater.
Many have taken this as evidence that OTC derivatives are inherently dangerous and should be banned. This could be done by outlawing all asset-backed derivatives (like the mortgage securities that got us into this mess to begin with), or by simply mandating that derivatives be traded on an open, transparent exchange. Thus, they would cease to be “over the counter”. Geithner’s recent comments, while they sound impressive, make a derivatives exchange highly unlikely, and actually point to an extension of the policies that caused the 2008 crisis.
“Substantial supervision and regulation” can fail. While the OTC derivatives had been the subject of a massive push for deregulation, the problem was that even if there were regulators to look at the books, the instruments had become too complex for them to decipher. Simply adding another layer of regulation won’t change the underlying problem, which is that these instruments are basically impervious to regulation unless traded on a transparent exchange, something Mr. Geithner apparently does not support.
Similarly, the “provision that would force banks to wall off trading operations from their commercial banks” refers to the infamous Glass-Stegall Act of 1934, the repeal of which in 1999 Nobel Laureate Joseph Stiglitz gives an “especial role” in causing the 2008 crisis. I’ve written on Glass-Stegall in the past, and I don’t wish to repeat myself, but I should stress that so long as Lawrence Summers, the architect of the bill that repealed Glass-Stegall (and thus, a major architect of the crisis) stays in place, there is little hope of reducing the size of our Too-Big-To-Fails. Needless to say, Mr. Geithner is not even considering reinstating Glass-Stegall.
So basically, Timothy Geithner’s big plan to rein-in derivatives trading gives only a minor face-lift to the status quo. He’ll slap on a few regulatory outfits and say he’s done the job. Meanwhile, our Too-Big-To-Fail banks are getting even bigger, over-the-counter derivatives are still legal, and there won’t be any meaningful punitive action towards the banks that caused this crisis. The severe risks to the system remain.
The “Too Big To Fail” Problem
(c/o Ezra)
David Min over at Center for American Progress has one of the clearest and most concise explanations of our current banking system I’ve seen so far. And he’s honest enough to mention that the only true solution to our “too big to fails” is to nationalize them and break them up. This is a must-read article:
To address this problem, we first need to define “too big too fail” and how the problem can implode our financial system. “Too big to fail” is best understood as a bank panic problem, and has arisen as the result of two developments in the global financial markets over the past several decades. The first development was the tremendous growth of a “shadow banking system” operating outside of the rules that have governed depository banking since the Great Depression. This shadow banking system essentially performed the same functions as banking—attracting short-term investments and using them to finance long-term loans—but did so through the use of entities that were not depository banks, and the use of financing instruments (such as mortgage-backed securities, commercial paper, or short-term repurchase agreements) that were not deposits. Because of this nonbank, nondepository structure, the shadow banking system, which grew to an estimated $10 trillion in size, fell outside the rules and protections of the regulated banking system.
The second development was the concentration of risk within the shadow banking system, such that a small number of financial firms were and are responsible for the vast majority of its liabilities. Before the 2008 crash, the five major U.S. investment banks had a combined balance sheet size of approximately $4 trillion, and this may have understated the true level of liabilities they were holding. Witness the recent revelations about failed Wall Street investment bank Lehman Brothers, which raises questions about the extent to which shadow banks offloaded balance sheet risk through the use of dodgy transactions.
Good stuff.
The Sham “Recovery”
Robert Reich is Professor at UC Berkeley, a former Secretary of Labor, and one of the very few who have reached such heights and are still concerned with the lives of the non-super-rich. His recent article in The Huffington Post is a must read:
The US economy grew at a 5.9 percent annual rate in the fourth quarter of 2009. That sounds good until you realize GDP figures are badly distorted by structural changes in the economy. For example, part of the increase is due to rising health care costs. When WellPoint ratchets up premiums, that enlarges the GDP. But you’d have to be out of your mind to consider this evidence of a recovery.
Part of the perceived growth in GDP is due to rising government expenditures. But this is smoke and mirrors. The stimulus is reaching its peak and will be smaller in months to come. And a bigger federal debt eventually has to be repaid.
So when you hear some economists say the current recovery is following the traditional path, don’t believe a word. The path itself is being used to construct the GDP data.
Look more closely and the only ones doing better are the people and private-sector institutions at the top. Many of America’s biggest companies are sitting on huge amounts of cash right now, but that says nothing about the health of the U.S. economy. Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they’re global, and selling into fast-growing markets in places like India, China, and Brazil.
America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs — 32 percent of workforce — and slashed capital expenditures 43 percent.
This is yet more evidence for something I’ve been trying to convince people of for some time. GDP means nothing.
Stiglitz calls Federal Reserve “Fundamentally Corrupt”
Joseph Stiglitz is an economist’s economist. Over the past decade he has emerged as the strongest and most consistent critic of securitization, globalization, and corporate fraud. His seminal 2003 Globalization and Its Discontents is a must-read if you want to get a handle on what’s going on now, and I have the feeling if more people in the White House had read it, we wouldn’t be in the embarrassing position with relation to the banks that we now find ourselves (that is, of peasants to their liege.)
So when this guy talks about the Federal Reserve, I think one should probably listen:
“If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure,” Stiglitz said during a conference on financial reform in New York.
Oh, and,
“So, these are the guys who appointed the guy who bailed them out,” Stiglitz said. “Is that a conflict of interest?” he asked rhetorically.
“They would say, ‘no conflict of interest, we were just doing our job,'” he answered. “But you have to look at the conflicts of interest.”
Wall Street Bonuses Increase 17%: A Banker’s Reaction
A little part of me dies when I read stories like this. I mean, I know Wall Street “owns” Congress, as Rep. Dick Durbin was kind enough to inform us, and so the chances of any meaningful punitive action towards them are virtually nil, but still these developments never fail to outrage.
And through it all, one cannot help but wonder: What exactly do these bankers do to deserve their multi-million dollar salaries? People tell me they “work hard”, sure, but then so does a ditch-digger outside Kuala Lumpur, and no one pays him a million dollars. It isn’t even as though their work helps anyone, or at least not objectively. I’ve heard all manner of explanations that “the economy stops without Wall Street” – as though it hadn’t done that with Wall Street’s help.
The part most perplexing to me is how these bankers seem immune to shame for their theft. Surely they read the newspapers, every one of which carries countless stories of everyday citizens who had their lives turned upside-down by this crisis of their making. The Times had a particularly good one the other day about how millions face years of unemployment because of the crisis. The article is entitled “The New Poor“. Several of the people they interviewed had their savings wiped out and are now on the verge of homelessness. I mean, don’t they read articles like that and feel bad?
Apparently not. I recently spoke with a high-school buddy of mine (well, maybe buddy is the wrong word) who, after an economics degree at Duke, found a comfortable position at a prominent Wall Street firm.
“Yeah, I’m a fat cat”, he said, with an unmistakable note of pride.
I wanted to know how he felt about the new poor, particularly as the company to which he attached himself had a direct hand in causing the financial crisis.
He shrugged. “Those people deserved it. They should have been smarter with their money.”
I was appalled. “But your company sold them predatory loans! I mean, you guys willfully misled them.”
“Look”, he countered, “No one put a gun to their heads and forced them to trust us. They’re idiots. If they were smarter, they would have gone to school, gotten business degrees, and been in a position to know what they’re talking about. You play with fire, you get burned.”
“But then what’s the point of your business? Aren’t you in the business of handling the money of people who lack the knowledge to handle it themselves?”
He laughed mirthlessly. A cold look crept into his eyes. “Are you stupid or something? We’re in the business of making money. That’s it. Sometimes we make money by making other people money – sometimes we make money when other people lose money. That’s the bottom line.”
I was at a loss for words. “How can you be so callous?” I managed to stammer.
“Stop it with this gay shit. Like its my responsibility to worry about every poor loser who comes through my door. I’m only responsible for myself. Period. I don’t go around telling people to watch my back – I watch my own. They should do the same. I’m fucking sick of you assholes coming up to me and whining about all these idiots who lost money during the crash. Those retards deserved it. I looked out for myself – my company looked out for itself – and we’re making money. Those idiots didn’t look out for themselves. They expected someone else to do it. And look what happened.”
Nearly defeated, I asked, “So the banks have no responsibility for all these people who are now financially ruined?”
“If they want to blame someone, they should take a long, hard look in the mirror. These dickheads were happy enough with us when we were making them 15% per year, but now that things go sour they look for someone to blame. It’s their own damn fault. What, they think we’re in business just to help them out? Fucking retards.”
Conscious that I was beginning to sound like a broken record, I persisted. I just couldn’t believe what I was hearing.
“Well, you guys were ready enough to take the government bailouts. I mean, how can you justify that?”
He scowled. “Look, you have no idea what the fuck you’re talking about. What did you study in undergrad? Engineering? Leave this shit to the experts, troll. If the government allowed the banks to fail, the economy would have crashed. Done. The world would have been over. And all those bullshit sob stories you’re trying to sell me, they would have been 100 times worse. Anyway, we’re paying you assholes back, so I don’t see what you’re crying about.”
He left me with a bit of advice. “You really need to pull your head out of your ass. All this crying over others isn’t gonna get you anywhere. You’re what – 22? How much money do you make?”
I told him. He burst into laughter.
“See, that’s what I’m talking about! You’re gonna grow up to be one of these losers we take advantage of, if you aren’t careful. Here, what you should do – read some Ayn Rand. She’ll tell you all you need to know.”
And that, ladies and gentlemen, is the mentality of Wall Street, that collection of companies without whom we cannot survive.
Are US Taxpayers Bailing Out Greece?
(c/o The Daily Digest)
Ron Paul makes sense (on this, at least):
Is it possible that our Federal Reserve has had some hand in bailing out Greece? The fact is, we don’t know, and current laws exempt agreements between the Fed and foreign central banks from disclosure or audit.
Greece is only the latest in a series of countries that have faced this type of crisis in recent memory. Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland. Several other countries (Spain, Portugal, Ireland, Latvia) are approaching crisis levels with public debt as well. Many have strong ties to Goldman Sachs and the case could easily be made that default could have serious implications for big US banking cartels. Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent. Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.
The point is, we don’t know. In fact, we know very little about what the Federal Reserve does with the trillions and trillions of dollars in cash that it’s empowered to print and distribute as it sees fit. I remember a couple months ago people were seriously discussing whether or not to audit the Fed. This never happened, and after a couple weeks people just stopped paying attention and turned their gaze to the next shiny object on the horizon.
Without a meaningful audit of the Federal Reserve, we will never know where our money goes. The Fed, as we all know, as been bestowed massive new powers as a result of this crisis (which they helped cause), and this makes an audit all the more important. I guess I would suggest you phone your congressperson about this, but we all know how much good that’ll do.
Priorities
U.S. Economic Stimulus spending per month: $32 billion.
U.S. War Expenditures per month: $56 billion.
Profiles in Idiocy: David Brooks
Here we go again, with another round of pass-the-buck victim blaming, this time from none other than our favorite NYT columnist, David Brooks. The point of his column, I guess, is that we’re all unemployed because we couldn’t adapt to the “changing economic environment” fast enough. Why is it changing? Stop asking silly questions! All you need to know is that unemployment is nearly 20% and it’s all your fault. David Brooks is sorry, but he wishes you had “adapted” faster to “shifting demands”. If you had, you wouldn’t be “paying the price”.
This recession has exposed America’s social weak spots. For decades, men have adapted poorly to the shifting demands of the service economy. Now they are paying the price. For decades, the working-class social fabric has been fraying. Now the working class is in danger of descending into underclass-style dysfunction. For decades, young people have been living in a loose, under-institutionalized world. Now they are moving back home in droves.
Man, this guy would probably blame a rape-victim for dressing “inappropriately” or “not adapting to a fast-changing daylight regime”. So convenient, isn’t it? We’re all unemployed, but guess what? We only have ourselves to blame.
Oh, but what about those short-sighted economists who failed to see a $15 trillion bubble? You know – the ones who, as late as 2007, were on record saying “The subprime mess is contained“? The ones who currently run our economic establishment? Don’t they deserve some blame, Mr. Brooks? Nah.
Speaking of which, wouldn’t you say, Mr. Brooks, that financial journalists, such as yourself, also had a hand in the current unemployment? After all, they shouted the slogan “buy, buy, buy!” long after it became clear that the Dow was terribly overvalued. They systematically refused to report the grave and serious conversations going on in the halls of Wall Street, even though they knew what was going on.
Or how about this? All those “journalists” who advocated that we cut social spending, and let “the free market” take care of everyone (like *cough* some columnists I know) – you don’t think they deserve some blame for the situation our unemployed workers find themselves in?
Nah, it’s much easier to just blame the workers. So let this be a lesson to you, all ye without steady employment! David Brooks cares about your plight, and wishes it were better! Now get a job, you bums!
Update: Dean Baker agrees.
China Ready to Dump US Securities
(c/o ZeroHedge)
This is serious. The Asia Times reports today that China is ready to start selling off its US Treasury Notes, ostensibly as a “punishment” for the recent US sales of arms to Taiwan. I and others previously warned about what would happen if China decided to let go of its dollar holdings – the gist is that China is the only thing standing between the US and catastrophic inflation. Previously these fears were pooh-poohed by establishment figures with the familiar arguments: “China needs us more than we need them”, “Who will China sell its surpluses to?” I even heard someone say, “Without us, the Chinese will be cavemen”. Well, it looks like China might have found itself a new trading partner, if this Asia Times article is any indication:
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.
Where do you think we’re getting the money to prosecute these $5,000 per second conflicts in the Middle East? Where did the money for our $2,500,000,000,000 (and counting) bank bailouts come from? China. They make our money real. Without their manufacturing powerhouse backing us up, our dollars are worthless. What, you think the world is going to value our “service economy” at $13,000,000,000,000 per annum if that money weren’t backed by Chinese promises? Not likely. And now those promises are now increasingly under threat.
Be afraid.
Greek Debt
Greece is in a lot of trouble, and as a member of the “eurozone”, its troubles have now become Europe’s. In a sense, we’re getting a grim preview of the sort of future we might have in America with the case of Greece. Like us, Greece spent heavily over the past decade and accumulated a lot of “sovereign debt”. Unlike us, however, Greece is not a military bully – and thus cannot simply print money and force the rest of the world to accept it. Further complicating the issue is Greece’s membership in the European Union. No Euro-using country has ever declared bankruptcy, and analysts are busy falling over themselves to predict what a Greek government default would imply. Some of the most grim predictions entail the break-up of the EU, while the more moderate voices still predict havoc within the eurozone.
If Greece defaults, it seems likely there would be some sort of run on the European banking system, and almost certainly the Greek banking system. But more significantly, this crisis highlights the impossibility of leaving the Eurozone, once you become a full-fledged member. For many countries (notably, the PIIGS – Portugal, Italy, Ireland, Greece and Spain – the slowly growing Eurozone countries) this leads to a catch-22.
One one hand, adopting the Euro means a country can’t combat deflation via the traditional methods. Usually this would be done by revaulating its currency, but since no individual country has control over the Euro (well, maybe Germany does) – this ceases to be an option.
On the other hand, an announcement to leave the Euro (As Tyler notes) would trigger an immediate run on that country’s banks. Nobody wants their bank account in Euros to suddenly transform into a bank account in a less prestigious currency (lira, drachmas, etc.) Once a country gets into the EU, it pretty much has no choice but to stay.
So leaving the Eurozone would doom Greece – and staying in might doom the rest of the EU. What are they doing about it? Well, the Times splashed on its front page today that after weeks of nail-biting vacillation, the EU has finally pledged a “bailout” to Greece. (Under that article, in tiny letters, the headline: “Greek Civil Servants Strike Over Austerity Measures – giving us a taste, I guess, of what that bailout will cost.) But the point is that no one knows how this bailout will actually work.
At the root of Greece’s problems, and the EU’s, lies the vast difference in economic output between members. Though Greece and Germany use the same currency, their economies are vastly different. This naturally leads to over-valuation of the Greek economy, and, I suppose, under-valuation of the German economy.
It looks like Britain made a smart move after all, not adopting the Euro.
Financial Quotes of the Day
“We’ve got strong financial institutions . . . Our markets are the envy of the world. They’re resilient, they’re…innovative, they’re flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong.”
– Hank Paulson, Treasury Secretary, March 16, 2008
“We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses, both small and large, and the very health of our economy,”
– Hank Paulson, Treasury Secretary, September 23, 2008
The Chinese Mystique
Perry Anderson has an excellent round-up of some recent books on the rise of China in this fortnight’s London Review of Books.
An excerpt:
These days Orientalism has a bad name. Edward Said depicted it as a deadly mixture of fantasy and hostility brewed in the West about societies and cultures of the East. He based his portrait on Anglo-French writing about the Near East, where Islam and Christendom battled with each other for centuries before the region fell to Western imperialism in modern times. But the Far East was always another matter. Too far away to be a military or religious threat to Europe, it generated tales not of fear or loathing, but wonder. Marco Polo’s reports of China, now judged mostly hearsay, fixed fabulous images that lasted down to Columbus setting sail for the marvels of Cathay. But when real information about the country arrived in the 17th and 18th centuries, European attitudes towards China tended to remain an awed admiration, rather than fear or condescension. From Bayle and Leibniz to Voltaire and Quesnay, philosophers hailed it as an empire more civilised than Europe itself: not only richer and more populous, but more tolerant and peaceful, a land where there were no priests to practise persecution and offices of the state were filled according to merit, not birth. Even those sceptical of the more extravagant claims for the Middle Kingdom – Montesquieu or Adam Smith – remained puzzled and impressed by its wealth and order.
A drastic change of opinion came in the 19th century, when Western predators became increasingly aware of the relative military weakness and economic backwardness of the Qing empire. China was certainly teeming, but it was also primitive, cruel and superstitious. Respect gave way to contempt, mingled with racist alarm – Sinomania capsizing into Sinophobia. By the early 20th century, after eight foreign forces had stormed their way to Pekin to crush the Boxer Uprising, the ‘yellow peril’ was being widely bandied about among press and politicians, as writers like Jack London or J.H. Hobson conjured up a future Chinese takeover of the world. Within another few decades, the pendulum swung back, as Pearl Buck and Madame Chiang won popular sympathy for China’s gallant struggle against Japan. After 1948, in a further rapid reversal, Red China became the focus of still greater fear and anxiety, a totalitarian nightmare more sinister even than Russia. Today, the high-speed growth of the People’s Republic is transforming Western attitudes once again, attracting excitement and enthusiasm in business and media alike, with a wave of fashion and fascination recalling the chinoiserie of rococo Europe. Sinophobia has by no means disappeared. But another round of Sinomania is in the making.
The review is nuanced, scholarly, and even-handed. Definitely worth a read.
75% of Americans Think Stimulus Was Wasted
CNN with a wince-inducing, yet on the whole, unsurprising report:
A CNN/Opinion Research Corporation survey released Monday morning also indicates that 63 percent of the public thinks that projects in the plan were included for purely political reasons and will have no economic benefit, with 36 percent saying those projects will benefit the economy.
Twenty-one percent of people questioned in the poll say nearly all the money in the stimulus has been wasted, with 24 percent feeling that most money has been wasted and an additional 29 percent saying that about half has been wasted. Twenty-one percent say only a little has been wasted and 4 percent think that no stimulus dollars have been wasted.
Pretty harsh. But then people are understandably upset – underemployment has been over 15% for almost a year and is now inching toward 20%; we’ve seen a year-long debate on “healthcare” which looks like it’s going down the toilet; we’ve seen the major financial institutions award their rascals of executives more money than a common man can expect to earn in three lifetimes; and we’ve seen utter complacency and disregard from our so-called “elected representatives”. Good news is hard to come by.
But at the same time, is the public right about this? Has the stimulus been a waste? Really, it’s quite hard to tell – the whole idea behind the bill was to create jobs and put a “bottom” on the economy, and this has only dubiously been achieved.
Joe Klein has a typically abusive response entitled “Too Dumb to Thrive” wherein he upbraids the bovine public for being too stupid to understand what’s going on; after all they all got $60 extra dollars in their paychecks! Why are they complaining?
Klein’s response lacks any real analysis – for that, I recommend ProPublica’s coverage of the stimulus, which would indicate that while the money hasn’t exactly been “wasted” per se, it has certainly been mis-allocated, and at times, completely mis-handled.
See, for instance this report on schools unable to access their stimulus funds:
After the federal stimulus passed in February, North Carolina school officials thought they had found a way to repair the 58-year-old gym and other crumbling school structures. The stimulus provided money for Qualified School Construction Bonds, which is intended to let school districts raise capital through interest-free bonds to fund construction.
The program also was expected to boost North Carolina’s construction industry. Ben Matthews, director of school support for North Carolina’s Department of Public Instruction, estimated it would create 11,000 jobs.
But the bond program has become entangled in financial and bureaucratic red tape. Only $2.3 billion of the $11 billion in bonds available this year have been sold as of last week, data compiled by Bloomberg show.
Well, that’s not good. Or again, take this report about stimulus funds going to contractors under federal criminal investigation:
The Department of Defense awarded nearly $30 million in stimulus contracts to six companies while they were under federal criminal investigation on suspicion of defrauding the government.
According to Air Force documents, the companies claimed to be small, minority-owned businesses, which allowed them to gain special preference in bidding for government contracts. But investigators found that they were all part of a larger minority-owned enterprise in Southern California, making them ineligible for the contracts.
Kickbacks, anyone? The point here is not that the stimulus was “totally wasted” as many Americans seem to think – only that there exists ample reason for them to feel that way. Maybe Joe Klein could keep that in mind next time he writes an abuse letter to America’s body politic.
Financial Quote of the Day
Alan Greenspan:
“I really didn’t get it until very late in 2005 and 2006.”
Reuters (13 September 2007), “Greenspan says didn’t see subprime storm brewing“
Thanks, Alan. Now back to your regularly scheduled programming.
China’s Got That Taint
The Times gives a nice in-depth scoop on yet another tainted milk scandal in China. The same industrial contaminant, melamine, again found its way into thousands of dairy products, ice creams, frozen yogurts, etc. The last time this was publicized was in 2008, but apparently contamination has occurred continuously throughout. More than 300,000 people were sickened in the 2008 outbreak, and the Chinese government felt itself compelled to execute 2 people over it. As they say, heads will roll.
The article reports that Chinese outlets are quoting the head of the Guandong Dairy Association as saying the contamination was kept quiet “in order to safeguard the good name of the dairy industry.”
This, I think, is significant. In the former Soviet Union and Mao-era China, scandals like these occurred at an unprecedented rate – and on a far larger scale. The failure of Stalin’s collectivization, the horrific famine attendant the “Great Leap Forward”, and China’s sham “backyard steel” industry were massive blunders that caused untold human suffering. (The Great Leap Forward alone killed 30,000,000 Chinese peasants.) But what’s striking about these mistakes was that they continued long after the plan’s stupidity became clear. Khrushchev tried planting maize in Russia and kept trying after years of crop failures. Mao continued to force his peasants to make steel in their backyards, long after it became clear that they could only produce worthless pig iron. What made these leaders so blind?
One theory is the hierarchical power structure of both countries. Power there was strictly a top-down affair; everyone had a boss, everyone a subordinate. And the bosses had unusual latitude in “firing” their subordinates. In those countries (especially during their “great terror” phases; 1936-1945 in the Soviet Union, and 1966-1976 in China) being “fired” meant you were actually shot.
As a result, a culture of abject terror developed – if you were an inspector or some other bureaucrat, you simply couldn’t report bad news, or at least report it and expect not to be arrested the next day. So you had these spectacular failures in practice – but on paper the economy was still chugging along; growing, in fact, at an unprecedented rate. Solzhenitsyn writes extensively about this system (called Tufkta) in Russia, and I can only imagine it was similar in China.
Over the years, these once-totalitarian countries began to ease the internal repression. They were still nominally one-party states, and you could still get in trouble for joining the wrong organization (see the Falun Gong in China) – but so long as you did your job and weren’t overtly anti-government, you could reasonably expect to avoid being arrested. Yet the same culture of Tuftka, of fudging the numbers to make things “look better” persisted. Hence China’s dizzying (and dubious) GDP growth.
China’s bureaucracy is not well-suited to solving problems like tainted milk. The opportunities for corner-cutting, for graft, are just too great – and after all, its ruling party doesn’t exactly have to stand for election. It will be interesting to see how they reassure the world of the quality of their products; whether they’ll execute a few more low-level functionaries to show us they mean business. For it’s clear that China seeks the world market. And it’s equally clear that Europe and America (as well as China’s domestic population) are not interested in a tainted product.
Airlines
2009 was a dark year for airlines around the world – darker, indeed, than 2001. They lost a full 12% of revenue, and the hand-wringing has begun.
On one hand it seems clear that from an environmental perspective, this is unquestionably a good thing. Airline emissions are notorious, they drink fuel like water (1500 million gallons per year, yo!), and constitute a thoroughly dirty and unsustainable enterprise. A 12% drop in revenue means approximately 12% less airplanes will be up there, churning out exhaust. Surely that must be a good thing.
But at the same time one invariably reads news like this through anegative lens. A 12% drop in revenue means that many workers unemployed, that much profit evaporated, that much slower GDP growth.
And herein lies the ultimate contradiction in “sustainable growth”, the reason why Copenhagen and Kyoto failed. If GDP roughly corresponds to energy produced, then, given current technology, GDP equals emissions. You cannot increase GDP while “curbing” carbon emissions. Under our current economic paradigm, we can’t cut greenhouse gas emissions.
“Alternative energies” simply haven’t manifested, at least not in such a form as to replace oil and coal. The truth is we’ll never get the dense free energy we got from hyderocarbons. Not ever again. Gasoline packs 44 Megajoules per kilogram. Windfarms can give us only 300-500 joules per square kilometer of land (that’s 4 orders of magnitude less). “Biofuels”, again, produce four or five orders of magnitude less energy. The only thing that comes close is uranium, which is great if you like prohibitively expensive energy, waste you can’t dispose of, and the occasional cancer-inducing meltdown. Oh, and all the good uranium has already been taken and put into useless nuclear weapons.
So whatever GDP “growth” we later achieve is not likely to have anything to do with “alternative energies”. Oil and coal are what we got, and it’s likely to remain that way for some time. I think it’s important to remember this next time our GDP takes a hit – nature cheers when GDP shrinks.
AIG Timeline
Bloomberg has a fantastic timeline of the fortunes and despairs our favorite International Group has suffered and celebrated over the past two years. This will be very useful for anyone still confused about how AIG ended up with trillions of taxpayer dollars (read: everyone)
Diet Glass-Stegall
The Economist has a pretty good rundown of Mr. Obama’s proposed financial “regulations”. You can tell they really want to be in favor of this, but even The Economist realizes that short of breaking up the big banks once and for all, any “regulation” is bound to fall short.
This is one of my favorite lines in the article:
Though not a full return to Glass-Steagall, the law that separated commercial banking and investment banking in the wake of the Great Depression (and was repealed in 1999), [the plan] is at least a return to its “spirit”, as one official put it.
Ha! Its spirit! Well, that oughta teach those bad ol’ banks a lesson.
But at least The Economist is honest enough to call a spade a spade:
Moreover, the plan is unlikely to help much in solving the too-big-to-fail problem. Even shorn of prop-trading, the biggest firms will still be huge (though also less prone to the conflicts of interest that come with the ability to trade against clients). As for the new limits on non-deposit funding, officials admit that these are designed to prevent further growth rather than to force firms to shrink.
They may, in any case, be pointed at the wrong target. Curbing the use of deposits in “casino” banking is an understandable impulse, but some of the worst blow-ups of the crisis involved firms that were not deposit-takers, such as American International Group and Lehman Brothers. And much of the losses stemmed not from trading but from straightforward bad lending (think of Washington Mutual, Wachovia and HBOS).
So how is Wall Street reacting? The Journal and The Times each emphasize the stock-market response (with colorful verbs such as “plunges” and “sinks”), but Kevin Drum over at Mother Jones got an e-mail which I think illustrates Wall Street’s mood a bit better:
Nobody I’ve talked to on Wall Street seems to think the proposed reforms (although details remain vague) are anything more than PR, aimed in the wrong direction, don’t do anything to make risk-taking more expensive, and are mere structural reforms that will be annoying to get around, but will be gotten around.
We’ll see what comes out in the next few days. Maybe there’s more to it than telling a bank you can’t invest in PE funds. We can hope anyway.
But if the intent was to “go after the banks” and get the HuffPo crowd revved up, it seems to be working. Hey, maybe we can throw in Geithner or Bernanke’s scalp and “hope” will re-spring eternal.
Yeah, that seems closer to the mark.
Stimulus Fraud
Propublica continues its fantastic coverage of the Obama stimulus bill by drawing attention to a true face-palm moment:
The Kentucky transportation department has awarded $24 million in stimulus contracts to companies associated with a road contractor who is accused of bribing the previous state transportation secretary, according to an audit by the federal Department of Transportation [1] (PDF).The DOT’s internal watchdog used the case to highlight the significant delays in the time it takes for the Federal Highway Administration to suspend or bar someone from receiving government contracts. Though the agency is supposed to make such a decision within 45 days, federal highway officials waited 10 months after the indictment to put the men accused of bribery onto the list of banned contractors.
I think this happy little episode displays pretty succinctly the vast and systemic corruption with which the Government has dispensed this stimulus.
The shadowy underworld of government contract awards is mysterious indeed:
In the Kentucky case, at trial this week, prosecutors have alleged that longtime road contractor Leonard Lawson paid state employees for confidential engineering estimates that helped him get a leg up on bidding for contracts.
Paul Krugman, Matt Yglesias, Ezra Klein, and the rest of the “progressive” blogosphere have each chastised Mr. Obama for not providing a “big enough” stimulus, and while there may be theoretical reasons for thinking such, it seems clear that even the biggest “stimulus” will fail to stimulate if it’s handled with fraud and deceit.
Eye on the Stimulus
We’re tracking the stimulus from bill to building, and we’re organizing citizens nationwide to watchdog local stimulus projects. Our team includes editor Tom Detzel, lead reporter Michael Grabell, Jennifer LaFleur, Amanda Michel, Eric Umansky and Christopher Flavelle.
When Do You Ban a Stimulus Contractor?
Kentucky highway contractor Leonard Lawson heads to court where he faces charges related to bid-rigging on road construction projects in Lexington, Ky., on Jan. 11, 2010. (James Crisp/AP Photo)
The Kentucky transportation department has awarded $24 million in stimulus contracts to companies associated with a road contractor who is accused of bribing the previous state transportation secretary, according to an audit by the federal Department of Transportation [1] (PDF).The DOT’s internal watchdog used the case to highlight the significant delays in the time it takes for the Federal Highway Administration to suspend or bar someone from receiving government contracts. Though the agency is supposed to make such a decision within 45 days, federal highway officials waited 10 months after the indictment to put the men accused of bribery onto the list of banned contractors.
The combination of lengthy delays in the contractor suspension process and the rapid disbursement of billions of stimulus dollars “creates a ‘perfect storm’ for contractors intent on defrauding the government,” the inspector general audit said.
But the case also highlights a common tension in the contracting world that is now getting more attention with the nearly $800 billion stimulus package: What level of evidence is enough to justify suspending a company from receiving government contracts?
In the Kentucky case, at trial this week, prosecutors have alleged that longtime road contractor Leonard Lawson paid state employees for confidential engineering estimates that helped him get a leg up on bidding for contracts.
Mission Accomplished
The Washington Post gives a great article on what we already knew:
TARP: Unstated Losses
The Financial Press is busy crowing over the loss estimates for the Paulson Bailout, claiming that losses have been “cut” by $200 Billion dollars. Of course, this still leaves $500 Billion unaccounted for, but standards for good news have fallen to the extent that a $500 billion loss is considered a ray of hope.
Unfortunately, we will be spared even that brief ray. Research from ProPublica conclusively debunks the claim that TARP losses have been mitigated, if only for the fact that the program has not yet finished.
As they say:
The latest estimate accounts for only the first year of spending, and the TARP’s spending isn’t done. Treasury says it expects the ultimate cost to be higher. Treasury Secretary Tim Geithner extended [8] the TARP thru Oct. 3, 2010, the TARP’s second birthday, earlier this week. He said, though, that Treasury didn’t expect to deploy more than $550 billion of the $700 billion available. As of today, Treasury has committed a total of about $407.3 billion [2] (that’s excluding companies that have refunded their bailout money [6]).
The TARP still has a little less than half its funds to distribute; meanwhile bank failures haven’t even begun to slow (three more failed this Friday, bringing the total to 167 this year), and unemployment still hovers around 17-20 per cent. It seems a bit premature to be declaring victory for the TARP.
The Reasoned Review 