April 25, 2009
|Khan Academy||Economy Science/Technology|
Baseline Scenario links to a wonderful site, the Khan Academy, at which a young man named Salman Khan has posted more than 700 instructional YouTube videos on math and physics, as well as banking and money, the credit crisis, and finance. Everything I've watched so far has been quite good. And it's all free.
Khan has a Harvard MBA, a BS and MS in electrical engineering and computer science from MIT, and a BS in math from MIT. So he knows his stuff. But much more importantly, he's an excellent teacher, with a friendly, unintimidating manner. He keeps the videos short and simple. Many are aimed at children.
Great stuff. And did I mention that it's free? Internet generosity. I love it.
|Saturday Gumpagraph||Gumpagraphs 2009|
|© Kent Tenney|
|Today's Joke||Humor & Fun|
Classified documents that were recently released show that Dick Cheney, who a couple of years ago went nuts and shot a guy, ordered Khalid Shaikh Mohammed waterboarded 183 times. When do you suppose Mohammed caught on and said, "I know this is just horse play?" But anyway, they waterboarded Mohammed 183 times, and thanks to the information they got from this guy, via waterboarding, we were able to capture bin Laden. — David Letterman
April 08, 2009
|Causes and Consequences of the Oil Shock of 2007-2008||Economy Energy Peak Oil|
On causes, he calculates that the runup in price was consistent with reasonable assumptions about oil demand and its elasticity. Elasticity is a measure of how strongly demand responds as price changes. For a product like oil, which has no short-term substitute and which is used in ways (like driving to work, heating a home, generating power) that people are highly reluctant to forgo, the elasticity is quite small. Which is to say, it takes one hell of a price increase to get people to consume less, especially in the short term. (In the long term, people may switch to smaller cars, and so on. Hamilton says that kind of long term adjustment may even help explain why prices have fallen as far as they have.) Worldwide GDP growth between 2003 and 2007 was such that at existing prices worldwide demand would have been greater than worldwide production, which had flatlined. Rising prices were the result. They kept rising until enough people were priced out of the market to equalize supply and demand. A speculative bubble in oil futures may have contributed to the price spike, but Hamilton's calculations show that it could have easily just been (mostly) your basic supply-and-demand story.
On consequences, he calculates that the impact of sky-high oil prices on the global economy may have been a significant factor in starting the recession that has now become such a vicious downturn. There was a debt bubble for sure, but it may have been the oil shock that pricked the bubble.
People tend to take cheap energy for granted, so we routinely underestimate the extent of its role in the economic fortunes of the modern world. Now that oil prices have fallen so drastically, exploration and new drilling have ground to a halt. Without new sources of supply, depletion will soon erase whatever supply cushion may exist at the moment. So the world is setting itself up for another big price shock when the economy eventually picks up and demand starts to recover. The world economy may get another big kick in the head just when it is trying to get back onto its feet.
|Wednesday Gumpagraph||Gumpagraphs 2009|
|© Kent Tenney|
|Today's Joke||Humor & Fun|
April 07, 2009
|Adam Smith On Usury||Economy|
Conservatives love to invoke Adam Smith — most of them, I'm guessing, without ever having read him. They've heard the phrases "invisible hand" and "division of labor" and that's about it. They imagine an Adam Smith who would endorse their idea of unrestricted and unregulated capitalism. Not so.
Adam Smith, in The Wealth of Nations, advocated usury laws (limits on interest rates) because they would promote lending to prudent borrowers and productive projects, which was better for society as a whole:The legal rate...ought not be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors [promoters of fraudulent schemes], who alone would be willing to give this high interest....A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.
When the legal rate of interest, on the contrary is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown in the hands in which it is most likely to be employed with advantage.
Now before you say this approach discriminates against the poor, banks like ShoreBank of Chicago, and not for profit mortgage lenders extend credit to lower income individuals with loss rates in line with prime borrowers, It takes (gasp) borrower education and in person screening, something most banks eschew.
Mortgage lenders didn't pump out subprime mortgages out of the kindness of their hearts or because someone made them do it. They did it because that's where the high interest rates were. The same way that credit card companies handed out credit cards to anyone with a pulse. If you were someone who'd have a hard time paying off your balance, so much the better. That's where the high interest rates were.
And now the rest of us are left to pick up the pieces. Which is one reason why usury laws have existed for centuries — until very recently — and why we need them again.
But before we leave Adam Smith, here are some comments Noam Chomsky made in an interview:
[Adam Smith is] pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.
He did give an argument for markets, but the argument was that under conditions of perfect liberty, markets will lead to perfect equality. That’s the argument for them, because he thought that equality of condition (not just opportunity) is what you should be aiming at. It goes on and on. He gave a devastating critique of what we would call North-South policies. He was talking about England and India. He bitterly condemned the British experiments they were carrying out which were devastating India.
He also made remarks which ought to be truisms about the way states work. He pointed out that its totally senseless to talk about a nation and what we would nowadays call “national interests.” He simply observed in passing, because it’s so obvious, that in England, which is what he’s discussing — and it was the most democratic society of the day — the principal architects of policy are the “merchants and manufacturers,” and they make certain that their own interests are, in his words, “most peculiarly attended to,” no matter what the effect on others, including the people of England who, he argued, suffered from their policies. He didn’t have the data to prove it at the time, but he was probably right.
This truism was, a century later, called class analysis, but you don’t have to go to Marx to find it. It’s very explicit in Adam Smith. It’s so obvious that any ten-year-old can see it. So he didn’t make a big point of it. He just mentioned it. But that’s correct. If you read through his work, he’s intelligent. He’s a person who was from the Enlightenment. His driving motives were the assumption that people were guided by sympathy and feelings of solidarity and the need for control of their own work, much like other Enlightenment and early Romantic thinkers. He’s part of that period, the Scottish Enlightenment.
The version of him that’s given today is just ridiculous.
Lies my teacher told me.
|Tuesday Gumpagraph||Gumpagraphs 2009|
|© Kent Tenney|
|Today's Joke||Humor & Fun|
There was a big rally on Wall Street after Citigroup reported a profit for the first two months of the year. That just goes to show you what determination, hard work, and 45 billion of our bailout dollars can do. — Jay Leno
April 02, 2009
If all you had to go on was the coverage in the media, you could be forgiven for thinking that the economic crisis is all about the financial sector. That it's all about banks and their problems. Banks, and maybe hedge funds.
But it goes much, much deeper, down to the fundamental conundrum of capitalism: workers are also customers. They must be paid so they can buy. Any given capitalist would like to maximize profits by paying workers as little as possible. But when all workers are underpaid, they don't have enough income, in the aggregate, to buy what's been produced. There is insufficient aggregate demand, as they say.
Since the early 1970s, inflation-adjusted US wages have stagnated, even while productivity has roughly doubled. Yes, household incomes have gone up some, but that's because more people in each household are working, and working more hours. Even with all that additional work, Americans haven't been making ends meet. So they started to borrow. Credit cards, then home equity loans. The missing aggregate demand was made up in the form of debt, debt, and more debt, until finally the system maxed out.
Capitalists got greedy, and sawed off the limb they were sitting on.
Or that's been my general analysis, anyway. But Chicago labor lawyer Thomas Geoghegan, writing in Harper's, has a deeper analysis, one that I think really gets into the specifics of how this happened — and with the appropriate degree of outrage. It's a brilliant, stunning piece, the best I've seen on this whole mess. It's long, but well worth reading in full. But since you may not have access to it, let me excerpt it at length, below the fold. Highly recommended.
Some people still think our financial collapse was the result of a technical glitch — a failure, say, to regulate derivatives or hedge funds. All we need is a better chairman of the SEC, like brass-knuckled Joe Kennedy, FDR’s first pick. It’s personnel — it’s Senator Gramm’s fault. Or it’s Robert Rubin’s fault.
In fact, no amount of New Deal regulation or SEC-watching could have stopped what happened. Hedge funds in themselves did not cause Wall Street to collapse. Some New Deal–type regulation was actually introduced in recent years, but it failed to do much: think of the Sarbanes–Oxley Act of 2002, which made CEOs swear an oath that their financial statements were not fraudulent. No, the deregulation that led to our Time of Troubles was of a deeper, darker kind. The problem was not that we “deregulated the New Deal” but that we deregulated a much older, even ancient, set of laws.
First, we removed the possibility of creating real, binding contracts by allowing employers to bust the unions that had been entering into these agreements for millions of people. Second, we allowed those same employers to cancel existing contracts, virtually at will, by transferring liability from one corporate shell to another, or letting a subsidiary go into Chapter 11 and then moving to “cancel” the contract rights, including lifetime health benefits and pensions. As one company after another “reorganized” in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in these future-oriented ways. No wonder people in our country began to live for the moment and take out loans and start running up debts. And then we dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term, and which had been so taken for granted that no one ever even mentioned it to us in law school. That’s when we found out what happens when an advanced industrial economy tries to function with no cap at all on interest rates.
Here’s what happens: the financial sector bloats up. With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking. When banks get 25 percent to 30 percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits, like auto manufacturing. Sure, GM is awful. Sure, it doesn’t innovate. But the people who could have saved GM and Ford went off to work at AIG, or Merrill Lynch, or even Goldman Sachs. All of this used to be so obvious as not to merit comment. What is history, really, but a turf war between manufacturing, labor, and the banks? In the United States, we shrank manufacturing. We got rid of labor. Now it’s just the banks.
...GM...really makes its money by running a bank on the side. “After a while,” said a friend from Detroit, “the only reason they were making cars was so they could make loans.”
Everything followed from this. The bloating of the financial sector helped create the growing U.S. trade deficits, which brought in a flood of cheap money for borrowing — which helped further bloat the financial sector. Look at the timing. The big trade deficits came at about the time the caps on interest rates came off, in the late 1970s. Capital flowed out of manufacturing, with its “low” profits, and into the financial sector, where profits were much higher. We became less competitive in manufacturing because we could not accept the lower rate of profit—not vis-à-vis our competitors in Mexico, but vis-à-vis our competitors in New York City. [...]
[T]he financial sector would not have been able to crowd out manufacturing without three major changes in the law.
First, and worst of all (as I always have to say, being a labor lawyer), we lost the right to organize. That’s a long story, but over the years employers found out they could just ignore the Wagner Act and fire pro-union workers right before so-called secret-ballot elections: they found out there was no real limit on what they could use as threat. And the result is that people in this country can’t get a wage increase. They can’t get a wage increase despite all our gains in productivity. That’s not supposed to happen. But that’s what did happen. The Economic Policy Institute reports that, since 1972, the median hourly wage for men has remained basically flat, and has actually declined for the bottom fifth of workers. (Women saw more of an improvement, but that’s only because women were grossly underpaid in 1972.) What is more astonishing is that in this very same period, when workers were losing financial ground, their productivity — their output per hour — nearly doubled. They were doing twice as much work for the same wage or less. [...]
At any rate, the wage stagnation that resulted from the inability to organize goes a long way toward explaining the current situation. People took their “cut” of productivity by going into debt. You may object: “Why did people have to go into debt? After all, family income went up.” That’s true, but only because more family members were working — and working longer hours. The income “gain” was illusory. The more hours people worked, the more they had to pay out in day care, in transportation, in eating at fast-food restaurants; that is, in outsourcing their private lives to vendors. I could go on about this: how we need more cars to get more family members to work, and so on. Let’s just say that the longer we’re away from home, the less we really take home at the end of the day.
This growing gap between how much we produced and how much we earned led to a bizarre paradox: as the economy grew, individual people were actually becoming worse off. Even people who were making more money were living in a way that put them deeper in debt. I think many of these people, strung out, began making wild consumer purchases as objective correlatives for the fact that they had no time to consume. It seems that the less time there is to consume, the more consumers spend.
I have briefly mentioned the second big legal change: over the past forty years, employers have found ways to cancel any earned right, of any kind, at any time. I’d say that with a competent lawyer any employer can cancel any promise to any worker. As a result, people learned it was not rational to save. In particular, right around the time Reagan took office, companies began to figure out that they could go in and out of Chapter 11 in order to dump their obligations not just to workers but also to retirees. As a labor lawyer, I saw firsthand in bankruptcy court the shocking way in which companies could cancel retirees’ health, severance, and pension rights, though some were federally insured. Although we now think of the middle class as a debtor class, people came into these Chapter 11 cases not as debtors but as creditors — yes, creditors, because big wealthy companies owed them pensions. By the time the “reorganizations” were over, the creditors had managed to hang on to five cents on the dollar, maybe ten. Often the companies weren’t “bankrupt.” The parent firm was simply shutting down the subsidiary and taking all the loot. [...]
[T]he third big change, which came along with the other two: the legalization of usury....[I]t became the law of the land: the old, state-mandated top rates of 9 percent or so were gone; now...there were no effective caps on what the big national banks could charge credit-card holders. Now we’re all shoveling billions into the banks, and there’s no way working people who can’t get a raise will ever climb out of debt. [...]
Because interest rates were so high, the banks no longer wanted borrowers with good moral character. Look at the way lending has changed just since the time I was in law school in the early 1970s. Even then, the mantra of my teachers in contracts and commercial paper was: “The loan must be repaid!” I have a friend, a professor, who still quotes that refrain. But it’s out of date. At interest rates of 25 percent, or 50 percent, or 500 percent, lenders don’t really want the loan to be repaid — they want us to be irresponsible, or at least to have a certain amount of bad character.
If he could charge 35 percent, [a banker] might not necessarily think, “The loan must be repaid” — at least not right away. And if he can charge 200 percent, he actually may not want the loan ever to be repaid. I had a retired schoolteacher in my office the other day whose husband is deep into Alzheimer’s. The two had taken a loan for $1,700, somehow managed to pay back $3,000, and still they had not even begun to pay off the principal. That’s not uncommon... [...]
It may be hard to grasp how the dismantling of usury laws might lead to the loss of our industrial base. But it’s true: it led to the loss of our best middle-class jobs. Here’s a little primer on how it happened.
First, thanks to the uncapping of interest rates, we shifted capital into the financial sector, with its relatively high returns. Second, as we shifted capital out of globally competitive manufacturing, we ran bigger trade deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had “cheap money” flooding in from China, Saudi Arabia, and even the Fourth World. May God forgive us — we even had capital coming in from Honduras. Fourth, the banks got even more money, and they didn’t even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling, because that’s the kind of thing that got the “normal” big return; i.e., not 5 percent but 35 percent or even more.
Go back to the top and repeat the sequence. It was what scientists call an autocatalytic reaction. It just kept going. All of that cheap money would have been a good thing if it had gone into manufacturing. But it didn’t. The capital inflows from the big trade deficits couldn’t go into manufacturing because the returns in banking were just too high. And because this autocatalytic reaction kept going — as long as there was the imbalance between finance and industry — the system could not readjust or stabilize. The bigger the deficit, the bigger the capital inflow; and the bigger the capital inflow, the bigger the financial sector became; and the bigger the financial sector became (relative to manufacturing), the bigger the trade deficit became.
And meanwhile, we lost more and more skill-based jobs. Oh, we had jobs, and even jobs that required college and postgraduate educations. But we stopped being skill-based workers. We became “knowledge workers,” dependent on the financial sector. And knowledge workers, unlike skill-based workers, don’t have the bargaining power to get higher wages out of rising productivity. What can they withhold? They can’t withhold knowledge. And since they have nothing to withhold, it’s much trickier for knowledge-based workers to get a higher wage. And if there are fewer skill-based workers, it becomes harder to raise wages in general. And if it’s harder to raise wages, then more of us go into debt. [...]
[W]ith no cap, with no limit on the bloat, the financial sector faces the same problem as manufacturing — especially now that it has managed to extract all of the value from manufacturing. That is, the financial sector constantly needs new “products.” So we came up with more derivatives. We had always had futures, but now we had futures about futures. We have long had futures on the weather; for example, there is a weather index. But now we have futures on the weather futures. These are the “products,” not widgets, etc., that our form of financial capitalism makes. This is what our country makes now: new products on which to place our bets. After the dot-com bust, we lost even our taste for investing in high tech. But we missed those dot-com profits, and so we turned our powers of invention to the bubbles themselves. We invented bigger and better pumps, in the form of new financial products. [...]
Paradox: “You say interest rates were too high, but in fact, the Fed rate, which sets most other interest rates, has rarely been lower than it was over the course of the past decade.” I admit it’s paradoxical. But as we now know, with low-interest mortgages — even the subprimes — the interest rates really were high, because they were variable....And even if those rates did not rise “variably,” a mortgage with very little down is a guarantee that the new “owner” is so house poor that he or she will need other kinds of debt to get by — credit-card debt at 35 percent. [...]
The money we bet in Chicago is the money we should have been investing in Detroit. And I know they’re lunkheads in Detroit, but the lunkheads ended up running the auto industry because the smart people, the Harvard dropouts and the autodidacts from Texas Tech, decided that the real money wasn’t in starting software companies or running telcos but in derivatives.
We set up the incentives to keep our best and brightest out of Detroit. In June 2008, even in a bad year for Wall Street, 39 percent of the Harvard graduating class went directly into consulting or the financial sector, and many others will go a few years later, after graduate school. [...]
It’s obligatory in an article like this for the writer to present a Plan. [...]
First, we have to pass a new type of law against usury that accepts the world in which we all live now. The saintly Illinois Senator Dick Durbin has proposed an amendment to the National Banking Act, to put a cap on interest at 35 percent. But that would let too many banks go on as before. Here’s an alternative: let’s cap interest at 9 percent, then let a federal agency give exemptions to applicants — banks — that want to raise rates up to Durbin’s limit (I would stop at 20 percent).
To get the right to this higher rate of 20 percent, however, the bank would have to demonstrate each year, to a federal agency, that it has a reputation for honesty and fairness and that it had not been found guilty of any fraudulent or bad-faith practices, such as the use of hidden fees or charges, or the unfair garnishment of someone’s pension. I’m aware that this standard is vague. I suppose few licenses would be denied. But the very existence of this procedure — and the right of you and me to email our gripes to a federal agency with the power to exert extreme pressure — would have a chilling effect on banks and keep them from getting too near unconscionable conduct or charging the highest possible rates.
Second, we should have state-owned banks like the German banks known as the Sparkasse. Maybe each of the fifty states could charter its own bank. Each would issue credit cards at a rate much lower than what the private banks charge. Also: no fees at cash machines, no oppressive collection cases, no gratuitous destruction of people’s credit ratings. The catch is that, as in Germany, the U.S. Sparkasse would lend only to the most creditworthy people. That is, the state banks would set benchmarks not only for how the private banks should behave but how the people should behave as well.
Third, we should have at least one or two “public guardians” as directors at the banks and other financial firms we have bailed out with $700 billion in taxes and all the money the Fed has printed. Every financial company into which we have “injected equity” should be required to have government-appointed directors, up to a third of the board. We can use these directors to nudge (if not dictate) what the banks and firms should do. For example, the directors should work to bring down credit-card rates. Through guardians, we can lower rates, bank by bank, by moral suasion and a certain built-in pressure rather than by external decree. The guardians should also demand of us good character if they bring down the rates. “Our directors” should help push capital into manufacturing. Of course, there has to be a reasonable profit, but sometimes a reasonable profit can be 3 percent instead of 30 percent.
Fourth, we should require the banks we bail out to cancel an appropriate amount of consumer debt — especially in instances where people would have paid back the principal by now had the interest rate been more reasonable. My retired schoolteacher, the one with the husband who is deep into Alzheimer’s and who has already paid $3,000 on a $1,700 loan, should be let off the hook. The banks we have bailed out should follow the Golden Rule: just as their own debts have been written down or paid off, so they in turn should do unto others.
Finally, we should think about ways to “inject equity” directly into the accounts of working people rather than into banks. The best way to do this is to announce a plan to raise the gross replacement rate of Social Security from 44 percent to something closer to 65 percent, which is still short of the rate in many European social democracies. We can afford this as much as or more than they can.
We could aim to reach that goal gradually, over the next twenty years, but even announcing the goal encourages future-oriented thinking. It would encourage people to believe that they could invest in real things again, instead of pinning their hopes on the false and predatory promise of a big, Vegasstyle payout. The promise of a real public pension that people can live on would lead fewer of us to chase bubbles in good times, even as it gave all of us the confidence to keep spending when times were bad. [...]
What’s immoral is to pump up demand, as we have, by handing out easy money at high interest and driving people into debt. Even in Babylon they spared people that kind of captivity. We now have to ensure our own country does the same.
It's stunning, isn't it, how nobody talks this way anymore. Not on the teevee anyhow. Not in America.
|Thursday Gumpagraph||Gumpagraphs 2009|
|© Kent Tenney|
|Today's Joke||Humor & Fun|
The Republicans released their budget counter-proposal this week. It plans to address the deficit, global warming, healthcare, energy, massive tax cuts for the rich. I'm not kidding. Also, there are no numbers in this budget. It's a budget plan without any math in it. You know, Obama should have saved that Special Olympics joke for these retards. — Bill Maher
April 01, 2009
I think this has to be my favorite music video of all time. I defy you to watch it without smiling:
|"Worse Than During The Taliban"||Afghanistan|
One of the talking points about the Afghan war has been that at least it's made things better for the women of Afghanistan. Not if they're Shiite. Telegraph:
President Hamid Karzai has signed a law the UN says legalises rape in marriage and prevents women from leaving the house without permission.
The law, which has not been publicly released, is believed to state women can only seek work, education or doctor's appointments with their husband's permission.
Only fathers and grandfathers are granted custody of children under the law, according to the United Nations Development Fund for Women.
Opponents of the legislation governing the personal lives of Afghanistan's Shia minority have said it is "worse than during the Taliban".
Mr Karzai has been accused of electioneering at the expense of women's rights by signing the law to appeal to crucial Shia swing voters in this year's presidential poll.
While the Afghan constitution guarantees equal rights for women, it also allows the Shia community, thought to represent 10 per cent of the population, the right to settle family law cases according to Shia law.
The Shiite Personal Status Law contains provisions on marriage, divorce, inheritance, rights of movement and bankruptcy.
The bill passed both houses of the Afghan parliament, but was so contentious that the United Nations and women's rights campaigners have so far been unable to see a copy of the approved bill.
Shinkai Zahine Karokhail, a female MP, said the law had been rushed through with little debate.
She told the Guardian newspaper: "They wanted to pass it almost like a secret negotiation. There were lots of things that we wanted to change, but they didn't want to discuss it because Karzai wants to please the Shia before the election."
The Afghan justice ministry confirmed the law had been signed, but said it would not be published until technical difficulties had been overcome.
A spokesman for President Hamid Karzai would not comment.
"Would not be published until technical difficulties had been overcome." Please.
Selling out who knows how many thousands of women for the sake of an election. Beyond disgraceful.
|Wednesday Gumpagraph||Gumpagraphs 2009|
|© Kent Tenney|
|Today's Joke||Humor & Fun|
Treasury Secretary Tim Geithner broke out his big plan this week to buy up all those toxic assets that the banks are holding. If you don't know what a toxic asset means, it's a piece of paper that's worthless now, but could be worth something someday, the same way Confederate money could be. Or, those old newspapers in your garage. All we have to do is find someone to buy them, preferably a moron who shits gold. — Bill Maher