Amend the Bailout of all Bailouts
Paulson's taxpayer-financed bailout continues to put money into the wrong pockets. So another item Congress should get to as soon as it returns: amend the Bailout of All Bailouts (the so-called "Troubled Asset Recovery Program") to force big banks to loan out at least 50 percent of the amounts they receive in cash from the government. In addition, because dollars are fungible -- that is, a dollar received from the government functions the same as any other dollar of bank assets -- the big bank beneficiaries of the bailout should be barred from (1) paying lobbyists who have anything whatever to do with administration or implementation of the bailout; (2) buying up other financial institutions; (3) paying dividends to shareholders; or (4) paying any bonuses or severance packages to any executives -- as long as the bailout continues. There's simply no excuse for using taxpayer dollars for any of these purposes.
posted by Robert Reich | 4:57 PM
140 Comments:
I don't think even that is enough.
- The global trade has now been severely disrupted. Currency around the globe is going crazy. If I have to make wild prediction, soon, international commerce will grind to a halt because no company can calculate payment properly.
- US domestic market alone isn't enough to get the nation out of the funk.
some important steps:
1. it is absolutely important to stabilize international currency. The fluctuation is killing trade.
2. in order to do that. swap, derivatives, etc. have to be quickly settled, if not nullified altogether. These type of "speculation" is bigger than the planet's global output. It is eating all cash with lost after lost.
Since almost all big banks have been nationalized, why not "freeze" these CDO/Swap, etc. and all settlement will be conducted in one year. after the date. (this has to be done internationally of course. but there are only so few places doing hedges, it's almost trivial. Round up the bosses and tell them to figure it out)
3. A short term International trade treaty. (12-16months long) (just to kick start everything quickly) This is specially important to cure currency fluctuation, export/import exchange settlement have to be insulated from wild fluctuation.
4. quickly set up an international banking body/exchanges to settle CDO/swaps/big exotic debt. Pronto! These debts about to swallow the entire planet.
5. some sort of agreement to do global level keynesian spending. (I am sure everybody need this or that infrastructure)
The important point:
The banking system is not able to settle the collapse of shadow banking system debt. These debt has to be settled outside the written contract, or else the entire planet banking system will die. There has to be planet size global agreement to kick start the economy. (It doens't have to be long term, something to kick start the trade again.)
PS. PHOTO op is NOT enough. Quit doing useless conference. It is TIME to actually settle debt, and make deal! empty statements are useless.
I really hope Obama puts you back in the cabinet. Unless you prefer sunny CA, in which case I hope he just calls you a lot for your advice.
How about granting us taxpayers investing in the banks access to the amounts of salary, bonus, pensions, stock options, deferred compensations, etc. that are paidout to the CEO's and other senior executives ?
That would require some form of oversight or regulation which would be un-American...unlike socializing banks.
"amend the Bailout of All Bailouts (the so-called "Troubled Asset Recovery Program") to force big banks to loan out at least 50 percent of the amounts they receive in cash from the government"
I hope your saying 50% of the total, not 50% of the $250 billion. Otherwise, the credit stimulus would only amount to $125 billion dollars, with rest going for... I guess we'll find out someday.
Don the libertarian Democrat
Deutsche Bank said in July second-quarter revenue from equity sales and trading dropped to 830 million euros from 1.4 billion euros in the same period a year earlier as demand for equity derivatives waned.
"The dislocations on capital markets in September must have had a catastrophic impact on the business" at Deutsche Bank, Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets, said in a note to investors.
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Raise your hand if you think banks ought to lend money, hold loans to term, and not get involved in derivative trading, equity trading, commodities trading, currency speculation, holding assets in SIVs off their balance sheets, sponsoring hedge funds, and scores of other things the average Joe on the street would not think that banks do.
The real killer in the above is excessive leverage. Leveraged bets and a run on the bank is what sank Bear Stearns and Lehman. The leverage enabler is an unsound currency coupled with fractional reserve lending and micro-mismanagement of interest rates by the Fed.
http://globaleconomicanalysis.blogspot.com/2008/10/equity-trading-losses-at-deutsche-bank.html
Nice to see someone in this financial mess that has some insight. I don't think Paulson has any idea of what he is doing. I agree with one of the below posters that you would make a great addition to an Obama cabinet should you be interested.
"force big banks to loan out at least 50 percent of the amounts they receive in cash from the government"
Imprudent lending got us where we are today. So you are suggesting more imprudent lending to cure the ills of imprudent lending...hmmm.
The entire bailout was designed as a big heist of taxpayer money, mission accomplished. Wall Streeters, lobbyists and our corrupt politicians will have a merry X-mas at taxpayer expense.
Will you have a merry X-mas?
DOOMED!
Yep.
Pay and bonus deals at Wall St banks equivalent to $70 billion or 10% of the bailoutare in the works. How pathetic that with all the problems these banks have caused, they are using the taxpayer bailout money for obscene payouts and bonuses.
Concerning credit default swaps, we hear there are trillions of dollars of them out there but nobody knows who owns them and nobody knows how much. Why can't the government(s) just demand that they all be reported to some central authority or they will be nullified. In other words demand the transparancy that didn't occur in the first place. Then it would be decided which ones to honor and which ones to declare null and void. I suggest that CDSs that were strictly bets (ie no underlying mortgage backed assets) just be nullified. At this late date why are governments not demanding full disclosure and transparancy?
Frank and Art, the Dark Wraith has presented a funny video lecture describing money and inflation. he covers money, products and industry.
Dark Wraith Video Lecture 2: The Equation of Exchange
Banks are hording cash to protect their own balance sheets to protect their bonuses. The republican party got us into this mess with their excessive pro-business focus and misguided reduction in government oversight. Now this administration can't figure out how to fix their mess.
It is amazing to watch the republicans bail out on their own party. Some won't use the term republican, they use GOP, because we have so many ignorant voters that don't know any different.
Paulson is a wall street plant within the republican administration to ensure the rich get preferential treatment during the inevitable market crash.
The bailout terms should ensure that we have a seat on the board… otherwise no bailout favor. We need regulation and oversight of out bailout money.
This is the same issue that got us into this situation… no oversight and no regulation. Now we are handing out money to the same crooks with no oversight or regulation change. Dumb assess rule today… but that is changing
Robert,
I enjoy your commentaries. Especially the one where you reported from iBerkley in the future (Marketplace joke..).
Thanks for keeping a blog. I frequently hear things on the news and wonder what "Robert Reich" thinks of that.. Now I can find out, without waiting for your Marketplace bit.
"...to force big banks to loan out at least 50 percent of the amounts they receive in cash from the government..."
The cost of the money is 5%, and banks can loan it out at maybe 6% for new mortgages. It doesn't add up.
Mr. Reich,
I am very worried that a global collapse will strand my son in Russia.
I have been unable to comprehend much of this credit-swap discussion, nor do I really care any more.
I have heard that 20% of the US economy is in financial services.
My daughter and I wondered why there were 4 banks on every major intersection in our city.
Why so many banks?
Is there hypothetical per/capita nuber that could tell us when we have more bank branches than people with jobs in a neighborhood?
Is the future of America going to be dominated by Banks, Churches and Casino/brothels?
Forcing banks to lend just exends the problem as these loans too will have to be written down to mkt prices - which will more than likely still continue to fall as more and more deleveraging takes place.
On the other hand, giving banks money that they don't lend is somewhat pointless also as the money is just sucked into a big black hole. If money is not lent out - growth cannot occur. Also, the money is just being used to cover additional write downs due to continued deleveraging thus disappearing into a black hole.
weaseldog:
Cute video, although he gets carried away with the entertainment aspect as opposed to the lesson.
It should have provided answers to your assertions though. By his example he shows that increased money supply preceeds increased industrial output, and that price inflation occurs from industrial expansion not industrial contraction.
In typical economist fashion, my biggest turn off with economics, he holds money velocity constant in his examples, yet it is variable and figures greatly in both real outputs and inflation.
I have never been a strong proponent of the overpowering influence of the money supply on our economy. No doubt it is important and because it's adjustable it is used to drive the economy but there are so many variables at play in our economy that money supply alone doesn't seem to me to me omnipotent.
To me economics is a behavioral science. Most all the postulates and axioms are predicated on an assumed behavior. Major behavioral changes create havoc with anticipated market responses. Just ask Alan Greenspan.
Art Said... "It should have provided answers to your assertions though. By his example he shows that increased money supply preceeds increased industrial output, and that price inflation occurs from industrial expansion not industrial contraction."
I didn't advertise that it did. Because I knew it wasn't a clear argument on the topic. I've seen a number of videos and read books that describe variations of my arguments, but we get back into science talk and math. I'm trying to avoid going to that level as already, we're not agreeing on Bartlett's statements and conclusions.
Are you referring to industrial expansion in this example as watering down the fruit juice? In that example production wasn't actually doubled. The supply was diluted and though the perceived value increased temporarily, the price was soon corrected.
If demand and the money supply remains constant, and supply diminishes, then econ 101 says that the price will go up.
In real life, when industry experiences supply constraints output cannot grow, but demand keeps increasing, then the price goes up, right?
Now if you increase the money supply, while supply is flat and demand increases, what happens? the price increases faster, right?
What happens if supply declines, demand increases and the money supply increases?
Demand for oil tends to trend upwards to grow industry. More industry needs more oil. When oil supplies quit growing for any reason, politics, poor maintenance or depletion, demand doesn't stop growing.
So the price of oil goes up.
It keeps going up, so long as businesses can keep paying the higher costs. If order for oil exceed supply, then some businesses don't get their oil. They quit producing.
So when supply is flat, but the industry is driven to grow, then some grow, at the expense of others contracting. It's a zero sum game when inputs are not growing.
When the price is high enough to knock players out of the game. They fire employees, they declare bankruptcy. They quit bidding the price up. Their ex-employees drive less.
Demand eases and begins to decline. The price drops because competing bids are disappearing.
The demand destruction trend has momentum as shocks ripple through the industry. Oil prices drop low.
Adding more money at this time for loans doesn't work well, because businesses are hurting from recent shakeout. Demand for their products is low. They have more capacity than they need, in order to fill orders. They don't need to borrow. They need customers to buy their products.
At this time, inputs are cheap and plentiful, but the customers are not buying.
The banks don't see these businesses as good investments, so they aren't really interested in loaning. They want to see who survives the slump and bet on the winning horse.
Still the money supply increases. Banks need more cash flow. They increase interest rates on loans. Businesses struggle to meet financial obligations with reduced sales.
Prices go up. More employees are laid off.
The banks see their coffers filling higher, but there's no where to put the money. So they invest in each other...
Now in spite of this, business eventually picks. The banks then flood industry with money. Industry expands. More money comes in.
Industry grows too large of r supply again and resource prices go through the roof again... the cycle repeats.
This system oscillates because the money supply drives it. The faster money is poured in, the higher the frequency and the higher peaks, and the lower the valleys.
Reducing the rate of growth in the money supply will slow the oscillations, and reduce the range of the swings.
Like a child on a swing set, there is a range of oscillation that is fun and comfortable. but keep pushing harder and the fun stops. You might even break or kill the child.
This is why I argue that interest rates need to be increased when industry is going flat. It will make investment in industry more attractive than investment in derivatives and other inflation hedges. It will slow the buildup to the next oscillation and reduce the size of the next bubble.
Art said.... "I have never been a strong proponent of the overpowering influence of the money supply on our economy. No doubt it is important and because it's adjustable it is used to drive the economy but there are so many variables at play in our economy that money supply alone doesn't seem to me to me omnipotent.
To me economics is a behavioral science. Most all the postulates and axioms are predicated on an assumed behavior. Major behavioral changes create havoc with anticipated market responses. Just ask Alan Greenspan."
We've mostly had growing energy and industry, growing with money. This masks the effects of changing the money supply alone. It makes Greenspan's misunderstandings seem reasonable. It makes it seem like economics in the industrial age follows different rules than other eras.
The rules are the same, only the settings have changed.
It seems to me that behavior follows effect, instead off the other way around. Bubbles pop after energy slowdowns. Not before.
Watch the next cycle. Oil prices will peak again before the next bubble pops.
That money has been extorted from us legally. Good luck trying to impose any new terms on how they get to spend it with Paulson calling the shots.
Hopefully Obama will have the justice department block mergers once he takes over. Unfortunately he hasn't shown any sign of being willing to go against Wall Street on economic policy, as far as I've seen.
Right On Secretary Reich!!
I just found your blog. I've always enjoyed your commentaries on Marketplace and other venues. And, I've always agreed with you wholeheartedly.
Steve, Salem OR
titanicexplorer... asks …why so many banks?...
because the borrowing cost of money from the government (Fed reserve, which tax payers own) is low and this industry gets to turn around and gouge the taxpayers to that need to borrow money for their individual needs. Banks are a loan-sharking entity that has excessive usury on the citizens of America. They can afford to build large capital intensive footprints on every corner to build their portfolios, which the taxpayers are paying for by borrowing their own money. Why can’t I get a mortgage rate at .05% above Prime interest rate? Why do public banks get to own me for 30 years? I buy a $250k house for my family, and eventually, after 30 years I end up paying $550k. The banks make $300k… get it ????
weaseldog:
No I'm not referring to the juice because it was not presented as a product but as the money supply. Granted his whole presentation was a mini show; one could posit that the juice flowed freely from plants requiring only a bottling effort to control supply while we know that donuts require a more complex production process.
That aside the juice was the money supply and the donuts were production output. As the juice supply (money supply) expanded, to keep it simple he just added water, the real output of donuts (industrial production) increased. Hence, money supply drives increased output, simplistically.
Now all your examples seem to pointed at the same phenomona. One of the reasons I don't buy pure monetary theory, as I feebly understand it, is that the money supply is ancilliary, catalytic, to supply and demand. Further, as I mentioned before, money velocity becomes an important factor.
In the professor's lecture what would have happened if the money supply doubled and the velocity declined by half? No change in outputs or prices.
One of the problems with trying to explain complex subjects with simplistic examples is you have to ignore so much. In his initial example, the money supply doubled, velocity remained constant and he calculates that the output of cheeseburgers would double, initially. More than likely, rather than cheesburger production doubling, demand for fries with the cheeseburgers would have increased, leading to expansion of another industry and the prices of cheeseburgers would not have risen. It is the problem with trying to force a macro phenomenon into a micro example.
If supply and demand are constant within a given industry then any change to the money supply will not drive anything unless the velocity is such that consumers get more money and they increase their demand. Or if the money supply change is so restrictive that the supplier cannot get the credit to continue his production, thereby altering his ability to supply the demanded quantities.
Neither money supply theory alone, nor supply and demand alone can answer all your questions. You need to consider product substitution options, money velocity, price elasticity propensities and a plethora of other variables.
Money supply is a macroeconomic phenomena, where supply and demand tends to be more micro, industry specific. A buyer seeking a family vehicle is not going to care much what is happening to the price of motorcycles. If asparagus prices rise, chances are it will have little effect on the price of apples, notwithstanding a aggregate agricultural problem.
You try and weave in oil prices to your analysis but the recent astronomical price rises were far from merely supply and demand. The futures market, which clearly drives current prices, saw an influx of pension and mutual fund money seeking to avoid the declining profits from the stock market. This brought in speculators to take advantage of all the new marks. Most oil experts tell us that oil prices have merely returned to where they should have been all along. Pessimists will not be inclined to believe them, obviously their right.
You drift off to your doomsday scenario again asserting that industries will die if there is not enough oil to go around. Calling Captain Innovation! Some marginal companies will die, but viable ones will find alternatives. Beyond that we are not yet close to oil running out. Whether new supplies are as vast as Saudi Arabia or not, there are new supplies coming online. Smaller wells in more obscure places will take a toll on operational efficiencies and profits but it will not stop the flow of oil in the near term. At some point I have no doubt we will have to nationalize our oil industry because the availability will become critical enough that profits will have to be discarded and repurchasing company stock will be off the list when compared to more drilling, everywhere.
In your wrap up, again you oversimplify. The loans being sought by industry currently are not expansion loans or frivilous consumption loans they are necessary for the cash flow needs of companies, many of which are still functioning fine. The auto industry needs loans to retool their US plants. They were stupid and mismanaged the long term interests of their firms but to feed the demand for smaller more fuel efficient they do face some significant expenditures. Many consumers want to keep spending but with credit tight they are hindered.
Banks make loans to make money. They don't want to take anymore risk than they have to but there are a lot of large and small businesses out there that are credit worthy. For my money, if I found banks refusing to lend to credit worthy customers I'd cancel their charters.
Sometimes I can't follow your logic. If you raise interest rates in an economic decline you intensify the decline. If industries can't get loans at current rates then increasing rates will simply exacerbate the issue, if for no other reason than the higher interest rates will increase the risk of default.
You keep missing that the goal right now is not adjusting the normal process, it's to resolve an urgent situation. Among all this science and theory you can never forget that actions need to spur positive psychological effects and raising interest rates does not do that.
Ooops! Ran outta time. Pardon any errors don't have time to proofread.
Is the future of America going to be dominated by Banks, Churches and Casino/brothels?
It's convenient that the corner branch actually functions as all three at once!
The Federal Government has crossed the Rubicon already by trying to force banks to lend at bazooka point (hat tip: Mish)
That said, why not cut through the chaos and put an end to it all: force all mortgage contracts (1st's HELOCS, Commercial) to be re-written at 1.0 to 1.5% lower in rate than they are today. A universal re-write is less expensive than a "stimulus package", treats all asset classes the same, and stops the tail chasing actions see to date. All new loans would be priced at 2.5% above Federal Funds rates. This eliminates discriminatory pricing and the mortgage industry that brought about this problem to begin with. Uniform term, problems reduced - not eliminated - but at least reduced.
My .02
Glad to see you taking a stand against lobbying. My question earlier was how much money do the banks have to lose before they run out of lobbying money?
So where is lobbying important? just asking because in Supercapitalism you state there's so much special interest money in DC that the voice of the middle class never gets heard.
Question:
Since most of those big banks are now government employees. Why are they still getting paid like they run the universe?
I for one think they should be fired and their job be outsourced to bankers in India for 1/10000000 the price.
Just to be perfectly petty and spiteful. (If they declare bankruptcy, make them take counseling class)
tho' personally, I still think they should be kicked from top level from their headquarter and be given a parachute made out of gold.
...splat.
Art, I'll repeat myself. Oil is not running out.
It's production growth has ended.
You say laternatives are will pick up the slack. From 2001 on, I don't see the alternatives doing this. Buy they need to. Can you predict when they will start replacing the oil we're not getting because supply growth has ended?
From 2001, we're down the energy equivelent of several hundred nuclear power plants. What alternative will provde the power each year of hundres of nukes,and when will it come online?
Yes every aspect of our economy has complexities but this doesn't mean that we can't understand the fundamentals.
Everywhere but from you, I'm reading that the bankers aren't making loans. That they are using the money to merge and buy other banks. They are squirreling it away.
I completely understand the TV bubblehead version of the story. But it seems they lied about it. And you keep repeating the lie.
The bailout is not going to loans. That is a lie. They lied to you. They lied to me. They are keeping the money to prop up their own portfolios. They are covering their own losses. The money is not being reloaned. It's being stolen and disappearing into a black hole.
They lied to you. They lied to me. Repeating the lie, won't make it come true.
Bailout
The issue must be solve
The Infininity
Dr. Reich, cc:Art, Weaseldog:
Given current accumulated systemic financial overleverage of an extroardinary scale -- where total US market Debt today is at a HIGHER level than even at the beginning of the 1929 depression --the piddling $700 billion bailout is structured to restore banking liquidity with the aim of unfreezing the credit crunch and thereby regenerating bank loans to businesses and people.
What is missing here in the logic, which some are indirectly onto to, is that the extroardinary OVERLEVERAGE situatiion encouraged by printing cheap money (i.e., money supply) combined with adopting hazardous, irresponsible lending practices, has createed not just a liquidity and trust problem in our banking system but a severe SOLVENCY problem.
So much of the $700 billion, in my opinion, is being directed to this problem by bailed our banks now and very little is trickling down to business loans. Compounding the problem is that while housing is at the ROOT of the financial crisis now, the $700 billion bailout, as structured, may spend almost nothing on distressed mortgages. And forecasts indicate over 2 million more households are in danger of being foreclosed.
We are going to be forced to print money to help reduce and stabilize housing foreclosures which have a rippling effect on the entire economy. This means even higher Debt and Interest cost levels. If we print too much money, we have the risk of jump starting a third world inflation rate (and again weakening the dollar and thus stimulating a return to higher oil prices). When we borrow more and more funds abroad from those countries with high savings, the National Debt shoots above the $12 Trillin stratosphere and annual Interest cost starts to peak at $600 billion a year ... equal to our total annual Defense budget (excluding related interest cost). This will all put a real CRIMP on spending to regenerate our economy which Reality neither Obama nor McCain have dared to face up to sofar.
So, what to do to come out of this Catch-22 financial debacle that has the ingredients of testing the frontiers of a national bankruptcy (assuming latter is possible)?? To be continued ...
Dr. Reich,
When I say the total Debt of Americans today is HIGHER than at the beginning of the 1929 depression, i'm referring to Debt as a percentage (%) of GDP.
Dr. Reich,
Another clarification: when I refer to printing money and/or borrowing from abroad to cover the ever accelerating Debt expansion for financing bailouts, deficits, and recovery investments, I mean either choice or a combination of each intensifies the Overleverage dilemma with its ancilliary risky effects on the dollar and commodity prices .. . a toxic cocktail the best economists are still groping in the dark to undersatnd the cause and effect realities of. New thinking is needed here about consistent macro and microeconomic policies that will not contradict each other and end up creating more financial instability ... or increasing real possibility of our country being confronted with a national bankruptcy.
If the banks won't lend the money being given to them out to borrowers in terms of car loans, mortgages, and lines of credit then we shouldn't be giving the banks the money.
Giving the banks "cheap money" without specific requirements as to how they use that money will only lead to more unscrupulous acts by key executives in the banks looking to line their own pockets.
Disgusting! When do we see some of these criminals doing the perp walk?
Frank, this is what I've been trying to argue in different ways.
Even the morning news bobbleheads are telling us that in spite of the generous gifts to the bankers, they still aren't lending.
These leaves us with only Art, holding out the alternative reality view, that the bailout is leading to increased liquidity. Every financial news source is telling me that their are using the money to fund takeovers and to cover their own losses.
They are not lending. They don't intend to start lending. They know we're screwed and that we are a bad credit list. They know we're going down. Isn't it obviou?
Considering that Paulson is chummy with these bankers and he's worked as one of them much of his career, it's hard to imagine that he didn't see this coming. In fact he lobbied hard against any efforts to impose any kind of strings on the money.
Either Paulson knows nothing about banking and finance or this is the plan.
Under IMF austerity measures, other nations gave these same banks billions of dollars in exchange for the promise of more liquidity, more loans, better rates. Exactly what we were promised. And they didn't get it. They got bankrupted.
The banks keep doing this over and over. The same people are making money doing the same thing over and over. Can we give away $trillions for nothing, for no return, no benefit, and come out smelling like roses? Are we the exception. Can we become stronger economically, by borrowing $trillions of dollars and giving it away?
Many are telling me that we can. For me, this logic strains my credulity.
And Art, in a recession, when the Fed lowers interest rates, the banks don't start investing in real world industry, for fear of defaults. They put their money into CDS's and other exotic instruments. Lowering interest rates during an induistry downturn, increases the money supply, but not to domestic business. The banks know that they are a bad investment in this period. With price inflation running high, the smart money gambles in high finance.
Now you argue that the futures market drove the price of oil up. I hear that a lot. Coincidentally, production went flat before prices went up, so supply did not meet demand. I think you're swallowing the Sunday Bobblehead story and not looking at the actual production rates. You're not doing your own research.
The 800 pound gorillas in the room are the huge amount of money spent on the military-industrial complex (more than the rest of the world combined) and the huge amount of money being spent on interest on the national debt. Naturally, neither McCain nor Obama are talking about them because they are political hot potatoes that neither one wants to touch in the midst of an election campaign.
But they are items that the next President will have to deal with. James Galbraith, son of John Kenneth Galbraith has written a book, "The Predator State," about the current regime in Washington. He argues that we are not in any danger of running out of people from abroad willing to lend us money so we don't have to worry about deficits at least right now. If he is correct, then Obama should continue to run high deficits for awhile in order to get our house in order by creating jobs, easing the plight of those who have lost their jobs and/or houses, creating a sustainable health care plan etc.
The notion that Obama should be fiscally stymied or constrained by the Republican overspending and undertaxing would only be prudent if the rest of the world decided not to lend us any more money to finance our deficits. In the long run we need to get our fiscal house in order and pay down the national debt in order to decrease the amount of money being spent out of our national budget on interest. In the short run it's more important to straighten out the mess that 28 years of Reaganomics has created. That's going to take even more money, but money actually spent on helping the middle class in the short run (extended unemployment, increased food stamps, mortgage relief) and the long run (investment in infrastructure and alternative energy).
John Lawrence, I agree with you.
If you have a sick tree, you start treatment with the roots. You don't just treat the foliage, then later treat the roots.
And I just came across this very scary article.
World will struggle to meet oil demand.
Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.
It's time for Art's Science to rescue us now. Each 1% of world oil production is equal to the power output of 400 nuclear power plants. Those alternatives must be ramped up fast.
This is what I've been telling family members and friends since this bailout package was introduced. So glad you came out and said it!
John.
You know I"m with you all the way on your points as we do need Constructive Debt financing to eventyally gte the Destructive Debt financing of last 28 years under control.
As usual, it´s all about walking the balance line carefully
between expenditures critical to Recovery and Overleveraging to point of no financial return. We can´t do everything. When I have time, I will show some interesting Before and After macro-economic results of Sweden´s and Japan´s entirely different approaches to similar crisises in the early 90s.
weasledog:
You'll pardon me but you are becoming somewhat of a raving lunatic. Not sure what financial news you're reading but those I've read suggest that things are improving, albeit very slowly. We are not dealing with an on or off light switch here, we are dealing with a rheostat. No one expected that a swell of bailouts was going to immediately turn the lights back on in full glow.
Take a look at what's happening with Libor rates, with the Ted spread. These are not indicators of a change from no lending to lending but they are indicators that tendencies are moving in the right direction.
Now I don't completely favor banks using bailout funds for acquisitions but there are plusses and minuses to those actions. Many troubled smaller banks, ineligible for bailout funds for one reason or another, would eventually fail. What would happen if they failed? The FDIC would take them over and clean them up and then look for a buyer. Acquisitions merely eliminate the FDIC step. Consolidation can also shore up balance sheets of the combined entity especially because the failing banks are being purchased at fire sale prices. Stronger balance sheets and increased funds available for lending eases any liquidity issues, although liquidity is not the major problem.
Is there going to be some hoarding going on? To be sure! There is still a lot of assessing going on and no one wants to jump head first into the pool. A toe, then a foot, then a leg, seems the more sensible way of getting wet again. Long term, banks cannot survive by investing in CDs. What other investments would you suggest they seek with the bond markets dried up and the stock market swinging from side to side like your out of control swing.
You are conjuring up all kinds of conspiracy theories. Everyone lied to us. Everyone is lying to us. Bernanke, Paulson, Bush - again I don't know why you even include him, you can't lie if you don't know what the truth is - the banking industry, worldwide, are all involved in a shell game attempting to fleece taxpayers. It's not clear whether you think the media "bobbleheads" are in on it or are merely hapless messengers. You seem to be suggesting that everyone is out to get YOU and the rest of us are added to "share the wealth".
The whole mess is further encumbered by the election. It is not uncommon, especially in perilous times, for things to reach a standstill when a change in administrations is about to take place. Often the final election, regardless the winner, returns commerce to business as usual. In this election, given the diametrically opposed strategies for cures, the commercial world is awaiting the outcome to get a sense of which way we will be going. Chances are either way will return some semblance of normalcy but the rate of return and the direction could be highly dependent on the eventual winner.
As with all problems there are no crystal balls. You don't have one. I don't have one. Bernanke nor Paulson nor Bush nor Obama nor McCain have one. Bernanke is well aware that inaction, which significantly fed the Great Depression, is not the answer, but he has no historical footprint to suggest what actions will work.
There is no doubt that free market ideologies are a delimiting factor in the bailout solutions. I would have taken voting stock rights rather than a preferred stock nonvoting posture. I would have mandated no acquisitions with bailout funds without government review. All bonuses and severance pays would be stopped, at the executive level, along with dividend payouts. Executive salaries would have had hard caps had I been establishing the plan. I would require that all loans denied be subject to government review and if the denials were unreasonable I would institute punitive measures against the banks involved, including a demand that bailout funds be returned. I would stop all lobbying payments.
In all this I realize that I am mimicking Dr. Reich. Our only difference might be in acquisitions but I would agree that those should require government oversight and approval. There is, however, strong resistance from many, not just idiotic conservatives, against the government taking too much control. Paulson does not strike me as a dyed in the wool radical conservative but he does believe in free markets and the benefits of allowing flexibility to those markets. It should be clear from Goldman's shorting of exotic invesments that he knew that there were risks to what was happening in the market. This fact does not support a value judgment that he, therefore, is a Dr. Frankenstein attempting to build a monster.
You would appear to have liberal leanings and I have always believed that the major difference between conservatives and liberals was that liberals see gray while conservatives see only black or white. Back to my opening analogy, this means that liberals believe that you tweak the rheostat you don't just turn the switch on or off. In either case you don't view the switch, whichever the mechanism, as being possessed by demons.
The management of the money supply has aided us often in limiting or curing recessionary forces and inflationary ones. It is an imperfect system and I think the current dilemma suggests it has limits. I have asserted my critiques and sympathies for Greenspan's actions but the even larger issue, in my mind, was he, and other experts and the markets, failed to understand how globalization have severely altered the old paradigms. The current players seem to understand that we now have a global economy and a coordinated approach is necessary to solve the problems. We are seeing some signs that we realize there are other bright minds in the world and they can have valuable inputs.
You are correct that banks and Wall Street took advantage of cheap credit to seek overseas investments and get themselves embroiled in fancy financial instruments. Seeking the highest profits and the best rates of return is what financial markets do. The problem was not that banks were leery of making loans to US companies but much more that we didn't have the demand in the US for all the extra money that was available. Even the demand that did exist had to compete with global opportunities offering greater returns. The birth of exotic investment vehicles took on the aura of shooting craps with loaded dice. Why make mundane loans when really big profits are there for the taking.
It is said that a little knowledge can be a bad thing. It can lead to believing that one knows enough to validly second guess those with much more knowledge. This is especially visible when viewing things in hindsight. Second guessing has replaced baseball as the great American pastime. When that "little" knowledge fails to provide us a window to clear rationales, there is a tendency to decide that our lack of understanding must be due to conspiratorial activities on the part of others.
Now you argue that the futures market drove the price of oil up. I hear that a lot. Coincidentally, production went flat before prices went up, so supply did not meet demand. I think you're swallowing the Sunday Bobblehead story and not looking at the actual production rates. You're not doing your own research.
One might suggest that it is you who is being a little myopic here. As with the economic issues there is no one reason for the problem. Supply/demand certainly was a factor but if you followed the testimony of experts in the Congressional Committee hearings you would have heard reasons that were far more influential in the fast rise in oil prices than simple supply and demand. I know, chances are that those "experts" were all part of a grand conspiracy. Are you suggesting that the supply/demand ratios have altered so much that they, alone, explain the 50+% drop in the price of oil?
I have mentioned to you before that the problem with pessimism is that it feeds on itself. Pretty soon everything is doom, at worst, or that those in a position to effect solutions are seeking only self-interest, at best. It is an "ism" that offers no solutions. When it's raining some seek refuge under the comfort of their roof while others buy an umbrella and take a walk in the rain.
To You're point #2-
"(2) buying up other financial institutions; "
Many have speculated that was the real motivation for the injections.
http://www.nytimes.com/2008/10/25/business/25nocera.html?_r=1&ref=business&oref=slogin
John Lawrence:
Let me get in line and also (too) agree with you. To Frank's point we have to tread softly but we are going to have to spend more to get our heads out from underwater.
Spending here on infrastructure and alternative fuel research should feed GDP growth and coupled with Obama's proposed changes to the tax structure (to my mind not enough), tax revenues should increase. If tax revenues only increase enough to pay the additional interest on the debt in the short term we're still at break even.
We can't let the fact that Dumbya, in attempting to starve the beast, ended up beating it to death, keep us from doing whatever is necessary to get people back to work and get revenues flowing again. Dumbya will go to retirement wondering what just happened over the last 8 years while he wraps himself in the comfort that he did a fair to middlin job. Cheney, on the other hand, will be fuming that the nation is still running the day after the inauguration.
You continue to confuse "bail outs" & "investments". The plan is for the government to make investments in these banks, & if thinks work out, a return is expected. Perhaps a return will not accrue, but this is the nature of investng. To allow the government as investor to enjoy additional rights that the present stockholders do not receive is basically one more step toward socialism. We are loosing our freedoms folks. Pleas wake up.
weaseldog:
One answer is right there in your post: Without extra investment to raise production..., and that one is not dependent on science.
Science does need to get a move on and it is. We are developing better methods of finding oil and evaluating the potential supply. This may explain my ANWR differences with Dr. Bartlett. This will hasten the exploration and drilling aspects. Coming up with innovations for processing and using heavy oil would have the effect of increasing supply because much heavy oil just sits around, on ships or in the ground.
I would agree that not nearly enough has been done over the last 30 or 40 years, let alone just since 2001. As much heat as Jimmy Carter takes for, supposedly, being a hapless President, if we had continued his energy/environmental goals, we'd be in much better shape today, on both energy issues and global warming. Between Reagan's "morning in America" and our habit of treating gasoline prices as sleeping pills we have literally wasted the last 30 years in regard to energy solutions, among many others. Granted the Saudi's might take an opposite view.
Admittedly, all the science's horses and all the science's men are not going to create Valhalla tomorrow. To your point, without some intensification of efforts, time is not progress's friend.
We should keep in mind that trillions of bacteria are being created everyday. The fact that we are not aware of that nor can see that does not mean it is not happening. I'm sure scientists around the world are working on various solutions but we won't here about them until somebody writes a paper about their discoveries. No papers is worrisome.
Thank you Art for calling me a raving lunatic.
I enjoyed the paragraph where you argued that Bernanke doesn't know what he's doing.
And I agree, I don't know everything, and if as you contend, that means I know nothing, then that's cool.
I'm a Constitutional Constructionalist and I am against government welfare programs for corporations. So yes, these days that makes me a liberal.
The shades of gray versus black and white are the criteria historically used to determine fascist leanings. I hadn't really thought of it in a liberal vs. Conservative form.
'Conspiracy' is a cool term for blowing people off. Like, "Only tinfoil hat conspiratist would believe that Al Capone and his buddies conspired to create and pursue criminal enterprises."
If you were to ever study the IMF, you would find a consistent pattern of behavior in relation to nations they have put through their austerity program. They even document this on their website. I know you won't do this though.
I know you enjoy arguing that the world is so complicated that you're the only person that can understand it. But you're wrong. Many things are simple. Some people overly complicate them in an exercise of pomposity. Greenspan is famous for this in his many Gobbledy Gook speeches.
I like your arguments about what should be done. I agree with you on much of the substance. I do not believe that these things will be implemented as you have suggested.
Further I think you're deluding yourself on the intelligence, wisdom and dedication to the public good that you have imbued Bernanke and Paulson with, in your thought and heart.
Another symptom of fascism is an over zealous love and trust of figures of authority, based solely on their station. I believe that you, like my maternal grandmother was, trust and admire these people simply because they have clawed their way to the top.
You don't need grand conspiracy theories to explain why people engage in crimes for money. Human nature is enough. Look at Ted Stevens for instance. He took money, goods and services in exchange for political favors. The web work of lobbyists and politicians can be called a conspiracy. But really it's individuals and corporations chasing their own self interest without regard for the public good.
I believe that Paulson and Bernanke are just looking out for themselves and their friends in the banking industry.
Not every crime or unethical act is an evil conspiracy Art.
Now did Bank of America and CitiCorp bribe politicians in South America and Africa to sell out their nations give away all their money. Sure they did. Do they bribe our politicians? Well sure they do. It's called lobbying. Do they represent the largest lobbying group in the USA now. Sure they do.
Is this a conspiracy? I don't know. It sounds like a business plan to me.
1. Bribe politicians.
2. Collect free money with no strings attached.
Is that a conspiracy?
Art A Layman said... "weaseldog:
One answer is right there in your post: Without extra investment to raise production..., and that one is not dependent on science."
Actually, that's like using one of those settlement loans, where you trade a payment over time, in on a quick prize.
A number of respected petroleum geologists have argued that Saudi Arabia may well have damaged their fields, increasing production the way they did.
Getting the oil out faster, means a field goes into decline faster and when it does decline, the slope is steeper.
Imagine a can of oil. You can pour it out at different rates. You can even quickly empty it, by turning it upside down and squeezing it. But no matter how fast you drain it, you get the same amount of oil.
Yes, technology is allowing us to find the pocket fields in faster and more efficiently, so that we can drain them.
But this is accounted for in Hubbert's theory. He talks about how technology will improve. Physics Professor Albert Bartlett talked about this too, in that video you watched.
Remember?
They both pointed out that because the fields discovered in the 1960s that we rely on today are so awfully huge, the tiny discoveries will never add up to enough production fast enough to move the peak. Only finding more super giant fields can give us a new peak.
Heavy crude and tar sands have been accounted for also. These things aren't secrets in the oil industry.
Where I think you're missing it, is in thinking that it's the size of the reserves that matter. It is not. It's the rate of extraction that matters. Heavy crude and tar sands have very low rates of extraction. so they won't have a large effect on daily production rates.
We're not running out of oil, we're going to pump less and less out of the ground.
Think of a trust fund of a $100 million. If it pays out $100,000 / year, is it the same as another of the same size that pays outs $30,000 / year?
Of course not.
The rate matters more than total size when it comes to measuring peak income, or peak oil.
Art, you asked where I was getting this raving lunatic news from...
It was from MSNBC.
Just so you know.
Video of an exchange on the recent banker's meeting on how they would divide up the loot.
Dylan Ratigan comments that we can't know what went on, because important pieces of the transcript have been blacked out. The deal is a secret.
Secrets of the Bailout
weaseldog:
You tend to think in terms of extremes. Seldom to the sublime but often to the ridiculous. Don't get so sensitive, many raving lunatics are lovable people.
Frequently leaders of all kinds find themselves faced with dilemmas for which they don't know the precise solutions. They make decisions based on a far more thorough knowledge of the facts and the complexities than you and I might be privy to. There may be times when those decisions are nothing more than educated guesses but chances are their educated guesses are far better than the SWAG method you and I might employ.
Jesus weaseldog, I never suggested that you know nothing and I am fully aware that I am closer to knowing nothing than I am everything. When critiquing someone who knows much more it makes sense, depending on the complexity of the subject matter, to at least realize that their answers may be wiser than yours, even if you can't understand their rationale.
Believe me I have second guessed the best of business managers, including CEOs, and I have often been right or at least more correct. I have two distinct advantages though. I, often, had a similar level of knoweldge of people and business as they and I had the advantage of not having to make the ultimate decision. It's far easier to be a naysayer when you're not in the hot seat.
I know of nowhere in the Constitution that suggests that the government can't or shouldn't provide aid to corporations. I would not suggest that it should be done willy-nilly but if the actions are taken to "provide for the general welfare" then the government not only can do it but should do it.
I guess if you hadn't thought of shades of gray as a liberal vs. conservative phenomenon I must be wrong.
Could it be that the use of the term fascist is akin to the use of conspiracy? Are you not suggesting that Bernanke, Paulson, et al, are involved in a grand conspiracy to assist their friends. Or is it that Bernanke is assisting his friends and Paulson his, and so on and so forth? If the shoe fits, wear it proudly.
Now you keep alluding, in fact even explicitly stating, that we have borrowed from the IMF. You'll have to site me chapter and verse. We borrow by selling Treasury Bonds and Bills. The IMF may have bought some, I don't know, but there is absolutely no securitization nor any kinds of remedial rights associated with those vehicles. Should we ever default the IMF as well as China and all the others would be S-O-L.
When at a loss, attack! I have never expressed that only I am imbued with omniscience, don't forget about God. Many things are simple, our economy, let alone the global one, is not one of those things. Sometimes your arguments exhibit an extreme insecurity.
I doubt that my ideas or more correctly those of Dr. Reich will be implemented but I do understand some of the reasons why. I don't agree with them but I am steeped in shades of gray.
You know, my parents raised me. In that raising, the paradigm was that they knew best. As I grew older I often found that the didn't always know best but the process worked better that way. We cannot have 300 million solutions to the current dilemma. We can't even take the time to weigh all 300 million. Nor can we entertain 100 or 50 or 20 ideas. Time is of the essence and therefore those in that "hot seat" have to take actions. They undertook a modicum of consultation with Congress, of course they had no choice, at least Paulson didn't, they got modifications to the plan, not sufficient but, again, we didn't have months to reach resolve. I know of no one who is arguing that the final attempt here is optimal or even guaranteed to work it was an approach and the rest of the world seems to have agreed with it.
In the area of "delusion" it would appear I should pay close attention to you. You exhibit a degree of expertise.
Gotta run again, more tomorrow.
Art,
By typical mistake of the
"elderly," I responded to your post on this essay to Dr. Reich's prior essay. I'm sometimes at a "bridge too far" in my immediate attention span.
Robert:
Oh...! You noticed....?
Best regards,
Econolicious
What about rebuilding Glass-Steagall as part of the agreement between banks and their acceptance of their bailout?
Frank, Art, Weasledog and others:
I have been suggesting that a US central bank replacing the Federal Reserve might be a good way to go. Now I'd like to take this idea a little further and I ask for your feedback. I'm not a professional economist, and I realize I'm treading in waters that are probably over my head, but with humility here goes.
It seems to me that all financial institutions are in the business of creating money. When a bank takes in a deposit, and then loans out more than that deposit, it is creating money. All leveraging by whatever institution creates money. If the bank doesn't get paid back, money is destroyed. If the bank gets paid back with interest, the interest represents an addition to the money supply.
When the Fed lowers interest rates and more money is loaned out, more money is created and, conversely, when it lowers rates and less money is loaned out, less money is created. Now the Fed has two ways to loan out money: 1)it can loan it out based on its holdings (in Treasuries or whatever) - this would be similar to leveraging or 2)it can loan out money based on nothing - this would be the same as printing money. There is a third thing it could do: it could print a check and issue it to every American citizen similar to the economic subsidy they already did earlier this year. This is different because it isn't a loan i.e. the Fed or the Treasury wasn't expecting to get paid back.
Now when the Federal government borrows money, it issues Treasury bonds and obtains dollars from foreigners and others that is already in the money supply. Those dollars are being recirculated, but new money is being created which is the interest paid on the bonds. But the government via the Fed could equally well have just printed the money, couldn't it? In that case the money supply would have increased and the value of the dollar would have been diluted, but an additional government obligation (to foreigners mainly) would not have been created. Also it would be inflationary.
It seems to me that just printing money by the Fed is similar to the issuance of stock by a corporation. If a corporation is successful and the value of their stock is rising, they can raise more money by just issueing more stock (similar to just printing more money by a government). The issuance of stock by a corporation is only constrained by a desire not to lower the stock price (not to dilute its value). However, if there are ready and willing buyers of the stock, the share price will not be diminished.
Similarly, if the dollar is strong (i.e. people and entities want to hold dollars) as is the case in the current financial crisis, then printing money by the Fed or a US central bank would not dilute the value of the dollar or necessarily be inflationary. The value of the dollar is only measured relative to other currencies. Similarly, the value of a stock is only relative to other investment opportunities.
If this makes sense, then a central bank could just print money and loan it out to companies for, for instance, alternative energy development and infrastructure rebuilding without borrowing it from foreign investors and incurring additional national debt. Where am I going wrong with this analysis?
Of course, if the dollar was weak, printing money would only cause inflation or in the stock example (analogously) lower the share price.
It seems to me that a US central bank replacing the Fed would be able to have a lot more flexibility and also would operate with more transparancy and be accountable to the people. I would appreciate your feedback.
Frank:
Though not as senior a senior as you, I too have noticed those bridges seem farther away than they used to.
John, if a bank loans money, and the borrower defaults, then I don't think the money is destroyed. It becomes a permanent part of the money supply. there's no way to get it back to the bank to unmake it.
At least I can't think of a mechanism.
In the US Constitution
Article 1 - The Legislative Branch
Section 8 - Powers of Congress
We have the following power expressed:
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures
So the notion of Congress controlling the money supply and not a private bank, is already in the US Constitution.
So your idea of a Central Bank is Constitutional in my opinion. Now I don't know if it would fix anything. I think we'd need intelligent people that have the country's best interest at heart, setting it up and running, to avoid the shenanigans we've seen of late.
It's my opinion that putting back the extensive regulations that protected the banking industry and getting rid our legalized political bribery system would be necessary steps to normalizing our financial situation. The two forces conspire to decimate our economic system.
We need to boot out the current players and bring in a new team that puts country before self. That isn't happening this election cycle. I don't think it'll happen the next one.
This whole debacle of letting Paulson have blank checks to fix the problems after he lobbied/bribed and worked hard to create the mess seems to me to show some fundamental flaws in our system. I don't think this is a case foxes guarding the hen house. I think it's a case of putting wolves in charge of the hens to keep the foxes out. In morning we're going to find nothing but feathers.
Art said, "Now you keep alluding, in fact even explicitly stating, that we have borrowed from the IMF. You'll have to site me chapter and verse. We borrow by selling Treasury Bonds and Bills. The IMF may have bought some, I don't know, but there is absolutely no securitization nor any kinds of remedial rights associated with those vehicles. Should we ever default the IMF as well as China and all the others would be S-O-L."
You're right. I misspoke on this account. The IMF has reported that the USA had the highest public debt. This isn't the same thing.
The US Constitution doesn't cover corporate bailouts. Corporations at that time were limited partnerships intended to complete a project under a charter, then were disbanded.
Large companies existed, but the owners, actual human beings were held responsible for the behavior of the company.
The idea of a corporation being a person (with in the Constitutional sense), separate from the owners and carrying a liability not directly linked to actual human beings, is an idea that came later.
If human being remained liable for the deeds that their corporation engages in, then boards would not want them to grow so large that they can't control them. If a CEO could be convicted of negligent homicide because the corporation killed people due to negligence, they would have a dramatically different structure than they do today.
Imagine if the board members of Union Carbide had to face criminal charges for the Bhopal Plant disaster, rather than the corporation getting sued for negligence.
The Chinese sacrifice an occasional CEO to save face, but that's not exactly the same idea.
If the framers had envisioned that corporations would be given Constitution Rights as a person, without the same limitations and punishments, then maybe they would've covered this, and made them illegal to begin with. Or at least restricted their rights. I don't know.
I agree on the general welfare argument you make. Bailouts can be in the best interest of the country.
I'd be in closer agreement with you if this bailout wasn't such a shoot from the hip operation with no accountability (explicitly expressed), few if any rules, and so completely secret in it's details.
And yes, I believe that Paulson Bernanke and friends are cutting backroom business deals and cheating us. One big rotten piece of this carcass is the fact that Paulson is putting the beneficiaries in complete control over divvying up the booty and they are being allowed to use the money in any manner they see fit.
If they followed the plans that you and Mr. Reich have suggested, I'd feel much more comfortable about this.
As to other conspiracies, Bush's buddy Ken Lay seems to have been involved in a few. This includes the Unocal pipeline deal that continued after Enron broke up.
Then we Ted Stevens and Sarah Palin and their bridge to nowhere, bribery, etc... Real conspiracies occur all of the time. People making plans in secret, doing back room deals. A lot of people enjoy committing crimes for profit. you don't need a tinfoil hat to believe that people band together to rob banks. That's a conspiracy. Shady mortgage deals are conspiracies. Grifter schemes and fake telemarketing for charities are also conspiracies.
The term conspiracy theory used in a negative context, seems to have devolved into any accusation that someone doesn't like. It's normally used to derail an argument without resorting to facts or counter arguments.
I do know that there are many people who have committed crimes and betrayals for money. I don't know Paulson or Bernanke personally. I do know that Paulson worked hard to get us into this mess. Whether he did it because he's stupid or because he planned this, doesn't really matter. He's the wrong person to fix it.
If a bull wrecks your china shop, you don't pay the bull to put back to rights.
Now no one in a position of responsibility cares about my opinion. They'll keep doing what they want to do. So you and I will be able to observe this as it moves along.
If stuff get's better, I'll be happy. If it doesn't, then I'll be unhappy. I prefer that you turn out to be correct.
Art, you argued that Greenspan's failing was that he didn't understand globalization.
Greenspan says that he thinks his mistake was in assuming that bankers acted in the shareholder's best interests. He says he was wrong about this.
If Greenspan no longer believes that bankers act in their shareholder's best interest, then why should we automatically assume that the ex-Goldman Sachs Bank Henry Paulson acts in our best interest?
John Lawrence:
Let's hope that you swallow enough water that I can keep my head above water because your query leaves me in that same pool.
I guess my first issue would be that turning over money supply creation to the government opens a huge Pandora's Box of political manipulation. One of the reasons for establishing the Fed as a quasi-public corporation was to minimize political interference in the meanderings of the money/credit/banking system.
The Fed is involved in all sorts of logistical activities for the banking industry and the government. To implement your plan would mean the government would have to absorb all of these or they would have to be given to the banking industry. In the latter case, transparency of banking activities would be lessened and much control lost, in the former the government budget would have to be increased to cover the costs. The fees currently paid to the Fed would offset some of these costs to the government but it would be difficult to target the revenues and they would likely become available for general expenditures. Not necessarily a good idea.
I see the biggest issue being that of allowing the government to decide when to print more money. In countries where this is practiced we have often seen a tendency to attempt to solve economic issues buy printing more and more money which has then led to hyperinflation and huge currency devaluations. Although the Fed is partially a government entity they function relatively free of government (political) influence or control. They seek to balance the economy without a concern for the political implications of their actions.
The history of the Federal Reserve Act reflects a lot of the issues associated with your proposal and some were arguing your viewpoint.
Printing more money versus assuming more debt reminds me of the old Fram commercial: "You can pay me now or you can pay me later".
The Fed system has worked pretty well for us over the last 95 years with a couple of major hiccups. I don't think that changing it now is a good idea. Given the net results would remain similar, if not much worse, it's kinda like changing the name of apples to oranges. We call it something different but it's still the same thing.
Here's an interesting article on the bailout.
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis
John Lawrence:
I guess I should offer some clarifications based on my limited knowledge.
It seems to me that all financial institutions are in the business of creating money. When a bank takes in a deposit, and then loans out more than that deposit, it is creating money.
Though true, a banks ability to do this is wholly dependent on the reserve requirements established by the Fed. This is the way that the Fed "prints money" it requires the bank to only hold, on hand or at a Fed account, cash reserves equal to x% of its deposits, demand or savings. There are different reserve requirements for the two different type accounts. The theory is, simply, that a bank makes a loan because it has cash available from deposits. It satisfies the distribution of that loan by depositing it into another bank account which then provides resources for another loan. Depending on the reserve requirement multiples of the original deposit create money.
All leveraging by whatever institution creates money.
Leverage, while the borrowings originate from the above process, doesn't, in and of itself, create money. It is the attempt to earn a greater return than the cost of the borrowings.
If a company has an internal rate of return of 15% (profits divided by net assets) and it seeks to expand its production in order to increase profits, if it can borrow the expansion funds at 8% and continue to earn its 15% return then it has a leverage return of 7% on the costs of the expansion. That's when compared to funding the expansion with its own assets.
This has been the historic example of leveraging that you learn in school. The same principal applies to intangible assets, such as, stocks or derivatives. The problem with those kinds of intangible assets is that other variables compound the risk. A well managed, solid company can expext to maintain its 15% IRR, give or take, overtime, because they have direct control of the inputs and outputs, they manage their business. Investing in paper means the leverage gains are subject to the vagaries of the market which are beyond their direct control. For this reason these kinds of investments tend to be shorter term, if they want to take the risk at all. Of course the financial industry deals in this kind of risk all the time so they are less squeamish about it. For a variety of reasons they can react faster to the market, normally limiting their risk. In either case the leverage option does not create money. The borrowed funds come from the money supply loop but the leveraging itself created nothing new. Even the gains and the interest earned or paid come from existing money that has just changed categorical form. The borrowing is eventually paid back closing the loop.
If the bank doesn't get paid back, money is destroyed. If the bank gets paid back with interest, the interest represents an addition to the money supply.
Not true. The lending institution takes a loss but the money is still in circulation. Again the interest is from existing money it has merely changed hands, its not new money.
When the Fed lowers interest rates and more money is loaned out, more money is created and, conversely, when it lowers rates and less money is loaned out, less money is created.
Assume you meant in the second half "when it raises rates". This is precisely true, depending on the demand for loans and the banks willingness to lend (the current dilemma, the Fed keeps lowering rates but the banks won't lend). It is how the Fed attempts to stabilize economic growth, inflation, prices, unemployment, etc. These particular actions cannot however extract money from the system. They simply control the rate of growth of the money supply.
Now the Fed has two ways to loan out money: 1)it can loan it out based on its holdings (in Treasuries or whatever) - this would be similar to leveraging or 2)it can loan out money based on nothing - this would be the same as printing money. There is a third thing it could do: it could print a check and issue it to every American citizen similar to the economic subsidy they already did earlier this year. This is different because it isn't a loan i.e. the Fed or the Treasury wasn't expecting to get paid back.
1) is a little off at least in practice if not in theory. Normally the Fed uses Treasuries through a buying and selling mechanism to alter the money supply. If it wants to infuse more money it buys Treasuries and sells them to withdraw money. 2) is also misleading. The Fed, when dealing with banks, often does not require any security but it does expect to be repaid with interest. These kinds of transactions are generally done when a bank is out of balance with its reserve requirements and is usually very short term. It is not generally an attempt to create new money supply although one might find separating wheat from chaff easier to figure out.
Your third option is not possible because the Fed does not have that authority. They are chartered to do a lot of things but essentially they are limited to buying and selling and loan and collecting. They cannot "print money" for just anything they feel like.
The stimulus we received earlier this year came through the Treasury and required Congressional approval. No arm of the Federal Government can disperse funds without Congressional approval, through specific legislation or budget appropriations. The Fed is self funded and is not a part of the federal government budget process. The current fiasco has opened the door to a freer rein for the Fed in dealing with it but they still operate on a basis of loaning or guaranteeing with some security considerations.
But the government via the Fed could equally well have just printed the money, couldn't it? In that case the money supply would have increased and the value of the dollar would have been diluted, but an additional government obligation (to foreigners mainly) would not have been created. Also it would be inflationary.
In this case, very soon the currency would tumble, not just dilute, and inflation would become hyperinflation. We have seen this around the world for centuries. Better to incur the debt and then default. Both would be heinous but one is a slow death the other is suicide.
Actually selling Treasury Bonds is more analogous to your stock example. The only difference is that owning stock may provide very mimimal tangible claims, while owning the Treasury Bonds provides no tangible claims at all. It is highly unlikely that a new stock issuance would not drive the companies stock prices down simply because EPS, a prime determinate in valuing stock prices, would decline.
Similarly, if the dollar is strong (i.e. people and entities want to hold dollars) as is the case in the current financial crisis, then printing money by the Fed or a US central bank would not dilute the value of the dollar or necessarily be inflationary. The value of the dollar is only measured relative to other currencies. Similarly, the value of a stock is only relative to other investment opportunities.
Admit the value of the dollar is often a mystery to the greatest minds but it is highly dependent on inflation rates, within each country, as well as the anticipated overall strength of economic growth, in real terms. As we have seen a devalued dollar on the currency markets can actually improve GDP but high inflation, bordering on hyperinflation, will cause the dollar's value to plunge and that will begin to hamper economic growth. If we are suffering rampant inflation and Europe is more stable the dollar will tank while the Euro will climb. The lesson may come down to, everything in moderation.
It must be kept in mind that while we have all these formulas and models that explain our various econometrics, the unknown variant is always expectations. The dollar is currently gaining strength while other currencies are declining in exchange value. One significant reason for this is that, for the time being, the world expects us to better whether a recessionary storm and they are not yet concerned that our overall debt is unmanageable (they should live here). Commencing to actually print more and more money could burst that bubble.
Bob, you are right. The American people have been given a bill of goods they do not believe in: the Bank Bailout is nothing more than slight of hand in cigar-filled back-room deals. This Senate Bill merely trades one problem for another; I’ve read it. The bill does not provide a serious means of paying back the bailout, and shunts the burden of the financial crisis from the shoulders of homeowners to future taxpayers. This is not acceptable! The bill, therefore, does not fix the American financial crisis, but simply switches one form of credit mess for another and does not hear the voice of hurting Americans. If the bill's authors were honorable, there would not be such provisions that allow elitist upper-class corporate execs to trample on the backs of the middle-class. What should have taken place are provisions for homeowner relief in addition to the banks, where the middle-class and banks can work in concert and have the government mere oversee the duties. An honorable bill would have included "at least" the following to fix the economic scenarios that already have shown to contribute to this crisis:
Protect the homeowner with:
• restrictions and regulation for banks, Fannie Mae, and Freddie Mac.
• restrictions for adjustable rate plans and provisions for its transfer.
• restrictions on seconds that tend to tie up short sales and make other unreasonable demands.
• bailout grants for toxic and catastrophic conditions that make homes unsellable.
• bailout for homeowner-caretakers of autistic children.
Protect taxpayer's credit by:
• preventing raise in rent, lease, or bank payment in economic crisis.
• removing penalties for payments made "not exactly on time" or skipped up to twice a year.
• illegalizing the practice of slapping on interest to a final payment made between receipt of statement and next due date.
• limitations against modifying credit standing or when reducing credit available en masse.
• restrictions on harassment phone call and letters.
• limitations on liens so as to not touch living expenses.
• limitations on garnishing wages until settled in 3 months into new job.
Protect the employee and small business owner through:
• stabilizing 401k accounts by requiring a minimum of 8 tiered investment plans.
• making 401k accounts portable upon leaving that company or if that company fails.
• preventing business partners from taking over 50% of property in a crisis.
• all government contractors who participate in a bid process sharing a % of the contract based on and ranked by lowest bid, excluding all who fail to meet the requirements.
A reasonable bill would also include the following to aid the economy:
• outlawing tax on unemployment and other government checks.
• bailout for small business research and development of game-changing energy technology.
• loosening grant requirements and simplify forms for game-changing energy technology.
• immediate award of grant monies for game-changing energy technology.
• fully funding all Phase I research and development grants for the first year with the assumption 100% will be applied as personal income to establish research.
• automatically advancing all research and development grants to Phase II for companies who have completed laboratory-level research or patentability or have otherwise shown they are ready for pilot plant scale or development testing.
• fully funding Phase II development based on industry pricing and to completion.
However, it is clear from this list that the original “bank bailout” is neither reasonable nor honorable. In Shakespeare’s portrayal of Iago in Othello, Iago exclaimed that honor to his name was more important to him than being enslaved to money. Here, the American people have neither.
The picture is clear that the purpose of the bill had nothing to do with bailing out Main Street, but ensuring that Main Street got stuck with the bill. Powerful people may not realize the opportunity for power and money was lost by the lack of foresight in trying to crowd out the middle-class. Now, both trust and recovery will take so much longer, leading me to the conclusion that John Nash was indeed correct in his theory of “both/and economics”. There should have been some collaboration between the people, the corporate banks, and the government.
There is hope for the recovery of the economy, and there is a comprehensive plan for the economy. But, it rests with Contrary Economists like ourselves who are well versed in economic trends (like Kondratieff Wave theory)! As Lou Dobbs on CNN suggests, “Don’t Americans deserve a government that works?”.
~Stephen L. Rush, Contrary Economist and CEO of For Fuel Freedom, Inc.
I'm sure a modest FBI or SEC investigation of the banks would reveal emails predicting/rejoicing a bailout that covers multiple sorry IB a**es and pays out the usual heavy bonus (100s of thousands) to the usual integrity-deprived suspects employed in NYC.
Art,
Thanks for your analysis, but would printing money for the express purpose of investing in infrastructure necessarily be inflationary? Also because of the secrecy the Fed is shrouded in, do we really know whether or not they are printing money or are selling Treasuries to finance their dealings? It seems like the government has just pulled two trillion dollars out of its derriere and this on top of a $500billion deficit.
Now they're saying that Obama can't go $90 billion in the hole; he has to exactly balance his investments with his revenues. What?? The current administration can spend $10 billion a month in Iraq, run a $500 billion deficit, and then pull $2 trillion out of its derriere on the way out the door, and Obama must match revenues with expenditures exactly?? I don't think so. It depends what the money is spent on. If it's spent on job creation, it should yield returns above and beyond what it would get if its spent on war. And I don't think that printing money for this purpose would be any more detrimental to the economy than taking on additional debt for this purpose especially if the government took an equity stake in the industries being created. After all they could be created as public/private partnerships among other options.
I love it. Last year you would not stop talking about how you used to have lunch with Greenspan on a regular basis. You talked him up as a brilliant economist who had help create a better, more prosperous America. Do you still have the same opinion now? Finally, mainstream press is realizing that Greenspan was wrong, and the massive credit he injected into the economy has played THE MAJOR roll in the destruction of our country. Would you agree that your good old buddy Alan did not do his job? By the way, you bought your house in Berkeley in spring 2006, talk about buying a deprecating asset!
John Lawrence cc: Art, Weaseldog,
John, with apologies, I mistakenly posted my thoughts about your Central Bank Printing Money idea on Dr. Reich's prior "Lame Duck" essay.
Frank Thomas, The Netherlands
weaseldog:
My idea of many not understanding the full implications of globalization, including Greenspan, is my own theory. It's not something Greenspan said or anybody else that I'm aware of.
In my naivete, I think most of the supporters of free trade envisioned a world of new markets for US goods with only a reciprocal of imports of foreign goods that each country was specialized in producing. I believe they failed to realize that dropping the trade barriers would allow manufacturing to move operations overseas and then ship the same goods back into the US. The labor savings coupled with less regulation more than offset the additional transportation costs.
The idea that lifting tariff barriers would allow imports at lower prices for the American consumer certainly worked but the savings came nowhere close to the real cost of jobs.
On the financial front, as trade opened up so too did investment opportunities. Greenspan was following age old money supply theories by holding interest rates low even as GDP growth gained strength after the 2001 recession. My guess is that he kept rates low, first because there were no signs of impending inflation and raising rates in the middle of a recessionary recovery could have slowed the recovery or even stopped it. At the same time job growth continued to be anemic, not gaining much strength at all until long after the recovery started. This is where I believe globalization began its biggest impact.
Historically, an increase in the money supply tended to stay within the US economy, feeding growth, which created jobs. We began to see the increased money flowing out of the US to better returning investments overseas. Some of it to fund operations that would manufacture goods for export and also support local markets and some of it to support mergers and acquisitions, deemed necessary to remain competitive on the global stage. At the same time, as we full well know now, the cheap money provided huge leverage opportunities for those who make money from money.
I stated, before Greenspan admitted it, that he was a victim of his ideologies. Seemingly he bought into Friedman and the power of the money supply and he also was a believer in Rand. I'm not well read on Rand's ideas but my understanding is that people will act in their own self-interest. In doing that they will create opportunities for many others and the world ends up better off. To me its an extension of Adam Smith's "invisible hand". In Smith's time the "invisible hand" theory made more sense because economies were such that there were no corporate behemoths capable of impacting tens of thousands of lives and livelihoods. Even given that I always felt the "invisible hand" idea was a little bit of a cop out.
As with all of us, Greenspan believed that businesses, banks in his world, would always seek maximum shareholder benefit which would mean managing risk wisely.
The idea that corporations seek to maximize shareholder wealth is, to a great extent, malarkey. All businesses seek more profits, for survival, for bonuses and higher executive salaries, for dividends, for growth. More profits mean more money for shareholders via dividends or via stock appreciation. The driver is greater profits and the shareholders just happen to get a free ride.
Greenspan knew, he was told often, that the financial markets were playing fast and loose, but I do believe that his ideology told him that surely they know what they are doing. Alas!
Anyway, that's a synopsis of my theory of relativity. ;)
Robert your statement shows how little you understand the banking system. The bailout money directed at the banking system is meant to replace Tier one captial reserves that will depleted based on the security write downs this year.
You know this but instead put out this kind of media trash about credit to the masses as if the banks should continue to be the subprime leader in bad loans.
Frank,
Thank you for your analysis. The thing that got me going on this is the fact that, although the US is responsible for the current financial meltdown, the biggest catastrophe supposedly since the Great Depression, the dollar is stronger than ever. Go figure! One would expect that other countries would be fleeing the dollar. If the dollar is that strong during a financial catastrophe, watering it down by printing money (although I assume a suitable euphemism could be found), would not seem to cause that much damage to the dollar, and could jump start the job creation here. Other countries would also be able to see that we were using this mechanism constructively and responsibly i.e. for infrastructure repair and job creation, and, hopefully, instead of punishing the dollar have respect for the real benefits that would be accrueing to the Main Street economy.
Does anyone really know that that's not what the shrouded-in-secrecy Federal Reserve is already doing? They just wouldn't tell us if they were. I wonder how the "government in toto" including the Fed and the Treasury Dept. can just come up with $2 trillion on the spur of the moment!?
John,
As I intimated, you've raised a very good question that warrants more discussion among Dr. Reich and his colleagues. I'm skeptical for reasons given, but ... let's hear more thoughts.
Private industry being paid with printed money for executing infrastructure contracts will not be interested if government also expects an equity interest. However, this approach will possibly work for partnering with private sector firms in entirely new industries or product developments close to the commercial exploitation phase for near-term JOB GENERATION results.
There are a lot of "ifs" as I and others are citing, but I've learned "contrarian" original ideas with obvious technical flaws or inconsistentcies should not too quickly be taken off the table ... especially in this blog medium.
John Lawrence:
Not that your idea is without merit in a, as Frank suggests, perfect world. Consider though that at the first level the printed money would go to fund infrastructure but once paid out it would, through the multiplier effect, feed the overall money supply, tending to devalue the dollar and create inflationary tendencies. No doubt if this facility was used only in a targeted effort the effects would be less than as a general practice but the unintended consequences could be catastrophic in the log run.
We get back to the expectations problem. The value of the dollar versus other currencies is an abstract. There are few, if any, hard and fast tangible bases supporting the strength or weakness of the dollar. It's all based on future perceptions. If we print money for a specific purpose, many will see that as just the beginning. First, infrastructure, next alternative fuels, then this, then that, eventually for military spending and soon expectations will drive the value of the dollar down and should additional specific purposes drive similar actions, inflation will rear its head.
Increased debt can also impact future expectations and real growth and inflation, etc., but there is this naive sense that we wouldn't incur all this debt if we didn't feel we could handle it. The bankruptcy courts are full of businesses and individuals that operated with this same naivete.
Taking on more debt is viewed as, at least, recognizing the scope of the risk. Printing more money obscures that scope and would tend to drive panic, in the exchange markets, in the face of the uncertainty. It is possible that, in your targeted scenario, inflation risks would not be significant but expressing that possibility may be a flaw in my education.
Currently, the Fed is taking certain actions and the Treasury others all bent on freeing up the credit markets to begin fueling economic activity. These actions would never be taken under normal circumstances but we have a crisis and that requires unusual attempts at solutions. In reality, there is such a confluence of difficulties in all sorts of venues around the world that weaseldog may end up making Chicken Little look like a carnival barker.
Now I'm with you regarding Obama and spending. It's absurd that when two out of three drivers of GDP (consumption, production and government spending) are declining that the third one should go on hiatus as well. If McCain understood anything at all about economics he would not be suggesting a freeze on government spending at this time. We need the government to increase spending to drive a return to economic stability and create jobs. I do doubt that Keynes envisioned in his theory that we would be starting from a $10 trillion debt though.
The government could start printing more money tomorrow but determining who that money should be loaned or given to and for what projects would require a huge infrastructure of its own and establishing that and putting it into operation would take time and time does seem of the essence now. Obama may be the first President, or McCain, God forbid, who doesn't get a two month window to staff his administration and establish plans and priorities. The situation is dire enough that the winner on November 4th will have to start work on November 5th. One can only hope that Dumbya realizes this.
Lastly, it is foolhardy to try and guess at what the world financial markets would think of a stark change in our practices. They could view it as innovative and maintain faith in the dollar or they could view it as foolish, in light of history, and run from the dollar like there was no tomorrow, and there may not be. Again, expectations often end up creating reality.
John,
I should have added that part of the reason the dollar is strengthening is purely technical, e.g., many hedge funds under pressure and forced to "Deleverage" must buy back their positions in Dollars. Such transactions are also creating a scarcity of dollars thereby contributing to dollar's rise lately. This phenomenon mustn't be underestimated in the excitement about the dollar's current apparent strength.
weaseldog:
You are stating the obvious. One realizes that if you step up production of a non-renewable resource you increase the depletion of the supply. The idea was presented in your link I didn't invent it.
It all goes back to my argument regarding a variety of response and discovery options to keep the dream alive.
Actually I seem to "remember" that Dr. Bartlett showed that Hubbert's original peak had moved out because of new discoveries. Again I am not suggesting that the world can go on at its present pace forever. I am suggesting that between new fields, even if many of them are small, and declining demand due to alternatives coming online, Hubbert's curve will level out some.
Now going forward we are going to be paying more for oil, heavy or light sweet. This will not be demand based as much as cost based. My reference to heavy crude and improving processing methods or new uses was that right now demand for heavy crude is limited and thus the prices are much lower. If we develop better methods for handling it it could essentailly add to the supply of usable oil, usable beyond current uses. It's an idea not a solution. The rate of extraction is directly proportional to the daily demand. If we can reduce daily demand the rate of extraction will slow. The innovation we need is across all horizons of oil production and use.
Your examples are interesting if not confusing. If you had a $100 million fund returning $100,000, it would be comparable to ten $10 million funds returning $10,000 each per year.
If you look at the Hubbert bell curve it is not the rate of extraction that spells doom it is the limit of reserves that shapes the downward slope.
Now admittedly the greater constraint is in the economics of oil discovery and production. At this point in time the Middle East has no other options for generating income. Russia and Venezuela and many other oil producing countries face similar income limits. They need to keep discovering, if possible, and producing oil. Right now they all can benefit from low labor costs but over time that will change and the price of oil will rise. If we and the rest of the world are much less dependent on oil the increased prices will not be as impactive and the producers will still make decent profits on lesser volumes.
There is no doubt that the innovations required to alter oil demand are many and varied but they are critical because in the long run reserves are far more delimiting than extraction rates.
Dr. Reich, cc: Art, Weaseldog
The discussion concerns about oil/gas reserves and extraction rates to meet future demands from population growth become academic if we finally get serious about developing Alternate fuel sources. We have 30 years to replace fossil fuels with green fuels. That's certainly possible if the WILL is there.
The next Administration must start the process to total independence from Mid-East supplies. Obama's goal of achieving this in 10 years is a bit unrealistic but a necessary HURDLE rate to activate people to the desperate, dependent situation we are in as a nation concerning fuel supplies.
Frank Thomas said..."The discussion concerns about oil/gas reserves and extraction rates to meet future demands from population growth become academic if we finally get serious about developing Alternate fuel sources. We have 30 years to replace fossil fuels with green fuels. That's certainly possible if the WILL is there."
To give an idea of the scale of energy we need to capture, to replace oil...
The oil that US consumes is approximately equal to the output of 5,000 nuclear power plants.
Energy isn't created out of nothing. It has to be extracted from something. Oil was our last big something to extract energy from. For the first time in our civilized history, we don't have a next gigantic fuel source to burn.
Folks keep telling me not to worry, in the future we'll discover the next new source.
But we need it right now. We're in the decline now.
If you're getting laid off from a job, you probably don't wait until your unemployment benefits run out, you're broke, losing your house and are deep in debt before you look for work. You start looking right away.
Waiting for the future to fix our problems on this scale is like betting our civilization on the idea that we'll win the lottery.
All of my life I've been hearing that alternatives will save us and I'll have a flying car. Where is my flying car? Maybe somethings will always be in the future?
Art said, "Actually I seem to "remember" that Dr. Bartlett showed that Hubbert's original peak had moved out because of new discoveries."
It was the politics of the Middle East Oil Embargo. Not new discoveries. Taking the area on the curve, he was actually optimistic. the Peak came sooner than predicted.
The peak for conventional oil, which he was predicting, came in 2005, about five years early.
The peak for all liquids, looks to have happened this year.
You said, "If you look at the Hubbert bell curve it is not the rate of extraction that spells doom it is the limit of reserves that shapes the downward slope."
Yes, these are different ways to spell doom. Our ability to extract oil faster with new technology means that the decline will have a higher slope.
You analogy about 10 trust funds is interesting. But we don't have ten planet Earths to draw the oil from. We just have the one. Only the banks seem to be able to get away with trading the wealth of hundreds of planets. In real life, this doesn't work.
The rate of extraction is our yearly allowance. As the easy to extract products will decline the fastest, were likely to see a steep slope, leveling out to a long taper.
Heavy crude's biggest problem is that it contains large quantities of Sulphur. It's a waste product that is very difficult to deal with. Exposed to air it breaks down to Sulphur Dioxide, then on exposure to moisture it become Sulphuric Acid. Piled into mountains at many refineries, down wind the air becomes filled with noxious fumes. In the long run, we'll pump and refine the stuff while letting other nations deal with the environmental problems. So I doubt this will stop us from burning the heavy crude.
Still, it's harder to pump it because it's thick and doesn't flow well. So extraction rates will be slow.
Tar sands seem to be giving out. There's not enough natural gas available to process it at higher rates. The oil industry has decided not to expand the mining of this stuff at this time.
you said, "Now admittedly the greater constraint is in the economics of oil discovery and production."
That is true.
For offshore rigs, there five dry holes drilled for everyone that produces. This makes the cost come out to be about $12.5 million per working hole. The oil industry is reporting that because new fields are trending smaller they aren't interested in doing additional drilling in many places. This is why they are lobbying to get the taxpayer to cover the cost of drilling dry holes.
weaseldog:
I'm not sure what a Constitutional Constructionalist is. I would guess it's what's called a "strict constructionist". I do not subscribe to that theory.
The original concept for allowing corporations as individual entities was to facilitate ownership funding without potential personal liability on the part of the owners. There are many instances where corporate officers can be held civilly or criminally liable for law violations on the part of the corporation, passive owners never. The standards of proof in those instances makes prosecution very difficult. The driving forces for incorporation were to protect owners and to provide for ownership continuity and to allow for contractual arrangements to continue across changes in ownership or management. I have extreme disagreement with the Supreme Court decision granting corporations the right to free speech. There are instances where that right may be advisable but I don't believe it should extend to political contributions.
The fact, to me, that the Constitution didn't address corporations means nothing. They exist through the allowed process of laws and as such situations may develop, such as bailouts, that are needed and unless the Constitution explicitly prohibits such actions it would be up to the courts to determine if the Constitution has been violated.
On conspiracy, you do go on and on. If a person or a group of persons effects a result that benefits another party or state or whatever that does not mean that the party benefitting had any part in the decision. To suggest they did and that the process was secret then you are suggesting a conspiracy exists. If the originating party is to benefit from the result through a prior agreement with the benefitting party then a conspiracy exists. If the originating party expects to benefit, nominally, as in an enhanced re-election opportunity, but there is no beforehand agreement to effect that then a conspiracy does not exist. The bridge to nowhere would be an example of the latter.
Now when you suggest that Paulson and Bernanke are only looking out for their friends you are ascribing to them an act of conspiracy. You are asserting that they are acting collusively to the benefit of third parties rather than to the benefit of those to whom they are responsible. Unless they both have some psychological need for acceptance, why would they do that? The only logical reason would be that they expect something in return which then broadens the conspiracy to include their friends.
When Countrywide set out to peddle poor mortgages, internally they were conspiring, but not likely with anyone outside the firm. Those buying their mortgages were not reviewing and further approving the bad mortgages they were relying on Countrywide to have done due diligence. The employees actually approving the bad mortgages were conspiring with company officials, to the extent that they knew the mortgages were effected through devious means. Though this is a conspiracy, albeit it confined one, the employees only had two options; go along or quit/get fired.
Similarly, criminals conspire all the time in the same way, except that the quit or get fired option usually has more of a finality aspect. Why do they conspire? Because, generally, the size of the crime requires multiple players and the leaders often want to remain away from the actual deeds. Watch the original Thomas Crown Affair.
There are a variety of reasons that Paulson and Bernanke would perform their current actions in private. It's possible some are dastardly but not likely since they will have to answer to Congress eventually. Especially if things go bad.
Not all, but most, who take on jobs at the level of Paulson and Bernanke, do so accepting that their repsonsibilities are for the best interests of the country. Neither of them knew when they took the jobs that this fiasco was imminent so we can't claim premeditation. I don't know them either but what I've read from those who do, I do not get the sense that either one of them is intent on doing anything except what will attempt to resolve the problems. To suggest otherwise, simply because you don't agree or understand what they are attempting and since you have no facts that support your contentions, is conjuring up a conspiracy theory. The primary reason that conspiracy crimes are seldom prosecuted is you have to prove criminal intent.
When faced with a dilemma, the nuts and bolts of which only a hand full of people understand, you are going to need one of those people to help unravel things. Would you feel more comfortable with another Wall Street executive other than Paulson?
Human nature also dictates that we look for scapegoats. Something went wrong so we have to find someone to blame. An industry or a system or even the government is not definitive enough. People! We need explicit people to blame! What good are racks or fires or prisons if we have no witches we can put our hands on?
Art, I see a way to ease the pain in our financial markets.
Quite simply, we need to back out of our two wars and put an end to this massive no bid contract system that has thousands of grifters lining for high profits in exchange for crappy services.
We need to quit spending money we don't have, on things we don't need.
Weaseldog,
You haven't been hearing "all your life" that alternatives energy sources will save us. I've been around longer than you and have in my middle age spent much time in the oil-gas industry. Not once since 1960 have I heard any special drive or serious pressure for movement to alternate fuels ... except NOW as we begin to realize we are approaching a crisis if we don't revert to green fuels over the next 30 years.
We can attack one another ad infinitum as either fantasizing or being too cynical about the possibilities to replace fossil fuels with green fuels in 30 years time. You can site all the oil-gas statistics and math calulations about extraction capability, reserves and population growth until the cows come home dramatizing how impossible this is.
But I have every faith in mankind's innovative survival resourcefulness when we are up against the wall. And this is not blind faith ... it's faith based on mankind's steady progress over adversities the last 300 years ... whether it be in medicene or flying to the Moon and eventually Mars.
Our survival success over energy independence will take many, many forms (including fuel conservation/efficiency)on a scale and diversity both you and can't possibly fathom.
Just heard from John Lawrence he attended an international conference of researchers, developmemt and business people in the wind and solar industries. He was flabbergasted at the advanced stage of knowhow of European and Asia groups especially in solar energy technology (e.g., the Germans).
If we don't get going, the rest of the world will be overwhelming us with their innovative products and energy alternatives -- to the detriment of jobs in America and our trade deficits. Don't forget we have enough coal reserves for the next 150 years. It becomees commercial as soon as we find the right technical solution to removing the environmental pollutants. Viable solutions are expected by 2012. That's a very short time for just one major clean energy breakthrough possibility.
As one of the original developers of using Drill Ships to develop Floating Offshore Production Systems for offshore deep, difficult water oil discoveries starting in the late 70s (and taking off ever since), I'm a realistic optimist who believes we will come up with new green fuel energy sources. This will be done in combination with a growing, innovative fuel efficiency and conservation culture that together will save us from any dire day of reckoning in 2040-50 (when conventional fossil fuels worldwide are expected to be depleted).
Only problem is I won't be around to say I was right to you!
Weaseldog,
Correction: 4th paragraph, last sentence: ... both you and I can't possibly ...
weaseldog:
All your haranguing doesn't seem to me to connect the dots of additional supply, even though smaller per well, coupled with alternative potentials and efficiency improvements. It is less important how much each alternative may contribute to replacing oil if collectively they can have a signficant impact.
Is there out there somewhere another source of energy? Not likely but who knows. There was a time we didn't now about electricity. There was a time when oil was good for nothing more than lighting lamps. There was a time when the only person envisioning space travel was H. G. Wells. My first exposure to computers was with an old Univac 60, tube type, which filled up a decent sized room, it was good for generating heat though. Today I have exponentially increased computing power sitting in a little box under my desk. Granted time has crept in as a critical path factor that was not an issue before.
Faith, my friend, it is all we have, in God, maybe not so much right now, in science, absolutely. If science fails, God becomes the last best chance.
Your vision of survival I'm afraid overlooks an awful lot of variables.
I hope that you're right Frank.
I prefer your outlook.
But I need proof, to believe, as the case against this outlook seems to be overwhelming.
I've followed advances in the technologies your describe. They will help us in our drive to grow to infinity.
It's a shame that we can't take control of the root of these problems. And just rationally and humanely, take control of our population size. Bringing us down to a billion human beings through a reduced birth rate would make all of these problems disappear.
I seem to remember a national dialogue on renewables and recycling in the 1970s.
Art you said, "Faith, my friend, it is all we have, in God, maybe not so much right now, in science, absolutely. If science fails, God becomes the last best chance."
Faith is the antithesis of science. Science is about understanding and testing, the retesting. You don't have faith in science. You don't trust a theory to be true. You verify it.
You said, "It is less important how much each alternative may contribute to replacing oil if collectively they can have a signficant impact."
This is true, depending on how we define significant.
Donalld Trump uses money to build hotels and office buildings. I earn money and I can find money on the street. I don't have Donald Trump's resources, but my income isn't insignificant. So i must be able to use my money to finance the building of hotels and offices, right? Well no...
I make enough to live on and pay down my debts. But there is a huge difference in scale between what I have and earn, as compared to Donald Trump.
But yes, we'll have to learn to live with a lot less. but hasn't your point been that living with less, is a doomsday scenario?
Haven't you been calling me names because I've simply argued that growth can't continue without growth in energy?
Aren't you in danger of becoming a Raving Lunatic be explaining that we may have to conserve?
weaseldog:
I have stated before that Jimmy Carter was a lot wiser and Ronald Reagan a lot dumber than they are currently given credit for. Had we listened to Carter we'd be well on our way to the proof you desire.
On your plan to ease the pain. Can't disagree both your suggestions would improve our plight even as they would fall short of overcoming the current issues.
My take on Iraq is that we will be pushed out even if McCain should win and they will drift back to a civil war with the Shia eventually victorious. I believe that Sadr is merely biding time.
On Afghanistan its another no win situation. There is no structure there at all, infra or otherwise. upon which to build a country. If we beat back the Taliban they'll just wait us out. A modicum of success there will take years if not decades.
No bid contracts can be a necessary weapon in the government's arsenal but they should be used sparingly, only when all factors have been weighed. We also need to tighten up bid contracts. The whole process is so loosy-goosy that the private sector often ends up the only winner.
I have long pondered, and I admit I can't make a strong argument, that dealings with any government entity should be done on a wholesale basis with minimal profits just as a matter of patriotism.
On the other hand, what the hell do I know?
Art said, "Neither of them knew when they took the jobs that this fiasco was imminent so we can't claim premeditation."
You're providing facts that are not in evidence.
They either knew, or they are too incompetent for their posts.
Many economists saw all of this coming. They warned about it when Paulson was working for Goldman Sachs and bribing politicians to set the stage for this mess.
Anyone who didn't see where this was leading several years ago, isn't competent to fill their posts. Heck, even Cartoonist Tom Tomorrow was making fun of the current defaults back in 2006, as a future prediction.
I recognized the derivatives time bomb back in the 1980s when someone published in article in Scientific American on how they work. It was easy to see it was a lot of BS to try to cheat a really simple concept.
I'm really getting tired of the, "No one could have anticipated..." line. It's another way of saying "I'm trusting that you're all too stupid to see through my incompetence."
weaseldog:
There is doubt that I'm a Raving Lunatic?
Though I agree we need to conserve we're not yet at the point that we all need to raise chickens and grow our own veggies and stock up our pantries.
You should avoid semantic arguments, you tend to get your tongue wrapped around your eye teeth. You do have "faith in science". You don't employ "faith" in science.
I am not a scientist. I have never enjoyed science as a subject of study. I do enjoy math but didn't get as far along with it as I would have liked. I do find it interesting that when researching medicine and medical issues regarding my wife that I find the information easier to comprehend than I would have thought. I do that out of necessity. Left to my druthers I'd probably go to porn sites.
Given all that, I must have "faith in science" to come up with solutions. I will not be filling the testubes nor lighting the Bunsen burners. Mine will be to consume the fruits of their labors providing profits to achieve even greater discoveries. Science is the object of my faith. My faith is not the operational method of science.
I've mentioned before that you deal in extremes. Compared to Donald Trump you will likely always suck hind teet. Donald started with money and a good start at empire. There are many Horatio Alger stories where those starting with nothing ended up with empires. It's a function of a lot of variables, luck often being the determinate one. I would be willing to bet you that compared to Donald Trump, your income is totally insignifcant. I used the term significant simply because I have no vision of what would be sufficient.
Maybe I can't read or maybe you can't. To me you have been arguing that we will all have to live at subsistence levels in just a very few years. "Less" is a nondescript, somewhat meaningless, term. If I cut back on smoking that is "less". If I stop smoking that is "less". If I gain weight, that is more, but if it endangers my health it is "less".
The continuum with plentiful at one end and nothing at the other end contains a lot of "less" datapoints as you move from one end to the other. Most of those datapoints would be "less" but would not comport with your idea of the ultimate "less".
Your arguments also seem centered on, we can't grow without growth in energy, and we can't have growth in energy, therefore we can't grow. Your basic premise is one of doomsday.
weaseldog:
Maybe I should have been more specific. The fiasco I referred as coming was the credit crunch not the mortgage fiasco. Historically the credit crunch was not a foregone conclusion of the demise of Wall Street. Following the tenets of the free market it made sense that some firms were going to fail, or at least suffer badly, but it didn't follow that with fairly simple corrective measures those failures could not be overcome. Because so many of these exotic vehicles were off-balance sheet the magnitude of the mortgage/derivative problem was not clearly visible.
To suggest that Bernanke and Paulson were well aware of the ultimate end to this and positioned themselves to benefit from a myriad of bailout solutions is the height of some kind of mania or noia. I have mentioned before that Paulson was aware that the market in these products was highly risky so Goldman sold many of them short. That does not mean that his crystal ball looked far into the future. By the time Bernanke took office most of the seeds for the damage had already been planted. Even as the unraveling started the depth of the problem was not clear nor was it clear what the repercussions might extend to.
Now if only we were all blessed with your foresight. Derivatives themselves are not the problem, puts and calls are derivatives and they are a decent investment vehicle, especially for those with limited funds to lose. CDS's, while decent risk aversion tools, ended up being used more like dice and less for risk aversion.
As with all this morass, greed and abuse crept in because these vehicles were driving fantastic paychecks. The fees alone were adding big numbers to profits.
I can't escape the opinion that you are on a witch hunt and since Bernanke and Paulson are still around they must have employed witchcraft to have survived. I have no problem with second guessing them or criticizing their actions but when you start conjuring up visions of demons working black magic your getting too far out for my money.
If they are playing dangerous, selfish games they are subject to being found out, and that of which you are accusing them, could lose their money and their freedoms for a few years. Doubt that either one of them would want that risk. You can't sell a prison term short.
Your anger is understandable but anger is an emotion that left unchecked can create delusions of conspiracies everywhere.
Someone better ask John Galt what he thinks. I think he believe "atlas has already shrugged". If not now, then after Nov 4th.
DOOMED! A nation that produces paper including its money is a goner. Any way you cut it.
A nation with lousy ethics in its day to day business, social and cultural conduct is screwed. Think I am wrong? Open all that junk mail you get and decide if all those offers are on the up and up and good deals.
How many elderly get "business ads" that resemble bills and they send in the money. How many bought "life insurance" polices and just keep paying expensive premiums for nothing. There are essentially no consumer protections. So, we make nothing and screw the remainder. Great!
This thing is in the toilet and deservedly so. The thieves are running the show.
DOOMED!!!!
Democrat Barack Obama said Wednesday that as president he would spend $210 billion to create jobs in construction and environmental industries, as he tried to win over economically struggling voters.
Obama's investment would be over 10 years as part of two programs. The larger is $150 billion to create 5 million so-called "green collar" jobs to develop more environmentally friendly energy sources.
Sixty billion would go to a National Infrastructure Reinvestment Bank to rebuild highways, bridges, airports and other public projects. Obama estimated that could generate nearly 2 million jobs, many of them in the construction industry that's been hit by the housing crisis.
The question is exactly how does Obama plan to spend the $15 billion per year. I suggest that he get the biggest bang for the buck possible. One of the ideas is to use it in conjunction with a public-private partnership in such a way as to attract as much private capital with as little public capital as possible. New industries may have to be created from scratch because there would be more flexibility than there would be trying to deal with old industries. In this way a massive effort could be undertaken to provide solar, wind and other alternative energy. This would also have the effect of jump starting the economy creating millions of jobs.
Another area that needs immediate attention is fresh water production through desalination.
Other countries have successfully used public-private partnerships. They are necessary now for the US since if private enterprise was all that was necessary why haven't the solar and wind industries already have been provided. Where is the high speed rail? Europe and Japan has these things precisely because of government involvement. But let's be smart and fiscally conservative in the ways we use taxpayer money. Cost plus contracts should definitely be eliminated.
Let's explore innovative ways to get the most bang for the buck while keeping deficits to a minimum. With an equity stake government can hope to pay back some day whatever deficits were created. It's a time honored principle to pay a toll when going over a bridge. This helps pay off the bonds that were issued to pay for the bridge. Let's extend this principle so that all monies spent by government are not merely outgo. There should also be a return to government. Using principles such as these, we could even hope some day to eliminate deficits and pay down the national debt.
Rather than outright own these enterprises or grant contracts to existing corporations that too often have proven to be boondoggles, perhaps government could provide "venture capital" and then take an equity stake in which a department of government has a say in how the project proceeds. That's why I have suggested creating a cabinet level Department of Trade and Industry similar to Japan's MITI.
In this way the deficit can hopefully be kept down while a massive undertaking can proceed without a massive investment.
Meantime us mugs in the U.K. have just become aware, on the back of our Government's taxpayer bail-out of the banks, that one of the worse cases, the Royal Bank of Scotland, intends to carry on with most of its intended bonus payments to staff.
Good to know that the taxpayer is ensuring all these bonus payments for staff in a private sector company we were told was in effect bust.
The sum that the RBoS is reported is have set aside for 'staff costs' is a cool £1.79 Billion. Good money - if you can get it!
http://www.uclick.com/feature/08/10/31/jd081031.gif
Too late.
John Lawrence:
As always, good ideas but the devil is often in the details.
The reason that the private sector has not invested more heavily in wind and solar, etc. is the economic payback isn't there. Alternative fuels, currently, must still compete with oil and electricity. The prices of those become the competitive determinate of pricing any alternatives and establishing potential profits.
When the price of oil was running around $150/barrel, this opened up the viability of many possible alternative energy projects. It also enabled further drilling, especially in riskier environments, as potentially profitable. If we find and can deliver more oil, faster than demand rises, this will tend to decrease prices yielding alternatives a less profitable option. Thus, the validity of government investment.
What form should government investment take? It can fund research or manufacture via contracts with limits on the extent of those contracts; the typical vehicle. It can enter into partnerships or stock ownership but then what would the spending limits be? What degree of control over day to day operations and expenditures would the government have? These kinds of arrangements have merit when the end result is in the nature of a specific target; where the technology and specifications are fairly well defined.
Building a high speed rail system from New York to Los Angeles with government getting royalties for a period of time after completion would seem the kind of enterprise lending itself to a partnership/ownership arrangement. The technology is known; the government could more easily arrange for purchase of the necessary land; and the progress is easily definable into segments; and upon completion there would be a revenue stream to provide payback to the government.
A project of this nature could go on indefinitely as a quasi-public corporation but issues such as liability for accidents; funding operational losses; funding maintenance and repairs, if revenues are insufficient; and many other issues could keep the government at risk for continued funding needs. Management influence also becomes a huge hurdle. How does the government control new risky operational strategies from being invoked? How do they keep a lid on spending to keep it under control? What kind of bureaucratic structure would be needed to provide oversight for a variety of quasi-public companies? If a competing private firm wanted to build a similar rail system from St. Louis to LA, without government involvement, how can we keep competition equitable.
I'm sure other countries have worked through these problems but cultural differences could impact the process significantly.
I'm not opposed to more government involvement in the marketplace but the methodologies are fraught with peril.
In areas where pure research and development is needed the government can be especially beneficial and has been in many venues, health, medical and space, come to mind. These are usually handled through grants or budget appropriations because of the unknown probability of success. I would agree that some sort of payback could be established if the research were successful but the unknown marketability of a successful or semi-successful result makes it difficult to predefine that payback.
Wind and Solar would not seem to require a lot of research, notwithstanding ongoing improvements. Logisitics and cost appear the major barriers to proliferation. Solar could be implemented on an individual basis today but cost seems to be the prohibitive factor. Solar farms, as wind farms, involve a commensurate grid system to broadly disburse the power. Government, through tax credits, more aggressive ones, could spur individual solar use. Improving or building a new grid system would seem to fall into a government funded realm. Not sure how the current system works but I would think that government should operate and maintain the grid system and collect fees from the private sector.
I know nothing about geothermal but would guess government should be funding research but the finance/ownership can get dicey since we don't know the eventual viability of success.
Taking an equity stake and then getting out of it later is cumbersome. In most instances, and especially by your recommendation, this combined ownership would be in new companies which would not be publicly traded. Since there is no market to value the stock the eventual payback to the government would have to be predicated on someone's best guess for the value of the company. Having been involved in a couple of these, not with government involvement, I am aware that it's not what one would define as leak proof evaluation process.
Do completely agree with you on desalination and my understanding is that there are economic issues with investment so the government could have a big role there. But I also understand that NIMBY is a big problem. The government certainly has the power to overcome that but that kind of issue can be the stuff of election defeats.
Share your disdain for cost plus contracts but they do fill a need. Usually cost plus contracts are only used where the specifications or deliveries in the contract cannot be clearly defined. It is considered unfair to put undo risk on the vendor through a fixed price bid contract. The government guarantees the cost exposure but will only pay a minimal profit margin as the offset.
From a government perspective fixed price contracts aren't much better. Usually, at the outset the specifications or deliveries are fairly well defined so the vendor can accept the risk, as defined, and can build in a reasonable profit margin, depending on competition. The vendor advantage occurs when, invariably, after a contract is awarded the deliveries or specs change. This allows the vendor to alter the contract value covering all costs with even better profit margins to the extent of the change. Since the bid process is over there is, except in rare occasions, no new bidding process and the original awardee gets all the benefits. Granted these situations are negotiable but the vendor holds most of the cards. Knowing this likelihood many vendors will low ball their original bid and smilingly await the changes.
All this to merely suggest that when the government gets involved with the private sector, the private sector has a tendency to win.
Dr. Reich,
I have enjoyed your commentaries for years. You are a liberal (progressive) I will always listen to and with whom I frequently agree. Lately on the subject of the economic meltdown, your comments seem especially insightful. It seems to me that this nation's investment banker's and willing commercial bankers perpetrated securities fraud on the world's economic system on an unimaginable scale. When did we do away with the profession of auditor? It would soften the blow of my party's loss if the new Democratic administration calls you back to duty. Meanwhile, please continue to call 'em the way you see 'em.
DR. REICH, cc: John, Art, Others
We appear now on a course of price DEFLATION made real by a multiple of simultaneous contributing elements: large scale credit crunch; a middle class "debted-out" situation; over 2 million more homeowners facing home foreclosures with reverberating effects throughout the economy; "sub-prime" home mortgage and commercial loans weakening bank capital structures; dumping of assets and rush for cash exerting downward pressure on prices; sharp reduction in consumption leading to glut of products and inventories; rise in company losses and unemployment; decline in tax revenues -- all feeding the Deflation spiral and higher annual Deficits.
This extremely destabilizing dynamic was the key driver of the 1929 US Depression, as well as Sweden and Japan's serious financial breakdowns in the early 90s. Roosevelt countered the 1930s price deflationary cycle with, among other policies, his New Deal job generation programs.
Japan saw its budget Deficit jump steadily to 5.75% of GDP between 1990 and 1995. But then Japan dragged its feet between 1995 and 2000 in facing the dimension of the crisis causing the financial sector to remain extremely weak. Actions were taken to lower interest rates to Zero and to cut taxes cuts to stimulate consumption ...but all to no avail. Price deflation continued. Annual Deficits persisted over a long period of lethargic economic growth and structural
price declines ... only finally stabilizing in 2006. Japan´s budget Deficit in 2008 is at an improved 2.2% of GDP. BUT, the long period of stagnation caused Japan´s national Debt to skyrocket from 80% of GDP in 1995 (where the US is in 2009) to 170% of GDP in 2008! There´s a lesson here!
Between 1990 and 1992, Sweden in contrast saw its budget Deficit leap to 11% of GDP. But Sweden took swift, strong actions forcing banks to write off bad assets immediately and then nationalizing banks and recapitalizing them under a new regimen of strict oversight and regulations. After 4 years, the government went public with the banks and the government recovered at least 65% of taxpayer bailout funds. Sweden´s budget SURPLUS for 2008 is an impressive 2.5% of GDP. Equally impressive, Sweden´s national Debt stabilized at 80% of GDP in 1995 and remarkably has declined to 40% of GDP in 2008. There´s a lesson here also!
What was the key lesson?
Sweden´s rapid actions caused a very deep recession but a much quicker recovery than Japan experienced. Sweden taught everyone a valuable lesson that it´s best to take all the pain at once and to sort out things as quickly as possible. Waiting only makes the situation worse and far more costly as Japan discovered the hard way.
The US 2009 budget Deficit is forecast now at $475 Billion or 3.5% of GDP, but this budget excludes all the bailout funds, recovery funds, and expected declines in tax revenues due to marked economic slowdown. These factors could well bring the 2009 actual Deficit to over $1 Trillion or near 7% of GDP! Our national Debt which was roughly at 55% of GDP at the end of Clinton´s term will have increased to an expected ±80% of GDP in 2009 after eight years of Bush Jr. If we delay implementing key reforms and reconstruction investments to jump-start economy and jobs, we could see our National Debt also almost double to the 170% of GDP range as Japan has today (vs. Sweden´s 40% of GDP today).
Very easy, cheap credit that escalated during 2004-2007 in the form of sub-prime mortgages (CDOs: collaterized debt obligations) and exotic Debt instruments has led to not just a toxic subprime crisis but to an extensive, broad-based credit crisis ... all based on the premise that house prices would always rise. Greenspan missed the indication of illiquidity in the marketplace as funds became highly leveraged with significant amounts of subprime assets ... inevitably apparent when asset prices dropped, leading to a dramatic increase in subprime defaults and delinquencies.
Result? Not only have bank Liquidity and Trust problems been created on a grand scale, but also serious bank Solvency problems, i.e., sharp reduction in banks´ Net Worth (the excess of assets over liabilities).
So, not surprisingly, the $700 Billion Treasury bailout plan may end up going mainly to recapitalize the balance sheets of banks (Net Worth and Liquidity)... leaving miniscule funds for helping those afflicted with distressed mortgages and foreclosure and for business loans.
The foreclosure problem is immense.
At least 2 million households are facing foreclosure prospects which will have devastating rippling effects throughtout the economy. This development will lead to even more unemployment and reduced consumption, and will also likely intensify trend toward a longer period of price DEFLATION ... a key driver initially in Sweden and Japan´s economic collapses.
Many experts consider Deflation a much more dangerous development than Inflation ... similar to Leverage which has the tendency to expand the downside much more than the upside.
QUESTION: Kenneth Rogoff, a former economist at the International Monetary Fund and now a professor at Harvard said, `If you print enough money, you can create inflation.´
This leads me to the obvious question: If US Deflation is a major danger today, could this be mitigated by some variation of John Lawrence´s idea that our government `Print Money´ (NOT Borrow funds)to pay for near term Job Generating Infrastructure Investments as part of program to regenerate our economy?
Perhaps any inflationary effect of Printing Money will offset possibly severe deflationary forces just starting to show their head? This might be a timely, reasonably safe test case for such a financing technique by Treasury ... limited, of course, to a specific and time-scaled series of investments in our infrastructure ...and using on-the-shelf designs and plans for mass transit systems throughout America to get moving QUICKLY on `Modern New Deal´ job expansion and productivity improvement infrastructure projects.
I´m just reviving John´s idea in light of deflationary conditions at play now. Still not sure it could makes sense. All critical thoughts are welcomed.
Dr. Reich,
Source of my budget and national Debt data as a percentage of GDP at early stages of Sweden and Japan´s economic collapses and in 2008 is: Thomson Financial Datastream supplied by Dutch news publication.
Data for 2008 excludes 2nd half effects of worldwide economic slowdown. Still, this historical comparison yields significant lessons of macro/microeconomic short and long term impact of different approaches to such financial crisises in these times.
Europe seems to be a step ahead the US in moving aggressively and promptly on Root causes ...whereas, unlike many mature European countries, these 100-year floods are happening every 10 years in America. WHY?
Dr. Reich,
It took the Dutch government and ING bank less than 2 days to agree in principle to a $13 billion (taxpayer) capital injection similar in form to a preferred share position at an interest rate of 8.5%. Deal gives government option to be paid back within 5 years at 150% (or $19.5 billion), or take option to convert to an ownership interest. Quick and to the point pragmatic arrangement, which also provides for membership on Board of Directors. Furthemore, this capital is in reality "Buffer Capital" to store up market confidence in ING's financial condition which is in fact rather sound ... despite sharp decline in stock price recently.
frank thomas with respect you have a poor perspective on the European setting. The various EU members have been squabbling and off without achieving very much of a coherent approach. First we had The French President Sarcose leading the EU on this and the it was the UK’s Prime Minister Brown, but both their initiatives came to naught. Brown probably had the better proposals but then the UK schizoid attitude to the EU meant hat he had little credibility as any such leader.
Yes maybe, and it’s only maybe thus far, the Dutch initiative has worked, but Ireland’s has not. Even the UK’s much-vaunted ‘Brown’ Initiative seems to be fraying (re Barclays going to the Middle East for funds and RBoS’s taking the public money and then thumbing a nose at the public interest). In fact the vaunted ‘Brown’ plan was no such thing. It was his Chancellor Darling who was the hero in all this – and he was given scant regard and no credit by the physcologialy flawed Prime Minister Brown (one of his Minister’s descriptions of him). This lack of governance teamwork bodes ill for the immediate future.
And on your earlier point about ‘why 100 year floods occur in the USA every ten years unlike mature European countries’. Again with respect, but, you are plain wrong on this one. For example, for at least the current and past two years recurrent, unpredicted and extreme flooding of heavily populated as well as rural areas has been big news in the UK. Hugely inappropriate development and a failure to address climate change are the primary causes of this. The UK Government’s answer to this has included, the gods help us, a restarting of the nuclear power station building programme. At least the USA has got that one more right.
Other facets of these problems in Europe are the imploding natural water supply systems in Spain due to over-development of nasty Florida-type developments up and down the Spanish Costas. Spanish city Barcelona this year had to ship in tankers full of drinking water.
Significant corruption at the central and local government levels has accelerated this corrosive nightmare. The more immediate consequence of unsustainable development in financial terms has been an unsold surplus of residential units numbering possibly into most of million. In proportion to the Spanish economy this is a truely immense disaster.
escotregen,
I've been through all the differences between scale and source of the European problems now and America's in some detail on previous posts to this blog.
In short, without going into great details, Europe's financial problems are mostly a direct result of our subprime fiacso combined with some European bank overleveraging here and there -- particularly in the UK and to a grand scale in Iceland. The UK is really in deeper financial problems (than mature European countries) because the British have a strong tendency to copy America's political-economic paradigm much more than most other European countries.
I know little about Spain's solutions to severe water problems, but they are having a residential sale slowdown caused by overbuilding and decrease in tourism. You may be surprised that Spain's management of its banking system has been excellent the past years. They've had no major financial problems because of buying packaged subprime assets or engaging in any form of America's exotic paper pyramid financing techniques.
As far as France is concerned, Sarkozy is also not doing that badly considering what he inherited from Chirac. France's economy, until the recent slowdown, has been progressing steadily from a decade long unemployment level during Chirac´s time of 10-12% falling to 7% in recent times.
It's all relative, my friend. Europe´s situation is not the deep, structural malaise America finds itself in ... where insight into risks were ignored and too late recognized to minimize the consequences therefrom.
I'm making no claims Europe is perfect. But it's clear that extreme Capitalism in my beloved US has failed. Up to now, it has appeared to be been the best system in creating Wealth. But the system, compared to Europe, has been working too one-sidedly to the advantage of specific groups.
Joseph Schumpeter (1883 - 1950) predicted that it would so end. He's the classical conservative Austrian economist who said Capitalism is fantastic, but would FAIL under its own success. For him, the differences in group welfare and wealth will eventually grow so big that they lead to great stresses in a society. Guess what´s been happening the last two decades in our country?
Having been an independent businessman most of my life and working for international firms in Holland, Belgium and Scandinavia for over 30 years with constant travel to US, it´s stuck me how major and mini financial crisises are such recurring events compared to Europe. For example, Sweden learned form its 1992 crisis and reformed so as NOT to repeat it. In comparison, I witnessed first hand, with my construction business in late 80s, America sink into a speculative financial binge supported by the Savings and Loan banks ... all costing taxpayers over $250 billion dollars excluding interest cost on borrowed funds. Difference with Sweden is we didn´t learn a thing from our mistakes and repeated our excesses in 2000 and raised the mistakes to an almost financial collapse stage during 2004-2007.
I don´t pretend to know the themes that might explain the frequency and depth of our repetitive 100 and 50 year financial floods. But this time we had better get the structual imbalances in our social-economic model correctly adjusted ... as Europe is relatively better at self-critiquing itself and reforming things for the betterment of ALL its citizens. We can learn s few things from the Europeans as well as the Canadians.
With Obama, there´s hope we´ll change course to a Balanced Capitalism that is not the often repeated Republican cliche and malarky ... Socialism.
Art, Frank and Others,
Art said:
The reason that the private sector has not invested more heavily in wind and solar, etc. is the economic payback isn't there. Alternative fuels, currently, must still compete with oil and electricity. The prices of those become the competitive determinate of pricing any alternatives and establishing potential profits.
When the price of oil was running around $150/barrel, this opened up the viability of many possible alternative energy projects. It also enabled further drilling, especially in riskier environments, as potentially profitable. If we find and can deliver more oil, faster than demand rises, this will tend to decrease prices yielding alternatives a less profitable option. Thus, the validity of government investment.
With all due respect to the private market, oil has gyrated between $150. a barrel and now what $60. a barrel(?) leading me to believe that the market mechanism is totally out of whack and the price swings have more to do with speculators than real demand. Ergo: why base public policy on such volatility? Let's get on with infrastructure and alternative energy development because these are real future needs and not base our decisions on the delusions of a disfunctional market.
Also Americans have only to look around us to see what already is being done by other countries on public-private partnerships for solar production without waiting for signals from the market. For example at the recent solar conference in San Diego I noticed that Hungary had such a deal. A quick search on the internet found the following:
Hungary to become solar energy superpower
06/22/2007 12:32
The large investment announced today by the Ministry of Economy and Transportation is connected to the activity of Genesis Energy Nyrt. According to the press release a HUF 26 billion American solar panel production factory will be built in K�rnye, in the Tatab�nya Industrial Park, in Kom�rom-Esztergom county.
The investment will start in the second half of 2007, and will be finished by 2009, it will employ 200, mostly highly skilled people.
The factory will produce solar energy cells in large volume for the European market. Due to its new technology, Genesis will produce cells much cheaper than those using traditional technology, and the energy producing capacity of the new cells is 25% higher.
This morning Genesis announced on B�T that the government supported the subsidy claim of company's affiliate Genesis Solar Hungary, which will allow the company to deduct from its taxes 37.5% of the value of the investment.
It's not rocket science folks. It's already ebing done. While we dither, others are acting. When are Americans going to wake up and smell the coffee? Rather than basing our future on the vagaries of the market, let us proceed with more rational developments now. Other countries are doing it. We don't have to reinvent the wheel or start from scratch if we would only look around us.
Rather than argue about "tax and spend" or "borrow and spend" let's transcend dichotomies, create other revenue streams for government and get on with it. If the devil is in the details, we'll be waiting forever for the hedge fund managers and speculators to sort things out. We need to create new revenue streams for the US Federal government other than taxes and borrowing.
Frank:
Whew! A lot there to chew on. A potential deflationary spiral does add another variable that may or may not lend more credence to John's proposal but you would be playing a little bit of Russian Roulette.
First concern I would have is the Treasury, after printing lots more money, has no vehicle for drawing down the money supply should inflation begin to spike out of control. The Fed would be able to raise interest rates or sell Treasuries via open market operations but these are methods to control money supply through the credit markets and if banks are not functioning as normal or if they are being circumvented in the money supply equation I'm not sure that normal inflation brakes would work. It is possible that we will reach the flash point and everything will end up having to burn down so we can start over from scratch.
Infrastructure spending will no doubt create jobs but those jobs will be targeted to some extent. The construction industry will blossom once again. Granted many of the jobs created will be marginally skilled but many others will require specialized skills and I'm not sure of the availability of labor with the necessary skills on a grand scale.
Regardless the funding mechanism, to be an effective program there will have to be many projects undertaken simultaneously. This will tend to create a number of "fly by night" construction companies seeking the newly available contracts. We could end up with new roads and bridges that are unsafe at the outset.
In my view many of those currently involved in infrastructure building and maintenance are freeloaders now. In North Carolina, and I'm sure across the nation, we find the same roads or sections of roads requiring major repairs every couple of years. My limited understanding is that our spec requirements are such that roads, etc., are not supposed to last that long without major overhaul. Also, as I understand it, the management of infrastructure projects is handled by the states with the federal government providing, normally, matching funds, but I'm sure the states would have no problem with all the funding coming from the federals. If you think we have special interest problems at the federal level, you ain't seen nothing yet.
My guess is that any attempts to initiate a major infrastructure improvement program will be a slow process. There are aspects where a rush would have no potentailly serious consequences but many, especially bridges, and to some extent roads, will require strict oversight. Example: In just one stretch of a few miles of interstate highway, in the Raleigh area, apparently engineering errors, on the part of state engineers, coupled with faulty inspection work, caused a complete redo of a expansion/resurfacing which cost upwards of $40 million in additional funding.
Sorry, got a little off point. Anyway, my biggest concern, especially when a deflationary spiral is added to the mix of problems, is that we would be playing around with a change to the formula for making nitroglycerin. We have a process where many involved in it understand it. Changing the model in the middle of a breakdown could create worse results than Sweden or Japan ever dreamed of.
This, of course, leaves us with the questions of, When would be a better time to try a really new idea? Or, when would be a worse time? Given the complexities of our current problems, I'm not sure adding a radically new idea to the mix is a good idea.
Funding with more debt is not necessarily ruinous. I've stated before that if we can return to GDP growth sufficient to increase tax revenues enough to pay the additional interest on that debt, we're at least at breakeven in the short term.
As you and John and others have posed there are numerous opportunities for some degree of jump starting the current malaise. The longer term problems still beg for answers. Even if we are successful at creating a new industry around alternative fuels, it is not certain that we can keep the jobs here for long. Japan already has a solar cell production industry and I believe Europe has a good start on wind equipment production. Maybe we can improve on the processes, and then maybe not, but any improvements we make will likely spread to those areas already ahead of us.
There are many ifs out there that could end up making weaseldog prescient.
By the way, heard a blurp on BBC last night that the Netherlands are making some vast inroads inot Algae production and use. Talk about a renewable source!
John:
Not necessarily disagreeing with your overall premise. I agree with your government investment ideas. I offered the private sector anaylsis in response to your comment about the failure of the private sector to respond to new energy alternatives.
I also agree with your analysis of the oil markets and the factors driving weird price swings. The real dichotomy there, from a solely private sector standpoint, is that a couple of months ago the price of oil made all sorts of options viable and then the price dropped and remanded all those options back to the drawing board.
The only real answer to moving forward on alternative energy is for the government to step in and override the economic return delimiters.
You're also right that, even now, we are looking more like a "me too" nation than an innovative one.
Frank will tell you that I am a realist and often cynical and pessimistic, at that. Democracy is government by compromise. When differing ideologies tend more toward the center, compromise can often lead to best results, for all. When ideologies polarize then compromise legislation often becomes the worst of all possible results.
Should Obama be successful and the Congress end up packed with Democrats, then progress would appear quite possible; notwithstanding that Democratic Congresses, historically, have often proved harder for a Democratic president to deal with than Republican ones. To get the government involved in a variety of equity deals will be anathema to many Dems and Reps. Since any progress, of the kind we are talking about, will likely be effective in fits and starts, the timing of the fits will be critical.
If improvements aren't moving favorably around the next election time, they will become huge campaign fodder for Reps to take back control of the Congress. The same will be true if a negative hiccup is occurring prior to the next presidential election.
The real delimiter becomes the Constitutionally mandated election cycles. Obama, far better than McCain, or any of the other active players on the political scene, may be able to assuage concerns and continue a march forward but he only has eight years and then he's done. Although he has good ideas, his major strength is in selling those ideas and convincing folks that this or that will work. At this point I don't know that we have any others that possess his talents. Of course, eight years is a long time and others could come along but what happens if those same talents come in the form of a conservative, with a strong ideology, next time?
No doubt we need to roll the dice and take some chances but the long term sustainability of progress is tantamount. Our free market process does do a good job of advancing our economic growth and utilizing innovation. I agree that the government needs to get involved, with funding, when profitability is limiting innovation and certainly we need constant vigilence on regulatory needs. Regulations will require an intense oversight committment because the markets will always operate ahead of the regulatory curve.
For the government to start taking equity positions in new ventures a whole host of issues crop up. First of all I would assume those equity stakes would be large, likely making the government the largest stockholders. Unless that stock is voting stock the government would have little control over management and management, with a seemingly infinite pocketbook, could easily get carried away. Further, the way most owners eventually gain big profits from their start up ventures is by going public in an IPO. There are legal limits to owners cashing out in an IPO but laws could be adjusted to exempt the government from those limitations. The bigger problem would be that IPO prices are somewhat based on the growth capability a company gains by the huge influx of cash from selling its stock. If a significant portion of IPO funds is going to be used to buy out the government's position that will limit the resources for growth potential and depress the IPO offering price.
Now if it's all done via preferred stock, the terms could be that the government gets a stated value for its preferred stock at the time of such an event. But the uncertainities, at the time of initial funding, of the future success, would likely lead to the government getting back only a reasonable interest rate of return. In that scenario there would be no windfall revenue streams.
Of course the government could just hold onto its preferred stock position and receive preferred dividends but now the government could be impeding the firms progress and would certainly be affecting their product pricing. Getting into those kinds of arrangements is far easier than getting back out.
Government does need to get involved with funding infrastructure improvements and alternative fuel research and production and we will all benefit from the jobs and economic growth and greater tax revenues. Trying to add another dimension of government profit may de-synergize the process.
Art,
Yes, the Netherlands are the world leaders in wind energy technology and now are on the verge of becoming world leaders in producing oil from the ultimate fast growing organism ... ALGAE.
Algae's potential is not new as firms have been making biodiesel from algae for years. But it's still expensive to make for fuel, so its viability price is high. Sofar it can't be made in commercial quantities like ethanol or some other biofuels.
But Dutch research is focused on algae's inherent ability to produce much more oil per unit of area and per unit of time than any superior plants. And, as you may know, Holland, with a polulation of 17 million people, has long been ahead in farming technology ... having one of the world's highest crop yields and being world's 2nd largest exporter of agricultural products after the US.
Fortuitously, farming algae doesn't require much space or good cropland. It avoids the "fuel for food" dilemma. Under right conditions, it can double its volume within hours. It makes bioreactors for speeding reproduction.
If algae is fed carbon dioxide and organic material like sewage, its oil yields increase substantially. The oil content is 30% up to 70% or more depending on technology used to exploit its high oil content.
It can grow on farms, in fresh water or sea water, in polluted water or farm runoff. It can purify a city's sewage while feeding on the nitrogen and phosphates in human waste. It consumes twice its weight in carbon dioxide, the most common greenhouse gas discharged by vehicles, power plants, and many other industries.
So Dutch scientists and scientists everywhere believe the potential of algae as a long-term sustainable energy source is HUGE.
Conservatively, with their feet on the ground as usual, Dutch researchers are convinced this simplest of all plants can be efficiently processed for fuel on a large scale in 10 years.
It's worth noting that KLM is funding research to make a kerosene-grade fuel out of algae for airplane fleets. Such a possibility avoids having to totally rebuild airplanes.
As Dutch scientist, Hans Feenstra recently stated,
"With the Earth's natural resources running out, it's becoming increasingly important to look for more sustainable alternatives. Algae offers the possibility for us to create value from renewable feedstock. It grows at a prodigious rate, can be used to abate CO2 emissions and has the potential to treat waste water streams. There are also no concerns regarding the food versus energy biomass debate."
Another indication of Europe reinventing its future by investing far more heavily in innovation than I've ever witnessed before in all my years here.
Pretty exciting stuff, Art! ... ALGAE!
Frank:
Honestly, first I'd heard about it other than as just another ethanol type product. A testament to my currency of ideas. I understood from the BBC report that it also gives off significant by-products.
Keep in mind though that America is on the forefront of generating huge amounts of wealth from nothing but money, the other green stuff; until.
Note to weaseldog: Humans didn't get this far without innovating! ;)
Art,
Yes, there are many by-products from the cake material left over after removing the oil from algae. For example, it's a source of healthy Omega-3 fatty acids for humans. It can be converted to horse feed for horses and as a weed killer for golf courses.
The by-products will be important to making the extraction of oil from algae profitable. Experts say petroleum prices must be at $100 a barrel to make the production of oil from algae a viable business.
Points like that have long ago persuaded me to fully agree with Thomas Friedman's idea that our government should set a Minimum price on retail oil and gas supplies to support continued aggressive R&D in alternate fuels and development of far more fuel efficient cars. Assuming oil at $100 a barrel will support these goals, this means the government and state taxes would be such as to maintain a Minimum gas-pump price of about $3.00 a gallon today.
This is just another key part of an energy independent program the next US President get real on.
Art,
correction: last sentence, last paragraph: ... US President must get real on.
Frank:
Totally agree. I've been in Friedman's camp for a long time. If gas prices remain low there will be no impetus, let alone profits, to seeking alternatives.
frank thomas I don’t want to expend much resource on a ping-pong blog sequence. My point was to highlight that your perspective on Europe was wrong. Just a couple of observations on what you say in response serve to confirm my original point was correct.
Firstly, to assert that Europe’s problems “are mostly a direct result of our subprime fiacso combined with some European bank overleveraging here and there” is way, way, off-beam. I’m not ‘surprised’ by what you assert to be an statement about the Spanish banking system; you entwine yourself in your own logic when you cite Spain as an excellent example of banking (ignoring my point about the widespread corruption throughout Spanish institutions). You cannot say that Europe’s problems were due in large part to USAS sub-prime problems and then cite a European country as though it was immune to this cause.
You also seem to have, surprisingly failed to comprehend my specifically commenting on Spain’s property sector's financial (as opposed to water and environment) travails.
Incidentally, I don’t that there’s much efficacy in citing Sweden as somehow typical of Europe. Sweden has always been out of the European mainstream, from its unfortunate relationship with Nazi Germany onwards – and of course the Swedish welfare state has been gradually unwinding for almost a decade now.
Secondly, leaving the seeming condensation aside, you are again wrong in asserting that “It's all relative, my friend. Europe’s situation is not the deep, structural malaise America finds itself in”. The current problems come on top of Europe’s sad under-performance on creative and new knowledge industries as well as basic job creation. Indeed I would agree on your point that the UK does copy the USA and that this is why the UK has done better than the rest of the EU for over a decade in these areas.
But regardless, Europe does face significant structural problems in the order of the USA - indded it is now nervous about its subservience to what the USA might now do.
Europe is not immune from the fuller global forces at work and is thus as desperate as the USA in the doomed hope that somehow Chinese (and perhaps Arab and other Asian savings transfers) will come to our rescue.
Anyhow I’ll leave it at those brief observations except to express astonishment when you assert “Europe is relatively better at self-critiquing itself and reforming things for the betterment of ALL its citizens”.
I cannot but help respond with pointing out that Europe generated two World Wars borne out of the divisiveness between and within its countries. These wars, you will I'm sure not be surprised to know, included mass extermination of its own peoples. This was then followed up with the dirty little wars in the Balkans in more recent years. Of course in the UK we had our own pernicious form of divisions and intolerance among citizens in the Ulster sectarian wars.
I'm just suggesting that you could maybe be more circumspect on you broad generalizations and assumptions about Europe. I think you may find Nial Fergeson's 'War of the World' helpful on a more informed perspective on the reality of modern European history, savage as much of it is..
Ted Harvey,
Ted, I'm sorry but here is a long "ping pong" reply, with respect, to your own misguided claims.
My focus is primarily on America's -- with some ad hoc comparisons to Europe -- last 28 year social-economic system developments up to now ... not about Sweden or Germany's Nazi past or wars in the Balkans, or Holland's 100 year war with Spain, for that matter. Of course, in geo-politics all countries make mistakes.
We macro-microeconomic analytical people leave that part of history behind on this blog. We are simply trying to explain the virtual reality US financial Mess today using historical patterns/facts (e.g., I've published over 20 Tables on this blog of Facts about our US Federal Budget performance since President Johnson).
People are trying also to come to terms with broader questions now like, what is the role of government in an economic system? What is the role and extent of regulatory reforms? When should banking institutions be nationalized?
As for corruption in Spain, there's corruption more, less or little in Italy, US, Norway and other societies. So what does that have to do with analyzing the relative economic performance of the US vs. European countries today?
I cite Sweden´s (vs. Japan's) handling of its 1992 collapse, because citizens and amateur economists (that's me) are curious about the lessons that can be learned from this classic example of a rather highly effective government handling of a very serious economic breakdown. In a relatively short time Sweden recovered and has become a rather strong, stable country today as the figures show.
Most of the other Scandinavian countries have been equally successful economically, I might add, over past years with exception of recent surprise of Iceland.
In past years, the well-managed EU countries have been constantly tightening their social welfare systems without going to the "survival of the fittest" cultural edge that the US has been following. Sweden has gradually reduced sensibly its social net as has Holland over the years as well as others. In brief, EU countries have constantly been working hard to get market freedom and social welfare policies in fairly good balance ... although some do it better than others.
I should have been clearer in my statement about Europeans self-critisizing and self-correction tendencies or abilities. My apologies. I was referring to an American trait of not being very self-critical, much less so than I've observed in Europeans over many, many years. You kind of exploded this out of context.
As stated, writers on this blog are addressing necessary and equitable approaches/changes for solving social-economic problems in the States with rare comparisons to European ways. One can't help but be influenced by some of the fundamental differences I´ve seen after 40 years of living and working in Holland, and a few years in Belgium and Scandinavia (Denmark).
As for the UK doing better economically than all the EU over the past decade because of closer ties to the US, that´s partly true, but offer some data below that puts a little perspective on your claims here. I wasn't trying to belittle the UK for its close ties to the US ... merely to stress fact the UK is having more severe economic problems with the subprime crisis than most continental EU mature countries. This is due to more aggressive bank lending practices and complex financial products similar to America, but fortunately not on a scale of the US.
The UK ties to America are a good deal deeper in many respects than most continental EU countries. I'm not saying this is good or bad but just an observation of a cultural difference that also influences economic policies as well.
I repeat that most of the problems in the EU have been due to the spread of the American subprime contagion with all its effects psychologically and directly ... reflecting reality of the flat, tightly connected financial world we are in today. In the US economic crisis situation, those closer in sink with US financial products and aggressive use of leverage (e.g., UBS of Switzerland, Bank of Scotland, English banks, German banks, Iceland banks, etc.) simply seem to get hurt more.
I greatly admire the British. As for UK economic performance being superior to other EU countries, I would say based on the facts I've studied, and setting aside the current crisis for a moment, past UK performance has been fairly comparable. Without going into lots of details, here´s some recent overview evidence of that from a 2007 OECD study showing individual country Actual GDP per Capita as a Percentage of the OECD Average in 2005:
Denmark........105%
France.........102%
Germany........105%
Italy...........96%
Netherlands....120%
Norway.........164%
Spain...........94%
Sweden.........110%
Switzerland....122%
UK.............110%
Canada.........121%
U.S............144%
Could go on with job generation and other comparative macro-economic data, but you'd find that the UK is performing very respectably in the middle range of most EU countries ... with an exceptional performance and reputation of London as a most enterprising financial center bar none ... although in the process of being a bit scarred by the current financial virus abetted by the States.
The primary thrust of this blog is to get into an exchange on the root causes and solutions to recurring financial crisises in the States over last 28 years and to learn something from others, e.g., their economic-models and how to do certain things tenhnically better in the US. None of us expects everyone, and perhaps often nonone, to agree with a particular analysis put forward. But we don't mess up the discussion about Nazi pasts and corrupt societies. Most of us, including me these past nine months, have responded to Dr. Reich's essays employing historical economic facts plus deep, maybe sometimes opinionated, cause and effect reasoning and conclusions. Occasionally, we do it worse than other times.
All respondents here, in general, have as much of a distaste for wild generalities as you profess to have. Again, apologies if I've offended you.
Looking forward to possibility we might engage each other more substantively on issues Dr. Reich raises so well about the US social-financial crisis. Respectfully agreeing to disagree is not a problem also.
Frank Thomas, The Netherlands
Frank, Art and Others:
I heard President Clinton on the David Letterman show from a few weeks ago (stored on my DVR) espousing the idea that private investors be given a chance to invest in infrastructure and alternative energy vehicles set up by government instead of just investing in Treasury bonds. Interesting idea. Instead of selling US debt to the world and thus added to US national debt, private investment money would be channeled into equity investments set up by government. In this way the US government could leverage small expenditures and attract private capital to accomplish its ends of job creation in productive fields. Investors would be using their money to fund needed industries instead of trying to make money off of money with derivatives etc.
I envision that the government would have an equity stake in these investments and also management responsibilities. Whether or not they are spun off and totally privatized at some point in time would be a subject for people more erudite than me. However, a perpetual return revenue stream I don't think is a bad idea. I think public-private partnerships for real job creation is the way to go that would minimize additional deficits and debts and leverage what monies the government invests thus minimizing debt creation.
This is as opposed to the model wherein government sells bonds (debt creation) and then gives the money to corporations in contracts, cost plus or otherwise. In this way both the government and private enterprise share the risks and rewards. And you create a society in which "we are all in this together" instead of the "me first" society we presently have. Also the current model makes the entire nation of taxpayer citizens into a bunch of serfs indebted to foreign capitalists, and when the Ponzi scheme of borrowing even more money to pay interest on the debt comes to an end, which it inevitably will, our children and grandchildren will be left holding the bag.
I think there are a lot of good aspects here from job creation to debt minimization to solving the global warming conundrum to shared risks and rewards to the US government taking a fiduciary responsibility to its citizens to fiscal prudence.
Your thoughts?
John,
Government partnerships with industry for combined major infrastructure and commercial developments are done frequently in Holland. Sometimes these transactions involve the governmemnt taking an equity cash stake with a preferred return and/or the government acquires its equity share in the form of contributing land to the project. There are often special provisions allowing the government to recover sooner at a profit its initial equity investment so that taxpayer funds can be reinvested elsewhere.
I will get more details for you of a typical transaction, time permitting.
Clinton's idea is not new in Europe but has many possibilities in America if structured well. Great to see the ideas flow forth how to finance our Recovery!
It´s a powerful variation of an earlier suggestion I made way back to Dr. Reich about floating, on attractive terms, US bonds (as opposed to State or municipal tax-free bonds) to the general public and firms to fund an `Invest in America´s Education´ program for all the States. There is a Debt created to US firms and citizens (not China) who would receive a monthly (tax/free) interest payment (not China).
Ted Harvey,
I'm aware of Niall Ferguson's books but have not read "War of the World" but shall do so at your behest during Xmas vacation with family in NY.
I must say my generation has had its diet of experiencing and reading about violence, genocide and fanaticism. I'm curious how Ferguson relates this war history to the continued decline or assent of Western civilization as we know it today.
I have a recommended reading for you. It's a recently published book by one of my favorite British historians (and historian of the arts), Simon Schama -- now connected with Columbia University in NY.
His book is entitled, "The American Future: A History." (I enjoyed his book about the Golden Century in Holland ). He explores the American story and how much is at stake now. He uses fascinating research on the down-to-earth personal histories of well-known and not so well-known Americans. He thinks too much historical writing engages in "generalities."
He speaks positively of America's considerable vitality -- especially in crisis times -- to rediscover itself and to rid itself of mistakes/misdirections egregiously undermining its ideals.
Frank:
First, major hurdle; how do you extricate politics from government?
Corporations are set up with groups of shareholders, initially, with a common objective, albeit somewhat of a selfish one; to make profits for those shareholders and to beat the competition in the marketplace to maximize those profits. That there may be some benefit to society is a plus but it's ancilliary to the primary goals.
Commencing operations, a corporation must secure financing and then set out to manage those financial resources sufficient to create profits. There is a limit, to some extent a hard limit, on the available funding through stock sales and borrowing. Therefore efficient spending is critical. With a funding mechanism which is, in theory, unlimited, efficient spending becomes less critical in fact, even though not in theory.
I have suggested that if government provides funds with no management control the government becomes nothing more than an open checkbook with few, if any, checks and balances on funding limits. In your proposal you would give government some degree of management control but how does that work?
First of all we will need an agency, likely a number of them, to coordinate the various business interests of the goverment. These agencies will be directed by Presidential appointees. We can follow the Fed model and give them control for a period of time with no fear of removal but what happens if we appoint a real dud. We're stuck for that term, give or take an impeachment ability.
If the agency(ies) have management control could they then direct or influence the individual CEOs at the helm of the various corporations? Could the CEO positions become political pawns?
In the private sector, CEOs and Boards tend to stay as long as they are doing an acceptable job and the shareholders are happy. With a change in presidential administrations occurring at least every eight years, if the change involves an opposing ideological shift, we could see major changeovers in the hybrid corporate/government management, totally unrelated to performance. This could be at the agency level, depending on term structuring, and/or at the individual company levels via government BoD actions.
Consider, and shudder, at a McCain administration where the decision is made to plug the control of all these quasi-public companies under the tutelage of VP Sarah Palin.
Now you can argue that the Board is elected by all the shareholders and thus a semblance of balance is operative but you know that Board members representing the greatest number of voting shares trump all other shareholders. Add to that the government would be the primary funder and would exert undue influence even if a minority shareholder in total.
The next, and perhaps biggest, issue is competition. We have Company A which is a quasi-public corporation and Company B that entered the same market as a totally private corporation. Competition stiffens and more investment is necessary to increase productivity and profits for all firms in this market. Company B has severe limitations on securing the necessary funding. Company A has a steady flow of resources. Eventually what happens?
Government can play a big role in offering seed money for potentials where the investment/payback picture is highly questionable and much research is needed. It can also serve an important role where the quasi-public companies are primarily regulatory in nature; the Federal Reserve. Freddie/Fannie is a classic example of what you propose, even though it wasn't intended as such originally. The implicit government guarantee gave F/F an unfair market advantage, with undue influence over market actions getting them deeply embroiled in the mortgage mess. Admittedly the management control is missing but Congress did have the ability to legislate heavy oversight and failed.
What happens, politically and actually:
If prices need to rise in an industry controlled by quasi-public companies?
If layoffs are necessary to maintain profits and dividends?
If regulatory measures are needed which would significantly impact a quasi-public industry and endanger profitability?
If a new administration decides to reduce funding for quasi-public firms and/or agencies?
If a completely private sector firm begins to takeover the market share? Do we ratchet up funding to beatback the private sector firm or do we allow the quasi-public firm to fail, taking down the private investors as well?
I would argue that there are industries where complete government control might be beneficial, even though less efficient. The power generation industry is one. I don't see a lot of social benefit in having the power generation industry being privately owned. We exert some pricing control through PUCOs but the results are often questionable. Being responsible to private owners, major investments are limited by rates of return on investment. Potential investments in nuclear power are borne by customers, including projects started and then stopped. In most markets those customers have no competitive options and competitive options is what keeps the market operating fairly and efficiently.
Again, where economic, profitable payback, barriers exist the government can effectively assist in research and start up funding. Can't disgree that when forced to bailout a company or an industry the government should exact a pound of flesh, if only as punitive. I just feel that altering the free market process too much can result in severely detrimental results. And all for a new revenue stream for government?
I agree that for specific projects, infrastructure and others, a quasi-public structure could be beneficial, especially if these are short term in nature. Taking an equity position via dividend paying preferred stock, generally implies no management control and is more of a lender position with a guaranteed return, with perhaps a gain at the end when reaching final settlement but valuation becomes an issue. It can also raise the specter of lawsuits in a very litigious culture. In infrastructure projects the government would have dual roles with conceivable conflicts of interests. They would be both part owner but also the inspector and final arbiter of compliance, possibly leading to decisions that would impact the ownership aspect and the returns.
I would also agree that quasi-public companies could start off adhering to your heirarchy of priorities:
1) Employees
2) Customers
3) Shareholders
But if the emphasis is to be on revenue streams for government, and likely at some point the price to be paid will be tax rate reductions, then the priorities become extremely interchangeable in application.
The real danger in providing too much security for the populace is eventually "security breeds apathy". To the best of my knowledge, that quote comes from me. It came to my mind many years ago when I worked in a union shop as a union member.
Art said, "Your arguments also seem centered on, we can't grow without growth in energy, and we can't have growth in energy, therefore we can't grow. Your basic premise is one of doomsday."
That's it in a nutshell.
Energy produces food, water, shelter and clothing. Fixed energy inputs mean fixed food inputs.
If we discover a new energy source that is more abundant than oil and as easy to consume, then growth will begin again. Science has not discovered this energy source yet.
We need that energy source years ago. You suggest we'll have it some years in the future. whatever it is, it's likely going to take decades to scale it up anyway. That doesn't solve our problems right now. We're in an energy decline now, not 20 years from now.
weaseldog:
Decline is a journey. Zero is a termination.
-0- is a beautiful mathematical anomaly, just like -1-. Applying all exponential possibilities they both result in themselves.
Art, nobody is going to prison over this. No matter whether they committed crimes or not.
Greenspan, Paulson and Bernanke are just the public faces behind the mob of greed.
No one went after the banks when they were committing crimes against other nations, under the IMF banner. You don't arrest people when the crimes are institutionalized. The only way they'd go down is if they screwed their fellow bankers.
Derivatives are time bombs. They must explode during times of contractions. That's how they are designed. they make good money during good times, and generate massive losses during bad. there's no free lunch. If there are winners, there must be losers. those using derivatives had their fun, made their money, now it's time for the taxpayer to empty their pockets and cover other people's bets.
You said, "The reason that the private sector has not invested more heavily in wind and solar, etc. is the economic payback isn't there. Alternative fuels, currently, must still compete with oil and electricity. The prices of those become the competitive determinate of pricing any alternatives and establishing potential profits."
Oil and gas are burned to build and maintain the infrastructure for alternatives. When the price of oil goes up, the price of construction increases, raising the cost of implementing alternatives. When oil triples in price, the cost build and ship windmills triples.
I've enjoyed your admonishments about how wise people often make what seem to be greedy or irrational decisions, because they have more knowledge than other people.
Situations where I have observed this phenomena.
1. Adults telling children this.
2. People say this, because they don't want let on that they have no clue what they are doing.
3. Backroom deals and sometimes criminal activity is driving the decisions.
4. People know they are doing the irrational thing, but they want to do it, and need to rationalize it.
In theory you could be correct that Paulson is making wise choices based on information that is superior to that of other mortals. I can't think of a case in politics or high finance where this has necessarily been true. I've seen plenty of case where it was asserted this was true, but there is no way to prove it one way or another, just competing rationalizations.
I find it difficult to follow your lead and respect and believe in someone, just because they are standing on a taller stool. I need more.
Weaseldog,
Have you aked yourself seriuosly what your goal is in raising the possibility humankind is fast coming to the end of its ropes?
I've enjoyed your intellectual questioning of conventional thinking in the face of certain scientific realities you focus on such as, "The law of diminishing returns with respect to food, energy supplies to keep up with demand, etc."
This begs the question, should we just give up and fall asleep? The answer by most humans will be , NO. Eternal optimism and innovative resilence will win the day. That's my realistic optimism.
You want PROOF, now. Good point! But when you combine that question with assertion things are falling apart in 20 years, you compromise your credibility as a rational based realist.
As I've said before, we have our current oil-gas reserves which will be adde to -- granted at much, much slower rates the next 40 years at say a 4% growth rate annually the next 20 years and declining thereafter -- to service 20% of world needs the by 2048; and IF at the same time the following events happen, which they WILL:
1) immediate near term conservation ideas (efficient lamps, lighting, cars, trucks, etc.) effectively contribute 10% to world's total energy supplies annually within 10 years (2018) and 30% within 40 years (2048)
2) alternate fuels (coal gasification, algae conversion, solar, wind energy, biofuels, hydrogen conversion, etc.) contribute 30% to world's energy supplies annually within 15 years (2023) and 60% in next 40 years (2048).
If you look at the math of this compared to a 5% annual growth in energy requirements over the next 40 years, you will find that supply-demand forces are in balance.
The question remains, will points
(1) and (2) above occur. The replacement energy growth assumtions above are Conservatively stated ... so I remain optimistic we humans will avoid the Bread and Tent lines on bicycles in 2048.
Lease prove me wrong, not with general doomdays assertions, but with math logic. I'm prepared to be scientifically convinced if you're up to the task. And I mean latter with all respect, as you know!
2)
Frank, you said, "You want PROOF, now. Good point! But when you combine that question with assertion things are falling apart in 20 years, you compromise your credibility as a rational based realist."
I've never argued that things are going to start falling apart in 20 years.
I've been making the argument that the damage began in 2001 when world oil supplies experienced their first disruption, caused by a decline in the world's major oil fields.
We climbed out of it temporarily, when Saudi Arabia made a dramatic, expensive yet short lived attempt to boost production.
Did you watch the Physicist Dr. Albert Bartlett video I linked earlier?
I've also linked several articles about oil production.
1. Conventional Oil production appears to have peaked in 2005.
2. All liquids production, appears to have peaked this year. The IEA in a preliminary report says we're entering a 9.1% per annum decline.
3. World oil exports are in decline. Oil producing nations are increasing consumption as production flattens or declines.
The reason that I feel this is important enough to talk about is because without an accurate understanding of our problems, we are unable to find the optimum solutions.
Our nation is sleepwalking into a crisis. We won't invest in alternatives, not because of price, but because the national dialogue centers around the idea that the USA has hundreds of years worth of oil left. So long as we as a nation believe such nonsense, we'll continue laugh at people that want to invest in any form of renewables.
So long as we pretend that all energy sources are equal, we can't make rational choices between them. Not all denominations of money are equivalent, likewise not all energy sources are.
Ultimately the world does not run on money. Money simply trades energy around. The sun doesn't shine because we're putting quarters in a meter. Plants do grow because there investments in the market are doing well.
I think we all agree on this, but there's a point where we're taught to engage in magical thinking when it comes to money. We've been trained to think that it changes the rules. That somehow it exists outside reality, yet shapes it.
Innovation keeps getting brought up. But innovation so far has only allowed us to burn increasing quantities of energy for increasingly dubious activities. Innovation has never produced energy out of nothing. It has never taken our basic understanding of energy out the the 19th century. the Laws of Thermodynamics were first described then, and they stand today. Every advance since, has proven them, rather than broken them.
This is the video that I posted earlier on the basic math behind Peak Oil. It's actually the math behind countless scientific principles...
Physicist Dr. Albert Bartlett On The Exponential Function And Growth
A couple of videos that discuss and explain the Peak Oil Issues.
Peak Oil Chat
Frank, on your points 1 and 2.
I think you need to be a bit more aggressive.
Because our technology has improved so immensely in the area of oil extraction, we're able to pump fields dry faster that Dr. King Hubbert anticipated. The Peak in Conventional Oil extraction came in 2005, five years earlier than he predicted.
The IEA predicts a 9.1% per annum decline rate.
The North Sea Slope is declining at 15% per annum. The Canterell field in Mexico is declining at about 14%.
Can we afford the alternatives once the decline is obvious to everyone? What will we sacrifice in declining economic and industrial environment, to ramp these up? Who will make the sacrifices?
I personally think that our best alternative energy source is wind power. It's the only one with a provably high EROEI.
But if it is the winner, then we're going to be living on a fraction of the power we enjoy today.
Energy units can be counted, much like money. there are sites that can tell you BTU equivalents for different energy sources. When trying to grasp the scale for myself, I used the conversion units published by the DOE.
Take a look at the BTUs in oil and other sources, and compare to our consumption of 23 million barrels a day. The data is easy to find using Google.
As to net energy growth, 2-3% has marked our best economic years. It doesn't seem like much, but that's a doubling of consumption every 24 to 36 years. And it's how we got to the levels we're at today.
Randy Udall on Peak Oil, Economics and Climate Change
weaseldog:
It should be apparent by now, but on the chance:
I am a cynic! My cynicism, however, is not one dimensional. I can look at a positive action or idea and apply cynicism and just as easily apply cynicism to a negative idea or action. Could I be an equal opportunity cynic?
Frank and John, for the most part proffer positive ideas and they see my cynicism. You assert negative ideas and see the same. In much less eloquent fashion you could describe me as a naysayer par excellence. Getting down to the nitty-gritty you could describe me as argumentative. I wear all those handles with great pride.
I am an anomaly in that I apply my cyncism optimistically and pessimistically.
As I told you before, I see most everything in shades of gray. To me there are no absolutes, save some in the moral's sphere. I disagree not to prove that I'm right or that I'm smarter. I try to poke holes in absolute assertions in an attempt to ask questions that the assertor may not have asked himself or that he may not have thought of.
I'm not an expert in logic but am a fair to middlin student of it and when I find folks employing illogical arguments I react.
I have a huge ego, I always have, but I'm long past the age where it needs to be constantly assuaged.
Now the opening statement of your recent post is interesting. Are you suggesting that someone should go to jail even if they committed no crimes? I would propose that up to now, as far as we know, neither Paulson nor Bernanke nor even Greenspan can be viewed as having committed a crime. My point about jail time was that should they, going forward with the bailout, become involved in a conspiracy of criminal activity - setting up funding solely for the benefit of their friends - they are at risk of being caught and if they are caught they risk jail time and fines. If you choose to pooh-pooh that, in your typical pessimistic way, perhaps you should do a Google search on "politicians now serving time in jail". There are a host of them around the country. I do realize that conspiracy to defraud is a difficult crime to prove but is has been and can be done. Just like with Abramoff it usually starts with a guy on the tale end getting caught for something and then he begins to unweave the embroidery to expose many others. Neither Paulson or Bernanke appear to be in positions where they would want to take the slightest risk of that outcome.
Enjoy our dialogue but at times your extremely negative attitude about everything is peevish.
You complain, over and over, about the IMF but fail to acknowledge that they have success stories as well. We don't live in a perfect world and your chickens and veggies and pantries will not make it so. There are plusses and minuses to most things in this world and very few entities are all good or all bad. Granted those with wealth, or access to it, fair better than most of us but that's life; nobody ever said it was fair.
Many have faced or are facing serious dilemmas yet those many react in entirely different ways. I, too, have a wife with a serious illness, in fact she likely doesn't have a lot of time left. I, too, have been unemployed with a pretty hefty overhead. I refused to let life get the better of me. I refuse to ignore optimism and begin looking at the world as full of demons leading us to Armageddon. I am the master of my fate, whatever that fate may be, and it will likely be determined by what positive effort I deem to put into it. I had a heart attack at 40; an aortic aneurysm at 64 and my wife's difficulties. After all of which I went back to living my life as I see fit. I smoke, I drink alcohol, I'm somewhat overweight, I get no exercise and I know I will not live forever. Since no one can assure me that changing any of those will guarantee me a longer life, I go along merrily.
Derivatives are valuable tools at times. No doubt they became floating crap games but we have no way of knowing the full impact this current problem creates with them. Most of the numbers we see are aggregates of the total population but no one is, at this point, breaking out the effect netting is having to get to the root total. There's going to be some losses, likely lots of them, there will also be many gains for some holding them on the right side with the right bank or insurance company. Whether there will be the political will to bail folks out on those remains unknown at this time. Once again, derivatives are not all good but they are not all bad either. The human element, that everpresent destroyer, abuses and misuses the phenomenon. Yes, we may all end up paying for it but sending a bunch of folks to jail will not ease the pain much. There is a price for living in a society.
For one steeped in math your equation of oil prices tripling = tripling the cost of building and distributing windmills is a little faulty. Maybe you don't understand business cost structures that well but more likely it's your doomsday outlook driving assertions without facts.
Don't know that I can argue with any of your listed
"observations" but are you contending that the list is all-inclusive?
In theory you could be correct that Paulson is making wise choices based on information that is superior to that of other mortals. I can't think of a case in politics or high finance where this has necessarily been true. I've seen plenty of case where it was asserted this was true, but there is no way to prove it one way or another, just competing rationalizations.
I copied this because it struck me as beautiful in its simplicity and inane in its scope. Likely you can't think of any because you possess neither the knowledge or the experience of those who have been deeply entrenched in those fields for years. Were Dr. Reich to submit a comparable assertion, I would have to give it credence. Neither you nor I are equipped to walk in Paulson or Bernanke's shoes and thus our criticisms and analyses fall far short of a complete judgment of their actions. We can pick them apart; we can suggest alternatives; but if we don't have the knowledge embedded in their brains from years of studying and dealing with the current types of problems we can't possibly be sure our arguments are valid. We can't know whether their arguments are rationalizations or the result of expertise far beyond our comprehension.
The real reason you can't prove it one way or another is that we generally get one shot at solving problems and we can't reverse the process to see if another alternative produces better results. Ergo, one man's definition of a rationalization is another's exercise of sound reasoning.
One thing you will learn as you get older is that whether you accept the decisions of others or not, those on the taller stools usually have the power, by virtue of the taller stools, to effect answers and you do not. So you can pray to a higher authority or you can accept that maybe they made a bad decision which may have appeared as the best decision at the time.
At some point you have to trust someone.
Art, there is a long list of politicians going to jail for committing crimes.
There is also a long list of politicians that clearly committed crimes, but were never called on it.
Then we have anomalies like Tom Delay who've been convicted and sentenced, but they may never see a cell.
I believe that Paulson has committed crimes. But so long as he's handing out the dough, I believe that he's untouchable.
I provided a link earlier that reports that the bankers involved are mostly just keeping the money and not using it to underwrite lending. The article references articles from that Raving Lunatic Asylum, the Wall Street Journal, which interviewed the actual banker that are receiving the money. Do you think that Paulson is being kept in the dark about what they are doing? That they are lying to him and grabbing his copies of the WSJ before he can ready them?
Or does he know, and he continues to lie to Congress?
Or, is he so stupid that he doesn't know what any of it means?
The news reports that Paulson has had extensive dealings with the bankers receiving the bailouts and that we are paying the bankers to tell us how much money they need and to decide who gets it for what purpose.
No, we never have to trust the likes of Paulson. We simply have to live with their decisions.
Now, I'll repeat I prefer your plan, or Robert Reich's plan over the current situation. But I can't pretend that Paulson's actions are an implementation of your plan. I believe that he and his friends are stealing from us.
The IMF has done a wonderful job of getting free money for the major banks. Otherwise, there isn't a lot of good that they have done. They've bankrupted two continents and destroyed the lives of hundreds of millions of people. Unless you want to use the John Wayne Gacy analogy that he was pillar of the business community and made children laugh.
Art said, "We can't know whether their arguments are rationalizations or the result of expertise far beyond our comprehension."
Outside of the folks that are receiving this cash to fund lavish lifestyles, you're one of their few defenders right now.
Though Robert Reich isn't calling Paulson a thief as I have, he's made it clear that he believes that Paulson is making bad decisions. Do you think this because Paulson is so much smarter that Robert Reich, that Reich can't understand his decisions?
If I have a trust scale, Robert is climbing it, whereas Paulson is still at zero.
I disagree with Robert about many of the things he writes, but I believe that I understand why we differ.
With Paulson all we hear is, "Give my friends hundreds of billions of dollars with no strings, or they'll crash the economy."
As Paulson the lobbyist (previous job), was bribing politicians to pass laws to make the is crisis possible, this has a strong appearance of extortion.
So I'll sum this up as, I trust you and Robert Reich, more than I trust Paulson. I don't believe that he's doing anything mysterious. He's simply stupid or a crook.
frank thomas I think you will be intrigued by the Ferguson book. I'm no fan of his - especially because as a fellow Scot I'm repelled by his inferiority complex over being a Scot. However, I must acknowledge that his book is of the highest intellectual order.
I hope I do justice do his thesis when I say that he argues that the 20th century was so especially violent because of the interplay of three factors 1. The presence of ethnic minorities in communities/states 2. A lack of proper political representation of those minorities in the community/state 3. Periods of great economic change impacting on the community/state (interestingly this change may be overall 'progress' or decline... it's the change that is the salient factor.
There is a wonderful, really wonderful trick he plays in the opening of one chapter with a play on a USA leader and the leader of another country in the 1930s... see if it catches you unawares and makes you chuckle as it did me.
Thank you for the Simon Schama recommendation, but I have been disappointed by the television programme 'of the book' that has been showing on BBC. I'm afraid that for me he betrayed just a tad too much of the power of the glowing convert as an immigrant to the USA.
I'm saddened by his lack of objectivity on this one. His previous works had hitherto impressed me, especially with the way he took a truly British, and not English, perspective on British history.
A sad, tiring and increasing aspect of the decline of British culture (as in England-led British culture) has been the undiluted adulation and blind-to-many-faults perspective that many of the British/English commentators and influential cultural leaders have adopted with regards to the USA.
This was most tragically personalised in the personality of Prime Minister Tony Blair - the classic case of a politian put into power with so much genuine cross-party electoral hopes, only for it to end in him taking Britain into more wars than any other British Prime Minster, sometimes at the behest of the USA. On the way to his demise he managed to galvanize many millions of people to come anto the streets to protect against the lies and chicanery of his Government (over the non-existent WMD in Iraq and the subsequent illegal and immoral war).
Art, thinking about your insistence in faith in science without understanding, keeps triggering a song in my head.
It's annoying...
"When you believe in things that you don't understand,
Then you suffer,
Superstition ain't the way, yeh, yeh." - Stevie Wonder
weaseldog:
You get so wrapped up in your own dogma.
I don't need to understand science to marvel at the advancements it has brought us.
I don't need to understand science to know that many still go into the field and if it was as done as you suggest, why would they do that?
I don't need to understand science to be able to read books, or articles, which point to promising research that is being done.
I don't need to understand science to be aware of its potentials for solving problems. What did we know of DNA twenty years ago? What did we know of space 60 years ago? What did we know of oil by-products 75 years ago? What did we know of heart disease or cancer or AIDS 40 years ago?
Science advances because there are unanswered questions. In certain venues progress is less and in others progress is more. Often progress is dependent on the need, the impetus and the resources.
Around the world we are seeing miraculous discoveries on a regular basis. It seems peculiarly myopic to take a stance that we know all we can ever know.
As the debate lingers you present a posture, more and more, of a frustrated, insecure, faux-intellectual. By your own admission you are an amateur scientist and it would appear an amateur mathematician. Exponential computations have often been used to predict doom but to truly evaluate all the affecting variables and the interactions there are higher levels of mathematics to employ. You appear well read, a good thing, but if you read and gain knowledge from a predefined viewpoint your resulting hypotheses can be skewed.
For instance, you have referenced two articles exclaiming that banks are using the bailout funds for acquisitions and you labelled them as proof of a horrendous act taking place. In fact both those articles also posited that it may not be a bad thing. There are pros and cons to the issue.
No one here has a special license for predicting the future. You see clouds and forecast thunderstorms. Others here see clouds and forecast cooler weather with the chance of a drizzle.
You harangue that no one is looking at the problems, that no one is focused on resolving population and energy issues. If you look at, and it is apparent you have, there are numerous academics and scientists writing about the issues and doing research, someone is looking into the problem. Some of this research may even be funded by governments.
Leadership, especially political leadership, often dictates that some, even critical, issues be muted so as to avoid a panic.
What would you suggest that our world leaders do about overpopulation? Should they give speeches about the pending doom if we don't stop propagating? Everyone then looks around and doesn't see the problem and the politician is classified as a raving idiot and he loses the voice he had. Should leaders undertake efforts to decrease growth rates? Are they not doing that in third world countries?
Now Doc Bartlett would consider a focus on population growth in third world countries only, as immoral. Is it really? From where did most of the recent advances in healthcare and disease control in third world countries come from? You can argue whether the developed world is doing enough but they are taking some of the spoils of their selfish use of resources and directing it to solving third world problems.
To paraphrase The Doc's example: You have two bottles; in one you have a deadly bacteria doubling every minute and in the other a similarly deadly bacteria which is doubling daily. Where do you direct your initial efforts for steming the growth?
As Frank and I have tried to argue; you have a given rate of decline in available energy reserves at current or projected demand levels. If you can slow the projected demand, the reserves last longer and the rate of decline diminishes. If you can add to the reserves, in whatever increments, and demand remains constant you have altered the rate of decline. If you can add to the reserves and slow the demand the two work in concert to slow the rate of decline, possibly at exponential factors.
I enjoy song lyrics and movie lines and quotes from historical figures. I find many that contain much wisdom. As a matter of course I don't get hung up on them to the point of emotional distress. Sometimes too much thinking can be a bad thing.
Art said, "For instance, you have referenced two articles exclaiming that banks are using the bailout funds for acquisitions and you labelled them as proof of a horrendous act taking place. In fact both those articles also posited that it may not be a bad thing. There are pros and cons to the issue."
No, it's just proof that the bailout isn't being used for the purposes that you and I wished it were. It's not being used to solve America's economic problems.
Now maybe you're right. Maybe doubling, tripling or quadrupling America's debt over the next year is a good and wise thing, even if it doesn't fix the credit problem. We'll see.
Art, recognizing what has been achieved with science isn't the same as having faith that it can perform miracles.
Perhaps part of my problem is that I've learned that if I don't anticipate problems, when they occur, I'm not prepared. And when occasional setbacks occur, no on comes and wipes my bottom and stands me back up.
Further, I spent a lot of my childhood with grand parents that survived the Great Depression as adults. They instilled in me the idea that I have to count on myself first, and if someone else helps out, that's a bonus.
So the idea that I should pretend that I don't see danger signs and to act as if it's a certainty that science will perform miracles for me at any moment, seems very strange.
Should I step in front of buses because science will find a way to cure death?
If science finds a way out of this delimmna, then I think it's unlikely to change my life, right now. So why pretend today it's happened, if it may not happen for twenty years? My wife might buy a winning lottery ticket some day, but I don't think I should spend that money now or live my life like it's a certainty.
Not all problems have solutions. Sometimes the only way to solve a problem is to redefine it. I believe that't the case for us.
And we won't solve the population issues rationally. It's not our nature. Mother nature will do it for us.
wease:
Art, recognizing what has been achieved with science isn't the same as having faith that it can perform miracles.
Having faith in something can come from two aspects. One can have blind faith, predicated on nothing tangible; no history or provable examples that the object of that faith has ever effected anything. Or, one can view the history of a subject, a process, and see the seemingly miraculous results it has created at various times and then, based on that history, develop faith that there is more to come.
I do not subscribe to any blind faith auras. I do, however, based on empirical historical evidence, have faith in many things. I have faith that even after numerous consecutive cloudy, rainy days, the sun will eventually shine again; that after horrendous storms and devastion, things will eventually be rebuilt and civilization will continue.
If I had no history of these things to rely on, or was unaware of that history, then my faith would be blind faith and thusly could be labelled foolish. Faith of either kind could end up, in hindsight, seeming foolish but what is the alternative?
You and I exhibit the difference between defeatism and optimism. You see doom and prepare for it. I see hope and believe in it. If your perspective is more correct what will you have achieved? A few more years of a struggling life? Your goals of self-sufficiency in the face of disaster are admirable but I don't believe that you grasp the full societal impact of your vision of the future.
You may be successful with your chickens and veggies and pantries but the pantry supplies are not infinite, they will run out. Without energy, providing antibiotics and nutrients, your chickens could be at risk of disease that might wipe out the flock. Your veggies could be susceptible to a similar blight or to ravaging animals.
Even if you can establish a commune of like-minded individuals, there will be bands of "indians" and outlaws who didn't plan as you did and will seek to continue to exist by robbing, even murdering, from those who had more foresight. Law enforcement responses will be much like in the pioneering days, they will arrive in time to bury the victims, not in time to save them.
In that kind of return to days of yore, you will find that, absent science, progress will be fleeting.
My grandparents and my parents lived through the Great Depression, as adults, and actually fared pretty well. I don't have a recollection of any lessons they passed on to me but somewhere I developed the idea that a great deal of my life achievements will be due to my own efforts. At the same time I came to understand that I cannot make it soley on my own volition. I need scientific advances to get me past illnesses. I need employers willing to pay for my labors in order to subsist and improve my standard of living. I get along fine alone but camaraderie enhances the life experience. To be sure I may be an isle but I am far from an island.
Now I wish no harm to befall you but the bus idea has merit. It can serve to further scientific research into curing death and it reduces the population.
I don't recall where any of us asserted that science or any other phenomena was going to change things right now. The assertion has been that improvements or solutions will be found sometime in the future. You deal with today's problems today and with the help of other influences you strive to solve tomorrow's problems tomorrow, even as you work on them today. Your doom prognostications are not a problem today even though the trend lines indicate a sooner tomorrow.
Though it may be true that all problems are not solvable, at any given point in time we are never sure of which ones are and thus we carry on seeking solutions, often in light of an apparent possibility of futility.
Nature is both a blessing and a curse. We are forever seeking to control nature's barriers while nature is aiding us by providing an extension of time to continue our quest.
Having spent most every night in a nursing home for the past ten years, I have happened upon the realization that while life itself is important, it is quality of life that makes it all worthwhile. Watching many biding time, merely exisiting, often under humiliating conditions, I quickly realized, for me, hanging on awaiting the grim reaper is senseless, a waste of time and energy. Paraphrasing; "Give me quality of life or give me death!".
wease:
There you go again. Black or white, right or wrong.
I do agree with you and Dr. Reich and many others that this "fix" should be done with a very firm hand. When doling out goodies one always wants to be in control. But there are limits, even though those limits might result from ideologies.
To put too many restrictions on the use of these funds there may be a rejection of taking the funds. Now a part of me says, ok, you don't like my terms, tough. Go your way without them. Where does that leave us?
At the outset of all this, Dr. Reich, among a whole host of other experts, pointed out that the problem wasn't liquidity or solvency but "trust". If you don't "trust" the ability of those seeking loans to be able to repay them does an injection of "free" funds all of the sudden force you or even advise you to make what you consider unwise or risky decisions?
The objective is to get the marketplace operating as usual again. There are multiple paths to achieving that. Granted it would seem the easiest way would be to force lending but that could leave us nowhere; to allowing the market to eventually sort out the problem by virtue of few takers. Or what if those taking the funds follow the mandate of the federal government to make loans and those loans end up defaulting? Have we affected "trust", positively? Have we gained anything?
If these funds are taken and used for acquisitions what happens? No doubt it seems a clear violation of the intent but if the grander scheme is to get markets working again, as opposed to just making risky loans, what happens? One possibility:
Banks acquire troubled banks, essentially consolidating the industry; this has to be watched carefully and may be a future problem requiring remedy, but the acquiring bank builds a larger, conceivably, stronger balance sheet. The current stream of earnings of both banks is anemic; due to potential failure of the acquired bank and the loan inactivity of the acquiring bank.
We now have a combined entity with this bigger, stronger balance sheet and its stock price will be greatly dependent on the return on assets that the combined entity earns. This is going to require higher overall profits. Maybe these entities would prefer to get into building automobiles or Plasma TVs but they have no expertise in those markets so it seems an unlikely alternative. The only experience they have for earning profits is by making loans. Eventually this means to maintain stock prices and shareholder welfare they will have to start making loans. Is this not the ultimate goal?
Admittedly we have gotten from one side of the city to the other by using the bypass instead of the direct route and this has cost us time and has wasted some money, we used more gas, but we ended up on the other side of town, our objective.
This scenario no more guarantees success than the forced loan scenario but it does allow the market to manage its way rather than the government dictating the route. To those with a more conservative view this is preferable.
If loans are forced and even if they prove satisfactory, at some point the government stock has to be repurchased, making a dent in liquidity, and also returning the banks to operating on their own. Are we sure that they will have found a new "trust" or will they revert to a very restrictive loan policy tightening credit once again?
All of this may be a hallucination on my part but it could also represent variables that only those experienced and knowledgable in the industry are truly aware of. It could represent why critiquing from the cheap seats is so much easier.
From your perspective it is much easier to just take the attitude that they are all crooks or connivers only looking out for themselves. In a larger sense what benefits do they derive if the system fails to shake itself out. Yea they have some more bucks, on top of the fortunes they already have, but to what avail if the whole economy tanks for years? If the credit crunch fails to lessen they won't even be able to take advantage of leveraging to make even more money.
Art said... "You may be successful with your chickens and veggies and pantries but the pantry supplies are not infinite, they will run out. Without energy, providing antibiotics and nutrients, your chickens could be at risk of disease that might wipe out the flock. Your veggies could be susceptible to a similar blight or to ravaging animals."
And I'm the pessimist? :)
I'm following the example of folks that survived and thrived through Perestroika and Argentina. Total extinction can't be prepared for. But shortages and rationing can be accounted for.
As to faith and blind faith. Thanks for clarifying that. Science has recognized certain laws that are still immutable and defines the limits of all of our technology. Further it gives us the tools to measure, and make comparisons. It's from these that I derive my outlook from.
I never once argued that I was going to go hide in a bunker. I think you have decided that my viewpoint is something completely alien to the truth. You've invented a persona for me, then ignore anything I write that counters it. I've written about Argentina, do you think this nation is devoid of life? Humanity is extinct there? It isn't. One of the lessons learned there and during Perestroika from the USSR states is that community is necessary for survival. One blogger writes that the isolated farmers suffered the worst atrocities, as gangs of thugs took their time there, spending days sometimes making the families suffer.
You decided I'm a nutcase, then you formed your own ideas about what i think and believe. No wonder we can't communicate.
You can measure matter and energy just as you can currency. Except that in currency, you can spend money you don't have. In energy, this isn't possible. the rules are stricter and Nature doesn't have a loan officer you can quibble with.
As to your second reply. If we give banks money and don't give them rules or expectations, then why shouldn't they just use the money for bonuses and expensive vacations?
As to taking banks that are too big to fail, and making them bigger, while giving them more free money with no strings attached... It seems like having some kind of plan would be better.
As to your trip analogy. Let's say you need a package delivered. So you stop a stranger at a local store. You give them $50,000 in cash, the package, with no instructions. What outcome can you expect?
The bailout has no plan except to give away money. It needs a plan. It needs rules. Without a plan or rules, I expect the banks to use them to enrich themselves without worrying about the economy. Banks are supposed to only worry about their own bottom line. They aren't altruistic entities.
If you want the bailout to benefit America then someone needs to direct it and attach strings to the money. This is not happening and Paulson publically refuses to take this role.
This is all just smoke and mirrors to mask the negative assets of banks and financial institutions. Look for Sorbane Oxley to be repealed to allow banks to again have "positive assets".
Losers will be companies like AIG that should have filed bankruptcy. Under the goverment loan program all the loan money is going to the "banks" as payments on derivitive contracts. AIG lost itself in a backdoor additional rescue of FIRE.
If you want the bailout to benefit America then you better lobby to repeal it. I think we all know how corrupt and unconstitutional this is. Government can't solve our problems. That was tried and it failed (socialism). The republic was never meant to operate this way. The same fear tactics used to get the world sucked into the war on terror were used by the government and wall street to make us fear a market and economic collapse if we didn't do a 'bail out'. A minor market correction after the first vote down and no one had the spine to stay the course. So now they voted to sink America into bankruptcy, rob the peoples freedom by devaluing the currency and the country, and over-reacting and expanding the money supply in an unrestrained and mindboggling rate (700b, then 1000b, now >2000b). If we don't get doing a lot more bankrupcies, and drastically cutting gov't spending, there will be a run on the biggest bank (dumping of treasuries). Short term pain will provide time to let the competents innovate and create new jobs to replace the void left by the government backed incompetents. Alas we don't learn for as I write the zombie car companies are seeking some of your children's and grandchildren's tax dollars (that is if our children have any country left) and I'm sure by Monday they'll give us a list of disasterous consequences to letting them fail (they won't of course emphasize that the UAW was heavily involved in election ad campaigns - it didn't take them long to come to the trough). If Obama is a slave to these forces were all doomed.
wease:
You do go on. Those in Argentina and Perestroika were not suffering with no hope since resources were, are, available to turn the tide. Your scenario portends no resource recovery. Yours is getting by forever.
Won't argue that there are not delimiting science laws but perhaps reading a little about Andrew Grove and Intel will put some perspective on some of same.
Gotta run, will say more later.
I think we need more unemployment benefits instead of a second stimulus package. This would allow more folks to keep up with their mortgages and address one of the current banking problems directly without lining the pockets of the banks themselves.
Thanks Robert.
Dear President Elect Obama:
I'm writing in regards to the suggested stimulus rebate that may again be passed by our countrys' administration.
The past stimulus rebate payments were not received by a great deal of the voting middle class and non-employed tax payers, due to the interception of the bailed-out banking institutions, who were collecting on outstanding student loans and medical bils. Debts were being made until we got behind from lack of employment.
Would our administration look at this matter and maybe make an adjustment; possibly sending half to the people and the remainder to the institutions in hope of stimulating the economy.
GOOD LUCK!!!!!!!!!
THANKS
Hasn't any figured out the "smoking mirror"? What else is Bush and the boys up to while we are all focused on the great bailout? Of course it's just another way to rape the American taxpayer, because they know they won't have jobs in the next administration.
Dear Professor REICH,
Annyong haseyo! Greetings from Korea!
It is great for me to discover your blog (only yesterday).
Congratulations for being in the
blogosphere, giving me quick and easy access to your latest ideas.
I have been an avid follower and reader of your ideas, since you wrote the wealth of nations.
I always ask my students to read and review your ideas.
Now I am trying to get a copy of your latest work on super capitalism.
Meanwhile, I congratulate you and the people of the US in having a great new chance to re create the wonder that is the United States.
You have a lot of hard work ahead.
We in Asia will surely learn from your work and experience. We also must remind ourselves to continue working hard, being creative and innovative.
Your ideas continue to be part of my own work.
MARAGTAS S.V. AMANTE
from the Philippines
but now a professor of business
and economics, Hanyang University
in Ansan, Seoul, KOREA
Email: amante2008@hanyang.ac.kr
Dear Professor REICH,
Bail out has a specific meaning in finance and accounting, but it could also be creatively stretched.
What is needed is to adhere to the usual standards and methods that assistance or bail out should do.
Assistance should be temporary, should promote innovation and creativity, as well as efficiency, and not to repeat financial drains and enlarge holes.
Consumer behavior is quite rational and common everywhere.
People buy cars if they have the features they want -- utility, price, maintenance and gas costs. Vehicle consumers are not buying cars if these are gas guzzlers, inefficient, lack consumer friendly designs, and expensive!
Unfortunately for the car companies, production finance and marketing management need to consider these aspects, whether these are involved in the current problems.
Some one should go over the details and check where exactly the debits and credits are going, and how will these be reflected in a post bail out financial statement.
MAR Amante
Korea
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I am not a fan of Palin, but this issue isn't really liberal or conservative to me at all. I think Letterman was out of line.
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