Political Economy category archive

Investors met in Philadelphia.

The subprime crisis, which has claimed the jobs of three chief executive officers and prompted more than $45 billion in write-downs at the world’s biggest banks, may end up spilling into 2009.

“These events tend to become deeper and play out longer than most people initially expect,” said Michael Mayo, an analyst who covers securities firms at Deutsche Bank AG in New York. “This is one of the slowest-moving train wrecks we’ve seen.”

The tumbling U.S. housing market will continue to inflict the damage. Mortgage-backed securities and collateralized debt obligations containing those securities are falling in price and will not find their footing anytime soon. That’s because most of the subprime mortgages, which provide collateral for $800 billion in securities, have yet to go bad, said Christopher Whalen of Hawthorne, Calif.-based Institutional Risk Analytics.

And the U. S. housing bubble is bursting all over the world.

Note the banks cited in the article:

Credit Suisse Group.

Deutsche Bank AG.

Citigroup Inc.

American securities firms sold their “securitized” junk all over the world.

In The Wealth of Nations, Adam Smith talked about the “invisible hand” of supply and demand. Sadly for the mortgage hucksters, the “invisible hand” works reliably only when the producers are producing real stuff, stuff that people need and use, not when they are producing phony stuff, financial vaporware.

And who is producing real stuff these days?

China. Korea. Japan. Malaysia. India.

And who is producing financial vaporware?

American financial houses.

Our economy has become a house of cards, dealt by card sharks.

Addendum, Later That Same Evening:

Atrios.

Follow the link.

This is the first explanation of the “why” for the wave of illegal immigration that I have seen. The author has a hypothesis as to why illegal immigration has exploded in the past two decades.

What do y’all think?

On Immigration and Population Demographics

Raymond Krauss

Lost in the current debate on immigration reform is the decline of fertility rates in the latter part of the 20th century in the United Stated. The fertility rate during the post WW II baby boom (1946-1965) averaged 3.5. After 1965, the rate dropped below 2.0 and stayed there. This baby boom bulge is about to cause the graying of America and with it serious problems for our economy, social security and Medicare.

The high fertility rate of the baby boomers (more children were born between 1948 and 1953 than the previous 30 years combined) would have spelled disaster in most other parts of the world. But here and in Europe, it caused an economic boom the likes of which the world had never seen. American business rode high on a mighty demographic wave. Sales in everything from hula hoops to personal computers rose thanks to a steadily growing customer base. As this baby boom wave recedes into retirement, sales will fall, and the economy will need to contract, rather than expand. The 60 year economic boom we have enjoyed may well turn into a bust. Real estate will be hard hit. Fewer young and middle aged people mean lower demand for housing and lower prices. This has already started. A slower economy also means lower tax revenues for the government.

This brings us to the social security crisis. The baby boomers will live longer and collect benefits longer than ever before, and lower rates of fertility are restraining the growth of the working age population who pay social security taxes. Under the current system, this will mean severe increases in social security withholding taxes for the same working age population.

Depopulation will cause even more problems with the working man’s Medicare deductions. Medicare problems are two fold: the rising number of enrollees and the rapidly climbing costs of medical treatment. The expansion of the elder population would not in itself be a problem if the number of workers paying into the program were growing at an equally rapid pace. Unfortunately, the labor force will be growing much more slowly than the retiree population for decades after 2010. It all comes back to the baby boom phenomenon. Again, the net result, less take home pay for working age people.

Dan Froomkin:

A defensive President Bush insisted that he was still relevant this morning in a news conference dominated by his bitter complaints about the Democratic Congress.

Asked how he found himself vetoing a children’s health insurance bill that had passed Congress with bipartisan support, Bush insisted that using a veto is “one way to ensure I am relevant.”

When a reporter followed up and asked Bush if he felt he was losing leverage and relevance, Bush replied: “I’ve never felt more engaged and more capable of getting the American people to realize there’s a lot of unfinished business.”

Which, let’s be blunt, is hard to believe.

(snip)

“There is a real question among Americans now about how relevant this government is to them,” pollster John Zogby told Whitesides. “They tell us they want action on health care, education, the war and immigration, but they don’t believe they are going to get it.”

Another take on relevance. Adrianna Huffington:

At yesterday’s press conference, President Bush insisted that he is still “relevant.” Normally, it’s an immutable law of politics that if you have to say you’re relevant, you’re not (shades of Clinton circa 1995). But in Bush’s case, his role as the primary Decider on the war in Iraq is keeping him tragically relevant — in the same way that the driver of a bus careening toward the edge of cliff is extremely relevant to his passengers.

Yeah, the Current Federal Adminstrator is relevant.

So is a boil.

It causes pain until

. . . it

. . . goes

. . . away.

The Washington Post recently explored the exit of top aides from the Current Federal Administration:

There is so much turnover that on one recent Friday there were four farewell parties or last-day exits. Bush poses for so many Oval Office photos with departing aides it feels like an assembly line. Officials said the transition is a function of so many aides having stayed longer than in past White Houses. “When you look at the people who are leaving, these are people who have been here since the beginning,” said Liza Wright, who herself left last month as White House personnel director. “And it’s a killer of a job.”

All the more so in a White House beset by an intractable war, a hostile Congress, a shipwrecked domestic agenda and near-historic-low approval ratings. The long-term ideals that many of them came to the White House to pursue appear jeopardized, even discredited to many. They tell themselves that they have acted on principle, that the decisions they helped make will be vindicated. But they cannot be sure.

A number of the persons quoted in the article expressed regrets of various kinds.

But nowhere did they express regret for betraying the ideals of the founders and dragging the sacred honor of this nation in the dirt.

Robert Reich on bailouts. Read the whole thing. It’s worth three minutes of your time:

It’s true that people tend to be less cautious when they know they’ll be bailed out. Economists call this “moral hazard.” But even when they’re being reasonably careful, people cannot always assess risks accurately. Many of the mostly poor home buyers who got into trouble did NOT in fact know they couldn’t afford the mortgage payments they were signing on to. The banks and mortgage lenders that pulled out all the stops to persuade them to the contrary were in a far better position to know; after all, they had lots of experience at this game. So did the credit-rating agencies that gave these loans solid credit ratings, as did the financiers who bundled them with less-risky loans and sold them to other financial institutions, and the hedge fund managers who quietly tucked them into their portfolios.

The real moral hazard in this saga started when Fed Chair Ben Bernanke cut the Fed’s discount rate (charged on direct federal loans to banks) and announced that the Fed would take whatever action was needed to “promote the orderly financing of markets.” Translated, this means that lenders, credit-rating agencies, financial intermediaries, and hedge funds will be bailed out, one way or another, because they’re simply too big to fail. Note that behind every one of these institutions lie thousands of well-paid executives who would have lost big if the Fed didn’t come to their rescue. Even though they had more information and experience at risk-taking than the suckers who borrowed their money, and even though executives at the top of these instutions typically earn more in a day than the borrowers do in a year, moral hazard somehow doesn’t apply to them.

Andrew Cassel had a fascinating column in Wednesday’s local rag about the commodoties markete as it affects oil prices. Since all of us are feeling the pinch (or pincers) right now, I recommend it for the light it sheds on how the oil markets work:

Here’s how it works: Say a hedge fund in California decides to put $1 million into oil futures. It hires a trader, who jumps into the pit (or more likely, onto a computer keyboard) and bids for a contract to receive oil next month.

Yesterday, such futures contracts were trading about $74 a barrel. Of course, the hedge fund has no intention of actually buying 13,500 barrels of crude (roughly $1 million worth) – the fund is betting that by next month, the price will be even higher and it can sell the contract at a profit.

As more investors bring more money to the table, prices can tend to rise – not just in the futures markets, but at your neighborhood gas station. That’s what has some critics calling for curbs on “rampant” speculation.

(snip)

The point is that markets don’t make prices rise or fall – rather, they make it possible for prices to move quickly, in either direction.

In other words, the market reflects what is going on in the larger world; it does not create what is going on in the larger world (assuming the marketers are honest, of course).

He supplemented it yesterday.