Political Economy category archive

The direct result of the Republican Economic Policy of non- and deregulation and their deluded belief that those pursuing tons of money will ipso facto conclude that acting responsibly and morally is in their and society’s financial best interest:

Sales of pre-owned homes dropped 5.3% to a seasonally adjusted annual rate of 4.49 million in January, the lowest sales pace in 12 years, the National Association of Realtors reported Wednesday.

Sales are down 8.6% in the past year, the industry trade group reported. The sales pace in December went unrevised at a 4.74 million annual rate.

It was like pulling the cops off the street and trusting drivers not to drive recklessly. Most drivers will not drive recklessly (many do not drive competently, but that’s another issue).

The ones that do drive recklessly cause horrible damage, especially when they are driving overloaded semis with bad brakes.

Like Citigroup and Bank of America.

Why didn’t the free and unfettered market sort this out?

U.S. Attorney George Holding said Tuesday that federal authorities have launched an international search for the executive charged with rushing shipments of bacteria contaminated syringes from an AM2PAT Inc. plant. Two former plant workers who provided prosecutors details about the plant’s operations have pleaded guilty for their roles in shipping tainted syringes.

The syringes contained Heparin, a blood thinner, and saline, and were recalled in December 2007 after an outbreak of illnesses. Health inspectors identified bacterial infections in Colorado, Texas, Illinois and Florida.

Oh. I forgot. It did.

According to the lead (and, dammit, it’s “lead,” not “lede”) for the story (follow the link), not steriziling the syringes was a “cost-cutting move.”

Masters of the Universe:

Shares of AIG fell 2% to close at 53 cents on Monday. The stock has dropped 66% so far this year. It slumped 97% in 2008.

Cookie Jill has more.

The Booman points out why Republican Economic Theory brings only failure. Read the whole thing:

At the root of the problem is the Republican’s positions on taxes, on government spending, and on federalism. A government that never raises taxes loses the ability to adjust taxes to the needs of the time. Such a policy is a like a broken clock. It will sometimes be the right policy to cut taxes, but with Republicans those instances will be strictly by accident and not design. Meanwhile, they will get it wrong every single time that conditions call for raising taxes.

(snip)

What this really amounts to isn’t just a failure of imagination. It’s a life lesson in the non-rational nature of Republican ideology in general. It works in good times to a certain non-idealized degree, but it completely lacks situational flexibility. It becomes bankrupt and bankrupts the institutions it controls at the same moment that conditions make its basic irrationally manifest.

I wonder whether I should just make my next mortgage check payable to the United States Treasury Josh Marshall on Citigroup:

As I read more about what’s happening . . . , I almost wonder if this is the nationalization decision, just in a way that no one quite wants to concede, since it makes even more explicit that the US is effectively in control of the bank. That said, the whole thing just seems to show that the institution is not viable.

Why Republicans hate Social Security (remember, only one of them voted for it). Thom Hartman explains:

Via Susie.

Brendan makes a phone call.

With commentary by Duncan.

The FDIC just started posting at 21:00.

So far there’s only one.

Number one: Silver Falls Bank, Silverton, Oregon (no relation to Silverado).

The Toimes:

Demand at food banks across the country increased by 30 percent in 2008 from the previous year, according to a survey by Feeding America, which distributes more than two billion pounds of food every year. And instead of their usual drop in customers after the holidays, many pantries in upscale suburbs this year are seeing the opposite.

Simon Jenkins in The Guardian:

The economist, JK Galbraith, has returned to fashion thanks to The Great Crash of 1929, but another work of his that deserves equal attention is 2004’s The Economics of Innocent Fraud. He long argued that big pay settlements for executives were little more than grand larceny, legitimised by the pretence that they were subject to shareholder, auditor and regulatory oversight.

(snip)

The answer is simple. Performance-related pay is called salary.

This is actually sound compensation theory and good organizational psychology.

Wrapping the bulk of an employee’s or an executive’s compensation up in huge annual “performance-related” bonuses which far exceed his or her base pay encourages short-term individual greed and stupidity self-serving risk-taking and discourages considering the long-term survival and growth of the organization.

A story of greed and irresponsibility.

Eleven worthwhile minutes. You can bank on it.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo

Via Andrew Sullivan.

February 20, 2009 | Posted by: Frank | Posted in: Political Economy | Bookmark this post

Bonddad analyzes “Fed speak.” The conclusion:

Here’s the bottom line: it’s terrible out there.

Follow the link to read the analysis.

While you’re at it, read his thoughts nationalizing the banks.

The hangover deepens:

The number of U.S. workers drawing unemployment aid jumped to a record high of nearly 5 million, the government said on Thursday, as a worsening economy made it increasingly hard to find jobs.

(snip)

U.S. stocks fell as the data reinforced fears the worsening slump would erode company profits, driving the Dow Jones industrial average to 7,465.95, its lowest close since October 2002.

(snip)

New applications for unemployment benefits were steady at 627,000 last week, hovering close to a 26-year high and raising the possibility that job losses in the non-farm sector could cross the 600,000 threshold in February.

Here in the States, we here a lot of fulminations about “globalization” from a States-centric perspective (“our jobs went where?”).

That is not the only perspective. Pamposh Dhar of the Phillipines asks some good questions:

First off, let me say that I am not against globalization. I believe that all human being are connected (or “interconnected,” as Buddhists say), so how could I be against a connected world? I am not.

(snip)

Moving on to the second part of my question: why does the concept of globalization leave our hearts cold?

Follow the link to see how she struggles to answer them.

Lindsay Graham:

“The truth is we’ve put more money into the Bank of America than it’s worth,” Graham said. “That’s not nationalization. That’s just stupid.”

Balloon Juice has more.

More coming:

Records show 143 U.S. homebuilders filed for bankruptcy last year versus 80 in 2007. To remain viable, many will be forced to continue to reduce expenses and cut prices on existing inventory to increase cash flow, in contrast to their previous focus on revenue growth for the better part of this decade.

“It wouldn’t surprise me to see one or two of the top 10 homebuilders filing this year,” said Bittner (of Grant Thornton LLP–ed.). “But in most cases, the current lending environment is unique in that as long as a builder has positive cash flow, the lender doesn’t want to foreclose or force a bankruptcy filing. Recovery is more likely if a bank can be patient with a borrower. Positive cash flow and ability to service interest on a credit facility provides for a better negotiation position with the lender.”

Harvard Business School professor Rakesh Khurana analyzes executive pay, pointing out that “there’s no distinction any more between value creation . . . and value extraction . . . .”

If you want to understand what’s wrong with Wall Street and American business, you will learn more from the seven minutes of this interview that from a year of reading the Wall Street Journal. His conclusion: Wall Street has been paying executives like mercenaries, who sell themselves to the highest bidder, not like Marines, who have a sense of duty, loyalty and a greater good.

And, no, he’s not talking about the size of the paychecks, but rather about the philosophies behind them.

Follow the link to listen (web quotation updated):

Here’s a fact we learned this week: Nearly 700 Merrill Lynch employees earned more than a million dollars last year, even though the company lost $27 billion and was forced to be sold to Bank of America.

It’s the kind of news that raises the hackles of Rakesh Khurana, who teaches at Harvard Business School. He tells host Scott Simon that the highest paid person isn’t always the best.

Read Professor Khurana’s article in the Washington Post here and his subsequent online chat here.

Ronald D. Orol and Alistair Barr of MarketWatch analyzes Geithner’s “stress test.”

Note the list of “banks” which may be taken to the lab for the test–it’s almost all the biggies (I use quotation marks because some of them haven’t been “banks” for long):

Treasury may end up effectively nationalizing many weaker institutions, if its stress tests conclude some firms need more capital.

Treasury is expected to allocate at least $100 billion of the remaining $350 billion from the Troubled Asset Relief Program to a bank bailout fund to buy preferred shares in banks that can be converted into voting common equity “if needed.” According to Treasury, banks can convert securities into common shares in a “worse than expected economic environment.”

(snip)

“Depending on how much capital an institution needs under this program, you could see a high percentage of its common equity, more than half, be issued to Treasury,” said David Brown, partner at Alston & Bird LLP in Washington. (Owning more than half the stock equals government ownership with equals nationalization–ed.)

If needed, the convertible securities will be converted into common shares at a “modest discount” to banks’ stock prices on Feb. 9.
Robert Klingler, attorney at Bryan Cave LLP in Atlanta, points out that most financial institutions were trading at historic low valuations on that date, which means the government stakes could be converted into massive controlling interests.

There are 17 institutions, representing roughly three-quarters of the assets in the banking system, which may be required to take the stress test.

These are: J.P. Morgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, American Express, Morgan Stanley, State Street , Bank of New York Mellon, U.S. Bancorp, SunTrust Banks, Capital One, PNC Financial , Regions Financial, Fifth Third, and KeyCorp.

For the owners. Not for the workers.

Watch the owners walk away protected by the bankruptcy statutes.

Watch the workers learn how to live in their cars.

The peanut processing company at the heart of a national salmonella outbreak is going out of business. The Lynchburg, Va.-based Peanut Corp. of America filed for Chapter 7 bankruptcy in U.S. Bankruptcy Court in Virginia Friday, the latest bad news for the company that has been accused of producing tainted peanut products that may have reached everyone from poor school children to disaster victims.

H/T Bill for the link.