Political Economy category archive

Waterford Wedgewood:

The loss-making company, whose famous brands include Waterford crystal, Wedgwood and Royal Doulton fine bone china, Rosenthal porcelain and Spring premium cookware, ran out of time in its attempt to raise up to £200m in fresh capital. It said this morning that Deloitte will be appointed as receiver and administrator.blockquote>

January 5, 2009 | Posted by: Frank | Posted in: Political Economy | Bookmark this post

’nuff said:

Pennsylvania has extended their open hours for filing unemployment claims. The department’s offices are now open six days a week.

As predictable as the arrest of a Wall Street banker:

Republicans, faced with their failed policies, blame everything except their own failed policies:

Republican Party officials say they will try next month to pass a resolution accusing President Bush and congressional Republican leaders of embracing “socialism,” underscoring deep dissension within the party at the end of Mr. Bush’s administration.

I’d end this just with just the word “buffoons,” except that they have done too much harm to too many persons for too many years to be dismissed so casually.

Addendum:

Susie.

This came through in my Quotes of the Day email a few days ago (emphasis added):

On two occasions I have been asked [by members of Parliament!], ‘Pray, Mr. Babbage, if you put into the machine wrong figures, will the right answers come out?’ I am not able to rightly apprehend the kind of confusion of ideas that could provoke such a question.
– Charles Babbage, 1792 – 1871

I figured I could do something with it, but what it was was not readily apparent.

So I decided to let it sit on the back burner of my brainpan for a while.

Then my friend Nancy nailed it. Put in the wrong numbers, and you get the bailout:

Re the quote: “. . .if you put into the machine wrong figures, will the right answers come out?”

That sounds like the Sec’y of the Treasury & Congress wrestling with the housing crisis!! {How in hell did it happen & whom shall we give the bailout $s to??}

The Bushie Legacy:

But a review of some of the publicly held builders’ annual reports reveals another human cost – job loss in the industry.

Hovnanian Enterprises Inc., of Red Bank, N.J., filed its Form 10-K on Christmas Eve, disclosing employment of 2,816 people as of Oct. 31. That was down from 4,318 a year earlier, or a loss of more than 1,500 jobs.

Beazer Homes USA Inc., of Atlanta, had 1,444 employees as of Sept. 30, 2008. It cut 1,175 jobs since Sept. 30, 2007, or 45 percent of its workforce.

Regionally, Orleans Homebuilders Inc. reduced its headcount by more than 20 percent during its fiscal year ended June 30, to 544 people. The Bensalem company said between June 30, 2006, and Aug. 31, 2008, it slashed its workforce by more than 50 percent.

Toll Bros. Inc. , the nationwide luxury home builder, eliminated 1,169 jobs over its fiscal year ended Oct. 31. Its workforce of 3,160 is now smaller than it was during its fiscal year ended Oct. 31, 2003. Employment peaked at 6,147 as of July 31, 2006.

Free hand of the market my anatomy.

Free hand of greed, fraud, and duplicity.

We’ve all been enronned.

Robert Samuelson:

It’s the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. But what lies on the other side is hazy at best. The great lesson of the past year is how little we understand and can control the economy. This ignorance has bred today’s insecurity, which in turn is now a governing reality of the crisis.

. . . he means only those persons who think like him. Ya know, the ones who persist in error, despite reality and human nature.

He doesn’t include all those other folks, such as–just to pick a name out a hat–Paul Krugman (you may have heard of him–Nobel Prize and all that)–who have been predicting the failure of Reago-Bushonomics for years.

Robert Reich shares his analysis. Follow the link for his rationale:

1. The poor and near poor, with family incomes typically under $20,000 a year. . . .

2. Middle and lower-middle class households whose breadwinners are within five years of being eligible for Social Security. . . .

3. Middle and lower-middle class retirees. . . .

No, not that fast lane. This fast lane:

Back in October 2000, just before he was elected president, George Bush described his base as “the haves and the have mores.” The remark was made in jest at the annual Al Smith Black Tie dinner, but the joke turned out to be on all those people who used to have just about enough, and who now, eight years later, have next to nothing.

According to government data, as of September, 31.5 million Americans were using the food stamp programme, up 17% from the previous year. That’s 10% of the US population. These are staggering figures.

They bring to mind another staggering figure I recently came across that I have been unable to remove from my subconscious. It is $163,987,000 – the salary that Henry Paulson, now secretary of the US Treasury, took home in 2006 for his services as CEO of Goldman Sachs.

More here.

Back when I worked for the railroad and had an office in 30th Street Station, I would wander the waiting room floor during breaks, enjoying the floor show that the public always provides.

Occasionally, I would be approached by a panhandler whose strategy was to say, “I’m trying to raise money for a ticket to Lancaster.” (Why Lancaster, I never figured out. None of them looked like anyone I’d ever seen in Lancaster, and I’ve spent a lot of time there. Besides, Lancaster is not well known for MD 20/20.)

I used to suggest that they check with Travelers’ Aid. Not actually being interested in getting home to Lancaster, they usually slowly moved away.

Well, no more.

Bonddad explains “securitization”:

This is where securitization comes into play. Instead of making one big pool of mortgages we “carve up the cash flows” – meaning, we make a series of bonds that pay people at different times. For example, one bond will pay principal and interest to a specific bond holder for three years beginning 3 years from now and ending 5 years from. Another bond holder will get principal and interest payments for 7-10 years from etc…. That’s all that securitization is – pooling a group of mortgages with similar characteristic (interest rate, length of maturity) and directing the various cash flows to different people at different times. That’s all.

This process has been going on for the better part of 25-30 years now without much incident. So – what went wrong this time?

The biggest problem with securitization is no one has a vested interest performing due diligence on the borrowers – the people taking out the mortgage loans. The mortgage brokers write the loan and sell it to a large investment bank. The investment bank pools the mortgage and carves it up into different bonds. The bond holders don’t hold all the collateral, only pieces of it. As a result, no one really owns all the mortgages for an extended period of time. Instead, the most they own is a piece of a larger pool of mortgages.

Let’s go back to the first few paragraphs. Remember – we’re using collateral composed of residential mortgages. What if we’re writing a lot of mortgages to people who aren’t credit worthy? That’s the central problem with the mortgage securities market right now – mortgage brokers wrote a lot of loans to people who couldn’t afford them. In other words, the collateral used as the basis for mortgage backed bonds was bad collateral. No matter how you carve the cash flows, you’re still using collateral that will eventually default.

Addendum, That Evening:

Mithras thinks Bonddad isn’t clear on what is the cart and what is the horse.

Frankly, I think that Bonddad pretty much nailed the mechanics of the process; that’s what I was interested in when I put up the post this morning.

As to where it went wrong, well, we can argue over the mechanics of what went wrong, and everyone can be right and everyone can be wrong all at the same time.

Whether it started to go wrong on Main Street, with the mortgage lenders, or on Wall Street, with self-designated Masters of the Universe, is really not the issue.

It went wrong when financial types convinced themselves and their regulators that the “invisible hand of the market” (whatever that is) was somehow inherently moral.

It doesn’t matter whether the initial mistakes were made by lenders or by Wall Street.

For all practical purposes, they colluded. Main Street signalled it was willing to make junk loans. Wall Street signalled that it was willing to “securitize,” well, just about anything, as long as it could find marks buyers. Hell, they would have “securitized” free paper matches if they thought they could find buyers.

Chicken or egg? Egg or chicken?

Doesn’t matter.

What matters is that, when greed takes control, good sense and judgement and moral sense go out the window. The “invisible hand of the market” knows not morality, but worships wealth.

I must say, though, that, as far as I am concerned, Mithras has a better handle on a solution: Make sure that the box of stocks Wall Street is trying to sell is not a box of air.

That breaks the fraud.

All that matters for a solution is breaking the fraud at the most efficient possible location.

A fable of our times.

Via Susie.

Here’s the Big Picture of How They Did It.

Back in the Olden Days, the United States suffered financial “panics” every 20 years or so.

Yes, that’s what they were called. “Panics.”

From 1929 through 1931 came the biggest panic of them all. It was termed the “Great Depression.” (The term “Depression” was adopted to avoid using the term “panic.”)

In its post mortem, it was discovered that the financial system of the 1920s was based on air.

Financiers were buying and selling air.

As long as no one noticed they were selling air, prices and “wealth” continued to increase.

Once the air was discovered (the stock market crash of 1929), the whole damn pile went to hell.

In response, the United States created watchdogs (“regulatory agencies”) to ensure that, when someone bought a box of “financial instruments” (aka, stocks and bonds), there was something in the box other than air.

Under regulated capitalism, the United States economy flourished. Yeah, there were speed bumps from time to time, but it was basically sound from the end of World War II until today. Well, yesterday. Well, a few years ago.

(By the way, the term “recession” was coined to avoid having to use the term “depression.” Recession = Depression = Panic.)

In the mid-1980s, the Republican Party began to castrate the regulatory agencies.

In the late 1990s, they accelerated their actions; in the early 2000s, they reached their political climax of releasing wolves in the hen house.

They used two primary strategies.

In some cases, they exempted certain types of “financial instruments” and financial organizations from regulation.

In other cases, they reduced the size of the agencies’ staffs and restricted their activities so that they were unable to discharge their duties.

Once again, air returned to the markets.

And, once again, this fall, persons finally opened their boxes of stocks and bonds and “securitized” “financial instruments” and found their boxes, well, full of air.

The Great Crash of 2008 is not an accident.

It did not result from some mystical inevitable “business cycle.”

Republicans did it.

And they did it to all of us.

And to the rest of the world. Q. E. D.

———————–

Also posted at the Great Orange Satan.

Merry Christmas,

In the United States, consumers cut spending for a fifth successive month during November and their incomes shrank, according to a Commerce Department report that pointed to deepening recessionary pressures.

It said spending contracted by 0.6 percent after falling even more steeply by 1 percent in October. Incomes contracted by 0.2 percent after a slight 0.1 percent gain in October.

New U.S. orders for long-lasting manufactured goods fell 1 percent in November, a less severe drop than anticipated.

The number of U.S. workers filing new claims for jobless benefits jumped by 30,000 to a 26-year peak last week. Initial claims for state unemployment insurance benefits rose to a seasonally adjusted 586,000 in the week to December 20 from a revised 556,000 the prior week, the Labor Department said.

(signed) George W. Bush and the Republican Party

The future of your economy.

They’re headed for the Bushborough.

Bye bye Wachovia.

Not a good idea to buy a fly-by-night mortgage company at the height of the bubble.

Addendum:

In the Guardian, Duncan Campbell describes modern banking:

One popular scam (in the UK in the 1970s–ed.) was the long firm fraud. It works thus: you set up a business in a warehouse using a bogus name, you order goods and pay on time; repeat, for a much larger number of goods and pay again on time; repeat for a much, much larger amount and disappear.

In many ways, some of our financial institutions have in effect been carrying out a fantastically sophisticated long firm fraud, although that may not have been their intention at the outset. They asked people to give them their money, they paid out on time; they asked for more, and paid out again; then they asked for even more – and announced that they had nothing left. Essentially, a long long firm fraud.

Read the whole thing.

Over at TPM Muckraker.

And Josh Marshall sees an issue:

But as I watch this unfold I feel increasingly concerned that the people controlling the money are using the complexity of the situation and the public’s difficulty in understanding it to use public money to shield very wealthy institutions and individuals from the inherent risks of their chosen line of work.

Addendum:

Noz is resigned to the worst:

apparently paulson had the authority to dispense money only on the condition that the institutions account for the money, but he decided not to. i don’t know why i keep expecting the bush administration to not horribly botch everything it does. you’d think after eight years i would have learned by now.

After all, isn’t it always the fault of the workers for expecting things like a safe working environment, reasonable hours, a paycheck, health care, and retirement income?

How dare they!

Toyota Motor Corp forecast a first-ever annual operating loss, blaming a relentless sales slide and a crippling rise in the yen in what it said was an emergency unprecedented in its 70-year history.

John Cole has another take.

The Guardian. The writer is discussing accountancy in the UK, but the same thing applies here:

The deepening financial crisis is indicative of the crisis of democracy. Corporate elites have hijacked too many public policymaking arenas and show no shame, or remorse for legitimising poor practices. Even worse, as the recent House of Commons Treasury Committee
hearing on the role of accounting in the banking crisis shows, they are not being called to account. It is salutary to look at how the elites disarm legislators and journalists to advance their interests.

The global rules, or accounting standards, for company financial statements are made by the International Accounting Standards Board (IASB), a private organisation financed and dominated by corporate elites. The UK’s accounting regulator, the Financial Reporting Council (FRC), is also dominated by corporate elites. It appeases its controllers by adopting international accounting standards drafted by the IASB, but without ever explaining the social and economic consequences of its acquiescence.