Political Economy category archive

Paul Krugman:

Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse (One can only hope–ed.). The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.

But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.

But, then again, Wall Street bankers wear three-piece suits (even the female ones), drive (or are driven in) expensive cars, and vote Republican, so it must not be their fault. Right?

Looming poverty raises enlistments:

The Army exceeded its targets each month for October, November and December — the first quarter of the new fiscal year — bringing in 21,443 new soldiers on active duty and in the reserves. December figures were released last week.

Recruiters also report that more people are inquiring about joining the military, a trend that could further bolster the ranks. Of the four armed services, the Army has faced the toughest recruiting challenge in recent years because of high casualty rates in Iraq and long deployments overseas. Recruitment is also strong for the Army National Guard, according to Pentagon figures. The Guard tends to draw older people.

“When the economy slackens and unemployment rises and jobs become more scarce in civilian society, recruiting is less challenging,” said Curtis Gilroy, the director of accession policy for the Department of Defense.

And how does a flair for the obvious seem so revolutionary?

Oh, I forgot. The obvious is too obscure for most economists because, well, it’s not obscure enough. And it doesn’t require long mathematical formulae and fanciful notions about how people behave that are in no way related to how people behave.

According to Dr. Ravi Batra, economics professor and author of The New Golden Age: A Revolution Against Political Corruption and Economic Chaos, (see: ravibatra.com ), bailing out banks is like bailing out criminals while victims are left to suffer.

The only difference here is that the victims, homeowners and consumers, are the foundation of the economy, and they are hurting because their wages have not kept pace with rising prices.

The celebrated economist Milton Friedman once said that the true test of a theory is its forecasting ability. Batra’s theories easily pass this sterling test.

This is because in the first edition of his book printed in 2006 Batra vividly foresaw the current economic chaos in all its dimensions. He forewarned us about stock market losses, the credit crunch, homeowner defaults and above all soaring unemployment, starting in 2007 and lasting at least till 2010.

The obvious was too obscure for any but liberal economists, who have been all over this thing like a bad suit for years.

But they were (hoick! ptui!) liberals (which we all know is a dirty thing–Rush Limbaugh told us so), so no one listened to them, for they just weren’t serious enough and, besides, their concern for the average Joe and Jane meant they had no Republican crud cred.

Besides, they did not qualify as members of the Masters of the Universe, given their belief that there is more to civilized society than survival of the fattest.

Batra quotation via Alan J. Heavens.

The Washington Post dissects the real estate crash, with a focus on La La Land. The whole thing is worth the 10 minutes it takes to read it. Here’s a nugget:

For a brief time in 2005, the housing market showed signs of cooling nationwide and interest rates edged up. Lenders reacted by reaching out to even riskier borrowers with more subprime and other exotic loans to keep the home-buying frenzy going, said Howard Shapiro, an analyst at investment bank Fox-Pitt Kelton.

Some lenders wooed borrowers with generous terms once reserved for the most creditworthy. Mortgage financiers Fannie Mae and Freddie Mac, eager to profit, started buying more of these loans — in effect, subsidizing the market.

Blinder used the Wile E. Coyote character in the old Road Runner cartoons to explain what happened to prices next: “The coyote is running, running until he runs off the mesa, suddenly he’s out there in thin air and stays there for a while — then crash,” he said.

The markets that crashed the hardest were the ones where prices had climbed the fastest.

I’ve been in the local Circuit City only twice. Neither time could I find anything whatsoever to interest me. It made Best Buy, which I loathe, look good.

This may be to some extent fallout from Republican Economic Theory, but it is just as much fallout from incompetent management, marketing, and product selection.

Wonder if the local store will go back to its roots as a bowling alley?

Bankrupt electronics retailer Circuit City Stores said on Friday it will liquidate its assets and shutter hundreds of U.S. stores after failing to reach a deal to sell the company.

U.S. Bankruptcy Judge Kevin Huennekens approved the plan to sell Circuit City to a liquidator group, capping a tumultuous year for the specialty chain.

except watch soaps and eat Chee-tos.

First-time applications for state unemployment benefits rose 54,000 to a seasonally adjusted 524,000 in the week ending Jan. 10, the Labor Department said Thursday.

The gain in the most recent claims data restarts an upwards trend that analysts had expected. Initial claims had declined in the prior two weeks, likely due to difficulties in accounting for seasonal adjustments.

In other news, no beer to cry in.

Conservatives lie.

Live with it.

Via Duncan.

Life is also tough in contractor-land:

More than half a million jobs were lost in the US last month, taking the unemployment rate to its highest in 16 years.

Job losses over the whole of last year totalled 2.6 million, the biggest annual loss since 1945 when 2.75m jobs were shed, the US labour department said.

The bulk of the year’s job losses came in the last four months when 1.9m people were laid off. In December alone, US employers cut 524,000 jobs. The original numbers for October and November were also revised higher.

We hear from the right that it’s always the fault of the working person who has the temerity to want fair pay, health care, and a retirement.

Toyota is suspending production at all 12 of its Japan plants for 11 days over February and March, a stoppage of unprecedented scale for the nation’s top automaker as it grapples with shrinking global demand.

Oh. Wait. There’s no UAW in Japan, is there?

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.