James Howard Kunstler, at "Clusterfuck Nation," has been making a lot of sense lately, despite his tendency to hyperbole.
One point is particularly salient to the current situation. Kunstler is saying what I've thought for months, that the financial crisis is part of a "convergence of crises," not the least of which was the run-up in oil prices over 2007-2008.
The surge in demand in that period that came from China and India in particular has ebbed as consumers worldwide have cut back on their driving and growth has declined. And the downturn, along with a collapse in the price of oil, has hit the energy companies as well, with exploration and development of new sources being put on hold.
One inevitable result of this, which the politicians don't seem to be discussing, will be another run-up in prices as the world economy gets going again. That's likely to hurt the recovery, perhaps to cripple it.
Thus while a credit and debt bubble with excess leverage set off the current crisis, don't look to see the economy recover just by increased lending and the re-inflation of the bubble through government action to restore "liquidity." Add to this that the real issue with many banks is solvency, a fact that most public officials and certainly the banks themselves are lying about, and you've got a recipe for a cyclical bust replacing both the relatively stable period since the 1970s oil shocks, brought on through monetary policy, and the boom and bust cycles that characterized capitalism prior to that.
Tuesday, April 21, 2009
Tuesday, March 31, 2009
The South Rises Again...
Detroit faces the guillotine... blue collar workers told to agree to the further erosion of their standard of living... the Midwestern states see that it's the coasts that count... the banking industry's record donations to the Democratic Party paying off handsomely... unions get the shaft....
Time was, the South was not the economic model for the nation. Workers in the North have had it bad, but since Reconstruction, the South has been the anti-union, cheap labor, owner-friendly place to locate businesses. And with all its growth, the South lags behind other regions in median family income and education, while having a strong lead in obesity and incarceration rates.
Now it's to be the model for worker's rights and remunerations. Brilliant politics, brilliant economics...
At the same time, there's this to be said: globalization has the effect of moving toward a more equitable world economy through Ricardo's theory of comparative advantage. One result of this is a decline in living standards among the wealthier countries as increased competition for resources and jobs raise the living standards of poorer nations. This is compounded by a lack of investment in human and physical infrastructure, a problem that the United States has excelled at over the past 25 years. In that sense, the right-of-center ideology that has dominated American politics and still plays too large a role in the Obama administration is in keeping with the spirit of globalization, and hastens the general trend downward.
Time was, the South was not the economic model for the nation. Workers in the North have had it bad, but since Reconstruction, the South has been the anti-union, cheap labor, owner-friendly place to locate businesses. And with all its growth, the South lags behind other regions in median family income and education, while having a strong lead in obesity and incarceration rates.
Now it's to be the model for worker's rights and remunerations. Brilliant politics, brilliant economics...
At the same time, there's this to be said: globalization has the effect of moving toward a more equitable world economy through Ricardo's theory of comparative advantage. One result of this is a decline in living standards among the wealthier countries as increased competition for resources and jobs raise the living standards of poorer nations. This is compounded by a lack of investment in human and physical infrastructure, a problem that the United States has excelled at over the past 25 years. In that sense, the right-of-center ideology that has dominated American politics and still plays too large a role in the Obama administration is in keeping with the spirit of globalization, and hastens the general trend downward.
Sunday, March 22, 2009
March on Wall Street and Washington
It keeps coming. Now that outrage is swelling over AIG's bonuses, it's time to ask what should be done.
Today's New York Times has a story about protesters visiting the homes of two AIG executives who received bonuses and have pledged to return them. And Frank Rich in his column warns that President Obama must match actions to his words in resolving the credit crisis, or risk losing his presidency.
In The Washington Post, William Greider writes that the president must catch up with and channel the popular outrage that is the current mood, and that Washington must avoid putting more power into the hands of the "secretive" Federal Reserve if we are to keep from becoming a corporatist state. Greider sees this as a moment to reinvigorate democracy, but also as the moment when things could fail entirely.
I agree that this is a crucial point in history. Economic growth since the late 1990s has depended on two bubbles, and some have argued that our economy's structure today is such that we need to replace the housing bubble with a new bubble if we are to begin growing again. Renewable energy is certainly a candidate, but encouraging another bubble is a terrible idea...but to return...
Alexis de Tocqueville warned 173 years ago that excessive focus on the economy and material goods could erode the intermediate institutions that keep people engaged in the community, and eventually undermine citizenship and democracy. We were well on our way to this when the latest bubble burst, and Greider is correct in arguing that now is the time to renew our politics.
How should we do this? For a start, contact your elected officials, state, local and federal. Then take on the banks:
1. Tell politicians to support the bill introduced by Senators Durbin and Sanders to limit credit card rates to 15% and limit particular fees that banks charge.
2. If they don't, organize recall drives against them or run against them in the next election.
3. Organize protests, letters, petitions, referenda, and ballot initiatives against the corrupt and frequently immoral and/or usurious practices of banks.
4. Pay down your debts (especially credit cards) entirely, while living within your means.
5. If you can't pay your debts, default on your loans and start over. It will reduce your credit rating and make it much harder to get credit in the future, so think carefully about which loans you want to refuse to pay.
6. Get Congress to revisit bankruptcy law and make it more citizen-friendly (rather than its current strong bias in favor of creditors).
7. Insist that your credit card company (you should have only 1 or 2 credit cards) freeze your credit line at 10% of your yearly income. Never allow them to raise it unilaterally. Alternatively, direct them to freeze charges on your card if you carry a balance for more than three months.
8. Better still, work to see these rules made into law.
9. Don’t pay the debts of a deceased relative – you owe their credit card companies nothing, even though the companies will go right up to the legal line in trying to convince you otherwise.
10. Buy locally.
11. Start organizing locally-owned businesses and like-minded individuals to develop a local currency that you can use as an alternative to the dollar. This is realistic: a business owner has debts to pay that must be in dollars, but personal spending by workers and consumers need not be all in dollars.
12. Group together with like-minded people to buy large voting bloc shares of banks and then use the leverage to force changes in policy – of course, don’t do this if you can’t take the economic hit of seeing your share values decline when you do the right thing.
13. Get some folks together and march, but not in your own neighborhood and not against the sensible small bankers in your own town. Target your march constructively. March on Washington and Wall Street.
- Centinel
Today's New York Times has a story about protesters visiting the homes of two AIG executives who received bonuses and have pledged to return them. And Frank Rich in his column warns that President Obama must match actions to his words in resolving the credit crisis, or risk losing his presidency.
In The Washington Post, William Greider writes that the president must catch up with and channel the popular outrage that is the current mood, and that Washington must avoid putting more power into the hands of the "secretive" Federal Reserve if we are to keep from becoming a corporatist state. Greider sees this as a moment to reinvigorate democracy, but also as the moment when things could fail entirely.
I agree that this is a crucial point in history. Economic growth since the late 1990s has depended on two bubbles, and some have argued that our economy's structure today is such that we need to replace the housing bubble with a new bubble if we are to begin growing again. Renewable energy is certainly a candidate, but encouraging another bubble is a terrible idea...but to return...
Alexis de Tocqueville warned 173 years ago that excessive focus on the economy and material goods could erode the intermediate institutions that keep people engaged in the community, and eventually undermine citizenship and democracy. We were well on our way to this when the latest bubble burst, and Greider is correct in arguing that now is the time to renew our politics.
How should we do this? For a start, contact your elected officials, state, local and federal. Then take on the banks:
1. Tell politicians to support the bill introduced by Senators Durbin and Sanders to limit credit card rates to 15% and limit particular fees that banks charge.
2. If they don't, organize recall drives against them or run against them in the next election.
3. Organize protests, letters, petitions, referenda, and ballot initiatives against the corrupt and frequently immoral and/or usurious practices of banks.
4. Pay down your debts (especially credit cards) entirely, while living within your means.
5. If you can't pay your debts, default on your loans and start over. It will reduce your credit rating and make it much harder to get credit in the future, so think carefully about which loans you want to refuse to pay.
6. Get Congress to revisit bankruptcy law and make it more citizen-friendly (rather than its current strong bias in favor of creditors).
7. Insist that your credit card company (you should have only 1 or 2 credit cards) freeze your credit line at 10% of your yearly income. Never allow them to raise it unilaterally. Alternatively, direct them to freeze charges on your card if you carry a balance for more than three months.
8. Better still, work to see these rules made into law.
9. Don’t pay the debts of a deceased relative – you owe their credit card companies nothing, even though the companies will go right up to the legal line in trying to convince you otherwise.
10. Buy locally.
11. Start organizing locally-owned businesses and like-minded individuals to develop a local currency that you can use as an alternative to the dollar. This is realistic: a business owner has debts to pay that must be in dollars, but personal spending by workers and consumers need not be all in dollars.
12. Group together with like-minded people to buy large voting bloc shares of banks and then use the leverage to force changes in policy – of course, don’t do this if you can’t take the economic hit of seeing your share values decline when you do the right thing.
13. Get some folks together and march, but not in your own neighborhood and not against the sensible small bankers in your own town. Target your march constructively. March on Washington and Wall Street.
- Centinel
Thursday, March 12, 2009
A Modest Proposal
The federal government and the Federal Reserve have now committed as much as $2 trillion to the banks, AIG, the commercial paper market, the stimulus package and the auto companies in an effort to prop up the economy and reignite lending. And what has it accomplished? There are some "positive" signs that lending is coming back, but the world's economy has been badly enough damaged that confidence is shaken and the self-reinforcing psychology of the "Great Recession" has taken hold.
Meanwhile, public rage at the government bailouts, while in many ways misinformed and misguided, would dissipate if the government's strategy changed. What's needed is a strategy that benefits everyone in the short term.
Consider the following:
Loans are essentially assets for banks, and the big problem right now is that the stupidity of many bankers led them to make bad loans and then overvalue them through securitizing them. Mark-to-market accounting rules, which mandate that assets be measured by current market value rather than purchase or sale price, makes it almost impossible to judge the actual value of the banks, since nobody is admitting fully how badly they are in the subprime and ARM markets. With unemployment on the rise, credit card, student and auto loans will be the next to default - plus commercial real estate.
But, as anyone knows, a bank's assets also include cash on hand and, if they're smart, an adequate reserve fund to cover a portion of loans that go bad. Clearly, the securitizing of debts and the seemingly 'risk-free' purchase of third-party insurance through companies like AIG allowed many banks to misjudge their needed reserve funds. Stupidity and perhaps criminal negligence ran amok.
If the U.S. government wants to pump money into the financial system, it should stop providing cash and guarantees for the securities themselves. Instead, how about using that $2 trillion to "give" every American a fraction of that, paid directly to whatever creditors they have.
A family of four would have their outstanding loans reduced by, say, $24,000. Banks would have loans paid or partly paid back, with increased capital reserves and increased ability to make loans as a result. Individuals or families with no debt would get cash.
Talk about increasing confidence! It might restore the economy to health, and at full capacity individuals could start paying down further debt while the government and Fed work to cut the burgeoning deficits and debt that is currently being created.
Of course that leaves the problem of inflation as we grapple with all this extra government debt. Plus entitlements obligations, solving long-term structural problems in the American economy, increasing the savings rate, revamping the energy infrastructure, fixing health care, etc. etc. etc.
But it would be a start.
Meanwhile, public rage at the government bailouts, while in many ways misinformed and misguided, would dissipate if the government's strategy changed. What's needed is a strategy that benefits everyone in the short term.
Consider the following:
Loans are essentially assets for banks, and the big problem right now is that the stupidity of many bankers led them to make bad loans and then overvalue them through securitizing them. Mark-to-market accounting rules, which mandate that assets be measured by current market value rather than purchase or sale price, makes it almost impossible to judge the actual value of the banks, since nobody is admitting fully how badly they are in the subprime and ARM markets. With unemployment on the rise, credit card, student and auto loans will be the next to default - plus commercial real estate.
But, as anyone knows, a bank's assets also include cash on hand and, if they're smart, an adequate reserve fund to cover a portion of loans that go bad. Clearly, the securitizing of debts and the seemingly 'risk-free' purchase of third-party insurance through companies like AIG allowed many banks to misjudge their needed reserve funds. Stupidity and perhaps criminal negligence ran amok.
If the U.S. government wants to pump money into the financial system, it should stop providing cash and guarantees for the securities themselves. Instead, how about using that $2 trillion to "give" every American a fraction of that, paid directly to whatever creditors they have.
A family of four would have their outstanding loans reduced by, say, $24,000. Banks would have loans paid or partly paid back, with increased capital reserves and increased ability to make loans as a result. Individuals or families with no debt would get cash.
Talk about increasing confidence! It might restore the economy to health, and at full capacity individuals could start paying down further debt while the government and Fed work to cut the burgeoning deficits and debt that is currently being created.
Of course that leaves the problem of inflation as we grapple with all this extra government debt. Plus entitlements obligations, solving long-term structural problems in the American economy, increasing the savings rate, revamping the energy infrastructure, fixing health care, etc. etc. etc.
But it would be a start.
Monday, March 9, 2009
An Introduction
"Too big to fail is too big to exist." - Senator Bernard Sanders (I-VT)
Just how bad is it? And what will 'normal' be like down the road?
Those are the only real questions looking forward. One suspects that the big, highly leveraged banks are much worse off than anybody who knows is letting on. That's about the best explanation for the U.S. administration to be pursuing its current strategy of pumping money into the huge banks, stress tests or not. The plan seems to be to keep them on life support until a recovery kicks in, although as has been pointed out by others, this fails to recognize that the banks themselves are integral to any recovery.
So to the point of this blog. My aim is to keep up with events, and to suggest that citizens have a responsibility to change their approach to the banks. If government is going to bail out the banks, this doesn't mean we should wait blindly for a credit culture to reignite. No, indeed.
This downturn is the time to learn frugal living, move away from revolving credit, and begin putting the banks on a sound basis by reducing their unethical and usurious methods of asset creation.
Much more to follow....
-Centinel
Just how bad is it? And what will 'normal' be like down the road?
Those are the only real questions looking forward. One suspects that the big, highly leveraged banks are much worse off than anybody who knows is letting on. That's about the best explanation for the U.S. administration to be pursuing its current strategy of pumping money into the huge banks, stress tests or not. The plan seems to be to keep them on life support until a recovery kicks in, although as has been pointed out by others, this fails to recognize that the banks themselves are integral to any recovery.
So to the point of this blog. My aim is to keep up with events, and to suggest that citizens have a responsibility to change their approach to the banks. If government is going to bail out the banks, this doesn't mean we should wait blindly for a credit culture to reignite. No, indeed.
This downturn is the time to learn frugal living, move away from revolving credit, and begin putting the banks on a sound basis by reducing their unethical and usurious methods of asset creation.
Much more to follow....
-Centinel
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