Category: Finance

This is a wonderful article by economist Joseph E. Stiglitz, about the evolution of our current financial crisis. A very concise history written in an ethically sound manner.

http://www.truthout.org/121008R

I’m concerned that our national bailout and stimulus processes are manipulating the ‘creative and destructive’ processes that are fundamental to dynamic free economies. It’s not just about protecting executives that ought not to be protected (although I think we need to have a new generation of executives that ‘think’ differently about economics)…..my concern is that we are losing the values that make America’s economy work.

The idea of ‘too large to fail’ is a breakdown of our economic ethic that allows useless, out-of-date, and misaligned economic institutions to fail….and be replaced with institutions with better qualities.

Eliot Spitzer (..that’s a familiar name?) wrote this interesting paper.

http://www.slate.com/id/2205995/pagenum/all/#p2

I yesterday became aware of the weblog and writings of Sharon Astyk…

Well, I wish I could take the credit for having constructed a brilliant analysis, but really, the best answer I can give is “What she said.”  That is, Ilargi and Stoneleigh have been running analysis of the credit crisis since before most people knew there was a crisis.  I frankly thought Ilargi was out of his mind when he told me that the economic crisis would reshape peak oil and climate change discourse, and ought to be our focus.  I was wrong, he was right.  Their analysis has been solidly spot-on, and I think it will continue to be.  We are in a self-reinforcing deflationary spiral.  Inflation may eventually be a response to that, but for right now and the immediate future, well, it isn’t.  Here’s an excerpt from Stoneleigh’s remarkable analysis.

“Thanks to a credit boom that dates back to at least the early 1980s, and which accelerated rapidly after the millennium, the vast majority of the effective money supply is credit. A credit boom can mimic currency inflation in important ways, as credit acts as a money equivalent during the expansion phase. There are, however, important differences. Whereas currency inflation divides the real wealth pie into smaller and smaller pieces, devaluing each one in a form of forced loss sharing, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie. This generates the appearance of a substantial increase in real wealth through leverage, but is an illusion. The apparent wealth is virtual, and once expansion morphs into contraction, the excess claims are rapidly extinguished in a chaotic real wealth grab. It is this prospect that we are currently facing today, as credit destruction is already well underway, and the destruction of credit is hugely deflationary. As money is the lubricant in the economic engine, a shortage will cause that engine to seize up, as happened in the 1930s. An important point to remember is that demand is not what people want, it is what they are ready, willing and able to pay for. The fall in aggregate demand that characterizes a depression reflects a lack of purchasing power, not a lack of want. With very little money and no access to credit, people can starve amid plenty.

Attempts by governments and central bankers to reinflate the money supply are doomed to fail as debt monetization cannot keep pace with credit destruction, and liquidity injected into the system is being hoarded by nervous banks rather than being used to initiate new lending, as was the stated intent of the various bailout schemes. Bailouts only ever benefit a few insiders. Available credit is already being squeezed across the board, although we are still far closer to the beginning of the contraction than the end of it. Further attempts at reinflation may eventually cause a crisis of confidence among international lenders, which could lead to a serious dislocation in the treasury bond market at some point.”

I think it is important that we be prepared for the real crisis – a long term, deep, deflationary Depression.  As I’ve mentioned before, most rhetoric about the Depression tends to look at the deepest part of the Depression, observe that we aren’t there yet (something along the lines of “During the Depression, unemployment was 25%, but at present we are nearly at 7%, a long way away from that).  All of this ignores the fact that during the Depression, unemployment rose gradually too.  In the fall of 1929, unemployment rose only very slowly.  But between March 1930 and March 1931, unemployment doubled, and didn’t reach its peak until 1933, more than 3 1/2 years after the crash.

My claim is not that we will travel precisely the same road as described in the Depression. But one of the things about crises worth noting is this.  They have their moments of screaming and running around, of explosions and flames.  And then they have most of the rest of the time, which is rather like life, only with incrementally painful shifts.

One of the incrementally painful shifts we are facing is that addressing peak oil and climate change are likely to be pushed to the back burner.  Obama has already noted that some of his energy goals will probably have to be put off.  The problem is that the odds are good that if they are put off, they won’t happen.  Meanwhile, over at The Oil Drum, Gail the Actuary has another clear-eyed post about how this will affect our long term energy infrastructure.

BTW, if you’ve relied as much as I have on their analysis, and can afford it, you might consider donating to the Automatic Earth’s Holiday Fundraiser, on the sidebar.  Ilargi has been doing the work of researching and writing full time, and essentially, they are trying to make sure he can keep doing it.  His goal – to make as much as a McDonalds burger flipper by exploring the financial crisis and helping people address it – seems pretty reasonable to me – I’d sure as heck rather have the two of them doing this work.

Sharon

Her weblog

http://sharonastyk.com/

For those graphics freaks out there in informationland:

A Visual Guide to the Financial Crisis

The Bush Administration has borrowed more money in the last eight years than all U.S. Presidents combined have borrowed in the previous 219 years. It also borrowed more money from foreigners that all previous Presidents combined.

The U.S.audit will be released on December 15th. It is the Financial Report of the U.S. Government, issued by the U.S. Treasury and signed by Secretary Henry Paulson. It is the only official government document that uses audited, accrual accounting to describe America’s financial position.

An interesting article on the U.S financial ‘siteation’.

Yesterday Minnesota voters approved the Clean Water, Land and Legacy Amendment, the largest conservation ballot measure in history, according to The Trust for Public Land (TPL), a national conservation organization. At more than $5.5 billion dollars for land and water conservation, the winning measure nearly doubles the previous largest conservation ballot measure, New Jersey’s Constitutional Amendment in 1998, which dedicated $2.94 billion in sales tax to the Garden State Preservation Trust.

For the entire article

I find it interesting that the Republicans are bantering around the “s” word with respect to Mr. Obama’s tax platform…referring to it as income redistribution. Look at the following graph….then let’s discuss income redistribution!

If you want to see tax-based income redistribution, I suggest you look at the Bush Administration tax policy over the past eight years.

I’d also throw in the recent bailout package and Treasury measures.

It appears socialism is good with the Republicans if it benefits the wealthy…but bad if it benefits a broad base of American households.

From Teddy Roosevelt (by way of Phipps):

We grudge no man a fortune in civil life if it is honorably obtained and well used. It is not even enough that it should have been gained without doing damage to the community. We should permit it to be gained only so long as the gaining represents benefit to the community. … The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and … a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.

A historian at William and Mary College has drawn all-to-dreary parallels between our current financial crisis and the economic collapse of 1873…. some of the similarities are eerie.

http://cityroom.blogs.nytimes.com/2008/10/14/learning-lessons-from-the-panic-of-1873/