Madoff & Ponzi Schemes: A Moral Isssue

In a Ponzi scheme, such as that perpetrated by Bernie Madoff, are those investors who withdrew profit before it collapsed obligated to return them to a pool in which the greater number of losers could draw on? Is the claim on any money recovered by the bankruptcy trustee to be prorated to the the owners of false balance sheets at the time the scheme collapsed?

After all, the winners were largely chosen at random so Madoff could point to them to cast luster on his fraud. The "winner" investors did not earn anything and the so-called positive balances were actually other peoples' incoming money.

Regardless of the eventual legal rulings, this is a deep moral problem. What do you think?

The legal issues are described by Diana Henrique in "A Lasting Shadow," in the NYT, Dec. 11, 2011.

Space Tourism

Some mega billionaires use their money to help alleviate poverty in Africa, but Paul Allen uses his to enable space tourism. Grow up, Paul.

Transaction Cost Minimization & the housing crisis

Home mortgage holders and the financial organizations that bundled them for re-sale listed the deed (separate from the promissory note) with a private firm, called Mortgage Electronic Registration Systems (MERS) because it saved the cost of public registration of deeds and promissory notes. The transaction cost economics of Nobel prize-winning Oliver Williamson and others argued that reduction of transaction costs was a clear gain for everyone. But, they forgot that not all affected parties may be party to any given transaction whose costs are minimized. The original mortgagee desires a registration system that is transparent. But with MERS, home owners can't tell who owns their mortgage after it is re-sold numerous times and packaged with others in a bond. This is now being contested in the courts.
Christopher Ketcham, "Stop Payment! A homeowners' revolt against the banks," in the January issue of Harpers suggests that the real estate crisis with its complex highly leveraged derivatives might not have happened without MERS.

Nobel Prize political rhetoric

From a recent story in NYT about the recent Nobel Prize winners:
Mr. Sims and Mr. Sargent "now find themselves thrust into an uncomfortable spotlight. Conservative voices, like the editorial page of The Wall Street Journal, have claimed them as their own. The men’s work on economic cause and effect and the theory of rational expectations — which maintains that people use all the information available in making economic decisions — proves that Keynes had it wrong, these commentators say.
It would be a provocative thesis — if it were true. But Mr. Sims and Mr. Sargent say their work is being misread. Both, in fact, are longtime Democrats who maintain that government can, and should, play a role in economic affairs. They stand behind many recent policies of the Obama administration and the Federal Reserve."
In fact, Keynes with his "animal instincts" had it right. Investors are ruled by their passions and observations of what others are doing. If others are getting rich by investing in sub-prime mortgage bonds, then many will follow suit and there you have a bubble bound to break.
The story in the Wall Street Journal is a good example of how the media shapes policy by lies.

Euro crisis

Quoting Thomas Palley, New American Fund
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The solution is to create a European Public Finance Authority (EPFA) that issues collectively guaranteed debt on behalf of eurozone governments which the ECB is allowed to buy. That would enable the ECB to manage governments’ interest rates via open market operations, as does the Federal Reserve and Bank of England. Proceeds from EPFA debt issues would be distributed to countries on a per capita basis so that national governments would control all spending decisions. Country liability for EPFA debt would also be on a per capita basis, and EPFA decision-making would be governed by member countries with voting rights again granted on a per capita basis. That would render EPFA democratic.

The critical feature is that EPFA’s power to issue debt would be used immediately to finance the rollover of existing debt at lower rates, and it would also be used on a permanent basis to finance current and future budget deficits. An EPFA would therefore be a solution to both the current crisis and to the euro’s design flaw outlined above."
This suggestion is equivalent to my proposed zero-interest public debt issued in severe recessions. If the ECB returned the interest it earns to the borrowers, It amounts to zero-interest debt. I know this is radical, but only a big change will do.

With respect to conflicts within the Euro zone countries, The New York Times reported:
"One dividing line is that the Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts."
I am convinced that this is the best and only solution. It is a happenstance of history that a German is the President of the ECB and that the German thinking is dominated by a past experience of disastrous inflation. This ghost kept the ECB even from lowering interest rates until recently.
Italian leaders announced an austerity program to ostensibly improve their economic growth. Don't these people learn from experience? The British have been going down this road for some time and their economy is stuck in the mud. Some reductions such as in the very generous Italian public pensions are in order. But, massive reductions in government spending just create more unemployment.

Sick, Sick, Sick

A woman pepper-sprayed 20 other customers at a Los Angeles Walmart on the run-up to Black Friday in order to be first at Xbox video games. This is consumerism out of hand. And soon the bargains will take their place in thousands of rental lockers across the country full of stuff that people don't have room for in their houses. Sick!

Same Sex Marriage

Twenty-nine states have enacted constitutional amendments blocking same-sex marriage. Twelve states bar same-sex marriage by statute. This is in spite of the fact that 53% of Americans say gay marriages should be legal. Go figure!

Special Interests rule

In January, the USDA proposed new guidelines for school lunches to reduce carbs and sodium to try to reduce obesity in children (One-third of children are overweight.) But, the food industry spent $5.6 million and blocked improvements to the 15 year-old guidelines. The present guidelines say that two tablespoons of tomato paste constitute a serving of vegetables. Well, the salt industry has to eat too!

European Central Bank

The Spanish are advocating that the ECB buy its bonds. The head of the ECB says no way. He is worried about the wrong problem while Rome burns. The New York Times DOES NOT CONTRIBUTE TO ECONOMIC UNDERSTANDING WHEN IT keeps using the phrase "printing money" when referring to the ECB. Central Banks do not do anything ordinary commercial banks do everyday--i.e. credit the accounts of borrowers when they make a loan. Will the ECB create world-wide financial and social ruin by clinging to ancient symbols? I'm afraid it has happened before!

Bottles at Grand Canyon

The National Park Service had announced the ban of disposable water bottles in the park as they constitute 30 percent of the trash there. A similar ban is in place at Zion. Coca-Cola objected and the proposed ban was put on hold. Coke has political influence because it contributed $13 million to the park. This is another example of the interpenetration of private interests into government. Corporations get what they want via contributions to election campaigns and by making so-called gifts to government programs. Beware of corporations bearing gifts!

If we don't pay taxes to support public functions, we become dependent on corporations to keep them going.

Making MOney

News item, Nov. 4, 2011, LSJ
"The government provided American International Group with $182 billion at the height of the 2008 financial crisis. Treasury has recouped $18 billion of the 268 billion it provided the company through the government's Troubled Asset Relief Program. The rest of the money came from the Federal Reserve."

And where did the Fed get the money? It made it by writing numbers after the account of AIG at the Fed. Apparently, it never occurs to the FED to do the same for underwater home mortgage holders! This is why people are participating in "Occupy Wall Street" and similar protests across the country.

AIG was a profitable insurance company before it gambled on derivitives based on sub-prime mortagages. AIG got bailed out from its folly, but not the common Joe home owner who is now in the street. This is the basis for the protest signs referring to the 99%.

Central Bank History

I have been advocating that the Fed should make loans to the Treasury to finance public intrastructure and consumer spending. If you think this is completely crazy, keep in mind what has actually happened. During the height of the recent financial crisis in 2007, the Fed loaned a German bank $350 million and Citigroup, JP Morgan, Bank of America, and Wachovia each $500 million. All this and more was done to keep the banks solvent so they could make loans to business.

None of this cost the American taxpayer a dime. The Fed was doing what any bank does everyday for its commercial customers, creating money by making loans. Security? The banks pledged various assets including residential mortgages that no one knew exactlly what they were worth. What could the US Treasury use for security? Why not the human capital assets of the nation? This would allow the Treasury to finance such local gvernment investments as teachers instead of laying them off. This makes too much sense and therefore probably won't be done!

For more, read William Krehm at

The Great Casino

"Many investors have bet against Greece, using billions of dollars in complex financial instruments, called derivatives, that turn a profit when there is a debt default." NYT Oct 28, 2011
This is immoral and absurd. No one should be able get rich betting against a sovereign nation.

Underwater Countries

Angela Merkel and the EU countries have forced the holders of Greek debt to accept 50% losses--called a haircut, in exchange for guaranteeing a bailout fund. There is no reason that the German and French taxpayes have to finance this fund. The European Central Bank still refuses to act like a bank and make loans to banks.
I doubt if the bailout fund will be sufficient to cover Greek bonds let alone Italy that owes $2.7 trillion or 120 percent of its GDP. If the central banks does not step up there will be chaos.

Underwater Mortgages

The ratio of total mortgage debt to property value:
Las Vegas 119%
Orlando 100
Phoenix 97
People have begun to stop outmigration from New York, Massachsetts, and Michigan to these supposed paradises. I guesss they have decided that snow is not so bad after all.

Karl Case estimates that the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion in 2010 than it would have been. This kind of decrease in the value of a major asset can not be absorbed by individuals or banks. Both need to start over. After all, this is an accounting problem and we could change the banking rules for banks that write off the decline and refinance their mortages.

Consequences of Burst Real Estate Bubble

A local government official in Livingston County, Michigan reports that the local government is stuck with the bill for water and sewer installation after the real estate developer went bust. The local government exercised its tax lein and put the land up for auction. Since prospects for development are slim and there are few buyers, a parcel may sell for $50. Under Michigan law, the developer may later buy it back for the auction price. If housing demand picks up, the delinquent developer makes out like a bandit. If not, the developer is only out $50.

The "Occupy Wall Street" people probably don't know these details, but they know the sstem is rigged in favr of the rich and they are mad as hell.

Selective Perception

What do you see when you look at the "Occupy Wall Street" participants? If you enjoy the status quo economy you probably see the trash they accumulate. If you prefer change, you probably see courageous people willing to scacrifice their comfort for a cause benefiting many.
It's called selective perception!

Occupy Wall Street has plenty of reasons

This is the kind of thing the "Occupy Wallstreet" protestors have in mind.
The SEC announced that Citigroup agreed to pay $285 million to settle charges that it misled investors in a $1 billion derivatives deal tied to the United States housing market, then bet against investors as the housing market began to show signs of distress.

Farm Subsidies

A new farm subsidy is being proposed by Senators Brown, Ohio, and Thune, S. Dakota, in spite of record high farm income. Current subsidies like many government programs go mostly to the rich. The top 10 percent of direct-payment recipients in 2010 received 59 percent of the money under the program. Those 88,000 people, including farmers, their spouses and absentee landowners, got an average of $29,598.
Here’s why this folly endures. Mr. Thune, a leading voice in favor of deficit reduction, received at least $80,000 in campaign contributions since 2007 from political action committees associated with commodity agriculture, according to data compiled by the nonpartisan Center for Responsive Politics, which tracks campaign spending. Mr. Brown has received $5,500 in PAC contributions from such groups in that period.

Wall Street Protest

Maye the revolution has begun. The Occupy Wall Street demonstration started last week and is growing. 700 people were arrested on Sunday. "The event has drawn protesters of diverse ages and occupations who are speaking out against corporate greed, social inequality, global climate change, etc." A protestor said, "The bottom line is the feeling that the financial industries here on Wall Street have caused the economic problems, and they're not contributing their fair share to solving them."

Detroit Can't Read

Detroit football and baseball teams are doing very well. Probably even those who can't read at the sixth grade level know this. But that is about as far as it goes. An estimated 300,000 Detroit residents 16 and older read below the sixth grade level. Michigan has 1.8 million residents who read below that level. Rochelle Riley writing in the Free Press of Oct. 2, points out that this even makes them ineligible for federal job training programs.
The good news is that the Rotary Club has pledged 3,000 volunteers to tutor adults. Bless them.

Monetary Stimulus

Adam Posen, a member of the the Bank of England's monetary policy committee, wants central banks to print more money, a lot more. He suggests that the Bank of England and the British Treasury form a government backed bank to make small-business loans. He does not say specificially how this would be financed.
The Euro Zone is in crisis and needs some new ideas. The Bank of England has a program of purchasing the bonds of weak euro zone economies, but it is expected to stop. The European Central Bank may be forced to adopt the policy I have been advocating, namely to directly make loans to Greece, et. al. The EU countries have abdicated the right to do this, leaving only the European Central Bank.
It is unfortunate that Posen uses the term "print money" since this diverts thinking about the central bank creating money by making loans. If the central bank can create a loan to a bank on its balance sheet in order to buy bonds, it could surely make a direct loan to the Treasury who could use the money to invest in infrastructure and create jobs whose income could increase consumer demand. This is of course the method that should be used to finance Obama's new stimulus instead of more government borrowing and slashing entitlements. (Slashing military budgets is the right idea.)
Source: New York Times, Sept. 17, 2011

Class Warfare

Republicans such as Paul Ryan scream "class warfare" everytime Obama proposes to remove some of the tax breaks enjoyed by the rich. But, class warfare is exactly what we have had for years as the rich get richer and the middleclass shrinks.

Cash Reserves

American corporations have a record $2 trillion in cash reserves. What does this mean? It means that you can give them all the tax breaks you wnat and they will still not invest and hire more workers. Their problem is not cash, but lack of consumer demand. That means that the critical part of Obama's jobs proposal is to increase incomes of workers via public spending on infrastructure, etc., not tax breaks, including the social security tax paid by employers.

9/11

There were two ways the U.S. could have reacted to 9/11. One, and the option our government choose, was to wrap ourselves in the flag and spend unlimited amounts on so-called security. The second option was to ask, why did this happen. What have we done to anger others to the extent that they are willing to die to harm us? Few asked this question, so we are today just as exposed and hated as we were 10 years ago.

Climate Change & Stupidity

“Here is the Texas governor (Perry) rejecting the science of climate change while his own state is on fire — ” Thomas Friedman, NYT, Sept.14.
Maybe he is suffering from heat stroke!
CNN reported on Sept. 9 that “Texas had the distinction of experiencing the warmest summer on record of any state in America, with an average of 86.8 degrees. Dallas residents sweltered for 40 consecutive days of grueling 100-plus degree temperatures.

The Price of Lost Chances

The Price of Lost Chances
A survey by The New York Times puts a stark price tag on the cost of reacting — and overreacting — to the Sept. 11 attacks. An even more difficult question is how much Americans paid in “opportunity costs.”
By DAVID E. SANGER Published: September 8, 2011

"In 2004, when he was arguably still capable of initiating another devastating attack on the United States, Osama bin Laden released a video gloating about his plan of “bleeding America to the point of bankruptcy.”
As usual, Bin Laden’s vow was overblown — but, as it turned out, not entirely crazed. A survey by The New York Times, detailed in the accompanying chart, puts a stark price tag on the cost of reacting — and overreacting — to the defining event of the past decade. America’s bill for fighting a 21st-century “asymmetric war” comes to at least $3.3 trillion. Put another way, for every dollar Al Qaeda spent to pull off the Sept. 11 attacks, the cost to the United States was an astonishing $6.6 million.
Today, Al Qaeda in Pakistan is crippled and Bin Laden is dead. But the $3.3 trillion figure suggests that the unanticipated costs of how we managed a grim decade — money already spent or committed in the future — amount to a little more than one-fifth of America’s current national debt.
Some of those were unavoidable, direct costs of responding to the attack. Some, like the Iraq war, were expenditures of choice. But there is also the more difficult, less quantifiable question of what we paid in “opportunity costs.”
Less than a trillion dollars of the $3.3 trillion was for direct responses — including toppling the Taliban. But what if at least some of the remaining $2 trillion plus had been spent on other, longer-range threats to American national security? Rebuilding a broken education system? Finding more imaginative ways to compete with China? Reducing the national debt? Or delivering on promises, by President George W. Bush and Secretary of State Hillary Rodham Clinton alike, for “Marshall plans” to rebuild societies at risk of letting the next Al Qaeda flourish?"

U.S Part of Drug Problem in Mexico

President Filipe Calderon of Mexico argues that the U.S. is partly to blame for the drug wars and killings in Mexico. “Calderón is clear about what he believes are the main causes of the problem. The consumption of drugs in the US and easy access to arms (which he also faults the US for) are two main reasons, along with a lack of educational and work opportunities.” News of the editorial was published by the Christian Science Monitor, June 16, but received little coverage in America where few think it is our problem. Wake up America, if we didn’t buy it, there would not be so much money to attract criminals. We need to seriously discuss making drugs legal and available to addicts in supervised clinics as is done in Holland.

Home Mortgage Relief

A 20 to 30 percent drop in home values is hard for banks and home owners to adjust to. Here is a possible plan equal to the task. Banks could be given the option of reducing the princpal owed to current assessed values. The difference in the value of the mortgage on the bank's books could be adjusted without a charge against the banks' capital as is now not the rule. These values exist only on paper and paper can be adjusted when it is out of line with reality. Example:
Original mortgage amount $100,000
Current market price 80,000 and the amount of the new mortgage
Difference 20,000 written off with no charge to banks' capital.
The interest rate on the new mortgage of 80,000 would be at current rates. The banks would have nothing to lose by getting these non-performing loans off the books. And, the home owners would have a mortgage they could afford, saving them from default. This is the bold plan that Obama is unlikely to propose.

Coffee Prices at Mercy of Speculators

Hedge funds and other speculators are drving up the price of coffee (as they have done with gasoline) much more than warranted by fundamentals of supply and demand. The government should prohibit futures markets and let the gamblers play at the casino where they can't harm the rest of us.
Futures markets are a means by which coffee processors can lock in the price of future deliveries, but this benefit is not worth its cost. Lots of businesses live with uncertainty--sometimes the acutal price in the future is more than the expected price and sometimes less. A prudent company can survive these fluctuations and thrive on the averages.

Clean Air and Breathers Lose

Our spineless President has caved in on proposed EPA clean air regulations, even though the U.S. has the dirtiest air in the developed world. The old law preventing EPA from considering cost in formulating regulations affecting public health is ill-concieved, but Republican rants about job losses is also over blown. Coal-burning electric power companies would shift to other energy sources, not close their doors.

Plight of Low Income people in Western World

Germany looks a lot like the U.S.
"While the top net income for middle- to higher-income Germans, generally defined as those earning 3,400 euros a month, or $4,870, rose slightly in real terms from 2000 to 2010, net incomes for low-wage earners, or those earning 960 euros a month or less, have fallen 10 percent, according to a new study by Markus Grabka, an economist at the DIW German Institute for Economic Research." NYT
Germany and the US are following a low wage policy, obstensibly to keep jobs from moving to low wage countries. Must labor be beaten down to the level of the world's poor? The better off will not escape from a low wage economy as it is wages that drive consumer demand, and it is consumer demand that keeps business profitable in the long run. Germany does not have a minimum wage, but it does have generous programs for low-income people. My own thinking is that we need a generous minimum wage so that everyone working can live decently.

The Big Casino

If you are looking for evidence that the stock market is one big casino, note the yo-yo pattern of the markets this week. Up 600 points, down 600, and repeat. If this casino were isolated from the real economy, no one would care, but it is not. To reduce this problem, four European countries have banned negative bets against financial stocks--selling securities that you do not own in hope of buying them back later for less. This is a pure gamble not unlike betting on the horses.
Another casino dealing in petroleum futures accounts for a similar yo-yo pattern in gas prices at the pump. Our lives seem to be at the mercy of gamblers' whims.

Taxes & Jobs

The following recent letter to the LSJ expresses my sentiments exactly:
Question for Speaker Boehner:
"The Bush tax cuts have just had their 10th birhtday, and acording to the conservative Washington Post, have cost us over $2.8 trillion. These tax cuts have benefited the top one percent, or a Boehner and his allies like to call them, 'the job creators.'
Speaker Boehner, I ask you, 'Where are the jobs?' "
signed, John Bethell, Grand Ledge MI

If low taxes for the rich were going to do the task, they should have worked by now! The fact is that our corporatons have huge cash reserves that they are not investing in plant and equipment, but rather buying up each other. Increasing their cash piles even more will do little for jobs. We have been sold a slogan despite the facts.

National Security

The police department of the city of Pontiac, Michigan, with 58,000 residents, has been closed for lack of funds. Still the Congress will not cut military spending in the name of national security. As long as many people are obsessed and have their attention diverted by slogans like "National Security", hate gays, and same sex marriage, we will have these insanities.

Debt Ceiling

The radical Republicans have held the country hostage and won. They have protected the tax cuts for the rich and the military-industrial complex. Of course, the debt ceiling was a bogus concept from the beginning.

Energy-- Good News

Automakers are not protesting Obama's increase in fuel standards to 54.5 MPG from the current 27 corporate average by 2025. The president calls for five percent a year improvement from 2017 to 2025.
This is a different posture from that taken by the automakers four years ago. Apparently the companies thought it would be bad form to oppose the new standards after the goverment saved their butts with bailouts.

Conservatives Become Radical

Conservative has always been a misnomer and never more than when applied to the Republicans in Congress. They are radicals who are willing to bring the country down to protect the super rich from taxes, break the unions, etc.

Light Goes On?

The ban on the sale of incandescent light bulbs set to be phased in January 1 is being opposed by some in the name of freedom. Whose freedom? Usually we say that people should be free to do as they wish if they do not affect others. But if some buy incandescent bulbs and thereby use more electricity and require more coal-burning generaton, they most certainly affect me. In an interdependent world, no honest argument may be made for freedom in general. The honest statement is that one person's freedem to use incandescent bulbs is a non-freedom for others.

Farmland Bubble

The value of Iowa farmland has almost doubled in six years. They rose 160 percent in the decade through last year. The super rich are looking for places to put their money. So they are buying farmland hoping for prices to apprciate. Some guy who sold his business for 45 milllion dollars bid $4 million for 430 acres in Michigan. His capital gains are taxed at a low rate. The Republicans say we can't taax these people because the provide us jobs. But, like many other fat cats, they do not create jobs, they just inflate asset values. In this case, there are no more farm jobs than under the previous owners.
Part of the rapid rise in farmland prices is due to government subsidies for ethanol made from corn. The Congress passed this silly subsidy as presidential candidates competed for votes from the Iowa caucus. The same people who oppose Obama's increase in miles per gallon requirements for auto manufacturers probably support the ethanol subsidy in the name of reducing oil dependence.

Spacey

The space shuttle program is now history. It never made much sense from a scientific perspective. Unmanned space exploration is cheaper and even more effective. Manned exploration was problematic from the beginning, but it was thought that manned flights were more likely to capture the public's interest and support. So chalk up another victory for show business.

Unemployment and Military Budget--both up

Unemployment has reached 9.2 Percent. So what did the Congress do? The House increased the military budget by 17 billion. The AP story cites "Concerns about undermining national security, cutting military dollars at a time of war, and losing defense jobs." "National Security" has become a take-out term that is meant to stop all debate. Our nation, states, and cities are more threatened by police and fire layoffs than by the Taliban.

Tea Party ON

The Detroit News reports that in the city of Flint, "Nine abandoned homes were torched Monday and Thursday, and a dozen burned in a four hour period last month. The week before, a civil rights pioneer was killed in his upper-income neighborhood. Two weeks earlier, one of the police mini-stations erected as a solution to rising crime was burglarized."
Because the city is broke, the number of police was cut by two-thirds. Patrols take hours to respond to calls. Even if suspects are apprehended, the city jail has been shut for three years and the county jail is full. "The criminals freely roam the streets while residents huddle in their homes...." Is this really the brave new world that Tea Party voters wanted? Is this the smaller government that they wanted?

Captains of Industry

The Lansing State Journal laid off 19 staff. A few years ago the paper had 24 reporters and now the newsroom has two editors, eight reporters, a columnist, and a multimedia assistant. The LSJ is a Gannett paper that owns 82 papers and shrank its employees by roughly 2 percent. On the other hand, the Gannett CEO took home a $1.75 million bonus last year that was part of 9.4 million total earnings. The Chief operating officer's earnings more than doubled from 2009 to 2010 to $8.2 million including a 1.2 million bonus.
I guess you have to pay a lot to get people to do this dirty work! These are the super rich that the Republican Congress refuses to increase their taxes because they provide us jobs. This is Orwellian double-speak at its worst.

Dumb and Dumber No. 2

A New York man is killed while riding his cycle to a rally protesting a law requiring a helmet. He was not wearing a helmet. That's dumb!

GBT

Applause to three local congretations of the United Church of Christ who welcomed Michigan Pride attendees this weekend. Unfortunately, Michigan is one of five states to ban all forms of recognition for same-sex relationships. The Bible quoters held a rally at the state capitol while the Pride Parade was in progress in Lansing. Would that the Bible quoters were as emotionally anti-war as they are anti-gay. The Biblical references to love and peace need more attention.

Dumb and Dumber, No. 1

I am starting a new series entitled “Dumb and Dumber.” First, I want to make a distinction between dumb and stupid. Dumb is when a person makes a wrong choice out of ignorance of the facts. Stupid is when a person hasn’t the sense to act in their own self-interest, often because their minds are captured by slogans and myths. An example of the latter is when low and modest income people support tax breaks for the rich. That's stupid.
The first example of dumb is the large number of people who buy gluten-free foods when only two percent of the population is allergic to gluten. Gluten-free is now a fad food, perhaps confused in popular minds with carb-free and thus good for those on diets. That’s dumb.
Please add your favorite example as a comment.

Catastrophe- Part 8 in a series

A recent National Geographic television channel program helped me understand the physics behind the increased number of violent storms--hurricanes, floods, tornadoes. An increase in the earth's temperature causes greater evaporation and more water vapor in the atmosphere. This moisture has to go somewhere, and that is back to earth. Also the increased water vapor absorbs more of the sun's energy and this energy contributes to storms.
Now, for public policy-- It is past time we got serious about our activities contributing to greenhouse gases, etc. particularly coal-fired power plants. The key to utilizing wind and solar energy is a national power grid to carry the electricity from the sunny and windy places to our major cities.

Debt Ceiling = Recession continues

Never has public policy been so dominated by superstition and myth as those opposing the increase in the debt ceiling and insisting on reducing Federal spending. This is a recipe for continuation of the recession. The Federal government is the only hope for tax revenue-starved state and local governments. Do these people really want to reduce the number of teacherw, firefigters, and police??

Big Oil Gouges Bib

The Senate continues the unconsionable tax breaks for big oil. Last quarter profits for Exxon of $10.7 billion and 30 billion for 2010 are apparently not enough to keep them in business! The Big 5 gouged us for $35 billion in the first quarter.
The political power of oil makes a mockery of democracy! I am pleased that Michigan's Senators voted against continuing the tax breaks.
And Big Oil is using high prices to exploit the environment by lobbying for permission to drill off shore, etc. all in the face of the recent blowout in the Gulf.

Immigration Policy

Baldemar Velasquez, president of the Farm Labor Organizing Committee, receiving an honorary degree from MSU, set my mind to work on immigration policy. He argued that all illegal immigrants living in the U.S. should be given the right to stay. "But, wouldn't that reward people for breaking the law?" Velasquez points out that we pardon law breakers all the time. He gave examples of Pres Nixon and the Watergate operatives. So why not Mexicans?
He argues further that if we believe in open markets for goods, why not for people. I don't have a good answer, so I am going with him, at least up to a certain number per year, so as not to overload facilities. I recall that Switzerland accepts a certain number of foreign immigrants per year and requires every local government to provide for a certain number. This spreads immigrants around rather than having them all in a few places putting a great strain on social services, and facilitating integration, etc.

Catastrophe- Part 7 of series-- Mississippi floods

After weeks of rain, the Mississippi River crested at Cairo, Illinois—an all-time high, exceeding the 1937 record by two feet. The Army Corps of Engineers breeched a levee to reduce the level at Cairo. The water has to go somewhere, flooding the town of Pinhook, Missouri and acres of farm land, a kind of triage. The same thing was done in 1937. Cairo is probably the most poorly situated city in the country on a narrow strip of land between the Mississippi and the Ohio Rivers. As Isabel Wilkerson writing for the New York Times in 1993 pointed out, “For generations, some farmers figured floods and droughts into the cost of doing business. But then the country’s big plumbing system of levees and dams, made better after every flood, was supposed to keep the rivers in their place and maintain the comfortable paradox of living on a floodplain.”
Just because our ancestors ignored nature and put a city in harm’s way does not mean we need to perpetuate the mistake. There will be heavy rains and hurricanes, and the flood waters will reclaim their own ancestral haunts. The truth of floods is that despite huge investments in flood control, the long term damage is unchanged. Why? Because we keep adding people and structures to the flood plain so that when the protections inevitably fail, the damage is higher.

"World A Safer Place" ??

I'm sorry Mr. Obama, the world is not a safer place with the implementation of your order to kill Ben Laden. You have fallen into the same trap as your predecessor who thought winning military battles would make the world safer. How many more years of evidence do you need to see that it is not true? The death of Ben Laden will only further energize terrorists. Terror breeds terror.

Catastrophe-- Part 5 of a series

Lester Brown draws our attention to three factors contributing to a possible catastrophe in world food supply. See Journey to Planet Earth, PBS.
1. World population continues to grow, even with some population planning bright spots in Bangladesh, etc.
2. As income rises in places like China and India, the demand for animal products grows that literally takes bread out of the mouths of the remaining poor.
3. Conversion of food crops (especially corn) to ethanol.
This adds up to higher food prices that we are already seeing, which is particularly ominous for the poor of the world. We are already seeing some failed nation states where inadequate and more costly food is part of the problem—Chad, Somalia, Afghanistan, Sudan, D.R. Congo, and Haiti.

Catastrophe-- Part 4 of a series

The people who object to an energy policy for the U.S. and reject the Kyoto agreement, argue that it is too costly. The environmentalists say that the costs are not fully accounted for. They point to failures in the market. But the problem is not inherent in markets, but rather in the property rights that are prior the market. A steel plant would not pay for labor if slavery were legal. And, it would not pay for iron ore if the pits were not owned. The question is who owns.
If the distribtion of rights is acceptable, there is little need for regulatory/administrative rules. This may sound like the familiar "markets are superior to regulation," But, it is quite different. There is no way that market processes can change property rights to those that we might like. Rights are anteceent to the market.

Your Brain on Music

"Research is showing that our brains understand music not only as emotional diversion, but also as a form of motion and activity. The same areas of the brain that activate when we swing a golf club or sign our name also engage when we hear expressive moments in music. Brain regions associated with empathy are activated, too, even for listeners who are not musicians.

And what really communicates emotion may not be melody or rhythm, but moments when musicians make subtle changes to the those musical patterns."

New York Times, April 18, 2011

Catastrophe-- Part 3 of a series

After you Alphonse: The western nations are embroiled in a fruitless debate with the developing world like China over who should reduce their carbon emissions. The growth in emissions will be in China and India, as they want to be like us. It is my observation that arguments over equity often result in everyone going down together. It is like an argument over who should bail as the boat sinks. Perhaps for every percentage that the US cuts its present emissions, China could reduce its growth in emissions by a similar amount.

Catastrophe-- second in a series

The major catastrophe facing the world today is not natural, but human induced climate change. The problem for acting on it is the fact that it is slower than a tsunami. Carbon emissions from coal burning and autos are threatening the polar ice caps and glaciers. Do I care if the problem is only the polar bears? A big problem would be slackened flow of India’s rivers used for irrigation and thus food production. And, perhaps rising sea levels flooding heavily populated coastal low lands. Acid rain released with burning coal is destroying our forests.
No more coal-burning electric generation? Could we do it Now? In World War II we turned our industrial capacity to the production of planes, tanks, etc. We simply said, no more production of private cars. The prohibition lasted almost three years. When we saw a clear and present danger to world survival, we acted. Instead of present danger, catastrophe is a few years off. But, if we are to reverse present trends in time to avert catastrophe, we need to act now.
1. No new coal-burning power plants.
2. No more cars with less than 50 m.p.g.
3. No more additions to the inter-state highway system, but rather a massive building of high-speed rail.
4. Massive and immediate development of a national electric grid to carry electricity from areas of solar and wind energy to populations centers.

Tell Me A Story Goldilocks

Double-dealing Goldman Sachs sold CDOs on subprime mortagages to investors all the while it was taking positions betting the mortgages would fail. They purchsed "insurance" agaist loses from AIG. AIG soon had so many claims against them that they could not pay off, so the government bailed them out to the tune of $182 billion, and thus made Goldman golden. This was called an AIG bailout, but it was really a Goldman bailout. Goldman used their politial power to insist that AIG could not sue Goldman for misrepresenting investments they knew were going bad.
Goldman insists that the contradictory actions were made by separate entities acting independently within the firm. Sure, tell me another funny story.
Not new news, but worth remembering.

DEBT!

Debt has become a scare word meant to paralyze thinking and to create a search for how to reduce it and by how much rather than to examine its assumptions. Here are some facts.
1. All money is debt, there is no other kind.
2. When a bank makes a loan to a business, it creates money.
Policy suggestion:
If a bank can create money for business, why can't the Federal Reserve (the nation's own bank) create money for the Treasury to keep our schools going and the police and fire fighters employed?

Outrage of the Day

Noted without further comment:
U.S. Senator John Kyl, R-AZ, stated that abortions comprised over 90 percent of the services performed by Planned Parenthood. It's more like 3 percent. When questioned he said, "No problem--it wasn't meant to be factual."

$4 Gas

Why have gas prices shot up in the last several weeks? Did a whole bunch of oil wells explode? Not much has changed in the real world, just in the imaginary world of casinos called futures market contract trading. Speculators think prices may be higher in the future, so they bid up the price of a contract to deliver oil sometime in the future, perhaps a year away. If the price does go up, they make a lot of money. In the meantime, the big oil companies are happy to charge us more now.
Some claim futures markets are jutified by giving big users of the product (such as the airlines) a chance to lock in a price for future delivery. But, in fact the market for futures is much, much larger than the users of the product. Most of the players are simply gamblers. Gamblers in ordinary casinos don't bother the rest of us, but these speculators do.

They Still Don't Get It

General Motors announced the Cadillac CTS-V Wagon that has a 556-horsepower V-8,which uses premium gas and qualifies for the $1,300 gas guzzler tax. And we tax payers saved their butts for this innovation? Well, Texans need something to drive on their 85 MPH highways!

World Ruled by Gamblers

The denizens of the casinos called bond markets wrecked the world economy in 2008 with their extreme bets on derivatives. Now they are attacking individual countries.
New York Times, April 13, 2010
"Portugal's Bailout Unnesessary"
"Portugal had strong economic performance in the 1990s and was managing its recovery from the global recession better than several other countries in Europe, but it has come under unfair and arbitrary pressure from bond traders, speculators and credit rating analysts who, for short-sighted or ideological reasons, have now managed to drive out one democratically elected administration and potentially tie the hands of the next one."

Great Britain (and Holland) is bringing suit against little Iceland over money their nation's depositors lost when Iceland's banks went bust. They might better sue Goldman Sachs who caused the problem in the first place. Goldman got all their money back for poor bets courtesy of the American taxpayer. Why is the American Tea Party after medicare spending when Goldman's billionaires took them for a ride?

Catastrophe-- Part 1 of a series

The movement of the tectonic plates and subsequent tsunami off the coast of Japan reminds us that we live on a thin crust subject to the whims of nature. In 2004, a similar event in the Indian Ocean killed 230,000 people in dozens of countries. Devastating as these tsunamis were, they had little effect on the atmosphere, unlike that of volcanoes. I am reminded of Krakatoa between Sumatra and Java, Indonesia in 1883, which killed 36,000 people. In the same area, Tambora, in 1816 produced an ash cloud that resulted in a year without a summer, and stunted harvests and created hunger in Europe and Russia.
David Keys in his book, Catastrophe, presents evidence of a much larger eruption in 835 that blew away the island upon which it sat. He associates the major climatic change to follow (floods and drought) with the disintegration of the Roman Empire, waves of bubonic plague, westward movement of the Avars out of Mongolia, and the rapid rise of Islam. When food sources change dramatically, political and social changes follow.

Health Care Act

There are many things to like in the Health Care Act.
1.Strengthens Medicare by lowering drug costs for seniors and by adding preventative services.
2. Improves insurance coverage for those with pre-existing conditions.
3. Expands coverage by allowing parents to keep their cildren on their policies until age 26.
4. Gives new options to plan and pay for long term services through a voluntary insurance program.
So why are the Republicans so rabid in their opposition? Because many of them have nice coverage through their employers and begrudge it for others. And, because it mandates that everyone must have insurance. But, one of the principles of insurance is that the base must be broad for the average needed care to be supported. This is why group plans have favorable rates.

European Austerity

Austerity is not the answer for Europe’s debtor nations. The UK has gone that route and the economy has tanked. Others, as noted below in an article in the New York Times, are destroying themselves. And Why are we all doing this when the physical ability to produce is still there? Eichengreen’s suggestion makes sense. It could be combined with writing off some of the bad loans held by banks as I have suggested before. We are killing ourselves at the altar of paper.

“In Greece, the central bank is forecasting that unemployment will hit 16.5 percent this year. Support for the Socialist government of George Papandreou and his reforms continues to erode, with a recent poll showing that just 35 percent of Greeks would vote for him again.
In Ireland, it now seems that the banks whose bad lending brought the country to its knees may need even more than the 35 billion euros already allocated to them by the European Commission and the I.M.F.
Finally, in Portugal, after four cost-cutting austerity packages that have covered the usual areas like pension reform, spending reductions and tax increases, the people have had enough.
The lesson is clear, argues Barry Eichengreen, an economist and an expert on the euro and its origins — sustained austerity that is not supplemented by some form of debt reduction in which the holders of bank or government debt are forced to take a loss is not just unworkable but unfair as well.
“When you reduce the incomes of the people who service the debt but you don’t reduce the incomes of the bondholders, you won’t reduce the level of debt,” he said. “Some might call it shared sacrifice, but some people are not sharing.”

Smaller Government

The Radicals are finally getting what they want--a smaller government, meaing reduced state and local government spending. Oh well, we don't need police now that everyone in Michigan can carry their own iron. And, who needs public schools since youth are having trouble finding jobs anyway. It's the theater of the absurd!

Bad Banks

There are three major ways that reduced asset values have been dealt with by different countries:
1. Asset guarantees. This was used in the US for Citigroup and Bank Of America. This was done to make them more attractive for merger. This doesn't cost the government much initially, but future liability to the taxpayer is uncertain.
2. "Bad Banks" Used in a limited way in the US for Bear Sterns (that was allowed to go bnkrupt) and AIG (government became majority stockholder). Sharply reduced valued assets were removed from the balance sheets of these firms. Liability of taxpayers is not clear to me. This approach could be similar to removing the rule that non-performing loans are a charge againt a bank's capital ??(the method I have been advocating).
3. Public Asset Management Companies (AMCs) Distressed real estate related assets purchased by an AMC. (I am not clear about the public liability, but I suspect the government is left holding the bag.) Ireland used this method, buying $97 billion constituting 44 percent of GDP.

Underwater Mortgages

The number of Amricans who owe more on their household mortgages than their house is worth now exceeds 11 million (23% of all mortgaged homes).
One of the marvelous things about capitalism is that a peoples' wealth can increase without any effort on their part as prices increase. The reverse is also true. Through no action on the part of the asset holder, wealth can decrease--occasionally dramatically as in 2008 when housing prices plummeted 20 to 30 percent. Such a big swing in value can make old contracts impossible to honor.

Of course, this was a paper phenomenon, not a tornado that made people homeless, though the physical result was similar. The banks are resisting reducing their mortgages because then they would have to admit they are bankrupt under current banking rules. The government could have changed the rules one-time to allow banks to write-off say 20% of their mortgages' value without it being a charge against their capital in exchange for a similar reduction in what home owners owe.
We celebrate the glory of capitalism, but don't have institutions that acknowledge its inherent volatility.

While You Weren't Looking

While the attention of the average American was distracted by trumped-up terrorism (WMD), fear of gays and abortion, the rich have stolen their purses! Income inequality has grown since the 1970s and spurted since the 1980s.
Everytime this is pointed out, the radicals say the speaker is engaged in shameful class warfare. Well, it has been systematic class warfare, and the middle class is losing big time.

Conservative Fraud

Using the word "conservative" is inappropriate when applied to the Republicans and their Tea Party allies. They are not conserving, but rather are radicals attacking unions and public schools.

Arab Democracy

Sometimes other writers capture my thoughts so well I can only quote them.
"When one looks across the Arab world today at the stunning spontaneous democracy uprisings, it is impossible to not ask: What are we doing spending $110 billion this year supporting corrupt and unpopular regimes in Afghanistan and Pakistan that are almost identical to the governments we’re applauding the Arab people for overthrowing?" Thomas Friedman, New York Times, 6 March 2011.

Stimulus & Jobs

The Congressional Budget Office reports that the unemployment rate might have been higher if not for the Stimulus enacted in 2009. A study by Goldman Sachs comes to the same conclusion. It's sad that the no-nothings in Congress who want to severely cut the budget don't understand. But, then they are not interested in facts, only folk wisdom and slogans.

Eisenhower Wisdom on Military Spending

“Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. … Is there no other way the world may live?”

then President Dwight Eisenhower

Super Bowl and the Decline of Western Civilization

We have a society where business firms are willing to spend three million dollars for a 30-second spot on television. At the same time, local governments are hard pressed to provide police and fire protection and some say we can't afford health care for the uninsured. This is sick. I wonder what the equivalent was in the days leading up to the fall of the Roman Empire??

Afghanistan, Mexico, Drugs & US policy

The current issue of National Georgraphic asks how the growing of heroin poppies in Afghanistan might be controlled. It is not just an Afghan problem. They are the supply side, but we are the demand side. Until we get realistic about drugs and help addicts, rather than criminalize them and their suppliers, the profits in the business will attract desperate people. We are responible for the terrorism in Afghanistan and Mexico and other places, and no amount of police and military will stop it. Our expensive drug policies are not only a failure, but have harmed people around the world.

Social Security is Falling, says Chicken Little

The press and politicians are trying to scare us about Social Security so we will accept silly things. It is like Chicken Little claiming the sky is falling. Sure the net outflow from the SS Trust Fund will drain it in 2037, but the Fund is just an accounting fiction. We don't have a special tax and fund for national defense. While it might be a good thing if the papers harped on the war fund being exhaustible, it would be practically meaningless. All taxes go in the Treasury and Congress decides how to spend it. It is not helpful to isolate one category of tax and spending from all the rest.

Culture and the Economy

It is not possible to understand the economy without understanding the culture that lies behind it. Below are some key facts:

1. The traditonal pension plan is disappearing. In 1980, 39 percent of private-sector workers had a guaranteed income for retirement. Today it is 15 percent.
2. Many retirees banked on their homes for retiremen funds. But, a decline of around one-third in housing prices has altered that. Around 20 percent of homeowners owe more on their mortgages than their home is worth.
3. The personal savings rate averaged around 10 percent in the 1970s-1980s. But, by 2007, the rate dropped to negative.
4. About three-quarters of people file for Social Security as soon as they are eligible at 62. Early retirement means that people after 62 have no work income out of which more savings could be set aside. Yet, these are the years when income is the greatest making savings easier.
We have a culture of living it up now, and the devel take the hindmost. No wonder that we have a lot of grouchy seniors who want to blame government taxes and spending for their troubles.

Letter to State Governors

There is precious little State governors can do at the state level to create jobs. The problem is inadequate consumer demand for the products of business. Spend your time lobbying Congress to authorize the Federal Reserve Bank and the Treasury to put the unemployed to work making things we need like hospitals, roads, trains, and state and local services such as police and fire fighters. Cutting state and local budgets will only make things worse. The laid-off workers can't buy anything. Business needs customers, not simly tax cuts.

Jobs policy

We are ruled by myth and assertions. One of the most troublesome is the iidea that we must kow-tow to buiness because they create jobs. David Johnson of Campaign for America's Future sets us straight.
"A job is created when demand for goods or services is greater than the exisitng ability to provide them.... So demand creates jobs. Business want to kill jobs, not to create them. Many people wrongly think that busineses create jobs. They see that a job is usually at a business, so they think that therefore the business "created" the job. The thinking leads to wrongheaded ideas like the current one that giving tax cuts to businesses will create jobs, becauae businesses will have more money. But an efficiently-run business will already have the right number of employees."
The botom line is that businesses need customers first of all, not tax cuts. And, how do we get more customers with more money to spend? This is a theme of several of my previous posts, but the essence is for the government to be the meployer of last resort, make public goods and services, and with the income that the now unemployed would receive, consumer demand will increase. The Federal Reserve should be creating money for the Treasury to spend for hospistals, schools, roads, trains, etc.