Bank of Japan More Innovative than US Fed

The Bank of Japan has begun a modest purchase of the stock of Japanese firms that expand the economy by investing in their factories or by raising workers’ pay.  “The BOJ is doing what it can to support capital spending and investment in human resources” says the Bank’s governor.  In contrast, the American central bank buys billions of dollars buying bonds owned by banks.  U. S. “corporations have tapped the markets for trillions of dollars in recent years, yet they have plowed relatively little of the money into new operations.”  American firms have been on a binge of buyouts and mergers further adding to oligopolies.    The stock market and junk bond markets love this.   “Business investment as a percentage of gross domestic product has remained below historical levels since the Great Recession. “ The government has not helped.  “Public investment spending as a share of overall economic activity has fallen to lows not seen since the 1940’s.  (NYT Dec. 18, 2015 p. B-8) This has pleased the Tea Party and other “know nothings.”  But it has done nothing to fill road chuck holes and repair dangerous bridges.   Meanwhile American passenger rail lines are the laughing stock of Europe and its high speed trains.                                                                                                        

Big Oil Spoils North Dakota

Big oil companies in North Dakota said their impact on the environment would be minimal. They lied.  The citizens of Tioga witnessed the largest land oil spill in recent American history in September, 2013.  Also in 2013, the locomotive of an oil train derailed and exploded in a collision near Casselton.  This year North Dakotans discovered illegally dumped oil filter socks, a source of hazardous radiation. A landfill with waste from oil fields is near the banks of the Missouri River.  Some families experienced dirty drinking water.  “One company, in fact, sued three activist landowners in 2011, seeking damages for trespassing after the men tried to document what they believed was the cover-up of a saltwater spill.”  Federal wildlife agents asked the oil companies to cover their waste pits as migratory birds sometimes dived in.  They were refused.  Thirty percent of the natural gas produced in the state was being treated as a byproduct and burned off, spoiling the air for neighbors.

      The oil drillers are lightly regulated by the three-member North Dakota Industrial Commission composed of the Governor, Attorney General, and the Agricultural Commissioner.  In their eagerness to gain great wealth, the state largely let the oil companies police themselves.  The oil companies made contributions to the governor’s campaign in 2012, a total of $550,000 from oil-related executives.

         A family signed a lease and saw their first well drilled in 2008.  Then June, 2011, they were informed that Burlington Resources intended to create a 30,883 acre oil production unit that would override their lease agreement.  Instead of receiving royalties for their land, the revenues would be split by all owners in the mega-unit. The mega-unit would include part of the Little Missouri State Park (three storage tank batteries inside park boundaries). The family learned that their consent was not required.  Only 60 percent of the unit’s owners were needed, and Burlington together with the Federal government land already amounted to 60%.  This freed Conoco Phillips, successor to Burlington, from boundary lines that required 200-foot set-backs from the borders of each production unit.  The companies would not have to negotiate easements or rights of way for pads, roads, and pipelines.  Dec 20, 2013, the commission approved the mega-unit.  This amounts to private eminent domain—taking of land by private companies for their own benefit.

             Source: New York Times, Nov. 23, 2014

Japan's Folly

Japan's economy has been in the doldrums for years.  So what are they doing? Their central bank is buying government debt just like the US Fed was doing.  Supposedly, these purchases keep interest rates low and stimulate borrowing and growth.  But the evidence is to the contrary in  a country with zero interest rates and still little investment. If this policy worked it would have worked before now, but evidence be damned! We live in a world driven by ideology and bankers.

Brussels Riots

Riots broke out a few days ago in Brussels as people protested the government's austerity policies. In Europe when people are fed up, they riot while in the U.S. our low income people accept their fate and believe it is their fault. Austerity policy has not worked anywhere in Europe, but they hold to it like a dog with a bone.  Germany lost WW II but they dominate Europe and the EU and insist all countries should follow them no matter how different are their economies.

Institutions and relative incomes

Important insight by Robert Reich--
"The myth is you get paid what you’re worth. Yet for many occupations it’s just the reverse: Pay is inversely related to the real benefits to society. Social work, teaching, nursing, and caring for the elderly or for children are among the lowest-paid of all professions, but the benefits to society are considerable. We desperately need these people." 
   Couldn't say it any better.

Why Do Many Embrace Inequality?

Papers and books describe the widening inequality in our society.  They provide little understanding of why the 99% put up with it.
          The explanation of Prof. Justin Friesen  et. al. suggest that "When we feel a lack of personal control, we compensate by looking for order or predictability in our environment.  So we desire and perceive governments and gods to be particularly powerful.  Those who suffer inequality often even defend the social system responsible,  rather than accept that life has been unjust." (reported in the NYT June 22, 2014)
       The constant litany in our press and TV emphasizes that capital provides jobs, and we can't threaten it or it will go away.  This slogan translates into no protest against the favorable treatment of capital gains and low effective tax rate for the super rich. 
    It is just as true that labor provides opportunities for capital, but this is seldom noted.  Our political energy is captured by the Tea Party who rails against big government (whatever that means) and ignores inequality with the lame excuse that doing anything about it would mean more government (whatever that means).
           

Bank Bailout in the Paper Economy

Timothy Geithner, former Treasury Secretary, has written a book explaining that he had no choice but to bailout the banks at taxpayer expense to prevent the country from falling into deep depression after the crisis of 2008.  Bunk.  There were other alternatives. Bad loans could simply be written off were it not for a rule that says the losses must be a charge against the bank’s assets.  If a rule is a problem, change it.  Another alternative was to nationalize the banks as at least one European country did. 

      You might think that a banker would understand that money created by a loan is just paper.  That paper could be disavowed, and the banks start over.  Likewise for the home owner—the mortgage terms could be rewritten to reflect the new lower value of the property and with new current interest rates. 

      Instead of this sensible policy, we persuaded somewhat more sound banks to buy the insolvent banks creating still larger banks too big to fail.  And, we enabled the management of these banks to pay themselves absurd salaries helping contribute to the increasing inequality we see today.  The home owners that could afford to barely continue paying to avoid default would be spared the agony.

      I described the above to a member of the Board of Governors of the Federal Reserve some years ago.  He said the idea was sound, but they did not have the legal authority to do it.  Was he making any attempt to change the law?  NO.  To do so would be radical and troublesome.  Geithner, Summers, and Paulson were all bankers who do not understand or admit to the essentials of banking.  They were and are incapable of thinking outside the box.  I hope someday that their narrow thinking will be placed alongside the tragedy of the Easter Islanders who cut down all of the trees on their island to build customary bonfires to their gods—only to find that erosion destroyed the island and their pathetic culture. 

     Note-- If this blog does not create some comments, I will be depressed.

Quantitative Easing

Quantitative Easing, don’t you love that term?  It is meant to be psychic balm.

The idea behind it is that the central bank can buy Treasury Notes and mortgage-backed  securities and thus increase their prices and drive down long term interest rates. The low rates are supposed to enable firms to borrow and provide employment.

      In 2012, the Bank of England (BOE) issued a report that said that the Bank of England’s policies of quantitative easing (QE)– similar to the U.S. Fed’s – had benefited mainly the wealthy.

Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.

        Many said the BOE's easing added to social anger and unrest. Dhaval Joshi, of BCA Research  wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it."

     "The question is whether putting more profits into the hands of the top 5 percent will really generate jobs for the rest of America. So far, the evidence is not promising."

Robert Frank, CNBC

According to an article in Wikipedia, “Central banks in most developed nations (e.g., the United Kingdom, the United States, Japan, and the EU) are prohibited from buying government debt directly from the government and must instead buy it from the secondary market. This two-step process, where the government sells bonds to private entities which the central bank then buys, has been called 'monetizing the debt' by many analysts.  The distinguishing characteristic between QE and monetizing debt is that with QE, the central bank is creating money to stimulate the economy, not to finance government spending."  Got that distinction?

     This is double-speak, as if government spending in recessions does not stimulate the economy. The term “monetizing the debt” is meant to be a take-out stopping further thought. Young economists are taught that monetizing the public debt is bad.  Further, they are taught that helping banks is good and helping people without jobs is bad.  It makes labor lazy, but not bankers.  Got that?

Repo Man

Money market mutual funds, which many regard as safe investments, lend cash to banks, brokerage firms and asset managers for one day at a time.  The next day by mutual consent, the loans are turned over.  The "repo market" is a huge $4.6 trillion.  Everything is cool until it's not.  Using short term borrowing to cover long term investments such as mortgages is inherently vulnerable to changes in expectations.  If one party becomes nervous and does not renew, the market collapses as it did for Lehman and Bear Sterns five years ago.
Sorry, but markets are not automatic and wonderful.

(For background see NYT, Sept. 13, 2013.

Jobs

Johnny Cash sings a song in which he says “St. Peter don’t you call me, ‘cause I can’t go, I owe my soul to the company store.”  This thought now dominates popular thinking .  But why is it that jobs depend on capitalists any more than returns to capital depend on labor?  Did you ever try to build something with only dollar bills?  Confusion on this point leads to local governments subsidizing companies to locate in their jurisdictions to the extent that taxpayers give back much of their wages in taxes. And then they bitch about taxes.

It leads to Congressional representatives objecting to reduced military spending and base closing because it reduces local employment.  But the money would be spent for other goods providing equal employment.  Instead of subsidizing military production, we should help employers and employees by sharing the costs of transition.  Contrary to much economic thinking, reallocation of labor and capital is not costless and if it is not shared, political action freezes assets in old lines of production.

To understand

"To understand the world, is to understand what in it is capable of being transformed." 
Bertold Brecht

I wonder what can be transformed today.

China Teaches Us

China has had phenomenal growth that slowed and now is continuing. The New York Times reports "the renewed growth has been fueled by rapidly mounting debt, as state-owned banks and the central bank have funneled hundreds of billions of dollars in additional lending to state-owned enterprises and government agencies to finance further investment projects."  We could do this too.  Our Federal Reserve could loan money to the national and state and local governments to build much needed infrastructure.  We are mired in old thinking that austerity is the answer to unemployment.  The debt of Chinese state-owned banks and the central bank is only a bookkeeping phenomena of no consequence. Central bank debt is just an accounting matter.  It can go on until the economy can not produce further goods. The limit is the real capacity of the economy.  Does anyone doubt that our economy can produce more?

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.

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.

$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.