About Peter Radford

Posts by Peter Radford:

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Sandy Weill Said What?

I must be getting old. Too old to understand English anymore. Sandy Weill, architect of Citibank’s ill advised growth, and long time advocate of the form of universal banking that brought about the crash, has just pronounced on the state of banking.

And called for the break up of the big banks.

Pinch me please.

Or at least roll the drums.

This is an astonishing volte face for someone who championed the elimination of Glass Steagall. More than that. He engineered a merger between Citi and an investment bank that was illegal at the time, so he had to get the law changed in order to complete the deal. He was that involved in shaping the modern banking scene. He was one of the fiercest opponents of regulation. He was outspoken, hard charging, and the very essence of the kind of banker who now dominates the industry. The mega banks were, in large part, his creation.

Now he wants them broken up.

There are two ways of looking at this.

One is that he sees the error of his ways and now wants, for all the right social reasons, the banks to be cut down in size and scope.

Or.

Maybe. Just maybe the reason he is willing to undo his life’s work is that his shares in Citi suck. A quick analysis tells me that Citi is worth more to its shareholders broken up. The parts are definitely worth more than the whole. So Our reformed Mr Weill is simply being a smart investment banker. He stands to gain a lot. A whole lot. So of course he wants them broken up. It’s all about the financial engineering.

Do I care?

Not really.

If Weill and his ilk make a bundle when we break up the mega banks, so be it. The social goal is to get rid of them. The taxpayers will win as well. The only people to lose will be the current executive teams of the banks who are the only reason those banks exist in their current form. No one else benefits. Indeed, as Weill is letting us know, everyone else, even the shareholders, suffer. And that’s saying something.

Not only are the mega banks too big to fail, too big to manage, too big to regulate, too big to analyze, and too big to understand, but they are too big to own. They have outgrown any useful purpose.

Break up the banks! Even Sandy Weill agrees.

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It’s The Wages Stupid

Such is the breadth and depth of the Romneyfication of our economy that otherwise sensible people make silly faux pas or repeat false thinking without a hint of knowledge of their error.

Take Sebastian Mallaby for instance. I was pleased with his two recent articles on banking. He offered us all a strident argument for the break up of the biggest. His logic was impeccable. His conclusions irrefutable. Of course this glowing reference of mine might be due to my prior identical argument. So, he rose in my estimation. Only to trip up.

In his article in today’s Financial Times he goes to great lengths to criticize the Fed’s rather anemic approach at present. Despite the manifest failure of its previous efforts to bring down unemployment, and despite the recent gathering of darker clouds portending a weakening of the economy, the Fed is stuck in a dithering pattern. This is largely because there are one or two strict advocates of depression austerity on the board who manage manfully to scupper progress most of the time. I think, also, that Ben Bernanke, being a stout Republican, is loath to do too much to help Obama.

So Mallaby hits away at this ineptitude. Good so far.

But.

Buried towards the end of his article we find this gem:

“Banks, having sold Treasuries, must choose to reinvest the proceeds in riskier assets rather than just adding to their huge cash piles. Corporations, facing lower borrowing costs, must resolve that this is the moment to invest. Consumers, seeing rising stock and bond markets, must summon the confidence to spend. If the Fed won‰Ûªt take the risk of going beyond what it has tried already, private actors won‰Ûªt take risks either. Monetary policy is like faith healing. The patient must believe.”

So. The path to success and to our final breakout from this lingering depression of ours is to engender confidence. That, apparently will solve everything.

No it won’t.

While I agree that confidence play a large role in shaping economic activity via the formulation of expectations and the encouragement of ‘animal spirits’, I am not sure that they are the critical element at play dragging us all down at present.

Ponder, for instance, on the way in which consumers are supposed to get back on track. According to Mallaby they need to see the stock and bond markets in glowing health. That will, apparently, cause them to cast aside their cares and go out on a shopping spree. Only a true child of the Romney era could ever think this. Us less educated types think that the lack of spending power may be a tad more important. And for the large majority of non-Romney people spending power flows from wages not stock or bond appreciation. It is the lack of wage growth for decades now that has caused the seizure of our economic motor, not the failure of stock prices to continue into orbit.

Now, I will grant that the middle class is too obsessed over house prices and that the crash in such prices has a lot to do with the enervation of our willingness to spend. But the reason we are so obsessed is precisely because homes are the largest assets most families own. Not stocks. Where the average family owns stock it is usually tied up in some form of retirement account and is managed by someone else. So whilst the financial media reports every little blip in stock prices, and I am sure many people take notice of them, when pinch comes to shove and a decision to buy something looming, it is cash in the bank that counts more than anything. And, as I have pointed out, that cash is most likely derived from wages.

This is, I am afraid, where the entire Romney generation gets off track. So enthralled are they by shareholder value, rational expectations, efficient markets, and market magic in general, that they entirely miss the point. They have done well. They do, in fact, have stock portfolios. They are concerned over stock prices. They worry about the things that Romney worries about. They have similar educations and world outlooks. They represent the failures of the Reagan/Bush delusion that free markets fix everything. And that for free markets to get on with this fixing of everything all we need is to inject a burst of confidence.

Rubbish.

Cash helps too. In fact it dominates all else.

During the last three or four decades our economy has shifted its weight behind profit and away from wages. It has been Romneyfied. Business firms have defended profit at all costs. They have Romneyfied the economy by gutting, deconstructing, outsourcing, offshoring, breaking contracts,and generally trampling on the workers who, in their role as consumers, those very firms rely upon for sales. It is no surprise therefore for the game to come to an end someday. When workers as consumers have no more cash, or when they have to reduce debt from flat wages, they spend less. Demand falls. Or its growth is meager. All the confidence in the world will not generate a spurt in spending if people have nothing extra to spend.

So it would be nice for confidence to grow. But it would be nicer were wages to grow first. But that means profits would have to fall relatively. And that doesn’t fit the Romneyfied narrative. So we don’t hear people like Mallaby talk about it.

Shame. Those banking articles were quite good.

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Take Our Money, Please!

Amidst all the gloom and doom in Europe it may have escaped your attention that the US can now borrow money at less than zero percent. Adjusted for inflation. Yes, that’s right. People are paying the US to take their cash off their hands. This is an extraordinary moment. The US, which has an old infrastructure, rotten trains, potholed roads, dilapidated schools, overused subways, and bridges in constant danger of falling down, can now borrow as much as it likes, free of charge, to rebuild all those things. The opportunity is enormous. We have the chance to fix everything and leave future generations with the world’s best infrastructure. It will give them a leg up on the competition. It will ensure future prosperity. It will create all sorts of business opportunities. It will boost profits. It will provide a massive injection of job creation. It will, in short, be a sure thing.

So, naturally we won’t do it.

Instead we will spend our election season mired in a sterile debate about how to cut borrowing.

Which means turning away free money.

Of course we could always borrow new free money and pay off older more expensive money and thus save ourselves a boat load of interest costs. that wouldn’t be too bad.

We won’t do that either.

Because.

Our elite has decided that we need to pay off debt.

No matter how cheap.

Stupid. Asinine. And utterly destructive.

But, that’s where our great leadership is.

Oh my. What a mess we find ourselves in.

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Weekend Thoughts

Some quick thoughts for a summer weekend:

I am reading Richard Posner’s book: “The Crisis of Capitalist Democracy”. He and I do not agree on much, if anything, but the book is s decent read and gives a perspective worth knowing. But I could not avoid choking on my coffee when he describes the activities and policy decisions way back during the height of the crisis. Various actions were considered, most dismissed as inappropriate. My favorite, nationalization, was knocked down early. Why? Let Posner tell us:

“That was a bad idea, and with few exceptions was rejected. Controlled by government, the banking industry would become politicized, and probably incompetently managed to boot …”

Oh my.

There’s not much need to go on. The old idea that an industry under government control is automatically politicized is trotted out every time a politician wants to avoid losing influence. Especially here in the US where the political donations flood in from industry, and where lobbyists write legislation so as to save their bought and paid for Senators and Congress-folks the bother. Yes that happens. A case in point being the change in the bankruptcy laws passed by the Bush regime. You see, it’s not as if the banking industry isn’t political. It is. Wildly so. What we have to avoid, apparently, is that it gets politicized. There’s a big difference.

Posner’s book title gives it away.

It’s OK for an industry to be political. That’s just an expression of free speech. And, as the ever perceptive Adam Smith pointed out a long time ago, capitalists have a tendency to want to twist the laws their way, which is why he warned us about them hanging around in groups. They want to rig the game. Using freedom of speech, mind you. It is another matter altogether for democratically elected politicians to twist things in favor of the voters. That’s called politicization. It’s not right. So rigging the game for capitalists is good. Rigging the game for everyone else is bad.

Got that?

Then there’s the second part of Posner’s sentence. The bit about the incompetency of government management. I assume he’s having a little giggle with this one. I mean, Richard, incompetency is endemic in banking. That’s how they managed to screw up so royally. And they haven’t exactly improved. The litany of foul-ups is way too long to go over here. Every week we learn of another. Let’s just say that when JP Morgan Chase is held up a paragon of bank management virtue and ‘only’ manages to lose about $6 billion on a shady, complex, and ill-understood deal, we should all reconsider what good management is. Because banks wouldn’t know. Or at least the big banks wouldn’t. It is screamingly funny, bordering on the absurd, to claim that we need to leave the failed big banks in the private sector, rather than bring them into the public sector, because the latter is the epicenter of incompetent management. They constantly mess things up despite all the subsidies we throw them. Just imagine what chaos they would cause if we didn’t subsidize them. Suffice to say that the words bank management deserve legendary oxymoronic status alongside bureaucratic efficiency and military intelligence.

Moving on.

I overheard two instances of misinformation that made my blood curdle.

One was when a person, in reference to the Euro crisis, put that blame for it squarely on the overly indulgent and presumably unaffordable social programs that ‘people over there vote for themselves’. Ugh. How this story makes its way around I have no idea. Yes, Greece is a case of rotten budgeting and a nation paying itself goodies with cash it doesn’t have, and has no intention of having. But the conversation wasn’t about Greece. It was about Spain. I have said this before, but in view of the continued misrepresentation of the facts I need to say it again: Spain wasn’t brought low by budgetary error. It was brought low by a real estate bubble with its roots in the inflows of capital consequent to the creation of the Euro. The Euro gave the illusion of a single economy, capital flowed to the margins in search of higher returns. The inflow allowed local wages to rise more rapidly than in the ‘core’ countries where the capital came from. This created an imbalance in competition, that, when the bubble burst, left the margins high and dry. Up a creek, so to speak, with no paddle. In this case the paddle being the chance to devalue a currency. The only way out is for the margins to deflate the hard and nasty way. Hence the problems we are seeing. This has nothing to do with social programs in the build up to the crisis. Nothing.

But the misinformation echoes about doing harm and reinforcing the narrative that we, in the US, need to tackle our ‘equally unaffordable’ social programs if we want to avoid being Spain. Of course the people repeating this story tend to be those who are predisposed to getting rid of social programs, and/or those living off of the bonds that have been expensively preserved at face value via the slashing of jobs and government spending everywhere.

Those that have want more and see a chance to grab it.

The second overheard conversation contained the wrongheaded but popular story that US businesses are not spending their piles of cash because of uncertainty surrounding their future tax status. This, as my father was wont to say, is utter tosh. It is a Republican meme, not a serious analytical position. In every study undertaken – that I am aware of – since the onset of crisis the resounding reason for business retrenchment and hesitation in investment is not uncertainty to do with taxes. It is uncertainty to do with lack of sales. We have a demand problem. No right minded business is going to build a new factory when it cannot yet sell all the output from its existing factories. That has nothing to do with taxes. It has everything to do with demand. This is not difficult to get to grips with, but it isn’t a good stick to beat Obama with. Hence the preference in some circles for the taxes canard.

Worse yet. The teller of the story proclaimed himself to be a ‘moderate’, who was enthused about Romney’s business experience. This experience will, he argued, enable him to make decisions that get us back to work. Quite how I think was left vague. This is probably because Romney has been, hitherto, the very definition of a policy fog. There seems to be a dense damp shroud hanging over every policy suggestion he supports. So dense that we cannot see it all. Only when it emerges will we know. Up until then the shroud protects Romney from having to be specific. About anything. But there is no shroud over Obama. He simply creates massive uncertainty, drains business confidence, and is therefore stopping, singlehandedly, the US economy from powering ahead on a giant wave of investment.

That much of that investment appears likely to be headed towards China and other destinations beyond our borders doesn’t worry a Romney supporter. Outsourcing, offshoring, all to the good. No?

What’s my lesson learned?

That no one should overhear such conversations. It’s maddening to listen to. And it says a lot about our electorate.

I should stick to reading. Not Posner though.

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Thinking Romney

The current furor over Romney’s activities whilst at Bain shows just how difficult it will be to get the economy back to solid growth. When all is said and done there are two very basic problems economic policy seeks to solve: making the economic pie larger so we are all better off, and then deciding how that pie ought to be divided among us.

Unfortunately modern economic theory largely – some would say totally – disregards the second of those two problems. A cursory read of any basic textbook will confirm that modern economics, in its mainstream or orthodox guise, is concerned only with making the pie larger. Hence the obsession with measures like GDP and so on. Who gets to share in that larger pie is left to politicians to haggle over. This division of duties is not historical, but is, rather, the outcome of the re-orientation of mainstream economics over the last seventy years or so.

As orthodox economics was being formed from the prior existing theories a key decision was to focus on what were thought to be objective issues and to leave the so-called subjective issues aside as being intractable to ‘scientific’ study. This led to economics becoming more and more simple, even though its techniques became more and more complex. The steady adoption of mathematical explication as the preferred form of expression in economic theory making, as opposed to, say, narrative, hid this simplification. The primary economic problem was reduced systematically to exclude any trace of subjectivity. This is hard to do in an inherently human subject, so intense effort was required to sanitize theory and remove anything remotely human. People became ‘agents’. They were stripped of whimsy, inconsistency, paradox, and any of their other more engaging and essentially human characteristics and were turned into automatons who followed strict and simple decision rules. By so doing they could be modeled and scrunched into the calculations that orthodox economists wanted to carry out.

The end result of this odd and inhuman project was that economics emerged re-cast as the study of allocation under constraint. It became a kind of applied math. Economic objects and artifacts that did not conform to the newly ‘scientific’ project’s rules were cast aside as being of no interest.

Now, applied math armed with the right assumptions can tell us that there exists out there, somewhere, an ideal world in which no person agent can make a fresh exchange without lowering the welfare of society as a whole. Such an ideal state is viewed as being ‘efficient’. Indeed its seen as being optimal. How could we not want to be optimal? The paraphernalia of economics hinges on this ideal state. More to the point it argues that policy needs to clear the decks and ensure we get as close to this ideal state as we can. Since the assumptions that underpin this allocative method have been carefully chosen, it will come as no surprise to you to learn that the theory tells us that market magic is the only way to arrive at the optimal. All other routes are doomed. They founder on the greed, ignorance, incompetence and other evils of government or other forms of central planning.

This is all very convenient.

Having set out to prove the efficacy of market magic, economists, by selecting only certain problems to solve and by being highly selective in their assumptions about human behavior, have managed to prove exactly that. Markets will, as long as there are no humans involved and as long as we hold our noses about those absurd and biased assumptions, beat all other allocative machinery in producing this magical optimum.

Whether that turns out to be a nice place to be is of no consequence to economics.

The obsession with the efficiency problem and the neglect of the distribution problem has major ramifications for society. Economics has a lot to explain.

One ramification is Romney.

He is typical of a whole generation – or two now – of highly educated and skilled purveyors of efficiency. Distribution is not a concern of his because the application of the efficiency techniques that are rooted in mainstream economics happens to have paid great dividends for him. Viewed from his vantage point the pursuit of efficiency has been great. He has, in his mind and as validated by mainstream economic theory, helped make the US economy more efficient. And by so doing he has earned a large fortune for himself. He sees that fortune as a just reward for all that efficiency building.

Another ramification is the single minded obsession on inflation by central banks everywhere. This is despite the fact that inflation has not been much of an issue for decades. The elimination or containment of inflation has come a huge cost. It has squashed the middle class. It has benefited creditors and rentiers. It has helped the financiers and hurt the manufacturers. It has hurt workers because wages have stagnated even though productivity has improved greatly.

It may sound odd to you, but there are a number of academic studies that suggest inflation – not hyperinflation – is not a problem at all. A few percentage points a year oils the wheels of the economy by making debt easier to repay, which is why manufacturers, who are typically borrowers, benefit at the cost of bankers during a period of inflation. It is no accident that the decades since the anti-inflation obsession took deep root have seen the burgeoning of bank profits and bank excesses. There is no evidence that the total absence of inflation is good for us, yet central bankers everywhere solemnly and doggedly pursue policies that harm workers and average families in order to prevent it rearing its ugly head.

I wonder why?

Well, that has to do with third ramification.

The taboo surrounding discussion of distribution. Or redistribution.

Market magic, as defined in the very restricted and applied math world of orthodox economics, is supposed to lift all boats. That it lifts some more – think Romney – more than others is not the concern of economists. And since the onset of the Reagan Illusion and its stranglehold on our elite’s attention span we have hewn close to the orthodox economist creed. We have pursued efficiency. We have produced and enabled lots of Romneys. Government is bad. Romneys are good. Since more efficiency gets us closer to that optimum, and since it sounds like a jolly good thing – who in their right mind wouldn’t want to be efficient? – discussions of distribution have become socially unacceptable. Worrying about who gets what muddies the efficiency waters. What matters is that there’s more. Groups like trade unions who argue about distribution are looked down upon. Groups who advocate growth, like bankers, are revered. Or they were. Okay, if not revered, at least looked upon as being doyens of capitalistic efficiency pursuit and allocative genius. Financiers helped move capital about our economy. They made the pie bigger. So what if they scarfed up all the goodies too? Think Romney.

There is a big problem with the pursuit of efficiency. I have hammered away at it before. It’s an idealist hiding to nothing. An optimal outcome cannot be defined in the face of endemic uncertainty. It just isn’t possible. So pursuing one is a fool’s game. Unless, of course, you can persuade the unsuspecting public otherwise. In which case you can present your arbitrary goal as being an optimum. You can argue that market magic will take care of everything. Meanwhile you can get on with making yourself and your buddies rich. Think Romney.

Oh. And those discussions about who gets what? They are class warfare. People who worry about the distribution of the goodies are inevitably just griping because they aren’t smart enough, or strong enough, to muscle in and get their own share. They worry about silly things. Like the sick, the elderly, the children, and other sources of social weakness.

We should ignore them. We should focus on efficiency. Sometimes that means we need to make tough decisions. Like fighting non-existent inflation demons and raising unemployment. Or like taking money away from the sick, the elderly, and the children in order to give it to the rich. Yes, these are tough things to do, which is why only serious people get to decide on policy. And, yes, it turns out that certain people will get rich while a lot of others suffer. But that suffering is a sure sign that our efficiency quotient is rising. No pain no gain. Let the rich gain by making us all more efficient. They deserve to be rich.

Don’t they?

Think Romney.

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