Keynes

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Banking and Orthodox Economics: An Ugly Brew

Nothing that has emerged about the JP Morgan losses announced last week has altered my original conclusion. This was a basic failure of governance, of regulatory oversight, and of control. Oh, and of orthodox economics. Again.

Yes there were rules in place to prevent such losses. They were ignored. Vanity, hubris, call it what you will, stopped the bank from exercising self-restraint. What appeared to be highly risky, complex, and very large transactions were allowed to take place despite the fact that they were risky, complex, and very large.

The bank thought it was more clever and sophisticated than it was. It turns out to have been dumb. Very dumb.

The oddity here is that these kinds of dumb plays are what brought the banks to their knees back in the crisis. Obviously no one at JP Morgan learned the lesson.

The other oddity is that these kinds of transaction look so smart when they are first planned and thought through. They usually start off well. The initial profits confirm the management’s view that it was correct in overriding the control and risk mitigating policies, the ultimate losses overwhelm those initial profits and make the management look like asses. Which they are.

Bravado is commonplace in banking. Especially in trading. Traders always think they can outsmart the market. None of them can. At least over the longer haul. What happens is that temporary successes – such as those JP Morgan saw – are remembered and rewarded, while the longer haul mediocrity is forgotten since it would deflate all those precious egos strutting about on the executive floor.

Banking is a long term rewards business. It deals in averages. Those averages are hugely influenced by the market. There is a massive actuarial element to the way in which banks profit or loss accumulates.

And, to beat the old Keynesian drum, endemic uncertainty undermines any of the risk calculations that underpin decision making.

Banks have specific reserves against known – potential – losses. For instance, when a customer stops making payments on a loan a bank will prepare to lose its money and will write-off as a loss at least, if not all, the cash at stake. Over and above these specific losses banks also hold large unallocated or general reserves. They know there will be losses ahead. They just don’t know the where, the how, or the what that will define those losses or their impact. This general reserve is a way of dealing with such uncertainty.

I have dealt with banking for a long time. It is a cyclical business. Losses are inevitable. It comes with the territory of being an intermediary. It is why banks ought to be cautious and boring.

The problem is not just that of Minsky style booms and busts – where a strong economy encourages lending of ever more marginal quality and ends up creating its own demise as the banks get overconfident – but has been exacerbated by the stupidity imported from economics.

As you all know by now I have a very low opinion of orthodox economics. This is because such economists don’t have much of a clue about how an economy works. They live in an alternative universe of infinitely flexible price movements, rational actions, and instantaneous adjustments. In such a place – Platonic in the extreme – it is possible to convince yourself that market forces take care of everything including sorting out banking. In this never land regulation is a burden and a source of inefficiency – how can you improve on perfection after all? But ever since the collapse of the Walrasian project in the mid 1970’s we have all known that perfect worlds like that of orthodox economists cannot exist. Moreover we also know that we have no clue as to whether markets actually work to achieve the results that ardent free market supporters like to argue they do. Worse still for the orthodox: all the evidence points exactly the opposite way. Markets are prone to instability, irregularity, chaos, and great cycles. They need a lot of institutional structure to stop them veering over a cliff.

Which is what regulation is supposed to do for banking.

One explanatory note. The Walrasian project was a hundred year long research and theory development project within economics to prove that, under certain conditions, free markets will arrive at what is called a general equilibrium. That is a point at which supply exactly matches demand, everyone is happy with the resource allocation, and no further beneficial exchange can occur. It’s nirvana. It’s also impossible to arrive at. The project collapsed because the definitive solution – purporting to prove the existence of a general equilibrium – was so absurd, patently ridiculous, and laughably divorced from any real world existence that it became an embarrassment to all but a hardy few orthodox economists. In a true science the collapse would have signaled a radical change in theoretical discussion. In economics it lingers on.

And it lingers on in the most pernicious way.

Because economics is ideological at its core, orthodox economists – people who hate government intervention in the economy – still make policy pronouncements as if markets performed the way the defunct Walrasian project wanted them to. Their continued advocacy of the free market proposition is not supported by theory, but it suits their politics. So they support and peddle policies designed to strip the economy of its institutional structure and to reveal the enchanted world of market magic that better conforms to their libertarian longings.

They refer to government as a burden. Or as a dead weight. They regard regulation as a gross interference. They believe, fervently and despite the evidence, that markets will allocate resources with stunning and unerring effectiveness.

Back to JP Morgan.

The losses announced last week are evidence that banks are hopeless at allocating resources effectively. There are too many variables in an economy for even the most brilliant analyst, trader, and manager to have sufficient foresight, let alone cognitive and calculating capacity to trade without risk. Losses will happen. Shareholders will get hurt. Since those losses could leak over and require taxpayer bail-outs, they are not something we can just ignore and leave to the shareholders to fix. Banking is central to our economy. It is a utility. We cannot tolerate it blowing up every so often.

Yet it does.

So, in order to minimize the social cost of banking’s inherent instability we used to regulate it severely. Tight regulation worked well between the Great Depression and the late 1980’s. Unfortunately that’s when orthodox economists unleashed their Platonic vision on us all – without admitting its inner lunacy and it failure – and advocated deregulation.

This was a bi-partisan movement. Such was the hegemony of orthodox economics that all mainstream economists, in both parties, supported deregulation. Indeed the decisive legislation freeing up the banks came during the Clinton administration, with Larry Summers leading the charge.

The inevitable result has been a succession of bubbles and crises that culminated in the great recession.

JP Morgan has been on the front lines trying to press back against re-regulation. It has argued forcefully that banks can monitor themselves and require a light regulatory touch at most.

Yet here we are.

My own view is that we need to return to the old Depression era style of regulation. That, and we need to break up the bigger banks to make them both more humble and more easily digested by those market forces they all laud so much. That’s not where we are headed though. Which is why I argue that we will be facing more crises in the future.

And, as JP Morgan has demonstrated, that future crisis may not be that far away.

Bankers cannot help themselves. They think they are smart, when in fact they are simply, and occasionally, lucky. At best.

We should not gamble the economy on being lucky.

Nor should we gamble it on a defunct and discredited economic theory.

I consider in profoundly unethical for the economics profession not to be transparent about the failure of the Walrasian project. More to the point it is doubly unethical to continue to pronounce policies as if it had been a success. Advocating the deregulation of banking being an example of this lack of ethics. Continued advocacy of free market economics is an ideological, not a theoretical economics, position. I have no problem – although I disagree – when it is couched as such.

Then again, economics lags way behind other disciplines and professions in it ethical behavior. Wrecking the economy periodically just because they don’t went to admit theoretical failure, is par for the course for orthodox economists. They’ll do it again.

So will JP Morgan.

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Historic Grumpiness

I am not sure how to react to the drift of events. It seems as if our leaders, both here and in Europe, are determined to re-create the Great Depression. I guess it must have been fun the first time through. While else would they be so steadfast in their lunacy?

We live in absurd times. We are lead by fools. Our commentariat is stupid, ignorant, badly educated, or simply to darned lazy to pick up a history book. It surely isn’t difficult. Even I can do it.

Boy, am I grumpy.

I crossed the line today when I came across a piece in the Washington Post by the now less than notable – in my mind – Robert Samuelson. His article attempts to provide a critique of Keynes. The conclusion being that Keynes would repudiate Keynesian policies in the supposedly debt ridden world of today. You can read the article yourselves, I am too annoyed to provide a prÌ©cis here. Suffice to say Samuelson succeeds only in displaying his ignorance both of Keynes and of recent history.

His argument is, as my father would say: utter tosh. Twaddle. Of course it doesn’t help my distemper to have spent the prior weekend re-reading Minsky, but let that pass.

We are living through an epic repudiation of classical economics in all its varied guises. In my more aggressive moments I wish that the Swedes, or whoever it is that doles out the faux Nobel prize for economics, had a recall button. The embarrassment of an entire generation of economists is on display before us, but instead of a scientific reaction – a healthy change of mind in view of their failure – we are being subjected to a petulant, nay petty, rearguard action wherein the orthodox true believers throw hissy fits of hate against the one theoretical construct that has, with flying colors no less, stood up against that facts.

Keynes has been vindicated. Not repudiated. Knowing as we do that Keynes was hardly a shrinking violet and was certainly not too shy to claim righteous victory for his ideas, it would shock me to the core to hear or read him walk away from his theories in their time of victory.

Have I made myself clear?

Whatever flavor of Keynes you adhere to, and this is not a moment to parse them apart, the basic constructs have supplied us with both analytical power to explain events, and policies to improve our lot or to solve our problems. That our leadership cannot or will not embrace those policies is a source of frustration for all those advocating them. Ideological blocks are preventing us applying the cure. But that we know the cure is clear.

Let’s get this straight:

  1. Printing a wad of money right now will not have an impact on inflation. Evidence: it hasn’t yet, despite the torrent of money flooding into the economy. Last Friday’s inflation numbers showed core inflation of 0.2% – the upward spike in commodity prices from earlier in the year are still rumbling through the system. Headline inflation was flat. Flat. Narry a surge in sight. Not one whit of hyperinflation. So, why I wonder, are we still warned that inflation is “just around the corner”and that all that money will absolutely throw us into a Weimar style disaster? We have been thus warned by the hardliners for three years straight. They have been utterly wrong. Also for three years straight. After all that error one would have thought a little introspection is called for along with a modicum of contrition. But no. We get the same argument trundled out one more time. At some point inflation will certainly rise, and, like the proverbial broken clock, I assume they will claim victory for their falsified idea.
  2. More evidence: throughout this crisis we have been told that the markets, vaguely defined as creditors holding sovereign debt, will run for the hills as the debt issued to fund deficit spending piles up. Just you wait, argue the hawks, interest rates are about to rocket skyward and we will not be able to fund ourselves any longer. What happened? US rates have fallen. They are low. Very low. Creditors are falling over themselves to buy US debt. Somehow they don’t seem to worried. They are running towards, not away, from the US Treasury. OK, say the hawks, how about those Europeans? They seem to be having funding difficulties. Yes they are. But not because of poor fiscal management. The markets are not scared of the debt. They are scared of the the pickle that a poorly integrated fiscal union is having. Countries with balance of payment problems – Spain for example – cannot adjust their economies when they remain locked with others with the exact opposite imbalance. So they have to throw themselves into austerity measures far more draconian than the original problem required. And, let the record show, the Spanish were paragons of fiscal rectitude before the crisis, they were not spendthrift. Not at all. Instead, the Euro is acting in the same manner that the old gold standard did. Anyone tethered to it is suffering. External adjustment is not possible, so all the adjustment has to be made within. That means lower wages, deflation, and recession. In turn this means paying off debt will be more, not less difficult. Austerity leads to contraction no matter how you spin it. And, anyone with even a smidgeon of historical awareness knows that, back in the 1930’s, the countries that abandoned the gold standard early were also those who recovered early. They were unshackled and could adjust. Thus the UK recovered well before the US or France, despite its similar problems. Heroic austerity is simply another description of stubborn self defeating folly.
  3. This latter point deserves to stand by itself: austerity is just that. Austerity. Slashing away at government spending reduces the economy in the absence of any offsetting private sector expansion. And the very reason that debt-to-GDP ratios have spiraled upward is because GDP has slumped while safety net spending has kicked into prevent a free fall. Economies can get stuck in a vicious squeeze when this happens. The response should not to be to dig the hole deeper, but to keep the cash flowing in order to buy time for the private sector to work out its kinks. If those kinks are debt related then the time needed – and the cost – will be accordingly high. In other words we need to induce growth, not suffer some latter day purgative episode of indeterminable length. This not a moment to savor a self inflicted bout of moral scourge and cleansing, but to find ways to re-build. That can take debt. Lots of it. Meanwhile countries that implement austerity are all, without exception, suffering unnecessarily. Unemployment has erupted wherever austerity has been applied. Imbalances are moving in the right direction, but only modestly and at great human cost. Apparently the people of Ireland are more aware of the truth than the hawks, they are voting with their feet. Irish emigration has shot up during the years of austerity. Meanwhile the Irish economy is shrinking, unemployment has reached about 15%, and all the indication is that the pressure is building not easing. The voters suffering at the sharp end of economic policy know better than those developing the policy. Austerity doesn’t work.

Thus, when we come across an article such as Samuelson’s we have to shudder at the enormity of its ignorance. Or it’s author’s willingness to avoid evidence. In polite company we don’t refer to it with the language it deserves. Elsewhere is another matter.

History will not treat kindly those who refuse to learn from this crisis. Millions of lives are being ruined because of a stubborn adherence by poorly educated experts and leaders to a set of ideas that have been totally falsified by events.

And those defunct ideas are not those of Keynes. Far from it. His ideas are still standing.

Capitalism, oh horror, turns out to be riddled through with internal weaknesses. Markets are not always self correcting. And, in honor of Minsky, the financial world is endemically unstable. Indeed the very strengths – don’t laugh, there must be some somewhere – of our banking system condemn it to periodic failure. Disruptions in one market can, indeed, leak over into others. Wages are sticky. Heck stuff happens – uncertainty really, really matters. The list goes on.

The list reflects reality. The list reflects Keynes. Or, rather, Keynes understood the list. Which means, for all his obscure writing and occasionally vague explanation, Keynes understood reality.

Which is why his ideas work. Which is way more than we can say for the other folks.

History. Facts. They can make you grumpy.

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    What A Depressing Week

    I tried my hardest to hide from the flow of depressing news this week, but here I am on Friday feeling battered by it all. This was a week in which we had our worst suspicions confirmed.

    Yes, the American economy is now deeply divided into haves and have nots.

    Yes, the so-called recovery is evaporating as we meander about in the no man’s land of stagnation.

    Yes, our elite is fumbling at every opportunity to do something about the malaise.

    Yes, the threat from European ineptitude is almost as strong as that fro our own incompetence.

    And, yes, the Republican hard core supporters are as extreme as we all feared.

    Combine this lot and you end up with a toxic, corrosive, and potentially devastating brew. No wonder I wanted to hide from it all.

    Where do I start?

    Well, let’s get the normal numbers out of the way. Quickly, since they will make us all queasy. New claims for unemployment assistance rose again. They are back to the level they reached in June – 428,000 – and show no sign of relenting. Gone are the weeks where we could fantasize that claims were distorted by clerical, seasonal, statistical, or weather related quirks. The well of excuses has dried up. Our economy is simply not capable of creating jobs. It was what now seems an eternity ago when we were celebrating weekly claims trending down towards the magical mid-300,000 range. That is well out of reach at the moment. Unfortunately our unemployment problem is going to stick with us for a long while. Equally, or perhaps more, unfortunately I doubt there will be any serious attempt as a resolution. Our interminable election cycle implies that it is in the Republican party’s interest to remain obstinately anti-worker as it seeks to create an electoral advantage. So I expect a great deal of smokey rhetoric about fixes backed by an equal amount of cynical inaction.

    We also learned this week that inflation has edged up somewhat. Even core inflation – the measure that strips out volatile stuff like energy and food costs – has risen to touch the 2.0% mark. While that’s not a problem, despite what you will be hearing from the right wingers, it implies that the average family is being squeezed Since incomes are flat, any rise in inflation erodes real purchasing power.

    No wonder people are uneasy or angry.

    Meanwhile our elite fiddles.

    The explanation for our elite’s complete inability, and unwillingness, to resolve the malaise is apparent when you read the awful Census Bureau report on poverty released earlier this week. It is a damning indictment of the last thirty years. Inequality is now so extreme here that America ranks alongside what we would all claim to be third world countries. These are places the average American would disdain as badly run, corrupt, and poverty riddled backwaters. They are places we, in our finer moments, pity. We look at the as places where the poor are mistreated, forgotten, and abused by their obviously corrupt leaders.

    Well we are one of those places.

    We rank alongside The Philippines and Mexico. So not only is our health care system sinking rapidly to that level, but our economy is also. At least in terms of its ability to distribute or share the wealth it generates. And lest we forget: it certainly generates wealth. But that wealth is now super concentrated in the hands of the well educated. Our society has an Edwardian air to it. A servant class is thriving to assist the wealthy. And an underclass is growing rapidly to provide cheap labor to supply the rich with the food and services they require to maintain their own lifestyles.

    There are signs of angst in the elite: stories about the decline of the middle class are now abundant. This outbreak of handwringing is touching. And totally ineffective since it is inevitably accompanied by statements about the long term intractability of the problem, and the urgent message to us all that we must avoid class conflict.

    As if that conflict doesn’t already exist.

    It does.

    Don’t fool yourselves. We are riven through with class conflict. Our political discourse doesn’t reflect it yet. But it will if we don’t change course.

    With our poverty levels rising, wages stagnant, and the chances of securing a solid middle class lifestyle diminishing for millions of families, the central question we will be facing over the nest decade is how to avoid social unrest as the gaps in our society widen even more. The elite has benefitted from a perfect storm: globalization came along to squeeze our workers just as technocratic education became the key to wealth. Our growing industrial productivity means we can make things without the workers that formed the backbone of the middle class of the 1950’s, 60’s and even the 70’s. Those days are gone. They are not coming back, despite the luddite instincts of some on the left who seem to want to draw down the curtain of global integration.

    The poverty of ideas runs as deeply on the left as it does on the right.

    Indeed, as contradictory as it may sound, it is big business most likely to sound the alarm most effectively. Business, after all seeks profit. It suffers when our middle class stops buying. It has to react. Just this week we read in the Wall Street Journal that Proctor & Gamble, that iconic provider of goods to the middle class, is abandoning most of its marketing efforts in that direction. Why? Their analysis – something they are knee deep in – tells them that the middle class is so threadbare that it is no longer worth the effort. Instead they are beefing up product development and programs designed to sell to our society as it now is: divided. Some very rich. Most poor.

    So big business is a canary in the mine. And their actions suggest that the current malaise is not a temporary phenomenon needing a fix from a stale text developed in the 1930’s. That would solve only the magneto problem – to borrow Keynes’ apt phrasing. It would not undo the division of our society that is the root cause of our longer term issues. For that we need to turn to a politically connected economic theory. It doesn’t exist.

    What does exist, unfortunately for us, is an extreme right wing theory adapted by our contemporary Republican party.

    They are reacting to another canary in the mine: the Tea Party. Laughable, scary, and extreme these folks are real. And they are worth our paying attention to. They exist because they feel threatened. Looking at the typical demographic we learn that the average Tea Party supporter is white middle class and nearing retirement. These are exactly the people who feel the accumulated changes in our society the most. Right or wrong – mostly wrong – they feel as if they behaved according to the rules. And yet those rules are not returning the pot of gold they were promised. So they lash out. Indiscriminately. Irrationally. They pick on “the other” whether it be minorities, immigrants, atheists, or educated people. The list of enemies is long and heterogenous. No two Tea Party supporter have the same grudge. But they all have some sort of grudge. And they need someone to blame. The neo-libertarian right has managed to channel the blame onto government. Hence the notion that Obama is a socialist.

    The left, as usual, has adopted a superior tone when dealing with the unwashed of the Tea Party. Instead of articulating anything new in response to the anger, the left has simply ridiculed the confused and often ignorant antics associated with the movement. The result has been that we have not fully embraced the message being sent: there is deep seated resentment throughout society about the failure of the economy to deliver the long assumed relentless increase in standard of living.

    Left wingers may think, as many I know do, that the failure stems from right wing policies. The belief is that the steady erosion of union power, the vilification of government, and the drumbeat of deregulation – all central tenets of libertarian thinking – will inevitably, and I stress that inevitability, produce the very society we now condemn.

    In stark terms the clash between the individual liberty so central to capitalism and the egalitarian pull so central to democracy has been won convincingly by the capitalists. Democracy has been rolled back. The libertarian aim is to gut it even further by eliminating social programs altogether. Those programs offend the libertarians both because they imply a need for taxation in order to pay for them, and because they imply an erosion of the rugged individualism that stands behind their philosophy.

    This impulse was given clear manifestation at the latest Republican debate. The crowd, and avowedly extreme group, cheered at the idea of a sick person dying, when the alternative was providing social health care. That Hayek, the great hero of libertarians, advocated social health care in order to mitigate the anger of the poor, went unnoticed. Our modern libertarians have moved beyond their core beliefs into a fear driven cynicism and outright hatred of their fellow citizens that is frightening. History will not judge them kindly.

    But.

    That there are Americans who follow those ideas is sufficient evidence to support the notion that our problems are deep rooted and need long term, collective, and well thought out responses.

    Right now we are not seeing anything remotely adequate.

    We need to tackle inequality. To do that we need to educate our people, not simply to compete in a global workplace, but so they can perform as citizens. The left’s frustration over things like the environment, over teaching of evolution, and many other issues can be solved were our education system producing citizens well versed in those issues. Clearly is isn’t. That so many erstwhile middle class voters can support policies that ruin the middle class is a great paradox needing remedy. And the delusion of libertarianism and its hatred of government needs to be exposed as the profoundly anti-social message that it self-avowedly is.

    After all, “we the people” is a clarion call for democracy, not for capitalism. Nor for libertarianism. We are our government. We are not our own problem. The lack of balance between capitalism and democracy is the source of our malaise. It is time to re-establish a more democratic balance.

    I would like to think that economists could contribute to regaining this balance. But, unfortunately, they have defined economics deliberately to ignore social, institutional, cultural, and other impulses that constrain economic activity. They pretend society doesn’t exist in order to model society’s economic aspects. The error in that should be obvious. Apparently it isn’t. So most economic theory is rendered useless or irrelevant awaiting the outcome of the more important debates about how society should construct and apportion wealth.

    Once that great debate about the core issues of economic activity are completed, economists can re-enter the discussion and tell us how best to set up markets. They are the engineers who implement someone else’s science.

    Pathetic.

    As I said: it’s been a depressing week.

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    Post Labor Day Pieces

    Labor Day is gone again. Another year into our economic malaise and little to show for it. The feeling I sense most is one of frustration, mixed with a growing skepticism that anyone knows what to do to get the country rolling again. The most popular narrative in the media is that we need to tackle our debt crisis, and that this needs to be balanced with some short term tinkering in order to spur job creation.

    Tinkering?

    Phooey.

    We need surgery.

    But we won’t get it. Another part of the common narrative explains why: the thought is that Keynesian policy failed us – exhibit A being the rotten outcome from the 2009 stimulus – and that any further such effort is throwing good money after bad. Besides, the same thought goes, we are up to our eyeballs in debt because of all that government intervention, and have no more room to add to debt levels without tipping the economy into a state of bankruptcy.

    Add in all the usual homilies about government borrowing sucking all the credit from the market so that the private sector cannot borrow, invest, and thus propel us all forward, and the sanctimonious commentators sit back as if they have discovered some deep truth. Some inescapable truth about economics that only the foolhardy try to avoid.

    That truth being that we ought to let the market – whatever that is – correct itself. Which it can only do once the government is firmly constrained, reduced, and otherwise neutralized.

    This narrative is, of course, straight from the right wing playbook supported by right wing economic theories. It endures and manages to influence policy makers despite the total lack of credible evidence to suggest that it is correct.

    For instance I find it odd that those who argue we should let the market solve our problems seem willing to ignore market based evidence. Were they to tune in to actual market signals they would find it emitting a primal scream. Interest rates are at near all-time lows. Cash is flooding into the US. Far from saying pay down debt, the market is urging, vociferously, that we borrow more. In other words we have a once in a lifetime opportunity to borrow vast amounts of money and invest it in our future. With rates at 2% practically any sensible long term investment would turn a neat profit for society. We could rebuild our infrastructure, refurbish our electrical grid, rebuild our bridges, invest in non-carbon energy sources to cut our dependency on oil, and we could even, and I realize this is a stretch, rebuild our rotting inner city schools.

    This would be a great gift to our children. Yes it would burden them with debt repayment costs. But those costs would be much smaller than the ones they would incur for the same amount of activity. We would, in effect, being giving them a cut-priced, but refurbished, infrastructure. Anyone flying into or out of New York City confronts the antiquated and failing physical assets we currently make do with. At 2%, all that could be improved. Or at least some of it.

    But no.

    Notwithstanding the urging of the free market and its message to borrow and invest, we are being led by policy makers intent on paying back debt. So lacking in imagination, energy, and substance are they that they ignore the very market they laud. So ideologically hidebound are they that they fail to see the opportunity we have. They don’t want to see it. They don’t want to muddy their ideological purity by acknowledging that the market, that paragon of economically efficient allocation of resources is begging, just begging, to allocate resources to US government debt.

    This blind and willful disregard for evidence will cost our children dearly.

    Not only will they inherit a diminished economy, but they will still be faced with having to refurbish our shabby and shamefully neglected infrastructure. An infrastructure that will represent a constraint on the growth they can squeeze from the economy.

    Meanwhile in another supreme example of ineptitude, Standard and Poors continues to give a higher rating – AAA – to mortgage backed securities that include elements of sub-prime debt, than it does to US government debt. The absurdity of this is indescribable. The enormity of the stupidity boggles the mind. It is, naturally, easily explained. The mortgage debt issuers pay to make sure their debt retains that coveted AAA rating. The US government clearly doesn’t. Never has there been a more clear and distasteful example of corruption on Wall Street. Yet it continues. Mercifully the credit markets seem to ignore S&P – as current interest rates suggest. Which begs the question: how does S&P continue in business? It is clearly irrelevant, corrupt, and incompetent. I can only assume inertia is the key factor keeping them afloat. All those money managers who rely on S&P ratings are too lazy or too ignorant to change their ways. Perhaps they are too stupid to undertake their own credit analysis. Or, perhaps, they are just as corrupt, and don’t want to be exposed as being part of the same game.

    Oh.

    And one last thing this post-Labor Day week.

    Today’s report on new claims for unemployment assistance showed an increase. Small, admittedly, but an increase nonetheless. Claims rose from 409,000 to 411,000. It is not worth my while to tell you what I think of this. One word will suffice: awful. What we need, clearly, is a major speech outlining a series of bold, but still small-enough-to-get-voted-through steps to attack this problem that blights our great nation. We need more political grandstanding. More rhetoric. More inspiring words. More faux emotional moments when the camera can pick out an unemployed worker beaming with pride at the imminent action promised by those words.

    More nothing.

    As today’s numbers clearly indicate, the recovery is in full swing and our labor force should be grateful for the stirling leadership from both the White House and Congress. I tip my hat to the policy makers. It takes courage, inventiveness, and a willingness to work together to produce such results this far into a recovery.

    Courage to look the unemployed in the face, and blame them for their misfortune.

    Inventiveness to avoid even the simple things that could be done to help the unemployed.

    And a great willingness to work together to corrupt and stall our political process sufficiently that the purpose of government becomes simply to be re-elected rather than to govern.

    With leadership attributes like these we can all rest assured that my report next Labor day will mirror, almost exactly, this one.

    Only we will then be closer to an election that will resolve, yet again, absolutely nothing.

    Labor Day? I think not.

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    Bits and Pieces From the Front Line

    Historians will surely love to reflect on these days. Each seems to bring some violent twist. Each adds to the amounting confusion. Each makes the story that much more difficult to tell.

    Today we learned that last week’s apparent uptick in the labor market was an illusion. At least until next week. New claims for unemployment assistance rose once more above the 400,000 level – to 408,000. Last week they had managed to slide slightly below, although only by a hair to 399,000. Somewhere along the way we have altered our view of what a “good” new claims number is. At the beginning of this crisis I was saying that we needed to get down to the very low 300,000 range. Below 325,000 at any rate. That level would be more consistent with healthy turnover and sufficient job creation that we were not adding to our longer term problem. We haven’t been that low for what seems like an age now, and so we have steadily changed and adopted 400,000 as being the watershed figure. The media and the stock market now greet a number below 400,000 as a sign of better times. It is not. It is terrible for an economy this far along from the last peak of employment.

    We should not recalibrate. We should demand action

    But our generals are now engaged in trench warfare. Their have fallen to a lowest common denominator of incompetence. Only now – how many months into the disaster – does Obama get on the road and start to talk up various jobs programs. Who knew we had a jobs problem? No one paying attention to Washington and the issues being addressed there.

    Meanwhile the troops – those of us outside of the magic circle – are reporting ever lower levels of confidence. Both consumer confidence and now business confidence are declining at alarming rates. This plunging confidence has two origins. One is that the economy is self-evidently not improving. Jobs are hard to come by, wages are stalled and actually falling in inflation adjusted terms, home prices are stuck deep in depression, banks are refusing to lend, and prices are lurching about, although there the trend is in the right direction. The second is the utter collapse of our political system. It has failed us totally. People are not so divorced from current events that they cannot see the insanity that is Congress. Never have we been so poorly led. And now the political class seems content to punt problem solving into the election cycle. As if that will make decision making easier.

    In that regard I have to point out the Republican Rick Perry’s extraordinary activity. Never has a candidate entered the ring in so blustering a fashion. His statement that were the Fed to take action to pump up money supply in order to lift the economy such action should be considered treasonous is inexplicably stupid. Apparently the Republicans now think that any action between now and the election – about 14 months hence – is an act of political interference. It is a biased act. It is therefore undemocratic, and – in Perry speak – treasonous. This is beyond bizarre. No wonder the Wall Street Journal is floundering about trying to encourage more candidates to enter the field. The current batch is dangerous.

    Another point on Perry: he is making a big deal of his pro-business one market credentials. This, he says, accounts for the supposed resilience of the Texas job market during the recession. Well, not so much. According to recent research what job growth there was in Texas over the past three years comes from an expansion of government, not private sector, employment. The private sector in Texas shrank. But that shrinkage was offset by a large number of new government jobs. So the Texas story is one of Keynesian success. Nice. And, in any case, we should all note that Texas has a rapidly growing population – it needs to add jobs at a faster furiously in order to keep up with population growth. It didn’t. It’s employment record falls short of Massachusetts and New York amongst others. Perry’s record is dismal.

    My real problem with this is that we need Obama to be challenged and attacked on his record. Which is grim to say the least. The last thing we need is a Republican party so far to the right that it scares the electorate into unthinking support of Obama, who, frankly, deserves to lose.

    Meanwhile we have to suffer through nonsense such as Warren Buffet asking to be taxed more highly. While the gesture is worthy, I must note that his much discussed article in the New York Times failed to mention that his solutions would not actually raise his tax rate by much. Perhaps we need to remedy that. At the every least we need to abolish the specious notion that income from capital and income from labor should be taxed at different rates. As the very wise English judge once said: “income tax is a tax on income”, we need to tax all income, whatever its source, at the same rate. And that includes inheritances, since an inheritance is a form of income to the generation receiving it.

    Another thought: the rise in risk within the global economy has been associated with a decline in rates on US government bonds. I am still waiting for the deficit hawks to concede that inflation is not about to surge and thus undermine bond rates. This wait, I think may take a while. Instead we have to suffer listening to Plosser, a Fed governor, and one of the dissenting three who opposed the recent announcement that the Fed would keep rates low at least through 2013, repeat his argument – wrong policy at the wrong time – at every opportunity. People like Plosser are the reason we have so incoherent a leadership. They are pulling against the rest of us.

    At any rate with rates this low we should be borrowing every dollar we can. And then investing it in capital projects that improve our long term competitive position. The problem with this is that public accounting fails miserably to distinguish between long term and short term spending. There is no national accounting capital account. So debt borrowed to build a productivity enhancing asset – something that adds to national wealth in the future, and which thus generates revenues to pay off the debt, is treated the same as debt used to plug the gap in current consumption. This is something we need to fix. It makes enormous sense to borrow long term money for infrastructure and education – two things that will add to the economy’s future wealth creating ability and thus help pay for the debt.

    And before you MMT people write to tell me we should just print money to pay for the things we want, let me argue that, while in current circumstances mired as we are in a liquidity trap, printing money is a viable alternative, I see it as a problem down the road when, and if, we have emerged from that trap. You cannot conjure real goods and services from mid air no matter how much money you print. So there is a limit on the efficacy of MMT. Beyond that point the deficit hawks argument that a surge in money could lead to a surge in inflation comes back into play. Plosser would be right. His error is that he is making that argument, falsely, while we are stuck in a deep hole. It’s all about inflation expectations and the way they are formed: an unfettered printing press is a very different animal than a bond market with the latter’s implication of repayment and thus constraint.

    The housing market is going nowhere. People forget that it was real estate construction, fueled by the bubble, that made the employment record of the last ten years look vaguely acceptable. Take it away and we have had a lost decade for jobs. And there is absolutely no sign that real estate is coming back. Sales of existing homes dropped 3.5% in July, back down to an annual rate of 4.67 million homes. To put that in context the peak rate back in 2005 was 7.08 million. One problem that has now added to the gloom is the number of sales contracts that fall through. In July 16% of all contracted sales failed to materialize. The reason for this historically high level of failure seems to be the inability of buyers to secure financing coupled with home valuations being well below the agreed contract price. This implies that people are willing to buy homes at prices that the banks think are too high. Plus there is no sign that the downward pressure on prices coming from distressed sales is abating: foreclosed and short sales comprised about 30% of the total number of sales, unchanged from June.

    Lastly: the ineptitude of the economics profession continues to sadden me. Whenever someone advocates we should adopt Texas style lower than average wages in order to boost employment nationally I cringe. It isn’t possible for everyone to be lower than everyone else. By definition. The existence of lower wage states implies the existence of higher wage states. Duh. But we still see such suggestions being made in the Op-Ed pages of well known newspapers. And these folks have tenure. Some at very respected schools. Maybe we should give up that respect.

    Or is that too radical?

    Just add it to the list of reasons to have no confidence in our elite to solve our problems.

    We are truly on our own.

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