It ain’t over until the Greek Tragedy Chorus SingsPosted: February 26, 2010 Filed under: Bailout Blues, Global Financial Crisis | Tags: CDOs, CDS, Goldman Sachs, Greece, Hedging, side bets Comments Off on It ain’t over until the Greek Tragedy Chorus Sings
I was beginning to think that EU was going to be the only hope for sorting through the mess Goldman Sachs has made of the financial markets of the world. I’ve mentioned the Issa documents which show how deeply Goldman Sachs was involved with the failure of AIG. We’ve also seen mounting evidence that Greece was part and parcel of the Goldman Sachs side bet operations also. It’s looking more and more that the side bets weren’t placed as hedging or insurance tools which is technically their function in financial markets. Hedging is a tool for locking in a rate of return when prices could possibly move against you. I used to hedge commercial mortgage originations with GNMA contracts back in the early 1980s. This was because interest rates were moving around so much, that we needed to insure the market wouldn’t move against us while we contracted with the home buyer. Farmers use hedges to lock in a price in the future for their crops when they harvest based on the costs they incur at planting. Businesses that sell things overseas and collect money in foreign currencies later, also using hedging. I won’t go into the details of how these things work or how you value them, because this is a real math exercise, but believe me in certain instances and markets, hedging works like a form of insurance. It’s to help a business manage its risk.
In the case of Goldman Sachs, it looks like they put together deals that they knew were problematic then used the side bets to reap the rewards of the shoddy deals. In other words, the purposefully seemed to invest in things that were going to blow up, sucked markets and the investors into thinking the deals were okay, and then waited to collect the true profits from the side bets. Oh, and they also seemed to have put the same sidebets on their own stock during the entire financial crisis. If this is found to be true, I can’t even imagine how big the consequences are going to be. If you want another take on this go see Naked Capitalism. It appears Yves Smith actually worked there for awhile and she’s talking about the experience.
However, my original thought was that it was going to be the EU that actually went after them. It appears–according to today’s NY Times–that the FED is looking into this too.
Ben S. Bernanke, the Federal Reserve chairman, told Congress Thursday that the Fed was “looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece.”
Mr. Bernanke said the Securities and Exchange Commission was also concerned about how derivatives — financial instruments that are largely unregulated and do not trade on public exchanges — have contributed to Greece’s problems. “Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive,” he said.
The S.E.C., in a statement, said that it could “neither confirm nor deny the existence of an investigation,” but added that it was cooperating with United States and international regulators in examining “potential abuses and destabilizing effects related to the use of credit-default swaps and other opaque financial products and practices.”
It is about time some one look into these activities. Not to be left out of the loop, Congress appears to have gotten a bit more educated on the situation, despite its heavy reliance on the FIRE lobby for campaign contributions.
Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the Senate Banking Committee, also took aim at credit-default swaps, which allow banks and hedge funds to wager on whether a company or country might default.
Critics say the swaps have contributed to Greece’s problems and increased the odds of a financial collapse.
“We have a situation in which major financial institutions are amplifying a public crisis for private gain,” he said.
The Fed inquiry was begun about three weeks ago, according to an official involved in the investigation who was not authorized to comment publicly. Fed examiners are focusing on whether Goldman and other banks complied with guidance the Fed issued in 2007 outlining how to manage the risk of complex financial vehicles. The investigation is still in its early stages, he added, as officials sift through records detailing how the derivatives were created, what compliance procedures were followed and what internal analysis was performed. The Fed is also looking at whether Wall Street made additional financial arrangements for Greece that have not been disclosed.
The Greek situation is bad. The country may default and because it’s part of the monetary union, it’s bringing the Euro down and the interest premiums up. If Greek sovereign debt (debt guaranteed by the government) goes into default, the costliness to Greece and the contagion that creates for the rest of the EU cannot be understated. Given that, even Goldman Sachs with all its White House connections will not be able to escape the number of Captain Ahab’s that will go after the Great White Vampire Squid. I can imagine there will be a lot of folks that will be glad to supply the harpoons.
Label me ‘Not Surprised’Posted: February 23, 2010 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, Team Obama, The Bonus Class, The Great Recession, U.S. Economy | Tags: AIG, CDOs, Darrold Issa, financial innovation, Goldman Sachs, Issa, TARP, Timothy Geithner Comments Off on Label me ‘Not Surprised’
I should’ve stuck to my research agenda, but no, I just had to go look at business headlines. There’s a debate on at The Economist over “Who benefits from financial innovation?” Nobel Prize winning Economist Joseph Stiglitz is arguing that financial innovation hasn’t been boosting economic growth but his position (which is mine) is currently in the minority.
The right kind of innovation obviously would help the financial sector fulfil its core functions; and if the financial sector fulfilled those functions better, and at lower cost, almost surely it would contribute to growth and societal well-being. But, for the most part, that is not the kind of innovation we have had.
In terms of that big question up there, the answer is found today on Bloomberg.com. If you answered “what is the vampire squid”,you’re absolutely right. The more relevant question appears to be what did that cost us? For that, I can only answer a lot and there’s more to come. Here’s the headline: Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs.
Well, there’s your financial innovation for you.
So, the fun thing about the story is that the unlikely hero is Darrold Issa (Republican) member of the House Committee on Oversight and Government Reform who “placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.” Oddly enough,it appears that Issa may have not really known exactly what he had just disclosed. It didn’t really attract any attention at the time. Luckily, some one who knew something eventually looked at it. This was essentially a list of the deals that made AIG insolvent. These were also the deals that the government basically bought when it rescued AIG.
The document Issa made public cuts to the heart of the controversy over the September 2008 AIG rescue by identifying specific securities, known as collateralized-debt obligations, that had been insured with the company. The banks holding the credit-default swaps, a type of derivative, collected collateral as the insurer was downgraded and the CDOs tumbled in value.
The public can now see for the first time how poorly the securities performed, with losses exceeding 75 percent of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs in the first place.
Here’s an even more interesting analysis from a legal standpoint. I know the deal was shady, I just have never known exactly if shady=unethical=illegal. The devil is truly in the details placed into public record by Issa.
The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.
These tallies suggest a possible reason why the New York Fed kept so much under wraps, Professor James Cox of Duke University School of Law says: “They may have been trying to shield Goldman — for Goldman’s sake or out of macro concerns that another investment bank would be at risk.”
Okay, so we know who we’re speaking of when Cox says the New York Fed, right? That would be Treasury Secretary Timmy-really-in-the-well-this-time Geithner. Bloomberg is going as far as to label his actions a cover-up. I frankly think that looks like a mild charge. Interestingly enough, an earlier version of the information was released by AIG but the counterparty names were redacted at the time. Chris Dodd’s committee had requested the information. Without the names–or more truthfully the frequency of ONE name in particular–you can’t really see much of a conspiracy.
What this detailed list shows–because the names are now out there along with the deals–is that the very same folks that underwrote the original toxic securities were the same folks that went to AIG to bet against them. It doesn’t look like they were hedging or placing insurance on their risk which would be natural and understandable transactions. It appears they fully knew the securities were bad and were preparing to make money by placing offsetting bets. This activity could only be determined if you saw the names of the counterparties next to the deals themselves. So, the appropriate document to list the information on would be a Schedule A. AIG released a schedule A for several years during the crisis, but without some of the most relevant details. We know now that this was at the request of the NY Fed (aka Tim–I’ve got GS on speed dial–Geithner).
In late November 2008, the insurer was planning to include Schedule A in a regulatory filing — until a lawyer for the Fed said it wasn’t necessary, according to the e-mails. The document was an attachment to the agreement between AIG and Maiden Lane III, the fund that the Fed established in November 2008 to hold the CDOs after the swap contracts were settled.
AIG paid its counterparties — the banks — the full value of the contracts, after accounting for any collateral that had been posted, and took the devalued CDOs in exchange. As requested by the New York Fed, AIG kept the bank names out of the Dec. 24 filing and edited out a sentence that said they got full payment.
The New York Fed’s January 2010 statement said the sentence was deleted because AIG technically paid slightly less than 100 cents on the dollar.
Before the New York Fed ordered AIG to pay the banks in full, the company was trying to negotiate to pay off the credit- default swaps at a discount or “haircut.”
Read that date. We’re talking November 2008. If you read further into the Bloomberg article you’ll see that the names were withheld also during 2009. Issa put the names out because he wanted to show U.S. taxpayers where their money went. It’s unclear to me if he understood then or maybe even now that by putting out the details of the deals, he’s basically provided information that let’s us know how deeply Goldman Sachs was in on the financial innovations that blew up the economy. Not only that, it appears they knowingly may have been loading some of those innovations with assets they knew would explode and that they were actively placing bets on that outcome at AIG. As of the end of January, 2010 meeting, Geithner and the NY Fed still didn’t want the details released. No fucking wonder!
Janet Tavakoli, founder of Tavakoli Structured Finance Inc., a Chicago-based consulting firm, says the New York Fed’s secrecy has helped hide who’s responsible for the worst of the disaster. “The suppression of the details in the list of counterparties was part of the coverup,” she says.
E-mails between Fed and AIG officials that Issa released in January show that the efforts to keep Schedule A under wraps came from the New York Fed. Revelation of the messages contributed to the heated atmosphere at the House hearing.
Tavakoli also says that the poor performance of the underlying securities (which are actually specific slices or tranches of CDOs) shows they were toxic in the first place and were probably replenished with bundles of mortgages that were particularly troubled. Managers who oversee CDOs after they are created have discretion in choosing the mortgage bonds used to replenish them.
“The original CDO deals were bad enough,” Tavakoli says. “For some that allow reinvesting or substitution, any reasonable professional would ask why these assets were being traded into the portfolio. The Schedule A shows that we should be investigating these deals.”
So, check this out.
Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, who delivered a report on the AIG bailout in November, says he’s not finished. He has begun a probe of why his office wasn’t provided all of the 250,000 pages of documents, including e-mails and phone logs, that Issa’s committee received from the New York Fed.
Okay, now, follow closely as I connect the dots to this one: U.S. Treasury loan plan may exclude TARP watchdog.
If you were Timothy Geithner, would you want Neil Barofsky poking around any more programs? Wouldn’t you be highly interested in controlling TARP oversight? No wonder Treasury officials and others have been after Barofsky for some time. (Here’s an outline of their actions and attempts to remove independency by Glenn Greenwald at Salon from last summer. )
Geithner basically knew the vampire squid was a huge contributor to the fall of AIG. It looks like he may have actively encouraged covering-up that information. It also looks like GS actively securitized mortgages it knew would fail eventually and made huge counterbets based on that information using AIG as its personal bookie. Then, when AIG couldn’t cover the bets, GS refused to negotiate any deals (they must’ve known something like a bail out was forthcoming). Then knew exactly what was in those securities so they knew their real value. Geithner made AIG pay GS 100% of the value when it appears they were worth around 35%. When AIG tried to report the counterparties, the NY FED told them to withhold the information. (Yet, post Timmy, the NY FED appears to have released everything to Issa’s committee. During Timmy’s time, remember, everything was heavily edited and Barofsky appears not to have gotten the same information.) They also were told not to provide details on the mark downs. Timmy must’ve known that Goldman was betting against the toxic assets they had created. Not only that, it looks like Goldman was actually shorting themselves! AND these guys were Obama’s major contributors. Giethner must’ve been part of the packaged deal.
I got one thing to say now. A lot of folks should be doing a perp walk on this one. This looks like fraud. If this is the kind’ve financial innovation these folks voting on The Economist poll want, then they should just as well turn their life savings over to Bernie Madoff right now. I just wish they’d stop giving the likes of him mine too.
(I hope I’ve explained this adequately, cause this sure is one fucking twisted tale.)
Amy Bishop and Massachusetts PoliticsPosted: February 22, 2010 Filed under: Crime, U.S. Politics | Tags: Amy Bishop, Braintree MA, Chief Edward Flynn, Chief John Polio, Chief Paul Frazier, Judy Bishop, murder, Ronal Solimini, University of Alabama, William Keating Comments Off on Amy Bishop and Massachusetts Politics
I’m still obsessed with the Amy Bishop case–most of all I’m fascinated by the events of December 6, 1986, when Bishop shot and killed her younger brother Seth. As I’m sure you all remember, Bishop is now in jail, after being charged with one count of capital murder and three counts of attempted murder for shooting six of her colleagues in the Biology Department at the University of Alabama Huntsville, three of them fatally.
Over the past few days, a great deal more information has come out and it appears more and more likely that local politics played a role in preventing Bishop from being charged with a crime in connection with the shooting of her brother Seth on December 6, 1986 in their home in Braintree, Massachusetts.
To recap, a day after the shootings in Alabama, current Braintree Chief of Police Paul Frazier released a statement in which he criticized the handling of the 1986 shooting by then Chief John Polio, now retired. Frazier had spoken to Officer Ronald Solimini, who in 1986 had arrested 21-year-old Amy Bishop and brought her to the police station to be booked.
Solimini told Chief Frazier that the file on the case had been missing at least since 1988, when Chief Polio’s successor, Chief Edward Flynn looked for it (I would love to know why he was looking for it).
Solimini said he had been in the process of booking Bishop for murder (witnesses say that word had been written on the booking sheet) when he was told by a Lieutenant to release Bishop to her parents. Supposedly the order had come down from then Chief of Police John Polio. From Chief Frazier’s statement of Feb. 13, 2010 (click on link in article to see Word document):
“I was not on duty at the time of the incident, but I recall how frustrated the members of the department were over the release of Ms. Bishop. It was a difficult time for the department as there had been three (3) shooting incidents within a short timeframe. The release of Ms. Bishop did not sit well with the police officers and I can assure you that this would not happen in this day and age.”
“It is troubling that this incident has come to light. I can assure you that the members of the Braintree Police Department maintain the highest of integrity. Since it was discovered this morning that the report is missing, I have been in contact with Mayor Joseph Sullivan. Mayor Sullivan and I have spoken with District Attorney William Keating and we will be meeting with him next week to discuss this situation. The Mayor supports a full review of this matter and agrees that we want to know where the records are.”
After Frazier’s public statement, a March 1987 report by the State Police (PDF) was released to the public. Based on this report, then Norfolk County District Attorney William Delahunt, now a Democratic member of the House of Representatives, had ruled the the death of Seth Bishop to be accidental and no charges were filed against Amy Bishop, according to Frazier.
On Feb. 16, Braintree Mayor Joseph Sullivan announced that the missing report on the 1986 shooting (PDF) had been found in the files of an unnamed police officer. Who was that officer? No one is telling as yet.
Neither the Braintree police report nor the State Police report included the information that after shooting her brother, Amy Bishop had held two auto mechanics at gunpoint at a car dealership near her home and demanded the keys to a car, or that after leaving the dealership she had pointed her shotgun in the face of a 16-year-old boy who was working at a newspaper distribution office. It was there that Bishop was finally arrested, but not before she also trained the shotgun on police officers.
Basically, Bishop had gone on a rampage around her neighborhood on Dec. 6, 1986. After discharging her 12-gauge pump-action shotgun three times in her home, killing her brother with the second shot, she had run out of the house, tried to stop a man in a car by pointing the shotgun at him (that was in the police report for some reason), gone into the car dealership in search of a get-away car, then tried again to get a car by pointing her shotgun at a 16-year old boy. Finally, she pointed the shotgun at two Braintree police officers who were trying to disarm her, according to Boston’s WCVB, Channel 5.
A source close to the shooting investigation told NewsCenter 5 that police officers who arrested Bishop in 1986 called it the “scariest day” of their lives.
“I remember looking at her and thinking ‘She killed her brother and now she’s going to kill me,'” one officer, who did not want to be named, told NewsCenter 5’s Kelley Tuthill.
William Keating, the current Norfolk County district attorney, said Bishop should have been charged with assault with a dangerous weapon for her alleged actions after shooting her brother in 1986.
“There was a mistake in not doing it. I don’t think you can justify it,” Keating said.
Come on. Bishop should have been charged with manslaughter at the very least. The weapon she used, a 12-gauge shotgun, had to be manually pumped in order to chamber a round. And it could not just “go off” accidentally. She would have had to pull the trigger. Amy had loaded the weapon in her bedroom, where it supposedly discharged “accidentally,” blowing a hole in the wall. She had tried to cover up the hole before going downstairs. Her mother Judy Bishop later claimed she did not hear the shotgun blast upstairs. Read the rest of this entry »
“Blame Barack Obama more than the system”Posted: February 22, 2010 Filed under: Surreality, Team Obama, The Media SUCKS | Tags: bipartisanship Comments Off on “Blame Barack Obama more than the system”
That’s the sub-headline from a February 18th article on US Politics in the Brit business mag The Economist. Kinda looks promising in that non hopey changey sorta way, doesn’t it? The op-ed basically looks at the Evan Bayh retirement and accompanying hoopla. It wonders if “America’s democracy is broken, unable to fix the country’s problems and condemned to impotent partisan warfare”, then decides it’s not our system, it’s not even us, and it’s not our partisan bickering and obscure senate procedures. It’s that Obama isn’t really finding policies or ways to please Republicans. Say what silly little man with the British accent?
This piece has unnerved the village and in so many interesting ways that I just have to go there. It’s not because The Economist piece is brilliant in any way, because it isn’t at all. It’s because to prove The Economist is out on an unsupportable limb, the village has to argue against their two central arguments. First, that Obama’s captured by the left wing. Second, that he’s really not making much of an attempt to offer them any policies the could embrace. Now, that’s just REALLY, REALLY, REALLY crazy and fun to watch. The retorts basically spell out how absolutely illiberal and how Republican Obama’s really been to show how kooky the Republicans have been to just say no repeatedly. For every example in The Economist, each villager provides examples of the Obama sell-out of the democratic platform. It’s like watching the alligators go after a marshmallow.
It is not so much that America is ungovernable, as that Mr Obama has done a lousy job of winning over Republicans and independents to the causes he favours. If, instead of handing over health care to his party’s left wing, he had lived up to his promise to be a bipartisan president and courted conservatives by offering, say, reform of the tort system, he might have got health care through; by giving ground on nuclear power, he may now stand a chance of getting a climate bill. Once Mr Clinton learned the advantages of co-operating with the Republicans, the country was governed better.
First, we have Matthew Yglesias of Think Progress with a different tilt called “Economist: If Only Obama Had Done Things He’s Actually Done, Things Might Be Different.” Yglesias takes on The Economist’s argument by responding point by point on each thing Obama been yielding to the Republicans since day one. Here’s a taste on Obama and Health Insurance Reform.
Last, if you want to say that in your view the Senate’s health care bill is too left-wing then of course that’s your prerogative. But the notion that it reflects the “left-wing” approach to health care couldn’t possibly withstand contact with a single person who holds actual left-wing views on health care. The left-wing view on health care is that we should take America’s successful single-payer health care program for senior citizens, Medicare, and open it up to all Americans. Most left-wing people are willing to accept a more modest reform than that and have coalesced around the idea of a level playing-field public option that will coexist with private for-profit comprehensive insurance plans, but the president’s embrace of even that notion has been less than fulsome.
Krugman’s take is that The Economist is delusional if they think that Obama can offer any thing and get a positive response from the party of no. He’s got the Rahm talking points down to sound bite level. Just look at who is calling whom ‘the commentariat” with obvious disdain. Krugman didn’t go after the marshmallow. He’s smarter than your average alligator.
Unfortunately, the commentariat seems to be full of people who know, just know, that Obama isn’t getting Republican cooperation because he’s in the thrall of left-wingers — and just make stuff up to bolster their case. The truth, which is obvious from every day’s news, is that there is nothing, nothing at all, that Obama could offer — other than switching parties — that would get him any GOP cooperation.
Jumping over to Brad DeLong’s site is even more interesting. Just read the blog thread header and embrace the sarcasm: In Which We Conclude That the Editor of The Economist, John Micklethwait, Has No Contact with Reality Whatsoever…
We have now seen this at least three times: on health care, on climate change, and most recently on financial regulation, the word has come down from the Republican Central Committee that moderate Republicans are allowed to “cooperate” with Obama as long as it leads to delay–but that once the time comes for action, then they must go into complete and total opposition. And so far every single one of them has toed the line.
DeLong obviously agrees that the party of no is in it to score as many political points as possible during the killing season. Nope, Brad didn’t fall for the marshmallow either.
Even more gasps and aplomb from the Washington Monthly and Steven Benen. (Like Matt, he went for the marshmallow.)
I realize The Economist is on the other side of the pond, but it’s going to be reflecting on U.S. developments, it’s going to have to do better than this. The White House “handed over health care to his party’s left wing”? Of course — how could we forget the time President Obama sided with Dennis Kucinich on single-payer? Or vowed to veto reform unless it included a public option and Medicare buy-in?
As for the notion that the White House should have made concessions on nuclear power, Obama did that, too. The president actually went even further than that, and said he’d also accept Republican demands for more coastal drilling, as part of a compromise on a climate bill. In response, Republicans said what they always say, “No.” (In truth, they not only said “no,” they said, “We’re going to block Congress from even voting up or down on the legislation.”)
As you all know, I’m no Obama fan, but I’m not sure what was in the water last week in the offices at The Economist. You have to be really not paying attention to not observed that most things offered up by the Obama administration are Republican lite at best and by the time the administration compromises with its own blue dawgs, it looks more Republican that what came out of the Nixon, Ford, and Eisenhower years combined. There’s not that many Republicans left at the moment in congress or the senate, but the ones that are there would probably say no to Nixon, Ford, Eisenhower and possibly Reagan. The Economist really laid an egg with this one. I for one would not want to be one of the nameless writers there who might possibly be mistaken for elucidating the examples in that article. The fault may partially rest with Obama’s absentee leadership skills, but I have to say for some one to argue that he’s been co-opted by the left wing and hasn’t offered up enough to please Republicans you must have some serious disconnect with the facts on the ground.
Sidenote to those you who don’t live near a bayou with alligators. Marshmallows are the things you can throw into the canals and bayous to get them to come to the surface so your tourist friends can seen them. For some reason, alligators just can’t resist marshmallows and most of the time they’re pretty shy. Go figure!
Behind the Unemployment RatePosted: February 21, 2010 Filed under: U.S. Economy | Tags: duration, structural unemployment, unemployment, Unemployment figures, Unemployment Rate 1 Comment
We’ve discussed this before. The unemployment rate that is used as the benchmark of the state of the job market by the mainstream media does not contain the full story. It’s missing the faces of people that have given up on the job market and are considered ‘outside’ the labor force. It considers any one employed that one works one paid hour per week even though those people want 40 hour a week jobs and maybe working multiple part time or temporary jobs to make ends meet because unemployment insurance only goes so far. It doesn’t give you information on how persistent that unemployment is and there’s no inference of where the unemployment is the worst. It’s just an average of every one who is actively looking for work and is not currently employed at least one hour a week as a percentage of the total labor force.
It is the flows in out and out of employment and unemployment and the labor force itself that gives you more information. It is the stratification of that unemployment by race, by industry sector, by region, by sex, by age and by education that gives you an idea of the faces behind the unemployment rate. It is also the source of unemployment and the duration or length of time out of a job that provides the detail that you must have to develop a successful unemployment policy.
I’ve mentioned that the duration of unemployment in this recession and its root in structural unemployment is what is so worrisome about the unemployment we have today. It appears that many of the jobs lost over the last decade are gone permanently. The financial crisis put a large number of these folks on the unemployment roles. Their benefits are running out and there are basically no jobs for them any more. Worse yet, states are cutting their budgets which mean job training and education are less available and will continue to become more personally expensive and less available. They will be unreasonable choices for older, unemployed Americans with only high school degrees and job skills that only China requires.
The article in the NY Times today called “The New Poor- Millions of Unemployed Face Years Without Jobs” is a good overview of what we’ll look forward to as we creep out of the recession. I was struck by the stories of the people profiled in the piece as well as the candid discussion that most of these folks will never know what it is to be middle class again.
Large companies are increasingly owned by institutional investors who crave swift profits, a feat often achieved by cutting payroll. The declining influence of unions has made it easier for employers to shift work to part-time and temporary employees. Factory work and even white-collar jobs have moved in recent years to low-cost countries in Asia and Latin America. Automation has helped manufacturing cut 5.6 million jobs since 2000 — the sort of jobs that once provided lower-skilled workers with middle-class paychecks.
“American business is about maximizing shareholder value,” said Allen Sinai, chief global economist at the research firm Decision Economics. “You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.”
This is a radical change from a country that prior to this century was a job creation machine for every one. Bostonboomer discussed the dark side of this change in her morning news thread on Saturday morning. We can look at the unemployment number and realize that it serves its role as barometer of bad numbers. It has some Cassandras–like Yves Smith of Naked Capitalism–wondering how these people will take their status as permanent underclass. Will it be with quiet resignation or more teaparties with more pitchforks and rifles?
Every downturn pushes some people out of the middle class before the economy resumes expanding. Most recover. Many prosper. But some economists worry that this time could be different. An unusual constellation of forces — some embedded in the modern-day economy, others unique to this wrenching recession — might make it especially difficult for those out of work to find their way back to their middle-class lives.
What does it mean when so many Americans are so visibly losing the American promise? What will it mean if–in order to continue replenishing necessary campaign coffers–American politicians continually sell out the American labor class for the American capital class? Obviously, in a democracy, those of us that rely on paychecks instead of dividend checks and capital gains can out vote them the bonus class. But can we achieve any real change when the two major parties continually move towards the same policies with only the only difference being which industry sponsors which version of the rhetorical spin?
Traditionally, three sectors have led the way out of recession: automobiles, home building and banking. But auto companies have been shrinking because strapped households have less buying power. Home building is limited by fears about a glut of foreclosed properties. Banking is expanding, but this seems largely a function of government support that is being withdrawn.
At the same time, the continued bite of the financial crisis has crimped the flow of money to small businesses and new ventures, which tend to be major sources of new jobs.
I think I mentioned before that my laugh line from the State of the Union Address was the one where POTUS said he wanted to double exports and make us an export driven economy. Most of us had the same reaction WTF are we going to export? Disneyland? Yellowstone Natinoal Park? Old Arnold Schwarzenegger movies? Where are the jobs coming from? What do we produce any more? Much of our economy seems based on manipulation of information to disenfranchise many and benefit a few or feeding, massaging, and entertaining the bonus class or giving sophisticated medical procedures to people with Cadillac insurance plans. Many of these folks worked with their hands. They made cars or houses or sewed clothing. We now have too many houses and we prefer cars from elsewhere. All of our clothes are made by the indentured servants in third world countries now.
What are these people to do? Our safety net programs have been gutted and the states are now in the position of gutting education and training. That link is from CNN.
States face combined remaining budget gaps of $134 billion over the next three years, the report said.
It said there has been no leveling of state revenues and most states are seeing monthly totals that are lower than recent forecasts.
Citing the Rockefeller Institute of Government, the report said that state tax collections have declined for four consecutive quarters, beginning in 2009’s third quarter.
Meanwhile, Medicaid costs have grown, the report said. And states continue to lose jobs. In January alone, states eliminated 18,000 jobs, and will continue to shed jobs, the report said.
Because states are required to balance their budgets, they will “continue to cut spending and increase taxes, which will also weaken the economy and, thus, its ability to generate private sector jobs,” it said
This is back from the NY TImes:
Some poverty experts say the broader social safety net is not up to cushioning the impact of the worst downturn since the Great Depression. Social services are less extensive than during the last period of double-digit unemployment, in the early 1980s.
On average, only two-thirds of unemployed people received state-provided unemployment checks last year, according to the Labor Department. The rest either exhausted their benefits, fell short of requirements or did not apply.
“You have very large sets of people who have no social protections,” said Randy Albelda, an economist at the University of Massachusetts in Boston. “They are landing in this netherworld.”
“We have a work-based safety net without any work,” said Timothy M. Smeeding, director of the Institute for Research on Poverty at the University of Wisconsin, Madison. “People with more education and skills will probably figure something out once the economy picks up. It’s the ones with less education and skills: that’s the new poor.”
The majority of people in this country rely on their jobs for everything. The majority of business in this country (in terms of numbers) rely on customers who pay for their products and services with their pay checks. When the money is sucked out of this process to a few people, the house of card falls. Income inequality is not good for the country at all, but that’s been the increasing story since the 1980s. Here’s another disturbing headline from FT Alphaville: “The US is not a viable concern anymore”. The thread is based on an interview with Richard Duncan, partner at Blackhorse Asset Management and author of The Dollar Crisis. He’s written a new book called The Corruption of Capitalism.
The point being: the world’s largest economy and engine of global economic growth — the United States — is simply not a viable concern any more. As Duncan explained it:
The country is de-industrializing because wages in the US are up to 40 times higher than those in developing countries like China. Therefore, the United States makes very little that the rest of the world cannot buy somewhere else much more cheaply.
And so, like any troubled company, the US too must restructure itself if it is to remain operational, says Duncan. How it goes about it, though, will be crucial to its success. The best policy according to the author would be heavy government investment in so-called ‘future’ industries — everything from solar, biotech, nano-technology and so on. Trouble is, a move like that would take more government spending not less.
What kind of future does this leave us with? That is why BB’s self-titled “incoherent ramblings” were not the least bit incoherent. It’s just very hard to grasp losing the promise. Suicides will go up as well as murder-suicides. More and more people will have to find other ways to get what they need outside of the traditional job structure. Read into that what you will.
Is the American Dream over?