Friday Reads: Confessions of a Naughty Professor

Good Morning!

I’ve felt discombobulated all week. I’m hoping this phase passes since it is spring and things are supposed to spring alive right now.  Right now, however, does not seem to apply to me. It’s been one of those weeks where I’ve felt like the stereotype of the absent-minded professor fits me like a snug glove. I get distracted easily and hours pass before I realize I’ve done nothing for the day.  It fits so do not acquit. Maybe I’ll just lie around in bed this weekend a little bit more and think these kinds of thoughts.

For some time, I’ve been writing how worried I am about the systemic risk involved with all these huge banks that have a near monopoly on credit card and house loans.  They also hold the deposits of some our of largest industrial and service corporations that actually provide things people use and need in their daily lives.  It’s the same situation in Europe and the UK where the needs of banks–based on their own faulty lending and investing strategies–have passed on tremendous costs to countries, their treasuries and their peoples.  I was glad to read that Ben Bernanke made a clear atement yesterday that he was in agreement with Senator Elizabeth Warren on the entire problem of banks considered “too big to fail”. I’d also like to add that it’s refreshing to see a senator on a committee that actually knows what they’re doing for a change.

During that conversation, Bernanke seemed to imply that the problem had been solved, suggesting that the Dodd-Frank financial-reform act had given policy makers the tools to wind down a giant bank without hurting the economy — although his conviction faded as the argument went on. On Wednesday, he wanted it to be known that fully sided with Warren.

“I agree with Elizabeth Warren 100 percent that it’s a real problem,” he said.

He also sided with Warren against those banks and others who suggest that having gigantic banks is not really a problem at all.

“Too Big To Fail was a major source of the crisis,” he added a little later, “and we will not have successfully responded to the crisis if we do not address that successfully.”

He talked about some of the tools policy makers could use to address the problem, including Dodd-Frank rules forcing the biggest banks to hold more capital or pay regulators a little more than smaller banks.

“If we don’t achieve the goal” of solving too big to fail with these measures, Bernanke said, “we will have to take additional steps. It is important.”

You only need to look at the entire senate hearing on JPM’s “Whale” situation to understand how these big bank purport themselves. This analysis is from NYT’s Simon Johnson.

At its heart, the Levin-McCain report reveals executives with a profound misunderstanding of risk in the world’s largest bank (I use the calculations of comparative bank size offered by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation). Even worse, the report shows us in some detail that banks – even after Dodd-Frank – can and do readily manipulate complicated measures of risk in order to make their positions look safer than they really are.

As Jeremy Stein, a Fed governor, pointed out recently, there are strong incentives to do this repeatedly in banking organizations (read the opening few paragraphs of his speech carefully).

The banking regulators – in this case, the Office of the Comptroller of the Currency – are clearly unable to keep up with this form of “financial innovation” (which is really just clever ways to misreport risk).

Did JPMorgan Chase’s top management do this intentionally? Did they mislead investors, particularly in the fateful conference call on April 13, 2012? This is a fascinating question on which the courts will no doubt rule. (You should also review this report by Josh Rosner of Graham Fisher, with the link kindly provided by Better Markets.)

Jamie Dimon will survive because JPMorgan Chase remains profitable. But it is profitable precisely because it receives implicit subsidies from being too big to fail. JPMorgan Chase disputes the precise scale of these subsidies – as I discussed here last week. Let’s just call them humongous.

This is not about individuals, this is about policy. And Richard Fisher has exactly the right approach:

At the Dallas Fed, we believe that whatever the precise subsidy number is, it exists, it is significant, and it allows the biggest banking organizations, along with their many nonbank subsidiaries (investment firms, securities lenders, finance companies), to grow larger and riskier.

This is patently unfair. It makes for an uneven playing field, tilted to the advantage of Wall Street against Main Street, placing the financial system and the economy in constant jeopardy.

It also undermines citizens’ faith in the rule of law and representative democracy.

You can see that regulators at all levels realize they have a problem.  I should probably  mention here that Fed Branches and the Board of Governors of the Fed are very independent of one another and each have distinct characters.  We have two layers of Fed bureaucracy championing reform.  Unfortunately, they can’t do much with out laws passed by Congress and signed by the President who are captured at every turn by the FIRE lobby.

Bernanke also compared himself to Volcker, when talking about the US banking system, which the Fed regulates. Volcker once said, famously, that the only great financial innovation of recent decades was the invention of the automated teller machine. Bernanke smiled as he quoted Volcker’s bellicose quip and said he wouldn’t go that far – but he was surprisingly frank in talking about the failures of the financial system and regulation.

“[‘Too big to fail’] is not solved and gone. It’s still here,” he said, emphasizing the point. He also threw in his lot with Elizabeth Warren, who often opposed Tim Geithner and others in her insistence that banks are of a dangerous size:

“I agree with [Warren] 100% that [‘too big to fail’] is a real problem … We will not have successfully responded to the crisis if we do not address [‘too big to fail’] successfully.”

That view is consistent with what Bernanke said as far back as 2009. But the subject of “too big the fail” has been a nonstarter for at least a year, since Occupy Wall Street protests receded.

Bernanke also took an activist view of sorts by plumping for a return to regulatory reform and advocating that banks need to pay higher surcharges to help the country bail them out if things go wrong. Then Bernanke criticized banks again, implicitly, by saying that they had restricted lending too much, making it hard for ordinary Americans to get a mortgage.

He went on to say that the Fed’s bond-buying program has been successful largely because the Fed has learned how to monitor the markets better – implying, correctly, that those trading on Wall Street need a regulator to keep an eye on them. All of this was surprising on two fronts: first, that Bernanke actually shared his own opinion, instead of a technocratic, non-committal vague fluttering of economic opinions, as is often the case. Second, it’s surprising that he took a somewhat controversial view, not designed to make friends on Wall Street.

And that, in fact, may be the most important development of this first press conference of 2013: we already know Ben Bernanke is a savvy politician who knows how to read a room. If Bernanke has thrown his lot in with those who have said that Wall Street needs to come under tighter control, you can be sure that he thinks it’s a historically smart view to take. Those who are against reform should take notice.

I am consistently reminded in many of these conversations of Lenin who wrote a lot about banking.  He said that the downfall of capitalism would come from the power of banks and their eventual destruction of the actual productive parts of the economy.  I realize when I quote Lenin that I run a very high risk of being called all kinds of things by Republicans looking to demean academics.  However, I read his 1916 Treatise  Imperialism: The Highest Stage of Capitalism in a comparative economics class in my senior year at the University of Nebraska.  Let me tell you that the business school at the University of Nebraska in Lincoln does not harbor any communists to my knowledge and probably is not all that populated with Democrats, either.  However, this is an important book to read to understand why the two Roosevelts were able to stop communism from taking root here.  A lot of it had to do with the control and regulation of monopolies and huge banks that stalled a lot of what Lenin foresaw. I’ve pointed to this several times over the time I’ve been blogging, but it always bears repeating.  Lenin had a point and does now since so much of these kinds of regulations have been removed over the last 30 years.

Lenin provides a careful,5-point definition of imperialism: “(1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life; (2) the merging of bank capital with industrial capital, and the creation, on the basis of this “finance capital”, of a financial oligarchy; (3) the export of capital as distinguished from the export of commodities acquires exceptional importance; (4) the formation of international monopolist capitalist associations which share the world among themselves, and (5) the territorial division of the whole world among the biggest capitalist powers is completed. Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capital is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed.”

Now, I’m not pushing Lenin’s view of what will happen once capitalism collapses, I’m only saying that he makes some really good points about how banks can play a huge role in bringing down market economies. I also think that Lenin never imagined a world in which nationalism may play a lesser role given the international flavor of bank havens today.  Both Roosevelts did their share of trustbusting and bank regulation to make me believe that they saw a lot of the same problems with the JPM of their times that we’ve got with the JPM of our our time. Unfortunately, there is a dearth of Roosevelts these days.

Banks are not the only entities that still employ practices that the government must regulate or we fail to have an economy that allocates benefits to all. It’s not only that but in some very sad cases we have companies that deny the rights and liberties of others and behave criminally.  We have a very robust, 21st century version of slavery here in the US.  I fully believe that both Rand and Ron Paul are neoconfederates with their views of state’s rights and many of the positions they take.  Rand Paul has recently suggested that we make more visas available so foreign workers can come here legally.  As I’ve seen in my state in oil rig companies and after Katrina during the clean-up, these visas are just as likely to lead to abuse of workers than those who come here under the wire.  So, what’s the real purpose?  Do we just need to ‘dog-tag’ every one?

Under a system of “legalized slavery,” foreign workers are routinely thrown in massive debt, cheated out of wages, housed in squalid shacks, held captive by brokers and businesses that seize passports, Social Security cards and return tickets, denied healthcare, rented to other employers (including the military), and sexually harassed and threatened with firing and deportation if they complain, according to two detailed reports by the  Southern Poverty Law Center and the  National Guestworker Alliance. The reports are based on sworn testimony gathered for lawsuits.

The H-2B visa program that brought 83,000 foreign guestworkers to the U.S. in 2011 for non-farm work has become a stalking ground for some of the worst abuses in American capitalism, according to recentreports by anti-poverty law groups. These reports describe in excruciating detail how predatory capitalists in many manual labor-based industries (supplying national brands like Walmart) lure and prey upon foreigners whose jobs average less than $10 an hour with little regard for human rights, labor law or legal consequence.

“We called it modern-day slavery,” said Daniel Contreras, who borrowed $3,000 to come from Peru and whose story is told in the Guestworker Alliance report. He was one of 300 foreigners brought to New Orleans by a hotel chain after Hurricane Katrina. “Instead of hiring workers from the displaced and jobless African-American community, he sent recruiters to hire us. At around $6 an hour, we were cheaper. As temporary workers, we were more exploitable. We were hostage to debt in our home countries. We were terrified of deporation. And we were bound to [owner Patrick] Quinn and could not work for anyone else. We were Patrick Quinn’s captive workforce.”

These are all circumstances that create revolutionaries and circumstances that both Roosevelts righted by ensuring that both sides of the market have an equal chance to succeed.

So, I can see that this post turned into a really long treatise on two of the factors of production which probably means I must’ve been working and thinking way too much this week.  I did not intend this post to be any kind of seminar on how dissimilar we treat the factors of labor and capital in this country.  So, don’t take this as a closed thread so much as me going off on a tangent after having gotten very pissed about how badly we treat people that work in this country vs how well we treat people that collect cash and gamble.  Perhaps it’s just the impact of watching all those folks get there savings stolen by EUCB.

Btw, if you want to see a most outrageous example of the government discouraging people that actually earn livings, please take a look at the types of things that my Governor Jindal is proposing to tax and tax hugely.  He just proposed $1.4 billion in new taxes on services.

Your paycheck will grow larger, but in exchange the price of your haircut, cable TV and Internet service will go up if lawmakers agree to Gov. Bobby Jindal’s rewrite of Louisiana’s tax code.

Jindal wants to do away with state income taxes, but he doesn’t want to shrink the state’s tax revenue overall.

So to help make up the gap, the governor wants to charge $1.4 billion in new sales taxes on items that have not previously been taxed, under the plan outlined to lawmakers this week.

That includes home landscaping, visits to the museum and zoo, a pet’s trip to the veterinarian, time at the tanning salon and more.

Businesses that pay outside accountants, architects, environmental consultants, computer programmers and janitors would see new taxes on those services.

In all, three dozen new categories of services would be swept into the state’s current 4 percent state sales tax to drum up $961 million. They also would be included as the sales tax jumps to 5.88 percent under the governor’s plan, to boost the total to $1.4 billion from the newly-taxed services, according to data from the Department of Revenue.

So basically, every hairdresser and barber, every kid that mows the lawn, every musician on the street corner, every plumber, every independent bookkeeper and tree trimer, and a whole lot of other mom and pop ventures must collect, account for, and pay sales taxes to the State of Louisiana under Jindal’s plan while every huge corporation is off the hook for property and income taxes.

Now, look at me honestly and say that court eunuchs and jesters like Jindal aren’t just asking for a revolution.  Shoo-be-doo-wah.

What’s on your reading and blogging list this morning?