Monday, August 31, 2009

WSJ 8/31 "Raft of Deals for Failed Banks Puts US on Hook for Billions"

The WSJ today reports:
"To encourage banks to pick through the wreckage of their collapsed competitors, the FDIC has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks."

Must Read: Lies, Lies, and Financial Reporting

Monday, August 31, 2009 Naked Capitalism
More Bogus Bailout Reporting: “As Big Banks Repay Bailout Money, U.S. Sees a Profit"

This article helps dispel the half truths and outright deceptions in 2 articles, one in the NYT and the other in the Financial Times.

Here are some of my personal observations and questions.

First, how is it that U.S. banks are repaying the U.S. Government?

The Federal Reserve is providing U.S. reserve banks with very low interest rates (i.e., "free money") that allow the banks to earn money to repay the government. So, the banks' profitability is in some degree dependent upon their preferential treatment.

Second, what role does AIG have in allowing banks to repay Government loans? One has to wonder whether the U.S. Government is getting back the money funneled to banks through AIG.

In March 09 Reuters reported that Goldman Sachs and a variety of European banks were the “major beneficiaries of $93 billion in payments from AIG”

The NYT reported that “Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).”

In April 09 the Treasury chief watchdog probed whether AIG paid more than necessary to banks.

So, are U.S. banks repaying the U.S. Government using money received from the Government via AIG? Additinally, are the bank still getting money from AIG?

The NYT article today reported that “The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.”

In closing, my question is how is it that the banks, many of which are still technically insolvent if they were forced to acknowledge losses, are paying back the U.S. Government?

US Income Distribution

Naked Capitalism today has a guest post by Andrew Kaplan on household income and savings. here are a couple of relevant excerpts.

"The most recent data available (for 2007) showed that the top 14,988 households (0.01% of the population) received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received 49.7% of income (the highest on record)."

"The fortunate 14,988 had an average income in 2007 of $35,042,705. They had an average federal tax burden, according to Piketty and Saez, of 34.7%, leaving them after tax income of $22.9 million. If you assume a 50% savings rate among this group, you get total savings of $171.5 billion. This is nearly ONE HALF of the total savings for the entire country implied by a savings rate of 4.2% ($365 bn) reported in this month’s Bureau of Economic Analysis data."

This article illustrates growing income inequality and the challenges facing household savings. Most households do not have sufficient discretionary income to save for health care, retirement, and college education for kids.

My personal household spending illustrates this challenge. I make just under $70,000 annually. This year that figure was reduced by 11 days of furlough taken in the spring of 09.

After deductions, including 7% mandatory retirement and health care contributions, my monthly take-home income is about $3,600 when I am not being furloughed. My expenses eat most of that up.
$1700 mortgage payment on a 15 year mortgage
$150 auto insurance -no car payments
$300 average monthly electricity/gas bills (Arizona is HOT in the summer and AC is costly)
$150 monthly water/sewage
$100 phone/cable/cell phone (bundled)
$100 regular medical/dental for RX, braces, allergy shots, et.
Leaves aproximaely $1,100 for food, gas, kid expenses, car repairs, unexpected expenses, recurring expenses (car registration, new glasses, prescription lenses, etc) for a family of 4. Not much left for saving.

Sunday, August 30, 2009

Deficit Spending and Resource Allocations

Ambrose Evans-Pritchard writes:

"Our quarter-century penance is just starting: Never in modern times has there been such a flat contradiction between the euphoria of markets and the stern warnings of officialdom at central banks and financial watchdogs."

He continues:

"All that has happened over this crisis is that huge private losses have been dumped on society: but the losses are still there, smothering the economy"

Evans-Pritchard argues that taxes must rise to compensate for the bailout-driven deficit spending. I agree with his analysis but DISAGREE WITH HIS CURE.

Rather than raising taxes and cutting social benefits, the U.S. should stop bailing out insolvent and morally bankrupt financial institutions and should dramatically scale down military spending.

U.S. military spending should be dramatically pared down. Many of the weapons systems driving costs are irrelevant for contemporary warfare. Additionally, U.S. empire building through military means does not work. Vietnam, Iraq, Afhganistan are the obvious lesson plans. The current U.S. decision to build 7 or 8 military bases in Columbia simply turns public opinion in the rest of the continent against the U.S.

If the U.S. were to dramatically scale down its military spending it could productively re-allocate financial and scientific resources toward discovery and creation of new energy forms and infrastructures.

The U.S. unwillingness to disengage from a pointless and destructive military obsession will be the nation's undoing...

Saturday, August 29, 2009

WSJ "Banks on Sick List Top 400" Aug 28 09

WSJ "Halting Recovery Divides America in Two"

Aug 29 WSJ article describes the recovery (and non-recovery) of 2 economies. The first economy is a "cadre of companies and banks, mostly big, united by an enviable access to credit." These companies and banks can go directly to capital markets to raise funds through bonds. The people employed by these privileged companies and banks have job security and living wages.

In contrast, an estimated 1 in 4 companies is in "dire straights due to lack of profits combined with not being able to borrow." These smaller companies are not being bailed out by essentially free government money lent by the Fed. These smaller companies are feeling the effects of reduced consumer spending and the pullback of credit by banks.

The WSJ's description does not reflect capitalism's "creative destruction." A company's cutting edge relevance or obsolescence does not predict its access to capital. What predicts access to capital is size and crony connections.

Friday, August 28, 2009

US Household Savings Rate

Yahoo Finance reports that the much lauded return of personal savings dipped slighly in July as incomes remained flat:
"With incomes flat in July as spending rose, the personal savings rate dipped slightly to 4.2 percent from 4.5 percent in June. The savings rate was 2.6 percent a year ago."

Are U.S. households really saving more? Micheal Hudson explains that the "savings rate" is not what it seems. Rather, much of what is represented as "savings" is really debt de-leveraging by households no longer able to role over debt. Here is an excerpt from his June article linked above:

(Hudson) "I put the word “savings” in quotation marks because this 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise. The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago. The only way in which these savings are “money in the bank” is that they are being paid by consumers to their banks and credit card companies."

The important issue here is that savings really means de-leveraging for most households.

This has important implications for U.S. citizens' financial security, consumption, and standard of living. With credit scarce, citizens must pay down debt. With incomes declining or stagnant, citizens must forgoe current consumption in order to pay down debt. That means standards of living will erode because Americans' have masked stagnating incomes for 80% of the population with easy credit for 3 decades.

This de-leveraging also means that financial emergencies may lead to personal crises, including bankruptcy and homelessness.

The U.S. population is now faced with the real implications of deteriorating wages and benefits.

Thursday, August 27, 2009

A Detailed Look at the Stratified Consumer

Although I don't always agree with Zero Hedge's political economy, I cannot resist the interesting and provocative articles on the site. This one is a very informative read about wealth stratification in the context of the recession.

Tax Cuts for the Wealthy Come Before Health Care for the Uninsured.

Mark Thoma at Economist's View points out a 3 trillion dollar price tag stemming from Obama's plan to extend Bush era tax cuts:

"It is interesting, and perhaps worth noting, that while political opposition seems to be hardening against the $1 trillion, ten-year cost of the early versions of health reform, barely a peep of concern has been raised about the $3 trillion price tag for President Obama’s plan to extend most of the Bush-era tax cuts."

One might also question Obama's wisdom in geographically widening the 3 trillion dollar war being fought in the Middle East.

One might also question the fiscal logic in escalating U.S. military presence in Columbia.

Continued Tax Cuts for the Wealthiest Americans, (never-ending) Bailouts for Financial Institutions, and Continuous War are being delivered by the President supposed to bring us hope.

Money by Randall Wray: From De-Regulation to Debacle

The following is taken from an excellent post (worth reading) by Randall Wray. The interesting point of his argument is that the "free" marketers want to free banks to make as much money as they want through their financial products but claim that government produced money is inflationary. This is a fundamental contradiction based in a double-standard. The contradiction is particularly important when we consider where bank money creation has got us (check the IMF report on derivative creation/destruction).

Here are excerpts from Wray's post.

"Deregulation, which actually dates to the Nixon years and even before, morphed into a self-regulation movement in the 1990s on the unassailable logic that rational self-interest would restrain financial institutions from doing anything foolish. This was all codified in the Basle II agreement that spread Anglo-Saxon anything goes financial practices around the globe. The final nail in the government’s coffin would be to preserve the value of money by tying monetary policy-maker’s hands to inflation targeting, and fiscal policy-maker’s hands to balanced budgets. All of this would lead to the era of the “great moderation”, with financial stability and rising wealth to create the “ownership society” in which all worthy individuals could share in the bounty of self-regulated, small government, capitalism.

We know how that story turned out. In all important respects we managed to recreate the exact same conditions of 1929 and history repeated itself with the exact same results. Take John Kenneth Galbraith’s The Great Crash, change the dates and some of the names of the guilty and you’ve got the post mortem for our current calamity....

"....The amazing thing is that the free marketeers want to “free” the private financial institutions to licentious behavior, but advocate reigning-in government on the argument that excessive issue of money is inflationary. Yet we have effectively given banks the power to issue government money (in the form of government insured deposits), and if we do not constrain what they purchase they will fuel speculative bubbles. By removing government regulation and supervision, we invite private banks to use the public monetary system to pursue private interests. Again, we know how that story ends, and it ain’t pretty. Unfortunately, we now have what appears to be a government of Goldman, by Goldman, and for Goldman that is trying to resurrect the financial system as it existed in 2006—a self-regulated, self-rewarding, bubble-seeking, fraud-loving juggernaut. . ."


Reading Between the Headline Numbers

Bloomberg reports this morning that

"Gross domestic product shrank at a 1 percent annual rate from April to June, the same as estimated last month, the department said today in Washington. The report also showed corporate profits climbed by the most in four years."

Did corporate profits rise due to job elimination? Probably since almost no corporations appear to be reporting increased revenue.

"The jobless claims report showed the four-week moving average of initial applications, a less volatile measure, dropped to 566,250 last week from 571,000. Continuing claims plunged by 119,000 in the week ended Aug. 15 to 6.13 million, the least since the week ended April 4."

Did continuing claims plunge because people have found jobs or because they've maxed out their benefits? Other data points suggest the latter explanation may be more accurate.

The Port of Long Beach reports today in the WSJ a 18.6% drop for July (year over year) in container imports. The port spokesperson described this as a "really weak" figure and was quoted as saying: "I don't think there's been any clear indication that things are improving yet."

Call me a pessimist, but I don't see the economy recovering until the U.S. diversifies its economy, producing new jobs and new products that can be exported. I believe this should be the federal government's top priority (over saving zombie financial institutions).

Wednesday, August 26, 2009

More Slaves Today Than in Any Time in Human History

Check out story at truthdig written by Terrence McNally (originally published at AlterNet)

"One hundred forty-three years after passage of the 13th Amendment to the U.S. Constitution and 60 years after Article 4 of the U.N.‘s Universal Declaration of Human Rights banned slavery and the slave trade worldwide, there are more slaves than at any time in human history—27 million."

Needed: An Economy of the People and For the People

We Have Lacked an Economy For the People
“The design of economic policy has delegated environmental,
health, and inequality indicators to secondary roles in favor
of the monetarist goal that ties central bank conduct to the drive
for price stability. A preferred alternative is to design policy that
focuses on global public goods, nonrenewable resources, human
resource use, and the sharing of knowledge goods

Dimitri B. Papadimitriou, President Economists for Peace and
Security and the Initiative for Rethinking the Economy
August 2009

The Crisis for the "People's Economy" Continues Despite Talks of Green Shoots for Finance :
“One speaker summarized the general position as a
'Minskyan supercycle' —a crisis of underconsumption and
overproduction occasioned on one side by a vast overhang of
private debts, which households would like to get rid of but
largely cannot; and on the other by the unwillingness of governments
to allow major corporations and (especially) banks to disappear—
a step that would be necessary to adjust supply, and
therefore profitability, to demand. Not incidental to this is an
undoing of globalization, caused by the collapse of trade finance,
revealing the fragility of the previous world economic structures
and the weakness of existing economic institutions—global,
regional, and national.”
James K. Galbraith

Tuesday, August 25, 2009

Health "Care" Data Points

Chris Hedges' article at Truthdig provides the following data points from Harpers 2009 Index

Percentage change since 2002 in average premiums paid to large US health-insurance companies: +87%

Percentage change in the profits of the top ten insurance companies: +428%

Chances that an American bankrupted by medical bills has health insurance: 7 in 10

—Harper’s Index, September 2009

From personal experience I can tell you how insurance companies make their money--by denying medical services. My insurance company refuses to cover the latest treatment for migraines, despite my clinical history of chronic migraines (at least 15 a month) and the failure of conventional migraine treatments.

My insurance company also routinely takes 6-12 before they will make payments for medical procedures. For example, after 12 months they still had not paid for an MRI conducted at one of their approved provider sites and ordered by one of their approved physicians.

I believe the market is the not the best mechanism for providing health care because the profit incentive undermines care and quality.

Herbicide, Endocrine Disrupters and Autism

Dr. Irva Hertz-Picciotto: Environmental Factors in Autism - Separating Evidence from Conjecture
Dr. Hertz-Picciotto was lead author on the paper, "Rise in Autism and the Role of Age at Diagnosis." The study found the seven- to eight-fold increase in the number of children born in California with autism since 1990 cannot be explained either by changes in how the condition is diagnosed or counted. Published in the January 2009 issue of the journal Epidemiology, results from the study suggest that research should shift from genetics to address the host of chemicals and infectious microbes in the environment that are likely to be found at the root of changes in the neurodevelopment of California's children. A UC Davis M.I.N.D. Institute researcher, Hertz-Picciotto concluded 'It's time to start looking for the environmental culprits responsible for the remarkable increase in the rate of autism in California.'
Hear Dr. Hertz-Picciotto at the Saturday Science Session

Herbicide Found in Water May Pose Greater Danger
By Kari Lydersen Tuesday, August 25, 2009 Washington Post
CHICAGO, Aug. 24 -- Drinking water containing a common herbicide could pose a greater public health risk than previously thought because regular municipal monitoring doesn't detect frequent spikes in the chemical's levels, according to a report released Monday by the Natural Resources Defense Council.
The report documented spikes in atrazine in the water supplies of Midwestern and Southern towns in agricultural areas, where the herbicide is applied to the vast majority of corn, sorghum and sugar cane fields.
Atrazine, an endocrine disrupter, can interfere with the body's hormonal activity and the development of reproductive organs. …

How America Treats Troubled Youth

Two adjacent articles in today’s WSJ say it all. The first article examines how youth in 4 juvenile detention centers in New York were treated. They were “regularly subjected to physical abuse that caused concussions, broken bones, lost teeth and fractures.” 1 young person died.

The other article concerns a young person who was detained at Guantanamo Bay prison. He was 12 when he was detained and was held prisoner at Guantanamo for more than 6 years. This strategy of incarcerating children is a great for winning hearts and minds.

Both of these articles concern incidents that violate the United Nations convention for the protection of children.

Monday, August 24, 2009

Best Economic Analysis

Steve Keen of the Univ. of Western Sydney has a fantastic 19 minute presentation on the current financial crisis. His presentation provides the most comprehensive analysis and set of prescriptions I've heard.

Economy in Purgatory / W is Increasingly Likely

Roubini warns of increasing likelihood of a double-dip recession in an article posted at the Financial Times.

Paul Krugman describes our current economic circumstances as purgatory-like in a video I found at calculated risk

"Investors Warm to Health-Care Overhaul" WSJ 8/24

Health care investors are relieved that the government is dropping government-run insurance plans and efforts to reign in drug care costs by negotiating terms with drug makers.

This story dramatizes a basic fact: What is good for investors is bad for those that receive health care and for those who pay for health care through their taxes.

Health care profits can occur only if health care providers control costs. Wow, is it possible that private, market-directed health care insurers might have more of an incentive to RATION care than government?

Yes. If one really looks at how profits are made, it does become clear that government has less of an incentive to ration health care than private providers do, because government is not aiming to profit from health care.

"Makers of Military Drones Take Off" WSJ 8/24/09

The WSJ today reports that "Makers of Military Drones Take Off" as the White House defense budget requests for fiscal 2010 include approximately $3.5 billion for unmanned aerial vehicles.

Unmanned drones are resonsible for countless civilian deaths in Afghanistan.

Military personnel in Afghanistan have pointed out that civilian "causalties" caused by drones undermine the U.S. mission in the country. Duhh....

Some personnel have even called for banning these unmanned drones.

Global research ran an article titled, "The Drones are Coming!!!!" that captured the horror of these unmanned instruments of death on civilian populations.

This report in the WSJ demonstrates that the Empire Project did not die with the Bush administration....

Saturday, August 22, 2009

Must Read

Market Ticker has an excellent article that is a must read on how the banks are masking their losses by charging high interest rates to consumers and corporations. The article explains how exorbitant these charges are, and why their cummulative effect undermines GDP growth. It is a compelling argument.

Today's Recommendations and Some Thoughts on Bubble Economies

Today I recommend two articles on the web that explore the economic implications of our bubble economy for Americans.

The first article is found at Naked Capitalism titled, "The End of a 30 Year Wealth Bubble." Although the article emphasizes how the collapse of the and then housing bubble have impacted wealthy Americans, it also explores growing inequality in the U.S.

See below for my thoughts on growing inquality.

The second article is available at the American Prospect and is titled, "The Assault on the Black Middle Class." This is a very relevant article because income growth has stalled for most Black Americans and inequality between Blacks and Whites appears to be growing again.

Now for my thoughts on the economy. Automation and globalization have together eliminated the types of jobs that allowed working class Americans to live a dignified, albeit modest, lifestyle and that enabled them to pay for their kids college.

That is hardly news. The bubble economies of the and the housing bubble masked stagnating wages. The availability of easy credit allowed people to live beyond their wages and to purchase houses that seemed to rise in value, producing what has been described as a "wealth effect."

The question is what now? Economists predict that jobs lost in this recession are not going to return any time soon.

Bernanke's efforts to re-ignite the housing bubble are doomed to failure, although he has been able to re-ignite some demand in low end properties that are either distresed or have been made available to first time buyers through government guarantees and incentives.

Foreclosures are rising, especially among prime borrowers. Foreclosures are not expected to peak until the end of 2010. See calculated risk and doctor housing bubble for some very good analyses on the housing market.

Foreclosures will keep property values low and inventory high, dampening the housing market and making it difficult for builders who sell anything but the low end for some time.

Retail sales will remain low, relatively speaking, because of what is being described as the "great de-leveraging" as consumers attempt to pay down debts, since they are unable to roll over their debt through credit.

Oil prices will go up again after the global economy resumes growth. This will cause problems for U.S. consumers. Indeed, a number of analysts believe that high oil prices are what caused our latest bubble economy to pop. There is a good analysis on this currently on Market Oracle but I've read quite a few others as well.

What industries will employ currently unemployed workers? What industries will employ graduating college and high school students?

Several years ago a Rand report argued that job growth trends predominate in low income sectors, such as home care aides. The report was written by Lynne Karoly and can be found at the Rand Corporation's homepage. The upshot of the report was that workers need to be trained to start their own businesses, since there will be few decent paying jobs available.

The trouble is that most self employment (excepting high paid professionals such as dentists) is in services. Service work in general tends to be relatively low paid and offers few benefits. Self-employed service work will be challenging as many "entrepreneurs" chase the few individuals with enough discretionary income to pay for services.

Self-employed workers will struggle to pay for health care. Currently, my basic EPO family health care plan runs about $1,400. There is no way most self-employed service workers are going to be able to afford such high premiums.

The upshot is that without centralized planning and investment, our economy seems unlikely to be able to sustain the majority of the population in any form of what we currently consider a "middle-class" lifestyle.

Some have described our emerging 21st century economy as a form of "neo-fuedalism."

Today's WSJ reported that "Developing World's Parasites, Disease Hit U.S." The article explores how parasitic diseases endemic to poor countries are invading the US.

I suggest that this invasion metaphorically illustrates how much of the developing world's parasitic wealth structure--where the vast majority are impoverished and a few exploit their nation's economic and environmental wealth--will come to define our own existence as our productive industry disappears, our labor laws are gutted or evaded, and our laws and decision making continue to allow and reward excesss, greed, and corruption.

Friday, August 21, 2009

US Interests Behind Military Coup in Honduras?

John Perkins argues in a post at Global Research that Chiquita Brand (Formerly United Fruit) and Dole Fruit may have had an important role in the overthrow of Honduras' democratically elected President Zelaya.

Apparently the populist (but not leftist) Zelaya was proposing to increase the minimum wage. Chiquita and Dole protested the move, saying it would eat into their profits.

Honduras' low wages are noteable, even in a region as poor as Central America.

United Fruit has a nasty history in Central America and the U.S. (CIA) role in instigating and funding military coups in Central and South America is exceedingly well documented.

The rise of populist and leftist leaders in Latin America is a direct result of the failures of U.S. neoliberal reforms that have impoverished population majorities.

It is deeply disturbing to hear that the US might again be instigating military coups in a region that has suffered greatly from our interference.

Is the Worst Over?

Bernanke says the worst is over.

Yet corporate defaults continue as another 8 debt issues defaulted today, bringing the total year to date to 205. Expect corporate defaults to continue. WSJ today reported Sears in trouble...

Mass Layoffs Continue as July experienced 2,157 mass layoffs (more than 50 workers involved) affecting over 200,000 workers. Small businesses also continue to fold and lose workers at high and mostly unrecorded rates. The unemployment rate of 9.4 hasn't gone up recently because long term unemployed are beginning to be dropped from the role (see post below on prisons for implications)

Corrpution Continues as GMAC and bankrupt CIT bilk retirees by selling notes without adequately reporting risks. Sound familiar?

Mortgage Delinquencies are up considerably among prime borrowers. Deutsch bank predicts eventually 48% of mortgages in US will be underwater by late 2010. Borrowers underwater by more than 10% are very likely to walk away.

Finally, The WSJ reports this morning "Securities Sink Banks in New Phase of Crisis." Regional banks are falling fast due to imploding commercial loans as commercial real estate collapses. The latest problem is occurring as banks "succumb to large amounts of toxic loans and securities they bought from other banks" (A1).

So, where is the recovery?

Private Prisons as Growth Opportunities!

A post on Seeking Alpha this morning describes investment opportunities in private prisons. The article notes that the Corrections Corporation of America controls more prison bed space than all other government entities, excepting the federal government and 2 states.

The article notes the prison population is bound to expand and that the U.S. prison population continues to rise as a percentage of the total population.

This trend coupled with the privatization of prisons apparently constitute an investment opportunity.

Consider this post in relation to growing "structural unemployment" among lower socio-economic classes in the US.

The current recession has impoverished millions of people who may, in their desperation, resort to criminal opportunities. Or, they may simply follow the lead of America's leading capitalists such as Goldman Sachs. In either case, crime is sure to rise.

Yet what an opportunity this presents for those still holding capital available for investment.

Although less opportunities exist for exploiting the poor's labor in the workforce, new opportunities exist for extracting value from the poor through their incorporation in the prison-industrial complex. Government taxes support this incarceration, completing the transfer of wealth from the general populace to the wealthiest elites.

Thursday, August 20, 2009

Health Care Debacle

More Americans are losing health care. United Health Care reported doubled profits in Q2 despite losing enrollees. Health care is in crisis and yet Americans resist a government plan. Why? George Lakoff provides answers in a post on Truth Out August 20 2009 at

Americans' aversion illustrates Althusser's position on ideology