Re(e)d This Blog

I’ve been waiting patiently for more information to be released on Obama’s 2009 stimulus plan- other than a dollar figure and some platitudes– and got a a little taste from the Washington Post- an op-ed from Larry Summers about the “American Recovery and Reinvestment Plan” 

This brief piece of writing didn’t do much to avail my ravenous interest, but it does give some buried clues as to the guiding principle that the plan will have.

The most important part of the piece was the clear idea being presented that this isn’t going to be package whose planning, execution, and oversight is going to reside within the realm of government — to quote Mr. Summers;  ”The Obama plan represents not new public works but, rather, investments that will work for the American public.”

That kind of language is code for privatized stimulus– the govt is going to hand no-bid contracts out to its best-of-friends, and when it comes time to account for how the money got spent, there are going to be question marks over everyone’s heads. This could be the domestic stimulus version of the Iraq reconstruction- the govt takes your tax dollars, and writes checks to private companies to do as they see fit. [This is confirmed with another Summers quote; "more than 80 percent of these 3 million jobs will be in the private sector"]

During FDR’s presidency, lots of tax dollars went into lots of stimulus and public works projects… and lots of them didn’t work. Since the programs were government run, public discourse could change their direction, even to the point of cancelling them. In a privatized stimulus package, the taxpayer money all gets spent up front, and you just have to hope that these for-profit corporations have the best interests of the entire country in mind. 

Those kinds of hopes have worked pretty well so far, haven’t they?

Economics

There has been a specter haunting the business articles in major newspapers and media sources, a term who’s simple utterance makes financiers tremble; deflation. Deflation is the process by which *all* of the numbers get smaller. The process during which ‘money’ becomes ‘more expensive’.

Theoretically, in the 1920s, you could take a dollar to the treasury and exchange it for $1 in gold. There was a physical standard by which $1 was judged. In the 1930s, the dollar was taken off of the gold standard so that FDR and his brain trust could manipulate the US economy more effectively in the service of lifting the Great Depression.

When there isn’t a physical standard which sets the value of the dollar, you can use the laws of supply and demand to change the ‘real value’ of a dollar— you know how your grandparents say ‘when I was a kid, I used to use a quarter to buy breakfast, lunch, dinner, a pair of dungarees, a buggy whip, one of those ‘newsies’ hats, and a slide rule- and I still had change!’ …. When you take them out to a $12 movie? Well, that was because when they were kids, there were less dollars out there, making each one more valuable. In the time since then, lower interest rates, increased overall debt, and the creation of fancy derivatives have increased the immediate supply of money, making each dollar less valuable. That process of increasing the total amount of available dollars, and the subsequent loss of value on each dollar is ‘inflation’.

Now that the subprime mortgage bubble is burst, the shrapnel is bursting bubbles in the financial services industry, which in turn is wrecking havoc everywhere. The vanishing act that those dollars are performing is lowering the quantity of dollars available for use, thusly increasing the ‘real value’ of each dollar. Decreasing value of people’s 401[k]s, decreasing home values, 50% off sales at Macy’s BEFORE Christmas, 2.7% decrease in the Consumer Price index in the last 2 months; this is deflation.

It’s happening, and there are two particular ways that it effects the working class;

1- cost of living/income variance

For the working class, the ratio between your cost of living and your income is potentially the most important mathematical equation in your life, as that simple ratio is the numerical value that is the quantitative description of your ‘standard of living’. If the cost of living is only $500 and you make $750 a week, your ratio is a positive one; 2:3.

If you move to rural Louisiana, and your income shifts down to $300 a week, your standard of living would stay the same if the cost of living shifts down to $100 a week; still a positive 2:3 ratio. As long as both numbers move in unison, there isn’t much of a day-to-day difference between those two situations- however, during deflation those numbers don’t move in unison, they move in variance.

Both ‘cost of living’ and ‘income’ are initially determined from the supplier/employer side, and business ideology will treat those two categories with opposite strategies, which will create an increasing variance.

A classical theory in economics is that prices are ‘sticky on the way down’ – meaning that the producer is going to slooooowly reduce the prices of things till it finds the ‘sweet spot’ – they’re going to reduce prices slowly and cautiously as they don’t want to err on the side of ‘too cheap’ … they’d rather just move the price again down next week if it doesn’t work. [see any retail outlet in the last 2 months]

However, when determining compensation for services, employers are working in the opposite direction, opting to err on the side of offering too little. They assume that they aren’t going to lose the potential employee with a ‘lowball’ estimate, and can always back down and offer a larger compensation if need be.

Those opposite ideologies create an increasing variance in the ‘standard of living’ ratio over time.

2-Locking it in.

Over the course of the last 15 years, the wealth gap in this country has greatly increased through the working class burdening itself with debts—college, credit cards, houses—the working class in America has more debt than any nation has ever had. These debts were incurred during a sustained period of inflation- when money was cheap. When deflationary forces begin in earnest, that money will still have to be paid back, but it’ll happen when dollars are more scarce and hence, more expensive. On the flip side, if you generated profits during that time, the new scarcity of dollars make the ones you have even more valuable- so, if you were ExxonMobile for example, and you generated the largest corporate profits in world history 6 quarters in a row in the 2000s, you’ll become even more rich and powerful, because those dollars sitting in your bank account become worth more as the overall numbers for everything get smaller. Deflation means incomes get smaller, while old debts stay the same. If paying back $120,000 in college loans is hard with the average income at $45,000 … what happens when the average income drops to $35,000 and you still owe $120,000 to FAFSA?

During times of deflation, savers are rewarded and borrowers punished- however, in our situation in the United States, those ‘savers’ are the fraction of the population who operated huge monolithic international corporations as profiteers, and the borrowers are the entirety of the US working class; those Americans who listened intently as the calm president told them to spend after 9/11, were beset by the siren song of commercials luring them into a lifestyle it regarded as ‘priceless’, ended up blinded by the apparent limitless potential of owning homes, and were culturally indoctrinated to believe that attending on-campus private colleges was a requisite to enter the productive world.

Unless you were born in the early 1930s, you’ve never seen a sustained period of deflation; so what do you do? There are hosts of governmental responses which would help offset the damaging elements [windfall profits on big oil from 1995-2008, effective stimulus package that includes reduced sales tax and increased import duties, financial bailout bills with a moratorium on home foreclosure, etc] … but those things can’t be done this weekend.

Pay down your debts. Think twice before you take out your credit card. Wait until you know why you want to go to college. Ignore commercials. Turn out the lights when you leave the room. Invite a friend over and make dinner. Talk to [or relive conversations with] someone who remembers the 1930s.

Consume less. Save more. Be grateful for what you do have.

Merry Christmas and happy holidays.

Economics christmas, deflation, exxonmobile, reed, reedthisblog, standard of living

when the financial industry and it’s lords came calling to washington [flying corporate jets], they were met with much handwringing… and left with a blank check for 800 billion dollars.

after the automakers were rebuffed for using the same tactics [and only asking for 24 billion], they did a little soul searching, and came back to washington with a slightly more concrete plan. 

that second plan was also rejected, by senate minority members who were deciding to, according to an internal memo leaked to msnbc,  ”stand firm and take their first shot against organized labor”

for the auto assistance to be shot down, while the wall st assistance was maintained, is class warfare, plain and simple. no matter what the reasons behind it, to give free money to the blue blooded rich paper pushers while denying aid to the blue collar middle class workers of this country is class warfare– but you don’t even have to read between the lines, its written in black and white on a distributed email amongst our nations representatives. no analysis required- the government decided to use this opportunity to take their ‘first shot’ at all of those 50k a year average middle american citizens.

now, less than a week after our representative congress decided not to help the struggling people of detroit, the white house has ridden in on a white horse to save the day- yipee! but wait, the details are the only important parts of these kinds of plans, so let’s take a quick look at the basics; this is from the AP newswire- quoted sections in green italics:

– Auto makers will get $13.4 billion in short-term financing from the Troubled Asset Relief Program, with an additional $4 billion to be made available in February, contingent on drawing down the second portion of the TARP funds.

so they decided to use some of the wall st. bailout money [thats what the Troubled Asset Relief Program is] to help the poor auto workers … not a bad idea, really. though clearly the automakers aren’t going to turn their businesses around during the traditional 3 hardest car industry months, and ESPECIALLY not in the midst of a financial crisis. so when the automakers have to come back in february to ask for more money, them getting it is contingent on giving the wall st.  folk in the Treasury Dept access to an additional 400billion. that doesnt sound like extortion, does it?

– If a company has not become financially viable by March 31, 2009, its loan will be called and all funds returned to Treasury.

as previously stated, we can’t really expect a 3 month car industry turnaround to happen- i hope no one reading this thinks that January and February are going to bring about a crazy car shopping spree… so, when march 31 comes around, and their still not viable, what happens?

– Debts owed to the government would outrank other debts.

oh, then the govt gets to take back the 17.4 billion it loaned them. so… what was the point of this whole exercise? if you were going to just string them along for 4 months before sticking a fork in them, why even bother?

–UAW [United Auto Workers Union] will be asked to accept stock rather than cash for the billions of dollars of pension and retiree health care liabilities being shifted from the companies to the union.

wait. what? so … when the executives sign this loan, it’s going to convert all of the workers pensions and retiree benefits into stock in the company? and then when the companies don’t turn themselves 180 degrees around by march 31st and are forced into bankruptcy by the government calling in their debt … then the workers pensions and retirement benefits will vanish with that bankruptcy? WHAT?!?! 

as this proposal becomes solidified, let us all pay close attention, because the destruction of the common man’s wealth in this kind of scale could be devastating, and can lead to the setting of precedents which can affect all of us little people everywhere.

Economics 17.4 billion, automakers, first shot against organized labor, gettelfinger, pension, tarp, uaw

only earlier today i posted a brief on Mary Schapiro, and my disappointement in her appointment … and this evening i found a silver lining.

Before i discuss it, i need to make sure everyone understands ‘credit default swaps’ and the market that trades them.

a person can buy a bond from a company- basically an IOU from the company that pays with interest. however, if you buy a  bond from a company that goes out of business before the bond matures, your bond is worthless. a credit default swap is a financial instrument originally designed to allow people to buy ‘insurance’ on their corporate bonds, paying a small percentage of the total value of the bond in exchange for the safety and peace of mind.

the problem is that the credit default swaps market is completely unregulated- its a giant backroom betting game where companies and individuals who don’t own bonds at all buy credit default swaps on those companies that they see as having the possibility of going bankrupt. experts estimate that the CDS market is 10 times larger than the bond market it’s supposed to operate as a safety net for. 

the CDS market is the massive tentacled beast which connects all business with financial components– its how come lehman brothers defaulting bankrupted AIG, and reduced the ‘off the book value’ of GE– the CDS market is a web of contracts connecting all businesses, and guaranteeing a wave of defaults and writedowns following any large bankruptcy.

this is a quote from Mary Schapiro to the board of her for-profit regulatory agency in october of this year- [i know its a long quote, but its pretty excellent]

“My final principle of regulation is the following: We must bring large systematically important yet unregulated participants in the financial markets under the regulatory umbrella and we must develop centralized clearing houses and exchange trading facilities for products that can affect the capital of our large institutions. Of course, I am principally speaking of the credit default swap market. I have been advocating a centralized clearing house to eliminate counterparty risk for nearly 15 years. Credit default swaps and other over-the-counter derivatives are being traded in volumes that could not have been foreseen even a few years ago. A turn in the CDS market can threaten the capital adequacy of a large firm. At the same time, a firm with a large CDS position, with many counterparties around the world, may be a firm that the federal government feels compelled to support with taxpayer money. At a minimum, this market needs a centralized clearing house so that the participants are known, adequate margin or collateral supports positions and the risks from counterparty failure are minimized.”

so, thats my silver lining, she at least pays lip service to the importance of regulation and transparency of the CDS market, though as with anything else complex and dangerous, the devil is in the details, and we’ll have to wait for innaugeration day and shortly after to see what kinds of new rules get added, and what kinds of teeth those rules get.

Economics

Mary Schapiro was appointed to the SEC before, so this isnt a new party for her. she has a long resume in financial regulation- she was appointed by Reagan in 88 as the commissioner of the SEC, in 89 she was reappointed by Bush I, and in 94 Clinton switched her to the Commodity Futures Trading Commission [[a sister regulatory agency to the SEC, where it handles the s&p instead of the stock market].

here is where her career took a slightly different turn- she left governmental regulation and went into the ‘for profit’ regulatory field– there is a company which regulates the stock market, and the companies pay them to act a fair arbitrage. now, in a wild opinion, i would guess that this organization operates in a similar fashion to the ’security’ at private universities; the college doesnt want to report its drug abuses, sexual attacks, etc. because it adds negative statistics and bad press, so instead of using real police, they operate with ‘campus security’ so that the school can just expel you and not have to report the incidents. so, after 8 years in governmental regulation, she moved into the rent-a-cop arena.

just to round out her resume, she was one of the 19 people chosen by bush II to sit on his ‘financial literacy council’. 

so, if our overall public complaint is that the last 20 years of lax regulation has led us into uncharted and perilous waters, and the precipice of danger lies open before us …. THEN WHY ARE WE APPOINTING THE PEOPLE WHO BUILT THIS SYSTEM. if she was going to regulate what was happening with any kind of success, don’t you think the last 20 years would look different?

i was hesitant to even talk about this, because those of us which are critical of obama’s choices thus far are starting to sound like a broken record- ‘blah blah, obama chose another clinton/bush/reagan era economist to head/chair/advise, this isnt change blah’ — but i feel the need to keep on and point these facts out. he hasn’t appointed a single consumer advocate, labor activist, ‘developmentalist’ economist …. nothing. just more and more members of the same ideological community which got us here.

Economics Mary, Obama, Schapiro, SEC

one of the many ramifications of the ‘financial’ crisis is going to be reduced tax revenue from things like real estate, incomes, etc. at the state and local levels… and it is at these levels that the ‘forgotten man’ of this country will feel the pinch of administrative choices while facing these difficult times. right now, the deepest effects have been psychological– when your 401k diminishes to 40% of its previous size, and the value of your home decreases, you get worried… but it doesn’t cost you extra dollars everyday. when state and municipal govts are forced to replace lost tax revenues, you can expect to have you wallet tapped to keep those services in place, and those are dollars which will come out every day.

because nyc is the home for the financial industry in this country [for the moment], we can be viewed as the canary in the coalmine- whatever happens to us now will happen to every major municipality when *their* primary industries become more deeply affected by the situation. for this reason, i think that nyc, and nystate’s, response to budgetary shortfalls in their mass transit system should be viewed carefully.

due to a loss of revenue on real estate and mortgage related taxes, and the revenues from payroll and income on the financial sector, the mta is experiencing a 1.2 billion dollar budget deficit for 2009. so far, the state is discussing two different possibilities to fill that gap:

1- increase the single ride fare to 2.50, the monthly to $100+, and cutting multiple services on the bus and subway lines.

2- add a 0.3% payroll tax on all companies in the areas serviced by the mta lines.

each of those ideas fills the deficit– in fact, the payroll tax covers it with $300,000 on top. sadly, the proposal with that includes the payroll tax also includes a toll on all of the east river bridges- effectively punishing the drivers who [one would assume] are driving into Manhattan because the mta isnt adequately servicing their neighborhood… and its that second clause which will get the program shot down. why didnt they just propose the payroll tax, on its own, as a solution? i have no idea.

the reason this is important to people outside nyc is that the model- an overall bad economy driving down tax revenue, resulting in increased cost to the user and decreased services, will most certainly be replicated all over the country.

EDIT:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~:

so, an additional comment on how this process is being reported– the newspapers are showing the MTA as the bad guy, approving a budget filled with crazy service cuts and fare increases, instead of giving the full store. the MTA is required to pass a budget which covers their needs, and they can’t pass it unless its balanced- and the only things they have control over are fares and services, as east river bridge tolls or the payroll tax are both up to the state legislature. the second half of the story is that the mta passed this emergency budget, after spending money on a famous consultant [see Ravitch Commission] who recommended the bridge toll/payroll tax.

so, at the end of the day, whatever happens, the mta has fought to keep fares down and services up, using a tax structure which puts the cost burden on ALL of the business which benefit from the mta service, and not just the commuters who use the lines.

Economics bus, doctrine, mta, payroll, shock, subway, tax, taxation

One of the fundamental principles of modern ‘professional’ journalism is that old magicians trick; slight of hand. very often, you can learn more about the current situations and political functionings by waiting for blaring, irrelevant news headlines … and then looking at the alternative news sources, to see what isnt being covered.
as economic situations are my personal favorite, i’ll remark upon one which is occurring as we speak.
if you turn to the ‘liberal’ press, you’ll find a barrage of financial articles regarding the individual crimes of greedy and unscrupulous members of the international financial community– namely Maddof [who put together a ponzi scheme totaling over 50billion dollars, while his day job was PRESIDENT OF THE NASDAQ] or that lawyer who swindled large scale investors. Effectively, the business pages of the popular ‘investigative’ press are currently filled with discussions of the moral turpitudes of nasty bad apples. When i see this much focus on individuals, and individual action, i wonder what else is happening.
look elsewhere, and you find an astonishing and remarkable situation- the masters of the universe [aka, the executives of the largest banks in the world] have decided that a 700billion dollar handout with no requirements as to future transparency or requirements on dispersion of the funds wasn’t quite laissez-faire enough… instead they’ve managed to remove the only tiny regulation inserted into the TARP bailout plan– limit on executive pay.
[[as a brief digression; executive pay doesn't matter-- it only adds up to millions, whereas badly dispensed govt bailouts are in the hundred billions. executive pay was simply a hot button issue that 'joe sixpack' was able to comprehend- so when the govt said 'we can hand you 700 billion, and you can do ANYTHING YOU WANT WITH IT, but you have to limit exec pay' joe sixpack could shout at his television 'yeah, you greedy wall st guy, take that!' .... meanwhile the other 699billion could be quietly slipped into their pockets throiugh acquisitions, shareholder dividend, paying off old debt etc... ok, sorry about that, read the last sentence of the previous paragraph again.]]
apparently, at the last minute, the tim geithner/henry paulson led TARP law was altered to only limit executive pay during the process of buying ‘toxic assets’. so, when the treasury abruptly decided to change course, and do ‘monetary injections’, that rule NO LONGER APPLIES, and the executives can take whatever compensation they see fit during these times of excessive crisis, when their companies are insolvent.
congrats wall st execs. you weren’t happy with everything, you needed more.

Reed Mollins
reedmollins@gmail.com

Economics compensation, executive, financial crisis, geithner, maddof, nasdaq, paulson, ponzi, toxic, wall

Money is a symbol- a direct symbol for wealth of any variety at all- food, land, time, machines, services etc.– and isn’t a ‘real’ thing in and of itself. Created because it helped facilitate trade between ‘wealth-creators’ of different varieties, it allowed a shoemaker to get bread from baker who already has shoes. Its a fairly simple concept, really, and one which truly did facilitate efficiency- as long as money was viewed and understood as the symbol that it was. A problem occurs when you separate the symbolic from the actual- the symbolic becomes capable acting in an opposite fashion to it’s actual.

Now enters the conception of ‘compounding interest’ - the backbone of capitalism of all stripes. The idea is that money accumulates more money around it, and the more money there is, the more money it can accumulate faster. this is a concept which works quite well, and makes sense, in mathematical principle.

in nature, however, a different rule prevails– the laws of entropy. every system is slowly decaying, and requires ‘work’ of some variety to keep it where it is. this is inherently opposite to the laws of compounding interest, and yet the symbol of money is meant to represent physical wealth.

how did the process of symbolism allow for a complete reversal of the natural order? i’m not sure what the historical imperative for this development was, but i find it extremely curious, and wonder if anyone has any insight for me …

Reed Mollins
reedmollins@gmail.com

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today saw a small announcement, gobbled up by the constant newsreel and spit out onto marginalized and fairly unlinked and unheadlined pages, regarding the abandonment of the windfall profits tax as a way to generate tax revenue to pay for the social spending which obama’s campaign constantly promised.
look in any of the business websites to see the response of the money and powerful– glee, ebulation, disdain for the rhetoric of the measure as a ‘populist way to cozy up with American voters and never a real policy issue’.
people will say ‘oh, but gas is below $50 a barrel now, how can we charge a windfall tax on them, they’re hurting during this downturn as well– the only problem with that logical reasoning is that they filled their coffers with record breaking profits 6 consecutive quarters, when dollars were cheap and plentiful, and during this downturn will use that expanded wealth to even greater self benefit. during a deflationary period, those that gained immediately before gain a second time; you make money when its cheap, and loan it out when its expensive… simple supply and demand. the current economic state is even more reason to punish those profiteers that accrued so much wealth during the 90s and early part of the new millennium on the backs of credit-card obsessed americans— if we don’t punish them for their crimes during those periods, they become exponentially more powerful when their gains are made concrete by lowered levels of cash flow in their competitors and dissenters.

but obama doesnt see it like that, and he doesnt have an economic team which sees beyond the dow jones industrial average.

moreover, without that kind of revenue stream, how can you expect to pay for the large scale infrastructure changes, much needed r+d on renewables, or any of the other grand plans paraded before the american people?

read the story of victor paz– president elected in bolivia in 1985 on campaign promises of social programs, infrastructure update, and progressive social policies. once elected, he convened a high and mighty economic team, which went through every line of the budget, cutting the programs that didnt work [social spending] and improving the ons that did [by privitizing them].

please watch out president elect very carefully, as it seems that each time he’s made a decision, it has gone against the rhetoric of his campaign, the very nature of the independent movements he co opted to get elected, and the best interests of the vast majority of american’s who voted for him.

Reed Mollins
reedmollins@gmail.com

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The comparisons between Obama and FDR seem to come easily to people—populist politicians who utilize advanced technologies to galvanize the people around them, men who’ve come into power during incredibly challenging times, and against incredible odds. Many of these comparisons imply a connection between their political agenda’s, but the connection is tenuous at best, and duplicitous at worst.
In witnessing Obama’s Transition Economic Advisory Board, we’re witnessing the first stages of the coalescence of Obama’s ideas into action, and a preview as to the direction his administration will take. This group of 17 has been presented as the intellectual wellspring from which our countries problems will be solved, and has been often likened to FDR’s brain trust. Unfortunately, other than being economic advisors to a president-elect during the interregnum, there isn’t much comparable about the groupings.
Roosevelt’s brain trust was comprised of scholars, economists, labor activists, proponents of grassroots agriculture, and intellectuals interested in the Soviet experiment. In comparison, Obama’s collection is entirely Washington insiders, Wall St. bankers, and CEOs of Fortune 500 companies, some of whom can be argued have been essential to the deregulation which led to the financial breakdown itself.
On the Board, and also shortlisted for Treasury Secretary, is Larry Summers, made famous for his actions in disassembling Glass-Steagall as Treasury Secretary for Clinton in the 90s. An ardent supportor of open market free trade and globalization, he angered people around the world when he asserted that developed countries should export their pollution to less developed nations because the economic impact of the people’s sickness or death would be less damaging to the international economy. He also believes that women are genetically inferior in terms of science and math, and perhaps most damning of all, also sat on an Economic Advisory Board for Reagan in the 80s.
Try to compare that to Felix Frankfurter, the supreme court judge who founded the ACLU and advocated for the recognition of the newly formed Soviet Union.
This weekend is the big economic summit in Washington, and while Obama declined his invite to attend, he’s sending Madeleine Albright and Jim Leach. While Summers was Treasury Secretary, the law which destroyed Glass-Steagall was created by, and named after, Jim Leach. [please see Gramm-Leach-Bliley Act of 1999]. Albright, in a slightly different angle, has been hawkish to the point of embarrassment, quoting herself as saying to Colin Powell, “What’s the point of you saving this superb military for, Colin, if we can’t use it? She was also forced to resign from the Genocide Prevention Task Force after she wouldn’t recognize the Armenian Genocide. Just to top this all of, and connect it to her economic leanings, she’s currently serving on the Board of Directors at the Council on Foreign Relations.
Specifics aside, the generalizations of the groups say it all—Obama has succeded in compiling a group with a complete uniformity of opinion— laissez-faire politics, rampant globalization, hawkish tendencies, and a dedication to serving the private good.

This isn’t the change we need. In fact, looking at how many have sat as Treasury Secretary since the Reagan era, it doesn’t seem like change at all.

Obama’s Team
http://www.guardian.co.uk/business/2008/nov/07/barack-obama-teab-advisors
FDR’s Brain Trust
http://en.wikipedia.org/wiki/Brain_Trust

Reed Mollins
reedmollins@gmail.com

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