We have never experienced a Presidential campaign with more fact-checking than what we are seeing during the current cycle. The well-timed release of a popular new book by Janine Driver entitled, You Can’t Lie to Me might be one of the reasons why this is happening. Fact-checking websites such as PolitiFact and FactCheck have been overflowing with reports of exaggerations, half-truths and flat-out lies by the candidates and their surrogates.
Paul Ryan’s acceptance speech drew instant criticism from a number of news outlets. I quickly felt vindicated for my last posting, which asserted that Romney made a mistake by selecting Ryan, rather than Ohio Senator Rob Portman, as his running mate. FactCheck provided this breakdown of the misrepresentations in Ryan’s speech:
Paul Ryan’s acceptance speech at the Republican convention contained several false claims and misleading statements. Delegates cheered as the vice presidential nominee:
Accused President Obama’s health care law of funneling money away from Medicare “at the expense of the elderly.” In fact, Medicare’s chief actuary says the law “substantially improves” the system’s finances, and Ryan himself has embraced the same savings.
Accused Obama of doing “exactly nothing” about recommendations of a bipartisan deficit commission — which Ryan himself helped scuttle.
Claimed the American people were “cut out” of stimulus spending. Actually, more than a quarter of all stimulus dollars went for tax relief for workers.
Faulted Obama for failing to deliver a 2008 campaign promise to keep a Wisconsin plant open. It closed less than a month before Obama took office.
Blamed Obama for the loss of a AAA credit rating for the U.S. Actually, Standard & Poor’s blamed the downgrade on the uncompromising stands of both Republicans and Democrats.
If the widespread criticism of the veracity of Ryan’s speech had not been bad enough, Runner’s World saw fit to bust Ryan for making a false claim that he once ran a marathon in less than three hours. In reality, it took him just over four hours.
Ultimately, convention speeches are about making the argument for your team. We should fully expect politicians to make their case using facts and figures that either tilt positive about their accomplishment – or negative about their opponents. As the fact-checking business has blossomed in the news media, it has been increasingly hard for politicians to get away with such truth-shading without someone noticing.
Both political parties will stretch the truth if they believe it will advance their political interests. It’s been a rough campaign so far, but the GOP convention that just ended was strictly in the mainstream for such party celebrations.
As the Democratic Convention approaches, a good deal of attention has been focused on PolitiFact’s Obameter, which measures how well Obama has delivered on his campaign promises. PolitiFact’s most recent status report offered this analysis:
Our scorecard shows Obama kept 37 percent of his promises. He brought the war in Iraq to a close and finally achieved the Democratic dream of a universal health care program. When the United States had Osama bin Laden in its sights, Obama issued the order to kill.
Sixteen percent are rated Broken, often because they hit a brick wall in Congress. Global warming legislation passed the House but died in the Senate. He didn’t even push for comprehensive immigration reform. His program to help homeowners facing foreclosure didn’t even meet its own benchmarks. (PolitiFact rates campaign promises based on outcomes, not intentions.)
With four months left in Obama’s term, PolitiFact has rated Obama’s remaining promises Compromise (14 percent), Stalled (10 percent) or In the Works (22 percent).
The ad claims that Romney raised taxes on the middle class. It’s true that Romney imposed a number of fees, but none of them targeted middle-income persons. Also, Romney proposed cutting the state income tax three times – a measure that would have resulted in tax cuts for all taxpayers – but he was rebuffed every time by the state’s Democratic Legislature.
I suspect that the Obama campaign has a secret plan in the works to avoid the scrutiny of fact-checkers during their convention. Their plan to have John Kerry speak is actually part of a plot to cause the fact-checkers to fall asleep. Once “Operation Snoozeboat” is complete, the speakers who follow Kerry will be able to make the wildest claims imaginable – and get away with it!
On May 22, the Congressional Budget Office released its report on how the United States can avoid going off the “fiscal cliff” on January 1, 2013. The report is entitled, “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013”. Forget about the Mayan calendar and December 21, 2012. The real disaster is scheduled for eleven days later. The CBO provided a brief summary of the 10-page report – what you might call the Cliff Notes version. Here are some highlights:
In fact, under current law, increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013 – a development that some observers have referred to as a “fiscal cliff” – and will dampen economic growth in the short term.
* * *
Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects – with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.
As the complete version of the report explained, the consequences of abruptly-imposed, draconian austerity measures while the economy is in a state of anemic growth in the wake of the 2008 financial crisis, could have a devastating impact because incomes will drop, shrinking the tax base and available revenue – the life blood of the United States government:
The weakening of the economy that will result from that fiscal restraint will lower taxable incomes and, therefore, revenues, and it will increase spending in some categories – for unemployment insurance, for instance.
An interesting analysis of the CBO report was provided by Robert Oak of the Economic Populist website. He began with a description of the cliff itself:
What the CBO is referring to is the fiscal cliff. Remember when the budget crisis happened, resulting in the United States losing it’s AAA credit rating? Then, Congress and this administration just punted, didn’t compromise, or better yet, base recommendations on actual economic theory, and allowed automatic spending cuts of $1.2 trillion across the board, to take place instead. These budget cuts will be dramatic and happen in 2012 and 2013.
Spending cuts, especially sudden ones, actually weaken economic growth. This is why austerity has caused a disaster in Europe. Draconian cuts have pushed their economies into not just recessions, but depressions.
The conclusion reached by Robert Oak was particularly insightful:
This report should infuriate Republicans, who earlier wanted to silence the CBO because they were telling the GOP their policies would hurt the economy in so many words. But maybe not. Unfortunately the CBO is not breaking down tax cuts, when there is ample evidence tax cuts for rich individuals do nothing for economic growth. Bottom line though, the CBO is right on in their forecast, draconian government spending cuts will cause an anemic economy to contract.
Although the CBO did offer a good solution for avoiding a drive off the fiscal cliff, it remains difficult to imagine how our dysfunctional government could ever implement these measures:
Or, if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.
The foregoing passage was obviously part of what Robert Oak had in mind when he mentioned that the CBO report would “infuriate Republicans”. Any plans to “widen the deficit” would be subject to the same righteous indignation as an abortion festival or a national holiday for gay weddings. Nevertheless, Mitt Romney accidentally acknowledged the validity of the logic underlying the CBO’s concern. Bill Black had some fun with Romney’s admission by writing a fantastic essay on the subject:
Romney has periodic breakdowns when asked questions about the economy because he sometimes forgets the need to lie. He forgets that he is supposed to treat austerity as the epitome of economic wisdom. When he responds quickly to questions about austerity he slips into default mode and speaks the truth – adopting austerity during the recovery from a Great Recession would (as in Europe) throw the nation back into recession or depression. The latest example is his May 23, 2012 interview with Mark Halperin in Time magazine.
“Halperin: Why not in the first year, if you’re elected — why not in 2013, go all the way and propose the kind of budget with spending restraints, that you’d like to see after four years in office? Why not do it more quickly?
Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression. So I’m not going to do that, of course.”
Romney explains that austerity, during the recovery from a Great Recession, would cause catastrophic damage to our nation. The problem, of course, is that the Republican congressional leadership is committed to imposing austerity on the nation and Speaker Boehner has just threatened that Republicans will block the renewal of the debt ceiling in order to extort Democrats to agree to austerity – severe cuts to social programs. Romney knows this could “throw us into recession or depression” and says he would never follow such a policy.
* * *
Later in the interview, Romney claims that federal budgetary deficits are “immoral.” But he has just explained that using austerity for the purported purpose of ending a deficit would cause a recession or depression. A recession or depression would make the deficit far larger. That means that Romney should be denouncing austerity as “immoral” (as well as suicidal) because it will not simply increase the deficit (which he claims to find “immoral” because of its impact on children) but also dramatically increase unemployment, poverty, child poverty and hunger, and harm their education by causing more teachers to lose their jobs and more school programs to be cut.
Mitt Romney is beginning to sound as though he has his own inner Biden, who spontaneously speaks out in an unrestrained manner, sending party officials into “damage control” mode.
This could turn out to be an interesting Presidential campaign, after all.
Comments Off on Get Ready for the Next Financial Crisis
It was almost one year ago when Bloomberg News reported on these remarks by Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group:
“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan inTokyotoday in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
I have frequently complained about the failed attempt at financial reform, known as the Dodd-Frank Act. Two years ago, I wrote a piece entitled, “Financial Reform Bill Exposed As Hoax” wherein I expressed my outrage that the financial reform effort had become a charade. The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank Act – had become nothing more than a hoax on the American public. My essay included the reactions of five commentators, who were similarly dismayed. I concluded the posting with this remark:
The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective. Once this 2,000-page farce is signed into law, watch for the reactions. It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.
During the past few days, there has been a chorus of commentary calling for a renewed effort toward financial reform. We have seen a torrent of reports on the misadventures of The London Whale at JP Morgan Chase, whose outrageous derivatives wager has cost the firm uncounted billions. By the time this deal is unwound, the originally-reported loss of $2 billion will likely be dwarfed.
Former Secretary of Labor, Robert Reich, has made a hobby of writing blog postings about “what President Obama needs to do”. Of course, President Obama never follows Professor Reich’s recommendations, which might explain why Mitt Romney has been overtaking Obama in the opinion polls. On May 16, Professor Reich was downright critical of the President, comparing him to the dog in a short story by Sir Arthur Conan Doyle involving Sherlock Holmes, Silver Blaze. The President’s feeble remarks about JPMorgan’s latest derivatives fiasco overlooked the responsibility of Jamie Dimon – obviously annoying Professor Reich, who shared this reaction:
Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades.
Nor any mention Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.
Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on my experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus.
Even if Obama didn’t want to criticize Dimon, at the very least he could have used the occasion to come out squarely in favor of tougher financial regulation. It’s the perfect time for him to call for resurrecting the Glass-Steagall Act, of which the Volcker Rule – with its giant loophole for hedges – is a pale and inadequate substitute.
And for breaking up the biggest banks and setting a cap on their size, as the Dallas branch of the Federal Reserve recommended several weeks ago.
This was Professor Reich’s second consecutive reference within a week to The Dallas Fed’s Annual Report, which featured an essay by Harvey Rosenblum, the head of the Dallas Fed’s Research Department and the former president of the National Association for Business Economics. Rosenblum’s essay provided an historical analysis of the events leading up to the 2008 financial crisis and the regulatory efforts which resulted from that catastrophe – particularly the Dodd-Frank Act. Beyond that, Rosenblum emphasized why those “too-big-to-fail” (TBTF) banks have actually grown since the enactment of Dodd-Frank:
The TBTF survivors of the financial crisis look a lot like they did in 2008. They maintain corporate cultures based on the short-term incentives of fees and bonuses derived from increased oligopoly power. They remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation. Just as important, their significant presence in dozens of states confers enormous political clout in their quest to refocus banking statutes and regulatory enforcement to their advantage.
Last year, former Kansas City Fed-head, Thomas Hoenig discussed the problems created by the TBTFs, which he characterized as “systemically important financial institutions” – or “SIFIs”:
… I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.
Although the huge derivatives loss by JPMorgan Chase has motivated a number of commentators to issue warnings about the risk of another financial crisis, there had been plenty of admonitions emphasizing the risks of the next financial meltdown, which were published long before the London Whale was beached. Back in January, G. Timothy Haight wrote an inspiring piece for the pro-Republican Orange County Register, criticizing the failure of our government to address the systemic risk which brought about the catastrophe of 2008:
In response to widespread criticism associated with the financial collapse, Congress has enacted a number of reforms aimed at curbing abuses at financial institutions. Legislation, such as the Dodd-Frank and Consumer Protection Act, was trumpeted as ensuring that another financial meltdown would be avoided. Such reactionary regulation was certain to pacify U.S. taxpayers.
Unfortunately, legislation enacted does not solve the fundamental problem. It simply provides cover for those who were asleep at the wheel, while ignoring the underlying cause of the crisis.
More than three years after the calamity, have we solved the dilemma we found ourselves in late 2008? Can we rest assured that a future bailout will not occur? Are financial institutions no longer “too big to fail?”
Regrettably, the answer, in each case, is a resounding no.
The 9 largest U.S. banks have a total of 228.72 trillion dollars of exposure to derivatives. That is approximately 3 times the size of the entire global economy. It is a financial bubble so immense in size that it is nearly impossible to fully comprehend how large it is.
The multi-billion dollar derivatives loss by JPMorgan Chase demonstrates that the sham “financial reform” cannot prevent another financial crisis. The banks assume that there will be more taxpayer-funded bailouts available, when the inevitable train wreck occurs. The Federal Reserve will be expected to provide another round of quantitative easing to keep everyone happy. As a result, nothing will be done to strengthen financial reform as a result of this episode. The megabanks were able to survive the storm of indignation in the wake of the 2008 crisis and they will be able ride-out the current wave of public outrage.
As Election Day approaches, Team Obama is afraid that the voters will wake up to the fact that the administration itself is to blame for sabotaging financial reform. They are hoping that the public won’t be reminded that two years ago, Simon Johnson (former chief economist of the IMF) wrote an essay entitled, “Creating the Next Crisis” in which he provided this warning:
On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself.
In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach. “If enacted, Brown-Kaufman would have broken up the six biggest banks inAmerica,” a senior Treasury official said. “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”
Whether the world economy grows now at 4% or 5% matters, but it does not much affect our medium-term prospects. The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation. We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system. This can end only one way: badly.
The public can forget a good deal of information in two years. They need to be reminded about those early reactions to the Obama administration’s subversion of financial reform. At her Naked Capitalism website, Yves Smith served up some negative opinions concerning the bill, along with her own cutting commentary in June of 2010:
I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are. This abuse of language is yet another case of the Obama Administration using branding to cover up substantive shortcomings. In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did.
* * *
So what does the bill accomplish? It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.
In particular, the transaction appears to have been a type of proprietary trade – which is to say, a trade that a bank undertakes to make money for itself, not its clients. And these trades were supposed to have been outlawed by the “Volcker Rule” provision of Obama’s financial reform law, at least at federally-backed banks like JP Morgan. The administration is naturally worried that, having touted the law as an end to the financial shenanigans that brought us the 2008 crisis, it will look feckless instead.
* * *
But it turns out that there’s an additional twist here. The concern for the White House isn’t just that the law could look weak, making it a less than compelling selling point for Obama’s re-election campaign. It’s that the administration could be blamed for the weakness. It’s one thing if you fought for a tough law and didn’t entirely succeed. It’s quite another thing if it starts to look like you undermined the law behind the scenes. In that case, the administration could look duplicitous, not merely ineffectual. And that’s the narrative you see the administration trying to preempt . . .
When the next financial crisis begins, be sure to credit President Obama as the Facilitator-In-Chief.
Comments Off on More Ugly Truth about Deepwater Horizon
Too many of the news reports concerning the second anniversary of the Deepwater Horizon oil rig blowout are suspiciously similar to the BP commercials featuring testimonials about how the company’s wonderful clean-up job has brought life along the Gulf Coast “back to normal”. Unfortunately, the ugly truth about life along the Gulf of Corexit has not been thrust before the American public with the same aggressiveness as BP’s public relations propaganda.
Since the catastrophe occurred back in April of 2010, one steady source of unvarnished reports on the matter has been Washington’s Blog. On April 18 of this year, Washington’s Blog posted this great piece which links to a number of reports documenting the extent of ongoing damage to the Gulf ecosystem.
We are constantly bombarded with propaganda emphasizing how offshore oil rigs create jobs. What we don’t hear are reports concerning the number of people from the fishing industry who lost their jobs (and their health) as a result of the Deepwater Horizon incident. Consider this AFP report from last year:
Local chemist Wilma Subra has been helping test people’s blood for volatile solvents, and said levels of benzene among cleanup workers, divers, fishermen and crabbers are as high as 36 times that of the general population.
“As the event progresses we are seeing more and more people who are desperately ill,” she said.
“Clearly it is showing that this is ongoing exposure,” Subra said, noting that pathways include contact with the skin, eating contaminated seafood or breathing polluted air.
“We have been asking the federal agencies to please provide medical care from physicians who are trained in toxic exposure.”
She said she has received no response.
The most devastating exposé on the Deepwater Horizon disaster came from Greg Palast, who wrote a two-part report for EcoWatch. A British investigative television program – Dispatches – sent Palast into Baku, Azerbaijan, with a cameraman to investigate a whistleblower’s report that in September of 2008, a BP off-shore rig in the Caspian Sea suffered a nearly identical blow-out to the Deepwater Horizon incident. BP concealed the true cause and extent of the Caspian Sea event from the U.S. regulators and Congress. From Part One:
The witness, whose story is backed up by rig workers who were evacuated from BP’s Caspian platform, said that had BP revealed the full story as required by industry practice, the eleven Gulf of Mexico workers “could have had a chance” of survival. But BP’s insistence on using methods proven faulty sealed their fate.
One cause of the blow-outs was the same in both cases: the use of a money-saving technique – plugging holes with “quick-dry” cement.
By hiding the disastrous failure of its penny-pinching cement process in 2008, BP was able to continue to use the dangerous methods in the Gulf of Mexico – causing the worst oil spill in U.S. history. April 20 marks the second anniversary of the Gulf oil disaster.
There were several failures in common to the two incidents identified by the eyewitness. He is an industry insider whose identity and expertise we have confirmed. His name and that of other witnesses we contacted must be withheld for their safety.
The failures revolve around the use of “quick-dry” cement, the uselessness of blow-out preventers, “mayhem” in evacuation procedures and an atmosphere of fear which prevents workers from blowing the whistle on safety problems.
In Part Two of the report, Greg Palast revealed that one of the classified cables leaked by Private Bradley Manning through WikiLeaks.org to The Guardian was a briefing from the U.S. Embassy in Azerbaijan to the State Department in Washington. The cable summarized information obtained fromBill Schrader, President of BP-Azerbaijan, about the cause and extent of the 2008 blowout. The collusion of the State Department in this cover-up became an important aspect of Palast’s report:
From other sources, we discovered the cement which failed had been mixed with nitrogen as a way to speed up drying, a risky process that was repeated on the Deepwater Horizon.
Robert F. Kennedy Jr., president of Waterkeeper Alliance and senior attorney for Natural Resources Defense Council, calls the concealment of this information, “criminal. We have laws that make it illegal to hide this.”
The cables also reveal that BP’s oil-company partners knew about the blow-out but they too concealed the information from Congress, regulators and the Securities Exchange Commission. BP’s major U.S. partners in the Caspian Sea drilling operation were Chevron and Exxon.
* * *
Kennedy’s particular concern goes to the connivance of the State Department, then headed by Secretary of State Condoleezza Rice, in the cover-up and deception. Chevron, noted Kennedy, named an oil tanker after Rice who had served on the oil company’s board of directors. “BP felt comfortable – and Chevron and Exxon – in informing the Bush State Department, which was run by Condoleezza Rice,” he said, “and they felt comfortable that that wasn’t going to come out.”
The U.S. Securities Exchange Commission requires companies to report “material” events. BP filed a “20-F” report in 2009 stating, “a subsurface gas release occurred below the Central Azeri platform,” suggesting a naturally occurring crack in the seafloor, not a blow-out. This contradicted the statements of three eyewitnesses and the secret statement of BP’s Azerbaijan President in then WikiLeaks cable.
“The three big actors, Chevron, Exxon and BP all concealed this from the American public,” concludes Kennedy. “This is a criminal activity.”
At this point, anyone who believes that Condoleezza Rice could be chosen as Mitt Romney’s running mate is headed for a big disappointment.
With the passing of time, the Deepwater Horizon story isn’t getting any better. It just keeps getting worse.
Regular readers of this blog know that I frequently discuss my skepticism about the true state of America’s economy. It gets painful listening to the “usual cheerleaders” constantly tell us about the robust state of our economy. The most recent Federal Reserve Beige Book serves as the Bible for these true believers. One need only check in on a few of the websites listed on my blogroll (at the right side of this page) to find plenty of opinions which run contrary to the current dogma that America is on its way to a full economic recovery.
My view is that the stock market has gotten way ahead of itself. Easy money has caused people to pile into risk assets as risk seeks return in a zero-rate environment. The real economy is nowhere near as robust as the increase in shares would have you believe. Moreover, even the falling earnings growth is telling you this.
Bottom line: The US economy is getting a sugar high from easy money, economic stimulus, and the typical cyclical aides to GDP that have promoted some modest releveraging. But the underlying issues of excess household indebtedness, particularly as related to housing and increasingly student debt, will keep this recovery from being robust until more of the debts are written down or paid off. That means the cyclical boost that comes from hiring to meet anticipated demand, construction spending, and increased capital spending isn’t going to happen at a good clip. Meanwhile, people are really struggling.
The hope is we can keep this going for long enough so that the cyclical hiring trends to pick up before overindebted consumers get fatigued again. Underneath things are very fragile. Any setback in the economy will be met with populist outrage – that you can bet on.
In the first two installments, I laid out the reasons why the U.S. economy, despite current strong consumer spending and the recent euphoria of investors over stocks, will weaken into a recession as the year progresses, led by renewed consumer retrenchment.
If my forecast pans out, the Federal Reserve and Congress may be compelled to take further action to bolster the economy.
* * *
Meanwhile, a number of economic indicators are pointing in the direction of a faltering economy. The Economic Cycle Research Institute index remains in recession territory. The ratio of coincident to lagging economic indicators, often a better leading indicator than the leading indicator index itself, is declining. Electricity generation, though influenced by the warm winter, is falling rapidly.
One of the most popular blogs among those of us who refuse to drink the Kool-Aid being served by the “rose-colored glasses crowd” is Michael Panzner’s Financial Armageddon. In a recent posting, Mr. Panzner underscored the fact that those of us who refuse to believe the “happy talk” are no longer in the minority:
no matter how you break it down — whether by party/ideology, household income, age, or any other category — the majority of Americans agree on one thing: there is no recovery.
But the fact that things haven’t returned to normal isn’t just a matter of (public) opinion. As the Globe and Mail’s Market Blog reveals in “These Are Bad Days for Garbage,” the volume of waste being created nowadays essentially means that, despite persistent talk (from Wall Street, among others) of a renaissance in consumer spending, people are continuing to consume less and recycle more than they used to.
Many people (especially commentators employed by the mainstream media) prefer to avoid “dwelling on negativity”, so they ignore unpleasant economic forecasts. Others appear trapped in a new-age belief system, centered around such notions as the idea that you can actually cause the economy to go bad by simply perceiving it as bad. Nevertheless, the rest of us have learned (sometimes the hard way) that effective use of one’s peripheral vision can be of great value in avoiding a “sucker punch”. Keep your eyes open!
Comments Off on Geithner Redeems Himself – For Now
I’ve never been a fan of Treasury Secretary Tim Geithner. Nevertheless, I have to give the guy credit for delivering a great speech at the Economic Club of Chicago on April 4. The event took place in a building which was formerly home to an off-track betting parlor, with an “upscale” section called The Derby Club (where Gene Siskel spent lots of time and money) – in an era before discretionary income became an obsolete concept.
“We’re going to be pounding away during the recess to get House members to know they’ve got to check their party at the door,” Wytkind said of Republicans in the House who opposed accepting the Senate’s transportation bill.
Other transportation supporters were similarly pessimistic. U.S. Chamber of Commerce executive director of transportation and infrastructure Janet Kavinoky said the 90-day extension could lead to a longer agreement, but only if lawmakers get right back to work after the two-week recess.
“No length of time is going to be good for construction or business, but at least 90 days provides a length of time Congress could get a long-term bill done,” Kavinoky said. “But the House in particular is going to have their nose to the grindstone, or whatever metaphor you want to use, to get a bill off the House floor and into a conference.”
The timing could not have been better for someone in a position of national leadership to deliver a warning that premature austerity policies (implemented before economic recovery gains traction) can have the same destructive consequences as we are witnessing in Europe. To his credit, Tim Geithner stepped up to the plate and hit a home run. Here are his most important remarks, delivered in Chicago on Wednesday:
Much of the political debate and the critiques of business lobbyists misread the underlying dynamics of the economy today. Many have claimed that the basic foundations of American business are in crisis, critically undermined by taxes and regulation.
And yet, business profits are higher than before the crisis and have recovered much more quickly than overall growth and employment. Business investment in equipment and software is up by 33 percent over the past 2 ½ years. Exports have grown 24 percent in real terms over the same period. And manufacturing is coming back, with factory payrolls up by more than 400,000 since the start of 2010.
The business environment in the United States is in numerous ways better than that of many of our major competitors, as measured by international comparisons of regulatory burden, the tax burden on workers, the quality of legal protections of property rights, the ease of starting a business, the availability of capital, and the broader flexibility of the economy.
The challenges facing the American economy today are not primarily about the vibrancy or efficiency of the business community. They are about the barriers to economic opportunity and economic security for many Americans and the political constraints that now stand in the way of better economic outcomes.
These challenges can only be addressed by government action to help speed the recovery and repair the remaining damage from the crisis and reforms and investments to lay the foundation for stronger future growth.
This means taking action to support growth in the short-term – such as helping Americans refinance their mortgages and investing in infrastructure projects – so that we don’t jeopardize the gains our economy has made over the last three years.
And it means making the investments and reforms necessary for a stronger economy in the future. Investments in things like education, to help Americans compete in the global economy. Investments in innovation, so that our economy can offer the best jobs possible. Investments in infrastructure, to reduce costs and increase productivity. Policies to expand exports. And reforms to improve incentives for investing in the United States – including reform of our business tax system.
A growth strategy for the American economy requires more than promises to cut taxes and spending.
We have to be willing to do things, not just cut things.
To expand exports, we have to support programs like the Export-Import Bank, which provides financing at no cost to the government for American businesses trying to compete in foreign markets.
To make us more competitive, we have to be willing to make larger long-term investments in infrastructure, not just limp forward with temporary extensions.
Any credible growth agenda has to recognize that there are parts of the economy, like the financial system, that need reform and regulation. Businesses need to be able to rely on a more stable source of capital, with a financial system that allocates resources to their most productive uses, not misallocating them to an unsustainable real estate boom.
Cutting government investments in education and infrastructure and basic science is not a growth strategy. Cutting deeply into the safety net for low-income Americans is not financially necessary and cannot plausibly help strengthen economic growth. Repealing Wall Street Reform will not make the economy grow faster – it would just make us more vulnerable to another crisis.
This strategy is a recipe to make us a declining power – a less exceptional nation. It is a dark and pessimistic vision of America.
Is this simply another example of the Obama administration’s habit of “doing the talk” without “doing the walk”? Time will tell.
Forget about all that talk concerning the Mayan calendar and December 21, 2012. The date you should be worried about is January 1, 2013. I’ve been reading so much about it that I decided to try a Google search using “January 1, 2013” to see what results would appear. Sure enough – the fifth item on the list was an article from Peter Coy at Bloomberg BusinessWeek entitled, “The End Is Coming: January 1, 2013”. The theme of that piece is best summarized in the following passage:
With the attention of the political class fixated on the presidential campaign, Washington is in danger of getting caught in a suffocating fiscal bind. If Congress does nothing between now and January to change the course of policy, a combination of mandatory spending reductions and expiring tax cuts will kick in – depriving the economy of oxygen and imperiling a recovery likely to remain fragile through the end of 2012. Congress could inadvertently send the U.S. economy hurtling over what Federal Reserve Chairman Ben Bernanke recently called a “massive fiscal cliff of large spending cuts and tax increases.”
Peter Coy’s take on this impending crisis seemed a bit optimistic to me. My perspective on the New Year’s Meltdown had been previously shaped by a great essay from the folks at Comstock Partners. The Comstock explanation was particularly convincing because it focused on the effects of the Federal Reserve’s quantitative easing programs, emphasizing what many commentators describe as the Fed’s “Third Mandate”: keeping the stock market inflated. Beyond that, Comstock pointed out the absurdity of that cherished belief held by the magical-thinking, rose-colored glasses crowd: the Fed is about to introduce another round of quantitative easing (QE 3). Here is Comstock’s dose of common sense:
A growing number of indicators suggest that the market is running out of steam. Equities have been in a temporary sweet spot where investors have been factoring in a self-sustaining U.S. economic recovery while also anticipating the imminent institution of QE3. This is a contradiction. If the economy were indeed as strong as they say, we wouldn’t need QE3. The fact that market observers eagerly look forward toward the possibility of QE3 is itself an indication that the economy is weaker than they think. We can have one or the other, but we can’t have both.
The economy is also facing the so-called “fiscal cliff” beginning on January 1, 2013. This includes expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester. Various estimates placed the hit to GDP as being anywhere between 2% and 3.5%, a number that would probably throw the economy into recession, if it isn’t already in one before then. At about that time we will also be hitting the debt limit once again. U.S. economic growth will also be hampered by recession in Europe and decreasing growth and a possible hard landing in China.
Technically, all of the good news seems to have been discounted by the market rally of the last three years and the last few months. The market is heavily overbought, sentiment is extremely high, daily new highs are falling and volume is both low and declining. In our view the odds of a significant decline are high.
Charles Biderman is the founder and Chief Executive Officer of TrimTabs Investment Research. He was recently interviewed by Chris Martenson. Biderman’s primary theme concerned the Federal Reserve’s “rigging” of the stock market through its quantitative easing programs, which have steered so much money into stocks that stock prices have now become a “function of liquidity” rather than fundamental value. Biderman estimated that the Fed’s liquidity pump has fed the stock market “$1.8 billion per day since August”. He does not believe this story will have a happy ending:
In January of ’10, I went on CNBC and on Bloomberg and said that there is no money coming into stocks, and yet the stock market keeps going up. The law of supply and demand still exists and for stock prices to go up, there has to be more money buying those shares. There is no other way in aggregate that that could happen.
So I said it has to be coming from the government. And everybody thought I was a lunatic, conspiracy theorist, whatever. And then lo and behold, on October of 2011, Mr. Bernanke then says officially, that the purpose of QE1 and QE2 is to raise asset prices. And if I remember correctly, equities are an asset, and bonds are an asset.
So asset prices have gone up as the Fed has been manipulating the market. At the same time as the economy is not growing (or not growing very fast).
* * *
At some point, the world is going to recognize the Emperor is naked. The only question is when.
Will it be this year? I do not think it will be before the election, I think there is too much vested interest in keeping things rosy and positive.
One of my favorite economists is John Hussman of the Hussman Funds. In his most recent Weekly Market Comment, Dr. Hussman warned us that the “music” must eventually stop:
What remains then is a fairly simple assertion: the primary way to boost corporate profits to abnormally high – but unsustainable – levels is for the government and the household sector to both spend beyond their means at the same time.
* * *
The conclusion is straightforward. The hope for continued high profit margins really comes down to the hope that government and the household sector will both continue along unsustainable spending trajectories indefinitely. Conversely, any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins. With the ratio of corporate profits to GDP now about 70% above the historical norm, driven by a federal deficit in excess of 8% of GDP and a deeply depressed household saving rate, we view Wall Street’s embedded assumption of a permanently high plateau in profit margins as myopic.
Will January 1, 2013 be the day when the world realizes that “the Emperor is naked”? Will the American economy fall off the “massive fiscal cliff of large spending cuts and tax increases” eleven days after the end of the Mayan calendar? When we wake-up with our annual New Year’s Hangover on January 1 – will we all regret not having followed the example set by those Doomsday Preppers on the National Geographic Channel?
Get your “bug-out bag” ready! You still have nine months!
On March 21, the Federal Reserve Bank of Dallas released a fantastic document: its 2011 Annual Report, featuring an essay entitled, “Choosing the Road to Prosperity – Why We Must End Too Big to Fail – Now”. The essay was written by Harvey Rosenblum, the head of the Dallas Fed’s Research Department and the former president of the National Association for Business Economics. Rosenblum’s essay provided an historical analysis of the events leading up to the 2008 financial crisis and the regulatory efforts which resulted from that catastrophe – particularly the Dodd-Frank Act.
While reading Harvey Rosenblum’s essay, I was constantly reminded of the creepy “JOBS Act” which is on its way to President Obama’s desk. Simon Johnson (former chief economist for the International Monetary Fund) recently explained why the JOBS Act poses the same threat as the deregulatory measures which helped cause the financial crisis:
With the so-called JOBS bill, on which the Senate is due to vote Tuesday, Congress is about to make the same kind of mistake again – this time abandoning much of the 1930s-era securities legislation that both served investors well and helped make the US one of the best places in the world to raise capital. We find ourselves again on a bipartisan route to disaster.
* * *
The idea behind the JOBS bill is that our existing securities laws – requiring a great deal of disclosure – are significantly holding back the economy.
The bill’s proponents point out that Initial Public Offerings (IPOs) of stock are way down. That is true – but that is also exactly what you should expect when the economy teeters on the brink of an economic depression and then struggles to recover because households’ still have a great deal of debt.
* * *
Professor John Coates hit the nail on the head:
“While the various proposals being considered have been characterized as promoting jobs and economic growth by reducing regulatory burdens and costs, it is better to understand them as changing, in similar ways, the balance that existing securities laws and regulations have struck between the transaction costs of raising capital, on the one hand, and the combined costs of fraud risk and asymmetric and unverifiable information, on the other hand.” (See p.3 of this December 2011 testimony.)
In other words, you will be ripped off more. Knowing this, any smart investor will want to be better compensated for investing in a particular firm – this raises, not lowers, the cost of capital. The effect on job creation is likely to be negative, not positive.
Simon Johnson’s last paragraph reminded me of a passage from Harvey Rosenblum’s Dallas Fed essay, wherein he was discussing why the economic recovery from the financial crisis has been so sluggish:
Similarly, the contributions to recovery from securities markets and asset prices and wealth have been weaker than expected. A prime reason is that burned investors demand higher-than-normal compensation for investing in private-sector projects. They remain uncertain about whether the financial system has been fixed and whether an economic recovery is sustainable.
To repeat what Simon Johnson said, combined with the above-quoted paragraph: the demand by “burned investors” for “higher-than-normal compensation for investing in private-sector projects” raises, not lowers, the cost of capital. How quickly we forget the lessons of the financial crisis!
The Dallas Fed’s Annual Report began with an introductory letter from its president, Richard W. Fisher. Fisher noted that while “memory fades with the passage of time” it is important to recall the position in which the “too-big-to fail” banks placed our economy, thus leading Congress to pass into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank). Although Harvey Rosenblum’s essay was primarily focused on the Dodd-Frank Act’s efforts to address the systemic risk posed by the existence of those “too-big-to-fail” (TBTF) banks, other measures from Dodd-Frank were mentioned. More important is the fact that the TBTFs have actually grown since the enactment of Dodd-Frank. Beyond that, Rosenblum emphasized why this has happened:
The TBTF survivors of the financial crisis look a lot like they did in 2008. They maintain corporate cultures based on the short-term incentives of fees and bonuses derived from increased oligopoly power. They remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation. Just as important, their significant presence in dozens of states confers enormous political clout in their quest to refocus banking statutes and regulatory enforcement to their advantage.
The ability of the financial sector “to resist the pressures of federal regulation” also happens to be the primary reason for the perverse effort toward de-regulation, known as the JOBS Act. At the Seeking Alpha website, Felix Salmon reflected on the venality which is driving this bill through the legislative process:
There’s no good reason at all for this: it’s basically a way for unpopular incumbent lawmakers who voted for Dodd-Frank to try to weasel their way back into the big banks’ good graces and thereby open a campaign-finance spigot they desperately need.
I don’t fully understand the political dynamics here. A bill which was essentially drafted by a small group of bankers and financiers has managed to get itself widespread bipartisan support, even as it rolls back decades of investor protections. That wouldn’t have been possible a couple of years ago, and I’m unclear (about) what has changed. But one thing is coming through loud and clear: anybody looking to Congress to be helpful in the fight to have effective regulation of financial institutions, is going to be very disappointed. Much more likely is that Congress will be actively unhelpful, and will do whatever the financial industry wants in terms of hobbling regulators and deregulating as much activity as it possibly can. Dodd-Frank, it seems, was a brief aberration. Now, we’re back to business as usual, and a captured Congress.
The next financial crisis can’t be too far down the road . . .
I don’t pretend to be an expert on Middle East politics. I usually rely on the perspective of Steve Clemons at The Washington Note, who provides candid, unvarnished commentary on the complicated issues in that region. Since December of 2008, I have been following the accomplishments of Jeremy Ben-Ami, the Executive Director of J Street, which he describes as “the political arm of the pro-Israel, pro-peace movement”.
Concern over the threat to Israel from Iran’s nuclear ambitions has been a hot topic during this election year. Nevertheless, on February 27, Andrew Jones wrote a piece for The Raw Story, which included some disclosures published by Wikileaks concerning Iran’s uranium enrichment efforts:
Growing concerns over Iran’s nuclear facilities may prove to be all for naught. Officials from the global intelligence company Stratfor allegedly discussed that Israel may have already destroyed the Iranian nuclear facility, according to one of the emails released by Wikileaks Monday.
In one of the over five million emails leaked, the conversation centered on Israeli Defense Minister Ehud Barak praising the news of deadly munitions blasts at a base of Iran’s elite Revolutionary Guards.
“I think this is a diversion. The Israelis already destroyed all the Iranian nuclear infrastructure on the ground weeks ago,” one intelligence official wrote in an email dated November 14, 2011. “The current ‘let’s bomb Iran’ campaign was ordered by the EU leaders to divert the public attention from their at home financial problems. It plays also well for the US since Pakistan, Russia and N. Korea are mentioned in the report. ”
This scenario makes sense. Iran would not likely admit to having been humiliated by Israel . Beyond that, the European Union plutocrats would enjoy nothing more than a decent sideshow to distract attention from their economic austerity fiasco.
For years, I have been waiting for someone to write a book called Israel for Dummies. Too many American teevee pundits seem completely ignorant about Israel’s internal political strife and its impact on the prospects for peace with the Palestinians. It appears as though someone has finally written that book. I recently came across a great piece written by Noah Millman for The American Conservative. Mr. Millman wrote a review of a new book entitled, The Unmasking of Israel by Gershom Gorenberg. As Millman explains, the book takes us back to the early days of Israel, with David Ben-Gurion at the helm, bringing us to the present-day, never-ending conflict with the Palestinians. Here are some highlights from Noah Millman’s book review:
Rather, the thrust of the book, as the title states, is to demonstrate that the series of decisions made during and after the 1967 War that resulted in the occupation of the West Bank and Gaza set in motion a process that has progressively “unmade” the State of Israel. Indeed, the progressive expansion of the settlement enterprise has so eroded the foundations of the signature achievement of political Zionism – Israel as we now know it – that not merely a “Jewish democratic state” but the state as such is now imperiled.
* * *
Since 1967, Gorenberg relates, the settlement enterprise has undermined the Israeli state top to bottom. It has fostered secrecy and corruption in government.
* * *
Again the story is familiar. Less so is the framing. Gorenberg, though he is outraged by the plight of the Palestinians, is not really writing about that plight. Nor is he writing from an anti-Zionist perspective. Rather, he is writing from a deeply Zionist point of view. Zionism, we tend to forget, was not a self-defense movement. It was a nationalist movement. Nationalism tells a people a story about what it means to be free – that being free means being part of a self-conscious, self-governing, sovereign, and independent collective. Losing consciousness of one’s national group, being governed by other groups, failing to achieve independence and sovereignty on par with other nations – these are signs of unfreedom. Of immaturity. The Jews before Zionism were, from the perspective of this narrative, either an exceptionally immature nation or not a nation at all. The goal of Zionism was not simply – or even primarily – to provide for a “safe haven” for Jews fleeing persecution by the Czar or the Nazis. The goal was the spiritual rejuvenation of the Jewish people by molding them into a nation like other nations and achieving independent statehood.
This is a narrative frame that, in broad strokes, Gorenberg accepts, which is why he is properly seen as a Zionist. Indeed, the whole argument of the book is that by holding onto and settling the territories captured in 1967, Israel has reverted to a mode of existence that Zionism was supposed to help the Jews grow out of. By undermining the authority of the state, the settlement enterprise has revived modes of being and of argument that, from Gorenberg’s perspective, the Jewish people should have grown out of when they acquired the power and responsibility of a state. Indeed, that was the whole point, from a moral perspective, of acquiring state power in the first place. The settlement enterprise doesn’t just undermine the moral case for Israel because it’s an injustice (plenty of states have perpetrated injustices – indeed, far worse injustices – without undermining the case for statehood as such) but because it is evidence that Zionism failed in what was arguably its primary objective.
As an aside: Be sure to read the Comment stream following Millman’s piece. It included some astute remarks and a good debate.
One American’s experience in attempting to get a better understanding of the Israeli – Palestinian conflict was chronicled on the Al Jazeera website. Punk rock icon, Jello Biafra of The Dead Kennedys discussed his decision to cancel a show he was scheduled to perform at the Barby Club in Tel Aviv with his new band (Jello Biafra and the Guantanamo School of Medicine). His bandmates had decided to boycott Israel in order to support the Boycott Divestment and Sanctions (BDS) movement. Wikipedia lists this explanation of the BDS movement’s three main goals:
Freeing all Palestinian territories from Israeli influence since 1967 and dismantling the Israeli West Bank barrier;
Acting towards the rights of the Arab-Palestinian citizens of Israel; and
Promoting the interests of Arab Palestinian refugees in reference to the United Nations General Assembly Resolution 194 of 1948.
Jello Biafra’s account of what followed his decision to cancel the Tel Aviv gig made for some interesting reading:
So with the rollercoaster still in my stomach and my head, I flew solo to Israel instead. The mission: to check things out myself and hopefully at least get closer to some kind of conclusion on whether artists boycotting Israel, especially me, was really the best way to help the Palestinian people.
* * *
I also got an invitation from a self-proclaimed fan to “come meet the Israeli right” and see the settlements through their eyes, complete with a wine-tasting party.
Many people I met on my trip to Israel feel that the boycott has damaged the Israeli opposition more than it has anyone else and “helped silence the peace camp in Israel”. A veteran journalist I met later told me, “the best way to contribute to peace is to try and work to understand both sides” and that he felt that boycotts strengthen extremists by keeping people apart.
* * *
One of the few things both Israelis and Palestinians seem to agree on is that one of the main obstacles to peace these days is the settlers.
Today the illegal settlements are completely out of control, with 300,000 settlers planted across the Green Line in the West Bank and another 200,000 beyond the Green Line in East Jerusalem. Borders are creatively moved and enforced by the infamous wall, started by the ideas of Yitzhak Rabin and greatly expanded by Ariel Sharon. It’s a black eye on the face of Israel’s reputation today, considered so even among many of Israel’s citizens and supporters.
Some people told me that if the wall had been built along the Green Line, it might have actually worked. But Sharon then used it as a land grab, creatively and maniacally routing it through the middle of Palestinian towns, Palestinian farmland and across Palestinian roads, in a deliberate attempt to make the West Bank such a splattered Swiss-cheese hodgepodge of impassable walls and checkpoints that a free Palestinian state could never get off the ground.
Any fantasy that Palestinians could one day be broken down to stay on “their side” of the wall and live happily ever after is ridiculous. It flies in the face of all human instinct and human rights. It is never going to happen. Like the Berlin Wall, it is destined to fall sooner rather than later.
* * *
A boycott of products made in settlements has begun inside Israel. There is also a growing boycott by artists refusing to cross the Green Line and perform for the settlers. A fancy venue has opened in one of the largest settlements in Ariel. Many artists refuse to perform there.
* * *
Yet bringing down this regime by boycott may be a much higher mountain to climb than the boycott of South Africa. The 1985 musician boycott of Sun City (a posh, government-owned golf resort and casino in South Africa) was just a promotional tool for the financial boycott, where banks, universities and corporations caved into pressure to pull their investments out of South Africa and broke the back of the white apartheid regime.
* * *
I am not saying the same tactics that brought down apartheid South Africa can’t be done. I am just saying that there are different and heavier obstacles this time and people need to be ready for them.
South Africa never had anything like the AIPAC (American Israel Public Affairs Committee) lobby, which is now considered more of a lobby for Likud than for the Israeli people. Nevertheless, they have a stranglehold over almost every member of Congress of both parties, using Joe McCarthy-type tactics to smear anyone they don’t like as anti-Jewish – and get them voted out of office.
* * *
I will not perform in Israel unless it is a pro-human rights, anti-occupation event that does not violate the spirit of the boycott. Each artist must decide this for themselves. I am staying away for now, but am also really creeped out by the attitudes of some of the boycott hardliners, and hope someday to find a way to contribute something positive here. I will not march or sign on with anyone who is more interested in making threats than making friends.
As for the Arab Spring, I cross my fingers on one hand and bite my nails with the other.
I have a lot to learn and a long way to go.
We all have a lot to learn. Jello Biafra’s humility is refreshing. If only our politicians were so humble . . .
Comments Off on More Great Thoughts from Jeremy Grantham
I always look forward to Jeremy Grantham’s Quarterly Letter. Grantham is the Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), an investment management firm, entrusted to oversee approximately $97 billion in client assets.
Unlike many asset managers, Jeremy Grantham has a social conscience. As a result, during the past few years we have seen him direct some sharp criticism at President Obama, Tim Geithner, Ben Bernanke and – of course – Goldman Sachs. Grantham fell behind schedule when his Third Quarter 2011 Letter was delayed by over a month. As a result, Grantham’s Fourth Quarter 2011 Letter was just released a few days ago. At 15 pages, it earned the title “The Longest Quarterly Letter Ever”. As usual, Grantham has provided us with some great investment insights – along with some pointed criticism of our ignorant legislators and mercenary corporate managers. What follows are some selected passages. Be sure to read the entire letter here (when you have time).
To leave it to capitalism to get us out of this fix by maximizing its short-term profits is dangerously naïve and misses the point: capitalism and corporations have absolutely no mechanism for dealing with these problems, and seen through a corporate discount rate lens, our grandchildren really do have no value.
To move from the problem of long time horizons to the short-term common good, it is quickly apparent that capitalism in general has no sense of ethics or conscience. Whatever the Supreme Court may think, it is not a person. Why would a company give up a penny for the common good if it is not required to by enforced regulation or unless it looked like that penny might be returned with profit in the future because having a good image might be good for business? Ethical CEOs can drag a company along for a while, but this is an undependable and temporary fix. Ethical humans can also impose their will on corporations singly or en masse by withholding purchases or bestowing them, and companies can anticipate this and even influence it through clever brand advertising, “clean coal” being my favorite. But that is quite different from corporate altruism. Thus, we can roast our planet and firms may offer marvelous and profitable energy-saving equipment, but it will be for profit today, not planet saving tomorrow.
It gets worse, for what capitalism has always had is money with which to try to buy influence. Today’s version of U.S. capitalism has died and gone to heaven on this issue. A company is now free to spend money to influence political outcomes and need tell no one, least of all its own shareholders, the technical owners. So, rich industries can exert so much political influence that they now have a dangerous degree of influence over Congress. And the issues they most influence are precisely the ones that matter most, the ones that are most important to society’s long-term well-being, indeed its very existence. Thus, taking huge benefits from Nature and damaging it in return is completely free and all attempts at government control are fought with costly lobbying and advertising. And one of the first victims in this campaign has been the truth. If scientific evidence suggests costs and limits be imposed on industry to protect the long-term environment, then science will be opposed by clever disinformation.
* * *
Capitalism certainly acts as if it believes that rapid growth in physical wealth can go on forever. It appears to be hooked on high growth and avoids any suggestion that it might be slowed down by limits. Thus, it exhibits horror at the thought (and occasional reality) of declining population when in fact such a decline is an absolute necessity in order for us to end up gracefully, rather than painfully, at a fully sustainable world economy. Similarly with natural resources, capitalism wants to eat into these precious, limited resources at an accelerating rate with the subtext that everyone on the planet has the right to live like the wasteful polluting developed countries do today. You don’t have to be a PhD mathematician to work out that if the average Chinese and Indian were to catch up with (the theoretically moving target of) the average American, then our planet’s goose is cooked, along with most other things. Indeed, scientists calculate that if they caught up, we would need at least three planets to be fully sustainable. But few listen to scientists these days. So, do you know how many economic theories treat resources as if they are finite? Well, the researchers at the O.E.C.D say “none” – that no such theory exists. Economic theory either ignores this little problem or assumes you reach out and take the needed resources given the normal workings of supply and demand and you can do it indefinitely. This is a lack of common sense on a par with “rational expectations,” that elegant theory that encouraged the ludicrous faith in deregulation and the wisdom of free markets, which brought us our recent financial fiascos. But this failure in economic theory – ignoring natural limits – risks far more dangerous outcomes than temporary financial crashes.
* * *
As described above, the current U.S. capitalist system appears to contain some potentially fatal flaws. Therefore, we should ask what it would take for our system to evolve in time to save our bacon. Clearly, a better balance with regulations would be a help. This requires reasonably enlightened regulations, which are unlikely to be produced until big money’s influence in Congress, and particularly in elections, decreases. This would necessitate legal changes all the way up to the Supreme Court. It’s a long haul, but a handful of other democratic countries in northern Europe have been successful, and with the stakes so high we have little alternative but to change our ways.
* * *
Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence. Fifty and one-hundred-year horizons are important despite the “tyranny of the discount rate,” and grandchildren do have value. My conclusion is that capitalism does admittedly do a thousand things better than other systems: it only currently fails in two or three. Unfortunately for us all, even a single one of these failings may bring capitalism down and us with it.
Keep in mind that the foregoing passages were just from Part II of the Quarterly Letter. Part III is focused on “Investment Observations for the New Year”. Be sure to check it out – it’s not as bearish as you might expect. Enjoy!
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.