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Head For The Hills

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March 12, 2010

When a stranger in a tinfoil hat tells me that the sky is falling, I don’t pay attention to him.  On the other hand, when credible sources warn of an upcoming economic collapse as a result of our government’s financial ignorance — I listen.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management.  From 2007-2008, he was chief economist at the International Monetary Fund.  He recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle”.  Their essay began with this observation:

Each time the system runs into problems, the Federal Reserve quickly lowers interest rates to revive it.  These crises appear to be getting worse and worse — and their impact is increasingly global.  Not only are interest rates near zero around the world, but many countries are on fiscal trajectories that require major changes to avoid eventual financial collapse.

What will happen when the next shock hits?  We believe we may be nearing the stage where the answer will be — just as it was in the Great Depression — a calamitous global collapse.  The root problem is that we have let a “doomsday cycle” infiltrate our economic system  . . .

The essay contains a number of proposals for correcting this problem.  One of them involves tripling the requirement for core capital at major banks to 15-20% of assets.  They concluded with this warning:

Last year, we came remarkably close to collapse.  Next time, it may be worse.  The threat of the doomsday cycle remains strong and growing.

Of course, the fact that scares me is that our government doesn’t give a damn.  We aren’t likely to see any changes in capital requirements or anything else that was suggested in that article.

Niall Ferguson is a professor of economic history at Harvard.  He recently wrote an article entitled, “Complexity and Collapse — Empires on the Edge of Chaos”.  It was published in the March/April 2010 issue of Foreign Affairs magazine.  The piece began with this summary:

Imperial collapse may come much more suddenly than many historians imagine.  A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.

Niall Ferguson’s essay inspired Paul Farrell of MarketWatch to write a commentary on Ferguson’s piece, summarizing the highlights, while driving home this message:

Dismiss his warning at your peril.  Everything you learned, everything you believe and everything driving our political leaders is based on a misleading, outdated theory of history.  The American Empire is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse.

*   *   *

His message negates all the happy talk you’re hearing in today’s news — about economic recovery and new bull markets, about “hope,” about a return to “American greatness” — from Washington politicians and Wall Street bankers.

*   *   *

“The Consummation of Empire” focuses us on Ferguson’s core message:  At the very peak of their power, affluence and glory, leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation.  They have it all.

Fortunately, Mr. Farrell included some advice for those of us who are wondering about how to survive an economic collapse:  Head for the hills.  Here’s what he had to say:

At this point, investors are asking themselves:  How can I prepare for the destruction and collapse of the American Empire?  There is no solution in the Cole-Ferguson scenario, only an acceptance of fate, of destiny, of history’s inevitable cycles.

But there is one in “Wealth, War and Wisdom” by hedge fund manager Barton Biggs, Morgan Stanley’s former chief global strategist who warns us of the “possibility of a breakdown of the civilized infrastructure,” advising us to buy a farm in the mountains.

“Your safe haven must be self-sufficient and capable of growing some kind of food … well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc.  Think Swiss Family Robinson.”  And when they come looting, fire “a few rounds over the approaching brigands’ heads.”

A reading of Paul Farrell’s article about Barton Biggs from July of 2009, reveals a more comfortable assessment of a crisis which may be 40 or 50 years in the future.  Professor Ferguson’s essay has apparently given Mr. Farrell a greater sense of urgency about the disaster ahead.  Here’s the assessment Mr. Farrell gave last summer:

But how to invest for the “End of Civilization” coming around 2050?  The next 40 years will be confusing: Accelerating struggles between aging populations and disenchanted youth, soaring commodity prices, global warming, peak oil, food shortages, famine, blackouts, rationing, civil disorder, increasing crime, worldwide jihads, riots, anarchy and other dark scenarios of a tomorrow with “warfare defining human life.”

Compare and contrast that view with the concluding remark from Mr. Farrell’s recent piece:

You are forewarned:  If the peak of America’s glory was the leadership handoff from Clinton to Bush, then we have already triggered the countdown to collapse, the decade from 2010 until 2020 … tick … tick … tick …

You have just read the views of some intelligent men who are warning us that a huge disaster may lie just around the corner.  Yikes!



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Three New Books For March

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February 24, 2010

The month of March brings us three new books about the financial crisis.  The authors are not out to make apologies for anyone.  To the contrary, they point directly at the villains and expose the systemic flaws that were exploited by those who still may yet destroy the world economy.  All three of these books are available at the Amazon widget on the sidebar at the left side of this page.

Regular fans of the Naked Capitalism blog have been following the progress of Yves Smith on her new book, ECONned:  How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.  It will be released on March 2.  Here is some information about the book from the product description at the Amazon website:

ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.

Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown.  Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.

In eConned (sic), author Yves Smith reveals:

–why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery

–how economists have come to play a profoundly anti-democratic role in policy

–how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors

–how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers

–how financial regulation enabled predatory behavior by Wall Street towards investors

–how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them

Michael Lewis is the author of the wildly-popular book, Liar’s Poker, based on his experience as a bond trader for Solomon Brothers in the mid-80s.  His new book, The BigShort: Inside the Doomsday Machine, will be released on March 15.  Here is some of what Amazon’s product description says about it:

A brilliant account — character-rich and darkly humorous — of how the U.S. economy was driven over the cliff.

*   *   *

Michael Lewis’s splendid cast of characters includes villains, a few heroes, and a lot of people who look very, very foolish:  high government officials, including the watchdogs; heads of major investment banks (some overlap here with previous category); perhaps even the face in your mirror.  In this trenchant, raucous, irresistible narrative, Lewis writes of the goats and of the few who saw what the emperor was wearing, and gives them, most memorably, what they deserve.  He proves yet again that he is the finest and funniest chronicler of our times.

Our third author, Simon Johnson, recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle” which explains how “we have let a ‘doomsday cycle’ infiltrate our economic system”.  The essay contains a number of proposals for correcting this problem.  Here is one of them:

We believe that the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.  If we triple core capital at major banks to15-25% of assets, and err on the side of requiring too much capital for derivatives and other complicated financial structures, we will create a much safer system with less scope for “gaming” the rules.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management.  From 2007-2008, he was chief economist at the International Monetary Fund.  With James Kwak, he is the co-publisher of The Baseline Scenario website.  Johnson and Kwak have written a new book entitled, 13 Bankers:  The Wall Street Takeover and the Next Financial Meltdown.  Although this book won’t be released until March 30, the Amazon website has already quoted from reviews by the following people:  Bill Bradley, Robert Reich, Arianna Huffington, Bill Moyers, Alan Grayson, Brad Miller, Elizabeth Warren and others.  Professor Warren must be a Democrat, based on the affiliation of nearly everyone else who reviewed the book.

Here is some of what can be found in Amazon’s product description:

.  .  .  a wide-ranging, meticulous, and bracing account of recent U.S. financial history within the context of previous showdowns between American democracy and Big Finance: from Thomas Jefferson to Andrew Jackson, from Theodore Roosevelt to Franklin Delano Roosevelt.  They convincingly show why our future is imperiled by the ideology of finance (finance is good, unregulated finance is better, unfettered finance run amok is best) and by Wall Street’s political control of government policy pertaining to it.

As these authors make the talk show circuit to promote their books during the coming weeks, the American public will hearing repeated pleas to demand that our elected officials take action to stop the mercenary financial behemoths from destroying the world.  Perhaps the message will finally hit home.

If you are interested in any of these three books, they’re available on the right side of this page.



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Simon Johnson In The Spotlight

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October 12, 2009

An ever-increasing number of people are paying close attention to a gentleman named Simon Johnson.  Mr. Johnson, a former chief economist at the International Monetary Fund, now works at MIT as Professor of Entrepreneurship at the Sloan School of Management.  His Baseline Scenario website is focused on the financial and economic crises.  At the Washington Post website, he runs a blog with James Kwak called The Hearing.  Last spring, Johnson turned more than a few heads with his article from the May 2009 issue of The Atlantic, “The Quiet Coup”, in which he explained that what happened in America during last year’s financial crisis and what is currently happening with our economic predicament is “shockingly reminiscent” of events experienced during financial crises in emerging market nations (i.e. banana republics and proto-capitalist regimes).

On October 9, Joe Nocera of The New York Times began his column by asking Professor Johnson what he thought the Wall Street banks owed America after receiving trillions of dollars in bailouts.  Johnson’s response turned to Wednesday’s upcoming fight before the House Financial Services Committee concerning the financial reforms proposed by the Obama administration:

“They can’t pay what they owe!” he began angrily.  Then he paused, collected his thoughts and started over:  “Tim Geithner saved them on terms extremely favorable to the banks.  They should support all of his proposed reforms.”

Mr. Johnson continued, “What gets me is that the banks have continued to oppose consumer protection.  How can they be opposed to consumer protection as defined by a man who is the most favorable Treasury Secretary they have had in a generation?  If he has decided that this is what they need, what moral right do they have to oppose it?  It is unconscionable.”

This week’s battle over financial reform has been brewing for quite a while.  Back on May 31, Gretchen Morgenson and Dan Van Natta wrote a piece for The New York Times entitled, “In Crisis, Banks Dig In for Fight Against Rules”:

Hotly contested legislative wars are traditional fare in Washington, of course, and bills are often shaped by the push and pull of lobbyists — representing a cornucopia of special interests — working with politicians and government agencies.

What makes this fight different, say Wall Street critics and legislative leaders, is that financiers are aggressively seeking to fend off regulation of the very products and practices that directly contributed to the worst economic crisis since the Great Depression.  In contrast, after the savings-and-loan debacle of the 1980s, the clout of the financial lobby diminished significantly.

In case you might be looking for a handy scorecard to see which members of Congress are being “lobbied” by the financial industry and to what extent those palms are being greased, The Wall Street Journal was kind enough to provide us with an interactive chart.  Just slide the cursor next to the name of any member of the House Financial Services Committee and you will be able to see how much generosity that member received just during the first quarter of 2009 from an entity to be affected by this legislation.  The bars next to the committee members’ names are color-coded, with different colors used to identify specific sources, whose names are displayed as you pass over that section of the bar.  This thing is a wonderful invention.  I call it “The Graft Graph”.

On October 9, Simon Johnson appeared with Representative Marcy Kaptur (D – Ohio) on the PBS program, Bill Moyers Journal.  At one point during the interview, Professor Johnson expressed grave doubts about our government’s ability to implement financial reform:

And yet, the opportunity for real reform has already passed. And there is not going to be — not only is there not going to be change, but I’ll go further.  I’ll say it’s going to be worse, what comes out of this, in terms of the financial system, its power, and what it can get away with.

*  *   *

BILL MOYERS:  Why have we not had the reform that we all knew was being — was needed and being demanded a year ago?

SIMON JOHNSON:  I think the opportunity — the short term opportunity was missed.  There was an opportunity that the Obama Administration had.  President Obama campaigned on a message of change.  I voted for him.  I supported him.  And I believed in this message.  And I thought that the time for change, for the financial sector, was absolutely upon us.  This was abundantly apparent by the inauguration in January of this year.

SIMON JOHNSON:  And Rahm Emanuel, the President’s Chief of Staff has a saying.  He’s widely known for saying, ‘Never let a good crisis go to waste’.  Well, the crisis is over, Bill.  The crisis in the financial sector, not for people who own homes, but the crisis for the big banks is substantially over.  And it was completely wasted.  The Administration refused to break the power of the big banks, when they had the opportunity, earlier this year.  And the regulatory reforms they are now pursuing will turn out to be, in my opinion, and I do follow this day to day, you know.  These reforms will turn out to be essentially meaningless.

Sound familiar?  If you change the topic to healthcare reform, you end up with the same bottom line:  “These reforms will turn out to be essentially meaningless.”  The inevitable watering down of both legislative efforts can be blamed on weak, compromised leadership.  It’s one thing to make grand promises on the campaign trail — yet quite another to look a lobbyist in the eye and say:  “Thanks, but no thanks.”  Toward the end of the televised interview, Bill Moyers had this exchange with Representative Kaptur:

BILL MOYERS:   How do we get Congress back?  How do we get Congress to do what it’s supposed to do?  Oversight.  Real reform.  Challenge the powers that be.

MARCY KAPTUR:  We have to take the money out.  We have to get rid of the constant fundraising that happens inside the Congress.  Before political parties used to raise money; now individual members are raising money through the DCCC and the RCCC.  It is absolutely corrupt.

As we all know, our system of legalized graft goes beyond the halls of Congress.  During his Presidential campaign, Barack Obama received nearly $995,000 in contributions from the people at Goldman Sachs.  The gang at 85 Broad Street is obviously getting its money’s worth.



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