Category Archives: Economy

Financial Crisis: Keep an Eye on Europe (Again)

Yves Smith has a useful overview of the pitfalls facing the European banking system and as a result Europe generally: Eurobanks: The Probable Point of Failure as Systemic Stress Rises. It is worth your time, but I’ll summarize the key points.

As Yves’ points out 1/4 of the advanced economies are now in negative interest rate territory. With negative interest rates you are paying to loan someone your money with the result that your capital declines in both relative and absolute terms. This creates an incentive to park your money in cash, which at least won’t decline in absolute terms, though it will decline in relative terms due to inflation (currently a paltry 0.4% in Europe). She points out:

But its utterly stunning to see this move not only being treated as a sound policy option, but actually being implemented. Deflation is the worst possible place to be in an economy with heavy debt levels. Economists have managed to forget the most basic lesson of the Great Depression, and tell themselves the bizarre story that putting money even more on sale will lead people to borrow and spend. Earth to central bankers: they won’t if they are worried about their future. What is needed is more demand, which means more fiscal spending and better incomes for workers, which means more labor bargaining power. Yet orthodox policymakers are deeply allergic to both ideas.

Or as they say in monetary theory, you cannot push on a string. The central bank policy of the US, Europe, Japan and China was and is to make sure money is plentiful for the financial sector in the hope that that it will be lent out and used to increase demand. But US and European bank balance sheets are still full of bad loans and giving them cheap money papers over the problem, but doesn’t solve it. With demand low, US & European banks have little reason to risk loaning money to the private sector, but are better off buying government bonds and using the interest rate differential to shore up their (still) poor balance sheets.  Japan had its lost twenty years. The US and especially Europe are making good progress in catching up with Japan.

In China, the excess money went to increasing production, which since demand isn’t rising fast enough, meant too much supply for the demand and thus product deflation. Charming. The solution of course is increasing demand, but Europe and the US leaders are more interested in keeping wages down, profits up and the rich richer.

The European Central Bank (ECB), like the US Federal Reserve of the late 20s and early 30s, is ill equipped to deal with the situation. Prior to the 2007 financial crisis the European Central Bank was a “currency union with a think tank” (don’t remember who first said that, but it is accurate). There is no European-wide banking insurance system ala the US FDIC, rather each state has to deal with its own failing banks. Ireland’s government debt went from 20% of GDP to 123% of GDP in 2013 due, in part, to socializing the bad bank debts. It was even forced into it by the ECB.

The ECB’s current solution to any bank failures is to convert depositor’s money into stock in the company which was tried in Spain and the 2012-13 Cyprus financial crisis. Using bail-ins to resolve insolvent banks makes the banking system less, not more stable:

The bail-in provision, which is now in place all across the Eurozone as part of the new EU banking rules that became effective January 1, is supposed to occur only when national deposit guarantee funds fail, and those are supposed to cover deposits of up to €100,000. There is a EU-wide second layer of insurance that is being implemented in phases, but it is more fig leaf than real. We’ve mentioned that there is a slow motion bank run underway in Italy, reflecting the fact that alert large depositors (and perhaps even smaller ones) recognize that they are at risk. Anyone with an operating brain cell will move their money out in part or in whole if they think their bank is at risk. Thus bail-ins increase the odds of bank runs, the last thing a regulator wants to have happen.

As do contingent convertible bonds, called cocos:

All cocos, however, take losses contingent on one or more trigger events: for example, the issuing bank falling below a preset capital threshold, or a decision by regulators. The triggers can push some cocos to convert into shares, while others instead write down to zero.

There is a second catch: risk. In good times, cocos behave like a normal high-yield bond, but in falling markets they expose investors to equity-like losses and volatility. In financial jargon this is called negative convexity, or “death spiral” risk: losses accelerate as things get worse.

With China seeing money leaving at a fast pace, how long it can keep from devaluing is an open question. If it does, the deflation problem will only get worse, putting further pressure on everyone’s banking system, especially Europe’s. France, the Netherlands and the UK banking sector assets are over 350% of GDP with Germany, Spain and Portugal not far behind. These have only grown since the start of the financial crisis. If enough French or German banks go belly up, the ECB has put in place rules that will only make the resulting financial and economic crisis much, much worse. Our elites always seem to learn the wrong lessons from history.

Video of Cory Doctorow speaking at Suffolk University

Cory Doctorow and others spoke at the Ford Hall Forum at Suffolk University on Oct. 13, 2015. The talk was The Remote-Controlled Society. It was a pleasure to work with Suffolk and the Boston University Computer Science department to make this talk happen.

I recorded some of it and put it up at the Massachusetts Pirate Party YouTube account. Reminder to self: always use a tripod when recording video.

The Ford Hall Forum posted video of the entire discussion.

He also spoke at the Berkman Center that same day.

The world the plutocrats wish for us

Naked Capitalism is rapidly becoming my favorite blog on economics & finance issues.  Yves Smith (pseudonym) and her fellow bloggers always bring insights and clarity to the post-2008 financial crisis world.  Even though I read it almost daily, I missed this article (no doubt due to the title), and only became aware of it via the Dollars & Sense blog

It succinctly expresses my own views of the world that our plutocrats and their supporters envision for us and have been working since the 1970s to achieve bit by bit.  Throw in increasing government and corporate surveillance, laws like SOPA & CISPA and corporations increasing attempts to enclose the internet commons for their private profit, and we have a vision of a future where all but a few are slaves.  A future that may not be all that different than the ancient Roman Republic during the Servile Wars, only with means of control that are totalitarian in all but name.

I need to go support Naked Capitalism, but I hope you will find that Yves Smith's words clarify the reality we all face.

“My sense is that the widespread sense of gloom, the increased level of aggression in many walks of life (and on the Internet) isn’t just due to the lousy state of the economy, although that certainly isn’t helping. In the last year, it has become increasingly evident that a very ugly set of changes that will have broad social impact is moving forward with surprising speed.

“We are in the midst of a finance-led counterrevolution. The long standing effort to roll back New Deal reforms has moved from triumph to triumph. The foundation was laid via increasingly effective public relations efforts to sell the Ayn Randian world view that granting individuals unfettered freedom of action would produce only virtuous outcomes, since the talented would flourish and the rest would deservedly be left in the dust. In fact, societies that have moved strongly in that direction such as Pinochet’s Chile and Russia under Yeltsin, have seen plutocratic land grabs, declining standards of living (and even lifespans), and a rise in authoritarianism or (in the case of Colombia) organized crime. Those who won these brawls did flourish, but at tremendous cost to society as a whole.

“In the US, the first step was making taxation less progressive. A second, parallel measure was deregulation, particularly in financial services. Together, they fostered the growth of an uber wealthy cohort that increasingly lives apart from middle class and poor citizens. The rich can thus tell themselves they have little to gain from the success of ordinary people. And, perversely, the global financial crisis has worked to the advantage of the financial elite. As former IMF chief economist Simon Johnson described in a May 2009 Atlantic article, the US instead suffered a quiet coup, with the top end of the financial services industry becoming more concentrated, and more firmly in charge of the political apparatus. And you see more vivid evidence of the financial takeover in Europe, where technocrats are stripping countries of their sovereignty and breaking them on the rack via failing austerity programs, so as to avoid exposing the insolvency of French and German banks. In the US, the events of the last year are less dramatic but no less telling, including a coordinated 17-city paramilitary crackdown on Occupy Wall Street, a “get out of jail almost free” settlement for the mortgage-industrial complex, and an election where the two candidates are indistinguishable in their enthusiasm for cutting Medicare and Social Security, and murder by drone.

“The implications of gutting social protections are far more serious than they might appear. Dial the clock back eighty years, and most people lived in or near the communities they grew up in. They could turn to extended family, or other members of the community for support if they suffered a serious setback. Informal social safety nets stood in the place of the government provided ones we have now.

“Broadly shared prosperity and government safety nets are essential underpinnings of a modern, mobile society. The American nuclear family isn’t just an outgrowth of the automobile era; it’s also the result of union jobs in an industrial economy helping create a wage foundation, and the high confidence most men (in those days, it was men) had in continued employment, and the existence of social protections if something bad happened (Social Security’s disability programs have raised entire families, for instance) made it viable to move far from one’s hometown in pursuit of opportunity.

“But as the population has become more mobile, the role of community, and their local support mechanisms, has faded. Yes, when people get desperate, they might still move in with a parent or child. But anecdotally, that seems far less common today than it was a few generations ago. So when government provided social insurance programs are gutted, the broader social impact is much greater than taking us back to the era right before they were implemented. Michael Hudson has described the changes under way as neo-feudalism. We are moving towards the sort of stratified society we had not in the 1920s, but in the early Industrial Revolution with a landed aristocracy, a small haute bourgoisie, some well remunerated craftsmen, and a large agricultural/servant class. In other words, the effort to roll back the New Deal is in fact going much further, in terms of reinstitutionalizing class stratification, lack of mobility, and a resulting large new “lower order” that will live in stress and often squalor. A new, more brutal society is being created before our eyes, and it seems such an incredible development that many people are still in denial about what is happening.”

From: Launching the NC 2012 Fundraiser

As PBS extolls arbitrage, is wealth looting next?

I didn't intend to have my next post focus on arbitrage and rentiers, but as I prepared to deal with several items I have put off in favor of sleeping the last few days, I just couldn't resist.

Last night, my wife was watching Market Warriors, a PBS show that seems to have been spun off from Antiques Roadshow. Various intermediate buyers/sellers comb flea markets and try to get the best price they can on the antiques they buy so in order to sell them at auction for a higher price. They have various constraints they have to abide by. In between the haggling, the narrator makes comments on the buying/selling process, negotiations and something about the items the participants have chosen.

They should have just called the show Arbitrage, as striped of the commentary, that is all the participants are doing. As they Marxists' M-C-M' equation says, they are using money to buy commodities to make more money. Watching stock or bond traders negotiate their deals would have been far more exciting and illuminating about the inner purpose of financial capitalism.

Which brings me to the latest Q&A with Michael Hudson about his book The Bubble and Beyond: Fictitious Capital, Debt Deflation and Global Crisis. In the Q&A, he ties the huge debts (especially private debts) we have developed since 1980, with the increasing amount of money the financial sector is siphoning off from the goods economy. The following excerpt summarizes our current march on the road to debt servitude:

But instead of supporting productive industry by extending credit to increase tangible capital investment, the banking system has extended credit mainly (about 80 percent in the United States and most English-speaking countries) to buy real estate and load it down with debt. The result is that rental income is used to pay interest to the banks rather than to pay taxes. This forces governments to tax wages, profits and sales. That increases the cost of living and doing business, on top of the interest charge.

In search of this loan market, banks have come to back untaxing real estate and deregulating monopolies, so that their economic rent can be paid to the banks as interest by customers eager buy these rights – and charge even higher rents or raise prices even further without making a new capital investment of their own. Instead of financing industry, U.S. banks don’t make loans for what can be produced in the future. They make loans against collateral already in place – including entire companies with high-interest “junk” bonds. The target company is obliged to pay the debt that the corporate raider takes on. The raider then is “free” to downsize and outsource the work force, squeeze the budget and hope to come out with a capital gain after paying off the banks and bondholders. The process is more extractive than productive.

While the financial industry has led the way in extracting economic rents from their customers and other sectors of the economy, other sectors are catching up.  Increasingly we see patents being used to extract economic rents, whether with the Apple-Samsung ruling or with patent trolls, rather than by actually innovating and creating more useful products. 

With artbitrage covered, perhaps PBS will come up with a new show that extolls the virtues of rent seeking.  I think Wealthy Looters would be a good title.

The question for us, though, is whether we want an economy that encourages invovation and spreading the wealth we all create as widely as possible or whether we want a rentier tollbooth economy controlled and milked by the wealthy.

UPDATED: 2007 State, Local & Federal Tax Rates by Income

A while ago I put together a spreadsheet of the tax rates that people at different income classes paid and kept meaning to post it once I looked at similar data from the 1950s or 1960s, when the actual tax rates that the wealthy paid were much higher.  However, with the latest Romney clandestine video, it seemed a fitting time to post it.

The data is from 2007 and it includes Federal, State and Local taxes.  My sources were:

You can find my google spreadsheet with all of the numbers (as well as some extrapolations if you remove certain tax breaks) here.  I had to do some calculations to break out some of the higher income ranges for the Federal data, but the computations are pretty straightforward.

Before I go to the charts, a bit of commentary.  

State taxes, especially sales and property, are regressive and that helps to skew the taxes so the poor pay more and the wealthy less.  Some states have a high enough income tax to offset that disparity, but many states do not have an income tax, or have a flat tax, such Massachusetts.

FICA (Social Security, Medicare, etc.) taxes are payroll taxes that only apply to wage income, but the total amount a tax payer has to pay is capped at $110,100 of income (as of 2012).  However, the Earned Income Tax Credit helps to offset the FICA taxes and you can see that from the Federal tax rate chart below where income tax rates are negative for those earning less than $18,000.  Also, the long-term capital gains taxes are paid at a flat rate that is not progressive, unlike Federal income taxes which rise with the income of the tax payer.

These issues, as well as others, ensure that the tax rates the wealthy pay are not that much higher than someone in the middle class.  

On to the summary charts.

State, Local & Federal Tax Rate by Income Range

State & Local Tax Rate by Income Range

Federal Tax Rate by Income Range


I see via Ezra Klein (via friends on Facebook) that Citizens for Tax Justice already has this info in a summary form for 2011. I'll poke around and see if they have the rates for the 1950s and 1960s.


Links 6/26/2012

Links 6/22/2012

  • Doug Henwood‘s Behind the News interview with Yanis Varoufakis, on the Greece & Euro Zone crisis. Turns out Yanis Varoufakis started work at Valve Software. When Doug stated that Valve was run along anarcho syndicalist, I went looking for more and found:
  • The Valve manifesto – which is the first thing that comes up when you search for valve software anarcho syndicalist on google. Sounds like a human place to work and L loves their games, but that two of the founders are multimillionaires, at least, seems to limit the ability to apply their model to other, less well financed, businesses
  • Copyright and “intellectual disobedience – Cool interview with cartoonist Nina Paley on free culture: “Intellectual disobedience is civil disobedience plus intellectual property,” Paley explained. “A lot of people infringe copyright and they’re apologetic … If you know as much about the law as, unfortunately, I do, I cannot claim ignorance and I cannot claim fair use … I know that I’m infringing copyright and I don’t apologize for it.”
  • Also, the Techdirt summary
  • The Scam Wall Street Learned From the Mafia – Matt Taibbi on more fraud by Wall Street banks: “But when added to the other fractions of a percent stolen from basically every other town in America on every other bond issued by Wall Street in the past 10 to 15 years, it starts to turn into an enormous sum of money. In short, this was like the scam in Office Space, multiplied by a factor of about 10 gazillion: Banks stole pennies at a time from towns all over America, only they did it a few hundred bazillion times.”
  • Julian Assange’s right to asylum – Glenn Greenwald
  • Washington’s 5 Worst Arguments for Keeping Secrets From You – a great list from Wired’s Danger Room blog
  • Atheists, Muslims See Most Bias as Presidential Candidates
  • Hark, a Vagrant: Idler – Remixing cartoons from very old illustrations

Links of Note, 1/7/2011

Quick hit: getting too close to power – Geek Feminism, sexist trolls and worse on the internet

NJ Public Pension Slugfest Reporting Omits 15 Years of Governors Stealing From Workers – Naked Capitalism, as Utah Phillips once said, The long memory is the most radical idea in America.

The Left Has Nowhere To Go – Truth Dig

Good Code– xkcd, a bit o' humor

Another Court Says It's Okay For Police To Search Your Mobile Phone Without A Warrant – Tech Dirt

US Air Force Intelligence Veteran Of Afghan War Explains Why He Supports Wikileaks – Tech Dirt

US Gov't Strategy To Prevent Leaks Is Leaked – Tech Dirt

Wikileaks: Israelis ‘Intend to Keep the Gazan Economy on the Brink of Collapse’ – Juan Cole, via Naked Capitalism

More young scientists: 8-Year-Olds Publish Scientific Bee Study – Geek Feminism

Fed Plans to End Tough Sanction Against Predatory Lending – Naked Capitalism

Standard & Poor’s Triple A Ratings Collapse Again. The Question is Why? – ProPublica

Would You Be Bullish About A Country with Five Years of Negative Real ROE? – Naked Capitalism, not all is rosy in China

Living without Money | a Documentary Film via Mark Boyle

Does America really have the finest military in the world? – Salon

We Really Do Spend More Than $1 Trillion on War – Truth Dig

A War Like No Other

Feynman called a woman “worse than a whore” for not exchanging sex for sandwiches. – Geek Feminism