Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

The Crash is past. Comes now Inflation.

by NBBooks Mon Mar 3rd, 2008 at 02:33:30 AM EST

Seems to me a lot of people don't realize the worst financial crash since 1929 has already occurred. I suppose they are waiting for a big explosive fireball and a lot of noise like in a Hollywood movie, or for the nightly news on their wide-screen televisions to show pictures of desperate bankers and brokers splattered on the sidewalks in front of 60-story temples of finance.


This diary is my humble little attempt to let these people know that the crash has already happened. It began in August. I guess they didn't notice, but a number of financial markets have already collapsed. First, of course, there was the derivatives based on sub-prime mortgages. That seems to be about where the common consciousness stops. But before U.S. Secretary Treasury Hank Paulson and Federal Reserve Chairman Ben Bernanke (a.k.a., Captain Carnage) even lifted a finger to try and sort out the sub-prime mortgage mess, they first had to deal with the collapse of the market for Structured Investment Vehicles. Since these two crises began last summer many other financial markets have also collapsed: corporate junk bonds, asset-backed commercial paper, municipal bonds. This last was saved just last week by New York State Insurance Commissioner Dinallo basically forcing Moodys, S&P and Fitch to give AAA ratings to the monolines insurers. All these markets have pretty much ceased functioning, with not even the banks that created some of this stuff willing to buy their own product. Financial institutions have also been disappearing, especially a number of hedge funds, the most recent being this past week: Peloton, a London-based hedge fund specializing in asset-backed bonds.
CommercialPaperCollapse

So, this is it. The financial system has crashed. Now we're finally seeing the Republican's cherished "trickle down" theories begin to work - and with a vengeance- as the damage spreads into the real economy. The basic mechanism for this is the contraction of credit, which is cutting off funds for real economic activity. Goldman Sachs and others estimate that the financial crash has contracted lending by about $2 trillion--and our economy is $15 trillion in GDP. Banks and other institutions are simply unwilling to lend. Here's the results we know of so far:
newhomesales
existinghomesales

Credit for auto loans is also drying up. A friend of mine applied for an auto loan at Wachovia, and was told they were not making loans. I thought it might be racism, so I called a different branch myself and was advised that if I wanted to buy a car my best option was to take out a line of credit on my home equity. Poof! There goes the auto industry, and all its supplying industries like steel, glass, plastic, machine tools, and so on.

As a wag on European Tribune noted a month or two ago, now we have peak credit to add to our worries over peak oil.

On a number of blogs last week, a number of people asked what can be done. Well, the truth is the chance for fixing it - at least fixing it in a way we might find acceptable - is past. Bush, Paulson, and Bernanke, and the governments and central banks of the G-7 have already embarked upon the course they will follow over the next year to three years - they are inflating. Remember that the week before Christmas a number of central banks - the Fed, the Bank of England, the National Bank of Switzerland, the Central Bank of Europe, the Bank of Canada and a few others, had a coordinated effort to prop up the financial markets. In three days they poured nearly $1 trillion of liquidity into the system. Let me repeat that, folks: $1 trillion in three days. Since then, the U.S. Federal Reserve alone has been pouring in an estimated $15 billion each week, largely through the Fed's emergency Term Auction Facility launched December 17. One of the side effects of the TAF is that U.S. bank reserves have fallen below zero; there is currently a quiet debate going on whether or not negative bank reserves is a problem or not, given the emergency measures the Fed has implemented.  

Whatever. The point is, this is the crash. We're in it now. And the people in charge have decided that the priority is to save the financial system. And they're pouring in liquidity in do it.

This presents us with two problems. First, this financial system is not worth saving, because the financial system itself is the cause of the problems. We need to radically alter it, not save it in its present form. For over thirty years, as the U.S. deregulated its banking and financial systems, hedge funds and other "players" that wanted to speculate or arbitrage were able to raise tens of billions of dollars in days, while companies and entrepreneurs working in new technologies, such as bio-engineered fuels, struggled to find a few million. Speculation and arbitrage have become the focus of the U.S. financial system rather than supplying credit to the real economy. As a result, the future has been starved of investment.
HedgeFundsAssets
When new companies and entrepreneurs look for financing in the U.S., where do they go? They don't go to Wall Street, which is preoccupied with trading for its own accounts. They go to the venture capitalists of Silicon Valley, where a new pool of capital was created by the computer and internet revolutions. This pool of money has not yet been assimilated into and corrupted by Wall Street. You really don't find capitalism on Wall Street anymore - just the insistence that you do.
VentureCapitalists

As a comment on econbrowser noted a day or two ago:

Throughout the world there has come to be a crystal-clear understanding regarding the dishonest, deceitful and duplicitous characteristics of United States central banking, investment banking and yes, even commercial banking.

The USA is widely perceived as little better than "a country made of con men" creating "fictitious wealth" and selling valueless paper, including but not limited to the currency.

Our nation and our world would be much better off letting this useless, rotten financial system be euthanized and put out of our misery.

Of course, that is not what is happening, which leads to the second problem. All the liquidity being poured in to save the financial system means that we are now headed down the path to classic hyper-inflation.  People have already seen prices escalating at the grocery store, but the worst is yet to come:

We've seen some quite remarkable movements in commodity markets the last two months. The graph below plots the price of 14 that I could get my hands on quickly through Webstract, with each price normalized at 100 for January 1. Every single one of these prices has risen dramatically since then. The most tame among the group has been zinc, which is up a mere 6.5% over the last two months, or 39% at an annual rate. Topping the group is wheat, up 46% over two months; I won't try to translate that one into an annual inflation rate because I don't want to scare you.

Infaltion14commodityFeb08

In a post on The Agonist a few days ago, Stirling Newberry has an excellent comment in a which he discusses three different types of inflation:

There are, empirically, three kinds of inflation, all of them recognized by Smith and Hume, though not labeled as such.

The first kind of inflation is macro-inflation. Macro-inflation is caused by an increase in currency base over supply of denominatable goods and services. . . .

Macro-inflation is the most clearly recognized kind of inflation, and the one which conservatives would like to blame all inflation on. It is capable of the greatest extremes of inflationary activity, hyper-inflation and deflationary spirals. As a consequence getting macro-inflation wrong is a deadly sin for a central banker.

The other kind of inflation which is easily labelled is micro-inflation. Micro-inflation comes from using monopoly power, withholding of information or other market anomoly, to increase the price of a good or service without a tendency to equilibrium. This last is important, because usually exercising market pricing power is either going to generate equilibrium, or is a move towards equilibrium from artificially low prices. . . .

The third kind, also recognized in Smith, is meso-inflation. Meso-inflation is when incentives become out of alignment between productive and unproductive labor in Smith, but more generally when incentives no longer send the correct signals to allocation of activity in an economy. A simple and obvious example of meso-inflation is a government over or under taxing. . . .

What we have been seeing is meso-inflation in the form of devaluation of the US Dollar to fund the war in Iraq and shifting of money from the middle class to the wealthy. . . .

All three kinds of inflation are not entirely evil. Some macro-inflation introduces necessary risk to holders of currency. That is it gets them off their butts and investing, lest they lose the buying power they have. Sucking money out of the mattress is a good thing, but once that is accomplished, macro-inflation has done its discounting work. Micro-inflation is often a periodic spur to innovation - when some good or service becomes a roadblock, the ability to increase its "customary rate of profit" without generating more competition, can force people to search for alternatives. Meso-inflation is, likewise, often a normal part of a market economy coming back into balance.

The key is whether the inflationary pressures are generating equilibrium pressures in return. If macro-inflation is spurring investment sufficient to increase production, then it is good. If micro-inflation is spurring the search for alternative supply, then it is good. If meso-inflation is reshaping the economy to produce a higher pareto optimality, and thus equilibrium with the increased profits being taken, it is good. Beyond this, they are bad.

The job of most policy makers most of the time is to maintain equilibrium in the broader economy, while promoting it in small sections of the economy where disruptive technologies are entering. Macro-stability is produced by micro-instabilities.

The underlying charge against late Greenspan and Bernanke is that they have created meso-inflationary pressures which do not tend towards equilibrium, and instead continue to spiral. The US spends on bombs and billionaires, devalues the dollar to pay for this, increasing the prices of resources, which increases the wealth of oilarchies and substitute production, which is met with spending on bombs (to get the resources, specifically oil) and billionaires (to keep assets in national hands), as well as greater protectionism (such as forbidding the Chinese from buying out American companies). This reduces production even more, while increasing demand for oil, which fires the cycle all over again.

So, essentially, what we've done over the past 30 years of deregulating banking and finance is create incentives for speculating and arbitrage, while creating disincentives for actual investment of capital in the real economy. We have shifted from industrial capitalism to financial capitalism. Rather than building a new economy of alternative energies and green technologies, Wall Street, U.S. elites, and the oilarchies have dug in to defend what they have. They have dug in to defend the past.

Other than the process of vetting a doctoral dissertation, defending the past is never a winning choice for an extended period of time. For Wall Street and U.S. elites, defending the past has led us into the worst financial crises since the Great Depression. But, worse, they are attempting to continue defending the past by pouring billions of dollars in new liquidity into the rotting financial system each day, creating a classic case of macro-inflation. I.e., wheat prices jumping 46% in just two months.

What this means is our standard of living will be declining ten to twenty percent a year, each year, for the next several years. Here is one of the first glimmers of how this is going to play out:

Soaring Food Prices Pose Threat to U.S. Aid Federal government to scale back donations and reduce number of recipient nations, complicating already strained efforts to combat global hunger.

Is a Democratic President likely to change all this? Each of us will have our own answer.

My answer at this time is "no." Because of a number of reasons. First, the financial system and the rich own the political process at this point, and for the foreseeable future. This explains why neither Obama nor Clinton are talking about how serious the financial and economic crises has become.

Second, the pain is going to be felt at the bottom first, and the poor and the working class have long been left out of the political equation in the United States.

Third, there is still something left of the safety net that was created after the first Great Depression. The Reagan Revolution and the Bushites may have done their best (worst) but the fact is that social security, veterans benefits, Medicare and Medicaid, and food assistance, though hobbled and enfeebled, still exist. As does unemployment insurance. If these programs had been terminated, we may have seen riots in the streets by now.

Fourth, the real economy of the U.S. already is, and has been, in a depression for the past three decades - manufacturing is about half what it used to be in the 1960s. Some industries have disappeared entirely, such as textiles, clothing, footwear, shipbuilding, printing equipment, power generating equipment, and foundries. Even U.S. employment in computer and peripheral equipment manufacturing is has fallen 17.8% in the past two decades, from 367,000 in 1990 to 199,000 in 2006. For the real economy, the old blues song applies: been down so damn long it looks like up to me.  

Fifth, a lot of liquidity has poured in, and will pour in, as large chunks of the U.S. economy are sold off to foreign investors - the Chinese, the Saudis, Dubai, etc. Since the crash began last summer, a notable new trend is that large chunks of the financial system have begun to be sold off. U.S. elites don't like, but they are desperate to save the system - and to keep you and me from upsetting their apple cart they've enjoyed for so long.

As Stirling Newberry wrote two days ago:

Are there solutions? At this point, not really. What's going to happen here is that the powers that be are going to inflation tax their way out of this downturn, that's what they keep saying they will do, and since they get to vote raises for their own salaries, there's no reason to believe they won't. After the downturn is over, it will be a very slow recovery. Then, at some point, you, the public, will be sick and tired of being sticked and fired, and will do almost anything to get rid of the corrosion of your money. You'll demand pain, and you will get it.

The question you have to ask yourself is, what are you going to get for this? I mean, several times in the last generation there have been bail outs and pain, and each time you've said that you are too busy watching American Idol to run things, so let the wealthy ruin them. The next no strings attached bail out will be your last, because after that, you'll be working for people in Dubai and Beijing.

And when monarchies and oligarchies give orders, they expect to have them carried out.


Display:
The third kind, also recognized in Smith, is meso-inflation. Meso-inflation is when incentives become out of alignment between productive and unproductive labor in Smith, but more generally when incentives no longer send the correct signals to allocation of activity in an economy. A simple and obvious example of meso-inflation is a government over or under taxing. . . .

Could you elaborate a bit on this type of inflation, for those of us economically challenged?

And here's a bit from the BBC that suggests the geographic scope of the problem.

The soaring cost of food is threatening millions of people in poor countries, the United Nations Food and Agriculture Organisation (FAO) has warned.

Food prices have risen an unprecedented 40% in the last year and many nations may be unable to cope, the agency says.

It is calling for help for farmers in poor countries to buy seeds and fertiliser, and for a review of the impact of bio-fuels on food production.

Another report indicated the rise in food prices in the previous year was 6%. Holy shit.

 Care to comment?

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Mar 3rd, 2008 at 04:28:47 AM EST
Just red Sterling Newberry's piece in the Agonist, and --I get it. More or less-- about Mesoinflation.

Thanks- have not dropped by the Agonist for a while-- will visit more often.
Good piece--yours and his.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Mar 3rd, 2008 at 04:53:49 AM EST
[ Parent ]
I am not sure that the distinction between macro and meso inflation is particularly useful.

I think that macro and meso inflations together combine as "fiscal" (government driven) inflation, whereas "micro" inflation may be characterised as a "monetary" (private banking sector driven) inflation.

I suspect that in a deficit-based economy at least hyperinflation may everywhere and always be a fiscal phenomenon.

Monetary inflation on the other hand, always leads to asset price bubbles, but I would be interested in recent examples of where these have led to hyper inflation - it seems to me that people borrowing against inflated assets is the sign of a deficiency of money, not a surfeit of it (Anglo Disease again).

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 3rd, 2008 at 05:23:19 AM EST
[ Parent ]
Brilliant Diary by the way, NBB.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Mar 3rd, 2008 at 05:25:53 AM EST
[ Parent ]
Newberry wrote something about meso-inflation a few months ago which I did not understand at all. Maybe I will go back and try to find it. But what struck me when I read his comment a few days ago is that it applies to the imbalance of incentives in favor of speculation and arbitrage, and against real investment.

Also, in the U.S., the tax system is imbalanced against wages and earnings, in favor of unearned income, such as capital gains. Newberrry wrote in the comment that meso-inflation can be used to hold down inflation, and I think this U.S. tax imbalance is an example - it holds down the wage side of classic cost-push inflation.

What also struck me is that Newberry wrote:

The root of meso-inflation is an imbalance of incentives. At a certain point this imbalance becomes so pervasive that it makes monetary policy useless.

Now read what Barry Ritholtz's Why the Fed Is Compelled to Lie to Congress.
http://seekingalpha.com/article/66530-why-the-fed-is-compelled-to-lie-to-congress
Here's what Bernanke would have to tell Congress if he were completely honest:
What is particularly worrisome to me is that as we have slashed interest rates 225 basis points, consumer loans -- mortgages and revolving credit -- have actually moved higher.
by NBBooks on Mon Mar 3rd, 2008 at 10:25:49 AM EST
[ Parent ]
... and away from profits does not directly undercut cost-push inflation ... indeed, to the contrary, any reduction in real wages leads to more impetus to push for recouping the loss in higher nominal wages, and that tax shift is a reduction in real wage.

Its the maintenance of slack labor markets that is the key to suppressing nominal wage increases ... no matter what the impetus to push for recouping lost wages, in the context of the extraordinarily slack labor markets that the US has been experiencing ... U6 unemployment above 8% at what was supposed to be the "peak" of the business cycle! ... there's little for workers as a group to do but to take it on the chin.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 5th, 2008 at 03:16:49 PM EST
[ Parent ]
And the people in charge have decided that the priority is to save the financial system.

since the people in charge own the financial system, and wax fat from its teat, was there ever any serious doubt that they would take this course?

bernanke is as painful to watch as alberto gonzales is.

good brains gone ba-a-a-a-d.

the heist's been a success, (dubai's booming), now for damage control.

captain carnage is holding the bridge so the getaway car can make tracks...  

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Mar 3rd, 2008 at 06:05:39 AM EST
The people in charge are owned by the financial system.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Mar 3rd, 2008 at 06:19:26 AM EST
[ Parent ]
yeah you're right, but then there is that revolving door that was in your old sig...the one between 'mere' and 'pogo'.

one's the lipstick, one's the pig- i had the terminals reversed.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Mar 3rd, 2008 at 09:17:39 PM EST
[ Parent ]
You mean Can the last politician to go out the revolving door please turn off the lights?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:29:10 AM EST
[ Parent ]
yup, i love them all.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Wed Mar 5th, 2008 at 07:31:04 AM EST
[ Parent ]
European Tribune - The Crash is past. Comes now Inflation.
Financial institutions have also been disappearing, especially a number of hedge funds, the most recent being this past week: Peloton, a London-based hedge fund specializing in asset-backed bonds.
This is actually very interesting.

FT.com / In depth - Peloton Partners in $2bn assets sale

Rumours of the crisis at Peloton's ABS fund, named best new fixed-income hedge fund last month, helped drive the high-quality mortgages in which it was invested to all-time lows this week as traders prepared for $9bn of assets to be dumped.

The losses are particularly striking because Peloton ABS was one of the big winners from the US subprime crisis, gaining 87 per cent last year after betting against low-quality mortgages.

But last month Ron Beller, co-founder, told the Financial Times that the firm had begun investing in "good-quality assets that are trading at deeply discounted prices" - including a large position in AAA-rated mortgages.

So, Peloton correctly was long high-quality assets and short subprime, and made a killing last summer. But then the high-quality ABS market also collapsed and they lost their shirt. Ouch.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Mar 3rd, 2008 at 06:22:04 AM EST
In Finnish.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 3rd, 2008 at 06:03:34 PM EST
[ Parent ]
... is that the world where this exists:
The first kind of inflation is macro-inflation. Macro-inflation is caused by an increase in currency base over supply of denominatable goods and services....

... and the world where this kind of things seems reasonable:

Meso-inflation is when incentives become out of alignment between productive and unproductive labor in Smith, but more generally when incentives no longer send the correct signals to allocation of activity in an economy.

... do not seem to necessarily be the same worlds.

Of course, there is no such inflation as the first kind ... its in that alternate universe where the government decides on the size of the money supply and response of the financial sector determines the interest rate.

So, use the term macro-inflation if we wish, but it refers to a process of dollar value GDP growth leading commercial banks to create money faster than new goods and services are produced ... if in flex-price markets, as price increases are required to bring more product into the market, and if in fix-price markets because they are reaching capacity constraints.

The second type of Newberry's inflation trio, micro-inflation, based on an increase in product market power, can stand as is. A structural increase in product market power means that a given cost structure is translated into a higher price structure, as those with product market power extract rents. If that increase in product market power is an ongoing process, those price increases should be ongoing as well.

The third type of Newberry's inflation, is in a world where the only kind of economic power is product market power, so that when there is a shift in income shares, its because "incentives" are out of whack. The inflationary wage price spiral is at its heart a tug of war between wage shares and profit shares, with a tug in the direction of wage shares being an increase in money wages, and an increase in the direction of profit shares being an increase in money prices. In increase in the intensity of that tug of war can be a source of inflation in the real world that corresponds most closely to Newberry's meso-inflation.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 3rd, 2008 at 06:40:47 AM EST
I think that "Profit" - or at least that type of Profit described by Adam Smith as  "Pernicious Gain"  (ie "Rentier" profit) - is one of the two causal mechanisms for inflation, the other being to base of Credit on deficit.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Mar 3rd, 2008 at 06:48:25 AM EST
[ Parent ]
In the U.S. you can buy TIPS--Treasury Inflation-Protected Securities--if you're worried about inflation. So many people are jumping into them, though, that the rates are horrible...

Millions of Americans are rushing into these securities to protect against rising prices. But this stampede has sent yields plunging to record lows. Today these bonds offer a poor long-term bet. TIPS, issued by Uncle Sam, are safe from default and guarantee a certain annual yield above the official inflation rate. So if inflation rises, the yield rises in lockstep.

http://online.wsj.com/article/SB120441379580905695.html?mod=googlenews_wsj
by asdf on Mon Mar 3rd, 2008 at 08:46:46 AM EST
You probably know that under Clinton the definition of the CPI was completely changed?

Some examples from ftd:
Cars, an international tradable goog, have become 6% cheaper between 1996 and now in the US according to the official CPI. In the Euro area in the same time cars have become 14% more expansive. Do you think the Dollar has rocketed in that time against the Euozone currencies? Anyhow this will only be adjusted for core inflation, which not includes e.g. oil and food prices and house renting has become 43% more expansive in that time (according to CPI), while the Shiller index increased 160%.

The trick is e.g. the hedonistic CPI calculation in the US. If a computer doubles its price, but has double the memory and processor capacity, in the US it counts as no inflation. In Europe a computer is a computer. For cars probably kW or whatsoever is used to determine the 'hedonistic use'.
Another trick is geometric CPI calculation. Let's say you have big cars and small cars and initially you both are bought to 50%. So now big cars become more expensive, but small cars don't because e.g. a Tata motors introduces a new cheaper car in the market. Then the US CPI calculation says, Ok as you can substitute aone type of car with another type of a car, likely more people will buy now small cars instead of big cars and you end up e.g. with only 35% buyers of a big car for the CPI calculation, for sure a Porsche driver won't care that he now drives a Tata. Or e.g. with more people eating the 1$ Burger instead of the steak.

If you want your money secured with something closer to what you would accept as CPI, you should buy inflation protected bonds denominated in Euro with the ECB inflation measure.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Mon Mar 3rd, 2008 at 09:31:36 AM EST
[ Parent ]
Buy eurobonds or something instead. Eh...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 3rd, 2008 at 06:06:34 PM EST
[ Parent ]
If one has a special reason to have inflation adjusted bonds, one should take inflation adjusted bonds, they exist in the Euro area as well.
If there is no special reason for inflation adjustment, one can as well buy US Muni bonds, they are as well very safe and have a higher return. There is no guarantee that there will be a high inflation in the future, although it can happen. Some serious economists think deflation could be as well a problem.
The diary is actually incorrect when it states, that the ECB has flooded the marked with extral liquidity. At the same time when lending out worth about half a trillion dollars, it was borrowing back from the market a very similar sum. The ECB did not introduce new liquidity. The Fed didn't as well. The reason was that the interbank lending rates were much above what they were targeted by the ECB. So in the (correct) assumption, that none of the banks to which it was lending will go bankrupt during the time it lends, the ECB only revived the interbank lending, which stopped, because the banks lost confidence into each other.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Mon Mar 3rd, 2008 at 06:32:37 PM EST
[ Parent ]
The rates are horrible, or not, depending on your inflation forecast.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:43:53 AM EST
[ Parent ]
So the financial system has crashed but, unlike 1929, the elites have gamed the system in such a way that they walk away practically unscathed and it's the poor, working and middle classes who take the hit.

And what's worse is that the quip about american Idol is correct. Even now many, both in Britain and the US, will be outraged if you suggest that there are other, better ways of organising things. So long as there are people worse off to compare themselves to, people don't seem to mind suffering absolute decline in wealth.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Mar 3rd, 2008 at 10:08:48 AM EST
Excuse me?

In 1929 the elites lost some of their shirts, but over the following 10 years it was the poor, working and middle classes who took the hit.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:27:34 AM EST
[ Parent ]
the following links for further reading.

Any solution is going to require the imposition of taxes on all financial transactions in order to dampen speculation and put economic incentives back on course to favoring real investment:

Currency Transactions Tax - List of Papers, including  the original Tobin Tax proposal

Destabilizing Speculation and the Case for an International Currency Transactions Tax

Why the U.S. economy now depends on asset inflation bubbles - Thomas Palley

More reading on why the financial system is inherently bad

The DailyKos diary is at http://www.dailykos.com/story/2008/3/3/9553/67940/30/467808

by NBBooks on Mon Mar 3rd, 2008 at 10:11:09 AM EST
First there is a big difference between 1929 and the present. Several of the most important changes have to do with monetary policy.

  1. The world is no longer on the gold standard
  2. Every (developed or developing) country has a central bank
  3. Central banks now work together through international agencies which didn't exist before
  4. US and European populations have safety nets available
  5. There is a ton of money sloshing around in the second world which can move into the first world whenever it is felt that prices have gotten cheap enough.

Yes, there will be inflation in the US, in fact it is already underway, but the consequences will not harm the financial industry very much. What will happen is the normal consumers will become more impoverished since they no longer have organized labor to push for wage increases as was the case during the 1970's.

One can never destroy the plutocracy through adverse economic changes. The nomenklatura of the USSR are now the new capitalists. Krupp and the other big industrialists came through WWII still big industrialists.

On a slightly different topic there is a new web site which seems to want to set itself up as a meeting place for economic discussions, not constrained by the interests of the economists who run the more visible blogs. I would suggest crossposting this diary there, there probably won't be many comments, but perhaps a community can get started if enough people do it.

http://www.economicpopulist.org/

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Mar 3rd, 2008 at 10:53:49 AM EST
The Federal Reserve's rescue has failed - Telegraph
The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.



Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Mar 3rd, 2008 at 11:11:55 AM EST
So the problem is debt deflation, not inflation.

Granted, any attempt to rescue the credit system for the benefit of the "real" economy will make good on some (most?) of the speculative (hence inflationary?) asset bubble of the past five years, but I believe that is necessary.

A "Second New Deal" would ensure that measures are put in place to ensure the impact of inflation on the working poor, who had no part in causing this problem, is minimized, and that those responsible for the financial asset bubble pay the cost of that social support.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:25:56 AM EST
[ Parent ]
Debt deflation is the problem for the financial markets; inflation is the penalty for us proles.

I second your "Second New Deal" idea, though I prefer Chris' revolution.

Related remark - John Williams (shadowstats) predicted this past year's performance in December, 2006. I wrote to him the other day, trying to gauge any interest in co-ops or re-regulation. He's a sort-of libertarian, but he said that such approaches sound interesting to him now - except that it's too late. Stagflation = death this time - no way out.

Robert Reich has been preaching higher taxes on the rich and earned-income-credit for the poor lately. Sounds OK to me, too.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Mar 5th, 2008 at 04:34:12 PM EST
[ Parent ]
Well, the problem with debt deflation is that it kills credit and this kills the "real" economy. So it is "our" problem, too, even if indirectly.

I don't see why there would have to be no way out of stagflation this time around.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 04:43:39 PM EST
[ Parent ]
My point was not comprehensive; it was just looking at the immediate relationships. It's almost always "us" that face the problems ultimately.

As to John Williams' comment, I was just musing. Actually, I was amused that he would entertain the idea of co-ops or regulation, given his basic philosophy. Then he was sort-of emphatic that we were submerged in quick-shit. No, I don't agree with him about the future - just the present.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Mar 5th, 2008 at 07:20:49 PM EST
[ Parent ]
You know NBBooks, I happen to think you are a genius. But...

On the subject of inflation here, I believe you are listening to the wrong voices.  Why?

Inflation is often a fiscal / monetary problem--but not this time.  This time, the rising costs of commodities like wheat and oil are being driven by something much more basic--demand is exceeding supply for real reasons such as increasing populations and a finite biosphere.

Because this is true, any advice from the banksters and their idiot economists will almost certainly make the situation MUCH worse.  You notice that none of the standard remedies proposed by the central bankers is "working."  (whatever that means)

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Mon Mar 3rd, 2008 at 01:34:19 PM EST
Ahh, there you are. I wanted to link to your article on financial capitalism versus industrial capitalism, but could not find it on your site. And I could not find the email in which you gave me the URL, so I would like it again.

What I liked about that graph with 14 commodities in it is that it shows there is a general phenomena occurring. I left out mentioning that commodities are also being pushed up by investors seeking to profit on the rise. In the interests of brevity amd all that. That's why I included the link to Thomas Palley's Destabilizing Speculation and the Case for an International Currency Transactions Tax:

A third challenge comes from the literature on herd behavior (Banerjee 1992; Palley 1995), which posits that market investors may act as a herd. Each individual acts rationally from his or her own standpoint, but collectively they behave as a herd, each following the actions of others for no reason other than the fact that others are doing it. In this case, the "behavior of others" becomes the market fundamental, and the actions of speculators can trigger movements in market prices through random dealings that have no relation to underlying economic conditions.

I'm not a genius; I just read people like you and Palley and Jerome and Migeru and Chris Cook and hosts of others I can't all name at once.

Each of these damn diaries could easily turn into a book. The really annoying thing the past two months is when I have tried to write a book, I get writer's block and research dreary.

by NBBooks on Mon Mar 3rd, 2008 at 02:04:19 PM EST
[ Parent ]
In other words, yes, there are a number of factors pushing up some commodities, such as those you site for wheat. Which explains why wheat is so much more of an increase than the other commodities. But all commodities are going up.
by NBBooks on Mon Mar 3rd, 2008 at 02:06:35 PM EST
[ Parent ]
The essay you are looking for can be found right here at this wonderful site:

http://www.eurotrib.com/story/2007/1/18/191310/123

And even though my web site is undergoing a major redesign, it address is, and will be:

http://elegant-technology.com/kossack_econ_1.html

Just a thought--maybe you should create a book as a collection of your more recent essays.  We should all have such writer's block ;-)

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Tue Mar 4th, 2008 at 12:16:57 AM EST
[ Parent ]
A fine diary to mention two related news items. The first which I do not have at my fingertip is a Bloomberg bulletin on the growth of "vulture fund" mortgage shops in the US. A private equity group of (former MBers, traders, IBers) raise cash to purchase distressed notes individually at deep discount, resets rate terms, collects payments until market value appreciation of the property >15%, iirc, determines the sale date of the note. The example in the story is a Sonoma, CA home, 2005 purchase price $1.5M. This market-based solution, guaranteed by new and unofficial FHA junk bond status, is GWB's dream.

Then there is this leading indicator, " 4 luxury model homes ablaze in Wash". The new title is "Ecoterror link eyed in Wash. fires".

WOODINVILLE, Wash. - Fires burned four multimillion-dollar show homes in a suburb north of Seattle Monday, and authorities found a spray-painted sign purportedly left by a radical environmental group at the scene.

The sign, a white sheet that had the initials of the Earth Liberation Front in scraggly red letters, mocked claims the luxury homes on the "Street of Dreams" were environmentally friendly, according to video images of the sign aired by KING-TV.

[scrubbed: "Built Green? Nope black!" the sign said.]

The sign, a sheet with red scraggly letters, said "McMansions in RCDs r not green," a reference to rural cluster developments.
[...]
The blazes are suspicious because they were set in multiple places in separate houses, said Chief Rick Eastman of Snohomish County District Seven. Eastman confirmed that the ELF sign was found at the scene of the fires in the community north of Woodinville, where some homes were still under construction.

This article has been "updated" for refresh with description of "green" building methods within the hour I first sited it. Oddly enough, the last alleged ELF-related crime in the state was a "string of arsons" from the mid-'90s to 2001.

Diversity is the key to economic and political evolution.

by Cat on Mon Mar 3rd, 2008 at 01:59:19 PM EST
Industrial and corporate lending is still working pretty good, and even if it didn't corporations have strong balance sheets and low debt.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 3rd, 2008 at 05:57:01 PM EST
I think the financial system has stalled, not crashed. There's quite a bit of wait-and-see happening, and credit is very much harder to come by than it was a year ago - which is hardly a bad thing considering how money was being loaned to anyone who could pass a medical test for the most rudimentary evidence of brain activity.

But the system as a whole is still functioning. Money - fictional as it is - is still being counted.

We'll know the system has crashed when trade goes back to barter and/or gold.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 3rd, 2008 at 08:29:07 PM EST
Well, there is an immense amount of existing credit = money swilling about the system (particularly hedge funds and sovereign wealth funds), and that is of course where people are looking for finance now that credit creation by intermediaries is (terminally, IMHO) fucked.

Bilateral "Trade" credit will always be a continuing fact of commercial life.

But I do think we have seen Peak (Bank) Credit.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 4th, 2008 at 06:14:06 AM EST
[ Parent ]
The Crash of 29 lasted a few days to a few weeks depending on how you measure it, but then the markets continued sliding down for many years.

Maybe the crash has already happened, maybe not.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:42:10 AM EST
[ Parent ]

  It is nice (but very scary) to see this so neatly summed up. I've taken steps myself, changing careers to something green and moving out to the country. I think we'll weather it better here than most, but for the rest of the United States ... yikes!

by SacredCowTipper (sct@strandedwind.org) on Tue Mar 4th, 2008 at 10:59:47 AM EST
It is getting increasingly difficult not to stumble upon conspiracy references while browsing the internet.

When it comes to money - the modern source of power - we must surely expect to meet the forces that historians most often fail to discuss -- [the] precise means by which the dominant class and those who serve it go about accomplishing their goals.

Here is a rather long story of "natural" economic powers - please try to enjoy:

HOW THE CITY OF LONDON CREATED THE GREAT DEPRESSION
by Webster G. Tarpley
December, 1996

The thesis of this paper is that the great economic and financial cataclysm of the first half of the twentieth century, which we have come to know as the Great Depression, was caused by the Bank of England, the British government, and the City of London. The potential for the Great Depression derived from the economic and human destruction wrought by World War I, which was itself a product of British geopolitics and especially of the British policy, exemplified by King Edward VII, of creating an encircling anti-German alliance in order to wage war. The economic destruction of Europe was continued after 1918 by the Peace of Paris (Versailles, St. Germain, Trianon, Neuilly, Sevres) imposed by the Allies on the defeated Central Powers. Especially important here were the 55 billion gold dollars in reparations inflicted on defeated Germany, along with the war debt burden of the supposedly victorious powers themselves. Never during the 1920's did world trade surpass the levels of 1913. Reparations and war debt were a recipe for economic stagnation.

The ravaged post-war, post-Versailles world of the 1920's provides the main backdrop for the following considerations:

    1. The events leading to the Great Depression are all related to British economic warfare against the rest of the world, which mainly took the form of the attempt to restore a London- centered world monetary system incorporating the gold standard. The efforts of the British oligarchy in this regard were carried out by a clique of international central bankers dominated by Lord Montagu Norman of the Bank of England, assisted by his tools Benjamin Strong of the New York Federal Reserve Bank and Hjalmar Schacht of the German Reichsbank. This British-controlled gold standard proved to be a straightjacket for world economic development, somewhat along the lines of the deflationary Maastricht "convergence criteria" of the late 1990's.

    2. The New York stock exchange speculation of the Coolidge-Hoover era was not a spontaneous phenomenon, but was rather deliberately encouraged by Norman and Strong under the pretext of relieving pressure on the overvalued British pound sterling after its gold convertibility had been restored in 1925. In practice, the pro-speculation policies of the US Federal Reserve were promoted by Montagu Norman and his satellites for the express purpose of fomenting a Bubble Economy in the United States, just as later central bankers fostered a Bubble Economy in Japan after 1986. When this Wall Street Bubble had reached gargantuan proportions in the autumn of 1929, Montagu Norman sharply cut the British bank rate, repatriating British hot money, and pulling the rug out from under the Wall Street speculators, thus deliberately and consciously imploding the US markets. This caused a violent depression in the United States and some other countries, with the collapse of financial markets and the contraction of production and employment. In 1929, Norman engineered a collapse by puncturing the bubble.

    3. This depression was rendered far more severe and, most importantly, permanent, by the British default on gold payment in September, 1931. This British default, including all details of its timing and modalities, and also the subsequent British gambit of competitive devaluations, were deliberate measures of economic warfare on the part of the Bank of England. British actions amounted to the deliberate destruction of the pound sterling system, which was the only world monetary system in existence at that time. The collapse of world trade became irreversible. With deliberate prompting from the British, currency blocs emerged, with the clear implication that currency blocs like the German Reichsmark and the Japanese yen would soon have to go to war to obtain the oil and other natural resources that orderly world trade could no longer provide. In 1931, Norman engineered a disintegration by detonating the gold backing of the pound sterling.

    4. In the United States, the deliberate British default of September 1931 led, given the do-nothing Hoover Administration policies, directly to the banking crisis of 1932-33, which closed down or severely restricted virtually every bank in the country by the morning of Franklin D. Roosevelt's inauguration. If Roosevelt had not broken decisively with Hoover's impotent refusal to fight the depression, constitutional government might have collapsed. As it was, FDR was able to roll back the disintegration, but economic depression and mass unemployment were not overcome until 1940 and the passage of Lend-Lease.


by das monde on Tue Mar 4th, 2008 at 10:14:50 PM EST
Fascinating thesis.
I'm not enough of an economic historian to critique it, but a couple questions come to mind.

  1. Motive. Could you or someone better versed than I discuss possible motives for such a draconian plan? Why do this?

  2. Opportunity. This attributes a huge amount of power to Norman personally, and many attempts to describe collusion fall apart on the rocks of complexity--could this really, practically, be done?

  3. Cost-benefit. Do the potential gains surpass, by a sufficient margin, the risks to be endured if the scheme  runs amok?

  4. How many people would have to be "in the know"? Is this plausible? Are they really smart enough to make it work? Is ANYONE really able to execute a plan on this scale reliably?

  5. Imagine the decision-making process involved. Norman (or his associates) propose an incredibly audacious and risky plan to destabilize the world economy and the world banking system, to the traditionalist- conservative, highly immobile political forces that at least partly controlled great Britain at the time, ---and they say- what?
"Bloody good idea, old boy. We'll just get our bags packed for the move to Australia in case it should encounter a hiccup."

The political elite do indeed conspire to arrange things to their advantage-- but not generally stupidly. The great flaw in historical interpretations that assume widesdpread collusion to accomplish audacious crimes is that they assume either that the conspiratorws are fools--or geniuses. Or both.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Mar 5th, 2008 at 02:41:00 AM EST
[ Parent ]
I wish to know more sources and opinions on this analysis as well.

Nevertheless, banking is an interesting industry. It has been gaining fairy-tale profits from wars right from inception on any level. The compound interest math was destabilizing civilizations from Babylon and earlier. (See the most recent audio "History of Debt and Credit" and articles on debt on this website.)    

The information that is circulating now wider is on the US banking system. You know that the US Federal Reserve is not a federal institution but a private bank, right? See Chapter 3 of the Zeitgeist movie, and Aaron Russo's film, for some shocking brain washing.

Your points are most logical, of course. I see two sources for possible determination towards totalitarian control. One source is "tradition": the model exists conceptually and in historical practice. There might be no other just as determined model for the elites to sustain their position. The model has many functional and well developed parts; by keeping the public busy with entertainment, wealth race and/or survival competition, many people can be "masterly" involved into the system without their full realization. The core "conspirators" could be just a few key shareholders of largest financial, war building and media corporations.

The second source is (in my opinion) a kind of primitive Darwinist understanding. I do imply here some fatal influence of Darwin's (and Marx's and Smith's) ideas... The existential question is: what a super-wealthy, super-influential person to do? Darwin appears to give an answer: protect and magnify your competitive advantage; use all the power you have, and use it for yourself, and do it aggressively. Smith kind of concurs, while Marx gives a scare that your wealth could be taken away. Probably, we do not appreciate enough how primacy of self-interest is re-ingrained into the 6 billion logic braincenters, regardless of how self-interest is really realized in the emotional-instinctive braincenters and the nature. Our perception of self-interest rationality may seem to be necessarily universal, but I dare to suspect that it has different quality since the 19th century. I am working on, let's call it ambitious, project here... What I can say now, is that emphatic protection and magnification of competitive advantages does not appear to be a norm in nature; neither is conspicuous control of resources, nor tragedy of commons situations.  Stretching up your own food chain is a bad idea. Competitive advantage is taken far too seriously. The "Monopoly"/"Cash Flow" set-up of modern economies and politics will not end happily neither for loosers nor the few "winners". The self-interest as we commonly see it should turn out to be a big delusion...

by das monde on Wed Mar 5th, 2008 at 04:47:12 AM EST
[ Parent ]
 
The self-interest as we commonly see it should turn out to be a big delusion...

understatement of the millennium!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Mar 5th, 2008 at 07:51:33 AM EST
[ Parent ]
the founding of the United States means. In the last letter he wrote before he died (on July 4 !, the same day John Adams died; something providential, mystical, and / or karmic about that!), Thomas Jefferson wrote:
May it be to the world, what I believe it will be, (to some parts sooner, to others later, but finally to all,) the signal of arousing men to burst the chains under which monkish ignorance and superstition had persuaded them to bind themselves, and to assume the blessings and security of self-government. All eyes are opened, or opening, to the rights of man. The general spread of the light of science has already laid open to every view the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride them legitimately, by the grace of God.
-Thomas Jefferson, letter to Roger C. Weightman, June 24, 1826

Why did the overwhelming majority of English elites support the Confederacy in the U.S. Civil War? Was it because they desired to finally see an end to the "dangerous experiment" in self-government? Could such "feelings" (better word, I think, is "intentions") exist some nine decades after American independence was violently wrested from the oligarchs' grasp?

If you think of it in these terms - that there are some oligarchs who despise the idea of the rabble governing themselves, a lot of things in history make sense. Consider it a simple case of colonialism versus anti-colonialism. Then consider the lengthy excerpt below  from Elliott Roosevelt's 1946 book, As He Saw It. Elliott accompanied his father to all the major conferences with Churchill, and later, Stalin. In FDR's and Churchill's face to face, the "Atlantic Conference" on board the U.S. cruiser Augusta in August, 1941, it immediately became apparent that the post-war war plans of the United States and Britain were in complete conflict. Amazingly, this conflict is glossed over or even ignored by most American historians, even though the conflict over post-war plans had global ramifications that we still live with today.

Last night, Churchill had talked without interruption, except for questions. Tonight, there were other men's thoughts being tossed into the kettle, and the kettle correspondingly began to bubble up and-once or twice--nearly over. You sensed that two men accustomed to leadership had sparred, had felt each other out, and were now readying themselves for outright challenge, each of the other. It must be remembered that at this time Churchill was the war leader. Father only the president of a state which had indicated its sympathies in a tangible fashion. Thus, Churchill still arrogated the conversational lead, still dominated the after-dinner hours. But the difference was beginning to be felt.

And it was evidenced first, sharply, over Empire.

Father started it.

"Of course," he remarked, with a sly sort of assurance, "of course, after the war, one of the preconditions of any lasting peace will have to be the greatest possible freedom of trade."

He paused. The P.M.'s head was lowered; he was watching Father steadily, from under one eyebrow.

"No artificial barriers," Father pursued. "As few favored economic agreements as possible. Opportunities for expansion. Markets open for healthy competition." His eye wandered innocently around the room.

Churchill shifted in his armchair. "The British Empire trade agreements," he began heavily, "are..."

Father broke in. "Yes. Those Empire trade agreements are a case in point. It's because of them that the people of India and Africa, of all the colonial Near East and Far East, are still as backward as they are."

Churchill's neck reddened and he crouched forward. "Mr. President, England does not propose for a moment to lose its favored position among the British Dominions. The trade that has made England great shall continue, and under conditions prescribed by England's ministers."

"You see," said Father slowly, "it is along in here somewhere that there is likely to be some disagreement between you, Winston, and me. I am firmly of the belief that if we are to arrive at a
stable peace it must involve the development of backward countries. Backward peoples. How can this be done? It can't be done, obviously, by eighteenth-century methods. Now-"

"Who's talking eighteenth-century methods?"

"Whichever of your ministers recommends a policy which takes wealth in raw materials out of a colonial country, but which returns nothing to the people of that country in consideration. Twentieth-century methods involve bringing industry to these colonies. Twentieth-century methods include increasing the wealth of a people by increasing their standard of living, by educating them, by bringing them sanitation-by making sure that they get a return for the raw wealth of their community."

Around the room, all of us were leaning forward attentively. Hopkins was grinning. Commander Thompson, Churchill's aide, was looking glum and alarmed. The P.M. himself was beginning to look apoplectic.

"You mentioned India," he growled.

"Yes. I can't believe that we can fight a war against fascist slavery, and at the same time not work to free people all over the world from a backward colonial policy.

"What about the Philippines?"

"I'm glad you mentioned them. They get their independence, you know, in 1946. And they've gotten modem sanitation, modem education; their rate of illiteracy has gone steadily down. . . ."

"There can be no tampering with the Empire's economic agreements."

"They're artificial. . . ."

"They're the foundation of our greatness."

"The peace," said Father firmly, "cannot include any continued despotism. The structure of the peace demands and will get equality of peoples. Equality of peoples involves the utmost freedom of competitive trade. Will anyone suggest that Germany's attempt to dominate trade in central Europe was not a major contributing factor to war?"

It was an argument that could have no resolution between these two men. The words went on, but the P.M. began again to get a tighter grip on the conversation. He no longer spoke sentences, he spoke paragraphs, and Commander Thompson's worried, glum look began to clear. The P.M. gathered confidence as his voice continued to fill the room, but there was a question un answered here, and it would remain unanswered through the next conference these men would join in, and the next after that. India, Burma-these were reproaches. Father, having once mentioned them aloud, would keep reminding his British hearers of them, sticking his strong finger into sore consciences, prodding, needling. And it was not from perversity, either; it was from conviction.
Churchill knew that; that was what worried him most.

Smoothly he changed the course of the conversation, smoothly he involved Harry Hopkins, my brother, me-- anyone to keep the subject away from Father and his mention of the colonial question and his nagging insistence on the inequalities of the Empire's favored trade
agreements.

It was after two in the morning when finally the British party said their good nights. I helped Father into his cabin, and sat down to smoke a last cigarette with him.

Father grunted. "A real old Tory, isn't he? A real old Tory, of the old school.'

"I thought for a minute he was going to bust. Pop."

"Oh," he smiled, "I'll be able to work with him. Don't worry about that. We'll get along famously."

"So long as you keep off the subject of India."

"Mmm, I don't know. I think we'll even talk some more about India, before we're through. And Burma. And Java. And Indo-China. And Indonesia. And all the African colonies. And Egypt and Palestine. We'll talk about 'em all. Don't forget one thing. Winnie has one supreme mission in life, but only one. He's a perfect wartime prime minister. His one big job is to see that Britain
survives this war."

"I must say he sure gives the impression he's going to do Just that."

"Yes. But you notice the way he changes the subject away from anything postwar?"

"It's embarrassing, the things you were talking about. Embarrassing to him."

"There's another reason. It's because his mind is perfect for that of a war leader. But Winston Churchill lead England after the war? It'd never work."

As it turned out, the British people agreed with Pop on that one.

--Elliott Roosevelt, As He Saw It, 1946, pages 35-39.

Unfortunately, FDR did not survive the war, and U.S. foreign policies were radically altered from FDR's vision, with a proto-colonialist tilt that was firmly set in place in Indochina, with a series of disastrous results that continue to this day.

by NBBooks on Wed Mar 5th, 2008 at 10:30:33 AM EST
[ Parent ]
NBBooks:

Churchill shifted in his armchair. "The British Empire trade agreements," he began heavily, "are..."

Father broke in. "Yes. Those Empire trade agreements are a case in point. It's because of them that the people of India and Africa, of all the colonial Near East and Far East, are still as backward as they are."

Churchill's neck reddened and he crouched forward. "Mr. President, England does not propose for a moment to lose its favored position among the British Dominions. The trade that has made England great shall continue, and under conditions prescribed by England's ministers."

This, and the reference to "eighteenth century methods" reminds me of
The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries. — Adam Smith in The Wealth of Nations


We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 10:38:59 AM EST
[ Parent ]
There is some truth to this. I just finished reading John K. Galbraith's "The Great Crash 1929" and he does blame the 1925 decision by Winston Churchill (then Chancellor of the Exchequer) to set the Pound exchange rate (on the gold standard) at pre-WWI levels.

Galbraith wastes no time calling Churchill an economic ignoramus (funny, that, appointing such a person to be Chancellor) and attributes the chosen rate (nearly $5 to the pound) to sentimental attachment to a 15-year-old figure. It may have been that the figure was suggested to him by people like Lord Montagu Norman, but Galbraith doesn't go into that.

What happened then was that the European central banks pressured the US to raise its interest rates to allow them to get rid of their surplus capital. Devaluation of the European currencies would have been the proper course of action in this case, I suppose, but the UK had just adopted the gold standard and the exchange rate was not supposed to be changed every 6 months.

The resulting rush of money into the US fuelled the speculative bubble leading up to 1929.

The rate cut by Montagu Norman in the autumn of 1929 is also not mentioned by Galbraith. In fact, he clearly states that the bull market ended on Labor Day weekend (first weekend of September, for those non-USians out there) though it took two months to crash.

It also appears that in 1929-32 Hoover actually did all that he was allowed to do by the establishment, which was intent on fiscal conservatism and keeping inflation down.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:40:04 AM EST
[ Parent ]
Are required reading for an economic numbskull such as myself. What these diaries do is deliver an overview that I can grasp, and also relate to my other interests in states of organization.

You can't be me, I'm taken
by Sven Triloqvist on Wed Mar 5th, 2008 at 04:25:10 AM EST
I have a problem with this...
So, this is it. The financial system has crashed. Now we're finally seeing the Republican's cherished "trickle down" theories begin to work - and with a vengeance- as the damage spreads into the real economy. The basic mechanism for this is the contraction of credit, which is cutting off funds for real economic activity. Goldman Sachs and others estimate that the financial crash has contracted lending by about $2 trillion--and our economy is $15 trillion in GDP. Banks and other institutions are simply unwilling to lend. Here's the results we know of so far:
This paragraph is preceded by a chart of commercial paper (showing a trough in 2003 and growth since, with a collapse in mid-2007) and followed by charts of new and existing home sales and mortgage rates. The implication is that the collapse of the housing bubble is due to the unwillingness of banks to lend [to each other], which is a result of the collapse of the commercial paper market. However, the housing market charts peak in 2005, two years before the collapse of Asset-Backed Commercial Paper which has dried up interbank credit.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:04:35 AM EST
You get a gold star - the first one to notice, er, at least comment, on that.

I'm not sure if the decline in home sales beginning in 2005 reflects the fact that stagnating wages and earnings were showing up as a decline in home sales that early, or if some regulators were starting to tighten the screws that early. Also, there was Greenspan raising interest rates off the 1.0% floor he had brought them down to after the dot com bust.  I'm not sure of the dates of the interest rate increases, but I think they began in 2004.

by NBBooks on Wed Mar 5th, 2008 at 09:26:17 AM EST
[ Parent ]
Here you go. These charts are in Leveraged Losses: Lessons from the Mortgage Market Meltdown presented to the US Monetary Policy Forum Conference, released February 29, 2008. See the report for a brief description of what you're looking at in each chart. But it is very clear that something in the financial system went sproinnnggg in July-August 2007.
2007Crash-LIBORRate
2007Crash-LIBORvSwap
2007Crash-JumboMortgs
2007Crash-ABX

I think what it all reflects is that whenever you let the financial and monetary system leave the real economy behind by running off and doing its own thing - speculating, creating and trading "risk management", speculating some more, trading for its own accounts, arbitraging the "noise" in the markets, etc. - you end up with a financial and banking crisis. Because any and all financial instruments must, in the final analysis, be paid for from the physical production of the real economy. Think of financial instruments as claims for payment. When there is a roughly 1.5 to 1 ratio, things are relatively sane. But when you get to where we are today, where there are $60 in claims of payment to every $1 in GDP, there is bound to be a "hiccup."
StockTurnover
NegativeSavingsRate
savingvsdebt

by NBBooks on Wed Mar 5th, 2008 at 10:06:49 AM EST
[ Parent ]
European Tribune - The Crash is past. Comes now Inflation.
On a number of blogs last week, a number of people asked what can be done. Well, the truth is the chance for fixing it - at least fixing it in a way we might find acceptable - is past. Bush, Paulson, and Bernanke, and the governments and central banks of the G-7 have already embarked upon the course they will follow over the next year to three years - they are inflating.
One of the causes of the Great Depression was the pig-headed monetary policy that was followed in the aftermath of the crash of 1929. "Fiscal responsibility", balanced budgets, high interest rates, concern for inflation above concern for employment, etc.

At least in this case, allowing the $2tn of credit to just disappear will, as you say, contract the economy substantially. When loans are deafaulted on and written off, the money they represent ceases to exist, therefore it is not necessarily a bad thing to inflate to get that money back into existence.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:09:06 AM EST
I think it might be an idea to do a sort of "meta Diary" on the subject of "Peak Credit? Discuss."

Linking to the Diaries which address the subject. A test for your editorial skills......

I am not sure what genius among our number came up with "Peak Credit" but it intuitively rings true.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Mar 5th, 2008 at 06:52:15 AM EST
[ Parent ]
It includes this:

'Bubbles' Greenspan (debt, money & growth)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 5th, 2008 at 07:21:55 PM EST
[ Parent ]
Ummm...as you say....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Mar 5th, 2008 at 08:44:57 PM EST
[ Parent ]
European Tribune - The Crash is past. Comes now Inflation.
Remember that the week before Christmas a number of central banks - the Fed, the Bank of England, the National Bank of Switzerland, the Central Bank of Europe, the Bank of Canada and a few others, had a coordinated effort to prop up the financial markets. In three days they poured nearly $1 trillion of liquidity into the system. Let me repeat that, folks: $1 trillion in three days. Since then, the U.S. Federal Reserve alone has been pouring in an estimated $15 billion each week, largely through the Fed's emergency Term Auction Facility launched December 17.
If I remember correctly, the ECB loaned two-week money. That trillion of liquidity is now gone. In fact, through the interest paid on the loans by the banks which needed liquidity, some additional money has been taken out of circulation.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:11:10 AM EST
European Tribune - The Crash is past. Comes now Inflation.
One of the side effects of the TAF is that U.S. bank reserves have fallen below zero; there is currently a quiet debate going on whether or not negative bank reserves is a problem or not, given the emergency measures the Fed has implemented.  
I don't understand how it is possible for reserves to be negative, can you explain how this happened? The US (unlike the UK) does have a reserve requirement. Is the Fed not enforcing its own banking regulations? Are the banks now technically insolvent?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:12:37 AM EST
European Tribune - The Crash is past. Comes now Inflation.
Whatever. The point is, this is the crash. We're in it now. And the people in charge have decided that the priority is to save the financial system. And they're pouring in liquidity in do it.
What would have happened if the liquidity injections you denounce hadn't taken place?

In fact, it appears that the ECB has been the most aggressive at injecting liquidity and the BoE the least aggressive. The result: no bank failures in the Eurozone, the Northern Rock disaster in the UK. And, as Chris Cook has revealed in his diaries, the BoE has even made matters worse by rescuing Northern Rock by reducing its regular lending to the rest of the banks by the same amount, thereby contributing to contracting credit and ensuring it would be impossible for any UK bank to actually take over NR even if they wanted to.

European Tribune: Bank of England & Northern Rock (by ChrisCook on February 12th, 2008)

There was then this startling admission

"These balances are a form of 'central bank money' and the Bank has taken steps to offset the creation of central bank money by lending less in its regular market operations than it would otherwise have done."

that the banking system is being starved of liquidity as a result of the (hugely profitable) harvesting by the Bank of England of "seignorage" in respect of its loans to Northern Rock. These profits arise out of the fact that the Bank of England is lending to Northern Rock at base rate (plus an accumulating penalty payable in due course to the Treasury) money which it is funding at zero cost.



We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:17:25 AM EST
European Tribune - The Crash is past. Comes now Inflation.
So, essentially, what we've done over the past 30 years of deregulating banking and finance is create incentives for speculating and arbitrage, while creating disincentives for actual investment of capital in the real economy. We have shifted from industrial capitalism to financial capitalism. Rather than building a new economy of alternative energies and green technologies, Wall Street, U.S. elites, and the oilarchies have dug in to defend what they have. They have dug in to defend the past.
A textbook case of the Anglo Disease?
Fourth, the real economy of the U.S. already is, and has been, in a depression for the past three decades - manufacturing is about half what it used to be in the 1960s. Some industries have disappeared entirely, such as textiles, clothing, footwear, shipbuilding, printing equipment, power generating equipment, and foundries. Even U.S. employment in computer and peripheral equipment manufacturing is has fallen 17.8% in the past two decades, from 367,000 in 1990 to 199,000 in 2006. For the real economy, the old blues song applies: been down so damn long it looks like up to me.  


We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:21:39 AM EST
why not tax forex and use that money to fund the u.n.?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Wed Mar 5th, 2008 at 07:52:32 AM EST
You just had to be poor or working class to notice.

What's happening now is that folks are running out of substitutable goods. And, of course, credit.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Mar 5th, 2008 at 03:28:02 PM EST


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