Tag: Economics 101

Dec 08 2010

Spelunker-in-Chief

First of all I have to give credit to TheMomCat for the title.  It’s her coinage as far as I know, and I think it’s pretty punny.

So what’s so bad about the Tax Cut deal outside, of course, breaking yet another major campaign promise?

Well, it raises taxes on those making less than $20,000 a year.

The “2% Payroll Tax Cut” starves Social Security, throwing it into a fiscal crunch that did not previously exist.

The Estate Tax break alone, affecting only 1.62% of Estates, will cost over $23.2 Billion per year.

And it runs up a $900 Billion Defict in just 2 years with over 70% of the benefits going to the Wealthiest 2% and Corporations, proving that anyone in Washington who claims to care about The Deficit is a FLAT OUT LIAR.  As Robert Reich says– “Families with incomes of over $1 million will reap an average of about $70,000, while middle-class families earning $50,000 a year will get an average of around $1,500.”

Not to mention that all these Republican Trickle Down Voodoo Economics Policies have been tried and tested for the last 10 years and are PROVEN FAILURES.

Likewise Liars are anyone who claims to care about Democratic Electoral Victory.  74% of Obama contributors and volunteers are deeply opposed to this deal, while fully 57% say it will make them less likely to support Democratic Candidates in 2012.

And Barack Hussein Obama is not just a Liar, but a Craven, Cowardly, Petulant, Whiner.

Update: I ought to point out before you invest a lot of time that the presser runs 32:24 and the Special Comment 11:51.  Americablog had the best liveblog coverage that I have read.

Dec 07 2010

Korean Update

I know the story of the day is Obama’s spectacular cave on the Bush Tax Cuts for the Billionaires.  It is not by ANY DEFINITION a stimulus.

  1. Tax Cuts of any kind are the LEAST stimulative investments a government can make, in many cases producing negative returns.
  2. PEOPLE ARE ALREADY GETTING THIS MONEY!  This does nothing at all to introduce new Aggregate Demand.

Even the more charitable than I (and the CBO I might add) Paul Krugman estimates at best an improvement of 0.3 to 0.4% in unemployment.

But we can’t allow the new horrible to make us forget about the last horrible- that’s what they want to happen, so here’s an update on the horrible Korean Job Export “Free Trade” bill that got dumped on us Sunday, just two days ago.  My earlier piece is here.

Dec 01 2010

A Big Day in Economics News

Two of the major Washington based stories are extension of the Bush Tax Cuts for the wealthiest 2% on which the best policy from an economic standpoint is to let them all expire and replace them with Obama Tax Cuts for those consumers hardest hit by the Financial Depression and most likely to spend them so that as poor a tool as Tax Cuts are there is at least some increase in Aggregate Demand.

Simply extending any of the Bush Tax Cuts has ABSOLUTELY NO STIMULATIVE EFFECT WHATSOEVER, this is money people already have and have had for 10 years now.  Continuing it will NOT make consumers more likely to spend it- they already are.

The fact that this is also the best political policy makes it unlikely that the Obama Administration and the Institutional Democratic Party will adopt it.  Indeed the best “bi-partisan” compromise we can seem to hope for is tying it to extension of unemployment benefits (which are one of the most stimulative transfer payments, but not at all as economically productive as investment in infrastructure).

Another story out of Washington is the Catfood Commission meltdown.  Clearly there aren’t 14 votes for the Chairmen’s Mark, and no progress has been made on compromise.  Bowes-Simpson is essentially unchanged and all the initial objections still apply, the most fundamental of which is that it subsidizes Tax Cuts for Corporations and the Wealthy at the expense of neccessary Government Services (and one of those is Social Security which is not even part of the deficit).

Unfortunately Simpson is probably correct that Republicans will simply pull out the most pernicious, greedy, and hurtful ideas and push them.

Another Big Fail by Barack Hussein Obama and his confederacy of dunces and conservatives.

Anyway the best reporting I’ve seen so far (though I did sleep in) is at Firedog Lake and as a service I’ve collected some of their Front Page stories on the subject.  The one I think gives the best overview is Scarecrow’s.

dday has some pieces on the FDL News Desk that have not yet been Front Paged (though I’m sure they will be).  One on the Catfood Commission-

And others on the Tax Cuts-

Nov 26 2010

The Failure of the Elites

I don’t have a Nobel Prize in Economics, but unlike Paul Krugman I don’t think this was inevitable.  I blame people and institutions.

I blame Vacuity and prestige schools that will accept and pass any legacy moron (like George W. Bush).

I blame Vanity and an academic atmosphere that prizes novelty and publication above scholarship, teaching, and facts.

I blame Venality and the greed of our upper class elites who can starve to death on mere millions because they can’t conspicuously consume as much as their billionaire brethren and are disappointed because they think it’s a birthright.

The Instability of Moderation

by Paul Krugman, The New York Times

November 26, 2010, 9:40 am

The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.

…

I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

When monetarism failed – fighting words, but you know, it really did – it was replaced by the cult of the independent central bank. Put a bunch of bankerly men in charge of the monetary base, insulate them from political pressure, and let them deal with the business cycle; meanwhile, everything else can be conducted on free-market principles.

…

Last but not least, the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock. And Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression.

(h/t Atrios)

Nov 17 2010

Betting on Black

Economics 101

The time has come, the Walrus said, to talk of many things.  Of shoes and ships and sealing wax, of cabbages and kings.

I want to focus here on Credit Default Swaps.  Since the abbreviation (CDS) is close to the abbreviation for Collateralized Debt Obligations (CDO), which includes as a subset Mortgage Backed Securities (MBS) there is a tendency to confuse them all together.

A Credit Default Swap is an insurance policy on a debtor paying their debt.

For a fee someone with deep pockets agrees to make good the debt if the debtor doesn’t pay.

Now as long as the debtor pays this is easy money, but what we are finding is that when they actually do default, the people who sold these insurance policies don’t actually have such deep pockets after all.

And since they’re “Too Big To Fail” financial institutions who owe other “Too Big To Fail” financial institutions the money is coming out of Taxpayer pockets instead.

As I might have mentioned before (but am too lazy to look up at the moment) it is Insurance Fraud not to keep sufficient reserves to pay off your policies.

What makes this even worse is that you don’t actually have to own the debt to buy the policy.  It’s like letting random people take out life insurance on you and not counting on them coming up with some brilliant Strangers on a Train scheme to bump you off.

It is fundamentally no different from going into a Casino and betting it all on Black.

Nov 15 2010

Just a scrap of paper Part 2

It’s Title Fraud Damnit!

Of the 10 diaries I’ve posted in the last 2 weeks about economics, fully 5 of them have been on bank fraud.

The latest develoment is rumors that Washington and Wall Street are conspiring to retroctively “legalize” the MERS records under the general Versailles Villager principle of looking foward and never punishing anyone important no matter how badly they fuck up.

I mean, if it works for torture, war crimes, anonymous indefinite detetion, and targeted assassination, what’s $1.4 Trillion between friends?

So I duly reported this on Saturday and today dday has a piece that is not quite as sanguine that this is a problem that can be solved by brute force-

This Week’s Developments in Foreclosure Fraud

By: David Dayen Monday November 15, 2010 8:18 am

Finally, a word on the "MERS Whitewash bill" floated by John Carney last week. Carney has been bloviating about this for well over a month, based mainly on speculation. He may have the history of Congress making mischief on behalf of the banks on his side, but he really doesn’t have a clue on this issue. Foreclosure operations are state issues governed by state laws, and lawmakers know they would have a difficult go of trying to adjudicate a constitutionally viable solution that would indemnify the banks in this case. They’d have to stick out their necks quite far, and it would almost certainly be challenged all the way up the legal ladder. The outcry that would ensue during that time would be tremendous. I’m not sure it’s something that risk-averse politicians would want to put up with. And Carney certainly has no evidence one way or the other. I’m happy to fight something that exists, but nothing does at the moment.

I am quite happy to fight potential problems, because the Vacuity, Vanity, and Venality of our Versailles Villagers shouldn’t ever be underestimated.

And there are other problems-

One Mess That Can’t Be Papered Over

By GRETCHEN MORGENSON, The New York Times

Published: October 23, 2010

O(n) the other hand, resolving paperwork woes in the world of mortgage-backed securities may be trickier. Experts say that any parties involved in the creation, sale and oversight of the trusts holding the securities may be held responsible for any failings – and if the rules weren’t followed, investors may be able to sue the sponsors to recover their original investments.

Mind you, the market for mortgage-backed securities is huge – some $1.4 trillion of private-label residential mortgage securities were outstanding at the end of June, according to the Securities Industry and Financial Markets Association.

…

All of this suggests that while a paperwork cure may eventually exist for foreclosures, higher hurdles exist when it comes to remedying flaws in mortgage-backed securities. The only way to wrestle with the latter, some analysts say, is in a courtroom.

“The whole essence of this crisis is fraud and unless we restore the rule of law and transparency of disclosure, we are not going to fix this,” said Laurence J. Kotlikoff, an economics professor at Boston University.

These are groups like PIMCO, Blackrock, and the Federal Reserve Bank of New York.  So far.

Then there’s also the problem pointed out by bmaz on Friday originally, these banks and real estate trusts owe a lot of money in filing fees in States hard hit by the Bank Induced Financial Collapse and Depression.

Are Obama and Congress Set To Screw American Counties, Homeowners and Give Wall Street Mortgage Banksters a Retroactive Immunity Bailout?

By: bmaz Friday November 12, 2010 7:40 pm

There are rapidly emerging signs the Obama Administration and Congress may be actively, quickly and covertly working furiously on a plan to retroactively legitimize and ratify the shoddy, fraudulent and non-conforming conduct by MERS on literally millions of mortgages.

…

As quoted above, even the most conservative estimate (and that estimate is based on only a single recording fee per mortgage, when in reality there are almost certainly multiple recordings legally required for most all mortgages due to the slicing, dicing and tranching necessary to accomplish the securitization that has occurred) for the state of California alone is $60 billion dollars. That is $60,000,000,000.00. California alone is actually likely several times that.

And there are those pesky Sections 9 and 10 of Article I.

There are at least 11 criminal frauds going on and the charitable and optimistic part of me thinks that they cain’t git all them thar’ worms back in the bait can.

Nov 15 2010

The market can stay irrational longer than you can stay solvent

Monday Business Edition

One of the emergent stories this weekend has been the question of whether Ireland is going to accept a bailout from the EU or the IMF.  The proximate problem is that interest rates on Irish debt (bonds) and the price of insuring it against defaults (Credit Default Swaps) rose quite sharply on Thursday and Friday.

No holding back the tide

By David Clerkin, Markets Correspondent, The Sunday Business Post

14 November 2010

The rate attached to Irish ten-year bonds, which days earlier had touched the already eye-watering level of 7.8 per cent, quickly eclipsed 8 per cent on Monday and smashed through 9 per cent on Thursday.

…

To put this spiral into context, it is worth noting that the rate stood at 6.8 per cent less than two weeks ago. It was 6.5 per cent a month ago. It was 4.7 per cent a year ago.

…

Some bond traders zeroed in on the market for credit default swaps (CDSs) – the insurance policies on offer to protect investors from a borrower becoming unable to repay their money. The CDS market, though thinner than the market in government bonds, exhibited equally grim characteristics last week. The CDS premiums on AIB debt – insurance against AIB defaulting – exceeded 10 per cent, and those on debt issued by other Irish banks continued their unwelcome rise.

As the market fate of the Irish government has been intertwined with those of the banks it guaranteed since September 2008, some traders spoke of a vicious circle. As Irish banks fell increasingly out of favour, fears over the Irish government’s creditworthiness intensified.

Andrea Merkel made some remarks at the G20 Summit (which was so unproductive for Obama, but that’s another story) about using the European Financial Stability Fund for another bailout that the Irish government is objecting to strenuously.

The Irish people?  Maybe not so much.

German solution seems irresistible to Irish people but not to the State

JOHN McMANUS, The Irish Times

Monday, November 15, 2010

Why is the Government against accessing the European Financial Stability Fund?

(Ireland, we) are led to believe, is a source of endless fascination, no little bafflement and some affection for the Germans. Right now they must be wondering why their chancellor, Angela Merkel, is being blamed for our latest crisis by the Taoiseach when she appears far more in tune with the Irish national mood than he does.

At a very fundamental level, all the German chancellor wants to do is change the rules of global finance so that the investors who lend money to feckless governments and banks must share the cost when things go wrong and thus be incentivised to act more responsibly. It’s a sentiment that pretty much everyone in Ireland would support.

Her proposals have an added populist attraction in Ireland as, inter alia, they would involve the burning of bank bondholders, the cause célèbre of much of the economic commentariat. This is because it is hard to see how Ireland could restructure its own debt – the nub of Merkel’s plan – without also restructuring the debts of the almost completely nationalised banking system.

…

From this point of view, the European Financial Stability Fund is starting to look irresistible. Not only do you get to burn the bond holders, you may even be able to help people out of negative equity! “What’s not for these Irish to like?” Merkel can legitimately ask. “Nothing” is the answer most of us would give.

So why is it then that we have a situation where the German chancellor and most Irish people seem to want one thing and our Government and the financial establishment want the other?

The answer is that, unfortunately, we must live with the immediate consequences of what is a laudable effort to reverse the balance of power between the financial system and sovereign governments. It is admirable – and indeed necessary – because the overriding lesson of the global financial crisis has been that governments have found themselves servants of the financial markets rather than the other way around. But while we would all like to get to the sun-lit uplands envisioned by Merkel, Ireland unfortunately might not survive the journey.

What does Merkel get out of it?  The Euro is teetering on the brink and a lot of people are heavily invested in it, financially and politically.

Ireland and Greece should ditch the euro

By Peter Oborne, The Daily Telegraph

November 15th, 2010

This is what the Spanish prime minister, Jose Zapetero, declared in an interview with the Wall Street Journal as recently as September 22: “I believe that the debt crisis affecting Spain, and the eurozone in general, has passed.”

Or let’s listen to Patrick Honohan , governor of the Central Bank of Ireland, who soberly informed the markets last week that surging yields on Irish government debt would soon be back to normal levels. Both men are deluding themselves – and us. From time to time, events take a turn which is too grave, unsettling and unfathomable for politicians to cope with. They enter a state of denial. We are now living through one of those times.

The European Single Currency cannot be saved. Yet the euro elite are unable to bring themselves to acknowledge the magnitude of this disaster. They have convinced themselves that all is well. The pattern is familiar and indeed we in Britain experienced something very similar in the months leading up to Black Wednesday and the eviction of sterling from the Exchange Rate Mechanism in September 1992.

…

The euro elite is utterly ruthless. In its mission to save the euro, it is ready to throw tens of millions out of work and in the process destroy businesses, lives and whole economies. Consider the terrifying facts. The Irish economy has gone through recession and entered what economists call a depression. Its output contracted by an extraordinary 10 per cent last year, and may well do so again over the next 12 months.

In Spain, unemployment stands at 20 per cent, and youth unemployment a horrifying and tragic 40 per cent. The depths of misery lying behind these statistics cannot be exaggerated. A friend of mine who lives in the Spanish province of Andalusia tells me that some children in his village cannot go to school. This is because their parents cannot afford to buy them shoes. Effectively large parts of Europe are de-industrialising. In Greece, the economy may contract by 15 per cent over the next two years as a result of massive cuts in state spending.

For Greece and Ireland, there is an absurdly easy way back to economic growth: return to the drachma and the punt. Such a move would enable national currencies to fall back to levels where they can be internationally competitive – which in the case of hapless Greece would be approximately one third of where it stands today.

Assertions by the big bankers and eurocrats that such a move is technically impossible are self-serving and false. It would of course be very messy in the short term, but there are many examples of countries pulling out of currency unions with no lasting ill-effect.

The peripheral eurozone nations are being prevented from taking this sensible move by a cynical alliance between the big banks and the Brussels elite. The banks cannot countenance any contraction of the eurozone because once Greece, Ireland, Portugal and Spain pull out, they will have no choice but to default on their debts. Such a move would bankrupt almost all European banks. Between them these four countries have a combined sovereign debt of well over £1 trillion. A very large part of this debt is owned by the major European banks. The Bank of International Settlements estimates, for example, that French financial institutions have lent the equivalent of 37 per cent of total French GDP to these failing countries.

However there are also hugely powerful political considerations. The collapse of the euro project will come as a shattering blow from which the European project cannot recover. That is why key members of the Euro elite are so determined to use this moment to press forward with their plans for political and economic integration.

More about Ireland-

Business News below.  Now with 51 Stories.

Nov 08 2010

How’s that austerity thing working out for you?

Let me explain slowly and clearly-

The problem is overcapacity and lack of aggregate demand.

Austerity by definition means less spending and less aggregate demand.

Irish Debt Woes Revive Concern About Europe

By LANDON THOMAS Jr., The New York Times

Published: November 7, 2010

LONDON – When interest rates soared last week on Irish government bonds, it served as a grim warning to other indebted nations of how difficult and even politically ruinous it could be to roll back decades of public sector largess.

An Irish bond market already in free fall plunged further after Ireland announced on Thursday that it planned to nearly double its package of spending cuts and tax increases to try to rein in its huge deficit. Investors took it not as a sign of resolve but rather of Ireland’s desperation and uncertainty about the true extent of its problems.

…

A year ago, as cascading mortgage defaults brought down the biggest Irish banks, Ireland became the first major developed nation to impose an austerity program. The country was hailed worldwide as an exemplar of probity and national consensus.

But as the full extent of the banking and real estate bust became evident, it was clear that the government of Prime Minister Cowen, which has been in power since the onset of the crisis more than two years ago, had underestimated the cost of fiscal recovery. Now the possibility that he will be forced from office or compelled to call a new election grows by the day.

…

The British chancellor, George Osborne, perhaps the keenest deficit hawk among policy makers in the developed nations, was taken to task last week by lawmakers. They accused him of exaggerating the extent of the country’s fiscal problems to justify broad cuts in middle-class benefits like universal payments to parents with children.

“How many children will be forced to leave their homes?” demanded one furious member of Parliament. “Will the numbers of homeless increase or decrease under your government? Will there be a reduction in special needs education for children in our schools?”

Pitchforks.

I’m reliably informed Keith will be back tomorrow.

Oct 22 2010

Let’s Count The Frauds

You can categorize these different ways and I don’t claim this list is is exhaustive, but inspired by Dan Froomkin I thought I’d list briefly some of the Bank Frauds that are encapsulated in what is generally called “Foreclosure Fraud”, but which I call Title Fraud.

As you read them, keep in mind that the bankster position is that all these frauds are mere bagatelles and formalities and that the only time there is a problem is when some deadbeat asshole home owner stops paying.

Appraisal Fraud

  • Your house was never worth all that.  Your appraiser is paid based on the appraised value and by the bank which wants you to take the largest loan possible to maximize their fees and interest.  This is part of what caused the Bubble.  They lied to you and that is fraud.

Loan Fraud

  • Low introductory rate?  Try flat out usury which used to be considered a sin by Christians (remember Jesus and the Moneychangers) which is one reason they feel justified in their anti-semitism (and they wiped out the Knights Templar too).  They lied to you about the terms of your loan to your face and buried the details in the fine print.  That is fraud.

Income Assessment

  • NINJA!  No Income?  No Job?  Accept!  Loan originators encouraged people to lie on their applications so they could sell them the loan that generated the largest fees and interest.  That is fraud.

Conveyance of Title

  • Thousands of years of precedent.  No shit.  We have hieroglyphics from the Egyptians and cuneiform from the Sumerians.  All of it had to be recorded in stone (or wet clay), so the proof could be produced.  Ephemeral photons not so much.  There are legal requirements and MERS lied about fulfilling them.  That is title fraud.

Tax and Fee Cheating

  • Why did they do that with the thousands of years and all?  Well it’s really about the next item in my list, but a not insignificant second reason was to avoid billions in fees to State and Local governments.  Tax cheating is fraud.

Collateralized Debt Obligations

  • Here’s the real money and motivation.  It’s not about the property, it’s about the income stream and if I can package them in a way the promises a certain rate of return on investment I can sell it like bonds.  The problem is that if I don’t have title to the underlying asset and lie to you about the income stream and your ability to collect from it (Brooklyn Bridge) that’s fraud.

Debt Rating Agencies

  • Part of the way I lie to you is I pay some purported “independent expert” to come in and repeat my lies, just like I did with the appraiser.  That is fraud.

Multiple Sales of the Same Asset

  • Since all you care about is the general performance of the income stream to produce the revenues I promised, it really doesn’t matter if I include some “assets” that I know are guaranteed failures as long as the overall performance passes fictitious muster.  As long as I’m servicing my Ponzi Scheme no one will ever know.  This is fraud.

Credit Default Swaps

  • In order to convince you I’m a fair dealer, I offer to take the worst parts of the pie myself.  Then I turn around and buy insurance against them failing for pennies on the dollar from a company that doesn’t have the money to pay off the policy when I need to collect.  This is Insurance Fraud (hello AIG and back door bailouts).

Fees, Fines, and Foreclosures

  • How do I make money?  Well you may think it’s off the interest, but I sold that for cash to a pack of fools who got a pile of crap in return.  But they need a Tax Farmer and Rent Collector and I’m happy to do that for a price.  And if I happen to run short I’ll just make up a penalty by holding a check and imposing it just like I do on unsecured credit cards and then siezing the property for myself if your lawyers aren’t are good as mine (and I have mighty fine lawyers, you betcha).

Accounting Fraud

  • And why do I do this?  To keep the inflated assets on my balance sheet defrauding my investors so I can keep my billion dollar bonuses flowing in.  If we had mark to market every major bank in the United States would be as underwater as the most foreclosed home owner.

The problem with this story is that there are so many individual frauds that it’s hard to keep track of them and I hope this summary is helpful.

Oct 21 2010

More From The Doctor

I mean, it’s only a Nobel Prize in Economics so what the fuck does he know anyway?

To choose austerity is to bet it all on the confidence fairy

The mystical belief is that a smaller deficit will lead to an investment boom. What Britain really needs now is another stimulus

Joseph Stiglitz, The Guardian

Tuesday 19 October 2010 22:00 BST

Lower aggregate demand will mean lower tax revenues. But cutbacks in investments in education, technology and infrastructure will be even more costly in future. For they will spell lower growth – and lower revenues. Indeed, higher unemployment itself, especially if it is persistent, will result in a deterioration of skills, in effect the destruction of human capital, a phenomena which Europe experienced in the eighties and which is called hysteresis. Lower tax revenues now and in the future combined with lower growth imply a higher national debt, and an even higher debt-to-GDP ratio.

Matters may be even worse if consumers and investors realise this. Advocates of austerity believe that mystically, as the deficits come down, confidence in the economy will be restored and investment will boom. For 75 years there has been a contest between this theory and Keynesian theory, which argued that spending more now, especially on public investments (or tax cuts designed to encourage private investment) was more likely to restore growth, even though it increased the deficit.

The two prescriptions could not have been more different. Thanks to the IMF, multiple experiments have been conducted – for instance, in east Asia in 1997-98 and a little later in Argentina – and almost all come to the same conclusion: the Keynesian prescription works. Austerity converts downturns into recessions, recessions into depressions. The confidence fairy that the austerity advocates claim will appear never does, partly perhaps because the downturns mean that the deficit reductions are always smaller than was hoped.

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