Saturday, October 25, 2014
Yves here. This is a terrific interview with Lord Adair Turner, former head of the FSA. Most of it focuses on the things missed in contemporary economics, particularly macroeconomics, and how some disciplinary “back to the future” would be desirable. A major topic of discussion is how wealth is becoming as concentrated as it was in the 18th century, and the driver then and now was the disproportionately large role real estate has come to play. Then, it was income-producing agricultural land. Now it is urban property, bid up by domestic and international elites who want to live in particularly prized cities. Turner points out the irony that access to cheap finance for housing, meant to help middle and lower income buyers, has instead contributed to rising wealth inequality. He also describes how the ability of banks and financial markets to supply virtually unlimited amounts of credit, against a limited stock of particularly sought-after locations, has the potential to create tulip-mania type results.
Perhaps due to time constraints, Turner didn’t venture into the views of classical economists, that profiting from land, which they derided as rentier capitalism, was economically unproductive. As Michael Hudson has stressed, they urged heavy taxation of land as the remedy.
Yves here. The irony is delicious. Chief bank apologist Andrew Ross Sorkin accidentally elicited a damning admission from JP Morgan chieftan Jamie Dimon. But that also reveals Dimon’s confidence that he is a member of a protected class, which sadly happens to be true.
Today’s Water Cooler: Ebola, Hong Kong inside game, Hillary takes shot at banks, Google does good deed, pilot sky-writes “I heart Dana.” With 767.
Class Traitors: How Ideological Brainwashing Gets Rich and Ordinary Americans to Undermine Their Economic Interest
Linda Beale, of ataxingmatter, has written forcefully and persuasively about some of the propagandizing-accepted-as-gospel that the well-heeled use to advocate policies that advance their economic interests. For instance, as most Naked Capitalism readers appreciate, but a remarkably large swathe of the US population does not, tax cuts for big corporations are simply a transfer to the rich. From a post last year:
I’ve argued frequently in the past that there is no there there–i.e., that lowering corporate tax rates will do nothing to create jobs. Instead, I’ve said, it will simply deliver an even higher profit margin to be skimmed off by the highest paid executives and, possibly, shareholders. The higher profit margins are unlikely even to be used to increase workers’ shares of the corporate revenues through higher wages, a place where they could most help the economy other than new jobs created. Thus, the drive for “revenue neutral” corporate tax reform (cut corporate taxes, cut expenditures elsewhere to make up for the decreased corporate tax revenues) is just another example of corporatism as an engine of the modern form of US class warfare
Beale takes up a different theme today: how the rich and poor act against their economic interest. For many in middle and lower income strata in red states, hostility to the government is an article of faith even though those states (and many of those same govement-hating citizens) are significant beneficiaries of Federal programs.
But less well recognized are the ways that the wealthy are undermining themselves. They’ve taken the “increase our distance from everyone else” experiment well beyond its point of maximum advantage, not just to the society around them but also in terms of the costs to the class warriors.
As we’ve pointed out, highly unequal societies have lower lifespans, even among the rich; the shallower social networks of stratified societies and the high cost of losing one’s perch, in terms of loss of friends and status, creates an ongoing level of stress that has a longevity cost. Beale points out something we’ve mentioned occasionally in the past, that creating an underclass with inadequate access to medical services is a great breeding ground for public health problems. The fact that many low income Americans can’t afford to take sick days and health plans generally have high deductibles, which discourage individuals from getting treated until they are sure they are really sick, isn’t a great program design if you want to reduce the spread of infectious diseases.
Yves here. As oil prices have come into focus as a result of a recent Saudi decision to facilitate a reset at a lower price per barrel, they’ve come into focus yet again as a critical nexus of economic and political power, and that’s before you get to the complicating overlay of climate change considerations.
This article by Gail Tverberg takes a more sophisticated, multi-persepctive approach than the overwhelming majority of articles on this topic. One of her big messages is that there is no way the world economy is getting divorced from oil any time soon.
Even so, I have some minor points of contention. For instance, she correctly points out that oil producers, even the Saudis, need oil prices to be at a moderately high prices to sustain national budgets. But Riyadh has a very low production break even point, a large cash horde, and plenty of borrowing capacity. The desert kingdom could afford a price war, say to hurt geopolitical enemies or to forestall investment in and development of alternative energy sources. Low oil prices make other energy sources look unattractive, and volatile prices also deter investment, making it well-nigh impossible to forecast cost advantages (if any) and end user takeup.
Yves here. As Matt Stoller wrote recently, Amazon’s business strategy is all about becoming a globally-dominant trading company. It might have helped if Amazon and its investors had studied the closest historical analogue to what Amazon is seeking to become: Japanese trading companies. In their heyday, Japanese trading companies, such as Mitsubishi International Corporation, which intermediated trade for the Mitsubishi zaibatsu, and its post-World War II less-tightly-integrated incarnation, a keiretsu, had an almost impossible-looking financial statements: staggeringly large revenues, extremely thin profits (those went to the industrial companies) and enormous balance sheets with breathtaking leverage.
The Amazon 2.0 version has a lot of improved features, the biggest being impressive cash flow, since it manages to get income before it has to pay for goods. However, Amazon, like its Japanese forebearers, is interested in dominance above all. For the Japanese trading companies, that made sense because they were the sales arms for the companies in their group, so the objective wasn’t for them to prosper but to merely get by. But for Amazon, plowing its vast cash flow into growth looks less and less sensible as losses gap up. It’s one thing to incur large costs to obtain a monopoly or oligopoly position, since high margins are expected to come later. Amazon has gotten away with no profits because, in reality, cash flow generation is in many ways a better measure of the true productivity of a business. But in Amazon’s case, its hugely positive cash flow is entirely dependent on its collection v. when it pays suppliers. If suppliers, which Amazon is also squeezing on cost, start to push back this hugely successful machine will look a lot less pretty. And this ins’t a theoretical concern; Justin Fox at the Harvard Business Review points out that Amazon of late hasn’t been able to stretch payables as much at it once could. Amazon is moving on so many fronts where establishing a dominant position is far from assured, which could call its entire model into question.
It’s widely known among tax professionals that the US does little in the way of tax enforcement, and the little that it does do is directed against individuals and small businesses.
What is not so widely known is how deep the institutional bias is in the IRS in favor of letting big corporate tax cheats get away with it.
Conventional wisdom is similar to the rationalization of weak enforcement at the SEC: that the agency is afraid that if they go after big companies, they’ll have the penalties and fines challenged in court, and they’ll often lose by virtue of being outgunned by better lawyer (yes, Virginia, even if you have a solid case, that doesn’t mean you’ll win at trial). And top tax litigators are among the most highly paid legal talent. I’m not up on current rates, but in the mid 1980s, Sumitomo Bank fought the IRS on a $100 million assessment and won. Their attorney was a solo practitioner who charged $1000 an hour.
It turns out that the picture is vastly worse than that.
Today’s Water Cooler: Canadian shooting, Hong Kong hiatus, jobless stats, Warren in 2016, imperial collapse, Twitter, Facebook, and Google
Yves here. Richard Alford, a former New York Fed economist, provides his assessment of the AIG bailout in light of some of the revelations in the AIG bailout trial. While many of his arguments have merit, I want to quibble with a couple of them.
The first is the size of the actual amount taken by AIG and the reason for the drawdowns. At the time AIG hit the wall, the amount it needed was first estimated at $50 billion to cover its credit default swaps portfolio and $20 billion for its securities lending. The Maiden Lane III vehicle that the Fed created to take the CDOs has a $62.9 billion face value, so we can use that as a rough and ready value, and the securities lending bailout costs rose to roughly $50 billion. But consider: those two together get you to only a bit over $110 billion versus the peak lending amount reported as just shy of $185 billion. And some of that ~$110 billion includes laundering a bank bailout through AIG, by not obtaining haircuts on the CDS on the Maiden Lane CDOs. So where did that say $80 billion go? It might be commercial paper or medium term notes during the very worst of the crisis, although with the Fed supporting AIG, you’d think investors would be see its paper as fine. We’re conferring with some close AIG watchers and may write up a discussion of what that AIG black hole consisted of.
Second is that at the end, Alford adopts a “what matters is looking forward,” as in preventing future crises. Yes, but we are great believers in post-mortems, particularly in light of the George Santayana saying, “Those who do not remember the past are condemned to repeat it.”
Yves here. This post on Uber raises a sobering point about activism and human cognition. How do you opposed a cause you regard as dubious without unwittingly legitimating it? For instance, remember when one of the many justifications offered for the Iraq War was that Saddam Hussein was in cahoots with Osama bin Laden? Even though that idea was patently false, efforts to debunk it actually reinforced the connection between Hussein and Bin Laden simply by featuring their names in close proximity.
If readers, particularly activists, have ideas for how to steer clear of effectively promoting ideas and causes you are challenging, please let us know in comments.
Yves here. One of the efforts the Naked Capitalism community has been engaged in is trying to understand and map our emerging political and economic order. Over the last four decades, massive changes have taken place in social values, in job security, in the importance of communities relative to other networks, like professional associations, and in the role of the state. Economists, social scientists, and laypeople have used various frameworks for describing this period. Understanding the driving process is important not merely for the purposes of description, but also for analysis, since a major question remains open: is this a last gasp of large-scale industrial capitalism, or is this the starting phase of a new economic order? We’ve tended to see this period as a self-limiting finance-led counter-revolution against the New Deal, but that may prove to be too optimistic a reading.
This Real News Network interview with Costas Lapavitsas, a professor in economics at the University of London School of Oriental and African Studies, takes a different perspective. Lapavitsas contends that financialization itself constitutes a new form of capitalism, which is supported by neoliberal ideology.
Independent of whether you fully agree with Lapavitsas’ framing, this talk gives a good overview of the major economic and political changes since 1970. His summary would be useful for those who could use a historical perspective on these shifts, or want a high-level understanding of the restructuring of modern economies without having to get too deep into the weeds. But even though this interview is designed to go down easily, it offers a lot of grist for thought.
Yves here. While investors remain fixed on how much more the Fed and the ECB will pump into financial assets via QE, Eurozone banks lumber on in their walking wounded state. Deflationary pressures and lousy growth grind down weak and even once-good borrowers. And it’s not as if the banks who lent to them in the first place were good shape themselves.
As we wrote at the onset of the Eurozone bank stress tests, they were designed to be even more cosmetic than the US bank stress tests. Just a month ago, we posted an analysis that showed that many countries in Europe have banking systems weaker than those in Latin America.
Even with the efforts to use the stress tests as a confidence-building exercise, the result of the current exam of Eurozone banks is expected to be less than impressive.