A new story on private equity secrecy by Mark Maremont at the Wall Street Journal started out with a bombshell, that of private equity industry kingpin KKR muscling a public pension fund to deny information requests about its practices:
Read more...Yves here. One of the major charges leveled at immigrants in the US is that they use public services (the stereotype is that they show up in emergency rooms, which are not a taxpayer expense,* as well as send children to school) and don’t provide anywhere near the contribution to the economy in terms of tax contributions relative to what they extract.
Notice that that charge is implicitly made of illegal immigrants, who presumably don’t pay income taxes (although I personally know one who does, by virtue of being in an immigration Schrodinger’s cat uncertainty state and having a Social Security card and meticulously paying taxes for 15 years while no longer having a visa and not having become a citizen. Will not bore you whit his shaggy dog story). But their incomes are often so low that it’s not clear they’d pay much even if their taxes were reported, save regressive FICA taxes. Yet they do pay other taxes: sales taxes, gasoline taxes, and property taxes embedded in their rents.
There is a separate public policy argument about immigration and foreign guest workers on H1-B visas, which is that at least the way it is conducted in America, that in combination with an anti-labor-bargaining policies, cheap immigrant labor gives employers even more leverage against workers. This post focuses narrowly on the “are they worse than natives in terms of impact on the public purse?” The study focuses on the UK. One of the striking revelations is how little decent data there is on this topic, particularly in a country that has no where near the number of unofficial immigrants as the US.
Read more...Due to the hour, and the fact that I want to work up the argument longer-form over a series of posts, I’ll give only an overview now as to why the popular handicapping on the AIG bailout trial, that the suit is ridiculous and not worthy of attention, is wrong.
While this case by any logic should be ridiculous, the Fed so egregiously overstepped its authority in the way it handled AIG (and for that matter, its other bailouts) that they handed Greenberg a decent legal argument. And to add to the government’s self-inflicted woes, all of its bailout cheerleading also plays straight into Greenberg’s hands.
Probably the biggest relief to the government so far is that the media has virtually ignored the trial. The only major news organization that has a reporter there daily is Bloomberg. Their reporter, Andrew Zajac, concurs with our view (and quoted us) that David Boies, the Greenberg attorney, has decent odds of winning the case. If Boies does prevail, you can expect an Administration-led firestorm of outrage, with the arguments previewed in a Steve Rattner op-ed in the New York Times.
But the grandstanding serves to obscure the legal argument, which when you get past the technicalities, has real significance politically. That is why the officialdom would rather distract the public by hammering on “That ungrateful deadbeat Greenberg. Who is he to want more money when by all rights he should have been wiped out?” If anyone bothered to look at what is really at stake here, it is that the Fed, with the help of the Paulson Treasury, greatly abused its powers. And that matters because as a practical matter, the Fed is unaccountable for its actions.
Read more...I’m a little slow to write this up because private equity abuses are so pervasive as to fall in the “dog bites man” category. But that doesn’t mean that the public at large, or worse, intellectually captured, credulous investors understand that.
One of the latest abuses to come to light is private equity firms effectively lying about their returns in past funds when dialing for dollars for prospective funds. The overview from Reuters, which broke the story last week:
Read more...Regulators look to be getting more serious about financial firm misconduct, as witness their new-found willingness to file criminal charges against banks. Not that has happened yet as regards JP Morgan, the US bank with far and away the biggest rap sheet of all US financial firms. But as we’ll discuss, while it is good to see regulators getting tougher with banks, this move still falls in the category of “too little, too late,” particularly since it looks to a last-ditch effort to improve departing attorney general Eric Holder’s file of media clips.
Here is an overview of the JP Morgan investigation from the Wall Street Journal:
Read more...Yves here. This post highlights an issue that has also been flagged by Wolf Richter, that fracking depends on junk bond financing that has been made unnaturally cheap by the machinations of the Fed. Steve Horn conflates QE with the Fed’s super-low interest rate policy known as ZIRP, when they are distinct, but they have been implemented with the same idea in mind, that of encouraging investors to make riskier investments, particularly riskier loans.
Horn cites sources that suggest that the Fed could start undoing its rock-bottom rates in 2015. Bear in mind that that’s a minority view.
Read more...Yves here. The Real News Network continues with its discussion between Chris Hedges and Sheldon Wolin of what Wolin calls “inverted totalitarianism.” One of the focuses here is how skillful fragmentation of the public, and keeping various groups separate from, and better yet, suspicious of each other, has helped greatly reduced the cost of keeping this system in place.
Younger readers may not recognize how radical the transformation of public discourse has been over the last 40 years. While there were always intellectuals who were largely above consuming much mass media, as well as political groups on the far right and left that also largely rejected it, in the 1960s and well into the 1980s, mass media shaped political discourse. There were only three major broadcast networks: ABC, NBC, CBS. They hewed to generally the same outlook. Similarly, there were only two major news magazines: Time and Newsweek, again with not much distance between in their political outlook. The Wall Street Journal was a stock market newspaper with little general news coverage. The New York Times didn’t aspire to be a national newspaper until the 1990s. Local newspapers were much more influential in their markets then than now, but they seldom deviated much from the national middle of the road, pro-middle class sentiment. The sort of fragmentation that this interview mentions is in part a result of the Karl Rove strategy of focusing on hot-button interests of narrowly-sliced interest groups, along with media fragmentation which has made it easier to target, as in isolate, them.
Read more...ves here. There’s one thing to add to Richter’s useful recap of what the supposedly sparkling 3Q GDP results mean for those of us who live in the real economy. The GDP deflator fell from 2.1% in the second quarter to 1.3% this quarter, so some of the rosiness of the results was due to the swing in the deflator.
Read more...Yves here. This discussion with Michael Hudson on RT focuses on the real meaning of the Ukraine-Russia gas deal. One point that Hudson makes that readers might doubt is that Russia loves the US sanctions. I’m not sure “love” is the right word, but there is reason to think they aren’t working out as the US had hoped. First, they’ve greatly increased Putin’s popularity. Even the intelligentsia in Moscow, who were hostile to him, have largely rallied to his side in the face of foreign bullying. Second, the Western press may be overstating the amount of damage done to the economy by the sanctions. Arguably the biggest negative is the fall in the price of oil, which came about growth in Europe and China slowing, and the Saudis announcing that they’d allow the price to reset at a much lower level than most analysts anticipated. But the ruble has been falling, which blunts that effect, but increases the drain on FX reserves as Russia tries to keep it falling too far and will increase inflation. Third, the sanctions have allowed Russia to engage in protection of domestic industries as a retaliatory measure, for instance, blocking many food imports from Europe.
Now all good well-indoctrinated neoliberals will say, “Trade protectionism merely allows domestic producers to become inefficient and uncompetitive.” It’s not so simple. Development economists are increasingly of the view that trade restrictions can help smaller economies develop domestic businesses to the point where they can compete in international markets, while if they foreign firms in, they’ll find it nearly impossible to build any local champions.
A colleague who does business in Russia but has no deep loyalties there, says he sees no signs of negative impact of the sanctions in Moscow (he describes it as now looking like any post World War II European capital). This is confirmed by recent surveys in Russia, so the lack of meaningful impact on Russian citizens isn’t an artifact of his seeing only the better parts of Moscow. Note that the latest EU forecasts anticipate very weak growth this year and next, as opposed to outright recession.
This visitor describes how the sanctions are helping Russian businesses. One of his friends has the Papa Johns franchise. They used to get their cheese from the Netherlands, but those supplies were cut off by the Russian sanctions against Europe. So they had to buy cheese domestically. It was cheaper but not as good. So he is working with the local farmers and cheese-makers to bring the cheese up to the standard of the cheese he used to import. So he expects to eventually have cheese that is lower cost than what he brought in and of comparable quality. And if he succeeded, the cheesemakers will be more competitive in Europe when the sanctions are relaxed.
The shorter version of this story is that Russia has a large enough domestic market and enough resources that unlike Iran, it may be closer to being able to function as an autarky when its imports and exports are restricted. The open question is whether it can go through the pain of a reset, with some serious and painful short-term dislocations, and escape the slow strangulation that the US claims it has imposed.
Read more...As reader Christopher put it, this got ugly fast.
Yesterday, Glenn Greenwald, Laura Poitras, Jeremy Schill, and John Cook issued a joint “inside story” on why Matt Taibbi left First Look. Let us note that it is pretty much unheard for journalists to report on personnel matters at their own employer, particularly so rapidly after a story breaks. The reason for the haste, and the focus on l’affaire Taibbi, appears to be to get out in front of an article coming out in New York Magazine about their patron, Pierre Omidyar.
The real issue, as we discussed in our earlier post, is whether this account supports the claim made in Omidyar’s press release about Taibbi’s departure: that it has nothing to do with editorial independence. As we’ll discuss, this story does not lay that issue to rest; in fact, it attempts to draw a bright shiny line between “corporate” matters like overall direction, editorial philosophy, mix of stories, as well as routine matters like expense controls, and “editorial freedom”. The distinctions aren’t that tidy. The degree of retrading of Taibbi’s deal with Omidyar and ongoing pressure to keep refocusing a shifting mission looks like bad faith. And one reads between the lines that Omidyar might have cooled on Taibbi’s plans to venture out of satire into more costly and more disruptive investigative reporting.
Read more...Yves here. Readers will take issue with some of former Fed staffer and banking expert Walker Todd’s comments on monetarism and Fed policy, but he nevertheless reaches the right general conclusions. The monetarist orientation of his post is a bit more understandable when you keep in mind that the central bank is run by monetary economists.
Todd treats quantitative easing as “money printing”. That sounds appealing but isn’t quite apt. The Fed was swapping assets, in this case cash for Treasury bonds or mortgage backed securities held by the public. The central bank seemed to think this would be useful due to its belief in the discredited but nevertheless very much alive “loanable funds” theory. In simple terms, if you make interest rates low enough, people will save less and spend more, and businesses will borrow and invest more because money is on sale.
In fact, what has happened is that many of those people who swapped bonds for cash went out and bought other financial assets, goosing stock prices, lowering yields on risky debt, and sending money sloshing into emerging economies. There appears to have been a modest amount of economic lift from that due to wealth effect among the rich. But big companies for the most part didn’t invest. They borrowed cheaply and are holding wads of cash that they can use to keep propping up their stock prices. Similarly, banks haven’t done much small business lending, in part because institutionally many have exited that business, and smaller enterprises themselves haven’t been too keen to borrow because in most regions and sectors, the recovery isn’t all that robust.
The Fed appears to have recognized that QE was largely a failed experiment before it announced the taper last year, but the market reaction was so lousy that it backed off and then tried again with lots more “we’re watching the market’s back” assurances. Cynics among my readers contend that the GDP figures today benefitted unduly from a 0.9% reduction in the GDP deflator, which would provide financial markets with a tailwind when QE was being halted officially.
Given that we’ve had three QEs so far, Todd has reason to argue against repeating this experiment. Another thread of his argument echoes that of Audit the Fed, which was the product of a left-right alliance, that the Fed never gave Congress an adequate explanation of the logic and expected effects of QE so it could be held accountable for this experiment.
Read more...This video, in which economist Mariana Mazzucato discusses her book The Entrepreneurial State, explains how most of what you think you know about innovation is wrong. Innovation is not led by the private sector; it lacks the long term horizons and risk appetite to do so. Instead, the most innovative countries and regions have the state playing a very active role, not just in funding basic research or making sure markets work properly, as in limiting anti-competitive practices that can stymie new entrants. Instead, the state plays an active role along the entire value chain. One result of the wide-spread misperception that the private sectors deserves most of the credit is that businesses are able to skim a disproportionate level of the returns for themselves.
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