How “economic recovery” is affecting haves and have-nots

May 6, 2013

Tom Keene on Bloomberg Surveillance: Interview with The Conference Board’s Kathleen Bostjancic, May 6, 2013

TK: Your chart on net worth, we’ve got to come back and talk about this.  It’s all been about the equity markets – real estate makes a little bit of a comeback – how does that skew to the “Haves”?  It’s a huge skew, isn’t it?

KB: Yeah.

TK: I mean what is it? It’s like ten percent of the public?

KB: Well, you know it’s only the top 50 that even directly or indirectly own equities, so it skews very heavily to the top, and it’s fair to say it would probably be the top ten percent, and that unfortunately exacerbates maybe the largest economic problem that we have, is the growing inequality in America, and that just continues, as you said, to push that further and further.  The income gains that we have seen so far have not gone to the average worker.  Higher income workers, higher skilled workers are doing a bit better, holders of capital and assets have done better, but as the employment data showed on Friday, we get surprisingly maybe moderately better numbers, but average hourly earnings are stuck at 1.9% year on year.

The cardinal maxim (from Bagehot)

July 8, 2012

“The cardinal maxim is, that any [government] aid to a present bad Bank is the surest mode of preventing the establishment of a future good Bank.”

Walter Bagehot, Lombard Street

Incredible move by B of A to make FDIC (and taxpayers) liable for derivatives losses

October 18, 2011

Why the German government cannot resolve the European financial crisis quickly

October 18, 2011

“If you try to get to the European crisis with economic rationality you will be mistaken.  What you have to do is you need to look at the legal framework, and you have to understand the legal framework.  And unfortunately the German constitution is very different when it comes to flexibility when compared to the US or to the French constitution, and that has a lot to do with Germany’s past.  So they have written a constitution in 1948 to avoid that [in] the course of emergency laws you can take a democracy back into dictatorship, therefore the hurdles are very high and that implies as well for the current situation.  And therefore I am afraid we will have to deal with this constitution, and that is going to make the process of European integration quite slow.”

Hans Guenter Redeker, head of foreign-exchange strategy at Morgan Stanley in London, speaking on Bloomberg Surveillance on Oct. 17, 2011

The ESFS is a mechanism for increasing the debt burden of European taxpayers

October 15, 2011

“The expanded powers of the 440 billion-euro ($600 billion) EFSF would allow the fund to buy the debt of stressed euro-area nations, aid troubled banks in the region and offer credit lines to governments. The EFSF’s current role is to sell bonds to finance rescue loans.”

read the full article at:



It appears as though financial markets are breathing a sigh of relief in the belief that the European Financial Stability Facility (EFSF) will be able to stanch the threat of “disorganized” default in Greece and beyond.  The ESFS is a remarkable mechanism.  It is widely referred to as a rescue fund.  But what kind of rescue is it really?  The ESFS provides a resource for European governments that are tapped out, and could not on their own borrow more money, to borrow from.  The money is provided to allow the borrowing country to  make sovereign debt (bond) payments, bail out their banks and, by extension, bail out the counter-parties of their banks, many of which are other European banks.  The money is absolutely not provided for the purpose of providing fiscal stimulus – government spending – that might stimulate the economy and (if properly deployed) generate new wealth.  No, the money is provided to pay prior debts, and it itself must be paid back.  Ponzi scheme, anyone?  What it all amounts to is adding yet more debt to the public tab while protecting the financial markets and investors from losses…for now.  The rationale for doing so is the carnage that would be created by “disorderly” defaults, and that a “Lehman-like” freeze-up of the financial system would wreak havoc on the global economy.   Thus, the economy is held hostage, and the governments (read: taxpayers) are being ransomed.  And make no mistake, the economy is genuinely hostage.  Defaults would, and will, cause severe and unpredictable economic damage.  Of course, it is hard to believe that the system will be able to make any eventual default “orderly.”  Default will be disorderly thanks to the impossibility of understanding the chain of exposures created by credit default swaps (CDS) and synthetic securities constructed from them.  Since CDS are contracts between two parties, there is no way the outside world can predict the chain of failures that a “credit event” (read: default) would unleash.  Presumably European regulators (and those in other countries) have been demanding that banks come clean and show them all the contracts to give them some idea of the chains of relationship.  Maybe that is the justification for raising the debt still further just to buy time.  Who knows.  One can only hope.  But chains is the right word…the new chains of servitude are paper chains.

The debt trap of trying to join the rentier class

September 14, 2011

“The distinguishing characteristic of economic rent is that earning it requires no effort whatsoever. Indeed, the regular rent tenants pay landlords becomes economic rent only after subtracting whatever amount the landlord actually spent to keep the place standing. Most members of the rentier class are very rich. One might like to join that class. And so our paradox (seemingly) is resolved. With the real estate boom, the great mass of Americans can take on colossal debt today and realize colossal capital gains—and the concomitant rentier life of leisure—tomorrow. If you have the wherewithal to fill out a mortgage application, then you need never work again. What could be more inviting—or, for that matter, more egalitarian?  That’s the pitch, anyway. The reality is that, although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.”

Michael Hudson, in The New Road to Serfdom, An Illustrated Guide to the Coming Real Estate Collapse, published May 2006 in Harper’s

“The normal structure of finance has government standing behind it, so that when markets fail, when banks are in trouble, governments stand up and shore up the system”

September 14, 2011

Lena Komileva, global head of G-10 strategy in London at Brown Brothers Harriman & Co., speaking Sept. 12, 2011 on Bloomberg Surveillance

“Crisis brings us back to the basics of how economies and financial systems work.  They are social structures that are purely man-made, and they depend on trust.  This is what we don’t have in the European banking system at the moment.  The English word ‘credit’ comes from a Latin expression meaning, “He believes,” or, “He trusts.”   And indeed, modern economies are dependent on financial systems being trustworthy, to make payments, to store wealth and manage risks, to help economic activity run.  So recent developments have brought these fundamentals into question.

“The normal structure of finance has governments standing behind it, so that when markets fail, when banks are in trouble, governments stand up and shore up the system. We have all been reminded through this banking crisis in Europe that financial and economic activity depends on entirely on people, that includes governments, keeping their commitments.  What the European governments have done, however, is said, “No we cannot keep our commitments, not only can we [not] pay off all our loans, but we cannot possibly shore up the financial system.”  Indeed, there is no single European national budget that is big enough to backstop the level of financial liabilities that are currently a risk.  I mean, Ireland is a very good example.  Whereby Ireland was, is, a very solvent economy but it has an insolvent financial system, and the governments struggle to backstop this. Unpayable loans have brought the whole economy into a depression-like scenario.

“So, the lesson here is that it is time for governments to step back in.  It’s time for trust to return.  Once it’s lost it needs to be won back.  And the speed with which it returns depends crucially on whether politicians, who decide what governments do, realize that a breakdown in trust in financial instruments and in financial institutions is bound to have a very central, core effect on economic activity in the Euro area.”

Our comment: Well, yes…but the problem is for the last decade plus, the players in financial systems have been screaming that they ought to have no regulation, and be free to take whatever wild risks they choose, keep the profit, and socialize those risks.  Now they want rescue, while still being free to serve themselves rather than the broader public interest (though in their rhetoric they tend to equate their action in their own self-interest with ultimate broader public interests via the magic of free markets that turn unbridled greed into virtue).  And any attempt by politicians to demand broader responsibility to those ultimately shouldering the risk – taxpayers – is still met with outrage from the dependent financial system.  The situation is very much like the US Savings and Loan debacle:  deregulation of the industry permitted wild risks to be taken, and when it all came crashing down, the government stepped in to pick up the tab.  A cynic would say that it all was a government-sponsored means of transferring wealth from poor to rich, and a cynic would say the same process is underway right now.  And a cynic might be right.

What politicians are grappling with now is a battle over who pays for what, from whom and to whom wealth is being transferred going forward, and what will be the ultimate structure that emerges.  Unfortunately, the ideology of unfettered risk-taking (with an implicit government backstop that must never be mentioned for fear of justifying government regulation of risk) is so deeply entrenched in the functions and functionaries of modern finance that it will be very difficult to let these people return to business as usual.  At the same time, it is very difficult to develop a new form of business as usual if the architects of the current system are responsible for building the new structures.  Yet this is the most likely scenario, given the wealth and political power that those the existing financial system amassed during the last decades.  As a result, any ‘solutions’ that emerge are likely to lead to much greater problems in the future.


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