"End of Wall Street Boom" - Must-read history

Moderators: Elvis, DrVolin, Jeff

The End

Postby JackRiddler » Thu Nov 25, 2010 10:40 pm

...

Top of the thread to anyone reading, my grab-bag catch-up is complete.

Here is another most important catch of recent months for me -- Richard Heinberg acting as a corrective to Taibbi and others who see money games as the sole cause of every crisis.

http://www.energybulletin.net/print/53766

Published on Energy Bulletin (http://www.energybulletin.net)

Temporary recession or the end of growth?
Published by Post Carbon Institute on Wed, 08/11/2010 - 07:00
Original article: http://www.postcarbon.org/article/13059 ... the-end-of

by Richard Heinberg


This is an updated version of an article which was originally published in August 2009.

Everyone agrees: our economy is sick. The inescapable symptoms include declines in consumer spending and consumer confidence, together with a contraction of international trade and available credit. Add a collapse in real estate values and carnage in the automotive and airline industries and the picture looks grim indeed.

But why are both the U.S. economy and the larger global economy ailing? Among the mainstream media, world leaders, and America’s economists-in-chief (Treasury Secretary Geithner and Federal Reserve Chairman Bernanke) there is near-unanimity of opinion: these recent troubles are primarily due to a combination of bad real estate loans and poor regulation of financial markets.

This is the Conventional Diagnosis. If it is correct, then the treatment for our economic malady logically includes heavy doses of bailout money for beleaguered financial institutions, mortgage lenders, and car companies; better regulation of derivatives and futures markets; and stimulus programs to jumpstart consumer spending. All of these measures have been tried—and found wanting.

Is the diagnosis therefore fundamentally flawed? The metaphor needs no belaboring: we all know that tragedy can result from a doctor’s misreading of symptoms, mistaking one disease for another.

Something similar holds for our national and global economic infirmity. If we don’t understand why the world’s industrial and financial metabolism has seized up, we are unlikely to apply the right medicine and could end up making matters much worse than they would otherwise be.

To be sure: the Conventional Diagnosis is clearly at least partly right. The causal connections between subprime mortgage loans and the crises at Fannie Mae, Freddie Mac, and Lehman Brothers have been thoroughly explored and are well known. Clearly, over the past few years, speculative bubbles in real estate and the financial industry were blown up to colossal dimensions, and their bursting was inevitable. It is hard to disagree with the words of Australian Prime Minister Kevin Rudd, in his July 25, 2009 essay in the Sydney Morning Herald: “The roots of the crisis lie in the preceding decade of excess. In it the world enjoyed an extraordinary boom…. However, as we later learnt, the global boom was built in large part on a … house of cards. First, in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: ‘For 25 years [the West] has been consuming more than we have been producing … living beyond our means.’” (1)

But is this as far as we need look to get to the root of the continuing global economic meltdown?

A case can be made that dire events having to do with real estate, the derivatives markets, and the auto and airline industries were themselves merely symptoms of an even deeper, systemic dysfunction that spells the end of economic growth as we have known it.

In short, I am suggesting an Alternative Diagnosis. This explanation for the economic crisis is not for the faint of heart because, if correct, it implies that the patient is far sicker than even the most pessimistic economists are telling us. But if it is correct, then by ignoring it we risk even greater peril.

Economic Growth, The Financial Crisis, and Peak Oil

For several years, a swelling subculture of commentators (which includes the present author) has been forecasting a financial crash, basing this prognosis on the assessment that global oil production was about to peak. (2) Our reasoning went like this:

Continual increases in population and consumption cannot continue forever on a finite planet. This is an axiomatic observation with which everyone familiar with the mathematics of compounded arithmetic growth must agree, even if they hedge their agreement with vague references to “substitutability” and “demographic transitions.” (3)

This axiomatic limit to growth means that the rapid expansion in both population and per-capita consumption of resources that has occurred over the past century or two must cease at some particular time. But when is this likely to occur?

The unfairly maligned Limits to Growth studies, published first in 1972 with periodic updates since, have attempted to answer the question with analysis of resource availability and depletion, and multiple scenarios for future population growth and consumption rates. The most pessimistic scenario in 1972 suggested an end of world economic growth around 2015. (4)

But there may be a simpler way of forecasting growth’s demise.

Energy is the ultimate enabler of growth (again, this is axiomatic: physics and biology both tell us that without energy nothing happens—certainly not growth). Industrial expansion throughout the past two centuries has in every instance been based on increased energy consumption. (5) More specifically, industrialism has been inextricably tied to the availability and consumption of cheap energy from coal and oil (and more recently, natural gas). However, fossil fuels are by their very nature depleting, non-renewable resources. Therefore (according to the Peak Oil thesis), the eventual inability to continue increasing supplies of cheap fossil energy will lead to a cessation of economic growth in general, unless alternative energy sources and efficiency of energy use can be deployed rapidly and to a sufficient degree. (6)

Of the three conventional fossil fuels, oil is arguably the most economically vital, since it supplies 95 percent of all transport energy. Further, petroleum is the fuel with which we are likely to encounter supply problems soonest, because global petroleum discoveries have been declining for decades, and most oil producing countries are already seeing production declines. (7)

So, by this logic, the end of economic growth (as conventionally defined) is inevitable, and Peak Oil is the likely trigger.

Why would Peak Oil lead not just to problems for the transport industry, but a more general economic and financial crisis? During the past century growth has become institutionalized in the very sinews of our economic system. Every city and business wants to grow. This is understandable merely in terms of human nature: nearly everyone wants a competitive advantage over someone else, and growth provides the opportunity to achieve it. But there is also a financial survival motive at work: without growth, businesses and governments are unable to service their debt. And debt has become endemic to the industrial system. During the past couple of decades, the financial services industry has grown faster than any other sector of the American economy, even outpacing the rise in health care expenditures, accounting for a third of all growth in the U.S. economy. From 1990 to the present, the ratio of debt-to-GDP expanded from 165 percent to over 350 percent. In essence, the present welfare of the economy rests on debt, and the collateral for that debt consists of a wager that next year’s levels of production and consumption will be higher than this year’s.

Given that growth cannot continue on a finite planet, this wager, and its embeddedness in the institutions of finance, can be said to constitute history’s greatest Ponzi scheme. We have justified present borrowing with the irrational belief that perpetual growth is possible, necessary, and inevitable. In effect we have borrowed from future generations so that we could gamble away their capital today.

Until recently, the Peak Oil argument has been framed as a forecast: the inevitable decline in world petroleum production, whenever it occurs, will kill growth. But here is where forecast becomes diagnosis: during the period from 2005 to 2008, production stopped growing and oil prices rose to record levels. By July of 2008, the price of a barrel of oil was nudging close to $150—half again higher than any previous petroleum price in inflation-adjusted terms—and the global economy was beginning to topple. The auto and airline industries shuddered; ordinary consumers had trouble buying gasoline for their commute to work while still paying their mortgages. Consumer spending began to decline. By September the economic crisis was also a financial crisis, as banks trembled and imploded. (8)
Given how much is at stake, it is important to evaluate the two diagnoses (Conventional and Peak Oil) on the basis of facts, not preconceptions.

It is unnecessary to examine evidence supporting or refuting the Conventional Diagnosis, because its validity is not in doubt—as a partial explanation for what is occurring. The question is whether it is a sufficient explanation, and hence an adequate basis for designing a successful response.

What’s the evidence favoring the Alternative? A good place to begin is with a recent paper by economist James Hamilton of the University of California, San Diego, titled “Causes and Consequences of the Oil Shock of 2007-08,” which discusses oil prices and economic impacts, explaining how and why the economic crash is related to the oil price shock of 2008. (9)

Hamilton starts by citing previous studies showing a tight correlation between oil price spikes and recessions. On the basis of this correlation, every attentive economist should have forecast a steep recession for 2008. “Indeed,” writes Hamilton, “the relation could account for the entire downturn of 2007-08…. If one could have known in advance what happened to oil prices during 2007-08, and if one had used the historically estimated relation [between price rise and economic impact]… one would have been able to predict the level of real GDP for both of 2008:Q3 and 2008:Q4 quite accurately.”

Again, this is not to ignore the role of the financial and real estate sectors in the ongoing global economic meltdown. But in the Alternative Diagnosis the collapse of the housing and derivatives markets is seen as amplifying a signal ultimately emanating from a failure to increase the rate of supply of depleting resources. Hamilton again: “At a minimum it is clear that something other than housing deteriorated to turn slow growth into a recession. That something, in my mind, includes the collapse in automobile purchases, slowdown in overall consumption spending, and deteriorating consumer sentiment, in which the oil shock was indisputably a contributing factor.”

Moreover, Hamilton notes that there was “an interaction effect between the oil shock and the problems in housing.” That is, in many metropolitan areas, house prices in 2007 were still rising in the zip codes closest to urban centers but already falling fast in zip codes where commutes were long. (10)

Why Did the Oil Price Spike?

Those who espouse the Conventional Diagnosis for our ongoing economic collapse might agree that there was some element of causal correlation between the oil price spike and the recession, but they would deny that the price spike itself had anything to do with resource limits, because (they say) it was caused mostly by speculation in the oil futures market, and had little to do with fundamentals of supply and demand.

In this, the Conventional Diagnosis once again has some basis in reality. Speculation in oil futures during the period in question almost certainly helped drive oil prices higher than was justified by fundamentals. But why were investors buying oil futures? Was the mania for oil contracts just another bubble, like the dot-com stock frenzy of the late ’90s or the real estate boom of 2003 to 2006?

During the period from 2005 to mid-2008, demand for oil was growing, especially in China (which went from being self-sufficient in oil in 1995 to being the world’s second-foremost importer, after the U.S., by 2006). But the global supply of oil was essentially stagnant: monthly production figures for crude oil bounced around within a fairly narrow band between 72 and 75 million barrels per day. As prices rose, production figures barely budged in response. There was every indication that all oil producers were pumping flat-out: even the Saudis appeared to be rushing to capitalize on the price bonanza.

Thus a good argument can be made that speculation in oil futures was merely magnifying price moves that were inevitable on the basis of the fundamentals of supply and demand. James Hamilton (in his publication previously cited) puts it this way: “With hindsight, it is hard to deny that the price rose too high in July 2008, and that this miscalculation was influenced in part by the flow of investment dollars into commodity futures contracts. It is worth emphasizing, however, that the two key ingredients needed to make such a story coherent—a low price elasticity of demand, and the failure of physical production to increase—are the same key elements of a fundamentals-based explanation of the same phenomenon. I therefore conclude that these two factors, rather than speculation per se, should be construed as the primary cause of the oil shock of 2007-08.”

Aftermath of the Peak

There is also controversy over to what degree troubles in the automobile, trucking, and airline industries should be attributed to the oil price spike or the economic crash. Of course, if the Alternative Diagnosis is correct, the latter two events are causally related in any case. However, it may be helpful to review the situation.
Everyone knows that GM and Chrysler went bankrupt in 2009 because U.S. car sales cratered. Sales of light trucks, the most profitable vehicles, took the biggest hit during 2008, as fuel prices soared and car buyers avoided gas-guzzlers. It was at this point that the auto companies really began feeling the pain.

The airline industry’s ills are summarized in a recent GAO document: “After 2 years of profits, the U.S. passenger airline industry lost $4.3 billion in the first 3 quarters of 2008 [as jet fuel prices climbed]. Collectively, U.S. airlines reduced domestic capacity, as measured by the number of seats flown, by about 9 percent from the fourth quarter of 2007 to the fourth quarter of 2008…. To reduce capacity, airlines reduced the overall number of active aircraft in their fleets by 18 percent…. Airlines also collectively reduced their workforces by about 28,000, or nearly 7 percent, from the end of 2007 to the end of 2008…. The contraction of the U.S. airline industry in 2008 reduced airport revenues, passengers’ access to the national aviation system, and revenues for the Trust Fund.” (11)

For the trucking industry, fuel accounts for nearly 40 percent of total operational costs. In 2007, as diesel prices rose, carriers began losing money and added fuel price surcharges; meanwhile the volume of freight began falling. After July 2008, as oil prices crashed, tonnage continued to decline. Overall, the cumulative decrease in loads for flatbed, tanker, and dry vans ranged between 15 percent and 20 percent just in the period from June to December 2008. (12)

This last set of statistics raises a couple of questions crucial to understanding the Alternative Diagnosis: Why, if global oil production had just peaked, did petroleum prices fall in the last five months of 2008? And, if oil prices were a major factor in the economic crisis, why didn’t the economy begin to turn around after the prices softened?

Why Did Oil Prices Fall?
And Why Didn’t Lower Oil Prices Lead to a Quick Recovery?


The Peak Oil thesis predicts that, as world oil production reaches its maximum level and begins to decline, the price of oil will rise dramatically. But it also forecasts a dramatic increase in the volatility of prices.

The argument goes as follows. As oil becomes scarce, its price will rise until it begins to undermine economic activity in general. Economic contraction will then result in substantially reduced demand for oil, which will in turn cause its price to fall temporarily. Then one of two things will happen: either (a) the economy will begin to recover, stoking renewed oil demand, leading again to high prices which will again undermine economic activity; or (b), if the economy does not quickly recover, petroleum production will gradually fall due to depletion until spare production capacity (created by lower demand) is wiped out, leading again to higher prices and even more economic contraction. In both cases, oil prices remain volatile and the economy contracts. (13)

This scenario corresponds very closely with the reality that is unfolding, though it remains to be seen whether situation (a) or (b) will ensue over the somewhat longer term (2011-2015).

Over the past five years, oil prices rose and fell more dramatically than would have been the case if it had not been for widespread speculation in oil futures. Nevertheless, the general direction of prices—way up, then way down, then part-way back up—is entirely consistent with the Peak Oil thesis and the Alternative Diagnosis.

Why has the economy not quickly recovered, given that oil prices are now only half what they were in July 2008? Again, Peak Oil is not the only cause of the current economic crisis. Enormous bubbles in the real estate and finance sectors constituted accidents waiting to happen, and the implosion of those bubbles has created a serious credit crisis (as well as solvency and eventual currency crises) that will take years to resolve even if energy supplies don’t pose a problem.

But now the potential for renewed high oil prices acts as a ceiling for economic recovery. Whenever the economy does appear to show renewed signs of life (as happened in late 2009 and early 2010, with stock values rebounding and economic activity increasing somewhat), oil prices will take off again as oil speculators anticipate a recovery of demand. Indeed, oil prices have rebounded from $30 in January 2009 to roughly $80 currently, provoking concern that high energy prices could nip recovery in the bud. (14)

A barrel of oil from newly developed sources costs in the neighborhood of $60 to produce, now that all of the cheaper prospects have been exploited: finding new oilfields today usually means drilling under miles of ocean water, or in politically unstable nations where equipment and personnel are at high risk. (15) So as soon as consumers demand more oil, the price will have to stay noticeably above that figure in order to provide the incentive for producers to drill.

Volatile oil prices hurt on the upside, but they also hurt on the downside. The oil price collapse of August-December 2008, plus the worsening credit crisis, caused a dramatic contraction in oil industry investment, leading to the cancellation of about $150 billion worth of new oil production projects—whose potential productive capacity will be required to offset declines in existing oilfields if world oil production is to remain stable. (16) This means that even if demand remains low, production capacity will almost certainly decline even below those depressed demand levels, causing oil prices to rise again in real terms at some point, perhaps two to four years from now. Volatile petroleum prices also hurt the development of alternative energy, as was shown during late 2008 and early 2009 when falling oil prices led to financial troubles for ethanol manufacturers. (17)

One way or another, growth will be highly problematic if not unachievable.

Big Picture Diagnosis: Continuing the Trail of Logic

At this point in the discussion many readers will be wondering why alternative energy sources and efficiency measures cannot be deployed to solve the Peak Oil crisis. After all, as petroleum becomes more expensive, ethanol, biodiesel, and electric cars all start to look more attractive both to producers and consumers. Won’t the magic of the market intervene to render oil shortages irrelevant to future growth?

It is impossible in the context of this discussion to provide a detailed explanation of why the market probably cannot solve the Peak Oil problem. Such an explanation requires a discussion of energy evaluation criteria, and an analysis of many individual energy alternatives on the basis of those criteria. I have offered an overview of this subject elsewhere. (18)

My summary conclusions in this regard are as follows.

About 85 percent of our current energy is derived from three primary sources—oil, natural gas, and coal—that are non-renewable, whose production is likely to peak and decline in the next two decades leading to severe shortages, and whose environmental impacts are unacceptable. While these sources historically have had very high economic value, we cannot rely on them in the future; indeed, the longer the transition to alternative energy sources is delayed, the more difficult that transition will be unless some practical mix of alternative energy systems can be identified that will have superior economic and environmental characteristics.

But identifying such a mix is harder than one might initially think. Each energy source has highly specific characteristics. In fact, it was the characteristics of our present energy sources (principally oil, coal, and natural gas) that enabled the building of an urbanized society with high mobility, large population, and high economic growth rates. Surveying the available alternative energy sources for criteria such as energy density, environmental impacts, reliance on depleting raw materials, intermittency versus constancy of supply, and the percentage of energy returned on the energy invested in energy production, none currently appears capable of perpetuating this kind of society.

Moreover, national energy systems are expensive and slow to develop. Energy efficiency likewise requires investment, and further incremental investments in efficiency tend to yield diminishing returns over time, since it is impossible to perform work with zero energy input. Where is there the will or ability to muster sufficient investment capital for deployment of alternative energy sources and efficiency measures on the scale needed?

While there are many successful alternative energy production installations around the world (ranging from small home-scale photovoltaic systems to large “farms” of three-megawatt wind turbines), there are very few modern industrial nations that now get the bulk of their energy from sources other than oil, coal, and natural gas. One example is Sweden, which obtains most of its energy from nuclear and hydropower. Another is Iceland, which benefits from unusually large domestic geothermal resources not found in most other countries. Even for these two nations, the situation is complex: the construction of the infrastructure for their power plants mostly relied on fossil fuels for the mining of the ores and raw materials, for materials processing, for transportation, for the manufacturing of components, for the mining of uranium, for construction energy, and so on. Thus a meaningful energy transition away from fossil fuels is still a matter of theory and wishful thinking, not reality.

My conclusion from a careful survey of energy alternatives, then, is that there is little likelihood that either conventional fossil fuels or alternative energy sources can be counted on to provide the amount and quality of energy that will be needed to sustain economic growth—or even current levels of economic activity—during the remainder of this century. (19)

But the problem extends beyond oil and other fossil fuels: the world’s fresh water resources are strained to the point that billions of people may soon find themselves with only precarious access to water for drinking and irrigation. Biodiversity is declining rapidly. We lose 24 billion tons of topsoil each year to erosion. And many economically significant minerals—from antimony to zinc—are depleting quickly, requiring the mining of ever lower-grade ores in ever more remote locations. Thus the Peak Oil crisis is really just the leading edge of a broader Peak Everything dilemma.

In essence, humanity faces an entirely predictable peril: our population has been growing dramatically for the past 200 years (expanding from under one billion to nearly seven billion today), while our per-capita consumption of resources has also grown. For any species, this is virtually the definition of biological success. And yet all of this has taken place in the context of a finite planet with fixed stores of non-renewable resources (fossil fuels and minerals), a limited ability to regenerate renewable resources (forests, fish, fresh water, and topsoil), and a limited ability to absorb industrial wastes (including carbon dioxide). If we step back and look at the industrial period from a broad historical perspective that is informed by an appreciation of ecological limits, it is hard to avoid the conclusion that we are today living at the end of a relatively brief pulse—a 200-year rapid expansionary phase enabled by a temporary energy subsidy (in the form of cheap fossil fuels) that will inevitably be followed by an even more rapid and dramatic contraction as those fuels deplete.

The winding down of this historic growth-contraction pulse doesn’t necessarily mean the end of the world, but it does mean the end of a certain kind of economy. One way or another, humanity must return to a more normal pattern of existence characterized by reliance on immediate solar income (via crops, wind, or the direct conversion of sunlight to electricity) rather than stored ancient sunlight.

This is not to say that the remainder of the 21st century must consist of a collapse of industrialism, a die-off of most of the human population, and a return by the survivors to a way of life essentially identical to that of 16th century peasants or indigenous hunter-gatherers. It is possible instead to imagine acceptable and even inviting ways in which humanity could adapt to ecological limits while further developing cultural richness, scientific understanding, and quality of life (more of this below).

But however it is negotiated, the transition will spell an end to economic growth in the conventional sense. And that transition appears to have begun.

How Do We Know Which Diagnosis Is Correct?

If the patient is an individual human and the cause of distress is uncertain, more diagnostic tests can be prescribed. But to what sorts of blood tests, x-rays, and CAT scans can we subject the national or global economy?

In a sense, the tests have already been done. During the past few decades thousands of scientific surveys of natural resources, biodiversity, and ecosystems have shown increasing rates of depletion and decline. (20) The continuing increase in human population, pollution, and consumption are likewise well documented. This information formed the basis for the well known Limits to Growth studies, which have used computer modeling to show how existing trends are likely to play out—with most resulting scenarios showing them leading to an end of economic growth and a collapse of industrial output some time in the early 21st century.

Why are the results of such diagnostic tests not universally accepted as a challenge to expectations of continued growth? Primarily because their conclusion runs counter to the beliefs and proclamations of most economists, who maintain that there are no practical limits to growth. They deny that resource constraints provide an eventual cap on production and consumption. And so their diagnostic efforts tend to ignore environmental factors in favor of easily measured internal features of the human economy such as money supply, consumer confidence, interest rates, and price indices.

Ecologist Charles Hall, among many others, has argued that the discipline of economics, as currently practiced, does not constitute a science, since it proceeds primarily on the basis of correlative logic rather than through the building of knowledge by a continuous, rigorous process of proposing and testing hypotheses. (21) While economics uses complex mathematics, as science does, its basic assertions about the world—such as the principle of infinite substitutability, which holds that for any resource that becomes scarce, the market will find a substitute—are not subjected to careful experimental examination. (It is worth noting that Hall and others have made the effort to lay the conceptual foundations for a new economics based on scientific principles and methods, which they call “biophysical economics.” (22))

Moreover, mainstream economists failed on the whole to foresee the current crash. There was no consistent or concerted effort on the part of Secretaries of the Treasury, Federal Reserve Chairmen, or “Nobel” prize-winning economists to warn policy makers or the general public that, sometime in the early 21st century, the global economy would begin to come apart at the seams. (23) One might think that this predictive failure—the inability to foresee so historically significant an event as the rapid contraction of nearly the entire global economy, entailing the failure of some of the world’s largest banks and manufacturing companies—would cause mainstream economists to stop and re-examine their fundamental premises. But there is little evidence to suggest that this is occurring.

At the risk of repetition: physical scientists from several disciplines have indeed foreseen an end to economic growth in the early 21st century, and have warned policy makers and the general public on many occasions.

Whom should we believe?

The specifics of the Alternative Diagnosis are falsifiable. If economic activity were to rebound above 2007 levels, or if oil production were to rise significantly above the July 2008 high-water mark, then the attribution of the current economic crisis to resource-tied limits to growth may be considered at least partly disproven. However, even if these things were to occur, the underlying reasoning behind the Alternative Diagnosis might still be correct. If the world oil production peak is delayed until, let us say, 2015 or 2020, and if another—this time bottomless—global economic crash results then, the ultimate outcome will be essentially the same. But if, meanwhile, the Alternative Diagnosis were to be taken seriously and acted upon, the consequences of doing so would be beneficial: a decade would have been spent preparing for the event.

Could the Alternative Diagnosis be altogether wrong? That is, might conventional economists be right in thinking that growth can continue forever? It is often said that anything is possible, but some things are clearly much more possible than others. The perpetual growth of human population and consumption within the confines of a finite planet seems like a very long shot indeed, especially since warning signs are everywhere apparent that ecological limits are already being reached and surpassed. (24)

What Not to Do: Prescribe Punishingly Expensive Placebos

If the physical scientists who warn about limits to growth are right, confronting the global economic meltdown implies far more than merely getting the banks and mortgage lenders back on their feet. Indeed, in that case we face a fundamental change in our economy as significant as the advent of the industrial revolution. We are at a historic inflection point—the ending of decades of expansion and the beginning of an inevitable period of contraction that will continue until humanity is once again living within the limits of Earth’s regenerative systems.

But there are few signs that policy makers understand any of this. Their thinking appears to be shaped primarily by mainstream economists’ assurances that growth can and must continue into the indefinite future, and that the economic contraction the world has recently experienced is only temporary—a problem that can and must be solved.

Still, the problem is not a minor one in the eyes of economists and policy makers. Consider the gargantuan size of the Treasury and Federal Reserve bailouts and stimulus packages that were deployed in the so-far futile attempt to restart growth. According to the special inspector general of the U.S. government’s Troubled Asset Relief Program (TARP), in remarks submitted to the House Committee on Oversight and Government Reform on July 21, 2009, $23.7 trillion were committed in “total potential federal government support.” This is expensive medicine indeed. It takes a moment to even begin to comprehend the enormity of the figure. It represents about half of annual world GDP, and is over three times the total amount spent by the U.S. government, in inflation-adjusted dollars, on all wars combined, from 1776 to the present. It is nearly fifty times the cost of the New Deal.

Other nations, including Britain, China, and Germany have committed to paying for stimulus packages and bailouts that, while much smaller in absolute terms, represent an impressive (or should we say frightful?) share of national GDP.

If the Alternative Diagnosis is valid, none of this will work in the end, because existing financial institutions—with their basis in debt and interest and their requirements for constant expansion—cannot be made to function in a context where energy and resource constraints impose effective caps on manufacturing and transport.

Are the bailouts and stimulus packages working? Much evidence suggests that they are not, except in limited ways. While during several months in 2010 U.S. economic data showed the economy growing, most of that expansion was directly or indirectly attributable to government stimulus payments. Meanwhile, tax revenues declined, leading to severe shortfalls for state and local governments. Unemployment remains high, with little prospect of improvement. (25)
President Obama has made the argument that the bailouts of banks and businesses were justified to stabilize the system long enough so that leaders can make fundamental changes to institutions and regulations, enabling the economy to then go forward healthier and more immune to similar crises in the future. But there is little to suggest that the kinds of systemic changes that are actually needed (ones that would enable the economy to function during a prolonged period of contraction) are under way or even contemplated. Meanwhile, as growth-based institutions are temporarily propped up, the ultimate scale of the damage is likely only to increase: when the inevitable collapse of those institutions does come, the consequences will likely be even worse because so much capital will have been squandered in attempting to salvage them.

In using up non-renewable resources like metals, minerals, and fossil fuels, we have stolen from future generations. Now in effect we are stealing from those generations the financial wherewithal that could have been used to build a bridge to a sustainable economy. The construction of a renewable energy infrastructure (including not only generating capacity, but distribution and storage systems, as well as post-petroleum transport and agriculture systems) will require enormous investments and decades of work. Where will the investment capital come from if governments are already buried in debt? If we have committed nearly $24 trillion to propping up an old economy with no real survival prospects, what’s left with which to finance the new one?

If the current prescription for our economic malady is wrong-headed, the same is true of many proposed cures for our energy problems. According to the Conventional Diagnosis, today’s high oil prices are due to speculation; the cure must therefore lie in the tighter regulation of oil futures trading (which may be a good idea, though it doesn’t get to the heart of the problem), while providing more opportunities to oil companies to explore for U.S. domestic oil (even though the likely production rates from currently off-limits reserves would be relatively paltry, and would have a negligible effect on oil prices). In fact, though, investing further in fossil fuel energy systems (including “clean coal” technology) will yield declining returns, given that the highest quality resources have already been used up; meanwhile, doing so takes investment capital away from the development of renewable energy, which we will have to rely on increasingly as fossil fuels deplete. (26)

What is required but is still utterly lacking is a fundamental recognition that circumstances have changed: what worked decades ago will not work now.

What To Do: Adapt to the New Reality

If the Alternative Diagnosis is correct, there will be no easy fix for the current economic breakdown. Some illnesses are not curable; they require that we simply adapt and make the best of our new situation.

If humanity has indeed embarked upon the contraction phase of the industrial pulse, we should assume that ahead of us lie much lower average income levels (for nearly everyone in the wealthy nations, and for high wage earners in poorer nations); different employment opportunities (fewer jobs in sales, marketing, and finance; more in basic production); and more costly energy, transport, and food. Further, we should assume that key aspects of our economic system that are inextricably tied to the need for future growth will cease to work in this new context.

What can we do to adapt most rapidly and successfully?

Rather than attempting to prop up banks and insurance companies with trillions in bailouts, it would probably be better simply to let them fail, however nasty the short-term consequences, since they will fail anyway sooner or later. The sooner they are replaced with institutions that serve essential functions within a contracting economy, the better off we all will be. (27)

Meanwhile the thought-leaders in society, especially the President, must begin breaking the news—in understandable and measured ways—that growth isn’t returning and that the world has entered a new and unprecedented economic phase, but that we can all survive and thrive in this challenging transitional period if we apply ourselves and work together. At the heart of this general re-education must be a public and institutional acknowledgment of three basic rules of sustainability: growth in population cannot be sustained; the ongoing extraction of non-renewable resources cannot be sustained; and the use of renewable resources is sustainable only if it proceeds at rates below those of natural replenishment.

Without cheap energy, global trade cannot increase. This doesn’t mean that trade will disappear, only that economic incentives will inexorably shift as transport costs rise, favoring local production for local consumption. But this may be a nice way of putting it: if and when fuel shortages arise, fragile globe-spanning systems of provisioning could be disrupted, with dire effects for consumers cut off from sources of necessary products. Thus a high priority must be placed on the building of community resilience through the preferential local sourcing of necessities and the maintenance of larger regional inventories—especially of food and fuel. (28)
It currently takes an average of 8.5 calories of energy from oil and natural gas to produce each calorie of food energy in industrial food systems. Without cheap fuel for agriculture, farm production will plummet and farmers will go bankrupt—unless proactive efforts are undertaken to reform agriculture to reduce its reliance on fossil fuels. (29)

Obviously, alternative energy sources and energy efficiency strategies must be high priorities, and must be subjects of intensive research using a carefully chosen spectrum of criteria. The best candidates will have to be funded robustly even while fossil fuels are still relatively cheap: the build-out time for the renewable energy infrastructure will inevitably be measured in decades and so we must begin the process now rather than waiting for market forces to lead the way.

In the face of credit and (potential) currency crises, new ways of financing such projects will be needed. Given that our current monetary and financial systems are founded on the need for growth, we will require new ways of creating money and new ways of issuing credit. Considerable thought has gone into finding solutions to this problem, and some communities are already experimenting with local capital co-ops, alternative currencies, and no-interest banks. (30)

With oil becoming increasingly expensive in real terms, we will need more efficient ways of getting people and goods around. Our first priority in this regard must be to reduce the need for transport with better urban planning and re-localized production systems. But where transport is needed, rail and light rail will probably be preferable to cars and trucks. (31)

We will also need a revolution in the built environment to minimize the requirement for heating, cooling, and artificial lighting in all our homes and public buildings. This revolution is already under way, but is currently moving far too slowly due to the inertia of established interests in the construction industry. (32)

These projects will need more than local credit and money; they will also require skilled workers. There will be a call not just for installers of solar panels and home insulation: millions of new food producers and builders of low-energy infrastructure will be needed as well. A broad range of new opportunities could open up to replace vanishing jobs in marketing and finance—if there is cheap training available at local community colleges.

It is worth noting that the $23.7 trillion recently committed for U.S. bailouts and loan guarantees represents about $80,000 for each man, woman, and child in America. A level of investment even a substantial fraction that size could pay for all needed job training while ensuring universal provision of basic necessities during the transition. What would we be getting for our money? A collective sense that, in a time of crisis, no one is being left behind. Without the feeling of cooperative buy-in that such a safety net would help engender, similar to what was achieved with the New Deal but on an even larger scale, economic contraction could devolve into a horrific fight over the scraps of the waning industrial period.

However contentious, the population question must be addressed. All problems that have to do with resources are harder to solve when there are more people needing those resources. The U.S. must encourage smaller families and must establish an immigration policy consistent with a no-growth population target. This has foreign policy implications: we must help other nations succeed with their own economic transitions so that their citizens do not have to emigrate to survive. (33)

If economic growth ceases to be an achievable goal, society will have to find better ways of measuring success. Economists must shift from assessing well-being with the blunt instrument of GDP, and begin paying more attention to indices of human and social capital in areas such as education, health, and cultural achievements. This redefinition of growth and progress has already begun in some quarters, but for the most part has yet to be taken up by governments. (34)

A case can be made that after all this is done the end result will be a more satisfying way of life for the vast majority of citizens—offering more of a sense of community, more of a connection with the natural world, more satisfying work, and a healthier environment. Studies have repeatedly shown that higher levels of consumption do not translate to elevated levels of satisfaction with life. (35) This means that if “progress” can be thought of in terms of happiness, rather than a constantly accelerating process of extracting raw materials and turning them into products that themselves quickly become waste, then progress can certainly continue. In any case, “selling” this enormous and unprecedented project to the general public will require emphasizing its benefits. Several organizations are already exploring the messaging and public relations aspects of the transition. (36) But those in charge need to understand that looking on the bright side doesn’t mean promising what can’t be delivered—such as a return to the days of growth and thoughtless consumption.

Can We? Will We?

It is important to state the implications of all this as plainly as possible. If the Alternative Diagnosis is correct, there will be no full economic “recovery”—not this year, or the next, or five or ten years from now. There may be temporary rebounds that take us back to some fraction of peak economic activity, but these will be only brief respites.

We have entered a new economic era in which the former rules no longer apply. Low interest rates and government spending no longer translate to incentives for borrowing and job production. Cheap energy won’t appear just because there is demand for it. Substitutes for essential resources will in most cases not be found. Over all, the economy will continue to shrink in fits and starts until it can be maintained by the energy and material resources that Earth can supply on an ongoing basis.

This is of course very difficult news. It is analogous to being told by your physician that you have contracted a systemic, potentially fatal disease that cannot be cured, but only managed; and managing it means you must make profound lifestyle changes.

Some readers may note that climate change has not figured prominently in this discussion. It is clearly, after all, the worst environmental catastrophe in human history. Indeed, its consequences could be far worse than the mere destruction of national economies: hundreds of millions of people and millions of other species could be imperiled. The reason for the relatively limited discussion of climate here is that (assuming the Alternative Diagnosis is correct) it is not climate change that has proven to be the most immediate limit to economic growth, but resource depletion. However, while there is not as yet general agreement on the point, climate change itself, and the needed steps to minimize it, both constitute limits to growth, just as resource depletion does. Moreover, if we fail successfully to manage the inevitable process of economic contraction that will characterize the coming decades, there will be no hope of mounting an organized and coherent response to climate change—a response consisting of efforts both to reduce climate impacts and to adapt to them. It is important to note, though, that the measures advocated here (including the development of renewable energy sources and energy efficiency, a rapid reduction of reliance on fossil fuels in transport and agriculture, and the stabilization of population levels) are among the steps that will help most to reduce carbon emissions.

Is this essay likely to change the thinking and actions of policy makers? Unfortunately, that is unlikely. Their belief in the possibility and necessity of continued growth is pervasive, and the notion that growth may no longer be possible is unthinkable. But the Alternative Diagnosis must be a matter of record. This essay, composed by a mere journalist, in many ways represents the thinking of thousands of physical scientists working over the past several decades on issues having to do with population, resources, pollution, and biodiversity. Ignoring the diagnosis itself—whether as articulated here or as implied in thousands of scientific papers—may waste our last chance to avert a complete collapse, not just of the economy, but of civility and organized human existence. It may risk a historic discontinuity with qualitative antecedents in the fall of the Roman and Mayan civilizations. (37) But there is no true precedent for what may be in store, because those earlier examples of collapse affected geographically bounded societies whose influence on their environments was also bounded. Today’s civilization is global, and its fate, Earth’s fate, and humanity’s fate are inextricably tied.

But even if policy makers continue to ignore warnings such as this, individuals and communities can take heed and begin the process of building resilience, and of detaching themselves from reliance on fossil fuels and institutions that are inextricably tied to the perpetual growth machine. We cannot sit passively by as world leaders squander opportunities to awaken and adapt to growth limits. We can make changes in our own lives, and we can join with our neighbors. We can let policy makers know we disapprove of their allegiance to the status quo, and that there are other options.

Is it too late to begin a managed transition to a post-fossil fuel society? Perhaps. But we will not know unless we try. And if we are to make that effort, we must begin by acknowledging one simple, stark reality: growth as we have known it can no longer be our goal. That party is over.

Notes

1. “Pain on the Road to Recovery” (http://www.smh.com.au/national/pain-on- ... ml?page=-1).
2. Here, for example, are a few relevant excerpts from the present author’s book The Party’s Over: Oil, War and the Fate of Industrial Societies (Gabriola Island, BC: New Society, 2003): “Our current financial system was designed during a period of consistent growth in available energy, with its designers operating under the assumption that continued economic growth was both inevitable and desirable. This ideology of growth has become embodied in systemic financial structures requiring growth…. Until now, this loose linkage between a financial system predicated upon the perpetual growth of the money supply, and an economy growing year by year because of an increasing availability of energy and other resources, has worked reasonably well—with a few notable exceptions, such as the Great Depression…. However, [when global oil production peaks] the financial system may not respond so rationally…. This might predictably trigger a financial crisis….”
3. See Albert Bartlett, “Arithmetic, Population and Energy” (lecture transcript), (http://www.globalpublicmedia.com/transcripts/645).
4. Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W. Behrens III, Limits to Growth (New York: Universe Books, 1972); Donella H. Meadows, Dennis L. Meadows, and Jorgen Randers, Beyond the Limits (Post Mills, VT: Chelsea Green, 1992); Donella H. Meadows, Dennis L. Meadows, and Jorgen Randers, Limits to Growth: The 30 Year Update (White River Junction, VT: Chelsea Green, 2003). See also the recent CSIRO study, “A Comparison of the Limits to Growth with Thirty Years of Reality” (2009) (http://www.csiro.au/files/files/plje.pdf).
5. See, for example, Robert U. Ayers and Benjamin Warr, The Economic Growth Engine: How Energy and Work Drive Material Prosperity (Cambridge, UK: Edward Elgar Publishing, 2005); and Robert Barro and Xavier Sala-i-Martin, Economic Growth (Cambridge, MA: MIT Press, 2003) (http://www.bookrags.com/research/econom ... pt-mee-01/).
6. See Richard Heinberg, The Party’s Over: Oil, War and the Fate of Industrial Societies (2003, 2005); Powerdown: Options and Actions for a PostCarbon World (2004); and The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism, and Economic Collapse (2006); as well as books by Kenneth Deffeyes, Colin Campbell, and Matthew Simmons; and websites http://www.theoildrum.com and http://www.energybulletin.net. The Association for the Study of Peak Oil organizes international conferences to study issues related to oil and gas depletion (http://www.peakoil.net and http://www.aspo-usa.com), and the U.S. chapter of ASPO publishes a weekly survey of relevant news, “Peak Oil Review,” compiled by former CIA analyst Tom Whipple. At the annual Association for the Study of Peak Oil conference in Cork, Ireland, in September 2007, former U.S. Energy Secretary, James Schlesinger, said: “Conceptually the battle is over. The peakists have won. We’re all peakists now.” See also Steve Connor, “Warning: Oil supplies are running out fast,” The Independent, August 3, 2009 (http://www.independent.co.uk/news/scien ... 66585.html).
7. The declining rate of discovery of new oilfields, and the list of past-peak oil producing countries, are widely documented; e.g.: Roger D. Blanchard, The Future of Global Oil Production: Facts, Figures, Trends and Projections by Region (Jefferson, NC: McFarlane and Co., 2005).
8. A May 4, 2009 report from Raymond James Associates (“Stat of the Week”) argued that world oil production peaked in July 2008 (http://blogs.wsj.com/environmentalcapit ... lyst-says/). In a subsequent interview, Marshall Adkins, author of the report, suggested that most knowledgeable players within the petroleum industry now accept the Peak Oil thesis in some form, whether or not they acknowledge it publicly (http://www.aspousa.org/index.php/2009/0 ... ll-adkins/).
9. Brookings Papers on Economic Activity, March 2009.
10. See Joe Cortright, “Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs,” Discussion paper, CEOs for Cities, 2008 (http://www.ceosforcities.org).
11. U.S. Government Accountability Office, “Commercial Aviation: Airline Industry Contraction Due to Volatile Fuel Prices and Falling Demand Affects Airports, Passengers, and Federal Government Revenues ,” April 21, 2009 (http://www.gao.gov/products/GAO-09-393). For a detailed discussion of the likely future impacts of high oil prices and oil shortages on the airline industry, see Charles Schlumberger, “The Oil Price Spike of 2008: The Result of Speculation or an Early Indicator of a Major and Growing Future Challenge to the Airline Industry?” Annals of Air and Space Law, Vol. XXXIV, [2009], McGill University (http://www.globalpublicmedia.com/the_oi ... ke_of_2008).
12. American Trucking Association (http://www.truckline.com/Pages/Home.aspx).
13. This scenario is implied in Robert L. Hirsch, Roger Bezdek, and Robert Wendling, “Peaking of World Oil Production: Impacts, Mitigatin and Risk Management” (U.S. Department of Energy: 2005): “As peaking is approached, liquid fuel prices and price volatility will increase dramatically….” (http://www.netl.doe.gov/publications/ot ... g_NETL.pdf).
14. See, for example, “Troubling Signs That Oil Prices Could Hamper Recovery,” Wall Street 24/7, May 8, 2009 (http://247wallst.com/2009/05/08/troubli ... -recovery/)
15. See, for example, James Herron, “Low Oil Prices, Credit Woes Could Spell Trouble for UK North Sea,” Rigzone, November 14, 2008 (http://www.rigzone.com/news/article.asp?a_id=69507).
16. Jad Mouawad, “Big Oil Projects Put in Jeopardy by Fall in Prices,” New York Times, December 15, 2008 (http://www.nytimes.com/2008/12/16/business/16oil.html)
17. See David R. Baker, “Low oil prices take wind out of renewable fuels,” San Francisco Chronicle, October 27, 2008 (http://www.sfgate.com/cgi-bin/article.c ... 13NNK4.DTL).
18. See Searching for a Miracle: Net Energy Limits and the Fate of Industrial Societies (Santa Rosa, CA: Post Carbon Institute and International Forum on Globalization, 2009 (http://www.postcarbon.org/report/44377- ... -a-miracle) .
19. This conclusion is echoed in, for example, Ted Trainer, Renewable Energy Cannot Sustain a Consumer Society (Dordrecht, The Netherlands: Springer, 2007); and (with some reservations), David J. C. McKay, Sustainable Energy Without the Hot Air (Cambridge, UK: UIK Cambridge, 2008), (http://www.withouthotair.com).
20. Just one example, from a press release April 20, 1998 describing the results of a poll commissioned by the American Museum of Natural History: “The American Museum of Natural History announced today results of a nationwide survey titled Biodiversity in the Next Millennium, developed by the Museum in conjunction with Louis Harris and Associates, Inc. The survey reveals that seven out of ten biologists believe that we are in the midst of a mass extinction of living things, and that this loss of species will pose a major threat to human existence in the next century.”
21. Charles A. S. Hall and Kent A. Klitgaard, “The Need for a New, Bioplysical-Based Paradigm in Economics for the Second Half of the Age of Oil,” International Journal of Transdisciplinary Research, Vo. 1, NO. 1 (2006); Charles A. S. Hall, D. Lindenberger, R. Kummell, T. Kroeger and W. Eichorn, “The Need to Reintegrate the Natural Sciences with Economics.” Bioscience 51:663-673, 2001.
22. Cutler J. Cleveland, “Biophysical Economics,” The Encyclopedia of Earth (http://www.eoearth.org/article/Biophysical_economics). See also the related field of Ecological Economics, especially the books of Herman Daly, including Toward a Steady State Economy (New York: Freeman, 1973); and, with Joshua Farley, Ecological Economics: Principles and Applications (Washington: Island Press, 2004).
23. The quotation marks around the Nobel name are justified because the Nobel family has never acknowledged economics as a science: the so-called “Nobel prize in economics” is awarded by a Swedish Bank.
24. See The Millennium Ecosystem Assessment (http://www.millenniumassessment.org/en/index.aspx).
25. See, for example, “John Williams: Times that Try Our Souls,” August 5, 2010 (http://www.theenergyreport.com/cs/user/print/na/7005).
26. See Richard Heinberg, Blackout: Coal, Climate and the Last Energy Crisis (Gabiola Island, BC: New Society, 2009), pages 137-143, 145-168.
27. The opinion that banks and insurance companies should be allowed to fail rather than being bailed out was voiced by many knowledgeable observers throughout late 2008 and early 2009. See for example Ambrose Evans-Pritchard, “Let banks fail, says Nobel economist Joseph Stiglitz,” London Daily Telegraph, Feb. 2, 2009 (http://www.telegraph.co.uk/finance/news ... glitz.html).
28. See Jeff Rubin, Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization. (New York: Random House, 2009).
29. See Richard Heinberg and Michael Bomford, “The Food and Farming Transition” (Sebastopol, CA: Post Carbon Institute, 2009), (http://postcarbon.org/food).
30. See Bernard Lietaer, “White Paper on All the Options for Managing a Systemic Bank Crisis” (http://www.lietaer.com/images/White_Pap ... _final.pdf). JAK in Sweden is a cooperative, member-owned bank that operates without interest (http://en.wikipedia.org/wiki/JAK_members_bank).
31. See Richard Gilbert and Anthony Perl, Transport Revolutions: Moving People and Freight Without Oil (Gabriola Island, BC: New Society, 2009).
32. The Passivhaus Institute pioneers construction methods that reduce energy input to buildings in many cases to zero (http://www.passivehouse.us). Roughly 20,000 Passivhauses have been built in Europe, only about 12 in the U.S.
33. See websites of Population Media Center (http://www.populationmedia.org/issues/), and SUSPS (http://www.susps.org/overview/immigration.html).
34. The organization Redefining Progress has developed a Genuine Progress Indicator (GPI) that incorporates many such indices (http://www.rprogress.org/sustainability ... icator.htm).
35. See, for example, “Understanding Human Happiness and Well-Being,” The Sustainable Scale Project.
36. The burgeoning Transition Town movement (http://www.transitiontowns.org) proceeds from the premise that “life can be better without fossil fuels.” YES! Magazine (http://www.yesmagazine.org) is a publication of the Positive Futures Network and highlights examples of low-impact ways of living that bring personal and social benefits. And the Simple Living Network (http://www.simpleliving.net) provides “resources, tools, examples and contacts for conscious, simple, healthy and restorative living.”
37. See Jared Diamond, Collapse How Societies Choose to Fail or Succeed (New York: Viking, 2005);Joseph Tainter, The Collapse of Complex Societies (Cambridge, UK: Cambridge University Press, 1988); and John Michael Greer, The Long Descent (Gabriola Island, BC: New Society, 2008).



Richard Heinberg is a Senior Fellow of the Post Carbon Institute and author of five books on resource depletion and societal responses to the energy problem. http://www.richardheinberg.com, http://www.postcarbon.org.


Energy Bulletin is a program of Post Carbon Institute, a nonprofit organization dedicated to helping the world transition away from fossil fuels and build sustainable, resilient communities.
Source URL: http://www.energybulletin.net/stories/2 ... end-growth

Links:
[1] http://www.postcarbon.org/article/13059 ... the-end-of
[2] http://www.postcarbon.org/article/40503 ... the-end-of
[3] http://www.smh.com.au/national/pain-on- ... ml?page=-1
[4] http://www.globalpublicmedia.com/transcripts/645
[5] http://www.csiro.au/files/files/plje.pdf
[6] http://www.bookrags.com/research/econom ... pt-mee-01/
[7] http://www.theoildrum.com/
[8] http://www.energybulletin.net/
[9] http://www.peakoil.net/
[10] http://www.aspo-usa.com/
[11] http://www.independent.co.uk/news/scien ... 66585.html
[12] http://blogs.wsj.com/environmentalcapit ... lyst-says/
[13] http://www.aspousa.org/index.php/2009/0 ... ll-adkins/
[14] http://www.brookings.edu/economics/bpea ... milton.pdf
[15] http://www.ceosforcities.org/
[16] http://www.gao.gov/products/GAO-09-393
[17] http://www.globalpublicmedia.com/the_oi ... ke_of_2008
[18] http://www.truckline.com/Pages/Home.aspx
[19] http://www.netl.doe.gov/publications/ot ... g_NETL.pdf
[20] http://247wallst.com/2009/05/08/troubli ... -recovery/
[21] http://www.rigzone.com/news/article.asp?a_id=69507
[22] http://www.nytimes.com/2008/12/16/business/16oil.html
[23] http://www.sfgate.com/cgi-bin/article.c ... 13NNK4.DTL
[24] http://www.postcarbon.org/report/44377- ... -a-miracle
[25] http://www.withouthotair.com/
[26] http://74.125.155.132/search?q=cache:Dt ... 520....pdf
[27] http://www.eoearth.org/article/Biophysical_economics
[28] http://www.millenniumassessment.org/en/index.aspx
[29] http://www.theenergyreport.com/cs/user/print/na/7005
[30] http://www.telegraph.co.uk/finance/news ... glitz.html
[31] http://postcarbon.org/food
[32] http://www.lietaer.com/images/White_Pap ... _final.pdf
[33] http://en.wikipedia.org/wiki/JAK_members_bank
[34] http://www.passivehouse.us/
[35] http://www.populationmedia.org/issues/
[36] http://www.susps.org/overview/immigration.html
[37] http://www.rprogress.org/sustainability ... icator.htm
[38] http://www.sustainablescale.org/Attract ... Being.aspx
[39] http://www.transitiontowns.org/
[40] http://www.yesmagazine.org/
[41] http://www.simpleliving.net/
[42] http://www.richardheinberg.com/
[43] http://www.postcarbon.org/
[44] http://www.postcarbon.org/donate
[45] http://www.postcarbon.org/publications/newsletters/


...

DONE.
Last edited by JackRiddler on Fri Nov 26, 2010 4:03 am, edited 1 time in total.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby 2012 Countdown » Fri Nov 26, 2010 2:31 am

From a financial board:

11-25-2010, 06:59 PM
Lots of rumours about a bank holiday being called here in Ireland this weekend, apparently the government are nationalising the banks here. Protests planned for Saturday, I expect there will be record numbers attending.
George Carlin ~ "Its called 'The American Dream', because you have to be asleep to believe it."
http://www.youtube.com/watch?v=acLW1vFO-2Q
User avatar
2012 Countdown
 
Posts: 2293
Joined: Wed Jan 30, 2008 1:27 am
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby vanlose kid » Fri Nov 26, 2010 5:12 am

2012 Countdown wrote:From a financial board:

11-25-2010, 06:59 PM
Lots of rumours about a bank holiday being called here in Ireland this weekend, apparently the government are nationalising the banks here. Protests planned for Saturday, I expect there will be record numbers attending.


related: must see.

Jim Corr: "I am asking that the Irish people unite, as our forefathers did, and take to the streets at 11am Saturday 27th from Wood Quay Dublin, to voice our anger and concern over the actions of our politicians and what is happening to Ireland."




*

Jack, great work. i'll be catching up.

*
"Teach them to think. Work against the government." – Wittgenstein.
User avatar
vanlose kid
 
Posts: 3182
Joined: Wed Oct 17, 2007 7:44 pm
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby 2012 Countdown » Fri Nov 26, 2010 11:58 am

re: Jim Corr video just posted by V-kid-

Interesting comments

1. At the 5:47 mark to 6:25, he is disappointed at the people's lack of awareness and inaction through superficial preoccupation. Seems we here in the US are not the only ones hypnotized and distracted by the entertainment complex. He also says France and Greece citizens are wondering why the Irish people are taking this without revolt.

2. At the 8:15 mark to 9:42 mark solutions/responses are presented. The Iceland response is called for. Default, and nationalization of resources.
George Carlin ~ "Its called 'The American Dream', because you have to be asleep to believe it."
http://www.youtube.com/watch?v=acLW1vFO-2Q
User avatar
2012 Countdown
 
Posts: 2293
Joined: Wed Jan 30, 2008 1:27 am
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby anothershamus » Fri Nov 26, 2010 1:42 pm

From my favorite economist and yours, Max Keiser 'jumps down, turns around, picks a bale of cotton' in this fantastic episode of: Keiser Report №98: Markets! Finance! Scandal!

First half of the show he rails on the head honchos of the system, who are stealing us blind. One interesting point: 'Congressmen by law are allowed to trade on insider information'.

In the second half, he talks to a systems analyst Nicole Foss Stoneleigh(http://theautomaticearth.blogspot.com/about where we are headed in this economic turmoil, it gets really interesting! I always watch the episodes twice to get all the little bits and pieces.



On Edit: Watch the crawler, it talks about violent riots in England that I hadn't heard about!
)'(
User avatar
anothershamus
 
Posts: 1913
Joined: Fri Jun 23, 2006 1:58 pm
Location: bi local
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby American Dream » Fri Nov 26, 2010 9:39 pm

This video is very relevant to the various narratives attempting to explain our predicament:

The Crises of Capitalism
"If you don't stand for something, you will fall for anything."
-Malcolm X
American Dream
 
Posts: 19946
Joined: Sat Sep 15, 2007 4:56 pm
Location: Planet Earth
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Sat Nov 27, 2010 1:35 am

Thanks all.

The New Yorker article turns out to be very well worth reading in full.

http://www.newyorker.com/reporting/2010 ... table=true
Archived here as fair-use with original link given for strictly non-commercial purposes of criticism, education and discussion.

Annals of Economics
What Good Is Wall Street?
Much of what investment bankers do is socially worthless.


by John Cassidy

November 29, 2010


For years, the most profitable industry in America has been one that doesn’t design, build, or sell a single tangible thing.


A few months ago, I came across an announcement that Citigroup, the parent company of Citibank, was to be honored, along with its chief executive, Vikram Pandit, for “Advancing the Field of Asset Building in America.” This seemed akin to, say, saluting BP for services to the environment or praising Facebook for its commitment to privacy. During the past decade, Citi has become synonymous with financial misjudgment, reckless lending, and gargantuan losses: what might be termed asset denuding rather than asset building. In late 2008, the sprawling firm might well have collapsed but for a government bailout. Even today the U.S. taxpayer is Citigroup’s largest shareholder.

The award ceremony took place on September 23rd in Washington, D.C., where the Corporation for Enterprise Development, a not-for-profit organization dedicated to expanding economic opportunities for low-income families and communities, was holding its biennial conference. A ballroom at the Marriott Wardman Park was full of government officials, lawyers, tax experts, and community workers, two of whom were busy at my table lamenting the impact of budget cuts on financial-education programs in Vermont.

Pandit, a slight, bespectacled fifty-three-year-old native of Nagpur, in western India, was seated near the front of the room. Fred Goldberg, a former commissioner of the Internal Revenue Service who is now a partner at Skadden, Arps, introduced him to the crowd, pointing out that, over the years, Citi has taken many initiatives designed to encourage entrepreneurship and thrift in impoverished areas, setting up lending programs for mom-and-pop stores, for instance, and establishing savings accounts for the children of low-income families. “When the history is written, Citi will be singled out as one of the pioneers of the asset movement,” Goldberg said. “They have demonstrated the capacity, the vision, and the will.”

Pandit, who moved to the United States at sixteen, is rarely described as a communitarian. A former investment banker and hedge-fund manager, he sold his investment firm to Citigroup in 2007 for eight hundred million dollars, earning about a hundred and sixty-five million dollars for himself. Eight months later, after Citi announced billions of dollars in writeoffs, Pandit became the company’s new C.E.O. He oversaw the company’s near collapse in 2008 and its moderate recovery since.

Clearly, this wasn’t the occasion for Pandit to dwell on his career, or on the role that Citi’s irresponsible actions played in bringing on the subprime-mortgage crisis. (In early 2007, his predecessor, Charles Prince, was widely condemned for commenting, “As long as the music is playing, you’ve got to get up and dance.”) Instead, Pandit talked about how well-functioning banks are essential to any modern society, adding, “As President Obama has said, ultimately there is no dividing line between Wall Street and Main Street. We will rise or we will fall together as one nation.” In the past couple of years, he went on, Citi had rededicated itself to “responsible finance.” Before he and his colleagues approved any transaction, they now asked themselves three questions: Is it in the best interests of the customer? Is it systemically responsible? And does it create economic value? Pandit indicated that other financial firms were doing the same thing. “Banks have learned how to be banks again,” he said.

About an hour later, I spoke with Pandit in a sparsely furnished hotel room. Citi’s leaders—from Walter Wriston, in the nineteen-seventies,


- lender to dictatorships and key engineer of the crushing Latin American debt crisis of the early 1980s -

to John Reed, in the nineteen-eighties, and Sanford Weill,


- who lobbied the repeal of Glass-Steagal restrictions so as to retroactively legalize Citi's mergers with Salomon Brothers and the Travellers Group -

in the late nineteen-nineties—have tended to be formidable and forbidding. Pandit affects a down-to-earth demeanor. He offered me a cup of coffee and insisted that I sit on a comfortable upholstered chair while he perched on a cheap plastic one. I asked him if he saw any irony in Citi being commended for asset building. His eyes widened slightly. “Well,” he said, “the award we are receiving is for fifteen years of work. It was work that was pioneered by Citi to get more financial inclusion. And it’s part of a broader reform effort we are involved in under the heading of responsible banking.”

Since Pandit took over, this effort has involved selling or closing down some of Citi’s riskier trading businesses, including the hedge fund that he used to run; splitting off the company’s most foul-smelling assets into a separate entity, Citi Holdings; and cutting the pay of some senior executives. For 2009 and 2010, Pandit took an annual salary of one dollar and no bonus. (He didn’t, however, give back any of the money from the sale of his hedge fund.) “This is an apprenticeship industry,” he said to me. “People learn from the people above them, and they copy the actions of the people above them. If you start from the top by acting responsibly, people will see and learn.”



Barely two years after Wall Street’s recklessness brought the global economy to the brink of collapse, the sight of a senior Wall Street figure talking about responsible finance may well strike you as suspicious. But on one point Pandit cannot be challenged. Since the promulgation of Hammurabi’s Code, in ancient Babylon, no advanced society has survived without banks and bankers. Banks enable people to borrow money, and, today, by operating electronic-transfer systems, they allow commerce to take place without notes and coins changing hands. They also play a critical role in channelling savings into productive investments. When a depositor places money in a savings account or a C.D., the bank lends it out to corporations, small businesses, and families. These days, Bank of America, Citi, JPMorgan Chase, and others also help corporations and municipalities raise money by issuing stocks, bonds, and other securities on their behalf. The business of issuing securities used to be the exclusive preserve of Wall Street firms, such as Morgan Stanley and Goldman Sachs, but during the past twenty years many of the dividing lines between ordinary banks and investment banks have vanished.

When the banking system behaves the way it is supposed to—as Pandit says Citi is now behaving—it is akin to a power utility, distributing money (power) to where it is needed and keeping an account of how it is used. Just like power utilities, the big banks have a commanding position in the market, which they can use for the benefit of their customers and the economy at large. But when banks seek to exploit their position and make a quick killing, they can cause enormous damage. It’s not clear now whether the bankers have really given up their reckless practices, as Pandit claims they have, or whether they are merely lying low. In the past few years, all the surviving big banks have raised more capital and become profitable again. However, the U.S. government was indirectly responsible for much of this turnaround. And in the country at large, where many businesses rely on the banks to fund their day-to-day operations, the power still isn’t flowing properly. Over-all bank lending to firms and households remains below the level it reached in 2008.

The other important role of the banking industry, historically, has been to finance the growth of vital industries, including railroads, pharmaceuticals, automobiles, and entertainment. “Go back and pick any period in time,” John Mack, the chairman of Morgan Stanley, said to me recently. “Let’s go back to the tech boom. I guess it got on its feet in the late eighties, with Apple Computer and Microsoft, and really started to blossom in the nineteen-nineties, with Cisco, Netscape, Amazon.com, and others. These are companies that created a lot of jobs, a lot of intellectual capital, and Wall Street helped finance that. The first investors were angel investors, then venture capitalists, and to really grow and build they needed Wall Street.”

Mack, who is sixty-six years old, is a plainspoken native of North Carolina. He attended Duke on a football scholarship, and he retains the lean build of an athlete. We were sitting at a conference table in his large, airy office above Times Square, which features floor-to-ceiling windows with views of the Hudson. “Today, it’s not just technology—it’s clean tech,” he went on. “All of these industries need capital—whether it is ethanol, solar, or other alternative-fuel sources. We can give you a list of companies we’ve done, but it’s not just Morgan Stanley. Wall Street has been the source of capital formation.”

There is something in what Mack says. Morgan Stanley has raised money for Tesla Motors, a producer of electric cars, and it has invested in Bloom Energy, an innovator in fuel-cell technology. Morgan Stanley’s principal rivals, Goldman Sachs and JPMorgan, are also canvassing investors for ethanol producers, wind farms, and other alternative-energy firms. Banks, of course, raise money for less environmentally friendly corporations, too, such as Ford, General Electric, and ExxonMobil, which need cash to fund their operations.


Can we have a comparative statistic?

It was evidently this business of raising capital (and creating employment) that Lloyd Blankfein, Goldman’s chief executive, was referring to last year, when he told an interviewer from a British newspaper that he and his colleagues were “doing God’s work.”

Yet Wall Street’s role in financing new businesses is a small portion of what it does. The market for initial public offerings (I.P.O.s) of stock by U.S. companies never fully recovered from the tech bust. During the third quarter of 2010, just thirty-three U.S. companies went public, and they raised a paltry five billion dollars. Most people on Wall Street aren’t finding the next Apple or promoting a green rival to Exxon. They are buying and selling securities that are tied to existing firms and capital projects, or to something less concrete, such as the price of a stock or the level of an exchange rate. During the past two decades, trading volumes have risen exponentially across many markets: stocks, bonds, currencies, commodities, and all manner of derivative securities. In the first nine months of this year, sales and trading accounted for thirty-six per cent of Morgan Stanley’s revenues and a much higher proportion of profits. Traditional investment banking—the business of raising money for companies and advising them on deals—contributed less than fifteen per cent of the firm’s revenue. Goldman Sachs is even more reliant on trading. Between July and September of this year, trading accounted for sixty-three per cent of its revenue, and corporate finance just thirteen per cent.


Thanks. That gives us an idea, no?

In effect, many of the big banks have turned themselves from businesses whose profits rose and fell with the capital-raising needs of their clients into immense trading houses whose fortunes depend on their ability to exploit day-to-day movements in the markets. Because trading has become so central to their business, the big banks are forever trying to invent new financial products that they can sell but that their competitors, at least for the moment, cannot. Some recent innovations, such as tradable pollution rights and catastrophe bonds, have provided a public benefit.


Yeah, right.

But it’s easy to point to other innovations that serve little purpose or that blew up and caused a lot of collateral damage, such as auction-rate securities and collateralized debt obligations. Testifying earlier this year before the Financial Crisis Inquiry Commission, Ben Bernanke, the chairman of the Federal Reserve, said that financial innovation “isn’t always a good thing,” adding that some innovations amplify risk and others are used primarily “to take unfair advantage rather than create a more efficient market.”

Other regulators have gone further. Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as “socially useless activity”—a comment that suggests it could be eliminated without doing any damage to the economy. In a recent article titled “What Do Banks Do?,” which appeared in a collection of essays devoted to the future of finance, Turner pointed out that although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth—payments that economists refer to as rents. “It is possible for financial activity to extract rents from the real economy rather than to deliver economic value,” Turner wrote. “Financial innovation . . . may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted a priori.”

Turner’s viewpoint caused consternation in the City of London, the world’s largest financial market. A clear implication of his argument is that many people in the City and on Wall Street are the financial equivalent of slumlords or toll collectors in pin-striped suits. If they retired to their beach houses en masse, the rest of the economy would be fine, or perhaps even healthier.


Since 1980, according to the Bureau of Labor Statistics, the number of people employed in finance, broadly defined, has shot up from roughly five million to more than seven and a half million. During the same period, the profitability of the financial sector has increased greatly relative to other industries. Think of all the profits produced by businesses operating in the U.S. as a cake. Twenty-five years ago, the slice taken by financial firms was about a seventh of the whole. Last year, it was more than a quarter. (In 2006, at the peak of the boom, it was about a third.) In other words, during a period in which American companies have created iPhones, Home Depot, and Lipitor, the best place to work has been in an industry that doesn’t design, build, or sell a single tangible thing.

From the end of the Second World War until 1980 or thereabouts, people working in finance earned about the same, on average and taking account of their qualifications, as people in other industries. By 2006, wages in the financial sector were about sixty per cent higher than wages elsewhere. And in the richest segment of the financial industry—on Wall Street, that is—compensation has gone up even more dramatically. Last year, while many people were facing pay freezes or worse, the average pay of employees at Goldman Sachs, Morgan Stanley, and JPMorgan Chase’s investment bank jumped twenty-seven per cent, to more than three hundred and forty thousand dollars. This figure includes modestly paid workers at reception desks and in mail rooms, and it thus understates what senior bankers earn. At Goldman, it has been reported, nearly a thousand employees received bonuses of at least a million dollars in 2009.

Not surprisingly, Wall Street has become the preferred destination for the bright young people who used to want to start up their own companies, work for NASA, or join the Peace Corps. At Harvard this spring, about a third of the seniors with secure jobs were heading to work in finance. Ben Friedman, a professor of economics at Harvard, recently wrote an article lamenting “the direction of such a large fraction of our most-skilled, best-educated, and most highly motivated young citizens to the financial sector.”


Most people on Wall Street, not surprisingly, believe that they earn their keep, but at least one influential financier vehemently disagrees: Paul Woolley, a seventy-one-year-old Englishman who has set up an institute at the London School of Economics called the Woolley Centre for the Study of Capital Market Dysfunctionality. “Why on earth should finance be the biggest and most highly paid industry when it’s just a utility, like sewage or gas?” Woolley said to me when I met with him in London. “It is like a cancer that is growing to infinite size, until it takes over the entire body.”

From 1987 to 2006, Woolley, who has a doctorate in economics, ran the London affiliate of GMO, a Boston-based investment firm. Before that, he was an executive director at Barings, the venerable British investment bank that collapsed in 1995 after a rogue-trader scandal, and at the International Monetary Fund. Tall, soft-spoken, and courtly, Woolley moves easily between the City of London, academia, and policymaking circles. With a taste for Savile Row suits and a keen interest in antiquarian books, he doesn’t come across as an insurrectionary. But, sitting in an office at L.S.E., he cheerfully told me that he regarded himself as one. “What we are doing is revolutionary,” he said with a smile. “Nobody has done anything like it before.”

At GMO, Woolley ran several funds that invested in stocks and bonds from many countries. He also helped to set up one of the first “quant” funds, which rely on mathematical algorithms to find profitable investments. From his perch in Angel Court, in the heart of the City, he watched the rapid expansion all around him. Established international players, such as Citi, Goldman, and UBS, were getting bigger; new entrants, especially hedge funds and buyout (private equity) firms, were proliferating. Woolley’s firm did well, too, but a basic economic question niggled at him: Was the financial industry doing what it was supposed to be doing? Was it allocating capital to its most productive uses?

At first, like most economists, he believed that trading drove market prices to levels justified by economic fundamentals. If an energy company struck oil, or an entertainment firm created a new movie franchise, investors would pour money into its stock, but the price would remain tethered to reality. The dotcom bubble of the late nineteen-nineties changed his opinion. GMO is a “value investor” that seeks out stocks on the basis of earnings and cash flows. When the Nasdaq took off, Woolley and his colleagues couldn’t justify buying high-priced Internet stocks, and their funds lagged behind rivals that shifted more of their money into tech. Between June, 1998, and March, 2000, Woolley recalled, the clients of GMO—pension funds and charitable endowments, mostly—withdrew forty per cent of their money. During the ensuing five years, the bubble burst, value stocks fared a lot better than tech stocks, and the clients who had left missed more than a sixty-per-cent gain relative to the market as a whole. After going through that experience, Woolley had an epiphany: financial institutions that react to market incentives in a competitive setting often end up making a mess of things. “I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” Financial markets, far from being efficient, as most economists and policymakers at the time believed, were grossly inefficient. “And once you recognize that markets are inefficient a lot of things change.”

One is the role of financial intermediaries, such as banks. Rather than seeking the most productive outlet for the money that depositors and investors entrust to them, they may follow trends and surf bubbles. These activities shift capital into projects that have little or no long-term value, such as speculative real-estate developments in the swamps of Florida. Rather than acting in their customers’ best interests, financial institutions may peddle opaque investment products, like collateralized debt obligations. Privy to superior information, banks can charge hefty fees and drive up their own profits at the expense of clients who are induced to take on risks they don’t fully understand—a form of rent seeking. “Mispricing gives incorrect signals for resource allocation, and, at worst, causes stock market booms and busts,” Woolley wrote in a recent paper. “Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction.”

Woolley originally endowed his institute on dysfunctionality with four million pounds. (By British standards, that is a significant sum.) The institute opened in 2007—Mervyn King, the governor of the Bank of England, turned up at its launch party—and has published more than a dozen research papers challenging the benefits that financial markets and financial institutions bring to the economy. Dmitri Vayanos, a professor of finance at L.S.E. who runs the Woolley Centre, has presented some of its research at Stanford, Columbia, the University of Chicago, and other leading universities. Woolley has published a ten-point “manifesto” aimed at the mutual funds, pension funds, and charitable endowments that, through payments of fees and commissions, ultimately help finance the salaries of many people on Wall Street and in the City of London. Among Woolley’s suggestions: investment funds should limit the turnover in their portfolios, refuse to pay performance fees, and avoid putting money into hedge funds and private-equity firms.

Before leaving for lunch at his club, the Reform, Woolley pointed me to a recent study by the research firm Ibbotson Associates, which shows that during the past decade investors in hedge funds, over all, would have done just as well putting their money straight into the S&P 500. “The amount of rent capture has been huge,” Woolley said. “Investment banking, prime broking, mergers and acquisitions, hedge funds, private equity, commodity investment—the whole scale of activity is far too large.” I asked Woolley how big he thought the financial sector should be. “About a half or a third of its current size,” he replied.


When I got back from London, I spoke with Ralph Schlosstein, the C.E.O. of Evercore, a smallish investment bank of about six hundred employees that advises corporations on mergers and acquisitions but doesn’t do much in the way of issuing and trading securities. In the nineteen-seventies, Schlosstein worked on Capitol Hill as an economist before joining the Carter Administration, in which he served at the Treasury and the White House. In the eighties, he moved to Wall Street and worked for Lehman with Roger Altman, the chairman and founder of Evercore. Eventually, Schlosstein left to co-found the investment firm Blackrock, where he made a fortune. After retiring from Blackrock, in 2007, he could have moved to his house on Martha’s Vineyard, but he likes Wall Street and believes in it. “There will always be a need for funding from businesses and households,” he said. “We saw at the end of 2008 and in early 2009 what happens to an economy when that capital-raising and capital-allocation mechanism breaks down.


Gee golly, it was bad. How did that happen?

Part of what has distinguished the U.S. economy from the rest of the world is that we’ve always had large, transparent pools of capital. Ultimately, that drives down the cost of capital in the U.S. relative to our competitors.”

Still Schlosstein agrees with Woolley that Wall Street has problems, many of which derive from its size. In the early nineteen-eighties, Goldman and Morgan Stanley were roughly the size of Evercore today. Now they are many, many times as large. Big doesn’t necessarily mean bad, but when the Wall Street firms grew beyond a certain point they faced a set of new challenges. In a private partnership, the people who run the firm, rather than outside shareholders, bear the brunt of losses—a structure that discourages reckless risk-taking. In addition, small banks don’t employ very much capital, which allows them to make a decent return by acting in the interests of their clients and relying on commissions. Big firms, however, have to take on more risk in order to generate the sorts of profits that their stockholders have come to expect. This inevitably involves building up their trading operations. “The leadership of these firms tends to go towards people who can deploy their vast amounts of capital and earn a decent return on it,” Schlosstein said. “That tends to be people from the trading and capital-markets side.”

Some kinds of trading serve a useful economic function. One is market-making, in which banks accumulate large inventories of securities in order to facilitate buying and selling on the part of their clients. Banks also engage in active trading to meet their clients’ wishes either to lay off risk or to take it on. American Airlines might pay Morgan Stanley a fee to guarantee that the price of its jet fuel won’t rise above a certain level for three years. The bank would then make a series of trades in the oil-futures markets designed to cover what it would have to pay American if the price of fuel rose. However, the mere fact that a certain trade is client-driven doesn’t mean it is socially useful. Banks often design complicated trading strategies that help a customer, such as a pension fund or a wealthy individual, circumvent regulatory requirements or reduce tax liabilities. From the client’s viewpoint, these types of financial products can create value, but from society’s perspective they merely shift money around. “The usual economists’ argument for financial innovation is that it adds to the size of the pie,” Gerald Epstein, an economist at the University of Massachusetts, said. “But these types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.”

Meanwhile, big banks also utilize many kinds of trading that aren’t in the service of their traditional clients. One is proprietary trading, in which they bet their own capital on movements in the markets. There’s no social defense for this practice, except the argument that the banks exist to make profits for the shareholders. The so-called Volcker Rule, an element of this year’s Dodd-Frank financial-reform bill intended to prevent banks from taking too many risks with their depositors’ money, was supposed to have proscribed banks from proprietary trading. However, it is not yet clear how the rule will be applied or how it will prevent some types of proprietary trading that are difficult to distinguish from market-making. If a firm wants to place a bet on falling interest rates, for example, it can simply have its market-making unit build up its inventory of bonds.

The Dodd-Frank bill also didn’t eliminate what Schlosstein describes as “a whole bunch of activities that fell into the category of speculation rather than effectively functioning capital markets.” Leading up to the collapse, the banks became heavily involved in facilitating speculation by other traders, particularly hedge funds, which buy and sell at a frenetic pace, generating big fees and commissions for Wall Street firms. Schlosstein picked out the growth of credit-default swaps, a type of derivative often used purely for speculative purposes. When an investor or financial institution buys this kind of swap, it doesn’t purchase a bond itself; it just places a bet on whether the bond will default. At the height of the boom, for every dollar banks issued in bonds, they might issue twenty dollars in swaps. “If they did a hundred-million-dollar bond issue, two billion dollars of swaps would be created and traded,” Schlosstein said. “That’s insane.” From the banks’ perspective, creating this huge market in side bets was very profitable insanity.


Entirely because the Fed and Treasury stepped in to guarantee these private side bets when it all went sour.

By late 2007, the notional value of outstanding credit-default swaps was about sixty trillion dollars—more than four times the size of the U.S. gross domestic product. Each time a financial institution issued a swap, it charged the customer a commission. But wagers on credit-default swaps are zero-sum games. For every winner, there is a loser. In the aggregate, little or no economic value is created.

Since the market collapsed, far fewer credit-default swaps have been issued. But the insidious culture that allowed Wall Street firms to peddle securities of dubious value to pension funds and charitable endowments remains largely in place. “Traditionally, the relationship between Wall Street and its big clients has been based on the ‘big boy’ concept,” Schlosstein explained. “You are dealing with sophisticated investors who can do their own due diligence. For example, if CALPERS”—the California Public Employees Retirement System—“wants to buy something that a major bank is selling short, it’s not the bank’s responsibility to tell them. On Wall Street, this was the accepted way of doing business.”


Meanwhile, who's paying the salary of the whiz-kid analyst advising CALPERS? Not CALPERS, but Wall Street.

Earlier this year, the Securities and Exchange Commission appeared to challenge the big-boy concept, suing Goldman Sachs for failing to disclose material information about some subprime-mortgage securities that it sold, but the case was resolved without Goldman’s admitting any wrongdoing. “This issue started to get discussed, then fell to the wayside when Goldman settled their case,” Schlosstein said.


The big banks insist that they have to be big in order to provide the services that their corporate clients demand. “We are in one hundred and fifty-nine countries,” Vikram Pandit told me. “Companies need us because they are going global, too. They have cash-management needs all around the world. They have capital-market needs all around the world. We can meet those needs.” More than two-thirds of Citi’s two hundred and sixty thousand employees work outside the United States. In the first nine months of this year, nearly three-quarters of the firm’s profits emanated from Europe, Asia, and Latin America. In Brazil, Citi helped Petrobras, the state-run oil company, to issue stock to the public; in the United Kingdom, it helped raise money for a leveraged buyout of Tomkins, an engineering company.

“It’s all about clients,” Pandit went on. The biggest mistake Citi and other banks made during the boom, he said, was coming to believe that investing and trading on their own account, rather than on behalf of their clients, was a basic aspect of banking. Even before the Dodd-Frank bill was passed, Pandit was closing down some of Citi’s proprietary businesses and trying to sell others. “Proprietary trading is not the core of what banking is about,” he said. In place of a business model that was largely dependent on making quick gains, he is trying to revive a banking culture based on cultivating long-term relationships with Citi’s customers. “Once you make your business all about relationships, conflicts of interest are not an issue,” he said.

Despite Pandit’s efforts to remake Citi’s culture, the firm remains heavily involved in trading of various kinds. Its investment-banking arm, which has grown rapidly over the past decade, still accounts for about three-tenths of its revenues (close to twenty billion dollars in the first nine months of this year) and more than two-thirds of its net profits (upward of six billion dollars in the same period). And within the investment bank about eighty cents of every dollar in revenues came from buying and selling securities, while just fourteen cents of every dollar came from raising capital for companies and advising them on deals. Between January and September, Citigroup’s bond traders alone generated more than twelve and a half billion dollars in revenues—more than the bank’s entire branch network in North America.

Many banks believe that trading is too lucrative a business to stop, and they are trying to persuade government officials to enforce the Dodd-Frank bill in the loosest possible way. Morgan Stanley and other big firms are also starting to rebuild their securitization business, which pools together auto loans, credit-card receivables, and other forms of credit, and then issues bonds backed by them. There have even been some securitizations of prime-mortgage loans. I asked John Mack if he could see subprime-mortgage bonds making a comeback. “I think in time they will,” he replied. “I hope they do."


And why do you hope that?

"I say that because it gives tremendous liquidity to the markets.”

“Liquidity” refers to how easy or difficult it is to buy and sell. A share of stock in a company on the Nasdaq is a very liquid asset: using a discount brokerage such as Fidelity, you can sell it in seconds for less than ten dollars. A chocolate factory is an illiquid asset: disposing of it is time-consuming and costly. The classic justification for market-making and other types of trading is that they endow the market with liquidity, and throughout the financial industry I heard the same argument over and over. “You can’t not have banks, and you can’t not have trading,” an executive at a big private-equity firm said to me. “Part of the value in a stock is the knowledge that you can sell it this afternoon. Banks provide liquidity.”

But liquidity, or at least the perception of it, has a downside. The liquidity of Internet stocks persuaded investors to buy them in the belief they would be able to sell out in time. The liquidity of subprime-mortgage securities was at the heart of the credit crisis. Home lenders, thinking they would always be able to sell the loans they made to Wall Street firms for bundling together into mortgage bonds, extended credit to just about anybody. But liquidity is quick to disappear when you need it most. Everybody tries to sell at the same time, and the market seizes up. The problem with modern finance “isn’t just about excessive rents and a misallocation of capital,” Paul Woolley said. “It is also crashes and bad macroeconomic outcomes. The recent crisis cost about ten per cent of G.D.P. It made tackling climate change look cheap.”

In the upper reaches of Wall Street, talk of another financial crisis is dismissed as alarmism.


No. Really?

Last fall, John Mack, to his credit, was one of the first Wall Street C.E.O.s to say publicly that his industry needed stricter regulation. Now that Morgan Stanley and Goldman Sachs, the last two remaining big independent Wall Street firms, have converted to bank holding companies, a legal switch that placed them under the regulatory authority of the Federal Reserve, Mack insists that proper supervision is in place. Fed regulators “have more expertise, and they challenge us,” Mack told me. Since the middle of 2007, Morgan Stanley has raised about twenty billion dollars in new capital and cut in half its leverage ratio—the total value of its assets divided by its capital. In addition, it now holds much more of its assets in forms that can be readily converted to cash. Other firms, including Goldman Sachs, have taken similar measures. “It’s a much safer system now,” Mack insisted. “There’s no question.”


That’s true. But the history of Wall Street is a series of booms and busts. After each blowup, the firms that survive temporarily shy away from risky ventures and cut back on leverage. Over time, the markets recover their losses, memories fade, spirits revive, and the action starts up again, until, eventually, it goes too far. The mere fact that Wall Street poses less of an immediate threat to the rest of us doesn’t mean it has permanently mended its ways.

Perhaps the most shocking thing about recent events was not how rapidly the big Wall Street firms got into trouble but how quickly they returned to profitability and lavished big rewards on themselves. Last year, Goldman Sachs paid more than sixteen billion dollars in compensation, and Morgan Stanley paid out more than fourteen billion dollars. Neither came up with any spectacular new investments or produced anything of tangible value, which leads to the question: When it comes to pay, is there something unique about the financial industry?

Thomas Philippon, an economist at N.Y.U.’s Stern School of Business, thinks there is. After studying the large pay differential between financial-sector employees and people in other industries with similar levels of education and experience, he and a colleague, Ariell Reshef of the University of Virginia, concluded that some of it could be explained by growing demand for financial services from technology companies and baby boomers. But Philippon and Reshef determined that up to half of the pay premium was due to something much simpler: people in the financial sector are overpaid. “In most industries, when people are paid too much their firms go bankrupt, and they are no longer paid too much,” he told me. “The exception is when people are paid too much and their firms don’t go broke. That is the finance industry.”

On Wall Street dealing desks, profits and losses are evaluated every afternoon when trading ends, and the firms’ positions are “marked to market”—valued on the basis of the closing prices.


Except that they no longer have to do that with all the junk that failed.

A trader can borrow money and place a leveraged bet on a certain market. As long as the market goes up, he will appear to be making a steady profit. But if the market eventually turns against him his capital may be wiped out. “You can create a trading strategy that overnight makes lots of money, and it can take months or years to find out whether it is real money or luck or excessive risk-taking,” Philippon explained. “Sometimes, even then it is hard.” Since traders (and their managers) get evaluated on a quarterly basis, they can be paid handsomely for placing bets that ultimately bankrupt their companies. “In most industries, a good idea is rewarded because the company generates profits and real cash flows,” Philippon said. “In finance, it is often just a trading gain. The closer you get to financial markets the easier it is to book funny profits.”

During the credit boom of 2005 to 2007, profits and pay reached unprecedented highs. It is now evident that the bankers were being rewarded largely for taking on unacknowledged risks: after the subprime market collapsed, bank shareholders and taxpayers were left to pick up the losses. From an economy-wide perspective, this experience suggests that at least some of the profits that Wall Street bankers claim to generate, and that they use to justify their big pay packages, are illusory. Such a subversive notion has recently received the endorsement of senior figures at the Bank of England. Andrew Haldane, the executive director of financial stability at the Bank, gave a speech in July titled “The Contribution of the Financial Sector: Miracle or Mirage?” It concluded, “Because banks are in the risk business, it should be no surprise that the run-up to the crisis was hallmarked by imaginative ways of manufacturing this commodity, with a view to boosting returns to labour and capital. . . . It is in bank managers’ interest to make mirages look like miracles.”

Under pressure from the regulators, the big Wall Street banks have responded to criticisms over executive compensation with something called “clawback.” Rather than paying hefty bonuses in cash every January or February, a bank gives its most highly paid employees some sort of deferred compensation designed to decline in value if “profits” turn into losses. The simplest way of doing this is to issue bonuses in the form of restricted stock that can’t be sold for a long period of time. If the firm gets into trouble as a result of decisions taken years earlier, and its stock price declines, those responsible will suffer. Morgan Stanley pays bonuses in cash, but places the cash in a restricted account where it can’t be used for a certain number of years. If during this period the investment that generated the bonus turns into a loss, the firm has the right to take back some or all of the cash.

The spread of clawback provisions shows that there has been some change on Wall Street. But it’s unclear if the schemes will hold up when inevitably challenged in court—or if they’ll deter traders from taking unwarranted risks. On Wall Street and elsewhere in corporate America, insiders generally learn quickly how to game new systems and turn them to their advantage. A key question about clawbacks is how long they remain in effect. At Morgan Stanley the answer is three years, which may not be long enough for hidden risks to materialize. “It’s just very easy to create trading strategies that make money for six years and lose money in the seventh,” Philippon said. “That’s exactly what Lehman did for six years before its collapse.”


Given the code of silence that Wall Street firms impose on their employees, it is difficult to get mid-level bankers to speak openly about what they do. There is, however, a blog, The Epicurean Dealmaker, written by an anonymous investment banker who has for several years been providing caustic commentary on his profession. The biography on his site notes, “I facilitate, justify, and advise parties to M&A transactions, when I am not advising against them.” In March, 2008, when some analysts were suggesting that the demise of Bear Stearns would lead to a change of attitudes on Wall Street, TED—the shorthand appellation the author uses—wrote, “I, for one, think these bankers will be even more motivated to rape and pillage the financial system in order to rebuild their ill-gotten gains.” Seven months later, on the eve of the bank bailout, TED opined, “Let hundreds of banks fail. Let tens of thousands of financial workers lose their jobs and their personal wealth. . . . The financial sector has had a really, really good run for a lot of years. It is time to pay the piper, and I, for one, have little interest in using my taxpayer dollars to cushion the blow. After all, I am just another heartless Wall Street bastard myself.”

In September, TED and I met at a diner near my office. He looked like an investment banker: middle-aged, clean-cut, wearing an expensive-looking gray suit. Our conversation started out with some banter about the rivalry between bankers and traders at many Wall Street firms. As the traders came out on top in recent years, TED recalled, “they would say, ‘You guys are the real parasites, going to expensive lunches and doing deals on the back of our trading operations.’ ” He professed to be unaffected by this ribbing, but he said, “In my experience, the proprietary traders are always the clowns who make twenty million dollars a year until they lose a hundred million.”

In September, 2009, addressing the popular anger about bankers’ pay, TED wrote that he wouldn’t “attempt to rationalize stratospheric pay in the industry on the basis of some sort of self-aggrandizing claim to the particular socioeconomic utility or virtue of what I and my peers do,” and he cautioned his colleagues against making any such claim: “You mean to tell me your work as a [fill in the blank here] is worth more to society than a firefighter? An elementary school teacher? A combat infantryman in Afghanistan? A priest? Good luck with that.” The fact was, TED went on, “my pay is set according to one thing and one thing only: the demand in the marketplace for my services. . . . Investment bankers get paid a lot of money because that is what the market will bear.”

While not inaccurate, this explanation raises questions about how competition works in the financial industry. If Hertz sees much of its rental fleet lying idle, it will cut its prices to better compete with Avis and Enterprise. Chances are that Avis and Enterprise will respond in kind, and the result will be lower profits all around. On Wall Street, the price of various services has been fixed for decades. If Morgan Stanley issues stock in a new company, it charges the company a commission of around seven per cent. If Evercore or JPMorgan advises a corporation on making an acquisition, the standard fee is about two per cent of the purchase price. I asked TED why there is so little price competition. He concluded it was something of a mystery. “It’s a commodity business,” he said. “I can do what Goldman Sachs does. You can do what I can do. Nobody has a proprietary edge. And if you do have a proprietary edge you’ll only have it for a few weeks before somebody reverse engineers it.”

After thinking it over, the best explanation TED could come up with was based on a theory of relativity: investment-banking fees are small compared with the size of the over-all transaction. “You are a client, and you are going to do a five-billion-dollar deal,” he said. “It’s the biggest deal you’ve ever done. It’s going to determine your future, and the future of your firm. Are you really going to fight about whether a certain fee is 2.5 per cent or 3.3 per cent? No. The old cliché we rely on is this: When you need surgery, do you go to the discount surgeon or to the one you trust and know, who charges more?”

I asked him how he and his co-workers felt about making loads of money when much of the country was struggling. “A lot of people don’t care about it or think about it,” he replied. “They say, it’s a market, it’s still open, and I’ll sell my labor for as much as I can until nobody wants to buy it.” But you, I asked, what do you think? “I tend to think we do create value,” he said. “It’s not a productive value in a very visible sense, like finding a cure for cancer. We’re middlemen. We bring together two sides of a deal. That’s not a very elevated thing, but I can’t think of any elevated economy that doesn’t need middlemen.”


The Epicurean Dealmaker is right: Wall Street bankers create some economic value. But do they create enough of it to justify the rewards they reap? In the first nine months of 2010, the big six banks cleared more than thirty-five billion dollars in profits. “The cataclysmic events took place in the fall of 2008 and the early months of 2009,” Roger Altman, the chairman of Evercore, said to me. “In this industry, that’s a long time ago.”

Despite all the criticism that President Obama has received lately from Wall Street, the Administration has largely left the great money-making machine intact. A couple of years ago, firms such as Citigroup, JPMorgan Chase, and Goldman Sachs faced the danger that the government would break them up, drive them out of some of their most lucrative business lines—such as dealing in derivatives—or force them to maintain so much capital that their profits would be greatly diminished. “None of these things materialized,” Altman noted. “Reforms and changes came in, but they did not have a transformative effect.”

In 1940, a former Wall Street trader named Fred Schwed, Jr., wrote a charming little book titled “Where Are the Customers’ Yachts?,” in which he noted that many members of the public believed that Wall Street was inhabited primarily by “crooks and scoundrels, and very clever ones at that; that they sell for millions what they know is worthless; in short, that they are villains.” It was an extreme view, but public antagonism toward bankers and other financiers kept them in check for forty years. Economic historians refer to a period of “financial repression,”


One of the most annoying Orwellian terms of all time. Stopping the dragon from eating you is dragon repression.

during which regulators and policymakers, reflecting public suspicion of Wall Street, restrained the growth of the banking sector. They placed limits on interest rates, prohibited deposit-taking institutions from issuing securities, and, by preventing financial institutions from merging with one another, kept most of them relatively small. During this period, major financial crises were conspicuously absent, while capital investment, productivity, and wages grew at rates that lifted tens of millions of working Americans into the middle class.

Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence? For a long time, economists and policymakers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it. Even after all that has happened, there is a tendency in Congress and the White House to defer to Wall Street because what happens there, befuddling as it may be to outsiders, is essential to the country’s prosperity. Finally, dissidents like Paul Woolley are questioning this narrative. “There was a presumption that financial innovation is socially valuable,” Woolley said to me. “The first thing I discovered was that it wasn’t backed by any empirical evidence. There’s almost none.”


To get more of The New Yorker's signature mix of politics, culture and the arts: Subscribe Now
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Sat Nov 27, 2010 1:43 am

.

The Good Irish Soldier

Ireland perhaps more than any other example shows what the bankster game is really about. Here's a country that unlike Greece or Portugal strictly followed all the rules proscribed by the neoliberals, ratings agencies and austerity hawks. Open markets, no capital controls, wage repression, social welfare cutbacks, balanced budgets five years in a row before the crisis, low taxes, the works. They had almost no public debt. Their public debt came almost entirely through the crisis, because Ireland obediently bailed out the banks. It's the banks' debt, socialized. And as soon as the banksters decide there is a profit in it, the good Irish soldier is lined up against the wall and shot.

Partial redemption for Krugman's QE2 China-bashing:

http://www.nytimes.com/2010/11/26/opini ... nted=print
Archived as fair use with link given for strictly non-commercial purposes of criticism, education and debate.

November 25, 2010
Eating the Irish

By PAUL KRUGMAN

What we need now is another Jonathan Swift.

Most people know Swift as the author of “Gulliver’s Travels.” But recent events have me thinking of his 1729 essay “A Modest Proposal,” in which he observed the dire poverty of the Irish, and offered a solution: sell the children as food. “I grant this food will be somewhat dear,” he admitted, but this would make it “very proper for landlords, who, as they have already devoured most of the parents, seem to have the best title to the children.”

O.K., these days it’s not the landlords, it’s the bankers — and they’re just impoverishing the populace, not eating it. But only a satirist — and one with a very savage pen — could do justice to what’s happening to Ireland now.

The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Or to be more accurate, they’re bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment.

But there is no alternative, say the serious people: all of this is necessary to restore confidence.

Strange to say, however, confidence is not improving. On the contrary: investors have noticed that all those austerity measures are depressing the Irish economy — and are fleeing Irish debt because of that economic weakness.

Now what? Last weekend Ireland and its neighbors put together what has been widely described as a “bailout.” But what really happened was that the Irish government promised to impose even more pain, in return for a credit line — a credit line that would presumably give Ireland more time to, um, restore confidence. Markets, understandably, were not impressed: interest rates on Irish bonds have risen even further.

Does it really have to be this way?

In early 2009, a joke was making the rounds: “What’s the difference between Iceland and Ireland? Answer: One letter and about six months.” This was supposed to be gallows humor. No matter how bad the Irish situation, it couldn’t be compared with the utter disaster that was Iceland.

But at this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland’s, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland’s debt safer than Ireland’s. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump.

None of these heterodox options are available to Ireland, say the wise heads. Ireland, they say, must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.


Messing it up in the last words. Are you saying an economically wise crime is a good crime?

.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby justdrew » Sat Nov 27, 2010 3:29 am

the (Fianna) Fail government needs to fall.

Image
By 1964 there were 1.5 million mobile phone users in the US
User avatar
justdrew
 
Posts: 11966
Joined: Tue May 24, 2005 7:57 pm
Location: unknown
Blog: View Blog (11)

Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Sat Nov 27, 2010 2:58 pm

viewtopic.php?f=8&t=30342&start=0

2012 Countdown wrote:Image
Protestors gather outside the GPO in Dublin as part of a demonstration organised by unions
against the Government's handling of the economic crisis. Photograph: Niall Carson/PA Wire

IRISH TIMES REPORTERS

Approximately 50,000 people marched in Dublin this afternoon in a protest organised by the Irish Congress of Trade Unions (Ictu) against the Government’s austerity plan.

The protest started on Wood Quay at noon, before crossing over to the north quays to Ormond Quay, continuing on to Bachelors Walk and then onto O’Connell Street, arriving at the GPO at 1pm.

Addressing the crowd on a podium at the GPO, Irish Times columnist Fintan O’Toole said the Government was doing a deal with people who had not been elected.

He said the country was paying billions to bail out the banks and the Government had declared war on the poor. He said Irish people were not subjects, but citizens, and wanted their republic back.

Ictu president Jack O'Connor told protestors the country had been brought "to its knees" by the Government and bankers.

"Several generations of Irish men and women" will have to foot the bill, Mr O'Connor said.

Congress general secretary David Begg said that Dick Turpin at least wore a mask when he robbed people. He also told the crowd that 100,000 people had joined the march, although gardaí said their estimate was 50,000.

“Does anybody in this country or in Dáil Éireann think that we can as a people afford to pay 6.7 per cent on money that we did not ask for in the first place and that is being forced upon us to bail out the banking system in Europe which is in hock to this country for €509 billion?”

Along with speeches from union leaders, some of whom were booed, musicians Christy Moore and Frances Black also performed.

Another speaker gave out what they claimed was Minister for the Environment John Gormley's home telephone number and instructed the crowd to "phone him as often as possible".

The protest ended shortly after 2pm and the majority of the crowd dispersed. A second, smaller rally then started and a crowd of several thousand people was addressed by Socialist Party MEP Joe Higgins.

Another group of about 300 protestors walked to the Dáil to continue their protest. A number of bottles and bangers were thrown at a line of gardaí blocking access to Leinster House and posters with a picture of Taoiseach Brian Cowen were set on fire.

http://www.irishtimes.com/newspaper/bre ... king3.html

=============

Protesters march through Dublin over Irish austerity plan
By the CNN Wire Staff
November 27, 2010 12:07 p.m. EST
Image
Thousands of people march through the streets of Dublin, Ireland to protest against austerity cuts, November 27, 2010.

Dublin, Ireland (CNN) -- Tens of thousands of people demonstrated on the streets of Dublin, Ireland, on Saturday against the government's austerity plan.
Irish police estimated the number taking part in the largely peaceful demonstration to be about 50,000.
The protests were organized by the Irish Congress of Trade Unions (ICTU), which has called the four-year plan for spending cuts and tax hikes "savage and regressive."
Irish police said a comprehensive policing plan has been put in place "in order to facilitate a peaceful march." Groups of eight to 10 police officers were seen at several key intersections, monitoring the activity.

Families, pensioners, the unemployed and members of unions and community groups were among the demonstrators who braved a rare dusting of snow to come out Saturday, the ICTU said.
The marching route took protesters along the River Liffey to a Dublin landmark, the General Post Office.
Irish Prime Minister Brian Cowen announced the plan this week after agreeing to a bailout package from the International Monetary Fund and European Union, needed to tackle Ireland's massive debt.
The plan saves 10 billion euros ($13.4 billion) through welfare cuts and an additional 5 billion euros ($6.7 billion) through higher taxes. There will be reductions in the minimum wage and public-sector pay, and a hike in the value-added tax on goods and services, Cowen said.
The plan calls for introducing water meters, making students pay more for higher education, and requiring more Irish workers to pay income tax.
Trade unions complain the plan unfairly targets lower-paid workers, while making no provision for a tax on asset wealth. They say it fails to explain how the Irish people can carry the banks' massive debts and sets out no strategy for creating jobs.
"People are angry and they've had enough of this government," local journalist Juliette Gash told CNN. "They're furious because they feel like the government has handed over the keys to the country."

http://www.cnn.com/2010/WORLD/europe/11 ... index.html

======

Demonstrators in Ireland Protest Austerity Plan
By JOHN F. BURNS
Published: November 27, 2010

Image
A demonstrator holds a picture of Prime Minister Brian Cowen of Ireland during a protest in Dublin on Saturday.

DUBLIN — After a week that brought Ireland a pledge of an $114 billion international rescue package and the toughest austerity program of any country in Europe, thousands of demonstrators took to Dublin’s streets on Saturday to protest wide cuts in the country’s welfare programs and in public-sector jobs.

The protests centered on a milelong march along the banks of the Liffey river in central Dublin to the General Post Office building on O’Connell Street, site of the battle between Irish republican rebels and British troops in the Easter Uprising in 1916 — an iconic event that many in Ireland regard as the tipping point in Ireland’s long struggle for independence.

The choice of venue for the protests by the Irish Congress of Trade Unions, coordinating the march through the city, reflected the mood of anger, dismay and recrimination in the wake of the economic shocks of the past 10 days. Those shocks have been the culmination of two years in which the Irish economy has shrunk by about 15 percent, faster than any other European economy.

Before that, Ireland enjoyed more than a decade of unprecedented prosperity, so the rescue package being worked out by the International Monetary Fund and the European Union and the austerity program the Dublin government has been forced to adopt to secure the bailout loans have come as a deep shock.

Among other things, the austerity package will involve the loss of about 25,000 public-sector jobs, equivalent to 10 percent of the government work force, as well as a four-year, $20 billion program of tax increases and spending cuts like sharp reductions in state pensions and the minimum wage. One Dublin newspaper, the Irish Independent, estimated that the cost of the measures for a typical middle-class family earning $67,000 a year would be about $5,800 a year.

The ensuing political turmoil has raised questions about the ability of the government of Prime Minister Brian Cowell to secure backing for the austerity package when it is presented to Parliament on Dec. 7. The coalition government was weakened last week by a split between the Fianna Fail party, which Mr. Cowen leads, and its main coalition partner, the Green Party, and a stunning loss by Fianna Fail in an election Friday for a parliamentary seat that reduced the government majority to two.

The peaceful and restrained nature of the protests on Saturday was one indication that the unrest may not lead to confrontations in the streets, as some have feared. On a bitterly cold day, turnout appeared to have fallen far short of the 50,000 that organizers had forecast.

Organizers had called for a “family friendly” demonstration, and that appeared to be what they got. With a police helicopter hovering overhead, speeches at the post office building drew cheers and shouts of support, and the detonation of some fireworks, but there were no reports of arrests. Protesters waved banners that depicted the austerity measures as an attack on the country’s poor, and told reporters that they feared for their futures, and the country’s.

“Everything’s collapsing,” one woman said.

“We can’t afford it,” a father with a young child said of the spending cuts. “I don’t know how we’re ever going to come out of it.”

The anger of many speakers, and among the protesters, appeared to fall about equally on the Cowen government and on the international financial institutions working out the details of the rescue package. Officials in Brussels, where European finance ministers were meeting on Saturday to discuss the package, said it could be confirmed with an announcement on Sunday.

One of the O’Connell Street speakers, typical of others, urged the country “not to allow a government with no mandate, bowing to people in Europe who are not elected, to determine our future.”

But if the government could take some encouragement from the relative quiescence of the demonstrators, its wider political prospects remained deeply uncertain. Fianna Fail’s share of the vote in the election last week, in Donegal, fell to 21 percent from 51 percent in the general election of 2007. The seat was won by Sinn Fein, a historical rival of Fianna Fail dating from the struggle for independence a century ago, but a marginal force in the republic’s politics in recent decades.

Although by-elections are regarded as unreliable bellwethers of voting patterns in general elections, the Donegal result was a further pointer to what many Irish political commentators expect to be a harsh loss for Fianna Fail in a general election that Mr. Cowen has indicated he will call for February or March.

In the meantime, the prime minister has rejected calls for his or the government’s resignation. He has said he intends to see the rescue package and the austerity program approved by Parliament before calling an election, the reverse of the pattern that Sinn Fein, among other groups, has demanded.

http://www.nytimes.com/2010/11/28/world ... ublin.html
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Sat Nov 27, 2010 5:44 pm

Meanwhile, in an alternate universe...

http://www.ft.com/cms/s/f8a5005c-f7ea-1 ... z16F84RKYc

Germany pays price of labour shortages


Source: UK Financial Times

German industrial companies are paying highly skilled workers large bonuses and increased wages to counter the worst labour shortage that Europe’s largest economy has seen since the country’s “economic miracle” of the 1960s.

Companies from Siemens to Porsche and Continental have announced cash bonuses and said they would use a clause in the national engineering wage agreement to bring forward by two months to February a 2.7 per cent annual salary increase for their German workforce. Labour market experts say the companies’ largesse is mostly a reflection of a drastic skill shortage that has started to impact on Germany’s booming engineer-driven economy.

The value of German exports is set to rise 16 per cent to €937bn in 2010, driven by strong demand for premium cars and machinery from China and other emerging countries, and manufacturers are starting to feel the strain. “The main reason is that companies have underestimated this year’s economic boom. Several sectors already face a substantial skill shortage,” says Joachim Möller, director of IAB, a German labour market research institute.

Today’s industrial companies are looking for higher-skilled staff. They are retraining workers to learn new skills and trying to attract foreign professionals, but with limited success.


"Back in the USA - you don't know how lucky you are, boy..."

http://perdidostreetschool.blogspot.com ... d-but.html

Tuesday, November 23, 2010
Corporate Profits Highest On Record - But Here Come The Public Sector Layoffs

The top 1% have stolen the country:


The nation’s workers may be struggling, but American companies just had their best quarter ever.

American businesses earned profits at an annual rate of $1.659 trillion in the third quarter, according to a Commerce Department report released Tuesday. That is the highest figure recorded since the government began keeping track over 60 years ago, at least in nominal or noninflation-adjusted terms.

The government does not adjust the numbers for inflation, in part because these corporate profits can be affected by pricing changes from all over the world. The next-highest annual corporate profits level on record was in the third quarter of 2006, when they were $1.655 trillion.

Corporate profits have been doing extremely well for a while. Since their cyclical low in the fourth quarter of 2008, profits have grown for seven consecutive quarters, at some of the fastest rates in history.



Best quarter ever for the corporations - but Cuomo and Christie and Bloomberg and the rest of the corporate shills are crying poverty and calling for budget cuts, layoffs and benefit erosion.

How is it that corporate America could be doing so well while everybody else is scared they're going to lose their jobs, their health care, their pensions or 401(K)'s, and their Social Security?

The best emblem of corporate America I can think of today - Cathie "Lay 'Em Off With A Smile" Black - is coming into the NYC school system to lay off 8,000 teachers, change the salary structure from steps to bonus-based, and rid the system of as many veteran salaries and benefits as she can.

Even if Black doesn't get the job, some other corporate shill will do it for Bloomberg.

Meanwhile corporate profits are at an all-time high and Wall Street is handing out hiring perks like no-interest loans, signing bonuses, and unlimited expense accounts.

This is the kind of stuff that has been happening in the private sector ever since Reagan and that is the largest reason why corporate America just had its best quarter ever and everybody else is struggling.

They're squeezing costs and squeezing labor.

Now corporate America is bringing these "corporate values" to the public sector.

And rather than fight this stuff and call them out on it, the unions say "Well, what can you do? We have to save as many jobs as we can, so we'll take the paycuts and benefit cuts."

No wonder they own us like serfs.

No one is fighting them.
Posted by reality-based educator at 8:55 PM
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Sat Nov 27, 2010 6:26 pm

.

Image

80-year-old millionaire Alan Simpson hopes greedy seniors drop dead already, looks forward to April bloodbath.

You paid 40 to 50 years of a regressive income tax for your pension, which was blown on wars, and now you want your $800 a month?!

http://en.wikipedia.org/wiki/Alan_K._Simpson

Yet, Simpson's youth was clearly not all baseball games and scout jamborees. In a recent brief in support of the claimant in the Supreme Court case Graham v. Florida , Simpson admitted that as a juvenile he was on federal probation for shooting mailboxes and punched a cop and—in his own words—“was a monster.” [2]


How's he doing today?

http://tpmdc.talkingpointsmemo.com/2010 ... n-leak.php

Alan Simpson:
'Greediest Generation' Won't Leave Me Alone Over Debt Commission Report

Evan McMorris-Santoro | November 24, 2010, 5:14PM

Pity poor Alan Simpson. Three weeks after he and fellow presidential debt commission co-chair Erskine Bowles tried to put a positive spin on their incredibly controversial prescription to balance the federal budget, Simpson is still taking heat from critics on both sides of the aisle.

"I've never had any nastier mail or [been in a] more difficult position in my life," Simpson told the Casper Star-Tribune in his homestate of Wyoming.

"Just vicious," Simpson said. "People I've known, relatives [saying], "'You son of a bitch. How could you do this?'"

True to form, Simpson gave his critics as good -- or better -- than he got.

He told the paper that "while every interest group that testified before his committee agreed that the mounting federal debt is a national tragedy


-- He wasn't paying attention to Galbraith Jr., I guess --

[/quote]they would then talk about why government funding to their area of interest shouldn't be touched."

"We had the greatest generation," Simpson said. "I think this is the greediest generation."

The problem, Simpson explained, is the "polarized" country we live in, and the media that exemplifies it. He then to reeled off the media figures ruining America for deficit commissioners like him.

"You don't want to listen to the right and the left -- the extremes," he said. "You don't want to listen to Keith Olbermann and Rush Babe [Limbaugh] and Rachel Minnow [sic] or whatever that is, and Glenn Beck. They're entertainers. They couldn't govern their way out of a paper sack -- from the right or the left. But they get paid a lot of money from you and advertisers -- thirty, fifty million a year -- to work you over and get you juiced up with emotion, fear, guilt, and racism. Emotion, fear, guilt, and racism.


The final recommendations from the commission -- which was charged by President Obama with finding a way to reduce the huge national deficit -- have not yet been released, and Simpson suggested the relationship on the panel have been testy at times.

"There are 18 of us on the commission, and it took us four months to establish trust," he told the paper. "That's how bad things are in Washington. Four, five months before we could trust somebody not to leak what we said or go out and crater it."

Despite all controversy it caused, Simpson said he's "loved taking on the challenge of cutting the debt." He also had a final message for critics, too:

"Time to go for facts," he said. "Everybody's entitled to their own opinion, but nobody's entitled to their own facts."[/quote]

With Simpson, who no insult -- or platitude -- will be left unsaid.

Also this month:

http://tpmdc.talkingpointsmemo.com/2010 ... d-bath.php

The Republican co-chair of the White House's fiscal commission predicted this morning that his controversial recommendations for reducing long-term deficits will have a real opportunity to become enacted next year, when the nation brushes up against its debt ceiling, and newly elected Republicans threaten to send the country into default.

"I can't wait for the blood bath in April," said Alan Simpson at a Christian Science Monitor breakfast roundtable with reporters this morning. "It won't matter whether two of us have signed this or 14 or 18. When debt limit time comes, they're going to look around and say, 'What in the hell do we do now? We've got guys who will not approve the debt limit extension unless we give 'em a piece of meat, real meat, off of this package.' And boy the bloodbath will be extraordinary."


.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Sat Nov 27, 2010 6:32 pm

.

Franco-German differences on euro bailout plans. As stefano pointed out, interesting how the potential total adds up to about the same as the Fed's QE2.

http://www.nytimes.com/2010/11/26/busin ... l?_r=4&hpw
(see fair-use notice above)

Germany Makes Gain on Bailouts
By STEPHEN CASTLE and MATTHEW SALTMARSH
Published: November 25, 2010



BRUSSELS — Undeterred by the deepening crisis over the euro, Germany stuck to its guns on Thursday in pushing to make private investors pick up part of the bill in any future bailout — and appeared to win support from France.

In a speech in Berlin, Chancellor Angela Merkel said the euro zone would retain its existing state guarantees until 2013 and thereafter would impose “discipline.”

With Ireland preparing to receive bailout money, France moved closer to the German position on Thursday. The issue is due to be discussed next month by European Union leaders.

Mrs. Merkel and President Nicolas Sarkozy of France discussed the matter by phone on Thursday, another day of intense market pressure as investors continued to sell euro zone bonds. Investors have been unnerved by suggestions that a new system might even apply to bonds issued next year.

In a brief statement after the discussion, Mr. Sarkozy’s office said the two governments would “work together” to set up a new permanent mechanism to deal with sovereign debt crises that would take effect in 2013.

Some have suggested that the euro project is in danger of breaking up as a result of the crisis. But Axel A. Weber, president of Germany’s central bank and a member of the governing council of the European Central Bank, dismissed that idea.

A fund of 440 billion euros (about $600 billion) was set up in May as a backstop for European countries. Mr. Weber said he believed that the size of the fund was sufficient but that European nations would come up with the difference — which he put at 145 billion euros — if faced with having to cover the total public debt load of Greece, Ireland, Portugal and Spain.

“I think that this pessimistic scenario can be ruled out,” Mr. Weber said, according to Reuters. “If, however, it came to this worst of worst cases, the euro will not fail because of a difference of 145 billion euros.”

Behind official statements, there still appears to be a difference between Germany and France, the two dominant economies in the euro zone.

German government officials argue that markets will be calmed only when they know, and can adjust to, any new rules operating after the fund expires in 2013 .

Berlin sees the current market turbulence as a consequence of the problems of the weak finances of some members, who for too long were able to benefit from low interest rates attached to their bond issues; the unspoken assumption was that Germany would provide a backstop if needed.

Officials in Berlin argue that as a condition of obtaining any financial assistance after 2013, the private sector should face losses, albeit mild ones initially.

But France and other member states have expressed concern about alarming nervous investors and exacerbating market strains. Paris is also aware that its budget position is weaker than Germany’s.

Many European Union members also worry about having this debate before Ireland’s bailout is completed and while speculation continues that Portugal and Spain may require assistance.

Some blame Berlin openly. German authorities “are slowly losing sight of the European common good,” Jean-Claude Juncker of Luxembourg, who heads the euro zone finance ministers’ group, was quoted as saying by Rheinischer Merkur, a German newspaper. But he added: “I am neither worried about the survival of the euro nor about the survival of the European Union.”

Jean Pisani-Ferry, director of Bruegel, a research institute in Brussels, said: “The German way is: ‘Let’s have clear rules and let’s define the rules precisely, and the private players learn what the rules are,’ The French approach is, ‘Let’s address the problems as they emerge, let’s keep maximum discretion and don’t set in stone what does not have to be set in stone.’ ”


Stephen Castle reported from Brussels and Matthew Saltmarsh from Paris.


This article has been revised to reflect the following correction:

Correction: November 27, 2010


Because of an editing error, an article on Friday about Germany’s push to make bondholders take some losses in the event of future bailouts of euro zone countries misstated the activity thus far of a $600 billion fund set up by the European Union in May to provide financial assistance to struggling nations. Its first loans will be made to Ireland; it did not lend money to Greece. (Greece’s $146 billion bailout, combining assistance from other euro nations and the International Monetary Fund, came before the bailout fund was established.)
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby 2012 Countdown » Sat Nov 27, 2010 6:52 pm

Iceland Is No Ireland as State Free of Bank Debt, Grimsson Says
By Jonas Bergman and Omar R. Valdimarsson - Nov 26, 2010 8:21 AM CT

Iceland’s President Olafur R. Grimsson said his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued.

“The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

Ireland’s Prime Minister Brian Cowen said this week his government has discussed an 85 billion-euro ($112 billion) bailout with the European Union and International Monetary Fund after the country’s banks threatened to bring the euro member to the brink of bankruptcy. Iceland’s banks, which still owe creditors about $85 billion, were split to create domestic units needed to keep the financial system running, while foreign liabilities remained within the failed lenders.

As a consequence, “Iceland is faring much better than anybody expected,” Grimsson said. The Icelandic state’s liability on foreign depositor claims stemming from Icesave accounts at failed Landsbanki Islands hf should be put to a national referendum, he said.

“How far can we ask ordinary people -- farmers and fishermen and teachers and doctors and nurses -- to shoulder the responsibility of failed private banks,” said Grimsson. “That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”


Accept Losses

Iceland is relying on a $4.6 billion IMF-led loan to rebuild its economy. Grimsson said today the government may not need the entire amount.

Bondholders of European banks should be prepared to accept losses because voters are becoming increasingly unwilling and unable to fund bailouts, FXPro Financial Services Ltd. said in a Nov. 24 note.

“The taxpayer has no realistic prospect of being able to save their banks, such is the magnitude of their bad loans and their extraordinary dependence on central bank support,” wrote Michael Derks, chief strategist in London at foreign-exchange firm FXPro. “Both junior and senior bondholders in these insolvent banks need to suffer huge haircuts,” he said.

Forcing bond holders to “share the burden,” may help the euro region remain intact, Derks wrote.

Junk

Grimsson, who said Iceland’s talks to join the European Union are ongoing, in January this year blocked a $5.2 billion deal to cover British and Dutch depositor claims stemming from Icesave accounts. The move prompted Fitch Ratings to downgrade the island’s debt to “junk” as a normalization of international relations grew more remote. Iceland’s Finance Ministry on Nov. 16 said the country may now be weeks away from a “final resolution” to the Icesave dispute as it secures broad lawmaker backing for a new accord.

Kaupthing Bank hf, Landsbanki and Glitnir Bank hf failed within weeks of each other in October 2008 after they were unable to secure short-term funding. The banking crisis led to an 80 percent slump in the krona against the euro offshore, until the slump was stemmed by the introduction of capital controls at the end of 2008.

Kaupthing’s winding-up committee today said it finished dealing with claims lodged against it. The bank is dealing with a total of 28,167 claims filed by creditors across 119 countries totaling 7.32 trillion kronur ($63 billion), it said in a statement today.

To contact the reporter on this story: Omar Valdimarsson in London at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

http://www.bloomberg.com/news/2010-11-2 ... -says.html
George Carlin ~ "Its called 'The American Dream', because you have to be asleep to believe it."
http://www.youtube.com/watch?v=acLW1vFO-2Q
User avatar
2012 Countdown
 
Posts: 2293
Joined: Wed Jan 30, 2008 1:27 am
Blog: View Blog (0)

Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Sat Nov 27, 2010 6:53 pm

.

A very good thread on DU. Posting here because some of it was new to me, including the statement by the Indian bank governor.
http://www.democraticunderground.com/di ... 89x9636301

Time for change, one of the greatest DU members ever wrote:

Fri Nov-26-10 10:02 PM

If You Don’t Understand it Don’t Trust it


Edited on Fri Nov-26-10 10:17 PM by Time for change

Throughout much or all of human history, people have sought to take advantage of other people by selling them stuff that is purported to be something that it isn’t. When this phenomenon reaches extreme proportions it manifests itself within a society by great concentrations of wealth at one end of the spectrum and consequent mass poverty at the other end. That is the situation that is unfolding in the United States today, as we attain the greatest level of income inequality in our history.

The lies that have been used to attain this status and convince millions of Americans to accept it as a normal state of affairs are too numerous to count. Probably the greatest lie of all – the one that serves as a foundation for all the others – is the one that maintains that great concentrations of wealth are the normal result of nature (or God) rewarding those who deserve it and punishing those who are too lazy or incompetent to deserve even the basic necessities of life. In this bizarro world, CEOs who make tens of millions of dollars a year are seen as deserving every penny that they get, even when they ruin the companies that they run, and even though it should be obvious that they virtually dictate their own salaries by virtue of getting to choose their own board of directors. Conversely, the poor are seen as deserving their poverty – even the children who are born into it.

Another contender for the greatest lie of all in today’s United States of America is that our system of government is a democracy. The rich give money to our elected representatives, who respond with legislative favors, and our courts condone that behavior by calling it “freedom of speech” rather than bribery. The rich also use their money to monopolize mass communication through the “public” airways, and that too is called freedom of speech.

With such a political system our government pretended to attempt to resolve our greatest financial crisis in several decades with a multi-trillion dollar bailout of wealthy banks rather than by directly addressing the needs of ordinary people who were losing their homes by the millions; and so-called “health care reform” passes as a plan to further empower the same insurance industry that helped to give us one of the worst health care systems in the developed world.

Such things could happen only in a society where people are bamboozled into routinely accepting the ridiculous as their reality. Many articles and books have been written to expose the numerous schemes that have been used in recent decades to transfer money from the poor and the middle class to the rich. Yet these things get scant attention in the television, radio, and newspaper media from which most Americans get their picture of reality.


A whole industry that serves no function other than transfer of money to the rich

The award winning bond market reporter Christine Richard’s “Confidence Game” is one of the most detailed stories of how this game can be played. The basic purpose of the book is explained in the book jacket:

Confidence Game is a real-world “Emperor’s New Clothes”, a tale of widespread delusion and one dissenting voice in the era leading up to the worst financial disaster since the Great Depression. Wall Street appeared to have found the secret for turning everything from risky mortgage… into super-safe triple-A-rated securities. Behind the façade of safety, the financial system had become dangerously fragile…


Why only one dissenting voice? Well, this particular game was so complex that apparently only one person in the world cared to spend the time that it took to understand it well. Once he understood it, he became so convinced that it was a fraud that he spent several years of his life trying to expose it and bring it down. Consequently, he was branded a fraud, because the game that he threatened to expose stood to make life very uncomfortable for a lot of very rich people. But he kept at it because he was certain that he was right. Richard explains in the preface to her book the basic outline of this game:

How was it that MBIA could write insurance on hundreds of billions of dollars of debt and yet tell its investors that it guaranteed only bonds on which it expected to pay no claims?... I exposed part of the secret by looking into various public projects… When the insured bonds issued to finance their projects threatened to default, taxpayers were called on to cover the losses. MBIA had a nearly perfect track record in the municipal bond market because it wasn’t the real insurer of the debt: Taxpayers were.


Richard’s story deals with Bill Ackerman’s efforts to expose the scheme, as well as the insights she gleaned from pursuing Ackerman’s efforts and doing some additional digging. From an e-mail from one of Ackerman’s allies to Ackerman:

“I had never given this any thought. If it is true that municipal bond defaults are made improbable by implicit (and explicit) state guarantees… then what we have is a whole industry that serves essentially no function other than to transfer money from the pockets of the public to the pockets of management and shareholders”.

“Zero-loss” underwriting required such extraordinary machinations to stay on the right side of the law that it was hard to believe the concept was not a fraud… The scheme guaranteed that the three reinsurers… got back “every cent of their money plus a profit.” To pull off the scheme, MBIA lied to its investors, its auditors, the credit-rating companies, and its reinsurers…


The book jacket also summarizes how this particular game ended:

With the onset of the credit crisis, the problems exposed turned out to be bigger than MBIA. An unquestioning acceptance of credit ratings… and the abandonment of common sense had become part of a deeply flawed financial system. The collapse humbled nearly every large financial institution and plunged the country into recession.



How India escaped financial disaster in the midst of world-wide recession

Robert Kuttner’s book, “A Presidency in Peril – The Insider Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future”, is a must read for anyone who wants to understand the essential failures of a combined Democratic President and Congress with large Democratic margins to address one of the worst and most dangerous financial crises our country has ever faced. Two pages in the last chapter of his book serve as a decent summary of the root of our problems:

The bottom line is that the entire business model of the financial industry needs to be drastically simplified, so that banking reverts to the proper role of providing credit and capital to the rest of the economy, and no financial product is too complex for regulators to grasp. This will require not just the tougher rhetoric we have lately seen, but a concerted regulatory push relying on all the powers of the presidency. Some of this requires new legislation, but much of it can be accomplished by executive action… It is simply a myth that the complexity adds to the economy’s efficiency, or that these are financial products required or demanded by bank customers…


Kuttner then explains how India escaped the financial crisis experienced by so much of the rest of the world, as explained to him by Dr. Yaga Reddy, the former governor of the Bank of India, a post equivalent to that of Chairmen of the Federal Reserve in the US:

India somehow missed the consequences of the toxic products invented and exported by US financial institutions. It had no financial crisis… I asked Dr. Reddy how India managed to dodge the financial bullet. “We don’t understand these complex instruments,” he told me with a smile, “so we don’t permit them. We leave them to the advanced nations like you.”…

My reporting has confirmed that Dr. Reddy stood firm in the face of intense pressure from the governments of Britain and the United States, as well as the world’s large banks and their Indian affiliates. He was attacked as old-fashioned and rigid. The Indian central bank under his leadership persisted… to make it unprofitable for Indian banks to create and gamble in the kind of exotic derivative securities that crashed the American system… and Dr. Reddy’s banking colleagues belatedly thanked him.


Kuttner sums up our current situation:

From the 1950s through the 1980s, banks and other financial institutions accounted for between 8 and 16 percent of total corporate profits. By 2006, the figure was more than 40%. Those who defended the bloating of the financial sector argued that innovation on Wall Street, by definition, was good for the real economy. Year after year, Alan Greenspan and others kept… testifying before Congress on how newly created instruments helped disseminate capital and spread risk… We now know that… all of this functioned at the expense of the real economy.



Black box voting

It is very difficult for many of us to understand why more of the American public is not outraged about a situation where private companies count our votes with secret software that provide no assurances about the accuracy of the vote count. The best explanation for that fact is that our corporate media, which is the main source of news for most Americans, does everything it can to persuade us that everything is ok – and too many people are happy to believe that.

I have never seen a poll which asks Americans something like: Do you think it is acceptable for private companies to count our votes with secret software that provide no assurances about the accuracy of the vote count? Yet this is exactly the situation that we are faced with. Why won’t a major polling firm ask that question and publicize the results?

Why on Earth would anyone trust a voting machine that: 1) is designed and made by a for-profit corporation; 2) whose results cannot be verified; 3) has been shown to be susceptible to manipulation and fraud, and 4) whose owners have contributed large sums of money to one of the involved political parties? Yet this is what we are being confronted with more and more.


Walking the tightrope of hypocrisy in the war against the poor and the middle class

If there is any silver lining to all this, it is perhaps that it is extraordinarily difficult to maintain illusions forever, no matter how much wealth is available for that purpose. Perhaps that’s a major reason why all empires in the history of the world have eventually fallen. Noam Chomsky deals with this issue in his recent book, “Hopes and Prospects”:

The persistence of generally social democratic attitudes (in the US) is noteworthy in the face of huge propaganda campaigns to efface any such ideas, a prominent feature of a society dominated to an unusual extent by a highly class-conscious business community, dedicated to winning what they call “the everlasting battle for the minds of men” and to beating back threats of “political power of the masses”, a serious hazard… more recently to the increasingly dominant financial institutions. Over the years the (propaganda) campaigns have had two primary enemies: unions and government.


Yes indeed. We’ve been flooded with this antigovernment blather since the Reagan presidency, and it’s so ridiculous that it is sickening to know that it has picked up as much popular support as it has. Worse yet is the fact that large factions of the Democratic Party have given support to this nonsense by trying to outdo Republicans from time to time with their own brand of anti-big government rhetoric.

Part and parcel of the anti- big government rhetoric is the attempt to brand as “Socialism!!” any attempt by government to fulfill the function of protecting the vulnerable from the powerful, as was done so successfully during the Franklin Delano Roosevelt Administration. This has been quite effective. Chomsky describes the results:

The power of financial institutions reflects the increasing shift of the economy from production to finance… one of the root causes of the greatest economic crisis since the Great Depression: the financial collapse of 2007-8, deep and ongoing recession in the real economy for the large majority, whose real wages stagnated for thirty years, while benefits and social indicators declined… with corresponding increases into the pockets of “those who mattered”.


But the elites have a problem when they try to verbally lambast “big government”. They risk exposing their blatant hypocrisy. Chomsky continues:

The antigovernment campaigns have to be nuanced and sophisticated, because the (propagandists) understand very well the need for a powerful state that intervenes massively in the economy and abroad to ensure that their own interests are most peculiarly attended to. The goal of sophisticated business propaganda is to engender fear and hatred of government among the population, so that they are not seduced by subversive notions of democracy and social welfare, while maintaining support for the powerful nanny state for the rich – a difficult course, but one that has been maneuvered with considerable skill.


Refresh | +51 Recommendations


Time for change does a lot of these well-researched, long posts.

Here's another, with the details on income inequality:
http://www.democraticunderground.com/di ... id=7214807

Image

This chart plots income inequality, measured as the ratio between the average income of the top 0.01% of U.S. families, compared to the bottom 90% (that would be most of us at DU). Note that preceding the great stock market crash of 1929, which plunged us into depression, the ratio rose from about 250 at the start of the 1920s to a peak of about 900 by 1929. The ratio then plunged, and by the start of WW II it had declined to about 200, where it remained with some relatively minor ups and downs until the beginning of Ronald Reagan’s Presidency. It then began another precipitous climb, with a sharp decline beginning during the last year of Clinton’s Presidency, but then another sharp increase beginning at about the time that the Bush tax cuts for the wealthy first went into effect, so that by the end of 2006 we’ve exceeded even the peak ratio of 1929 that preceded the Great Depression. The three green bars in the chart represent the stock market crash of 1929, the last pre-Reagan year, and two years preceding our current recession/depression.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
User avatar
JackRiddler
 
Posts: 15983
Joined: Wed Jan 02, 2008 2:59 pm
Location: New York City
Blog: View Blog (0)

PreviousNext

Return to Political

Who is online

Users browsing this forum: No registered users and 1 guest