Saturday, January 30, 2010

Why no prosecution, but instead bailouts?

Hopefully I won't get thrown off this page for this, but every valid conspiracy theory I have ever seen involved the Wall Street banker class. Why is it that the biggest fraud scheme in the history of the world has not only not been investigated or prosecuted, but the perpeptrators of the fraud bailed out and massively rewarded? This is like going to Federal prison, finding the convicted bank robbers, throwing the judge and jury in prison and giving the convicts the key to the bank and releasing them. This is only about a $5 trillion fraud when you sum it all up and it touches all corners of the world. Guys like Blanfein should be charged and tried. If they are innocent, they have a huge pile of money for a defense, but someone should act. As Karl and others write over and over again (William Black cites the same study), the FBI warned that massive mortgage fraud was going on as early as 2004. What is it that has put the power structure in the US in position that simple shoplifting can get you prison time while massive financial fraud gets you another huge bonus?

I have recently been trying to trade the oil markets short. Once the volume dries up, the robots take over. If there was only one form, trading these markets would make you rich, but the form changes. In order to sell into a market, you need bids and the machines line the bids up to where there is always 1 contract in the front and never over a few behind it. The large bids are phonies and they disappear when the line comes to them. I suspect the bids and the asks are put there quite often by the same entities. You see market orders go right through bids to the bid behind it over and over again, meaning the computers are getting the signals and moving the pawns before the orders hit them. Not only are our securitization markets rife with fraud, our other markets are being manipulated for the profit of the very operations that owe the public fidiciary duty. It is no wonder that Goldman and the other banks are reaping massive trade profits out of the markets. Bull the oil market up $1 or so with minimal cost so you can play the other side after squeezing the ones that are on the right side. You have to watch this a few days to realize what is going on. These guys are more than making the markets. You might as well be playing the roulette wheel and giving the house the vig. The copper market is the same and I am sure the SPX overnight is also manipulated. I doubt there is much left in NYC that isn't some kind of organized crime. Organized crime starts within the government.

There isn't much Karl wrote that I either haven't written myself or that I disagree with. The smokescreen nonsense that heads up every major election always covers up what is really going on. There are also myths about who is who. Bernanke either hasn't a clue what caused the Great Depression (over extention of credit) or he is doing the opposite of what he knows would cure it. Bernanke didn't cause this mess. What caused this mess was the idea that the supply of credit was infinite and it was only a matter of debt service itself that determined how much debt one could take on. This would only be true if it wasn't necessary for some to act as creditors. Thus only a minority few could ever pose at any given time as major debtors. It is clear that one more time we are being forced to bail out our own creditors. FDR bailed out the banks in 1933 along with the Fed. Wall Street created the mess that time as well, but we had one problem then we don't have now, gold. FDR had to devalue gold to balance world financial flows. But, he confiscated gold from the American public in order to relieve the Fed of its duty to redeem all its paper in gold. The Fed was broke then. We will find it broke again.

Why is it that everything seems to be on the table but banking? The compound interest equation always eventually collapses and causes a depression and most likely has for 3000 years or more. It is clear that in order to produce a real return that the yield on loaned funds has to exceed the inflation created by such lending. Once lending becomes speculative, the bubbles arise and then burst. Every form of protection ever created has collapsed into a pile of economic ruin. For some reason, this is a mistake made over and over again by man. Any other form of business that caused such problems would be outlawed immediately, but this one is always deemed essential to the continued operation of the world. The idea that one group gets to draw an income out of the very existance of money while the others pay a penalty and provide the property to create the money/debt is beyond me. It is clear that this seemingly benign operation could be the very synagog of Satan spoken of in the bible. It is also clear that bondage in Egypt was a lien against the entire population for 20% of its income. Moses prohibited usury for the very reason that it would eventually enslave and destroy the society in which it was practiced.

Wednesday, January 6, 2010

Does Economics Deserve a Nobel Prize

By Michael Hudson Written and published December 18, 1970

I moved this here because I couldn't get it all to show up on the windown on his site.

It is bad enough that the field of psychology has for so long been a non-social science, viewing the motive forces of personality as deriving from internal psychic experiences rather than from man's interaction with his social setting. Similarly in the field of economics: since its “utilitarian” revolution about a century ago, this discipline has also abandoned its analysis of the objective world and its political, economic productive relations in favor of more introverted, utilitarian and welfare-oriented norms. Moral speculations concerning mathematical psychics have come to displace the once-social science of political economy.

To a large extent the discipline’s revolt against British classical political economy was a reaction against Marx¬ism, which represented the logical culmination of clas¬sical Ricardian economics and its paramount emphasis on the conditions of production. Following the counter­revolution, the motive force of economic behavior came to be viewed as stemming from man's wants rather than from his productive capacities, organization of pro­duction, and the social relations that followed therefrom. By the postwar period the anti-classical revolution (curiously termed neo-classical by its participants) had carried the day. Its major textbook of indoctrination was Paul Samuelson's Economics.

Today, virtually all established economists are products of this anti-classical revolution, which I myself am tempted to call a revolution against economic analysis per se. The established practitioners of economics are uniformly negligent of the social preconditions and consequences of man's economic activity. In this lies their shortcoming, as well as that of the newly-instituted Economics Prize granted by the Swedish Academy: at least for the next decade it must perforce remain a prize for non-economics, or at best superfluous economics. Should it therefore be given at all?

This is only the second year in which the Economics prize has been awarded, and the first time it has been granted to a single individual—Paul Samuelson— described in the words of a jubilant New York Times editorial as “the world’s greatest pure economic theorist.” And yet the body of doctrine that Samuelson espouses is one of the major reasons why economics students enrolled in the nation's colleges have been declining in number. For they are, I am glad to say, appalled at the irrelevant nature of the discipline as it is now taught, impatient with its inability to describe the problems which plague the world in which they live, and increasingly resentful of its explaining away the most apparent problems which first attracted them to the subject.

The trouble with the Nobel Award is not so much its choice of man (although I shall have more to say later as to the implications of the choice of Samuelson), but its designation of economics as a scientific field worthy of receiving a Nobel prize at all. In the prize committee’s words, Mr. Samuelson received the award for the “scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science. . . .”

What is the nature of this science? Can it be “scientific” to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied? Is economics really an applied science at all? Of course it is implemented in practice, but with a noteworthy lack of success in recent years on the part of all the major economic schools, from the post-Keynesians to the monetarists.

In Mr. Samuelson’s case, for example, the trade policy that follows from his theoretical doctrines is laissez faire. That this doctrine has been adopted by most of the western world is obvious. That it has benefited the developed nations is also apparent. However, its usefulness to less developed countries is doubtful, for underlying it is a permanent justification of the status quo: let things alone and everything will (tend to) come to “equilibrium.” Unfortunately, this concept of equilibrium is probably the most perverse idea plaguing economics today, and it is just this concept that Mr. Samuelson has done so much to popularize. For it is all too often overlooked that when someone falls fiat on his face he is “in equilibrium” just as much as when he is standing upright. Poverty as well as wealth represents an equilibrium position. Everything that exists represents, however fleetingly, some equilibrium—that is, some balance or product—of forces.

Nowhere is the sterility of this equilibrium preconception more apparent than in Mr. Samuelson's famous factor-price equalization theorem, which states that the natural tendency of the international economy is for his wages and profits among nations to converge over time. As an empirical historical generality this obviously is invalid. International wage levels and living standards are diverging, not converging, so that the rich creditor nations are becoming richer while poor debtor countries are becoming poorer – at an accelerating pace, to boot. Capital transfers (international investment and “aid”) have, if anything, aggravated the problem, largely because they have tended to buttress the structural defects that impede progress in the poorer countries: obsolete systems of land tenure, inadequate educational and labor-training institutions, pre-capitalist aristocratic social structures, and so forth. Unfortunately, it is just such political-economic factors that have been overlooked by Mr. Samuelson’s theorizing (as they have been overlooked by the mainstream of academic economists since political economy gave way to “economics” a century ago).

In this respect Mr. Samuelson's theories can be described as beautiful watch parts which, when assembled, make a watch that doesn’t tell time accurately. The individual parts are perfect, but their interaction is somehow not. The parts of this watch are the constituents of neoclassical theory that add up to an inapplicable whole. They are a kit of conceptual tools ideally designed to correct a world that doesn’t exist.

The problem is one of scope. Mr. Samuelson’s three volumes of economic papers represent a myriad of applications of internally consistent (or what economists call “elegant”) theories, but to what avail? The theories are static, the world dynamic.

Ultimately, the problem resolves to a basic difference between economics and the natural sciences. In the latter, the preconception of an ultimate symmetry in nature has led to many revolutionary breakthroughs, from the Copernican revolution in astronomy to the theory of the atom and its sub-particles, and including the laws of thermodynamics, the periodic table of the elements, and unified field theory. Economic activity is not characterized by a similar underlying symmetry. It is more unbalanced. Independent variables or exogenous shocks do not set in motion just-offsetting counter-movements, as they would have to in order to bring about a meaningful new equilibrium. If they did, there would be no economic growth at all in the world economy, no difference between U.S. per capita productive powers and living standards and those of Paraguay. Mr. Samuelson, however, is representative of the academic mainstream today in imagining that economic forces tend to equalize productive powers and personal incomes throughout the world except when impeded by the disequilibrating “impurities” of government policy. Empirical observation has long indicated that the historical evolution of “free” market forces has increasingly favored the richer nations (those fortunate enough to have benefited from an economic head start) and correspondingly retarded the development of the laggard countries. It is precisely the existence of political and institutional “impurities” such as foreign aid programs, deliberate government employment policies, and related political actions that have tended to counteract the "natural" course of economic history, by trying to maintain some international equitability of economic development and to help compensate for the economic dispersion caused by the disequilibrating “natural” economy.

A Revolution

This decade will see a revolution that will overthrow these untenable theories. Such revolutions in economic thought are not infrequent. Indeed, virtually all of the leading economic postulates and “tools of the trade” have been developed in the context of political-economic debates accompanying turning points in economic history. Thus, for every theory put forth there has been a counter-theory.

To a major extent these debates have concerned international trade and payments. David Hume with the quantity theory of money, for instance, along with Adam Smith and his “invisible hand” of self-interest, opposed the mercantilist monetary and international financial theories that had been used to defend England’s commercial restrictions in the eighteenth century. During England’s Corn Law debates some years later, Malthus opposed Ricardo on value and rent theory and its implications for the theory of comparative advantage in international trade. Later, the American protectionists of the 19th century opposed the Ricardians, urging that engineering coefficients and productivity theory become the nexus of economic thought rather than the theory of exchange, value and distribution. Still later, the Austrian School and Alfred Marshall emerged to oppose classical political economy (particularly. Marx) from yet another vantage point, making consumption and utility the nexus of their theorizing.

In the 1920s, Keynes opposed Bertil Ohlin and Jacques Rueff (among others) as to the existence of structural limits to the ability of the traditional price and income adjustment mechanisms to maintain “equilibrium,” or even economic and social stability. The setting of this debate was the German reparations problem. Today, a parallel debate is raging between the Structuralist School – which flourishes mainly in Latin America and opposes austerity programs as a viable plan for economic improvement of their countries – and the monetarist and post-Keynesian schools defending the IMF's austerity programs of balance-of-payments adjustment. Finally, in yet another debate, Milton Friedman and his monetarist school are opposing what is left of the Keynesians (including Paul Samuelson) over whether monetary aggregates or interest rates and fiscal policy are the decisive factors in economic activity.

In none of these debates do (or did) members of one school accept the theories or even the underlying assumptions and postulates of the other. In this respect the history of economic thought has not resembled that of physics, medicine, or other natural sciences, in which a discovery is fairly rapidly and universally acknowledged to be a contribution of new objective knowledge, and in which political repercussions and its associated national self-interest are almost entirely absent. In economics alone the irony is posed that two contradictory theories may both qualify for prizeworthy preeminence, and that the prize may please one group of nations and displease another on theoretical grounds.

Thus, if the Nobel prize could be awarded posthumously, both Ricardo and Malthus, Marx and Marshall would no doubt qualify—just as both Paul Samuelson and Milton Friedman were leading contenders for this year’s prize. Who, on the other hand, can imagine the recipient of the physics or chemistry prize holding a view not almost universally shared by his colleagues? (Within the profession, of course, there may exist different schools of thought. But they do not usually dispute the recognized positive contribution of their profession’s Nobel prizewinner.) Who could review the history of these prizes and pick out a great number of recipients whose contributions proved to be false trails or stumbling blocks to theoretical progress rather than (in their day) breakthroughs?

The Swedish Royal Academy has therefore involved itself in a number of inconsistencies in choosing Mr. Samuelson to receive the 1970 Economics Prize. For one thing, last year’s prize was awarded to two mathematical economists (Jan Tinbergen of Holland and Ragnar Frisch of Norway) for their translation of other men's economic theories into mathematical language, and in their statistical testing of existing economic theory. This year’s prize, by contrast, was awarded to a man whose theoretical contribution is essentially untestable by the very nature of its “pure” assumptions, which are far too static ever to have the world stop its dynamic evolution so that they may be “tested.” (This prompted one of my colleagues to suggest that the next Economics Prize be awarded to anyone capable of empirically testing any of Mr. Samuelson’s theorems.)

And precisely because economic “science” seems to be more akin to “political science” than to natural science, the Economics Prize seems closer to the Peace Prize than to the prize in chemistry. Deliberately or not, it represents the Royal Swedish Academy’s endorsement or recognition of the political influence of some economist in helping to defend some (presumably) laudable government policy. Could the prize therefore be given just as readily to a U.S. president, central banker or some other non-academician as to a “pure” theorist (if such exists)? Could it just as well be granted to David Rockefeller for taking the lead in lowering the prime rate, or President Nixon for his acknowledged role in guiding the world’s largest economy, or to Arthur Burns as chairman of the Federal Reserve Board? If the issue is ultimately one of government policy, the answer would seem to be affirmative.

Or is popularity perhaps to become the major criterion for winning the prize? This year’s award must have been granted at least partially in recognition of Mr. Samuelson’s Economics textbook, which has sold over two million copies since 1947 and thereby influenced the minds of a whole generation of—let us say it, for it is certainly not all Mr. Samuelson’s fault—old fogeys. The book’s orientation itself has impelled students away from further study of the subject rather than attracting them to it. And yet if popularity and success in the marketplace of economic fads (among those who have chosen to remain in the discipline rather than seeking richer intellectual pastures elsewhere) is to become a consideration, then the prize committee has done an injustice to Jacqueline Susann in not awarding her this year’s literary prize.

To summarize, reality and relevance rather than “purity” and elegance are the burning issues in economics today, political implications rather than antiquarian geometrics. The fault therefore lies not with Mr. Samuelson but with his discipline. Until it is agreed what economics is, or should be, it is as fruitless to award a prize for “good economics” as to award an engineer who designed a marvelous machine that either could not be built or whose purpose was unexplained. The prize must thus fall to those still lost in the ivory corridors of the past, reinforcing general equilibrium economics just as it is being pressed out of favor by those striving to restore the discipline to its long-lost pedestal of political economy.


Tuesday, January 5, 2010

2010 here we come

I guess I will be stuck as a bear for the next several years. But, unlike the past, I think I have a good chance to be right. 2010 holds a lot of interest for us that love markets and economics. It also is leading right into disaster. The end of the world in 2012 could get a real boost this year.

First, there won't be a double dip recession because there really isn't a recovery. There were over 26 million first time claims filed for unemployment in 2009 and yet all we heard about since May was we had a recovery on the way. In examining the consumer confidence numbers last week, which were reported to have improved, I found much of what I found back in the middle of the year, hope 6 months out and a horrible present reading. In fact, the reading for December for the present was so bad it was the worst number in 26 years. That didn't make the bullish news, but it was on the conference board page for the index none the less. 6 months ago, the reading looked the same, a real bearish current reading and a more optimistic 6 month from now reading. So, the 6 month expectation turned out to be a dud.

They had a great housing number, but housing collapsed with boom time sales numbers all the way to the bottom. What is going to happen with housing once they get the last first time buyer to the closing altar? New home sales are at depression levels, so the game is buy a house on the courthouse steps and flip it to a first timer complete with a free downpayment from Uncle Sam and a guaranteed mortgage from FHA. Time is running thin here, as there are too many losses in the system to save it.

Factory orders or something of that sort came out today. They beat expectations, but these orders had fallen a sum of nearly 30% during the period between July 2008 and January 09 and the sum of the rebound has been about 5% since the bottom. Bulls are claiming the numbers indicate a boom, but the sum so far has been a dead cat bounce that is at best a weak inventory rebuild effort. Some boom for $800 billion plus the TARP.

I think the economy just continue to recover until it is discovered to be in a depression. There is too much debt and too much damage and not much other than the desire of China to buy up American goods to put in their empty array of buildings so they at least have the appearance of maintaining a nice group of museums can change this. Just like I heard the Ocean was the icebox in Hawaii, the homestead is the ATM for the US consumer and it has been overdrafted. We had record level auto sales and record level home sales in the US for a good part of a decade and we are still showing high levels of preowned home sales. This pool of autos and homes will carry the US consumer a long way while he gets his house in order. Credit is tapped and card companies have their share of high losses. Not many people that can avoid it are going to pay the rates on these cards, save those that can't pay the debt back.

Forecast: Real US growth will be negative, but reported growth will be around 2%. Real growth is negative because dead cat bounces and government gifts don't count.

China. I don't know what it is going to take to knock over China, but from what I can read, what they call growth is not what I would call growth. If building capacity and buildings that won't be used any time soon is growth then I buy into it. As a result of this policy, China has pinned the price of commodities to the ceiling. Because their necessity is they keep the public employed and the money flowing, this could go on for awhile. Their government isn't much different than ours in this matter. The longer this goes on, the longer the bust will be that follows.

Forcast: China probably reaches its growth goals, but they won't be real. Cracks are already showing in China in the eyes of a lot of analysts, but the public is being told they are hot. I think by the end of the year, the construction industry in China will have officially hit the rocks and the commodity producing countries, namely Australia and Brazil will be having a hell of a hangover. A crash in the stock markets in those 2 countries could very well occur

As a result, world growth will have spent itself. From what I can read, India is a better long term play than China, but it is clear that India will have its own bust. Deflation will have re-established its grip on the US and this will be devastating to world demand. Growth is more than a word, but a business around the world. It must be 30% of the economy around the world. The portion that puts an economy on the plus side is about to vanish.

The financial sector will do well for another 3 months. Though I don't expect another large failure in the US this year, there will be a restart of the crisis. The worst probably hits in 2011. 2 or 3 large US banks will be taken over and broken up before 2012 is over. Their condition currently is being concealed in hopes something doesn't get worse in the meantime. The US isn't the only part of the world that has to liquidate debt and it is quite conceivable that 30% of the worlds supply will be defaulted or liquidated in the next 5 years. This is not conducive to putting things on the installment plan. One of the major Japanese auto companies will be in GM/Chrysler land by mid 2012.

The stock market will finish 2010 lower than it started 2009.

It is quite likely that it could recapture the entire loss that followed the bankrupting of Lehman Brothers. The Dow is already near the bottom it made in July 2008, but the S&P still has another 7% or so to go to make that bottom. The difference is likely due to the fact that the Dow lost points from AIG and Citi while the SPX lost value and the replacements put the points back in the Dow on the rally, but Citi and AIG never came back. There isn't a lot of promise for stocks due to a lot of reasons, but mainly to the fact that the credit flow that created the earnings in the market isn't coming back. Being able to borrow money at less than 1% doesn't make up for the lack of cash flow that is going to continue with the market. The customers are lacking the most important feature of all, credit and cash. Once the market reverses, the liquidity crunch is going to return with vengence, as there won't be a takeout.

The sovereign debt market will get interesting.

I don't believe Greece and Italy will default this year, but I do believe that as time goes forward, these countries are going to default or better yet, repudiate their debt. Currently we are seeing Iceland being tossed a bargaining chip of membership in the Eurozone in order to get them to agree to assume the losses of European investors in their 2 failed banks. I don't believe it is possible for that few people to agree to assume that much debt, nor should they. That will be an early story this year, a sign of things to come, but not much of an event at this time. It will be when Greece, Spain, Italy or Ireland tells them to stuff it.

Funny financing will cease

The focus seems to be on the Fed and the US, but the wildest financing is being done by China and other Asian countries. I do believe we are going to find out there is less to these sovereign wealth funds than has been mentioned. I wonder what kind of duds they contain that we haven't seen. China contains entire vacant cities that must cost tens or hundreds of billions to build. Dubai is todays tower of Babel. Much of the money of the middle east is tied up there. London is going to have its share of problems, especially if they drive their financial mob out with taxes. American commercial property is going to weigh on the US banking system and some are going to begin to question the US commitment to FNM and FRE. It is possible that the US will have to withdraw from its Asian wars.

The Democratic Party will lose one of the houses in Congress

This seems next to impossible at this time, but this economy is going to be hung around the neck of Obama and people are not very interested in the goals of the liberals in Congress. States are about to have to dump a massive number of employees and maybe sue to get out of some union contracts. The Republicans and other parties, should there be other parties, are going to hang the unemployment is going to stop at 8% with this stimulus around the necks of Democrats. The requirement to get health insurance is going to be one more boat rocking event.

Bernanke will be approved, but he will resign by years end

I have contended for some time that the dollar plays too big a role in the world economy to be treated in any fashion imagined on the whim of an economic tyrant. This goes for the government of the US as well. I can see the government being such a burden on the debt market that the private sector will be short of capital. the market will raise rates and the Fed will have to follow. The world will experience another liquidty crisis and that will prevent a dollar collapse.

The economic problems will become officially knows as Depression II

This downturn will become worldwide and it will become significantly worse. The only thing that will prevent collapse of governments will be the fact that money and credit are so short that governments will be able to stimulate without the money collapsing. China and India will join the depression, which will seal the deal.

So much for my bearish predictions. Everyone that was going to survive will. There will be benefits and opportunties for those that have the right strategy and the idea that something can't go on forever will sink in as the truth. There will be a lot of bankruptcy and a lot of liquidation. Unfortunately for most of us, we are going to be wiped out financially either way we go. We should all recognize that any one of us may be anothers only means of survival on a given occasion, so lend a hand if you can.