We can't grow ourselves out of debt, no matter what the Federal Reserve does
posted by Keito
2012-09-04 21:34:32'Let's replace our fixation on growth with a steady-state economy focusing on lower consumption, leisure and ecological health.
Federal Reserve chairman Ben Bernanke's pledge at Jackson Hole last Friday to "promote a stronger economic recovery" through "additional policy accommodation" has drawn criticism from economists, liberal and conservative, who question whether the Fed has the wherewithal to stimulate economic growth. What we actually need is more spending, say the liberals. No, less spending, say the conservatives. But underneath these disagreements lies an unexamined agreement, a common assumption that no mainstream economist or policy-maker ever questions: that the purpose of economic policy is to stimulate growth.
So ubiquitous is the equation of growth with prosperity that few people ever pause to consider it. What does economic growth actually mean? It means more consumption – and consumption of a specific kind: more consumption of goods and services that are exchanged for money. That means that if people stop caring for their own children and instead pay for childcare, the economy grows. The same if people stop cooking for themselves and purchase restaurant takeaways instead.
Economists say this is a good thing. After all, you wouldn't pay for childcare or takeaway food if it weren't of benefit to you, right? So, the more things people are paying for, the more benefits are being had. Besides, it is more efficient for one daycare centre to handle 30 children than for each family to do it themselves. That's why we are all so much richer, happier and less busy than we were a generation ago. Right?
Obviously, it isn't true that the more we buy, the happier we are. Endless growth means endlessly increasing production and endlessly increasing consumption. Social critics have for a long time pointed out the resulting hollowness carried by that thesis. Furthermore, it is becoming increasingly apparent that infinite growth is impossible on a finite planet. Why, then, are liberals and conservatives alike so fervent in their pursuit of growth?
The reason is that our present money system can only function in a growing economy. Money is created as interest-bearing debt: it only comes into being when someone promises to pay back even more of it. Therefore, there is always more debt than there is money. In a growth economy that is not a problem, because new money (and new debt) is constantly lent into existence so that existing debt can be repaid. But when growth slows, good lending opportunities become scarce. Indebtedness rises faster than income, debt service becomes more difficult, bankruptcies and layoffs rise.
Central banks used to have a solution for that. When growth slowed, they would simply buy securities (usually government bonds) on the open market, driving down interest rates. Investors who wouldn't lend into the economy if they could get 8% on a risk-free bond might change their minds if the rate were only 5%, or 2%. Rates that low would stimulate a flood of credit, jumpstarting the economy. Today that tool isn't working, but central banks are still trying it nonetheless. With risk-free interest rates near zero, they continue creating money through the same means as before, now calling it "quantitative easing". The thinking seems to be: "If you have more money than you know what to do with and are afraid to lend it, how about giving you even more money?" It is like giving a miser an extra bag of gold in hopes that he'll start sharing it.
Most commentators interpret Bernanke's remarks as signalling the possibility of a new round of quantitative easing. If so, the results will likely be the same as before – a brief churning of equities and commodities markets, but little leakage of the new money into the real economy. In all fairness, we cannot blame the banks for their reluctance to lend. Why would they lend to maxed-out borrowers in the face of economic stagnation? It would be convenient to blame banker greed; unfortunately, the problem goes much deeper than that.
The problem that we are seemingly unable to countenance is the end of growth. Today's system is predicated on the progressive conversion of nature into products, people into consumers, cultures into markets and time into money. We could perhaps extend that growth for a few more years by fracking, deep-sea oil drilling, deforestation, land grabs from indigenous people and so on, but only at a higher and higher cost to future generations. Sooner or later – hopefully sooner – we will have to transition towards a steady-state or degrowth economy.
Does that sound scary? Today it is: degrowth means recession, with its unemployment, inequality and desperation. But it need not be that way. Unemployment could translate into greater leisure for all. Lower consumption could translate into reclaiming life from money, reskilling, reconnecting, sharing.
Central banks could play a role in this transition. For example, what if quantitative easing were combined with debt forgiveness? The banks get bailout after bailout – what about the rest of us? The Fed could purchase student loans, mortgages or consumer debt and, by fiat, reduce interest rates on those loans to zero, or even reduce principal. That would liberate millions from the debt chase, while freeing up purchasing power for those who are truly underconsuming.
More radically, central banks should be allowed to breach the "zero lower bound" that has rendered monetary policy impotent today. If investors are unwilling to lend even when risk-free return on investment is 0%, why not reduce that to -2%, even -5%? Implemented as a liquidity tax on bank reserves, it would allow credit to circulate in the absence of economic growth, forming the monetary foundation of a steady-state economy where leisure and ecological health grow instead of consumption.
One thing is clear: we are at the end of an era. No one seriously believes that we will grow ourselves out of debt again. There is an alternative. It is time to begin the transition to a steady-state economy.'
IMF Says Bailouts Iceland-Style Hold Lessons in Crisis Times
posted by Keito
2012-08-24 18:22:17'Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.
Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.
“Iceland has made significant achievements since the crisis,” Daria V. Zakharova, IMF mission chief to the island, said in an interview. “We have a very positive outlook on growth, especially for this year and next year because it appears to us that the growth is broad based.”
Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy. The island’s subsequent decision to shield itself from a capital outflow by restricting currency movements allowed the government to ward off a speculative attack, cauterizing the economy’s hemorrhaging. That helped the authorities focus on supporting households and businesses.
“The fact that Iceland managed to preserve the social welfare system in the face of a very sizeable fiscal consolidation is one of the major achievements under the program and of the Icelandic government,” Zakharova said. The program benefited from “strong implementation, reflecting ownership on the part of the authorities,” she said.
As of March this year, the IMF had program arrangements with 11 European countries, representing about 65 percent of its funds, according to its website. Governments inside the euro zone have struggled to comply with the austerity terms prescribed in joint aid packages provided by the IMF and the European Union, leading to revised terms and extended deadlines for nations such as Greece.
At the same time, bond markets have reflected a lack of confidence in recovery programs, sending debt yields higher and adding to pressure on government finances. Countries inside the euro area or with pegged currencies such as Latvia have relied on wage cuts and reduced welfare services as a means toward delivering on bailout goals.
In Iceland, the krona’s 80 percent plunge against the euro offshore in 2008 helped turn a trade deficit into a surplus by the end of the same year. Unemployment, which jumped nine-fold between 2007 and 2010, eased to 4.8 percent in June from a peak of 9.3 percent two years ago.
“Each program is different and responds to a different situation so one cannot compare them directly,” Zakharova said. “Of course, considering the depth of the crisis in late 2008, Iceland’s recovery has been impressive.”
Iceland, which the IMF estimates was the world’s third- richest nation per capita in 2005 before slumping to rank 20th by 2010, ended its 33-month program in August last year. The $13 billion economy will expand 2.4 percent this year, the IMF said April 17. That compares with an estimated 0.3 percent contraction in the 17-member euro area.
Iceland’s growth “is driven by private consumption, investment has picked up strongly and even though, when you look at net exports, those have a negative contribution to growth, it is mainly because imports have been strong, reflecting strong consumption and an increase in income and the healthy expectations of households,” Zakharova said. “Still, exports have been increasing very strongly. Last year was a banner year for tourism. These are all really positive things.”
Iceland, which started EU membership talks in 2010 with euro-area membership an ultimate goal, is starting to question whether accession to the trade and currency bloc is the right way forward as the region’s debt crisis deepens. Thirty-nine of the Reykjavik-based parliament’s 63 lawmakers oppose continuing EU membership talks and may push to have the process shelved before elections next year, newspaper Morgunbladid said today.
The island still needs to show it can unwind its capital controls successfully, Zakharova said. About $8 billion in offshore kronur are locked behind the restrictions. The central bank has said the plan to ease controls is likely to be completed by the end of 2015. The law allowing the government to maintain the controls expires next year, requiring a parliamentary extension. Former Economy Minister Arni Pall Arnason said in a September interview that Iceland has no plans to return to a free floating currency before entering the euro.
The krona has gained about 15 percent against the euro since a March 28 low and was trading little changed at 147.27 per single currency as of 12 noon in Reykjavik today.
“The lifting of the capital controls is a key challenge for Iceland and it’s not an easy task,” she said. At the same time, “the government has regained access to international capital markets; the cleaning up of the balance sheet of banks has been proceeding at good speed. So going forward it’s important that the gains are sustained and consolidated,” she said.
As the central bank prepares to ease capital controls, policy makers are also raising interest rates in part to protect the krona from any weakening that might ensue. The bank increased its benchmark rate a quarter or a percentage point on June 13, bringing it to 5.75 percent. It was the fifth interest- rate increase since August last year.
“Further monetary tightening is needed, over the next few quarters, in order for Iceland to get to the target,” Zakharova said. “But we’ve also seen that the central bank has made strong statements about a hawkish monetary policy stance, indicating that the monetary policy will be tightened over time. So we think that the stance is appropriate at this point.”'
The Runaway Banking System
posted by Keito
2012-08-14 16:38:04'There's Only One Solution That Might Fix Our Corrupt Financial System
The simple truth is our giant banking system is metastasizing throughout our economy. It’s sucking away our wealth. And it’s out of control.
Americans want their pound of flesh, and rightfully so. We’ve seen our bankers commit every kind of financial crime imaginable. They trade on insider information. They manipulate markets. They rig bets. They fix prices. They sell securities that are designed to fail so that they can bet against them. They launder money for rogue nations. They create too-big-to-fail banks that gamble with impunity knowing that we will bail them out again and again. And they collectively crashed the economy causing 8 million workers to lose their jobs.
Wouldn’t it be lovely to see these financial felons doing the perp walk?
Sure, that might satisfy our desire for justice or even revenge, but it wouldn’t solve our banking problem. Neither would a return of Glass-Steagall, which would separate investment banking (the gambling part) from commercial banking (where our deposits are federally insured). And neither would a properly enforced Dodd-Frank legislation that was supposedly designed to prevent the next financial crash.
None of this will work because even if vigorously enforced, our too-big-to-fail banking system will still be there, ripping us off each and every day. Worse still, even if you locked up all the CEOs and replaced them with saints selected by Ralph Nader, these giant banks would still be a clear and present danger to our economic system and to each of our jobs, if we’re lucky enough to have one.
The simple truth is our giant banking system is metastasizing throughout our economy. It’s sucking away our wealth, and it’s out of control. No bank CEO can effectively manage the empires they now preside over. No regulator can keep up with the financial games that are played right under their noses. It’s just not possible. Too-big-to-fail also means too-big-to-control.
The real dangers run even deeper. Banking is supposed serve a relatively simple, yet critical function – turning our savings into investments. It’s such a simple function that most introductory economic textbooks hardly mention it at all. But this function becomes immensely complicated and dangerous when banks become casinos. Financial apologists tell us those casinos make our system run more efficiently and provide ways to disperse and reduce risk…except not on this planet.
Back in the real world, banking casinos are like any other casino. They are designed to make money from money any way they can and as fast as they can. If they can rig a bet, they do it. (That in a nutshell is what the LIBOR scandal is all about.) If they can hoodwink a client by selling damaged goods, consider it done. If they can find ways to hide bets off the books, “don’t think twice, it’s alright.” Bending and breaking the rules is what they do. And if caught, they blame it on the guy below or the other bank across the street or the regulator who wasn’t doing his job, or maybe even the poor schlep homeowner who didn’t read the fine print.
Every time a bank is caught in one of these scandals (and every big bank has been caught), they point to their immaculate ethical policies that put the consumer first. They also brag about their sophisticated and rigorous risk management systems that are designed to prevent and contain the damage. Whatever happened, they claim, was a minor breach, an accident, a rogue trader, a bumbling manager or a misunderstanding. And those at the top are always insulated by plausible deniability.
But all of this dissembling is a cover for the obvious: too-big-to-fail banks are the predators and we are the prey.
And we’re talking about very big and powerful predators – predators who are so large that they can set prices at will. (See the August 9 New York Times article, " With Low Rates Banks Increase Mortgage Profits " about how the large banks are overcharging all of us on mortgages.)
We shouldn’t be surprised.The biggest banks are simply getting bigger and bigger. In 1994 the assets of the top six U.S. banks were the equivalent of 17 percent of our economy. By 2009, after the crash and bailouts , the top six assets jumped to a whopping 63 percent of the economy. By March 2010, the top six banks (Bank of America, JP Morgan Chase, CitiGroup, Well Fargo, Goldman Sachs, and Morgan Stanley) held $9.2 trillion in assets. (How much is that? It's as much as the net worth of 119 million average Americans combined.)
Given their size, there is no way we can allow these banks to fail – ever. Given their size, there is no way the political establishment can resist their lobbying and campaign donations. Given their size, there is no way our judicial system can control the racketeering.
Shouldn’t we just break them up into smaller pieces?
At first blush this seems like a grand idea. Let’s smash them to smithereens so that no bank can ever again grow so large. I’m for giving it a try. But we may end up with hundreds if not thousands of banks that will still find ways to gamble our money away. Many of these banks can fail at the same time – as happened during the Great Depression, and during the savings and loan fiasco in the 1980s. Also, it would be very difficult to control the ways in which these banks might link up with each other or connect with large non-banking corporations. We’d need a boatload of regulations and regulators to police so many private banking entities. And I’ll wager we’d still face the same underlying problem: wherever there are vast sums to be made from financial casinos large or small, we’re at risk.
Turn the banks into public utilities?
When I was writing The Looting of America in 2009, I still had hope for basic reforms: prosecutions, new laws, Glass-Steagall, you name it. But even then, I worried that these reforms were doomed:
Perhaps the biggest problem with our government's timid approach to the financial crisis is that it just won’t work. We are gambling that somehow, through a hodgepodge of bailouts, regulations and controls, we can eliminate financial instability. But history provides little reassurance. Never before has so much human energy been devoted to investigating, analyzing and managing our economy. And yet, the most advanced and sophisticated economic system ever created, crashed all over our textbooks, our research papers, and our free-market theories. And if we don't change the way we do things, it will crash again.
Let's hope we won't throw away much our children’s inheritance because we did not have the courage to do the obvious: take over the failing banks, drastically trim their astronomical salaries, control their hazardous financial engineering, and run the damn things for the good of us all.
Since then we’ve learned the hard way that in a modern complex global economy, large-scale private banking doesn’t work. Rather than bust them up into smaller privately owned pieces, I think it’s time to take them over and run them as public utilities, paying decent civil service salaries and no more. Rather than one big national bank, we should consider chartering many state banks (the number depending on the size of the state). North Dakota still has one and it runs just fine. Then our public-employee bankers could concentrate on moving savings into good investments rather than moving the chips around their rigged roulette wheels.
But won’t we be subject to bungling bureaucrats?
Do you think public employees possibly could do worse than the mortgage brokers who lied and stole their way into the financial crisis? Would you really miss the shysters who sold dangerous adjustable mortgages to senior citizens who already had secure fixed mortgages? Will you pine for the days when bankers sold toxic assets to school districts and various municipalities all over the world? Are you worried that you’ll grow nostalgic for bankers who made billions on the upside and then stuck the taxpayers with the losses when things headed south?
And please don’t use Fannie and Freddie as counter-examples. Until they were nationalized after utter failure, those mortgage giants were run as private entities – complete with stockholders and highly paid executives – all backed with implicit government guarantees. They were the worst kind of public-private partnerships. We can do better.
Won’t we lose our banking talent by so drastically lowering the salaries?
Yes we would, and thank goodness. There are thousands of very bright people who are drawn into banking because of the enormous financial rewards. Collectively, they are harming our economy. We would be much better off if that enormous talent pool flowed into medicine, science and education.
Just think about what the current system is doing: We lure our best and brightest into finance because they can literally make millions of dollars per HOUR. And in order to do so, they create enormous hazards for our economy. If someone from another planet looked our way, they would surely ask: “Why do you deploy some of the best talent on Earth to destroy yourselves?”
But isn’t this outright socialism?
This is about as socialist as your local police and fire departments. Over the course of history, we have learned that some services best serve the commonwealth when run as public trusts.
Overall, the free-market works reasonably well in the non-financial economy. (Yes it needs very tough regulations to protect the environment, public health and the workforce. And having a larger labor movement would serve as a badly need check and balance to concentrated corporate power.) But our private banking sector defies the most fundamental laws of capitalism: Both banking profits and losses should go to the entrepreneurs and their investors, not the public. Furthermore, if you really care about preserving capitalism in the real economy, we can’t allow finance capital to run hog wild, creating instability and crashes in its wake. Sooner or later, we’ll be forced to nationalize the banking sector. In fact, we already did. We bailed them out. We guaranteed hundreds of billions of toxic assets. We provided trillions in virtually free loans. Under the rules of capitalism, we should own them already given that level of support. (You can be sure, Warren Buffet would own them all, if he provided that kind of financing.) We just didn’t have the guts to take them on.
Look around and you’ll see the wreckage of big private banking wherever you look. The unemployed, the empty houses, the struggling families who are underwater, the collapsing state and local budgets -- all of that was caused by our banking system run amok.
How the hell could this possibly happen in America with a banking lobby that owns Congress? Doesn’t that make this scheme a bit fantastic and unrealistic?
It sure does. But doesn’t that admonition apply also to any and all banking reforms? Right now, with the banksters in control, even the most minor reforms are challenged every inch of the way. So what’s realistic right now? Just about nothing.
But that wasn’t the case at the height of the 2008 crash when every bank was on its knees begging for help. That was the time to act. But we didn’t. Why? One reason is because progressives didn’t have a vision of what banking should look like. We defaulted to the idea that private banking was a given, and therefore our “reforms” failed to offer an alternative. The progressive goal seemed to be to put teeth into Dodd-Frank. How realistic was that?
I think it’s very realistic to begin thinking real hard about what we’ll demand the next time the system crashes…and it will. Are we going to accept, yet again, that the big banks get bailed out and then remain in private hands? Or will we have a rational plan for turning them into public utilities?
Of course just having a plan doesn’t make it so. But if we don’t know what we really want, we’ll get nothing, or even worse we’ll get more attacks on public services, public employees and environmental regulations.
There’s also hard, cold politics to consider: By demanding the end of large-scale private banking we might help to shift the debate. If the idea spreads and gains credence, then reforms like Glass-Steagall or busting up the big banks will start looking mild in comparison to the abolition of private banking as a whole.
You know it’s true. We need to end too-big-to-fail, instead of proposing reforms that are too little, too late.'
Back to Business...
posted by Keito
The Coming Storm
posted by Keito
2012-07-25 22:07:52“Then we shall have only corporate currency, and a government of the corporations, by the corporations and for the corporations—a “soulless” corporate republic.” U.S. Money vs. Corporation Currency by Alfred Owen Crozier, 1912