The U.S. Parliament

Occupy Wall Street – Manifesto for a U.S. Parliament

2011-10-08T01:34:00.008-04:00

The movement to occupy Wall Street represents something that has not happened in the U.S. for a very long time: a struggle for systemic change. Grassroots movements in the U.S. tend to deal with single social issues, and almost never identify any systemic problem. Occupy Wall Street seems to take aim at the biggest problem for the U.S.: the fact that the country is an oligarchic corporate state.

I was down at Zuccotti Park today, and what struck me was the lack of a systemic message to actually deal with the problem. In order to create such a message, you must first understand why the problem came about. So why is the U.S. an oligarchic corporate state?

I strongly believe that the U.S. constitution is to blame. The constitution was written in the 18^th century, for the 18^th century. Back then, only wealthy, white men were allowed to vote. In the U.S. voting system there can only ever be two parties, because whoever gets a majority in a district wins representation from the entire district, and it becomes very unlikely that a third of fourth party can ever win any representation in any district in the whole country.

So, the two political parties we have today both grew out of political movements among wealthy, land-owning, white men, and those parties still represent the same slice of the population today.

To illustrate how economically conservative the U.S. system is, consider the fact that there is not a majority within the Democratic Party that supports universal healthcare. Such a position cannot be found even within the most extreme right-wing parties in the rest of the world, which says a lot about the Republican position.

In order for real change to come about in the U.S., we need changes to the voting system that allows for more parties. If every vote counted towards representation in the legislature it would mean the end of the oligarchic corporate state. We need PROPORTIONAL REPRESENTATION.

So, what is proportional representation? First of all, it is the system of choice of the vast majority of advanced countries in the world. If a party receives 15% of the votes, it receives 15% of the seats in the legislative body. This inevitably leads to more parties, and a range of views being represented. If 10% of the population is environmentally conscious, there will be a green party, and if 10% of the population are libertarians, there will be a libertarian party in the legislative body.

Here is my suggestion for bringing democracy to the U.S.: The U.S. Parliament

The Inception of a U.S. Parliament

The idea behind a bicameral system (the House and the Senate) where one body can overrule the other is, in reality, an idea of permanently limiting political change. The result is that it becomes almost impossible to bring about fundamental political change as society changes, and the fundamental situation that existed at the time of the creation of the bicameral system will, in essence, be preserved indefinitely.

In my suggestion, the two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501 (in order to prevent a deadlock). Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present Electoral College awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering and other abusive tools would be removed entirely.

The fact that all states have an equal voice in the Senate is frankly absurd. I completely understand the need for regional considerations, but the legal independence of U.S. states more than makes up for potential negative effects of populous states being more influential on a federal level. U.S. voters must realize that there is a time and place for everything. The U.S. Senate is not the place to discuss the construction of a local playground, and The Montana Senate is not the place to discuss the moral implications of abortion.

For Montana with 0.3% of the population, to have equal power to California with 12% of the population, is beyond absurd, and deeply undemocratic.

Proportional Representation

In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!

The votes would be counted according to the D’Hondt method, and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Bill of Parliament

The concept of a “Bill of Parliament” would be very different from a “Bill of Congress”. The problem with bills in the U.S. today is that they lead to corruption through earmarks and lack of coherence. Earmarks obviously lead to corruption by individual Congressmen, when money is being appropriated to corporate donors by the recipient Congressmen. However, the sprawling nature of American bills of Congress also further weakens the small aspects of democracy that do exist in the U.S.

If a bill about, for instance, construction safety is being held hostage by means of a provision about space exploration in the same bill, it amounts to making a mockery of the political system. For a political system to work for the voters, bills must be philosophically coherent and earmarks as we know them must be abolished. It must be this way in order for the most rational, efficient solution to converge with the will of the people.

The Usage of a Mixed Personal and Party Vote – The Party-List Ballot

The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.

End the Role of Money in U.S. Politics

The financial aspects of U.S. politics are alien and preposterous to most non-Americans. The idea of both local and national politicians going around the country begging for money from wealthy people, corporations and organizations is simply unbelievable. Most U.S. politicians don’t even try to claim that they have guiding principles for the benefit of their voters, naturally because that would be too transparent in light of billions of dollars in campaign donations. In ancient Rome, votes could be bought openly, and it is frankly not much different in the U.S. today.

All money contributions to politicians must be ended. Political parties should be funded with tax money, as they are in many other countries. The consequence of this will be a constant debate based on actual issues instead of who can afford the most advertising on TV.

Decrease the Power of the President

A U.S. President is the head of state, the head of government and commander-in-chief. No other modern country has this configuration, and for very good reasons. To give one individual such vast powers is simply dangerous. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship. It should be easier to fire the President through a vote of no-confidence.

It is definitely possible to have a significant President, elected in a separate election, as well as a Parliament with proportional representation. Finland is one country that has this.

Homogenization of Voting Cycles - Avoid The Do-Nothing Government

In the current system, as a result of not holding elections for the House and Senate at the same time, those two houses of Congress tend to go to different parties, as the ruling party usually gets punished by voters after a while in the majority. As a result of this, every piece of legislation that politicians try to introduce will either be shut down, watered down or changed beyond recognition. Result: a broken, do-nothing government. In a unicameral system, like the one I'm suggesting, this could not happen, but there could nevertheless be harmful effects of voting cycles via the interaction between local and federal elections.

In a system with a U.S. Parliament, there would obviously still be local elections, with proportional representation of course. Those elections must be held at the same time as the Parliamentary election in order to avoid the situation with the do-nothing government, where local elections are unfairly impacted by national politics, for instance. The goal should be to have as vibrant a political discussion as possible, with the merits of different policies at center stage at all times.

Increase Voter Participation by Practical Means

The United States has, by far, the lowest voter participation out of the OECD countries. This is, of course, a testament to a non-working system. Most U.S. voters obviously feel that there is no point in voting, and many of them are consistently and strongly prevented from voting, legally and illegally. Voter suppression is so rampant that it is worthy of a banana republic. Here are some numbers of voter turnout in OECD countries between the years 1945 and 2005, and the voting system used in parenthesis:

The Netherlands: 84.8% (proportional representation)

Sweden: 83.3% (proportional representation)

Israel: 80.0% (proportional representation)

Germany: 80.0% (proportional representation)

Great Britain: 73.0% (fundamentally the same voting system as the U.S.)

Canada: 66.9% (fundamentally the same voting system as the U.S.)

United States (midterm): 40.6%, (presidential) 55.1%

As you can see, the three countries with the lowest numbers all have one thing in common: they all have the winner-takes-all voting system, the U.S. system, in which very large parts of the population are shut out of the political process completely.

There are a number of practical measures that can be taken to make it easier for people to vote, such as:

- conduct all voting on Sundays

- automatically register every U.S. citizen as a voter on the person’s 18th birthday

- create a national ID card which is sent to every U.S. citizen when the person turns 18

- allow mail-in ballots in every election

By changing the voting system the U.S. could finally become a democratic country!

U.S. Recovery Plan - Turning the Chinese into Americans

2009-10-19T15:15:00.004-04:00

There have been many stories in the news lately, detailing statements from the U.S. government about the dollar. Statements known as “talking up the dollar” have been coming very frequently from Geithner, Bernanke and Obama. This, of course, is meant to make people around the world believe that, even though they’re doing nothing about it (and are actually making things worse every day), effective policies to keep the dollar strong will come in the future.

However, this strategy goes deeper than that. The U.S. government has now embarked on some pathetically futile strategy to try to change other peoples’ behavior to suit American economic needs. This is very evident in this recent speech by Bernanke, as reported by the NYT:

http://www.nytimes.com/2009/10/20/business/economy/20fed.html?hp

The problem, in essence according to Bernanke, is that people in Asia, and especially China, don’t spend money like drunken sailors, as is the custom in the U.S.. If the Chinese started consuming their own goods instead of selling them to other countries (and getting rich in the process), then the U.S. could become more competitive on the international arena.

It’s like asking the sports team you’re playing against to bench its best player, in order to make the game more fun for everyone else. How quaint.

The average person might not think much of a statement like “the trade imbalances on the world market are too large, and should be reduced by increased domestic consumption in China”. But it is in its core, a pathetic, vain and useless attempt to deal with the economic crisis in the U.S. by trying to take a non-existent shortcut.

Geithner, Bernanke and Obama know that the U.S. can’t export its way out of the crisis, because American goods cannot compete. If the dollar were to implode, American exports probably would be competitive for a while based on price alone, but the larger implications would unequivocally be irreversible, long-term economic stagnation. So again, the only way to take this shortcut is to tell others to change their ways. Now, how likely is it that that will happen?

Bernanke goes on to say that China should increase its social protection for citizens as a way to increase domestic consumption. Now, I’d be the first to agree with such a policy, but alas, China does not care about its own citizens. China is simply the authoritarian political/economical system it has always been. It doesn’t matter if the country calls itself communist, capitalist or imperial: the outcome is the same (the same goes for Russia, by the way). Much like the United States, whoever grabs the power has the power.

The much criticized “Asian values doctrine” can actually be helpful in this context. This doctrine, much favored by the Chinese government, is influenced by Confucianism and other eastern philosophies, but as applied to modern society, it proclaims that individual considerations, be they materialistic or human rights related, should be sacrificed for the good of the authority. I have myself met many Chinese students who have defended this doctrine vigorously.

Where does that leave the Chinese consumer? When, at any time, your house might be bulldozed for a new dam project, your farm taken away because a local politician sold it, or your salary might be cut in half, what is the most rational thing to do in order to protect yourself from catastrophe? You save money!

American politicians seem to think that Asian people save money as some kind of old, funny habit. In fact, they are just being rational, and Americans should obviously be doing the same thing, considering the fact that there is no social safety net in the U.S., and that we have a casino economy.

The Chinese will probably increase their own consumption eventually, but in order for that to be of any help to the U.S. they would have to start buying lots of American goods, and I don’t see that as very likely.

If the Chinese do increase their domestic consumption of domestic goods, I’m sure that won’t be at the expense of exports to the U.S.. They’ll just make up for that by building more factories and enlisting more unemployed people from the countryside to work in them.

Moving on to those who actually control things in China. Why the hell would they try to export less?? In 2007, George W. Bush asked Hu Jintao if they couldn’t please let the Chinese currency appreciate against the dollar. Jintao simply responded: “Why?”.

Embarking on a policy to export less, when exports have taken China out of the dark ages and into the light, would be something that not even a retarded Chinese equivalent of George W. Bush would attempt.

Advocating that the Chinese should be turned into Americans is so pathetic, I’m almost out of words.

Wait, I have a suggestion: if China actually were a communist country, exactly as described by Marx, then it would export almost nothing. So, the plan is simple: invade China, overthrow the authoritarian capitalist government, and install a philosophically pure communist rule! Then America can have its wonderful bubble/casino economy back on its feet!

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Why Does the World Need the Dollar?

2009-10-14T17:23:00.005-04:00

Earlier this year, I wrote a lot about inflation, and whether or not it would occur. I now believe that the dice has been thrown, that there’s no turning back: there will be large-scale inflation soon enough. The reason: the U.S. has spent almost $12 Trillion in an attempt to re-inflate the economy artificially.

To put it bluntly, the U.S. economy should no longer be described as being on a “sugar rush”. A more accurate analogy would be a cocaine high. What else could account for a 60% surge in stocks while the real unemployment rate is 20%?

Related to this is the U.S. dollar. Inflation hurts the dollar, but that’s far from the whole story. The dollar’s future as the world’s reserve currency is at stake. If everyone who holds dollars or dollar-related assets abroad starts thinking that these dollars will be worth a lot less in the near future, there will be no alternative to a currency crisis.

The fact that the U.S. has the world’s reserve currency enables it to spend far more than it makes. As I have mentioned before, this is the reason why a lot of economists, and especially American economists, are of the mindset that macro-economic models don’t apply to the U.S.. I think there’s some truth to that, because if you don’t HAVE TO ever pay back your loans, you don’t really have to worry about them. However, what happens on the day that you have to start paying?

Some prominent economists, most notably Paul Krugman, are currently claiming that a weak dollar is good for the U.S.. This will help U.S. exports, the theory goes. Also, according to Krugman, the U.S. needs to spend money on stimulus to get the economy going again, in other words through Keynesian spending.

Krugman does not address the potential of the dollar losing its position as the world’s reserve currency, but instead focuses his analysis on the short-term perspective of fighting the crisis and unemployment at all costs. What he does not realize is how real of a danger this is, but I’m sure he realizes the consequences if this were to actually happen. That’s probably why he’s not talking about it.

I believe that it actually wouldn’t take that much for the dollar to lose its position right now. Under the surface, many important international economic players have been discussing replacing the dollar with something else. These players include both wishful thinkers and those who would actually be in financial danger in the short term. If a few of these players were to move away from the dollar, it might set off a chain reaction that could crush the currency.

First this spring, people like Vladimir Putin and Hugo Chavez started talking about the need for replacing the dollar, while barely being able to hide their excitement.

Second, shortly after that, the IMF started dusting off the old idea of international drawing rights, or a basket of currencies. This debate was also helped forward by Joseph Stiglitz and Simon Johnson, both formerly connected to the World Bank and the IMF.

Third, and this is one of the most important ones, China started voicing concerns about the dollar. This time, Geithner had to go to China and give a speech about how great the dollar was doing. China buys a third of U.S. debt on the international market.

Fourth, and this one might turn out to be very important too, Japan elected a new non-conservative government for the first time ever. Japan buys about the same amount of U.S. debt as China does. One of the basic premises of the new Japanese government was that it would stop trying to be the U.S.’s lap dog. We’ll see how that goes, but I don’t think we can expect to see Japan follow Geithner’s every whim.

Fifth, rumor has it that the Arab Gulf states want to get rid of the dollar too. Their incomes are down by more than half since the beginning of the crisis, and they’re getting a little desperate. For the dollar to drop drastically in addition would be disastrous for them.

All these economic players are not dumb, they understand, in contrast to people like Krugman, that there are some very real dangers connected to owning dollars at the present time. They may run the risk of losing their savings and day-to-day incomes at the same time.

The number one question then becomes: Why does the world need the dollar?

The dollar was instituted as the world’s reserve currency at a time when the U.S. was a world leader in production as well as consumption. This meant that the dollar was both “as safe as houses” and “as good as gold”. An advanced economy with a competitive industry would be less likely to resort to irresponsible fiscal practices, and an insatiable, highly materialistic American consumer could keep the smoke in the chimneys in factories around the world. In other words, the U.S. was the economic engine of the world, and that’s why it made sense to use the dollar as the reserve currency.

However, the U.S. is not in the same position either in terms of production or consumption, and definitely not in terms of fiscal responsibility. The American manufacturing industry is not competitive, and the American service industry turned out to be smoke and mirrors on Wall Street. There is no way that the American consumer is going to get back to spending the way they used to, because it was all built on credit.

I believe that there is a shift happening in the world economy right now. In terms of the future developments of the balance of power between the big three blocks, Asia, the EU and the U.S., this is how I think about it:

It is clear to see that China will only continue to increase both its sophistication and volume of trade. The recent crisis has only strengthened the country’s position. The U.S. is no longer China’s biggest trading partner, the EU is. Japan is also increasing trade with China, and so is India.

It seems that the EU will continue to do what it is currently doing: to be competitive in very advanced industries, while not growing or shrinking much either way. I’m basing this on a continued focus on industrial policies, a good access to education and in general a less volatile society.

With respect to the U.S., it is very hard to see what the country has going for it. Where is the growth going to come? What is going to improve? The country has no industrial policy, and will not get one soon. One year at an American University costs as much as a Mercedes E-Class. The political system is deadlocked by lobbyists who bribe individual politicians. Industry resistance to innovation digs the grave of American manufacturing. More importantly: the country is bankrupt.

I believe that the world economy will shift, and that the dependence on the U.S. will have to be lowered. This will mean more power for Asia, and a tighter relationship to that continent on the part of both the U.S. and the EU. This will also mean that the dollar will most likely be given up as the world’s reserve currency.

What will this mean for the U.S.? Simply put: a drastic reduction in material prosperity across the board.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Ease of Doing Business at Home - Difficulty of Competing Internationally

2009-10-06T11:09:00.005-04:00

“Saturn builds cars that Americans wanna buy!!”

I’ve seen this commercial very often in the last few weeks, but the guy in the clip did not really hit the nail on the head, now that Saturn will be closed. Apparently, Saturn did not make cars that Americans want to buy… (They were supposed to merge with “Penske”. Maybe it was George Costanza’s shoddy work on the “Penske file” that killed the deal…)

The Saturn brand was started as a way for American cars to compete with Japanese and European cars. In the commercial, the message is that what Americans now want in a car is fuel-efficiency, design, reliability and other things that are usually associated with foreign cars. By imitating these foreign cars, Saturn has claimed to also possess these attributes. However, just saying it, doesn’t make it so.

It has become blatantly apparent that the American car industry is uncompetitive. It is, however, not only the car industry that is uncompetitive. The U.S. manufacturing industry, about 7% of the economy, has been shrinking steadily for decades, and the size of it is now almost half of what it is in most other industrialized countries, as a portion of GDP.

There are several reasons for this, but one of the most important ones is that U.S. industrial goods cannot compete in the international trade arena.

It is quite easy to get a grip on the market dynamics of a domestic market; the market within just one country. For instance, if you raise the fuel efficiency standard on cars, cars will become more expensive, and in the short term, fewer people will buy them. That’s the easy bit.

Industrial products, and cars in particular, are for the most part dependent on international trade. When it comes to very advanced industrial goods, it is usually not possible to sell them in a single market and still be profitable; you need more customers, and industrial products almost always fit in to some type of chain of products that are dependent on each other.

For 30 or 40 years in the western industrialized world, a steady stream of legislation and industrial policies have followed much the same path. Legislation with respect to efficiency standards, safety standards, health care, vacation time and much more has followed the same trajectory in most industrialized countries: a significant increase in these standards and rights.

However, the exception is the United States.

As I outlined in my post about circular looting, (in the list to the right on March 19) I believe that the political system which allows large-scale corporate donations to politicians has created a “business-friendly” climate in the United States. This climate has been developing over the last 30 or 40 years, and has led to policies that make it as easy as possible for companies to turn quick profits in the U.S., at the cost of long-term perspectives.

Think of it this way: as U.S. automakers were making money selling gas guzzlers in the U.S. (while not being able to sell them elsewhere), automakers in Europe and Asia were being subjected to ever stricter regulations on efficiency standards, forcing them to develop better engines. In the U.S., on the other hand, the powerful industrial companies have stood in the way of any changes that might hurt their bottom lines in the short term.

This process also applies to a lot of other areas. European and Asian automakers had to deal with higher costs for vacation time, labor rights and taxes. This was by no means easy for these companies, but what this actually does in the long term is to make them more competitive.

The politicians of Europe and Asia developed this legislation because they thought it was the right thing to do. A cleaner environment and 6 weeks of vacation for everybody were simply seen as moral imperatives. They did not think of the eventual side effects.

Because industrial companies in Europe and Asia have had to fight much harder to remain profitable, they have developed better products and improved productivity and technology, while they have also had less of an impact on the environment and created better working conditions.

(Nowadays, it is widely known amongst economists that the previous estimates of American workers being more productive than others are not true. The PC revolution did increase this productivity, but it was later just inflated by Wall Street profits, which later turned out to be an illusion of productivity)

OK, I know what you’re going to say: the UAW has cost the American auto industry so much that they are the reason American cars are not competitive. I agree that there is some truth to that. The UAW is what I would call a “labor aristocracy union”. Such unions are very selfish (in the beginning very racist), and have no concern for society as a whole. That is very different from European unions, which would for instance fight for more vacation for everybody, not just autoworkers.

However, the over-reaching of the UAW does not explain the fact that innovation was stifled, and that such massive lobbying to stop any improvements was undertaken for decades. The auto companies also agreed that they should be the ones to pay for workers’ health insurance, which is something I disagree with. This stance comes from the anti-socialist movement of the early 20th century. Again, the companies chose this path themselves.

The short-term perspective of the American industrial sector which has involved fierce resistance to any environmental, safety or labor-related reforms, has brought the sector to its knees. In economic boom times, the American model works. In economic recessions, the weak will be taken to the slaughter.

This is the perfect example of what the Freiburg school of economics is all about: we need capitalism, but the framework within which capitalism exists can make it stronger, and make it function much better.

A “Freiburgian” would say: Saturn didn’t make cars that Americans wanted to buy, because the economic and societal framework surrounding the auto industry promoted a hunt for short-term profits.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Devaluation of the Currency - Ultimate Keynesian Folly

2009-09-29T16:58:00.003-04:00

How is The United States going to get out of the current crisis? The various bailouts are truly unprecedented, and the effects are starting to show. Here are a few examples:

- The FDIC has essentially run out of money, and will probably need a bailout very soon

- Congress is just about to hit its debt ceiling of $12 Trillion, and Geithner will soon (middle of October) ask for it to be made higher

- Corporate insiders, those who own stocks of the companies that they themselves work for, are selling their companies’ stocks at a very high rate. This signals trouble ahead to say the least

- The U.S. government pretty much owns the entire mortgage market as of now, as well as most of the toxic mortgage-backed securities

- 46% of the Treasury’s expenditure is now paid for with loans (link coming)

It can be difficult to understand how all this is related, but the simplest explanation for it is that this Keynesian spending is meant to bridge the gap from the distressed current situation to the return of the good times. The economic destruction that the crisis of 2008 has caused is enormous, and something has to come in place of what has been destroyed. If nothing does, the economy will simply re-align itself at a new, much lower level, with a lower standard of living in the country.

That “something” which must come in place of what has been destroyed can be a number of things. As I have mentioned in previous postings, it can be a bubble of some sort: housing, technology or developing economies. Of course, this is not an improvement; it is just make-believe.

Wall Street, the government and the media have during 2009 desperately been seeking a new bubble, but nobody has been able to figure out, and convince others of, what it could be. Instead, the financial establishment has tried to pretend that nothing bad actually happened, and that the crisis was just a mistake, which would be a reason for the stock market to go back to its old levels.

The “something” that could bring the U.S. back from the crisis could also be foreign exports. This is how South Korea and Sweden were able to get out of their structural crises 10 and 20 years ago, respectively. Unfortunately for the U.S., the country does not have a competitive export industry, and there are very few people who believe that it will become competitive any time soon. The U.S. industrial base is barely half the size of, for instance, Germany’s or Sweden’s, as a share of GDP. I believe that for the U.S. to become a successful exporter again, changes to the educational system are a must.

In order to become a successful exporter you must have one of 2 things: better products or better prices. If you don’t have either, there is a third way: devaluation of the currency.

A currency devaluation instantly lowers the prices of a country’s products abroad. To my great shock, this was even discussed as an alternative on CNBC’s Squawk Box this morning. This, if anything, is a sign of true desperation.

If you have to resort to currency devaluation, you might as well throw in the towel. The only thing this does is to artificially support uncompetitive industries that will eventually die anyway. In the meantime, you have lost a lot of economic power as you have sold out your currency. This is more important to the U.S. than to any other country in the world. Here’s why:

The only reason that the U.S. has been able to spend far more than it has earned for the longest time is the position of the dollar as the world’s reserve currency. This is the reason why traditional macro-economic models are usually said not to apply to the U.S.. The country is like a rich kid whose parents don’t care how much credit card debt he runs up.

It can in this context be helpful to compare the U.S. to Britain, which also spends much more than it earns. Since the crisis hit, Britain has had to face it head-on. Sure, it tried to re-inflate bubbles and bring the good, debt-fueled times back American-style, but those feeble attempts failed. The result: there is no alternative other than severe budget cuts and structural changes, or what I earlier called a re-alignment of the economy at a lower level.

If the U.S. devalues the dollar, which it seems to be doing with all these crazy bailouts, it will have to start operating like most other countries: spend only what you earn. Since the bailouts began, more and more voices have been heard in terms of lost faith in the dollar. We’ve heard it from the Chinese, the IMF, The World Bank and even the Japanese.

Of course, to spend only what you earn is a policy that I whole-heartedly support, but I would prefer that this insight come as a result of intelligent discussions, rather than through financial destruction and a huge loss of economic position for the U.S..

To sum up what I’ve been arguing (in a somewhat rambling way perhaps…), I believe that the U.S. is playing with it’s most precious resource, the dollar. To lose control of the power that the dollar holds would be disastrous for the national finances, and probably irreversible. The absolutely enormous bailouts have put the dollar at risk, and the government is jumping headlong into unknown territory.

History will not be kind to the Paulson/Bush/Geithner/Obama alliance…

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Secret: No More Money Market Fund Protection - The Illusion Continues

2009-09-25T14:25:00.009-04:00

This is just a quick note on the state of the market and the economy right now. I am very bothered by the false spin that has been coming out of almost every media outlet and the government ever since this spring. The absence of reasonable economic analysis is almost complete.

The government and the media are currently putting ordinary people at risk by not telling them that certain guarantee programs are ending. As of last week, September 18, the Treasury Department’s ” Temporary Guarantee Program for Money Market Funds” HAS ENDED.

Click to view: http://www.treas.gov/press/releases/tg76.htm (note that this only says that the program will end on September 18, there is no announcement that it has actually ended, which it has)

They obviously don’t want anyone to know this, because they don’t want anyone to withdraw money from these funds. If you remember, this program was started last autumn, because the withdrawals that were seen during the most chaotic days could have absolutely destroyed the stock market. The program was initiated not out of concern for ordinary people who had money in these funds, but as a way to support stock prices. The consideration is the same today.

I have not seen a single media entry, except one mention on the CNBC website, telling this story. The problem with these funds is that people see them as savings accounts. In fact, a lot of the money is invested in stocks, and although the fund will not swing like stocks, there is a much higher risk of losing all your money. There is no FDIC protection. A lot of people in Britain and The Netherlands lost money in this way last year.

There are a few people who seem to be keeping an eye on things though. The government is about to hit its debt ceiling of 12 Trillion Dollars soon, and the word is that Geithner is about to ask for it to be raised. In other words, the government has spent so much money bailing out anything and everything, that the $700 Billion last year is now like a spit in the bucket. The question will soon become: who will bail out the government? The situation is really serious now. Please take a look at CNBC's Heidi Moore's article on that:

http://www.cnbc.com/id/33019073/

The absolute surge in stocks over the summer was not something that I foresaw. I am flabbergasted at it. Then it came to me; this is the same pattern as during the depression. Here’s what happened back then:

- 1929: crash

- Early 1930: stock market up by 50%

- Late 1930: stock market down 50%

A lot of things are different now, but I wouldn’t be surprised if the same thing happens within 4-5 months. By this I mean, of course, that the crash and the 50% surge has already happened, and we're just waiting for the 50% drop. After that, all the terrible mistakes that the Treasury, the Fed and Congress have made will become very apparent. They have essentially done everything wrong in the handling of this crisis.

This is my basis for this accusation: this crisis has been dealt with as if it were a smaller, cyclical crisis, but the medicine has been administered on a massive scale. I believe that this is a structural crisis, and that none of the cyclical theories apply. Now we will only get debasement of currency, more unemployment, and a downward-spiraling trend.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Manifesto for a U.S. Parliament - 2009 Update

2009-09-10T16:38:00.005-04:00

In light of recent political developments, I am, to my great surprise, no longer alone in calling for an overhaul of the way decisions are taken in this country. So far in the year 2009, we have seen more starkly than perhaps ever before how far away the U.S. is from being a democratic country.

The healthcare debate in particular has raised a lot of questions regarding the decision-making process. More specifically, the role of the Senate has been put into question. The media makes it seem as if any healthcare reform hinges on a small group of senators, lead by Max Baucus from Montana. They may in fact be right, and considering the fact that this man represents roughly 0.15% of the population (90% of which are white), it is easy to see why such a situation might be called into question even in the U.S..

In an excellent article in the Washington Post called The Gangs of D.C., Alec MacGillis explains the strange power of the Senate and the impact this has on democracy at large. Also, focusing on procedural issues, Eric Etheridge of The New York Times writes about the Senate, filibusters and democracy.

I obviously agree with what these writers are saying about the Senate; it is an unbelievably undemocratic institution even before taking into account the tens of millions in corporate “donations” that these individual senators receive. However, neither of these issues can hold a candle to the fact that voters in the U.S. never have any real choice to begin with, because there is no proportional representation.

Before I continue, let me just reiterate what proportional representation is. First of all, it is the system of choice of the vast majority of advanced countries in the world. If a party receives 15% of the votes, it receives 15% of the seats in the legislative body. This inevitably leads to more parties, and a range of views being represented. If 10% of the population is environmentally conscious, there will be a green party, and if 10% of the population are libertarians, there will be a libertarian party in the legislative body. Neither of these things could ever happen in the U.S. because there is no proportional representation.

Instead, the U.S. system has evolved into nothing short of a corporate state. It is clearer than ever that citizens actually have very little say in what happens in their country. This would never happen in a system with proportional representation.

Here is my suggestion for bringing democracy to the U.S.: The U.S. Parliament

The Inception of a U.S. Parliament

The idea behind a bicameral system (the current system) where one body can overrule the other is, in reality, an idea of permanently limiting political change. The result is that it becomes almost impossible to bring about fundamental political change as society changes, and the fundamental situation that existed at the time of the creation of the bicameral system will, in essence, be preserved indefinitely. At the time of the creation of the American political system, wealthy, white, older men were the only citizens who were allowed to, and were ever supposed to be, involved in the political process. That is largely unchanged to this day, all things considered.

In my suggestion, the two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501 (in order to prevent a deadlock). Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present electoral college awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering and other abusive tools would be removed entirely.

The fact that all states have an equal voice in the Senate is frankly absurd. I completely understand the need for regional considerations, but the legal independence of U.S. states more than makes up for potential negative effects of populous states being more influential on a federal level. U.S. voters must realize that there is a time and place for everything. The U.S. Senate is not the place to discuss the construction of a local playground, and The Montana Senate is not the place to discuss the moral implications of abortion.

For Montana with 0.3% of the population, to have equal power to California with 12% of the population, is beyond absurd, and deeply undemocratic.

Proportional Representation

What makes the American political system different from most other political systems (save for some other Anglo-Saxon countries) is the lack of proportional representation. If 49% of voters in a given constituency vote for a certain party, those voters could receive 0% representation in the legislature. This is not an anamoly either; it happens all the time.

In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!

The votes would be counted according to the D’Hondt method, and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Bill of Parliament

The concept of a “Bill of Parliament” would be very different from a “Bill of Congress”. The problem with bills in the U.S. today is that they lead to corruption through earmarks and lack of coherence. Earmarks obviously lead to corruption by individual Congressmen, when money is being appropriated to corporate donors by the recipient Congressmen. However, the sprawling nature of American bills of Congress also further weakens the small aspects of democracy that do exists in the U.S..

If a bill about, for instance, construction safety is being held hostage by means of a provision about space exploration in the same bill, it amounts to making a mockery of the political system. For a political system to work for the voters, bills must be philosophically coherent and earmarks as we know them must be abolished. It must be this way in order for the most rational, efficient solution to converge with the will of the people.

The Usage of a Mixed Personal and Party Vote – The Party-List Ballot

One of the common objections to a political system that is based on political parties, as opposed to individual politicians, is that such a system takes away the ability of the voter to vote for a politician that he or she particularly likes. This problem can be remedied by the party-list ballot. In such a system, the voter takes a ballot for the party that he or she likes, and on that ballot, the party has listed the politicians that it considers best suited for the job of being a member of Parliament.

The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.

End the Role of Money in U.S. Politics

The financial aspects of U.S. politics are alien and preposterous to most non-Americans. The idea of both local and national politicians going around the country begging for money from wealthy people, corporations and organizations is simply unbelievable. Most U.S. politicians don’t even try to claim that they have guiding principles for the benefit of their voters, naturally because that would be too transparent in light of billions of dollars in campaign donations. In ancient Rome, votes could be bought openly, and it is frankly not much different in the U.S. today. That U.S. voters continue to accept this is beyond me.

As a result of the government in general receding since the days of Reagan, a power vacuum was created. Slowly but surely, aided by both Republicans and Democrats, the U.S. actually turned into something that is very much like a “corporate state”. In some ways, this state can eventually turn almost as bad as a “failed state”, since it may lead to a form of anarchism (a sort of Ayn Rand-style unregulated economy).

All money contributions to politicians must be made illegal immediately. Period. Political advertising on TV and elsewhere must also be ended, and campaigns should be conducted purely through debates in the media. Each political party would be given a set amount of money from U.S. taxpayers, end of story.

Decrease the Power of the President

A U.S. President is the head of state, the head of government and commander-in-chief. No other modern country has this configuration, and for very good reasons. To give one individual such vast powers is simply dangerous, and as we have seen during the last 8 years, it can have truly disastrous consequences. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship. It should be easier to fire the President through a vote of no-confidence.

It is definitely possible to have a significant President, elected in a separate election, as well as a Parliament with proportional representation. Finland is one country that has this.

Homogenization of Voting Cycles - Avoid The Do-Nothing Government

In the current system, as a result of not holding elections for the House and Senate at the same time, those two houses of Congress tend to go to different parties, as the ruling party usually gets punished by voters after a while in the majority. As a result of this, every piece of legislation that politicians try to introduce will be either shot down, watered down or changed beyond recognition. Result: a do-nothing government. In a unicameral system, like the one I'm suggesting, this could not happen, but there could nevertheless be harmful effects of voting cycles via the interaction between local and federal elections.

Increase Voter Participation by Practical Means

The United States has, by far, the lowest voter participation out of the OECD countries

This is, of course, a testament to a non-working system. Most U.S. voters obviously feel that there is no point in voting, and many of them are consistently and strongly prevented from voting, legally and illegally. Voter suppression is so rampant that it is worthy of a banana republic. Here are some numbers of voter turnout in OECD countries between the years 1945 and 2005:

The Netherlands: 84.8% (proportional representation)

Sweden: 83.3% (proportional representation)

Israel: 80.0% (proportional representation)

Germany: 80.0% (proportional representation)

Great Britain: 73.0% (fundamentally the same voting system as the U.S.)

Canada: 66.9% (fundamentally the same voting system as the U.S.)

United States (midterm): 40.6%, (presidential) 55.1%

As you can see, the three countries with the lowest numbers all have one thing in common: they all have the winner-takes-all voting system in which very large parts of the population are shut out of the political process completely.

There are a number of practical measures that can be taken to make it easier for people to vote, such as:

- conduct all voting on Sundays

- automatically register every U.S. citizen as a voter on the person’s 18th birthday

- create a national ID card which is sent to every U.S. citizen when the person turns 18

- allow mail-in ballots in every election

- End all electronic voting and create completely uncomplicated, nationally standardized paper ballots

Low-Hanging Fruit

2009-09-01T16:48:00.002-04:00

Over the last few months the American media has been reporting that the economy seems to be recovering across the board. The stock market has risen almost 50% on these news, anticipating a full-blown recovery.

I have argued before that the supposed recovery is only an illusion, and I will continue to explain why below. I would also like to remind readers that this year’s pattern in the stock market is actually very similar to the pattern during the Great Depression (I won’t go into that further right now, but I recommend reading John Kenneth Galbraith’s “The Great Crash of 1929).

News stories tend to be self-reinforcing. Journalists feed on each other’s sentiments and the reactions from readers. That is why you get news cycles that eventually peter out, while others take their place. In yesterday’s New York Times, Robert Schiller makes the connection between news cycles and the stock market in the article An Echo Chamber of Boom and Bust.

In my view, what Schiller argues is a somewhat exaggerated view on the impact of news cycles on the stock market, but I think the Schiller’s thesis is nevertheless relevant at this point in time.

Journalists in the mainstream media are generally painfully ignorant of economics as a subject. On the CNBC website, I went through all the profiles of the journalists that I regularly see on the network, and only ONE person, Michelle Caruso-Cabrera, has any sort of degree in economics (she is, by the way, a border-line fascist, so her “insight” should be taken lightly). The so-called “chief economics reporter”, Steve Liesman, seems to have no education whatsoever in economics.

Without really knowing what they’re talking about, journalists have over the last 6 months or so all jumped on the recovery story bandwagon. I’m not sure how it started, but it might have been because of the stimulus money, the supposed optimism of the Fed and other government officials, but the recovery story in its essence is this:

The economic crisis is leveling out

“Leveling out” is a term that usually implies that the worst is over and that a change in direction is about to come. However, I would argue that it definitely does not have to mean that, and in the case of this crisis, does not mean that.

By far the most important measure of how well an economy is doing is employment. The “real unemployment rate” in the U.S. is currently between 16% and 18%. That is basically the percentage of people of working age who don’t have jobs (and who don’t study, are housewives or are on disability). That is in my mind the only relevant figure. One of the most important factors in the “recovery story” is that job cuts are leveling out. In other words, companies are currently cutting jobs at a slower pace.

As the economic crisis has been going on for over a year, this makes perfect sense. What companies have been doing is that they’ve been picking low-hanging fruit. They’ve been laying off staff-members without whom they can still function, in order to preserve cash. They’ve gotten rid of an extra secretary, some superfluous salesmen, and they’ve stopped having donuts delivered every morning.

When companies have gotten rid of all their non-essential spending, they couldn’t possibly get rid of more spending at the same pace without drastically changing their business model and becoming an entirely different company (although this has happened as well). That job cuts are leveling out is an economic inevitability.

To illustrate this, I would ask you to think of the U.S. economy as a regular guy. This guy loses his job. This is what he will probably do:

1. He’ll stop going as much to restaurants

2. He’ll stop taking expensive vacations

3. He won’t buy a new car

What this guy is doing is picking low-hanging fruit. He is cutting down on non-essential things, but, for now, he won’t do something radical like selling his house. As a result of cutting down on expenses, he now has more money than he would have had if he had kept going as if nothing happened, but that does not mean that he is on his way to recovering his old life-style. He has not gotten a new job.

In order for our guy to keep cutting down on expenses, he would have to do something more radical, like selling his house and moving into an apartment. He’s very reluctant to do that, because that would radically change his life-style.

Just like the guy has not gotten a new job, and keeps cutting down on expenses, U.S. companies don’t have any new or improved revenue streams. Demand is not up, domestically or abroad. U.S. exports are not very successful, judging by the trade deficit. For U.S. companies to start hiring again, and for the guy to get a job again, the money has to come from somewhere. you can’t just will it to happen, or magically create it.

The important thing to remember is that companies are still cutting jobs, at a pace that would have been utterly frightening only three years ago. This means that, if anything, demand for goods and services will keep going down and down and down. This will force companies to cut even more jobs, and the cycle continues.

So I ask again: what has improved? A leveling out is not an improvement. This is the basic thing that U.S. journalists do not seem to understand. Journalists have been jumping for joy, saying that the car industry is coming back as a result of the “cash for clunkers program”. But again, where’s the money coming from? It’s coming directly from the government, so the “improvement” is just an illusion.

When the government hires someone, it is not “job creation”, and when the government spends money, it cannot be counted as economic improvement. Government spending can do all sorts of things, but it is a type of economic activity that must not be confused with the market. With respect to the “clunkers” program, government spending is a zero-sum game.

In conclusion: how do you know when the economy is improving? Let me present a few alternatives:

1. You export your way out of the crisis, like Sweden and South Korea did in the 1990s. You sell more abroad than you buy from abroad = more money for the country.

2. You inflate a new bubble of some asset class and try to convince people that the price of this asset class will continue to go up forever. It seems to work for about 5 years and then do a lot of damage, while the elite has gotten richer. This is the traditional approach in the U.S., and the one that seems to be in the works right now.

3. A massive technological leap forward radically improves productivity, like it did during the industrial revolution, and to a smaller extent, in the 1990s with the PC revolution.

4. You permanently re-align the economy at a lower place with lower amounts of consumption compared to before, as Great Britain had to do when the empire slowly crumbled over a few decades. This is also a possibility for the U.S..

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Genocide in America

2009-08-14T15:28:00.004-04:00

Please click on the graph for a clearer picture.

What is a genocide? Usually the matter is related to an ethnic conflict with active use of force by one group against another. According to the definitions in international law, however, a genocide can also be perpetrated by denying a group of people access to adequate living conditions, causing large-scale loss of life. Factors that decide these living conditions are obviously things like food, shelter, access to clean water, medicine and health care.

Contrary to what the debate in the American media would have you think, the issue known as “America’s health care crisis” is not merely some actuarial difficulty causing inflated prices;

Literally hundreds of thousands of Americans are dying because they are do not have access to health care.

A widely published and cited figure is one that states that between 20,000 and 30,000 Americans die every year because they don’t have access to health care. Indeed, both domestic and international studies repeatedly confirm that the number is in this range. A well-known study on this subject came out from “The Urban Institute” in 2008:

http://www.urban.org/UploadedPDF/411588_uninsured_dying.pdf

Studies such as this one are usually debated ad nauseam for their methodology (read about the exact methodology in the study by clicking on the link), but the basic premise is this: the study estimates how many uninsured Americans died because they received too little treatment or treatment too late as a direct result of not being insured.

Based on the numbers in this study, I have projected the estimated number of Americans that will have died from uninsurance when this decade is over. The average yearly increase of deaths is around 5%, but if anything, one would expect that number to be higher in the next 2 years.

Please take a look at the graph in the beginning of the article.

The numbers are simply staggering, and to say the least, frightening.

The number of Americans that can be expected to have died by the end of this decade as a direct result of not being insured is 287,000!

The death of close to 300,000 people must surely qualify as a genocide if something is intentionally behind it.

It has been suggested by some people on the right wing that a lot of people who don’t have health insurance are in this situation because they choose to take the risk of not buying insurance. We all know that this theory is pure garbage. I think it’s safe to say that people in general try to strive for a shot at surviving cancer. In other words, everybody wants health insurance.

So what is behind the lack of health insurance among almost 50 Million Americans? Since the days of Theodore Roosevelt, attempts at covering the uninsured have been made, and have failed every time. Every time it’s the same thing: the people who stand to gain from the continuation of the current system fiercely fight and prevent the uninsured from becoming insured through extortion, threats and lies.

These people are currently engaging in, and perpetuating, a genocide on the poorer elements of American society, commensurate with definitions of genocide from the “Convention on the Prevention and Punishment of the Crime of Genocide” from 1948.

The lobbyists and extortioners should be brought to justice and charged with genocide. By the end of this decade, they will have the blood of close to 300,000 Americans on their hands.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Output Gap - A false and Dangerous Theory

2009-06-26T16:38:00.007-04:00

Please click on image to see details.

In my last post, I talked about the likelihood of inflation in the U.S. in the near future and I was trying to debunk some of the theories that claim the opposite. I will continue on that note today and talk about one issue that is supposed to make inflation an impossibility during an economic downturn: the output gap.

The “output gap” is a measure of the difference between economic activity in an economy when times are sustainably good, and when there is a downturn. A lot less goods and services are produced during an economic crisis, for obvious reasons, and that is what accounts for the output gap.

Most economists who are currently advising the Obama administration or who are given time in the media are pointing to this output gap. They are saying that the current level of production in the U.S. economy is “unnaturally low”, and hence there is a lot of “slack” in the economy.

This slack, it is thought, can simply be filled in by printing more money, in order to save the economy. Because of the slack, inflation will not be created because the money printing is simply making up for the consumption which has disappeared, but should still be there, it is thought.

In other words, they are saying that the level of production today in the U.S. is not as high as it’s “supposed to be”.

In reality, they are saying that factories are “supposed to” produce more cars, TVs and clothes, and that people are “supposed to” get more haircuts and eat out more often.

But why should this be? Who says that there’s a “natural level” at which consumption should be? Definitely not me…

Please take a look at the model that I drew up in the beginning. This is an illustration of the U.S. economy. The important thing to see in the model is that both consumption and economic output will very likely be lower in 2009 compared to what they were in 2006. My model explains the very simplest of economic linkages: output follows consumption, or put in other words: supply follows demand.

Since the crisis started, demand has gone down rapidly all across the economy. Demand for houses, labor, haircuts and basically everything else has gone down. Naturally, there would be no point in producing any of those things if nobody wants to pay for them, so production goes down.

In order to find out what happened to the demand, what made it go down, one must look at what was fueling it, where the money was coming from.

Maybe the country had an export good, the price of which suddenly dropped like a rock. This recently happened to Russia and its oil. Consumption in Russia consequently went down because a lot of money disappeared.

Maybe the country had a brain drain of people which made key industries less productive. This happened in Zimbabwe when the country expelled its white farmers. A lot of money disappeared, and, incidentally, the Zimbabwean government tried the trusty method of printing money, with less than fabulous results.

There are many ways in which an economy can get in trouble, but no matter what, during times of crises, consumption and output will go down. Where was the money coming from in the U.S.? The answer is: credit.

Wages in the U.S. have been stagnant for over 30 years, and in order to make up for that, Americans have been taking loans to fuel consumption. Credit is the very thing that disappeared in this crisis, and that is what is decreasing demand.

In order for the output gap to be closed without anything radically changing in the economy, credit would have to come back as an economic force just as strong or stronger than before. We all know that that is not going to happen, so where does that leave us?

If there are no prospects of this gap being closed by new credit, then there is no slack in the economy, and money printing will simply be the futile and devastating activity it was in Germany and Zimbabwe.

The gap would have to be closed by something else, such as a more successful export industry. If, by some miracle, the U.S. export industry were to become extremely successful within a matter of months, so that the trade gap could be closed and turned into a surplus, then maybe the theory of the output gap could be relevant. The U.S. would have to stage an unprecedented economic miracle. Somehow I don’t see that as very likely.

The theory of the output gap can be relevant in normal economic times, when simply analyzing small ups and downs. But this theory is wholly irrelevant in a structural crisis or a depression.

In conclusion: the theory of the output gap is false and irrelevant because it is based on a notion of the imminent return of the credit-fueled good times. Using this theory as a justification to print money has been done before, with disastrous inflation as a result.

The economy is not "supposed to be" anything. It is only what you make it in to!

Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Regulatory System as a Competitive Advantage

2009-06-20T15:30:00.002-04:00

One of the most central themes in how I think about the interaction between economics and politics is the importance of the rules governing capitalism, in order for capitalism to reach its full potential and serve society in the best way it can.

The case for a well regulated economy is quite simple when you look at the alternatives:

Socialism does not work because no one can ever know enough about human economic behavior in order to plan everything in advance, and an unregulated economy does not work because that leads to monopolies, oligarchies and crime, and makes a democratic process impossible.

The economic crisis has now reached a stage where the role of regulation is becoming apparent for the U.S. financial system. More specifically, I argue that U.S. financial companies are now doomed to failure in competition with foreign financial companies because they have not, and will not, be adequately regulated.

A recent article in the New York Times highlights this problem. The article explains that, as a result of the crisis, the influence of British, German, Swiss and Japanese banks is growing on Wall Street and in the U.S. in general. As Eugene A. Ludwig explains, this could have something to do with regulation:

“What worries me is the competitive edge that non-U.S. banks have vis à vis U.S. banks,” said Eugene A. Ludwig, the comptroller of the currency under President Bill Clinton, who now runs the Promontory Financial Group, a Washington bank consultant group. “Non-U.S. banks generally operate under more coherent regulatory structures than U.S. banks do, which creates imbalances that non-U.S. banks can exploit, especially at a time when their U.S. counterparts are operating under extraordinary constraints.”

In short, the U.S. economy has again reached a stage where it is a wild west-style economic system that is essentially unregulated. The little regulation that exists is highly fragmented, where different financial regulators oppose each other and where financial companies can choose their own regulator, invariably picking the one that enforces the least amount of regulation.

By contrast, financial institutions in the EU operate in a much more comprehensive economic framework in general. A lot of this has to do with the work that was done in anticipation of the introduction of the Euro as the common currency. More specifically, Germany refused to go along with the project unless the German brand of stable capitalism became central to the operation of the Euro zone.

Some of the best examples of this are:

- The European Central Bank has a single mandate: to fight inflation ONLY, and not concern itself with economic growth, and to be wholly independent from politicians. A very helpful international comparison of central banks can be accessed here: http://www.bis.org/publ/mktc01.pdf?noframes=1

- Antitrust laws and fierce enforcements of those laws are meant to ensure that the “too-big-to-fail” problem does not occur.

- Bank capital requirements are higher, and additional credit rating standards are imposed on complex financial products such as mortgage-backed securities.

In addition to these rules, several countries in the EU have other regulatory advantages over those that U.S. companies have, such as:

- A single financial regulator with clear, often internationally harmonized rules (such as Basel I and II, and multiple EU agreements)

- Unlimited liability instead of limited liability. In many countries in the EU, financial executives are personally liable for what happens in their companies. This obviously creates a different risk-taking climate.

- The right of the government to take over non-banking institutions such as mutual fund companies and hedge funds in order to protect investors, much like the FDIC takeover authority in the U.S..

What I have listed above under the heading of “regulatory advantages” may seem like a not so coherent list of issues, but what these things lead to in terms of the role of financial institutions in the economy is one central thing:

A focus on long-term profits instead of short-term profits

It would be very hard to argue that a focus on short-term profits is a good thing from a societal economic perspective, or indeed from any perspective other than that of the individual financiers.

A focus on short-term profits, I argue, leads to large-scale “looting”, which I explained in
this blog post on circular looting.

Needless to say, the focus that American financial institutions have on short-term profits, as a result of the inadequate regulatory framework, is the explanation as to why U.S. companies are being challenged by foreign ones now. U.S. companies are simply not equipped to compete in the long term. When the looting is done, the companies have nothing to show for.

What we are seeing right now is a failure of the central functions of capitalism. Because the system has been under-regulated, if not unregulated, the good dynamics of capitalism where efficiency, choice, competition and innovation are central components have been shoved aside, in favor of outright looting.

Presently, U.S. financial companies appear to be doing better, but make no mistake, this is only an illusion. The suspension of the mark-to-market rule has enabled them to grab numbers out of thin air and make it look like they’re profitable again. Also, because the federal government is lending money to them extremely cheaply, on a highly unsustainable level I might add, these companies are currently experiencing some short-term gains.

As soon as the government realizes that the enormous subsidies cannot go on anymore, U.S. financial companies will start to tumble once again. My guess is that that will happen within 1-2 years.

The New York Times article gives the example of the U.S. auto industry not being able to compete with the Japanese auto industry, which I think is an excellent example. Because the U.S. government failed to implement proper standards for automobiles there was seemingly no need to change anything, you just keep churning out new cars for quick profits.

One day, though, the confidence of the public was used up, and the U.S. auto industry as we knew it died. In a not so distant future, Bank of America will be the new GM, and Deutsche Bank will be the new Volkswagen.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Inflation Riddle

2009-06-10T11:32:00.007-04:00

The single most important discussion in economics at the moment is whether or not there will be inflation in the U.S., and if so, when that will happen. The Bush and Obama administrations along with the Fed and the Treasury have made their positions crystal clear: they believe that inflation is a near impossibility in this economic environment.

The government, the Fed and the Treasury have for months now been trying to tell the world that things are getting better and that the measures they have taken to ease the crisis are working. Geithner even went to China and gave speeches telling everyone how much confidence the Chinese still had in the U.S. economy, even as the Chinese sold long-term U.S. Treasuries and bought short-term U.S. Treasuries instead (which is a clear sign of a loss of confidence).

Governments around the world are currently engaging in what they call “quantitative easing”, otherwise known as money printing. The most famous example of this is probably Germany after World War I. Germany had a huge war debt to pay, and that debt was strangling the German economy. The Germans decided to simply print more money and be done with it. After that policy was implemented, people started using money to light fires in their furnaces because it was worth so little.

Nowadays, even the Bank of Switzerland is printing money. The U.S. government is the worst offender, and is currently flooding the U.S. economy with money. In a matter of months, the Fed has suddenly expanded its balance sheet 40 times, after having stuck to a policy of stability for six decades. This is truly revolutionary and truly disturbing.

Take a look at the recent expansion in the Fed's monetary base:

http://research.stlouisfed.org/publications/usfd/page3.pdf

Why are governments doing this? It has to do with the theoretical approach to the creation of inflation.

For people who are unfamiliar with a range of theories in economics, such as the entire economic team of the Bush and Obama administrations, there is a dogma concerning inflation:

Inflation can only be created by a wage and price spiral

This is what the government believes, or at least is strongly hoping for. In other words, for inflation to start growing, people would have to start demanding higher salaries (which is not exactly easy in a country essentially without unions or labor laws) and people would have to start consuming goods and services to a much higher degree. So, all of a sudden, we would have higher salaries, more consumption and the good times would again start to roll. The government sees this as an unlikely scenario. On that point, I absolutely agree.

So, if you believe that the preceding scenario is the only scenario under which inflation can be created, printing money might make sense for a while. However, I, and many others, do not believe that this is the only scenario under which inflation can occur.

You can look at the problem of what inflation actually is in 2 ways:

1. inflation is ONLY a wage and price spiral where too much money is chasing too few goods and services, OR

2. inflation is an excess of money in the economy

In order to find out which of these two statements is true, a simple theoretical model can be constructed. If statement 1 were true, there would be no examples in history where inflation was created without a wage and price spiral. Is that so? The answer is unequivocally: NO.

Inflation has been created without a wage and price spiral countless times in economies around the world. Some examples are: Argentina at the end of the 90:s, Zimbabwe currently, Germany in the 1920:s and 1930:s, and so on and so on.

However, what these countries do have in common during the abovementioned crises is money printing. For different reasons, these countries have been printing money in order to get out of a crisis, and that has created massive inflation. This is exactly what the U.S. is doing today, so why should the U.S. be different?

The statement that inflation can only be created by a wage and price spiral is most certainly untrue. It has no basis in empirical evidence, and in fact, much evidence to the contrary exists.

I believe that inflation is simply an excess of money in the economy. Is an excess of money being created by the Fed right now? You would have to be some sort of lunatic to answer "no" to that question.

People tend to focus too much on microeconomics when thinking about inflation, which is what makes them believe in the wage and price spiral theory. They believe that consumers tend to steer the economy with their spending. This does not have to be true in many cases, though.

If a central bank such as the Fed starts printing money and flooding the economy with it, that money is going to go somewhere. It does not have to go to consumption of goods and services, it can go to the financial markets and spur speculation.

That this happened in the last few months would be a good bet, because the recent attempts to save the economy has mainly been a huge bailout of financial companies, transferring massive amounts of wealth over to them.

If all this money had been transferred to American citizens in the form of living allowances or something like that, we might have had some sort of price spiral, but that didn’t happen. When Wall Street got all the bailout money, it started to push up prices of stocks again in the early spring, and a massive stock rally occurred.

So, I believe that the rise of the stock market has to do with an inflation of prices brought on by the financial bailout. This will most likely put additional upwards pressure on inflation. This is a kind of price spiral too, and this taken together with the excess of money in the economy makes inflation even more likely.

To sum up: the U.S. will experience massive inflation soon as a result of the money printing activities and the recent stock rally is an illusion brought on by the financial bailout.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Job That Doesn’t Need Doing - The Structural Crisis of 2009

2009-05-11T16:14:00.005-04:00

A structural economic crisis is very different from normal economic crises. With an astonishingly accurate history, they come around just about once every 40 years. When a country slips into a structural crisis, it means that there is really nothing that can be done about it, except to plan for a new future when the crisis is finally over.

Put more simply, a structural crisis means that the way in which a country has previously built its prosperity has come to an end. This is because the country has become dependent on a certain type of industry that has become obsolete, unable to compete or can no longer grow.

The following is a timeline of structural economic crises in America over the last 120 years:

1890 - The Long Depression

For a few decades, the U.S. economy had been growing rapidly as a result of the development of natural resources and huge investments in infrastructure, most notably railroads. This ultimately made the entire economy dependent on the continuation of this rapid growth, because so much money had been invested the driving forces behind it. When the crisis came, mines, railroads, factories and farms closed on a large scale, and unemployment eventually reached close to 20%.

Fast forward 40 years:

1929 - The Great Depression

In my view, the Great Depression was caused by a combination of a tech bubble and a real estate bubble. These bubbles were inflated with the help of too much credit and speculation with borrowed money. The U.S. economy had become dependent on the continuation of these bubbles, and the high value of the stock market, and when that was no longer sustainable, everything came crashing down. The outcomes are well known: unemployment of 25%, bread lines and lost savings.

Fast forward 40 years:

Early 1970s - Oil, Gold and Manufacturing Crisis

Another classic type of structural crisis is when an industry becomes completely unable to compete, seemingly over night. This happened all over the Western world in the early 1970s in the apparel sector. Huge numbers of people used to be employed in this sector prior to this time, but Asian competitors took over the market completely. This was only a part of a series of Asian manufacturing takeovers that continues to this day.

The 1970s crisis was multifaceted, and not as severe in the short term, although it could be argued that it partly set the stage for the next crisis. The 1970s crisis also involved the end of the Bretton-Woods system and the oil embargo.

The most notable long-term outcomes in the U.S., though, was a decline in manufacturing of apparel, steel, ships and many other industrial goods, because American companies were unable to compete with imported goods. This crisis permanently changed the make-up of American employment in general, as manufacturing jobs kept getting lost (in relative terms) even after the crisis had passed.

Fast forward 40 years:

2008 - Subprime/Derivatives/Credit Crisis

Out of the three structural crises I have briefly described, the current crisis is certainly the most similar to the Great Depression. The similarities keep adding up every day, but the most striking similarity is the fundamental causes: a real estate bubble (preceded by a tech bubble), built on too much borrowing and speculation with borrowed money.

Put in other terms, the dependence on Wall Street in particular really unite these two structural crises. Speculation with borrowed money, the government’s vested interest in the continuation of the bubble, ordinary people’s reliance on the bubble itself: the situation today is almost exactly the way it was in the 1930s.

What I'm actually saying by giving the example with the 40-year cycles is that it seems that it takes 40 years for an economy to develop different types of imbalances. These imbalances can take different forms, but all lead to the same thing: a structural crisis.

For a polticial discussion, imbalances that lead to structural crises are very helpful tools in trying to figure out the best way forward for an economy. There are distinct imbalances that can develop both on the left and on the right. Today's crisis is one that developed on the right, and the crisis in the 1970s was a crisis on the left.

Put simply, when an enormous accumulation of capital occurs in the financial sector, or in an oligarchy, a severe imbalance in the economy has developed. That was the case in the 1930s as it is today. This leads to a structural crisis.

Conversely, when the government tries to steer the economy too much in an artificial way, the industry usually becomes uncompetitive. This was the case with the British auto industry in the 1970s and the Swedish shipping industry in the 1980s. This also leads to a strucutural crisis.

What we see in this pattern is another example of a political pendulum swinging back and forth. Judging by this pendulum, the next structural crisis in the U.S. will occur in 2050, and it will be a structural crisis coming from the left.

When an economic system becomes reliant on speculation alone, which is the case now and in the 1930s, I believe that the crisis will be more severe.

Before the Long Depression and the crisis of the 1970s, the U.S. had overextended itself in particular industries, but there was at least something to show for it at the end of the day. There were goods and infrastructure available that people legitimately needed, but a crisis which has Wall Street speculation as its main feature leaves only a black hole.

Financial speculation is a job that doesn’t need doing. It benefits no one in the long run. Speculation inflates bubbles that in the end do a lot more harm than good, particularly to ordinary people who don’t see them coming.

Speculation doesn’t provide a good source of funding for businesses and their new ventures, both venture capitalists and businesses can attest to that. Most importantly, as we have seen now, it can bring down an entire economy if it goes on for long enough.

Whether you are on the left or on the right, financial speculation is your enemy. I believe that the U.S. will fall into a depression either this year or in 2010. History is screaming it from the roof tops.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Geithner's Lies - A Preview

2009-04-24T15:45:00.004-04:00

The famous “bank stress tests” are in their final stages right now. On May 4, Geithner is going to present the results, and those are certainly rather predictable.

The tests were created in order for the Treasury to be able to paint as rosy a picture as possible, of the situation that the country’s banks are in. This has not been denied, and in fact, it has been confirmed, although using different words.

“The point of doing this is to avoid a panic, not cause one”, said Geithner recently.

What happens if the government finds something that is worthy of a panic (which it probably has)? That’s where Geithner’s lies and acting skills come in.

Early this week, results of the tests started to leak out. The rumor on Wall Street is that 16 of the 19 major banks are actually insolvent. If that shouldn’t cause a financial panic, I don’t know what should.

I don’t know if this is true, but it certainly could be. Like I said, it’s a rumor.

The government released the details of how the tests were conducted today. This is how the stress test works:

The banks have to figure out what would happen to them if:

1. unemployment went up to 10.3%,

2. home prices fell an additional 22%, and

3. the economy contracted by 3.3% and remained flat in 2010.

Note that the banks are conducting these tests themselves, and it is not exactly in their interest to tell anyone that they’re insolvent. Supposedly, if the government does not find the information coming from the banks to be credible, the banks will have to explain themselves.

In short, there is no independent auditor, only two vested parties who both want to paint a rosy picture and reveal as little as possible.

So, Geithner’s speech on May 4th is rather predictable, no matter what the government finds. In fact, I can give you the short version right here right now, so you won’t have to spend time listening to it on May 4th.

Dear members of the press, (this is Geithner speaking)

For three months, the U.S. government has been conducting stress tests on the nation’s major banks. I’m here today to present the findings of these tests.

The tests were conducted in the most stringent of ways, in order to make sure that the nation’s banking system can hold up in our current economic times. We tested the banks under fictitious, harsh economic scenarios that are very unlikely to become a reality.

Our findings show that despite continuing difficulties in our economic system, and even under a scenario of significant further deterioration, our nation’s banking system remains safe and well capitalized.

In recent months, the banks have taken unprecedented steps to shore up their liquidity positions by writing down legacy assets and by attracting new capital. This, along with an apparent improvement in the overall economic condition of the country, makes it clear to us that our financial system is on the road to recovery.

Blah, blah, blah, banks are great and Wall Street should love me…

Thank you, and no questions please.

I have a strong feeling that the actual speech that Geithner will give, is going to consist of absolute rubbish. Everybody on Wall Street knows he’s lying, but they don’t care, they only care about how convincing his lies are, because that is what will move the market in the weeks to come.

For ordinary people, all this means that even more vital information is being swept under the rug in order to preserve the financial oligarchy, which is the mission that Geithner seems to think that he was given by the American people.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Wall Street Calls Bank of America's Bluff

2009-04-21T01:49:00.001-04:00

On Monday, Bank of America presented a fantastic first quarter result with a profit of $4.2 Billion! In the face of insolvency, losses that amount to 20 years of profits, and purchases of Merrill Lynch and Countrywide that very likely doubled the bank’s exposure to toxic assets, how is this possible??

With such great news, Wall Street must have gone crazy, because Bank of America’s stock went down by 24% the same day. What happened??

The answer is as simple as it is predictable: Bank of America’s report is utterly fraudulent.

I looked at the SEC report myself, and found that a little over $2 Billion of the “gain” is a result of the fact that Bank of America has decided, with no basis in reality, that its toxic assets are now worth a hell of a lot more than what they were only a few weeks ago. They can do this because the rule known as mark-to-market has been repealed.

Also, Bank of America makes reference to other new GAAP rules (rules that govern accounting), which apparently (according to them) enables them to put assets in “special purpose entities”, away from the balance sheet. This is what Enron pioneered, and it is what eventually brought down that company.

I could find no numbers concerning how much had been hidden away from the balance sheet this time, but the bank obviously doesn’t want that to be found. This makes me believe that the real number is very big.

Think of Bank of America as a regular guy. This guy has a yearly salary of $30,000. He has a credit card debt of $2,000. He also owes a loan shark a further $10 Million, and he lives in his aunt’s house.

The guy prepares a loan application to buy his own house, and in it he states that his income is $100,000, that he has a credit card debt of $2,000, and that he already owns his own home.

The only thing that’s accurate in his application is the credit card debt. The reason for that is that it can be checked by the bank. Everything else is pure fantasy.

It is the same way with SEC filings. You can bend the rules so much that SEC reports hardly mean anything anymore. You can’t trust ratings agencies or auditors either, because they get paid by the companies that they are supposed to be scrutinizing.

All this makes Wall Street look at a certain metric: quality of earnings.

“Quality of earnings” is not mentioned very often in financial journalism, probably because it seems to suggest that not all profits are actually a reflection of a company doing well. Quality of earnings describes to what degree the earnings of a company can be attributed to actual sales, as opposed to accounting wizardry.

I have over the last year argued that there has been an alliance between politicians, Wall Street, banks, regulators and the media to cover up the true extent of the financial crisis in order to preserve the financial oligarchy. By doing this, they have been able to uphold the illusion that everything is fine.

Even though Wall Street traders are not saying it out loud, they seem to be breaking ranks. They can no longer push up the prices of bank stocks and other financial stock in the face of such obvious and rampant fraud.

Expect stock markets to go much lower in the coming months.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

What Actually Caused the Great Depression?

2009-04-14T17:25:00.001-04:00

During times of economic crises, wacky theories concerning the origin of the crisis tend to spread like wildfire. That was the case during the great depression, and that is the case now. Some people might include my theories in that category, but that is, of course, purely based on ignorance.

At present, there are literally hundreds of theories about the crisis out there, and discussions about the great depression have also resurfaced.

With respect to the great depression in relation to the current crisis, almost all the arguments can be boiled down to the following question:

Was the great depression caused by the easy access to cheap money?

As President Obama has noted, the discussion about the great depression is far from over. The factors behind that crisis are very complex, and far beyond the understanding of most politicians. Obama recently spoke in disbelief about the continued disputes over this.

There are a few things that I believe are beyond discussion:

- The stock market crash set off the depression because so many had so much invested in the market.

- The stock market crash was caused by overly inflated values of stocks.

- The overly inflated values of stocks were caused by an unprecedented amount of speculation with borrowed money.

Following this line of reasoning, the question remains: what causes speculation? If we can nail down what causes large-scale speculation, we might be able to answer what causes depressions.

More specifically, circling back to my initial question, “was the great depression caused by the easy access to cheap money?”, the question becomes:

- Does easy access to cheap money cause large-scale speculation which in turn causes depressions?

The answer to this question can be found more easily than one would think. If you can identify periods of time in history when money was cheap and abundant, and ascertain that rampant speculation always occurred during such times, you have your answer.

A quick look back in history tells us that this is not so. There have been many periods in history when borrowing money was cheap, but when speculation was minimal. This is noted in what is widely considered to be a standard work on the depression, “The Great Crash”, by John Kenneth Galbraith.

During several periods in the 19th century, cheap money was available, but without the result of large-scale speculation. This was also the case in the 1950s and 1960s. So, to say that cheap money alone causes large-scale speculation would be erroneous from a scientific standpoint.

I tend to believe that speculation can trace its roots to something far more basically human. I believe that speculation does not occur just because it CAN occur, but because there seems to be a reason to for people to speculate.

Greed is a human emotion that can never be extinguished. Everyone is guilty of it, and when a human sees an opportunity to make a quick buck without effort, whether this is prudent or not, he or she often takes that opportunity.

The most classic example of speculation is the tulip bulb speculation in Holland in the 16 Hundreds. This business went so far that a single tulip bulb could be worth an entire year’s salary at the time. What this speculation frenzy also featured were contracts with rights to buy bulbs in the future, trading fictitious bulbs that had not yet been grown, and all the other classic speculation behaviors that we see again today.

We may think we’re so advanced today, but greed, this inescapable human emotion, has already conjured up the complicated schemes of speculation many times before in the history of man.

If you can buy a tulip bulb and sell it the next day, and then not have to work for the rest of the year, who wouldn’t do that? If you can buy a house in Florida, sell it within weeks for a comparable profit, how could you resist?

In short, humans need a reason to start speculating, and in the case of the great depression, people got excited about mainly two things which will sound familiar to everyone today: real estate and new technology.

People started buying second homes to be resold shortly afterwards, and stocks in new technologies like radio and automobiles.

Speculation frenzies will probably always exist, but when such a frenzy gets out of control, it can shake the very foundations of society. When too many people start getting in to the frenzy, perhaps even the government (by relying on the stock market to provide basic public services, such as pensions, infrastructure and, of course: jobs), the country becomes utterly dependent on the continuation of the speculative bubble.

A speculative bubble can never be upheld forever, and it can never be re-inflated, so when a bubble of sufficient proportions is created, a country will not be able to avoid a depression.

In the decade before the depression, President Coolidge repeatedly praised the wonders of the stock market. In addition, most of the powerful politicians in Washington, and the members of the Federal Reserve Board, were themselves highly vested in the stock market, and were hence not at all interested in reining it in, even though they could see ominous signs.

It seemed at this time that all of America could become prosperous without any effort on the part of Washington politicians. This is extremely similar to how the Reagan, Clinton and Bush Jr. administrations operated. Hands off, hope for the best and leave the provision of American prosperity to private corporations.

Then as now, the United States was utterly dependent on the upholding of the inflated values of the stock market.

The question then becomes whether the current speculative bubble is large enough to cause a depression. I believe that the answer is, unequivocally: yes.

Moreover, I advise that the winner-takes-all voting system should be destroyed

What the People Want - Crisis Management and Proportional Representation

2009-04-08T14:10:00.001-04:00

One of the central premises of this blog is that the will of the people, the voters, is not at all realized in actual political policies in countries, such as the United States, that don’t have proportional representation.

One of the clearest examples of this in history can currently be seen in the differences in the economic crisis management between countries that have proportional representation and those who don’t.

The voters in The United States and Great Britain (which both have the winner-takes-all voting system) are outraged and disgusted by the taxpayer give aways to the financial oligarchy, whereas voters in countries with proportional representation, such as Germany and Sweden, are generally pleased with the political handling of the crisis, even though they suffer greatly in this crisis too.

The winner-takes-all voting system excludes all those voters, often more than 50% of the voters, who do not subscribe to the specific beliefs of the two only parties that exist in this country. By contrast, a system with proportional representation counts every single vote, and if a party gets 10% of the votes, it gets 10% of the seats, hence incorporating the will of all the voters, as opposed to a small number of them.

In addition to this, the United States allows huge political donations to individual politicians in a scheme that can only be described as a “policy purchasing program”. Money for policy; it’s as simple as that.

The Handling of the Economic Crisis in The United States and Great Britain

Since the current economic crisis began last year, the handling of it has been strikingly similar in The United States and Great Britain. It has been based on one central premise alone:

Protect the current financial power structure, and the individual players within it, at any cost to the taxpayers and no matter what the long-terms consequences to the economy are.

It really is as simple as that, because there is virtually no evidence to the contrary. With bailouts, loans, guarantees to AIG, Citigroup, Bank of America, Bear Sterns and many more, the U.S. taxpayers are on the line for over $10 Trillion at this point!

Enormous bailouts of Royal Bank of Scotland, Barclays Bank and many more in Great Britain will eventually cost British taxpayers Trillions of dollars too. All the while banks and other financial companies in both countries are continuing to pay enormous bonuses while successfully opposing financial regulation.

The American and British economies are at this point essentially unregulated. The people in both countries are outraged, and I personally don’t know anyone, nor have I heard anyone outside the corrupt media elite, voice support for the bailout and support of the financial oligarchy.

I don’t have any exact numbers for this, but if I, as a resident of Manhattan working in the financial industry, don’t know anyone who thinks that this is a good idea, I can only imagine what people around the country think about it.

Protesters in Britain have repeatedly smashed the windows of banks, and bank employees have had to hire body guards, so I don’t think the outrage is any smaller there.

The Handling of the Economic Crisis in Germany and Sweden

Although there have been bank bailouts recently in Germany and Sweden, it has been done on a much smaller scale. Banks in both Germany and Sweden had been over extending themselves in lending to Eastern Europe while that part of the continent was trying to re-join Europe after communism.

Both the German and Swedish governments have repeatedly stated that it would be immoral to throw away large amounts of taxpayer money, both for the immediate purposes of taxpayers and the long-term consequences to the economy.

The internal economies in Germany and Sweden were already sufficiently regulated, so in no way are the banks there causing as much of a domestic problem. One could instead look at an industry that is vital to the U.S., Germany and Sweden: the auto industry.

The U.S. has simply given away billions of dollars to companies that are clearly not competitive. Germany’s car companies are very competitive, but the car market in Germany is extremely slow nevertheless. Germany was creative in dealing with this, and gave taxpayers a few thousand dollar to scrap their old car and buy a new one. Sweden will most likely follow this idea.

Sweden refused to bail out SAAB, noting that the company had only been profitable for a handful of years during its 50-year existence. How would Sweden be able to turn around a car company when the biggest automaker in the world could not? It must be noted that the Swedish government in general is not opposed to state-owned companies.

The Swedish government owns many companies that it runs for profit, and created and maintained one of the most successful brands in the world: Absolut Vodka. Who said the government couldn’t run a business?

The Swedish and German governments have, throughout the economic crisis always had the taxpayers’ interests and the future of the country as their first and only priorities.

Small bailouts have occurred, and stimulus in the form of aid to local governments that have run short on cash because of job losses have been paid.

The public outrage that has occurred in Germany and Sweden has largely concerned bonuses, but the big difference is that those bonuses were paid by the companies themselves, not the taxpayers, as in the case of the U.S. and Great Britain.

The policy response to the economic crisis from the winner-takes-all countries has been disastrous, and I personally disagree with almost 100% of what the response has consisted of. The policy is based on the premise that the financial oligarchy must be preserved, taxpayers and country be damned.

The policy response to the economic crisis from the proportional representation countries has been deliberate, responsible, thoughtful with a long-term approach. I agree almost 100% with what has been done in those countries, even though I would not vote for any of the parties currently in power in either country.

This fact describes clearly that the will of the people is not translated into policy in the United States and Great Britain. These two countries are undemocratic and both need vast constitutional overhaul.

Obviously, I advise that the winner-takes-all voting system should be destroyed.

Another Financial Atom Bomb

2009-04-02T23:45:00.006-04:00

I simply cannot fathom the stupidity of American lawmakers anymore. For months now, they have been lobbying for mark-to-market accounting to be suspended, cheered on by Wall Street. On Thursday, they got their wish.

The Financial Accounting Standards Board decided on the change after Congressional hearings during which they had been severely pressured by politicians from both parties.

Mark-to-market means that banks have to value their assets at market price. When banks have worthless assets that nobody wants to buy, that used to mean bad news for the bank, as if a fruit stand were full of rotten apples. Not anymore.

Thanks to this change, banks can just make up what they think the assets “should be” worth. This will make it seem as if the banks are doing much better, and we will most likely see a big change already in the first quarter reports that are coming out soon.

This change is nothing short of ridiculous. Is anyone going to believe that the trouble that the banks were in is all of a sudden over? Did the rotten apples become red and shiny again?

Another reason for the change is that Geithner thinks he has come up with a round-about way of giving more taxpayer money to individual bankers. It works like this:

1. the banks are allowed to decide themselves what assets are worth and put that on their books

2. when the recently announced "public-private partnership" to buy toxic assets (to the utter detriment of the taxpayer) will start, the government will be able to grossly overpay for the toxic assets, because by that time these assets will have been marked up dramatically by the banks themselves.

It looks like the government is not overpaying, because they're just paying what's on the books...

3. again, an enormous transfer of wealth from taxpayers to bankers has occured.

The most significant factor in all this is not that one would be well advised to stay away from bank stocks; it is the implications for the whole economy. Until the problems at the banks are exposed, we cannot solve the financial crisis.

What the suspension of the mark-to-market rule will do is to bury the toxic assets even further away from sight of regulators and the public, and enable banks to go on with their zombie existence until its time for the next bailout.

And there will have to be more bailouts as a result of this disastrous policy.

This policy change is, in essence, a complete endorsement of the “Enron Accounting” that has already brought the world financial system to its knees. Why U.S. politicians have decided to legitimize it is totally beyond me, and it is an unbelievable outrage.

Moreover, I advise that the winner-takes-all voting system should be destroyed

The Spanish Inquisition

2009-03-31T12:27:00.009-04:00

Recently, a Spanish court under judge Baltasar Garzon announced that it may “within days” issue arrest warrants for six former Bush administration officials for having provided legal justification for torture.

The ex-Bush officials are Alberto Gonzales; former undersecretary of defense for policy Douglas Feith; former Vice President Dick Cheney's chief of staff David Addington; Justice Department officials John Yoo and Jay S. Bybee; and Pentagon lawyer William Haynes.

A detailed AP Report can be read here

From The UN Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment, Article 2(2):

"No exceptional circumstances whatsoever, whether a state of war or a threat or war, internal political instability or any other public emergency, may be invoked as a justification of torture"

The United States has signed this convention, and the abovementioned article should describe, categorically, what this country’s position on the issue of torture is.

During the presidency of George W. Bush, The United States became a country that tortured and broke the laws of international aggression (invading another country without legal justification).

The bottom line is that these two crimes make the United States, in these two respects, no different from countries that have been charged with international crimes in the past, including:

- Iraq when it illegally invaded Kuwait, and

- Augusto Pinochet in Chile when he had people tortured

The United States lost it’s moral high ground under Bush, and can no longer speak to the rest of the world with any amount of weight about legal issues. The world has simply stopped listening. Why? Because these crimes have not been dealt with, and the criminals are still at large, and in fact, one (Jay Bybee) is still sitting a federal judge.

Spain considers crimes such as torture to be punishable anywhere, wherever they occur. At the very least if the crimes are committed by countries that have signed the Convention Against Torture, like the United States.

The most interesting thing about the possible charges is that the Spanish court goes after officials that enabled torture to occur, and not the torturers themselves, who are also punishable under the convention. The possible charges mean that this process will only be one step away from charging former President Bush and former Vice President Cheney.

Obviously, all these people should be charged in the United States before they are charged in Spain! However, the Obama administration seems unwilling to actually deal with the crimes committed by the Bush administration.

A “Truth Commission” is definitely not the proper way to deal with such crimes, because such a commission gives criminals immunity, which is undemocratic and immoral.

In a country of laws, there is a very simple premise to how society functions: if you break the law, you will be punished. Does it make sense that some poor bastard who sells crack on the corner should get 10 years in jail while those who torture, invade and kill people should remain in their jobs as judges or drink beer on a cozy ranch in Texas?

That simplistic question is really the essence of the problem. We cannot move on until the Bush administration, including the former President, is charged with war crimes in court.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Financial Minority Reports

2009-03-26T17:52:00.004-04:00

Since taking office, Timothy Geithner has been an absolutely appalling Treasury Secretary with only one strategy: to pamper and protect Wall Street as much as possible with taxpayer money while opposing legislation that would hold Wall Street accountable for having run the economy into the ground.

I was thus highly surprised when he on Thursday came out with a sweeping program to deal with the deadly mess in the financial markets, a program that was meant to deal with both long and short term problems.

The most important suggestion in the program presented by Geithner is the creation of a single regulator, “with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities”.

This may not sound like much on the surface, but it actually deals with some of the central problems in the American financial system, as well as problems in the academic world of economics.

It is a well-known fact that the American economy is a so-called “boom-and-bust” economy. It cannot seriously be denied that this is a result of the fact that the U.S. has an essentially unregulated economy. The lack of a social safety net is also a significant contributing factor.

Geithner’s new, single, regulator would actually, according to him, continuously research the dynamics of boom and bust, and try to prevent the harmful results.

More specifically, the new regulator would try to find out when an asset bubble is building, such as the tech bubble in the 90s, or the housing bubble of today, and then try to stop it in its tracks.

This is critically important, and it is a strategy that can prevent financial crises, similar to the murder prevention strategy in the movie “Minority Report” with Tom Cruise.

In that movie, some type of psychic people called “pre-cogs” can see into the future, and they can see who will commit murders in the future. The would-be perpetrators of murder are then arrested and jailed in advance, so that the murder never actually takes place.

There is no ”pre-cog” needed for the new regulator, nor will anyone have to go to jail for crimes not yet committed, but studying emerging asset bubbles in the economy and acting on the findings will produce a functionally similar result: preventing pain and suffering in the future.

The way this could be done is rather simple. The new regulator would study anomalies in the market. If the price of an asset, say real estate in Florida, starts rising unusually quickly and without a clear reason, that would be a strong indication of a bubble.

This would then be made widely known, the public would be strongly cautioned, and perhaps some temporary legislation could be put into place in that region (temporary changes in zoning laws to prevent over-building maybe). The regulator would immediately look for evidence of predatory lending and other fraud in Florida, and act on anything it would find.

On the other hand, let’s say there were an area in Florida where new and profitable industries were being built. Jobs were being added and the population was growing. At a time like that, it would make perfect sense for real estate values to go up, so an instance like that would be ignored by the regulator after an investigation was done.

Unfortunately, asset bubbles are poorly understood among academic economists in the U.S. today, or at least they are said to be poorly understood. In reality, asset bubbles are products of simple, basic human behavior. To understand asset bubbles, you need to know only 2 things:

1. When everyone else is doing something, people in general will automatically think that it’s a good thing to do. It’s a basic function of being a pack animal.

2. When it seems that there exists a real possibility of making money quickly and easily, even the smartest people get sucked in to, for instance, a speculative bubble. This human tendency is the reason why some of the most successful investors on Wall Street invested their own money with Bernie Madoff.

However, these facts are rarely recognized by American economists because they defy free-market orthodoxy.

Hence, Geithner’s new program of establishing a single regulator is a big step away from the free market orthodoxy that is prevalent among the vast majority of public and academic officials in the United States.

I believe that the program could become an extremely important tool in a sustained economic recovery in the United States.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Geithner Plan - Same Old Crap

2009-03-24T11:58:00.002-04:00

Geithner’s new plan was presented with a complexity that seemed engineered to fool people into believing that it was not what it has always been: a direct continuation of Paulson’s original Wall Street give-away plan.

The CEO of an investment firm called “Fusion IQ”, Barry Ritholtz, said it best yesterday when he was commenting on the stock market rally:

“This is the free-money rally. Traders like the fact that there’s a boatload of cash headed their way”

At least he’s being honest about what’s going on. The “boat” is being loaded up with cash by docile American taxpayers, who have never stood up for themselves to claim their rights as citizens.

Now we're seeing the results. J.P. Morgan Chase is, again, planning to expand it's fleet of corporate jets while tent villages are growing across the country and the number of Americans without health insurance is nearing 100 million.

I would like to offer a condensed version of the plan for those who have not kept up with Geithner’s change of vocabulary (which is all it is). The plan has the following features:

- HUGE subsidies for hedge funds and other similar entities to buy toxic assets

- potential for these buyers to get almost all the gain if there eventually is one

- minimal potential for the taxpayers to get any gain if there eventually is one

- minimal risks for these investors if the investments don’t work out

- enormous risks for the taxpayers if the investments don’t work out

- borrowing from the FDIC to finance the hedge fund subsidies. This is a truly desperate move, and one which actually threatens the safety of money in everyone’s bank accounts. The FDIC is already under funded, and this move could be disastrous down the road

The government is really getting desperate. Borrowing from the FDIC is something I never imagined would happen.

By the same token, for the government to buy its own treasury bills, which was announced over the weekend, is a very desperate move, that has only happened in times of really severe crises before (like when the U.S. felt it was going to be attacked with nuclear warheads by the Soviet Union in the 60s).

I’ll make a few predictions: In a couple of years, we will have interest rates above 10%, housing prices 20% lower than today, a stagnant stock market, inflation above 5% and unemployment at sustained high levels.

Moreover, I advise that the winner-takes-all voting system should be destroyed

Circular Looting

2009-03-19T20:50:00.014-04:00

Please click on the image to see the model

“Looting” is a concept in economics developed by two American economists called George Åkerlöf and Paul Romer. This term was recently put into the framework of the current crisis by David Leonhardt of the New York Times, and I believe that it is very helpful to do so.

I also believe that there is more to the story than the original concept of financial looting, namely that of collaboration from politicians, which creates a type of perpetual motion of looting that I call Circular Looting.

The concept of looting in economics is rather simple:

It means that corporations that know that they will be bailed out by the government if they are at risk of going bankrupt, act irresponsibly in order to make as much short-term profit as possible, without regard to the long-term consequences.

In other words, corporations “loot” the economy instead of trying to make a profit with an investment strategy that they genuinely think will work. Corporations always know that the looting business strategy will fail eventually, but when it does, it’s the government’s problem.

What comes to mind first is obviously sub prime mortgages. In Vallejo, California, a man whose profession was to be a strawberry picker, was in 2006 approved for a $720,000 mortgage for a house. Needless to say, this man did not meet the traditional requirements for such a large mortgage, and defaulted on the mortgage rather quickly.

This particular mortgage makes for a good example of what has been happening over the last few years. As the strawberry picker signed up for the mortgage, there was a string of people who were given large fees, going all the way back to Wall Street itself.

These fees, and the overall profit from all the investments related to the sub prime market, are what constitutes the “loot” in the looting cycle that has been going on over the last decade or so.

Here’s what most likely happened in the Vallejo example:

- the bank received mortgage origination fees

- the bank sold the mortgage to an investment bank (like Lehman Brothers), and got a fee

- Lehman Brothers packaged the strawberry picker’s mortgage with others, created a “mortgage-backed security” and sold that to Wall Street, and received a fee

- Wall Street traders bought and sold the securities, and received large commissions

Obviously, everybody in the chain knew that a strawberry picker was not going to be able to pay this mortgage, but everyone was making money in the meantime, so the looting was a win-win situation, for a period of time.

This describes how looting is a good idea for corporations that engage in it, while being ready to run for the hills when everything comes falling down. Now we’ll move on to the political connection.

There are not that many companies in the United States that can depend on being bailed out by the government, but the exception to the rule is the financial sector. In other words, large banks, investment banks and any other financial institutions that are deemed to be important enough for the local or national economy, can usually count on being bailed out.

Bailouts don’t only concern the institutions that are considered “too big to fail”, which is evidenced by Åkerlöf and Romer’s report, “Looting”, which describes the looting behavior of smaller, local banks in Texas.

The financial industry in the United States donates enormous amounts of money to virtually all politicians in Congress and those running for President. This has been going on for so many years that it is now a Washington institution.

This behavior obviously creates a dependency on the part of politicians on the financial industry, without which they would not be able to become elected.

This, along with the promise of a bailout when the financial institutions are about to go under, creates an utterly symbiotic relationship between politicians and the financial industry.

This symbiotic relationship is described by the following four stages of the Circular Looting that you can see in the model at the beginning of the text:

1. Donations from the financial industry to every imaginable political campaign.

2. The donations force politicians to create and perpetuate a business friendly climate with low taxes, virtually no financial regulation or oversight, and the absence of labor rights.

3. In such a “business friendly” climate, corporations are free to engage in whatever kind of business they desire, because they are left alone, and because of extremely low taxes, they can reap all the rewards instantly. Looting is created on a massive scale.

4. There is only so much looting that can go on until the market is depleted. Eventually the bubble has to pop, either because of inflated values, or because of exposed fraud. It is then that the politicians come back and help their friends in the financial industry with bailouts.

If looting is to be successful in the end, individuals who are working for the financial institutions must be sure to not invest in their own companies too much, and cash bonuses are essential to the scheme.

What AIG recently did when executives were given bonuses after the bailout had already happened is remarkable. Even after the looting was done, the executives were able to extract bonuses directly from taxpayer money. This must surely be unprecedented prior to this crisis.

Looting, bailouts and political donations make American society eerily reminiscent of the feudal society of Europe during the middle ages, where most people were serfs, and everything and everyone was controlled by the aristocracy.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

AIG Bankrupting Cities Across America?

2009-03-17T10:54:00.004-04:00

Although the news about AIG bonuses yesterday was disturbing, it was not nearly as disturbing as some of the other news that came out at the same time.

Up until a few days ago, the names of the institutions that AIG had paid with bailout money were kept secret, but when we found out who they were, there was one category that stood out starkly: municipalities in California.

I decided to do some research on how much money belonging to cities and municipalities AIG is holding. What I found out was frightening.

Municipalities all over the country have evidently handed over money to AIG from their municipal bonds. This means that cities across America are at risk of losing billions of dollars, and risk going bankrupt if AIG does!

AIG states on its website that it directly manages $72 Billion of these assets that belong to cities across America.

At the end of the day, these assets are actually made up of schools, hospitals and libraries in towns everywhere. It is almost for certain that we’re talking about much more than $72 Billion being at risk, which is a staggering number to begin with.

In addition to handing over immense amounts of cash to AIG, cities have been making extremely risky financial bets through Credit Default Swaps, which is evidenced by the payments to municipalities in California, as I mentioned in the beginning.

AIG owes a lot of people money for these swaps and is like a bookmaker who can’t pay the people who all bet money on the winning horse that nobody thought was going to win. The difference here is that all those people who are supposed to be paid money by AIG have decided to keep quiet about it, presumably so as to not create a panic.

With respect to all the cash that was handed over, everyone may not know what the so-called “municipal bond market” is, or how that relates to AIG, but it works something like this:

- individuals or corporations give money to, for instance, the city of Los Angeles for the construction of a school

- Los Angeles promises to pay a 5% return on the money 10 years in the future. That is “the municipal bond”

- Los Angeles hands over the money to AIG, in order for AIG to make that 5% for the bond holders. The section of AIG that does this is called the “Fixed Income” unit

You may realize where I’m going with this: AIG hasn’t exactly been the best or wisest investor over the last few years. AIG is now a black hole of losses, and it almost doesn’t matter how much taxpayer money you put into the company, most people who are owed money by AIG will not be paid.

For now, AIG is on life support with taxpayer money and with the temporary illusion peddled by Washington and Wall Street that everything is going to be just fine. It won’t.

There is a strong possibility that problems with municipal bonds will add a whole new dimension to the crisis, and that cities across America will have to choose between closing schools or paying bond holders when AIG eventually files for bankruptcy.

I have argued before that the main difference between the United States and other industrialized countries is that the U.S. does not safeguard a standard of living for its citizens, and that basic services are, like everything else in this country, a gamble for everyone. If the gambles at 70 Pine Street in New York (the AIG building) don’t work out, kids in California may not go to school.

Moreover, I advise that the winner-takes-all voting system should be destroyed

AIG Can't Believe We're Letting Them Do This

2009-03-16T02:14:00.003-04:00

As several newspapers have reported, AIG has as of Sunday, March 15, paid out an additional $165 Million in bonuses to its executives and other employees.

This money is obviously coming right out of the pockets of taxpayers, and the situation has now gone from ridiculous and criminal to something worthy of a march with flaming torches.

When will the American people wake up!!?? The United States is being robbed in the most real sense of the word. The executives of AIG have no intentions of cleaning the mess up, nor could they, nor would they ever even know where to begin.

What is happening now is pure and simple theft, and it is happening as the amount of unemployed Americans is nearing 15% (counting those who have given up looking for work, who are curiously not included in most official statistics), and the number of Americans without health insurance is nearing 100 Million.

America’s big corporations have been laughing working Americans in the face for decades, and are continuing to do so even as those Americans lose their jobs, their homes, their health insurance, their very way of life and hopes for the future.

How far are working and formerly working Americans willing to go in order to protect the incredible transfer of wealth to the top 1% of the population?

How far are they willing to go to stand up for the right of robber barons to rip everyone off by staving off regulation, labor rights and consumer rights?

Pretty far it seems, if you are to believe what the Obama administration is saying. Even though Obama received the strongest of mandates for change in decades, particularly with respect to social justice, he has apparently decided that that mandate meant something completely different.

Obama’s mandate apparently meant galvanizing the rights for robber barons to rob, not giving Americans an actual healthcare alternative (this can be solved by private means alone, according to Obama) and continuing bonus payments to bankers who brought the world economic system down (don’t even think about firing them, they must be retained with bonuses for their great skills…).

AIG has received $170 Billion in taxpayer money already, which is money that will definitely never be seen again. That money went to satisfy claims for a fraction of the speculation insurance payments called “credit default swaps”.

AIG could be on the hook for, literally, trillions of dollars for these swaps. What is important to understand is that AIG has, for a long time, not had any intention of running a successful business.

When you run a successful business, you carefully consider the pros and cons of a certain investment, and act accordingly. AIG, Lehman Brothers, Bear Sterns and many others had a different plan: shuffle money through the company, take a fee, and let the government hold the bag when the party’s over.

The largest banks and financial institutions in the U.S. knew that they would be bailed out when the shit inevitably hit the fan, and that is what Lehman Brothers was counting on, but didn’t receive.

These companies acted accordingly: they enriched themselves for as long as they could, and would run for the hills as soon as it all came crashing down.

AIG is still in the process of being bailed out, so naturally, the executives are still trying to enrich themselves until the very end. They probably can’t believe that we’re still going along with this.

What the hell is wrong with people? Is there nothing left of self-respect in Americans? Is there no sense of justice left? Is there no pride?

It is your duty to claim your right.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Worst of Both Worlds

2009-03-13T15:53:00.004-04:00

A conservative mantra is that “the government is inefficient”. By looking at government services currently being provided in the U.S., it’s hard not to agree. However, there are two different questions you have to ask yourself:

1. is the government inefficient?, and, 2. can the government ever be efficient?

I agree that the U.S. government is inefficient, but I don’t believe that the U.S. government can never be efficient. I believe that that depends on how the government is set up.

The U.S. system of government is crippled by the conflicts between state-level and federal power, and such conflicts tend to deteriorate a country more and more as time goes by. Two good current examples of this are Spain and Belgium, where regionalism takes away precious resources while sowing the seeds of division, further feeding the vicious cycle.

Sometimes there’s a legitimate case to be made for splitting a country into several parts, and a lot of times things can work out for the better, as they did when Czechoslovakia split.

In order to eliminate tensions between regional and national interests inside a country, there are traditionally two approaches: 1. create a unitary government with a centralized power structure, or 2. create a federation with independent member states.

In the United States, the member states are not exactly independent, most importantly not in the economic sense. In the current structure, individual states and their inhabitants are having to pay so much money to the federal government that they would be completely unable to provide for their individual needs without the federal government providing services.

To simplify a bit, in a unitary government, the central government has all the money and provides all the services. In a federation with independent member states, the individual member states have almost all the money and provide all government services for themselves.

I will provide three examples of three different governmental structures, and weigh pros and cons in terms of regional interests and the allocation of money at different levels of government.

The first example is Sweden, which has a unitary government. The central, national government, has virtually all the economic resources and provides almost all the government services. Some services are provided by regional authorities, but are still paid by the national government. A system like this one is highly efficient for creating things like national health care, national infrastructure, guaranteed pensions, free university education etc.

Pro: Efficient for achieving common, national goals

Con: Not enough economic resources in regions to achieve regional goals

The second example is the EU, which is a federation with independent member states (it’s called a “union”, but legally speaking it should be called a federation). The member states pay yearly fees to the EU in order to fund some common initiatives, such as border control, crisis funds and trade initiatives, but the vast majority of the member’s economic resources remain with the individual countries. Virtually all government services are still provided by the individual member states (of which Sweden is one).

Although there are many people and organizations across the EU who share common goals, the framework for achieving those goals are not there in the EU. For instance, there is no “EU tax”, which would be an obvious step towards achieving common goals across the federation.

Pro: Enough money remains in the individual member states for those states to be able to achieve their own, regional goals.

Con: The federation does not have enough economic resources to achieve goals that are shared across the EU.

The third example is the United States, which does not fit in to any of the descriptions above, and is hence a hybrid system where the federal government and the states share the economic resources, and also share the provision of various government services in the same way.

The EU does not have a federal income tax, but the U.S. does. Most unitary governments have no local tax (or the local tax is almost negligible), but the U.S. has sizeable state and local taxes.

So, in the U.S., the states don’t have enough money to be independent of the federal government, and the federal government does not have enough money to achieve goals shared by all states.

Con: Not enough economic resources in regions to achieve regional goals

Con: The federation does not have enough economic resources to achieve goals that are shared across the U.S.

The U.S. system picks only the cons in the two alternative forms of government, and is hence the worst of both worlds. There is simply not enough tax money coming in on either level of government for U.S. citizens in general to be able to enjoy a standard of living on par with that of other industrialized countries.

In addition to this, the U.S. has a non-progressive tax system, which means that taxes on low-income people are comparatively very high, and taxes on high-income people are comparatively very low.

High-income people do not need many government services, but because low-income people are taxed at such a high rate, these people are in need of even more government services than they would have been under a progressive tax system. However, they cannot receive such services because neither the federal government, nor the states have the money to pay for them.

I believe that the U.S. system of government is a recipe for inefficiency and division, and that is also how many U.S. citizens see their own country: as an inefficient and divided country.

The U.S. should seriously consider becoming more like one of the two first examples I gave: either a unitary government or a loose federation of truly independent states that can provide for their own needs as they see fit.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Gordon Brown's Proposals

2009-03-10T12:44:00.002-04:00

Last Wednesday, the British Prime Minister Gordon Brown gave a speech to Congress, parts of which were very surprising to me. Brown expressed a need for countries to work together to solve the global crisis, and he also suggested two important new measures:

1. A “Global New Deal”, or “Economic Marshall Plan”, and

2. Making the “shadow banking system” illegal

These two suggestions are actually quite radical, but I have not come across many details of these two suggestions. I will nevertheless attempt to speculate around these ideas.

A Global New Deal is hard to imagine ever coming to fruition. What Brown means by this seems to be that countries should come together and inject vast amounts of money in markets, where needed, in order to save and re-build those markets. Brown also seems to be talking about more tangible investments in industries to spur future growth, hence the mention of the Marshall Plan.

I assume that it would involve many different countries putting large amounts of money into a big pot, and then trying to decide where the money would help the most. Alternatively, if the global new deal involves countries simply coordinating financial rescue actions, it’s a little less hard to imagine, but still unlikely.

The issue of “international bailouts” has come up recently in the EU. Eastern Europe has been attempting to free itself from the chains of communism by creating an entire “subprime economy”. They took loans in foreign currencies such as Euros, Swiss Francs and Swedish Crowns. As Easter European currencies plunged in value, the loans skyrocketed in value.

It was thought to be an understanding in the EU that Eastern Europe could act fiscally irresponsibly in order to re-join Europe as equals, and that Western Europe would help them in case they ran in to trouble. When a number of Eastern European countries, such as Hungary, Romania and Bulgaria asked for an actual bailout, Germany said no. Germany feels a lot of resentment for having given up its own financial stability in order to support stability in the Euro and EU zone, and the country has apparently had enough.

When it comes to trying to convince many different countries to act in solidaric ways during a crisis, I believe there must be a system set up in advance. Otherwise, a country will have to choose between international solidarity or feeding its own population, and the former will obviously take a back seat.

Making the shadow banking system illegal, is quite a radical proposal, especially for the economies of the UK and the U.S.. Brown did not specify what he meant by the “shadow banking system”, but it is clear that he was referring to entities such as hedge funds and investment banks that are providing capital for lending in the economy.

In a way, this is a strange proposal, considering the fact that governments around the world have actively been participating in creating the “shadow banking system”, setting up entities like Fannie Mae and Freddie Mac. Brown seems to be saying that the banking system needs to go back to basics, to the way it was before governments started subsidizing mortgage rates (back 60-70 years ago in most cases).

Whether or not you expressly make the shadow banking system illegal, it is in the process of disappearing anyway. Brown’s comments seem to stem from a newly found clarity in terms of the real role of various financial institutions in the U.K. and the U.S., a clarity that he, like U.S. politicians, did not have when he was Chancellor of the Exchequer.

What Brown is suggesting is, in my mind, sound. If entities other than banks would stop providing enormous amounts of capital for all types of speculation, societies would become less reliant on stock markets, and the housing market would experience less swings. Mortgage rates would definitely become higher. Mortgage rates of over 20% were not too uncommon a few decades ago.

With respect to mortgages, I have for a long time advocated a system of covered bonds for the banks, like the one Germany has. I also believe that the Federal Reserve needs to be made into a government-owned Central Bank with a single, inflation fighting, mandate.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Libertarianism and the Crisis

2009-03-04T19:08:00.000-05:00

As the economic crisis continues to deepen, a lot of Americans are questioning the system that allowed it to happen, for good reasons. The writing was on the wall when Barack Obama was elected President, in a move that sent a very strong signal of the desire for political change in America.

As the U.S. government has struggled to deal with the economic crisis, the American public has grown more skeptical of the ability to solve it, when it seems that bailouts, stimulus packages and housing programs have little effect on economic recovery.

If an economic recovery is unattainable, then the only alternative is economic restructuring, meaning that current systems will have to be replaced by new ones. The Obama administration’s response has recently been to move left on the political spectrum, for instance by proposing national health care (as an eventual goal) instead of privately provided health care. This is actually a type of restructuring, as it amounts to the replacement of a system.

The response from Republicans has been confused and offered little else than calls to curb spending. With respect to the economic structure that allowed the crisis to build up, Republicans were the ones to create it (along with Clinton). As a result of that, the incumbent American right has little to say in terms of criticisms of the economic structure, and that is where Libertarians come in.

Voices from the Libertarian movement have grown stronger in recent months. the reason for that is simple: Libertarians advocate economic restructuring from the perspective of people on the right that is unrelated, and in some cases goes in contrast to, the views of traditional Republicans.

To sum up so far, Libertarians and Democrats currently claim to have economic solutions, whereas Republicans, in essence, don’t.

The Libertarian movement in The United States is multifaceted and sometimes confusing. The thinking behind the philosophy is always based on individual liberty, if you leave aside some more unusual philosophical currents such as “communist libertarianism”. The libertarian movement is by far the strongest in the U.S. out of any country, and perhaps as many as over 10% of the population describe themselves as libertarians.

Libertarians don’t like to be placed on the traditional political scale, but I would argue that there is no problem doing that, and that anything else would be philosophically incoherent. The political scale is rather simple: the more government intervention one supports, the further left one is, and the less government intervention one accepts, the further right one is. The furthest right is an anarchist, and the furthest left is a communist.

The reason that libertarianism in America is surrounded by confusion is that cultural issues have a much stronger position in politics than in most other countries. In the public consciousness, things like abortion, gay marriage and drug politics have been thrown into the traditional political scale. This however, is not philosophically coherent. The traditional political scale is based on notions of government intervention, or lack thereof.

Both Libertarians and Republicans support a hands-off approach to income distribution and the economy in general, but Republicans do not support a hands-off approach to cultural issues, which Libertarians do. That fact sometimes makes Libertarians appear, in the eyes of Americans, to be further to the left than Republicans. I argue that this cannot be so.

You cannot create a working political scale based on inherently different and complex issues such as abortion and gay marriage, which is why you must break such issues out of the political equation in order to reach philosophical coherence.

Libertarians support even less government intervention than Republicans, often dramatically so, which makes them further to the right than Republicans, and indeed further to the right of any other significant political movement in the world.

As I mentioned earlier, the reason that Libertarians have come into the spotlight more recently is that they have offered different ideas as solutions to the economic crisis. These ideas are meant to deal with the problem that there is an enormous mountain of debt in America, and that the current state of the economic system is unsustainable. The ideas are not without merit, considering how deep the crisis is, but I believe them to be far too dramatic, and very misguided.

A lot of Libertarians believe that the gold standard should be re-introduced, and that the Federal Reserve should be abolished. The results of doing that are very complex, but it has to do with the money supply.

By re-introducing the gold standard and getting rid of the Federal Reserve, the government would be much more constrained in its spending, and the size of government programs would have to be dramatically reduced. In other words, such a move is completely in line with the philosophy of as little government as possible.

Citizens would, for the most part, not rely on the government for the stability of their money, they would rely on gold itself. If the gold standard were introduced today, either the value of everything in society would have to go down dramatically, or the price of gold would have to go up dramatically. Either way, it would completely change the country.

Making these suggestions a reality would almost amount to a dismantling of the government as we know it. This in addition to the further and dramatic deregulation in most areas of economic, financial and private life that Libertarians support can only be described as anarchism. “Freedom of choice” can usually be translated as “every man for himself”, but that doesn’t sound as good.

It is therefore strange that Libertarians should come into the spotlight during this crisis, which was created to a large extent by deregulation, weak government oversight and a weak government in general.

Furthermore, Alan Greenspan, whom many today recognize as one of the major culprits of the crisis, is a life-long libertarian and follower of Ayn Rand’s philosophy. And although he was working within an institution that Libertarians wish to have abolished, he was doing so in the most Libertarian way he knew how: by deregulating and supporting an unfettered market in any way he could.

Moreover, I advise that the winner-takes-all voting system should be destroyed (which, by the way, would almost certainly lead to The Libertarian Party becoming much more influential in U.S. politics. But that’s OK, because all I care about is that every vote is counted!)

Decoupling America from Wall Street

2009-03-03T02:00:00.005-05:00

Wall Street is a barometer for the health of the U.S. economy. Not because it has any credibility in predicting anything related to finances or the economy, but because Americans have allowed their fates to become inextricably shackled to that of Wall Street. All over the country, people are suffering, even starving and dying, as a direct result of the crisis and the societal structure in which Wall Street once flourished.

The commercial media is not reporting on it, but National Public Radio has been covering bread lines in Florida, fenced-in plots of land where people can live in their cars in California, and hundreds of people in the Midwest lining up to receive food packages from Save the Children. This is the reality of the crisis now.

We all know how it started by now. A long time ago, I wrote that institutions like AIG were like black holes, that the amount of debt in the U.S. exceeds the global GDP and so on and so on. Nothing can be done now to save the financial system as we know it, and that realization will come to everyone soon enough. America must start over. The country must be restructured.

The U.S. is not ready for this crisis, and this fact is intimately linked to the creation of the crisis 35 years ago, when America embarked on the road to anarchy under Nixon.

The real winners in the culture wars of the 60s were the libertarians. As cultural issues took over national politics, the traditional core of national politics: income distribution and societal economics, were swept aside, not to be seen again for a long time (at least not from the perspective of those who were not wealthy).

Somehow, the anarchistic libertarian way of organizing society became the norm for the U.S. government. “Every man for himself” and “the law of the jungle”, were not slogans in this process, but they might as well have been.

It was slowly decided that the U.S should follow its own route to prosperity, and one that entailed: no health care system, no elder- or childcare system, no real pension system, no real unemployment benefits, no labor rights, no consumer protection rights, no mass transit, no financial regulation, the world’s lowest taxes etc etc…

How could a country possibly make up for the lack of all these things that all other advanced countries have? The answer is: Wall Street. The free market was thought to be able to take care of all these things, which arguably make up the bulk of societal success and overall well-being of its people.

In other words, Americans didn’t just gamble their savings on Wall Street, they gambled everything. At this point, the country has only two choices: rely on Feed the Children or decouple from Wall Street.

Decoupling from Wall Street means purging the influence of speculation from the daily lives of everyone who does not actively seek it out. It means introducing stability and predictability for Americans who so direly need it. It means guaranteeing prosperity in the richest country in the wolrd. It means:

- providing national health care and collective bargaining for drugs, making private health insurance and expensive drugs obsolete. This would be a huge relief for both the public and corporations

- providing a good pension after a life of work through a national pension plan which is not subject to speculation

- heavily regulating the financial sector, and especially the mortgage sector, so that real estate price swings will be far less likely to occur in the future

- introducing much needed labor rights, including a much higher minimum wage and much stronger job security for everyone who is gainfully employed

- providing as close to free University education as possible, taking away the burden on families to save for college. (in most advanced countries, University is free, unbeknownst to most Americans)

The structural shift is absolutely inevitable. It is only a matter of time before the libertarian anarchy is a thing of the past.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Promises and Ideology

2009-03-02T01:34:00.001-05:00

The budget plan that was recently presented by the Obama administration is definitely more in line with Obama’s campaign promises as compared to the actions of the administration since the inauguration. Decoding Obama’s actions since he became president is a very puzzling exercise.

There are three major things that Obama has done since he became president, namely:

1. Appointing administration officials who don’t even remotely agree with his political ideals, and even oppose them vigorously in some cases

2. Stomping on his own ideals in dealing with the economic crisis, alienating progressives who helped him get elected, and

3. Presenting a budget proposal that represents a 180-degree turn from numbers 1 and 2 in this description. The budget proposal is completely in line with what Obama campaigned, and won, the election on

How do you explain this seemingly strange and incoherent behavior? There are two important factors at play: economic crisis management and bipartisanship.

Obama does not know very much about economics and finance, which is a bit of a problem during times like these. I believe that Obama has been manipulated by Geithner and his henchmen (who all stem from Wall Street), into believing that propping up Wall Street with taxpayer money is the only thing that can be done to solve to crisis.

With respect to Obama’s bipartisan efforts, it seems that he has some sort of historic hang-up with Lincoln’s “team of rivals”, which makes him want to go down the bipartisan path. However, I think that this is the most incongruous and strange political strife in recent history.

Even though Americans hate to talk about ideology, there is no escaping the existence of it. In reality, the issue of ideology is very simple: it begins and ends with income distribution. The distribution of money in society is the very reason that ideologies came about in the first place.

Americans like to think about ideology in terms of specific issues, such as abortion, budget deficits, the military or gay marriage. However, in the big scheme of things, these issues will always be mere distractions compared to income distribution. That is, unless politicians are able to convince voter that these “issues” are more important than income distribution, which American politicians have been able to do for 30 years.

A budget proposal like the one that Obama just presented is exactly what Republican politicians have been trying to avoid for 30 years. How can anyone with any amount of political clarity of vision think that Republicans would go along with Obama after that? Republicans know that if Americans get a taste of, among other things, free health insurance, they will never want to go back.

Obama’s budget is definitely not bipartisan, and it is highly ideological. The only thing that this means, is that the American political landscape has finally broken free of the fear mongering surrounding issues like abortion, and is now actually focusing on issues that concern everyone.

Obama promised to deliver change, and this budget proposal is it.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Upholding the Illusion

2009-02-24T15:06:00.001-05:00

Upholding the illusion that America’s financial system is simply going through a crisis which can be resolved is becoming increasingly more difficult for the U.S. government. After an enormous bailout package, a stimulus package worth about 6% of GDP and guarantees of bad assets worth much more than that, the government has nothing to show in terms of recovery.

It is also an illusion that many U.S. financial institutions are not already nationalized. AIG has received $150 Billion from taxpayers. The company has far more in losses, and it will report what is expected to be the biggest losses in U.S. financial history on Wednesday.

AIG has now asked for more taxpayer money, although the government already owns 80% of the company.

Citigroup has received $45 Billion from taxpayers, and is now asking for much more. Citigroup is only worth about a fourth of that, around $10 Billion, so why the hell are there any shareholders left other than the U.S. government?

The U.S. government’s ideological opposition to nationalization has wound up costing American taxpayers 4 or 5 times more than what a nationalization would have cost.

Citigroup’s shares are as I just mentioned worth $10 Billion, yet taxpayers have paid the company $45 Billion just so that the shareholders won’t lose their investments (of which there is only 10% left since Citigroup’s stock lost 90% of its value), and so that the executives won’t have to be fired.

It would have been a lot cheaper to simply buy all the stock. Cheaper yet would have been the only morally sound thing to do: wipe out shareholders and nationalize the bank.

Furthermore, banks are failing across the United States every week now, and the FDIC (which nationalizes such banks every week so that they can be liquidated and/or sold off) has had to hire more staff, and is currently bringing people back from retirement.

The U.S. government also has a secret list of which banks are in serious trouble, and are in imminent danger of failing. Many have called for this list to be made public, but the government refuses.

In addition to all this, the U.S. government is engaging in the sort of “creative accounting’ that played a large role in creating this crisis. It is trying to sweep all the losses of big institutions under the rug by “not estimating assets too conservatively” as Geithner has stated.

What that means is that when the government has given taxpayer money to big banks and other institutions, it has valued their assets much higher than the market (which values them at zero), creating the illusion that these institutions are much better off than they really are.

Also, the government has helped institutions like AIG to set up “special purpose entities” where the company can hide bad assets away from the balance sheet, again creating the illusion that things are much better than they really are. This is what Enron did, and a lot of people went to jail after that…

All these efforts are obviously counterproductive and ultimately detrimental. The government is lying about many things relating to the financial crisis, but most people don’t realize it. Why is the government doing this? Well, I think it feels that it MUST uphold the illusion that the system can indeed go on as it has before. If it cannot, what is the alternative?

They know what the alternative is: a European-style regulated society where citizens are guaranteed a standard of living rather than being left to hope for that standard amidst cycles of boom and bust. In a country where all politicians are either right or right-wing, this is a terrifying prospect.

I recently realized that the upholding of illusions is exactly what Keynes based his theories of spending and crisis management on, and that’s why it makes perfect sense for Keynes’ theories to be back in the spotlight.

It is widely believed that Keynes developed his theories in response to the Versailles Treaty after World War I, and the treatment of Germany in economic terms.

The Versailles Treaty made it so that Germans’ standard of living went lower and lower each year after it was enacted. This, according to Keynes, destroyed confidence among Germans, and the economic crisis started feeding off itself (which is something that was echoed by Ben Bernanke in a speech before Congress today).

So, after the war, Germans were obviously bankrupt. Even so, thought Keynes, they should keep spending, and if they could not, the government should enable them to do so. Even if you don’t have money to spend, you must uphold the illusion that you do, by borrowing money to spend, otherwise the economic crisis will get worse. That is in essence what Keynes thought.

Expressed in that way, Keynesian economics sounds like a really bad case of “keeping up appearances”, don’t you think? Upholding the illusion is what it is all about.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Better Stimulus Package - Research and Education

2009-02-20T14:54:00.002-05:00

Obama’s recent stimulus package will help to plug a lot of holes in state budgets across the country. It will also marginally improve the infrastructure situation. However, 40% of the package is made up of tax cuts, and for that and other reasons, I believe that it will be very unsuccessful in actually helping the economy recover.

I believe that the road to economic recovery for the United States is not one of tax cuts or stimulus packages, but one which made this country great in the first place: massive spending on scientific research and education.

I do not believe in trickle-down economics, like the Reagan/Bush/Clinton policies, because that theory is based on a belief that excess money, spent by wealthy individuals, floating around in society, will somehow create wealth for all citizens.

I also do not believe in Keynesian economics, like the stimulus package, because that theory is based on a belief that excess money, spent by the government, floating around in society, will somehow create wealth for all citizens.

You can probably tell where I’m going with this: the basic flaw of both trickle-down and Keynesian economics is that the money that the government spends and/or controls in other ways has no direction or purpose.

I’m not saying that the government should tell people what to spend money on, or that there isn’t a large role for the so-called “invisible hand” for people in society. I’m saying that when the government spends money, it must do so with a specific purpose, and do it well.

There are two important issues to consider when delving deeper into this: economic growth and job creation. These are favorite expressions of politicians, but most politicians have only a vague idea of what they actually mean.

Economic growth occurs when something is added to society. If someone gets up off the couch and starts growing potatoes, he or she has contributed to economic growth. Economic growth does not occur if the government gives someone a tax cut or chooses to spend tax money on road maintenance.

Job creation occurs when someone hires an unemployed person and pays that person’s salary with the revenue from increased production. When the PC was invented and Silicon Valley hired thousands of people, that was a perfect example of actual job creation.

Job creation does not occur when the government hires someone to work on road maintenance or when a company hires someone and pays the salary out of money left over from a recent tax cut. (the government could create jobs by actually starting their own business enterprises, but that is rather unusual).

Hence, both trickle-down and Keynesian economic policies are ineffective for economic growth and job creation, especially in times of crisis. In order to actually spur job creation and economic growth, you need something specific, something new, and American history provides excellent examples.

After World War II, The United States started spending massive amounts of money on higher education and scientific research. Young people were able to go to college for free, and scientific researchers were making strides like never before. This enabled the U.S. to go to the moon, invent vaccines and computers, and become the most industrially and economically powerful country in the history of the world.

In sector after sector, The United States became the world leader with the help of education and research, and this laid the foundation for the immense prosperity that the country still enjoys today. Unfortunately, since Nixon, all that prosperity which was originally created by everyone in society, has been funneled only to the top.

It would be very difficult to make the case that these industrial advances came about as a result of trickle-down, low tax economics. Nor could it be argued that Keynesian economics was behind it, because it was not used.

It is crystal clear that America’s prosperity mainly came about as a result of massive government spending on research and education, and it is to this that we must return.

In order to actually create jobs, and to achieve actual economic growth, the U.S. government should:

- make college education much cheaper, and free for as many people as possible

- fund research into as many areas as possible and help industries with the practical application of research results

- create national standards in the most important school subjects, such as the natural sciences and English

- end the system where local schools depend on local real estate taxes, and centralize funding for schools

These are only a few ideas for a new stimulus package with a real potential to help the American economy, and there are myriads of other things that could be done quite easily. A stimulus package full of tax cuts will do nothing to help the American economy recover, but research and education will.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Government Incompetence and the Creation of the Crisis

2009-02-18T18:22:00.002-05:00

The vast majority of severe economic crises start with an unexpected bursting of a speculative bubble. These speculative bubbles are usually very complex, and are made more potent by complex financial instruments that only the people who created them can understand. This is also the idea behind these complex instruments; it will make them seem worth more than they are because people don’t realize what they are made up of.

During crises in the past, governments have always been unable, or in the case of the U.S., unwilling, to keep up with the ever increasing complexity of the financial instruments. In the end, that leads to a situation where nobody knows what anything is worth, so prices can only go down.

In the panic of 1873, which led to the “Long Depression”, speculation in complex bonds relating to railroad construction was a large contributing factor. Before the “Great Depression”, traders were mailing complex trades across state borders in order to evade any financial regulation (which only existed as local law at the time).

In the crises in Sweden and Japan in the 90s, complex financial products related to real estate speculation were almost fully responsible for the crisis, as they are in the crisis in The United States today.

As I mentioned above, governments are usually unable to keep up with financial markets when complex financial products are being created. This is mainly a result of the lack of competence within the government, and a lack of understanding of the financial markets on behalf of its staff. George W. Bush was famous for having repeatedly mixed up inflation and deflation. More importantly, however, the SEC has been largely absent in recent years.

Many traders that I have talked to here in New York, as well as traders in the media, say that they have never once been contacted by the SEC in any capacity over the last decade. This is especially true for the most complex trading, including trading with mortgage-backed securities and CDOs “squared” (don’t ask). Similarly, the ratings agencies were left alone to prosper as they saw fit.

The long-term commitment to self-regulation has obviously contributed a lot to the current situation. And U.S. politicians have failed the country in more ways than one in the creation of this crisis. Self-regulation becomes a vicious cycle in the following way: when the government does not engage in regulating, it loses the capacity and competence to do so.

Hence, after two decades of self-regulation, the U.S. government has no idea what’s going on in the financial markets because they haven’t touched them, studied them or regulated them. The SEC has under 4,000 employees, which I’m guessing is less than the amount of shoe shiners in New York City. Needless to say, this lack of competence is very problematic in trying to deal with this crisis.

An unfortunate “solution” to the problem of not being able to deal with a complex financial crisis has been to bring in the people who created the crisis in order to solve it. Of course, these people have their own agendas, and are easily able to enrich themselves as taxpayers pay money to resolve the crisis. This is the “solution” currently being pursued by Obama and Geithner, which has already turned out to be very detrimental, as taxpayer money has been thrown into a black hole, only to enrich individuals on Wall Street.

The much talked about Swedish solution to the crisis also dealt with this problem. In Sweden, executives were fired, and representatives from the financial industry were not made a part of the team that would clean up the mess, or at least they were included to the smallest extent possible. The Swedish government had to create competence within its agencies in order to deal with the problem and get the best deal for taxpayers. It did so mainly with the help of academia.

The belief that the government can never be competent enough to engage in issues such as these is misguided. When it comes to the IRS, the U.S. government is very competent. The IRS has vast, in-depth knowledge of anything that pertains to taxes, domestically and abroad, and in immensely complex arrangements. I’m not saying that the IRS is perfect, but that the SEC MUST become more like it. The IRS has over 86,000 employees, which is more than 20 times as many as the SEC.

The SEC is, at present, completely incompetent. The people that are advising Obama and Geithner are nothing but self-serving Wall Street insiders, as the people who advised Bush and Paulson also were. The Obama administration and the Treasury need to turn to international and domestic academia (except for those who used to work on Wall Street) and to Sweden, Japan, The IMF and The World Bank for help in resolving this crisis. By gradually building competence, the U.S. can hope to avoid some of these problems in the future.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Taxpayer Bonuses to Failed Bankers... Is Obama Serious??

2009-02-16T16:00:00.001-05:00

Chris Dodd is s sneaky fellow. Towards the end of the stimulus package negotiations, he snuck a provision in, severely limiting bonuses for executives receiving taxpayer money through the TARP or in other ways.

Tim Geithner has filled his cabinet with ex-Wall Streeters, so he and the Treasury have been fighting, tooth and nail, against limits on executive pay, just like Paulson did. Dodd’s provision was meant to counter the Treasury.

Now Obama has sided with the Treasury, and is trying to come up with ways for taxpayer money to be paid to these executives.

On Fox News on Sunday, senior Obama adviser David Axelrod said that the administration will: “seek changes in the government's approach to executive compensation”. That can only mean one thing: Obama will refuse to implement to provisions that he will sign into law on Tuesday.

Obama is prepared to break the law in order to give failed bankers million dollar bonuses paid by taxpayers! As someone who supported Obama fully, I am now left speechless, only able to say: are you serious Obama!!??

If a corporation feels like its executives deserve multi-million dollar bonuses and is willing to pay that, I have no problem with that. And if that corporation keeps paying the bonuses even in the face of multi-billion dollar losses, that is also fine with me. It’s just stupid, and I don’t understand why the shareholders accept that.

However, when the corporation receives taxpayer money, it is very much my problem how that money is being spent.

This is a really, really serious crisis. In Florida, there are actual bread lines. In Nevada and California, local governments have designated and fenced in land for people who live in their cars, reminiscent of the “Hoovervilles” of the Great Depression. Food banks are out of food in the Northeast, and the beggars in New York City are no longer mostly made up of addicts.

The President of The United States is currently weighing these problems against the need for multi-million dollar bonuses to failed bank executives. You have to ask yourself if he has lost his mind.

The heat is turning up in the battle for taxpayer money and the continued roll of Wall Street in the American economy. On outlets for Wall Street employees like CNBC and Fox News, the rhetoric is really changing dramatically.

The financial sector seems united in a battle against taxpayers, eerily reminiscent of crises in countries with financial oligarchies and mafia control like South Korea and Russia. The gloves have come off, and the financial oligarchs seem to be winning. People on these networks, such as Larry Kudlow and Charlie Gasparino, are absolutely mocking efforts to use taxpayer money to help taxpayers, as opposed to giving it to individuals on Wall Street.

For decades, The United States has been dictating what countries receiving aid from the IMF should do during bank crises. The advice has always been the same when corrupt countries have been receiving aid: fire bank executives, nationalize banks, and under no circumstances give the banks money with no strings attached.

Now, The United States is going down the very road it has warned against so many times, and the results have already proven to be disastrous. Bankers and other Wall Street executives are demanding taxpayer money while hiding even the slightest hint of the extent of their losses. They have insiders from Goldman Sachs, Citigroup and many other firms in the Treasury, and they are even using TARP money to lobby for these things.

I don’t know what Obama is thinking at this time. What he’s actually doing, though, is taking food from the mouths of starving Americans and putting the money in the pockets of bank executives who have brought down the American financial system.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Road to Sweden, or the Road to Japan

2009-02-13T12:55:00.003-05:00

As I have mention before, this crisis is NOT unprecedented, which the U.S. government keeps claiming. The reason that they’re claiming this is partly that they don’t understand it, and partly that they won’t admit how much trouble the banks are in. I can understand the latter to some extent; admitting this would probably create a panic.

The two crises in Sweden and Japan in the 90s had the following attributes:

1. The banks became insolvent because of bad assets

2. The bad assets were hidden off their balance sheets, meaning that they could not be seen by the public or the government

3. The bad assets were made up of complicated financial products related to real estate speculation

Sound familiar? We have here three almost identical crises, and two different approaches in dealing with them: the Japanese way or the Swedish way.

The Japanese way resulted in “Japan’s lost decade”, with huge job losses, capital destruction and an immense waste of taxpayer money. A sustained weakening of the Japanese economy occurred, which harmed Japanese competitiveness greatly.

The Swedish way certainly created short term pain for the country, but the net result of the crisis was an actual profit for the taxpayers, a sustained budget surplus and an eventual lowering of the national debt. In short, the country came out of the crisis stronger than before.

Another thing that, by now, may sound very familiar to Americans, is how the Japanese dealt with their crisis. They did the following: gave the banks hoards of money with no strings attached, bought bad assets, attempted to have a public/private partnership in buying up bad assets (which Geithner just recently suggested), passed multiple stimulus packages and lowered interest rates to zero.

Japan did all this, and everyone now agrees that none of it worked, otherwise they would not have had a “lost decade”…. The country’s crisis was not resolved until they did what Sweden instead did. The Swedish government did the following:

- Ruthlessly combed through the books of the banks to weed out which banks could be saved, and which could not be

- Nationalized the ones that were deemed to be able to survive, and let the weak ones fail

- Wiped out all shareholder value and fired bank management

- The government had to actually learn all there is to know about the assets, so that they could be sold at the highest price. They did not simply let stock market “experts” dole out money to their buddies.

Prior to the rescue, the Swedish Parliament had passed a law giving it the right to do all these things if a bank’s equity in relation to its debts fell below 2%. Many U.S. banks are far below that threshold now.

So, the U.S. government has two very clear alternatives: one that has been proven to work, and one that has been proven to be disastrous. It doesn’t get much clearer than that.

The U.S. government is currently furiously pursuing the disastrous course.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Geithner Proposal - On Second Thought

2009-02-12T02:03:00.002-05:00

Initially, I thought the Geithner plan seemed pretty stupid and unfinished. I still believe it is both of those things, in its essence, but I have come to realize that it actually has some merit, albeit through unintended consequences. Bear with me and I will explain.

First of all, the Geithner plan is a direct descendant of the Paulson plan, which makes it fundamentally misguided and immoral in nature. Also, the most counterintuitive of arguments is its main premise: that private investors will want to buy toxic assets that are worthless because the same investors turned their backs on them.

Now, the important thing to remember is that there are different kinds of so-called toxic assets. I’m not sure who came up with the term, but it seems to mean that nobody wants to buy the assets, that they have somehow become “contaminated”.

In most cases, they are contaminated for a reason, such as that they are made up of mortgages for houses that have actually been torn down or have lost more than half of their values. In other cases, however, the assets are sort of guilty by association.

In the eyes of a capitalist economy, whether or not an asset is actually destroyed or just guilty by association does not matter; an asset is only worth what someone is willing to pay for it.

If Geithner’s plan can help to separate out the two kinds of assets and entice investors to buy the ones that are not as bad, then the plan will have achieved something. An asset like this would have to be something rather special though. It would have to be:

- unrelated to the housing market

- unrelated to the continued existence of firms that are very near bankruptcy, which includes many banks

Also, the buyer would have to have a long-term strategy, because there is simply no way that the stock market will achieve any stability, probably for years to come. I have no idea how many assets that fit all these criteria there are at this time, and I don’t think anyone has.

Circling back to what I said in the beginning about unintended consequences, what I have just described is not what the plan meant to do. Geithner wanted investors to buy the assets that in fact have been destroyed, and that will happen when hell freezes over.

Another important point that I’d like to mention, and one that I will come back to soon, is the reason for this confused and unfinished plan. What most people don’t realize is that politicians have no idea what’s going on. They don’t know what these assets are, how they came to be, or how to solve the problem of them being worthless.

I happen to work in a large office building in midtown Manhattan, and ever since Bear Sterns failed, I have seen officials from the government running around in my office building and other buildings, talking to experts in financial trades, banking regulation and more, trying to understand what is going on.

Long story short: it’s not something you learn over a few doughnuts.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

There ARE Solutions to the Banking Crisis

2009-02-10T16:44:00.001-05:00

Treasury Secretary Geithner presented his new financial rescue plan on Tuesday, which impressed no one. The plan was confused, unfinished and intellectually contrafactual. In this posting, I will expand on my solution to the banking crisis, which involves a system of what are called “covered bonds” along with the creation of new banks.

After the plan was introduced and poorly received, Geithner defended himself by saying that there was “no historical precedent” to this crisis. Nothing could be further from the truth. Simply giving the banks taxpayer money to spend as they please, a.k.a. the “Bush/Paulson/Geithner solution” is what lacks a historical precedent, simply because it’s so infinitely stupid.

Geithner, along with what seems to be the entire American political and economic establishment seems to be completely in the dark in terms of economic research and economic history. I’m saying that there are many precedents to this crisis, and that there are many precedents on how to solve it.

There are 2 main, related problems that must be solved as soon as possible:

1. the banks are insolvent, and

2. the mortgage securitization market is dead

The banks are insolvent because they own worthless assets that nobody wants to buy. Geithner’s plan involves trying to convince private investors to buy these worthless assets, but the reason they’re worthless is that these same investors didn’t want to have anything to do with them in the first place.

The assets are like rotten apples in a fruit stand, and however much such apples are promoted, I think it’s pretty safe to say that few people will ever by them.

The mortgage securitization market is the market where banks sell off mortgages to private investors in the form of mortgage-backed securities, which is the same thing as the assets I mentioned above.

Nobody wants to participate in the mortgage securitization market anymore because housing prices have imploded, so the market is dead with little chance of being revived any time soon. In other words, if housing prices don’t go up, the mortgage securitization market will continue to be dead.

Now to my suggestions of solutions to these problems. In a catastrophic banking crisis, the solution has in the past been either nationalization or the creation of new banks.

Nationalization is the more common solution, but if a bank’s debts are five times its market value, what is the point of rescuing it by nationalizing it? Spending five dollars to make one dollar doesn’t make a lot of sense… In light of the banks’ situation, nationalization would be the least severe destiny awaiting them. It would, however, be extremely expensive for the taxpayer.

Because the U.S. Government is ideologically opposed to nationalization, my bet would be that Bank of America and Citigroup (along with many smaller banks) will have the same fate as Lehman Brothers.

Instead, I believe that the creation of new banks is the appropriate solution. This was done in the 1800s in the United States during a catastrophic banking crisis. Under this plan, the government would simply set up a new bank, inject it with money for lending and write strict rules on how it can operate. That would instantly create a stable, prudent and dependable bank.

The government would then sell off 49% of the shares to private investors and keep running the bank according to prudent standards until the crisis is over. At that point, the bank can be sold off completely.

Instituting a system of covered bonds would be a good solution for the mortgage market. This is a very stable system that has been used for hundreds of years in Europe. Basically, all the banks would get together and put all their mortgages in a giant pool.

As soon as one mortgage defaults, it is immediately taken out of the pool, and the loss is shared by all the banks at once. All the mortgages, meaning the investments that the banks have made, are hence “covered” by all the participants in the system.

Under this system, the mortgages remain on the banks’ balance sheets. It is a collaborative effort, as well as being a system where each bank has to take responsibility for its own lending practices. This system encourages prudent lending standards by all participants, stabilizes the housing market in general, and improves the trust in the financial system.

We need to think in new ways about the crisis, which Geithner acknowledged in his speech, but he is so ignorant that he does not know of any solutions like the ones I just described.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

What to do with the Banks?

2009-02-09T15:27:00.006-05:00

Allow me to explain, in plain language, what the whole discussion about the troubled banks is about. A lot of the banks, most notably Bank of America and Citigroup, are already insolvent. The only reason that they haven’t had to file for bankruptcy is that they’re claiming that their assets are worth much more than they actually are.

The banks are saying: our assets are worth a lot, but nobody is willing to pay anything for them now, but the value of them will go up in the future, so give us money now.

The very foundation of a capitalist economy is that any asset, whether it’s a house, a painting or a complex financial product is only worth what someone is willing to pay for it. In a communist economy, the government decides what assets are worth, but that is not, as we all know, how things are done in the U.S..

The assets that the banks are claiming to be worth so much money are actually completely worthless, because nobody is willing to pay anything for them. They’re like houses in a ghost town.

According to financial regulation you have to “mark assets to market”, which means that you have to value them according to what people are willing to pay for them, which is in line with the capitalist economy. However, the banks are hiding all these assets away from sight of regulators, investors and the public, so that they can get away with not doing this.

They do this by putting worthless assets in what they call “special purpose entities”, which do not appear on the balance sheet. It’s as if someone were to have a secret credit card with a huge balance that they have hidden away from their spouse, while telling that spouse that they have no debts.

Currently, the U.S. government is trying to figure out how they can relieve the banks of these assets (of which the government actually has no idea how much there are, or of what they are made up). Tim Geithner will present a plan tomorrow at 11 a.m., and the most important factor in this plan is that the government will try to buy these worthless assets from the banks.

What they have to do, in actual fact, is to decide a price of the assets, just like communist governments used to do. It is strange for the government to engage in communist economic policies in order to save capitalism. The taxpayers will pay for the assets, but whatever price is above zero is too high, so the American taxpayer is without question being ripped off big time… again.

The money which is available for use in this plan is $350 Billion. That is nowhere close to being enough for the banks so that they can avoid bankruptcy. The only thing this does is to buy time. It buys time for these worthless assets to go up in value again, and that is the only way that the banks can remain in their current forms.

Will the assets recover the value that they used to have? Absolutely not. Using the analogy of the house in the ghost town again, the ghost town would have to turn into a boom town in just a few months. I’m not aware that something like that has ever happened.

To simplify things quite a bit, you could say that one of these bank assets is made up of 1,000 houses in a low-income area of Cleveland (where the sub prime crisis is extremely severe).

By now, all of them will have lost at least 50% of their value, 200 of them will have been torn down, and 500 of them are empty (and the empty ones have lost 80% of their value due to looting and other things).

If each house were worth $20,000 in the beginning, the bank asset would have been worth $20 million. After the value destruction that I outlined above, the face value of the asset would be only $5 million. In addition to that, such an asset is priced based on the future expectations of it, which I need hardly mention are not good. Hence, nobody wants to buy it, and it is in fact worthless.

This decrease in value from $20 million to $5 million in a short time is the essence of the banks’ problems. In many cases, the situation is far worse than what I have described above, but I’ll try to keep it simple for now.

Hence, this bailout, like the other ones, is totally misguided and has no prospects of working. Why are they doing this anyway? Because the prospect of nationalization is too ideologically offensive to American politicians. Nationalization would lead to all the shareholders losing their money, and the bank executives would be fired.

Several banks will have to be nationalized sooner rather than later anyway, regardless of further bailout attempts. As I said, the reason for this is simple: the value of the bank assets will not go back up. I don’t favor nationalization because I think that would be too wasteful and expensive, but instead, I favor the creation of new banks, as I wrote in January.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Proportional Representation - The Iraq Example

2009-02-06T16:01:00.004-05:00

George W. Bush claims to have created a new democracy in the Middle East: Iraq. One of the most interesting things about this is how it was done, and how the government and the voting system was set up. Surely, if a democratic “liberator” country topples a regime in the name of democracy, it would want to create a new democracy in the country as a mirror image of itself. In the case of Iraq, however, this was not done.

Proportional Representation has become the system of choice for virtually all developed countries in the world, except in the Anglo-Saxon countries. When the United States toppled the Iraqi regime and installed a new political system, the American model of government was not chosen. Instead, Proportional Representation was chosen.

All that Proportional Representation is, is a system that counts every vote and awards seats in Congress based on how many votes a certain party gets. Can it get any simpler than that? If you get 40% of the vote, you get 40% of the seats. End of story. In The United States today, however, if you get 40% of the vote, you may get 0% of the seats. The American voting system inevitably leads to the following outcomes:

1. Only two parties can ever take part in the political process, even if those two parties are not even close to enjoying support from a majority of the population.

2. Politics is not driven by issues, such as whether or not to provide national healthcare. Instead, the personality of politicians and the amount of money a politician has are without question the two most important factors.

3. Co-operation between the parties (a.k.a. bipartisanship) occurs, so that neither of the parties can ever be challenged by a new party. This can also be described as a political cartel. For a new party to come onto the political stage, one of the old ones would have to disappear.

If the United States government had suggested the American voting system for Iraq (also known as the winner-takes-all voting system), there would have been a nationwide outrage and eventually, very likely, a civil war. The reason for this is that, inevitably, only two parties would have made it into the Iraqi parliament, one of which would have ruled everything.

Clearly, there would have been one Shia Nationalist Party and one Sunni Nationalist Party. The Shia Nationalist Party would have won the majority and ruled completely. The Kurds would not have been represented at all, nor would any other minority, like the Christians.

In a deeply divided and diverse country like Iraq, it would have been disastrous to have only one ethnic group rule the whole country, which is what would have happened under the winner-takes-all voting system. The other groups would most likely have been repressed to a point where rebellions started occurring. The Kurds would have rebelled against the usage of oil money, the Sunni would have rebelled against religious intolerance, and so on.

By giving the Iraqi people Proportional Representation, The United States ensured that every Iraqi was given a voice, regardless of ethnicity, region or income. This made the likelihood of civil war infinitely smaller, and gave the new country a chance to work its problems out. It remains to be seen whether that is possible, however, but a fair voting system is obviously of the utmost importance.

The United States is also a deeply divided country because of geography, ethnicity and old divisions going back to the civil war. There is an incredibly strong anti-government sentiment in this country that is unmatched in the rest of the world, leading to a situation that many foreigners would describe as semi-anarchistic. The American people do not want to work together, and they do not share the same goals.

I believe that the reason for this is that the American people cannot be represented proportionally because of the winner-takes-all voting system, as Iraqis can. As a result of this, doing nothing seems like a better option than having one group rule over all the others. In the United States, an unfair voting system has gradually led to a governmental paralysis.

For all those groups of voters whose interests are not shared by the political elite, there is no way to gain a political voice, because their party would have to be big enough to eradicate either The Republicans or The Democrats from the political scene, which is obviously easier said than done.

The only rational thing these people can do is to be critical of government action in general, which is what they have done for over 200 years now…

The main reason that I write this blog is that I consider the American (as well as the Canadian and British) system of government to be undemocratic. Even George W. Bush knows that the American voting system is undemocratic, otherwise he would have seen to it that Iraq was given this system too.

The biggest problem, however, is that the American people are not aware of what consequences the current voting system has, or that there is something called Proportional Representation, and that is why I’m writing all this.

Share your thoughts in the comment section

The Shimon Peres Proposal

2009-02-04T11:46:00.000-05:00

The New York Times reported yesterday that the President of Israel, Shimon Peres, had come up with a suggestion for dealing with fraud and other abuses on Wall Street. During a Sabbath dinner last week, Peres reportedly proposed that, instead of giving huge bonuses to executives of failed banks and Wall Street firms, large bonuses should be given to federal employees who sniff out the next Bernie Madoff or expose the next financial derivatives scheme à la Lehman Brothers.

The proposal is a very good one, and it goes deeper than what it seems like on the surface. It is not the most sophisticated of political tools, but it is one that most people can understand and embrace. It may not be fair to other federal employees, but desperate times call for desperate measures.

The core of the problem is bad governance. For decades, people who have worked as federal regulators have only done so long enough to make their next career move: to work on Wall Street with ten times the salary. This makes regulators unmotivated and decreases the skill of the regulatory institutions in general because of poor staff retention numbers.

Also, financial regulation is simply a game of cat and mouse, where regulators try to keep up with Wall Street’s innovations, but always lose. The reason: Wall Street employs ex-regulators who know how to structure everything relating to financial transactions so that they will be kept under the radar.

The situation for federal regulators is very similar to that of Mexican policemen who can’t feed their families on their salaries and turn to the drug trade to make much needed money. I don’t think the families of regulators are starving, but when prosperity is put into a relative context, as it always is, they might as well be. The incentive to move to Wall Street is simply far too great.

People who work for the United States government are actually not that poorly paid from a comparative perspective. They get a fair salary and pension, a good amount of vacation time, good work hours and are allowed time with their families. In most respects, working for the U.S. government closely resembles working in a middle-class job in the EU, where all jobs, whether private or government paid, come with such benefits.

So, theoretically, I disagree with the fact that financial regulators should be paid much more than other federal employees. However, this is a crisis if gigantic proportions, and because Wall Street is the biggest part of people’s financial well-being, problems with fraud and schemes can rock the foundations of society.

I hereby suggest a few more details to the Shimon Peres proposal:

- give regulators who expose fraud and schemes a share of the fines in the eventual court settlement

- increase incentives for the already enacted whistle-blower compensation with respect to Wall Street firms

- consolidate all financial regulatory agencies into one huge agency

- consolidate all financial regulation into clear, simple, federal legislation (this is definitely easier said than done)

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Turning Prime Into Subprime - For Taxpayers

2009-02-03T10:46:00.000-05:00

A disturbing new trend is slowly emerging as banks are responding to the crisis and the political climate. Banks and Wall Street firms have obviously made billions from the bailouts because of taxpayer donations, but it has taken them a while to figure out how to benefit from the crisis and rip off taxpayers with a new business model. Now they seem to have figured that out.

Politicians have been angry with the banks for not lending more money to the public. Since the banks got the bailout money, they have been sitting on it and only been spending money on “essentials” such as bonuses and dividends.

What is happening now is that they actually are starting to lend. They are giving 30-year fixed rate mortgages with very low interest rates. This is also the centerpiece in a new recovery plan put forth by the Republicans. Making these loans seems like something a very healthy bank would do, so in light of the fact that most of the major banks are effectively insolvent, how are they doing that?

Recently, it has come out that Wells Fargo is giving 30-year fixed rate home mortgages in Portland, Oregon, with an interest rate of only 3.875%. Considering that interest rates everywhere else are much higher, these loans are completely unrealistic from a business perspective. In addition, Oregon’s real estate market is not exactly booming, so the loans are quite likely to go into default.

Today, Citigroup announced that it was going to use $36.5 billion in bailout money to provide home loans for the public. $10 billion of that will be backed by the government entity Fannie Mae. Citigroup has not announced interest rates or other details as far as I’m aware, but the important thing to remember is the combination of using bailout money and government-backed entities to guarantee the loans.

I believe that Wells Fargo and Citigroup are doing the same thing: making loans that are likely to go into default using taxpayer money while taxpayers guarantee the loans if the default.

This is very similar to how the subprime loans were created. When making those loans, the banks didn’t care at all whether the loans would go into default; they just took the fees for making them, and then sold off the loans.

This is the same thing, and from a taxpayer perspective. This amounts to a triple or quadruple whammy.

First, taxpayers pay for the unbelievable mistakes the banks made, then they pay CEO bonuses, then they pay to start up the subprime scourge again, and finally get sent the bill from Fannie Mae and Freddie Mac. When will we stop digging a deeper hole for ourselves???

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Response to Crisis - Kleptocracy

2009-02-02T12:01:00.004-05:00

Obama has certainly done many good things since he took office. However, as I feared last year, his appointments in the economic field are proving disastrous. Timothy Geithner and Larry Summers were two terrible choices that represent a direct continuation of the utterly failed policies of Greenspan and Paulson.

A kleptocracy is a political system run by thieves. The only beneficiaries in the system are the thieves themselves, and the public is left robbed. At this point in American history, Wall Street appears to have taken over democracy completely, and is somehow able to dictate the terms no matter who is in the White House or in Congress.

A kleptocracy usually includes large elements of bribes, corruption and extortion, without which the government cannot function. Around the world it is often said that The United States has the “best politicians money can buy”. Indeed, that is how it is, and Wall Street has bought these politicians over many years now. Politicians cannot run their campaigns without these donations, so the relationship is unavoidably symbiotic.

Kleptocratic regimes are usually associated with countries such as Uganda and Congo, so why is the U.S. a kleptocracy? Because Wall Street controls the agenda and gets all the benefits.

We are now approaching the third or fourth bailout attempt with the exact same theme: outright taxpayer donations to failed Wall Street firms and banks and their stockholders.

Everybody can see that it’s not working, so why is the Obama administration suggesting another one of these bailouts: the bad bank solution!!?? The bad bank solution entails simply giving banks taxpayer money to cover their losses, with no strings attached. And believe me, that money will never be seen again. It’s going to go into a black hole of losses, built up by fictitious profits, but now exposed and imploded.

To engage in something so morally offensive and intellectually misguided as the bad bank solution only has one explanation: the system is totally corrupt. Why else would the government embark on a bailout that everyone knows won’t work?

I blame Timothy Geithner and Larry Summers for continuing the kleptocratic system. Their only concern seems to be the continuation of the supreme rule of Wall Street in American democracy. Geithner specifically said today that the current financial system must be preserved.

If they are going to rob the taxpayers, it would actually be better if they robbed the money and spent it on luxury goods. That would at least provide some jobs for people, or prevent luxury goods companies from having to lay people off. Maybe a “Thain renovation” would be appropriate?

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Is the Stock Market Working?

2009-01-30T14:09:00.001-05:00

The heading of this post may seem like a strange question, but I think at times like these we need to ask ourselves more fundamental questions. The American people are deeply invested in the stock market in a myriad of ways, and now that stocks have lost almost half of their value, I think it’s time to re-evaluate the very model of our economy, and in particular, the role of the stock market. A majority of Americans are to a great extent dependent on the stock market doing well for their fundamental well-being. What I’m asking is: should that really be so?

The stock market is supposed to fill an essential function in an advanced society: to provide money for ventures that otherwise would have been far too expensive to embark on. The invention of the stock corporation was an ingenious one, in that it allowed many people, not just kings and despots, to invest in large and expensive projects such as factories, mines, and much more. This adds a whole new layer to society and enables immense progress, innovation and price reductions.

To determine whether or not the stock market is “working” from the perspective of society at large, one must try to determine the reason why investors buy stocks of different companies. If investors truly believe that a company has a good plan and structure for growth and profit, and invest in that company as a result, then that is a good example of how the stock market can help society progress and prosper. If, however, an investor invests in a company for other reasons, the role of the stock market in society becomes much more questionable.

The way you can tell whether or not investors are buying stock because they believe in companies or for other reasons is by looking at how the stock market moves. If the whole stock market as one, regardless of the industry that the companies are in, then something is up. Of course there will always be a connection to the economy as a whole, but different industries will always be affected differently. When the stock market moves up and down as one, as the American stock market has for a long time, then there is unquestionably something that is not working.

What is causing this is speculation without a motive. Investors buy stocks not because they think that the companies are going to do well, but because they think that other people will buy the stocks too, so that the price will go up. When they do that with borrowed money, a huge bubble is created, which will eventually pop and create a recession or a depression. This creates an outcome that is completely contrary to what the stock market is meant to do, in that companies that do well can get punished, and companies that do poorly can get a hugely inflated stock price. This sort of behavior removes the good dynamics of capitalism.

U.S. politicians have over the last 30 years allowed the stock market to become almost a state within the state. If the stock market does not get what it wants in terms of de-regulation and bailouts, it brings stock indexes down until politicians cave in. This is what happened when the first TARP-plan was voted down. Remember, stock brokers don’t get paid a percentage of the profit they make for their clients, they get paid based on the volume of what they trade. Hence, it does not matter to them if they win or lose, they just have to play. They need people to believe that the stock market is a good place to invest money in, and that is why you hear endless optimism everywhere in the media with regard to the stock market. When it seems like the whole financial world is coming to an end, stock brokers will try to tell people that it’s a great time to buy stocks based on some economic report that says that the situation isn’t quite as bad as everyone thought. It’s simply absurd.

Because almost all Americans own stocks in one form or another, Wall Street can hold everyone’s money hostage at the same time. This situation is undemocratic, inefficient and immoral.

The American people and the American economy must de-couple itself from the stock market. The stock market has become a place of pure gambling and blackmailing, without regard to what a stock market is actually supposed to do.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Good Versus Bad Protectionism

2009-01-28T15:13:00.001-05:00

For the longest time, The United States had a firm commitment to protectionism. Protectionism is a policy under which a country limits imports by different means so that the country consumes primarily its own goods. In the early 20th century, America’s commitment to protectionism was ended, and a commitment to free trade was started instead. Of course, protectionism has its clear advantages. It is clearly better for the U.S. economy on the whole if Americans buy Fords instead of Toyotas, because the money would stay in the U.S. instead of being transferred to Japan. The story, however, is much more complicated than that.

During times of a severe crisis when job losses mount and industries shut their doors, calls for protectionism usually grow louder. That happened during the Great Depression, and it is happening now. Much of Barack Obama’s campaign rhetoric was centered on domestic industry and a return to consumption of domestic goods, and more recently, Timothy Geithner has repeatedly alluded to the fact that China is manipulating its currency to stimulate exports. What Geithner is effectively saying is that China should raise the value of its currency, so that Chinese goods will become more expensive in the U.S., so that Americans will buy American goods instead. So, what are the benefits of free trade, and is there such a thing as “good protectionism”?

Free trade has many advantages. Most importantly, it lowers the price of goods dramatically, and makes goods available everywhere. 20 years ago, the prices of food, furniture, clothes, electronics, appliances and much more were considerably higher than they are today. The globalization of free trade have made these goods much cheaper in the West and provided jobs in the Third World. Today, most types of trade is global, and many countries even import the same goods that they export (this is also called “counter trade”). Globalization has, in short, put millions of people to work, and brought cheaper goods and greater prosperity to everyone.

During a crisis, globalization and free trade do little good. The enormous forces of the global economy cannot be controlled or steered towards a certain goal, such as job creation in the U.S.. Protectionism can do that, but at a cost to the global economy, and global growth. An increased amount of protectionism would likely cause some problems in trade relations around the world, but those problems may not be as large as those that would occur if the unemployment rate were to go up to 15-20%. There are definitely some excesses in global trade that could be addressed, while local goals could be achieved.

Not every country can produce everything, and it would make little sense for advanced, industrialized countries to start producing basic goods again just to create jobs. For the government to sponsor a pencil factory next to a bio-tech lab would be stupid. That would be an example of bad protectionism. We need trade to a large extent, but we don’t need trade for everything, and in some cases, trade can be a liability.

There are certain goods that are not suited for global trade, for various reasons. I’m thinking primarily of food, defense and government contracts. If a country does not have its own food production, it becomes very vulnerable to political insecurity in the world. If a food exporting country has a choice between feeding its starving citizens, or breaking a deal with a food importing country, the former will obviously be chosen.

A country that is dependent on imports for its defense is also very vulnerable to insecurity. Again, if a weapons exporting country is faced with a choice of defending itself or breaking a deal with another country that wants to buy weapons, the former will be chosen.

With respect to government spending in general, it makes little sense not to buy domestically when buying police cars, fire trucks, steel for bridges, energy, and so on. To directly take taxpayer money and transfer it to foreign taxpayers through government imports results in a dramatic hemorrhaging of money for the country’s finances.

The conclusion one can draw from these examples is that there is such a thing as “good protectionism”. If the American government wants to create jobs at home, it should primarily focus on supporting domestic production in food, defense and whatever goods the government purchases. Good protectionism is protectionism that makes economic and philosophical sense.

No country can be legitimately blamed for implementing such policies, so the impact on global trade is minimized using this approach. Focusing on good protectionism can also lower the trade imbalance and strengthen the dollar. When it comes to free trade, the story is very similar to that of public goods and public utilities: there are times when the free market is unmatched in providing what is needed, but there are other times when the free market is completely unsuited to the task at hand.

Share your thoughts in the comment section

The Good Bank Solution

2009-01-26T11:37:00.003-05:00

One solution to the financial crisis that is currently being discussed is the so-called “bad bank solution”. What this means is that the government would set up an entity, and gather all the toxic assets that the banks have, so that the bank system can be freed of the bad stuff and move on. Sounds good, but where do the losses go? The answer is: to the American people.

This solution is no different from the original TARP plan, in that the American taxpayer simply gives banks money to cover all the mistakes those banks made, with no strings attached. I believe that the losses in the banking system are too great for a bailout like this one to have the potential to work, regardless of the moral implications. That is why we need a different solution.

First, a reality check to illustrate my point. Bank of America and Citigroup are the two large banks that are in the worst shape. Consider their market value in 2007 compared to today:

Bank of America’s market value in the second quarter of 2007: $228 Billion

Bank of America’s market value in January 2009: $33 Billion

Citigroup’s market value in the second quarter of 2007: $255 Billion

Citigroup’s market value in January 2009: $15 Billion

In addition to this, these banks have several times their market value in toxic assets, which means that they are effectively insolvent already. Consider also what Bank of America did after it received bailout money: it went and bought MORE mortgage-backed securities, creating even greater losses. When the bank found out that it was going to get a bailout, it started paying huge bonuses to its executives, in reality using TARP money for that. It’s definitely time to stop betting on the losing horses. It doesn’t matter how much money we spend on these banks, they’re not going to be able to continue in their current forms. The bad bank solution is nothing more than a bad solution.

I am instead proposing a Good Bank Solution, under which the government sponsors entirely new banks, completely untainted by the crisis and the toxic assets. Instead of trying to repair a complete wreck of a bank, a new one is constructed from scratch. The public could then safely put its money into those banks, investors could invest money in them, and the banks could immediately start lending with prudent standards. More specifically, the plan would consist of the following steps:

1. The government drafts a bank charter (the rules for the bank), and includes very stringent standards on lending, how much capital the bank must have, how the bank can invest, how much money the bank must lend, and so on.

2. The government puts money into the bank. We’re talking about billions of dollars, not billions in losses, but in investments in a new banking system with a clear potential for profit. The government owns 100% of the bank.

3. The bank opens for business, takes customer deposits and starts lending immediately. Investors will be able to buy 49% of the stock, but the government must remain the majority shareholder for a few years until the financial crisis has been resolved. By selling stock, the government may already have recouped half of the investment at this stage, potentially at a profit.

The government can create many of these banks, and in one fell swoop bring confidence and lending back. It is important to note that this is just a temporary solution. Once the crisis has passed, these entities can be sold completely, so that the government does not have to act as a banker.

Before that happens, the government will also have been given time to legislate the new financial regulation that is so direly needed. The “good banks” don’t need regulation, because they will have that written into their charters. This would be a big operation for sure, but it must be done, because the current system is broken.

Share your thoughts in the comment section.

The Six Stages of the Credit Crisis

2009-01-23T13:54:00.004-05:00

Recently, the idea of the nationalization of major banks has been gaining ground in the U.K. and the U.S.. I am against the idea, simply because I think it will cost too much in the end. It was the right thing to do in the 1980:s in the U.S., it was the right thing to do in Sweden in the 1990:s, but this time the scale of the problem is so different that nationalization could be very dangerous.

I’d like to talk about the current crisis on a larger scale, because there are some definite patterns that have shown up in recent years in several countries that now seem to be imploding. I’m thinking of the U.S., the U.K., Ireland and Iceland. The common denominator for the last 20 years of financial history is crystal clear:

All four countries decided about 20 years ago that they would promote and expand the financial industry through deregulation, tax incentives and lower interest rates.

Of course, the U.S. was already the financial hub of the world, but it nevertheless embarked on the same strategy as the other three countries. In all four countries, the financial industry’s share of GDP grew steadily and even explosively as a result of the respective governments’ efforts. This was a very attractive development for politicians, because only by de-regulating, they could hold off on raising taxes, grow GDP and increase the standard of living. It seemed to be a win-win situation, if it hadn’t been for the familiar problem of credit.

Debt fueled both speculation and consumption, so that debt levels have now risen to astronomical levels in all four countries. Private debt is now several times larger than the GDP in each of these countries. By borrowing money to speculate and consume, companies and individuals have set in motion a huge credit expansion and created the enormous credit bubble that we have today. As I wrote here ,whenever such a system is shaken, everything falls apart, because real debts stemming from fantasy money must be paid back with real money.

A pattern seems to be emerging with respect to how a country develops after the huge credit bubble is popped. The smaller you are, the sooner you will go down. The more debt you have, the less likely rescue attempts are to work. There seems to be six stages to the further development of this crisis, and the following scenario may play out in all four of these debt-laden countries:

1. Real estate prices go down

2. The stock market collapses

3. Bailout attempts fail

4. The currency gets attacked and loses much of its value (which greatly increases the country’s foreign debt)

5. The banking system becomes nationalized

6. The country becomes insolvent

Iceland has already gone through all the stages. The U.K. is in stage number 4. Ireland is in stage number 3, where the U.S. also currently finds itself. Will all the four countries go through the six stages? That doesn’t have to happen if you do the right thing. We must stop throwing good money after bad, and only invest minimal amounts in the current financial system, while we build a new one at the same time. I believe we must move very quickly with a new plan, the creation of completely new banks, which I will elaborate further on in my next post.

P.S.
To those who say that nationalization is “socialism”, I’d like to say that it actually amounts to the opposite of socialism: it is meant to save the capitalist system. If the system is not saved, you may very well experience actual socialism.

Share your thoughts in the comment section

Crowd Them Out!

2009-01-22T12:30:00.002-05:00

President Obama and his administration is currently working on a new stimulus package that includes large amounts of spending on public goods, such as infrastructure, health care and the environment. Traditionally, a public good is something that is available to all citizens of a country at little or no cost, to the benefit of everyone. However, in The United States, goods that are considered “public” in most other countries, are considered “private”. For example, health care is considered a right (by extension a public good) in the EU, whereas it is considered a privilege (a private good) in The United States. Such thinking is the reason why a lot of commentators are voicing opposition to Obama’s stimulus package at the moment.

The free market philosophy is deeply ingrained in American culture, and stretches back hundreds of years. A lot of Republicans and other free market proponents are now criticizing Obama’s plan, saying that it would “crowd out” the private sector from the provision of certain goods and services. “Crowding out” is a phrase that is used to describe a situation where the government provides a service that could have been provided by the private sector. For instance: if the government were to provide free health care for U.S. citizens that was as good as private health care, why would anyone pay for health care? As a result, private health care companies would be “crowded out”.

It is important to remember that Obama’s stimulus plan is concerned almost exclusively with public goods, or at least what the administration considers to be public goods. Obama is not suggesting that the government should start producing toaster ovens to sell for a profit. He is proposing to use public money for public goods. Very few people would argue that the government would be better at producing toaster ovens than the private sector. They tried this in the Soviet Union, but wound up with toaster ovens that could barely toast one piece of bread, as well as a mountain of them that was never sold. As I eluded to earlier, the Republicans don’t consider health care to be a right. The current debate is hence a highly ideological one. The real question here is: can the private sector provide the goods in Obama’s plan 1. affordably and 2. reliably?

Let’s go through a few examples. The most important sectors that this plan is concerned with are electricity, roads and health care.

Electricity - does anyone remember the Enron scandal? If not, this company pioneered a new approach to the provision of electricity and natural gas. Before Enron, electricity was considered as something that should be provided to citizens at the lowest cost possible. There was literally a direct link between the government’s not-for-profit production and distribution of electricity and the citizen’s outlet. Unbeknownst to citizens, Enron convinced politicians that that should no longer be so.

By introducing itself as an intermediary between the energy source and the electrical outlet, Enron was able to charge customers vast sums of money, while making electricity much more expensive. Enron bought up power grids (which were built up with taxpayer money) and charged more. It bought power plants, and charged more. It intentionally choked the supply of energy, and charged more. In the ground zero of free market philosophy, Texas, electricity prices rose by 800%, and are still at that level today even though Enron is gone. California experienced countless blackouts when Enron was in charge of electricity provision in that state. These blackouts were partly intentional to choke the supply, and partly due to incompetence. So, the result was blackouts and price increases of 800%... - guilty on both counts.

Roads - Americans are always screaming about high gas prices, but I never hear anyone screaming about road tolls. In the New York area, a trip to the shopping mall can easily wind up costing $40 in tolls. It’s important to remember that almost all roads in the country have been built with taxpayer money at some point in the past. As such, they are the property of taxpayers, as much as the White House itself is. Local governments all over the country have been selling roads to private companies since the 1980:s, in the same way that electricity grids were sold to Enron. Road tolls inhibit citizens from driving on roads that they themselves paid for, and in many cases, the money goes to private companies. These private companies have no incentive to make the roads as good as possible, their only incentive is, and should be as a corporation, profit. Hence, it makes no sense to sell a road to a private company to run it for profit, when the government can run it without a profit motive. It’s a question of good governance.

The very reason that the country’s roads are crumbling is the outsourcing of roads to private companies. By doing this, The United States now has a more expensive, and lower quality transportation system. Guilty on both counts.

Health care - need I even mention the 50 million Americans who do not have access to health care? That number is growing as the economic crisis gets worse. The United States ranks very low on measures of population health, far behind all other Western countries, and even behind Cuba. Also, I never understood why employers should be saddled with health care costs. The duty of an employer is first and foremost to pay a salary and adhere to labor laws.

A little known fact is that The United States spends around twice as much tax money per capita on health care compared to the countries in the EU that provide the most comprehensive free health coverage, such as Germany, France and Sweden. In The U.S. you are covered for nothing, and in the EU you are covered for everything, at half the cost! What does that tell you about the efficiency of the market in the provision of health care for citizens?

So, what we have is truly second-rate health of the population and non-existent coverage at astronomical prices. Guilty on both counts.

The private sector absolutely cannot provide these things affordably or reliably. In an economy, there are certain things that are suited to be provided by the market, and others that are definitely not. The motive of a health care organization should be to keep citizens healthy at the lowest cost possible. Anything other than that reflects a medieval state of mind. Profit cannot be a part of the equation, because dead patients are more profitable than surviving ones. The motive of an electricity infrastructure is to keep citizens warm and able to feed themselves. Anything other than that severely threatens the security of citizens. The motive behind a national infrastructure is for citizens to be able to move around and for goods to be able to travel. Anything other than that amounts to a country giving up sovereignty over its land.

Selling out public goods to private companies is highly detrimental to a country, and indeed immoral. Obama’s plan would crowd these companies out. The plan will not bring the short-term boost that Wall Street is praying for, and will actually do the opposite of what Wall Street wants in terms of the policy on public goods. However, people on Wall Street are too stupid to figure that out.

The selling of America’s resources must be stopped and reversed. Therefore I say: crowd them out!

The Hope For A New Financial Order

2009-01-20T13:11:00.002-05:00

On this day that Barack Obama is inaugurated, I would like to talk about the need for big ideas for the world’s financial future. As the U.S. and the world is in a state of hope for a better future, now is the time to think big, and to think fundamentally about how we can move forward. What we need is a truly global effort to change our financial system for a sustainable future.

The financial crisis is getting worse every day, and there are some very good reasons for this. As a result of the developments of the last 20-30 years, the world’s financial state is worse than most people realize. I usually don’t list a heap of numbers on this blog, but this time, a bit of a reality check is called for. The current crisis actually has a pretty straight-forward cause, which is a rather simple question of plus and minus. Consider the following facts:

The GDP for the entire world in 2007 was around $54 Trillion.

The outstanding value of financial derivatives is currently over $200 Trillion

At least $100 Trillion of these financial derivatives are estimated to be so-called toxic assets, by several independent estimates. In essence, these assets are worthless, but someone has to take the hit…

So there is a slightly delicate question of $50 Trillion that needs to be resolved. I recently had a conversation with a plumber about the economic crisis. He was, understandably, confused about the crisis. He couldn’t understand how there could be more debts than there was money in the world. Though he was more familiar with plumbing than the world of high finance, his reasoning about the economy was positively more profound than that of any Wall Street trader.

The answer to the plumber’s question has to do with what is known as credit expansion. In essence, when speculators borrow money to bet on all sorts of different things, a bubble is created that will make it seem as if there is more money than there actually is. A speculator can hence own lots of “fantasy money”. However, the catch is that, if things go bad as they have now, the speculator cannot pay his debts back with fantasy money; he has to pay them back with real money (because the fantasy money is now worthless). Since there is considerably less real money than there is fantasy money, something’s got to give. That is why Lehman Brothers, Bear Sterns and all the other institutional speculators no longer exist, and that is why we are in a global financial crisis right now.

So, how do we deal with this problem? In society there are many rules. If rules were gotten rid of, does anyone really believe that everyone would behave responsibly anyway? If we took down all the road signs and got rid of all the traffic rules, would everyone drive safely down the road at an appropriate speed? I don’t think so, and the same is true for high finance.

Commerce is truly global again today, which it was not 30 years ago, and hence the same regulations as those that were gotten rid of in the 1980:s (which led to the crisis) cannot be applied today. The new legislation doesn’t necessarily need to be more draconian, but it needs to be comprehensive, simple, uniform as well as prohibitive.

I think it’s time for the U.N. to get involved in financial regulation. We need an International Treaty of World Commerce. We need clear and well thought out rules that will prevent a global meltdown like the one that we are seeing today. Here are some suggestions of what should be included in an International Treaty on World Commerce:

Prohibition on overly leveraged speculation - in other words, a prohibition on borrowing 20-30 times more than you own, in order to make financial bets. Leveraged speculation is what leads to credit expansion and asset bubbles, the cause of this crisis. In many countries, it is illegal to buy lottery tickets or place bets with a credit card (borrowed money). This law would be in the same spirit.

Tax on stock market investments - this would discourage small-scale investing by vulnerable individuals and also breed prudent investment strategies among institutions. Less volatility and less vulnerability would be the outcome. The tax money could go to a reserve fund of the IMF to fight economic crises wherever they occur.

Uniform accounting standards - these standards would be constructed so that hiding assets away from, or within a corporation’s balance sheet, would be next to impossible. The tactic of hiding bad assets or large liabilities, pioneered by Enron and perfected on Wall Street, is also an important cause of the crisis.

Prohibition on complicated derivatives - most financial derivatives were intentionally constructed in such a complicated way that the buyers were not meant to be able to understand what was in them or how they worked. The food industry could serve as inspiration for more transparency, and any financial product would have to have a strict declaration of its “ingredients” as well as the exact plan for growth and how that makes sense.

There are many more things that could be added. Readers are encouraged to add their own suggestions in the comment section.

Oligocracy

2009-01-14T17:22:00.004-05:00

OK, Oligocracy isn’t really a word, but I hope it will become one as time goes by. Oligarchy (which is a real word) means the rule by the few, or a sustained political elite. Oligarchy tends to develop over time, as certain segments of the population, such as powerful families, accumulate more wealth and influence and become oligarchs. My version of the word, Oligocracy, is meant to describe a system that is intentionally set up from the beginning to be the rule of the few.

It comes without saying that a rule of the few, as opposed to the rule of the many, is inherently less democratic, and, indeed, undemocratic. The phrase, “the rule of the many” is not primarily meant to refer to a government that has, for instance, a lot of politicians, or a lot of public referenda. Instead, it is meant to refer to the inclusion of as many of the citizens as possible in the shaping and outcome of the political process. An oligocracy is meant to do the opposite.

There are several reasons why the founder or founders of a political system would want to limit the influence of citizens in the country when drafting a constitution. The United States constitution is by far the oldest constitution that is still in use in the world. Many other industrialized countries have had to write new constitutions because of wars, or chosen to significantly re-write them as they have become seen as obsolete. The older and less amended a constitution is, the more likely it is that values that are unfamiliar to us today will appear in it. Values tend to go through an evolution as societies evolve. For instance, we would be very unlikely to see a new constitution in an industrialized country that would prohibit black people from voting.

When The United States Constitution was drafted and consequently adopted, a few important values that are unfamiliar, and even reprehensible, to us today, were commonplace and seen as normal. A few of these values, which were expressed in law in The Constitution, were:

- the belief that black people should not be allowed to vote

- the belief that women should not be allowed to vote

- the belief that people who do not own property should not be allowed to vote

These beliefs express clearly, more than anything else, the belief that only a small segment of the population should be allowed to have an influence in the political system. Although all three of the abovementioned rules have been gotten rid of, the spirit of them most certainly remains in the constitution, because that constitution is so old and relatively unchanged. The U.S. Constitution, as well as other federal and state-level law, retains a very large number of provisions that are meant to limit the influence of currently disenfranchised citizens and political actors. The United States is a clear example of an Oligocracy.

In the current U.S. system, there are mainly three factors that perpetuate the U.S. oligocracy:

1. Winner-takes-all voting system. In this system, the party that gets the most votes in a given district gets all the seats in that district. The U.S. and British systems are examples of this, and this system invariably creates a two-party system. Only two parties have actual influence on national politics, and all other parties are, in practice, excluded. The alternative, which is used in a majority of advanced democracies, is proportional representation. Proportional representation awards seats in proportion to how many votes a party received. Hence: 25% of votes = 25% of seats.

2. Bipartisanship. In a two-party system, the two parties will benefit from working together, so that no other party can be successful in elections. This creates a type of political cartel, much like an economic cartel, where supposedly competing companies agree to set high prices for the customer instead of competing with each other. The voter will inevitably be short-changed in a system of bipartisanship.

3. Limiting voting rights and voting access. The U.S. still legally restricts voters who have been convicted of crimes, and to some extent, university students who study in a state other than their home state. In The U.S., voting is a much more complex affair than anywhere else, where complicated registration and voting procedures are clear and intentional deterrents to voting. Illegal voter suppression is also more common than anywhere else.

An oligocratic system is an undemocratic system that excludes large segments of the population. It comes as no surprise that The United States has, by far, the lowest voter participation in the entire industrialized world.

Why Didn't They Listen?

2009-01-12T14:26:00.005-05:00

It has been announced today that Obama, by way of President Bush, has asked for Congress to release the second half of the TARP fund. The institution of this requirement may have been the only sensible thing to come out of the TARP plan. If it had not been instituted, all the 700 billion would have already been given away to Wall Street institutions and banks, never to be seen by taxpayers again.

The Democrats now say that they have a plan to use this money to help Main Street instead of Wall Street because the original TARP plan produced so much “unhappiness”, according to Barney Frank (who, by the way, has received millions in donations from Wall Street firms over the years). The question then becomes, in light of the hundreds of thousands of emails, letters and phone calls from voters telling politicians not to vote for the TARP plan: why didn’t they listen?

Economics is not as difficult an issue as some make it seem. Most of what it’s about is pluses and minuses. The public rightly understood that the original TARP plan was a huge cry for help by Wall Street firms that were about to go under. Simply giving them money without strings attached would not achieve anything. The public understood this too. What the public did not understand was the concept of “Voodoo economics”, where money magically appears if you leave financial markets alone. The reason that the public didn’t understand this was that it makes no sense. It makes no sense because it doesn’t work. End of story.

Politicians, however, strongly believed that they had mastered the art of Voodoo economics. They listened to who they referred to as “the smartest people in the room” (Wall Street executives), in addition to taking millions in donations from those same people. “The smartest people in the room” had for years told them that the free market can provide all the security Americans need, so taxes could be kept low and the government would not have to take responsibility for the well-being of Americans. It’s a pretty sweet deal if you think about it: in your job you get to:

1. have less responsibility (by not insuring pensions, wages, affordable education and more)

2. get millions in donations

3. not have to take any tough decisions that will anger and disappoint people (raising taxes)

The politicians were able to outsource their own jobs, while also keeping them and receiving millions of dollars in donations from the ones they outsourced to. Sweet deal! That is why they didn’t listen.

Question: what possible upside could there be to allowing large-scale campaign donations, for instance by Wall Street firms? The argument that it is essential for freedom of speech is a pretty weak one...

Protecting Your Investments With Foreign Securities

2009-01-09T13:53:00.004-05:00

Let’s say that the economic crisis really does turn in to a full-blown depression, currency crisis, inflation or deflation spiral and obviously further deterioration in the stock market. What can you do to protect your investments? Not a whole lot, but there are a few alternatives that should be considered. What I’m about to suggest is not an easy thing to do, because it requires knowledge far beyond traditional investing and hedging in The United States.

The premise on which this analysis is based is that the U.S. economy as a whole, including the financial economy, the government, the local governments and U.S. corporations are all in very bad shape, and hence cannot be trusted as investment vehicles. Furthermore, if the U.S. government is in bad economic shape, that fact has word-wide implications on most investments.

The real core of any investment is what’s actually behind it. In the end it comes down to what someone else is willing to pay for that investment, and that in turn has everything to do with the environment in which the investment is situated. If the U.S. economy is sinking, then U.S. corporations will suffer, and U.S. stocks will sink too. (also, in case someone forgot, the U.S. stock market was and is a house of cards…)

If the U.S. government is doing poorly, and is at the same time drastically lowering interest rates, not only does one not get a good return on U.S. Treasuries, the government may actually default on the Treasuries, or inflation will make the principal worth much less. In the end, all this has to do with the way a country is run in the long term. Keeping your money inside a country that is poorly run will deteriorate all your assets domestically and internationally. The key to protecting yourself during a catastrophic crisis could then be to find a different, well-run country, from which to buy Treasuries.

If you can find a “well-run” country, you can then invest in that country’s Treasuries, or government debt. The taxpayers of that country will stand behind the debt and guarantee its value. That, in turn, means that for your investment to be safe, those taxpayers must have jobs and overall security, and the government of the country must have responsible long-term policies. Otherwise you run the same risk that you run in buying U.S. Treasuries. In order to analyze what country might be a good one to invest in, one must know about mainly the political and fiscal situations in that country. A well-run country has:

- a persistent budget surplus

- a diversified economy

- a sufficiently regulated financial sector

- a long-term political commitment to fiscal responsibility regardless of ideology

- an independent national (or supra-national) bank committed only to fighting inflation

Being able to identify countries according to all these conditions is certainly not easy, and one must know a lot about international comparative politics, history, law, government studies, institutional studies, economics and much more. However, I would like to suggest two countries that fit these descriptions: The Netherlands and Sweden.

The Netherlands has for centuries been involved in trade and business in a prudent way. The commitment to sound fiscal policies is very strong, and just like Sweden, this country consistently supports the heavy spending of the EU while getting less money back in return. The country responded well to the economic crisis and took pre-emptive steps to protect its prudent, venerated banking sector.

Sweden has a more inconsistent history of financial prudence, but has more recently gone through crises that has made the commitment to sound economic dealings very strong. Sweden is most of all famous for its efficient government institutions. When the economic crisis started in the U.S., the former Swedish minister of finance, Bo Lundgren, offered to testify before Congress on how to deal with the crisis, which is very, very similar to the Swedish crisis of the early 90s. The Bank of Sweden recently had to suspend its sales of Treasuries because demand from abroad was too high. Obviously there were some investors who were thinking in a similar way to what I am describing in this post.

Addendum - What’s wrong with the traditional hedging strategies?

U.S. stocks: Traditionally, stocks are supposed to at least keep pace with inflation and pay dividends, so that they make for good investments in the long run. We now know that the stock market was a house of cards, and there is no imaginable reason why the stock market should be a good investment anytime soon.

Foreign stocks: Before the crisis, a lot of people were talking about the idea of de-coupling. that meant that it was thought that other economies were operating independently of the U.S. economy. We now know that that idea was completely misguided. Hence, foreign stocks more or less equal U.S. stocks, and as such don’t constitute good investments.

Cash: In 2008, the Federal Reserve increased the money supply enormously. That creates a huge potential for massive inflation in the future.

U.S. treasuries: Danger of default and massive inflation, in addition to non-existent returns.

Treasury Inflation Protected Securities (TIPS): Danger of default and even lower returns. Danger of deflation.

Municipal bonds: Clear danger of default. Local and state governments have not been able to sell bonds lately because confidence has already evaporated to some extent. This is because a lot of construction projects have fallen through because of the credit crisis. Many states are in a state of fiscal emergency. If all this weren’t enough, rampant fraud with respect to these assets are beginning to come to the surface. that is why Bill Richardson had to withdraw from his attempt to join the Obama administration.

Savings account: Danger that the FDIC will run out of money. In a catastrophic crisis, this is not at all a distant possibility.

Gold: Subject to much speculation and danger of loss of value. Still, by owning a commodity, you will probably be better off than with the abovementioned assets.

Obama Knows

2009-01-08T13:21:00.001-05:00

I have recently been quite disturbed by the appointments that Obama has made, especially with respect to his economic team. Yesterday, my wife tried to console me by saying: “he has a plan”. By that she meant that the appointments don’t necessarily translate into the policy favored by the people Obama has chosen, who largely constitute a restoration of the Clinton economic team. I put a lot of blame on Clinton for the situation we are in today, and I also blame Reagan and Bush Jr., but I don’t blame Bush Sr.

In a speech at George Mason University, Obama spoke in very serious terms about the economic state, and he, I believe, correctly identified many of the upcoming challenges. What Obama realizes is that the challenges we face are not limited to the restoration of confidence in the financial markets. This is not about even about the financial markets anymore. We are unavoidably facing a paradigm shift in the way that this country functions.

To put this in perspective, we seem to be facing a budget deficit of around 2 Trillion dollars with the Obama plan. The current estimated value of “toxic” financial assets is now around 8 Trillion dollars. If it would take 8 Trillion dollars to clean up the financial markets so that those markets can again provide America with across-the-board prosperity (which they can’t), but 1 Trillion dollars to provide direct relief according to the Obama plan, then the choice seems easy. Obama suggests something pretty simple: to funnel taxpayer money directly back to the taxpayers who need it, instead of giving it away to financial institutions in the hopes that, some day, that money will trickle back to the taxpayers. The latter was the Paulson plan.

I am definitely not a fan of deficit spending, even in a crisis. Normally, I would have argued that fiscal restraint, followed by a time of a baptism of fire would be called for. However, since the people of The United States have essentially no societal protection with respect to incomes, pensions and healthcare, such a harsh experience would probably be too devastating. To set the record straight, what we really should be talking about now are things like the following:

real dangers to future American competitiveness, a deterioration of the fabric of society, hunger, poverty, crime and the like.

Obama makes the case that the only way to deal with the situation is to mortgage our economic future. I reluctantly agree.

Here’s an important quote from Obama’s speech:

“We could lose a generation of potential and promise, as more young Americans are forced to forego dreams of college or the chance to train for the jobs of the future, and our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically worse.”

We cannot move forward thinking that the financial markets are going to provide prosperity and security for Americans, we must provide that among ourselves. That is the only way.

Like it or not - Burris is right

2009-01-06T13:53:00.002-05:00

The Governor of Illinois, Rod Blagojevich, certainly seems to be a criminal. There are phone conversations in which he’s talking about selling Obama’s Senate seat, and the circumstantial evidence of Governor Rod being a crook is overwhelming. However, in the eyes of the law he is not a criminal, yet. He has not been convicted, and he has not even been indicted yet; he has only been accused of criminal activity. That means only one thing: he is still legally the Governor of Illinois, with all the powers of such a Governor.

Last week, Governor Blagojevich named Roland W. Burris as the junior Senator of Illinois to replace Obama, and Burris accepted. Today, Burris showed up in Washington for the 111th Congress, eager to get to work. However, he was shown the door by the Secretary of the Senate, Nancy Erickson because she did not accept his credentials. Burris proceeded to make the following statement to the media:

“Members of the media, my name is Roland Burris, the junior senator from the State of Illinois.”

For a replacement Senator to be named by the Governor, paperwork has to be signed by both the Governor and the Secretary of State. This is an old tradition dating back to English colonial times. In Illinois, the Secretary of State, Jesse White, has refused to sign. Theoretically, it is now argued by the Senate, this fact makes it impossible for Burris to become a Senator until White has signed. I beg to differ.

The Constitution specifically mentions that no specific tests should be required for membership in the Senate. In this case, what the Senate is actually trying to do is to:

impose a test on a would-be Senator with respect mere accusations of wrong-doing of the Governor who appointed him

It is clear that the Constitution overrules Illinois state law in this matter. The Constitution says nothing about signatures from the Secretary of State, and the Supreme Court has ruled that the Senate cannot impose any additional tests on would-be Senators. We’re not even talking about the appropriateness of the would-be Senator himself, but that of the one who appointed him. I believe that it would be very difficult to make an actual legal case that Burris should not be the Senator of Illinois. Like I said, Governor Blagojevich still has all the powers of a Governor, end of story.

This debacle certainly raises some important questions, however. The most important one, in my view is:

Who can veto a Senate appointment?

From the Burris debacle, one could deduct that the ones who can veto such an appointment is: 1. a Secretary of State, 2. a Secretary of the Senate, and 3. the Senate collectively.

Imagine if all Secretaries of State were to get together and decide to block all Senate appointments. They could then do so until people that they liked were appointed instead. These Secretaries could gain control of the Senate. Imagine if the Secretary of the Senate were to start blocking would-be Senators to achieve political goals. That would become an enormously powerful position. If the Senate started imposing all kinds of different tests on would-be Senators, the American political system would become infinitely more gridlocked than it already is.

I think the whole thing stinks, but if you want to follow the law, Burris must become Senator. The American political system fosters corruption because private donations to politicians are allowed, which makes it possible for criminals like Blagojevich to become Governors.

Fighting Off Depression

2009-01-05T13:34:00.006-05:00

Paul Krugman writes today in The New York Times about what the new administration should do to fight off a depression. Krugman believes that large-scale Keynesian deficit spending is what is needed in a situation like the current one. He also rejects the Friedmanite theory that capital injections into banks can be a way to fight off a depression.

Krugman is certainly a decent economic thinker, but he is not known for his consistency. He used to advocate capital injections into banks, but is now apparently against those. He used to call Thomas Frank’s theories on the so-called “Southern Strategy” “erroneous” (theories having to do with poor people voting for Republicans, even though that goes against their economic self-interest), whereas he now writes about them all the time, as if he came up with them himself. Krugman, like Bernanke, lacks an ideological determination and clarity of vision.

Now, I agree that something has to be done to try to avoid a depression, but things are more complicated than Krugman make them seem. First of all, Keynesian spending is just a band-aid approach. Second, Friedmanite bank capital injections usually work, but only if they are highly controlled by the government. Third, a depression in The United States is something very different compared to a depression in every other industrialized country, because The United States does not have a social safety net.

Short-term solutions is without question the usual name of the game in terms of American politics, and also in terms of American academic economics. As I wrote in my last post, ideology is absent from American politics. If the government does not have a clear-cut ideological vision, a series of band-aid approaches tends to dominate politics. The result is the same if the ideological conviction is a conservative one, in which case (according to conservatism) band-aid approaches constitute the second-best solution, second only to doing nothing. Keynesian spending can indeed provide some short-term relief if a depression is looming. Perhaps more than anything, it can provide a “psychological stimulus”, where people see other people working, building things, and things happening in general. This can bring back confidence in the system. The question that I’m asking, however, is: should confidence in the system be quickly brought back by Keynesian spending?

I would argue that the problems we are experiencing today are much deeper than a problem of confidence. To apply a series of band-aid approaches so that we could go on as before would be a grave mistake. Like I said, there is nothing wrong with spending during a crisis per se, but you should never spend money you don’t have. Spending is good, deficit spending is bad.

I turn again to Sweden, that went through a very, very similar crisis in the early 90s. Sweden had tried the Keynesian model for 30 years, but ultimately rejected it when it became clear that it was artificially supporting a system that was not sustainable. That system came to an end in the early 80s. With these lessons in mind when the crisis came, the Parliament worked out a crisis package with broad, multi-party (yes, there are more than just two parties in Sweden…) support. The solution, thought the government, was not deficit spending, but:

1. spending reduction,

2. capital injections into banks (where the government took control of those banks, not just gave away the money like a bunch of idiots…) and,

3. Long-term commitment to budget surplus and a pay-as-you-go system for government spending

This may sound like some type of anti-government Republican credo, but keep in mind that government spending makes up over 40% of GDP in that country, whereas it makes up less than half that in The United States. Let me say this once and for all: sound fiscal policies should have nothing to do with what ideology you subscribe to.

Number 1 and 2 in the list above were meant to stave off the crisis, but by no means quickly get rid of it and continue like before. The government realized that something had to give, and the recovery was painful, but real. The third action, or commitment, was actually realized, and it was meant to set the country up in such a way that the next big crisis would be easier to get through.

This is exactly what ended up happening. To be sure, Sweden is currently going through a lot of pain and job losses, but the government’s coffers are full because budget surpluses for over 10 years have created a readiness for the crisis that we see today. As a result, Sweden can use the surplus that has been built up to spend its way out of the crisis without running a deficit. That’s the beauty of the whole thing: you achieve crisis relief without setting the country up for the next crisis by means of deficits, loans, and all the rest of it.

The United States now has a chance to set the country up in the same way that Sweden did in the early 90s. By doing that, the country will be more sustainable in the future, and be able to weather the next crisis as Sweden weathers the current one now.

Without Ideology, There Is Only Anarchy

2009-01-02T17:00:00.000-05:00

The word “ideology” has a somewhat offensive ring to most Americans. You often hear politicians on the campaign trail saying things like “Americans are not interested in ideology”, or “we will work in a non-ideological, bi-partisan manner”. All that ideology really is, is a coherent structure of ideas that are meant to appeal to voters. So how can that in itself be offensive?

When the United States was founded at the end of the 18th century, it was founded on the idea of independence from the British king. That a subordinate country broke free from a colonial power was certainly nothing new, but the great novelty in the American case was how this was done, and how the new country moved forward. If a political commentator in 1788 would have guessed what the future of America was to be, using history as a guide, he or she would most likely have guessed that the heroes of the revolution would battle it out with each other for supremacy in order to ascend the “American throne”. In other words, we could very well have had a “King George Washington”.

The founding fathers chose instead to give away power to a segment of the general population, using a model that resembles that which was used in ancient Greece, where property-owning men were made a part of the political process. Indeed, many argue that the parallels between contemporary American and ancient Greek democracy are many still today, especially with respect to Socratic ideals of the good citizen and politician who is financially and morally responsible for his household, community, as well as being a prudent policy maker in the legislature. Another important factor and parallel was the belief that politics should be primarily a local affair. This early model of democracy is hence based on the leadership of a (hopefully) benevolent elite.

When The United States was founded, all European countries were still dictatorships. This fact created a struggle for something better in Europe, which eventually created the ideologies we know today. Without question, the two most important ideologies to come out of this process are liberalism and socialism. Conservatism is not an ideology, as much as it is an absence of ideology, because it only seeks to conserve, and not to renew. Today, in the entire western world, with the exception of the United States, the political landscape in each country is basically made up of two blocks of somewhat opposing ideologies:

Right: Classic liberals along with conservatives, and

Left: Socialists along with social liberals.

The United States hence defies what seems to be the “natural order” of a Western political landscape, in that it has two blocks on the right (Republicans and Democrats), and none on the left.

Due to the fact that America was never a dictatorship governed from within, the struggle for political change with respect to economic differences between different segments of the population never quite took off. America was only a dictatorship vis-à-vis its colonial power, and not vis-à-vis a domestic dictator or domestic elite. Also, The United States was founded before a real crystallization of the ideologies occurred, so little inspiration could have come from them. At the time of its founding, The United States had the most modern form of government on earth, but because of the inherent, incredibly conservative nature of the constitution, that was eventually about to change in a big way.

Being the first one to embark on something has its pros and its cons. The early adoption must be followed by constant updating, otherwise you run the risk of lagging behind quickly. The United States was among the very first to adopt standards for electricity and TV, never to change them after that. Hence, the low Volt grid (110V as opposed to 230V in most other countries) is less efficient, and the American TV standard now has a lower resolution than that of most other countries. The United States never updated its constitution to include things like proportional representation, a unicameral legislature, a separation of the head of government from the head of state; things that most citizens of other Western countries now enjoy.

The American political system can now only be described as an 18th century dinosaur in an increasingly complex world. The recent financial crisis is the perfect example of how the individual nature of American politics is unable to deal with complex problems. Because the system is based on the perceived good personal qualities of the “benevolent elite” (meaning the individually elected Congressmen), American politics has become an awkward expression of the individual gut feelings of the elected individuals. When the financial crisis came, a motley crew of individuals who had no idea whatsoever about what they were doing or what they were dealing with, signed away trillions of dollars of taxpayer money in the biggest misguided give-away in history. The inability to act swiftly, responsibly, intelligently and successfully is, in a nutshell, the biggest problem with the American political system. In order to act swiftly, responsibly, intelligently and successfully, you don’t need a gut, you need an idea.

Negative statements about ideology from American politicians come as no surprise. Systems and institutions have a way of perpetuating themselves in their own self-interest. American politicians have been able to convince voters for centuries that ideology is bad, because that is all that voters are ever exposed to. If ideology were introduced in a big way in American politics, it would not only make it more difficult for wealthy individuals to get elected on vague policies; politicians would be able to be held accountable on a moral and philosophical level. That would in turn, by definition, take away large elements of self-interest from politicians and give that self-interest to voters. Naturally, an American politician would not want to do this.

As a direct result of this, the vagueness and lack of ability to foresee the actions of an elected politician creates a highly watered-down political process in a do-nothing government. Politicians won’t want to do anything because that goes against their self-interest. In that situation, politics inevitably moves towards a type of anarchy. Small government, less regulation, less social security, less concerted action in all things political; these are all anarchic tendencies.

Without ideology, there is only anarchy

Manifest for a U.S. Parliament Part 2 - Every Vote Counts

2008-12-20T23:51:00.001-05:00

A political system is only as good as the voters make it. If voters don’t take responsibility for the workings of their system they will inevitably be taken advantage of by the politicians that they vote for. People who choose to go in to politics are always highly driven individuals, and unless the political system is set up in such a way that the interests of the voters is the foremost concern at all times, politicians will make the system work primarily for themselves. A system that allows large-scale monetary contributions to individual politicians, such as the American system, is hence a recipe for disaster. Likewise, a system that only allows two parties, will foster collaboration between those two parties to the effect that no other party can be allowed in to the political system, and very large parts of the population will be shut out of politics in terms of their wants and needs.

I will now continue this second part of the manifest with prescriptions for how the American political system can be made better and truly work on behalf of its voters, whatever the needs and convictions of those voters are.

Proportional Representation

What makes the American political system different from most other political systems (save for some other Anglo-Saxon countries) is the lack of proportional representation. If 49% of voters in a given constituency vote for a certain party, those voters could receive 0% representation in the legislature. This is not an anamoly either; it happens all the time. In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!

The votes would be counted according to the D’Hondt method (more on that some other time), and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Inception of a U.S. Parliament

The two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501. Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present electoral college awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering would be removed as a tool entirely.

The Usage of a Mixed Personal and Party Vote – The Party-List Ballot

One of the common objections to a political system that is based on political parties, as opposed to individual politicians, is that such a system takes away the ability of the voter to vote for a politician that he or she particularly likes. This problem can be remedied by the party-list ballot. In such a system, the voter takes a ballot for the party that he or she likes, and on that ballot, the party has listed the politicians that it considers best suited for the job of being a member of Parliament. The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.

End the Role of Money in U.S. Politics

As I wrote in my last post, the ability of individuals, corporations and organizations to make large contributions directly to individual politicians is making a mockery of the political process. All such contributions must be made illegal immediately. Period. Political advertising on TV and elsewhere must also be ended, and campaigns should be conducted purely through debates in the media. Each political party would be given a set amount of money from U.S. taxpayers, end of story.

Decrease the Power of the President

There’s really only one appropriate word to describe someone who is head of state, head of government and commander-in-chief: King. No other modern country has this configuration, and for very good reasons. To give one man such vast powers is simply dangerous, and as we have seen during the last 8 years, it can have truly disastrous consequences. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship.

Increase Voter Participation by Practical Means

The main reasons behind the fact that voter turnout is the lowest in the U.S. among all industrialized countries is obviously that there is no point for most people to vote because there is no proportional representation. But there is also large-scale voter-suppression, fraud and other tactics that keep voters away. This must obviously be dealt with mercilessly. In addition, there is a number of practical measures that can be taken to make it easier for people to vote, such as:

- conduct all voting on Sundays

- automatically register every U.S. citizen as a voter on the person’s 18^th birthday

- create a national ID card which is sent to every U.S. citizen when the person turns 18

- allow mail-in ballots in every election

- End all electronic voting and create completely uncomplicated, nationally standardized paper ballots

If you agree with me, spread the word. If you disagree with me, leave a comment. (You can also leave a comment if you agree with me)