Thursday, November 17, 2011

Paul Craig Roberts: Bankrupt Economics

"When profits are produced by rendering a country’s work force unemployed the edifice that economists have built that justifies market capitalism as the deliverer of economic welfare to society no longer stands."
The economic mess in which the United States and Europe find themselves and which has been exported to much of the rest of the world is the direct consequence of too much economic freedom.
The excess freedom is the direct consequence of financial deregulation.

The definition of free markets is ambiguous. At times it means a market without any regulation. In other cases it means markets in which prices are free to reflect supply and demand. Sometimes it means competitive markets free of monopoly or concentration.

“Free market” economists have made a mistake by elevating an economy that is free of regulation or government as the ideal. This ideological position overlooks that regulation can increase economic efficiency and that without regulation external costs can offset the value of production.

Before going further, let’s be clear about what is regulated. Economists reify markets: the market did this, the market did that. But markets don’t do anything. The market is not an actor; it is a social institution.

People act, and it is the behavior of people that is regulated. When free market economists describe the ideal as the absence of any regulation of economic behavior, they are asserting that there are no dysfunctional consequences of unregulated economic behavior.

If this were in fact the case, why should this result be confined to economic behavior? Why shouldn’t all human behavior be unregulated? Why is it that economists recognize that robbery, rape, and murder are socially dysfunctional, but not unlimited debt leverage and misrepresentation of financial instruments?

The claim, as expressed by Alan Greenspan along with others, that “markets are self-regulating” is an assertion that unrestrained individuals are self-regulating. How did anyone ever believe that?

When Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Deputy Treasury Secretary Larry Summers, and SEC Chairman Arthur Levitt browbeat Brooksley Born, head of the Commodities Future Trading Commission, and prevented her from doing her duty to regulate over-the-counter derivatives, they committed one of the most stupid policy mistakes in economic history.

The financial crisis that resulted has spread its devastating effects everywhere. The explosions in public debt and money creation, resulting from efforts to bail out the financial system from its own stupidity, have brought the U.S. dollar and the euro, the two reserve currencies of the international financial system, under pressure, undermining confidence in the reserve currency status of the currencies and the international financial system, as the price of gold indicates.

Obviously, the lack of financial regulation was dysfunctional in the extreme, and the social costs of the policy error are enormous.

Thirty-three years ago in an article in the Journal of Monetary Economics (August 1978), “Idealism in Public Choice Theory,” I developed a model to assess the benefits and costs of regulation. I argued that well-thought-out regulation could be a factor of production that increases GNP.

For example, regulation that contributed to the quality and safety of food and medicines contributed to specialization in production and lower costs, and regulations enforcing contracts and private property rights add to economic efficiency.

On the other hand, bureaucracies build their empires and extend their regulations into the realm of negative returns. Moreover, as regulations increase, economic managers spend more time in red tape and less in productive activity. As rules proliferate, they become contradictory and result in paralysis.

I had hopes that my analysis would result in a more thoughtful approach to regulation, but to no avail. Liberals continued to argue that more regulation was better, and libertarians maintained that none was best.

The ongoing financial crisis has given us a taste of what the absence of regulation can produce. Despite the enormous cost, the financial system remains unregulated. As soon as Wall Street devises a new financial instrument and finds new suckers, it will happen again.

The ambiguous concept of freedom in economics has laid other minefields. Until the Clinton administration, economic concentration was seen as impinging on economic freedom. As late as the Reagan administration, AT&T was broken up.

The Clinton administration permitted the concentration of the media. Formerly, this concentration would not only have been considered “in restraint of trade,” but also contrary to the American tradition of adiverse and independent press.

Today mergers and concentration of economic power are no longer seen as encroachments on competitive markets but as necessary to maintain global competitiveness.

In the George W. Bush and Obama administrations, we have witnessed enormous financial concentrations. One consequence has been that financial corporations can no longer be held accountable as they “are too big to fail.”  Thus, the economists’ story of how the market weeds out the failures can no longer be told. The failures accumulate and are subsidized with public money. This is the antithesis of economic efficiency.

The dispersed power that made the market a socially functional institution is disappearing. For example, capital is free to concentrate, but labor unions, a “countervailing power” to capital, are being destroyed. Jobs offshoring has destroyed the manufacturing unions, and now politicians are using the state and local budget crises to destroy public sector unions.

Developments since the collapse of the Soviet Union twenty years ago have confused economists and produced results that threaten the edifice of economic theory. Economists have confused jobs offshoring with free trade. However, jobs offshoring is not trade at all. It is labor arbitrage.

Free trade theory is based on comparative advantage. Labor arbitrage is the pursuit of absolute advantage. Profits resulting from jobs offshoring raise questions about economic theory’s justification of profit maximization.

Theoretically, profits are justified, because they are evidence that resources were efficiently used in producing consumer satisfaction and are a measure of the economic welfare of the society. This conclusion no longer holds when profits are produced by rendering a country’s work force unemployed.

Offshoring separates consumers from the incomes and careers associated with the production of the goods and services they consume. The profits from offshoring reflect the economic welfare of the foreign country.

Therefore, the edifice that economists have built that justifies market capitalism as the deliverer of economic welfare to society no longer stands.

Paul Craig Roberts is an American economist and a columnist. He served as an Assistant Secretary of the Treasury, earning fame as a co-founder of "Reaganomics." He is a former editor and columnist for the Wall Street Journal and Business Week.   Roberts has been a critic of both Democratic and Republican administrations.

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Saturday, October 22, 2011

Andrew Cockburn: Too Bad to Fail

“If the Occupiers start chanting ‘Mark to Market,’” an attorney highly conversant with the darker workings of the Wall Street-Washington complex told me, “we’ll know they’re serious.”   Such a call would quickly presage the collapse of our “too big to fail” banks, for it would highlight the fact that a huge proportion of the assets of Bank of America, Wells Fargo, JP Morgan, and Citigroup consist of loans that will never be paid back and are therefore essentially worthless.

The so called “recovery” of our leading financial institutions from the post-Lehman abyss has depended on a fraudulent valuation of these assets, but stripped of the fiction, the banks are insolvent.

Not long ago, accounting rules required bank assets, such as mortgage, credit card and other loans, not to mention the securities derived therefrom, to be “marked to market,” meaning that they had to be valued on the balance sheet  at what they might fetch if offered for sale on the open market.  This practice, enjoined by the Financial Accountancy Standards Board (FASB), was quite popular at a time when the bubble was still inflating, propelling house prices and the mortgage backed securities they supported in a pleasingly northward direction, and naturally carrying quarterly bonuses and other good things along with them.

However, such attitudes changed in a hurry once the housing bubble burst and the ratings agencies, albeit belatedly and reluctantly, began certifying that mortgage loans, as packaged and puréed into securitized instruments, were worth a lot less, or nothing at all.  In 2008 therefore the banks were forced to disclose write-downs of $175 billion.  By early 2009 not only were most of these institutions facing capital shortfalls that rendered them insolvent, they were close to having to admit the fact and head for the bankruptcy court.

Cries of rage and pain echoing round Wall Street were amplified in Washington DC by $27.5 million in bankers’ cash, funneled through lobbyists who focused their particular and generous attention on the capital markets subcommittee of the House Financial Services Committee.

The consequences were immediate and gratifying, at least from the point of view of the banks.  Hapless number crunchers from the FASB were hauled in front of the subcommittee on March 12, 2009,  and harshly instructed to change their rule, fast, or the congress would do it for them.

Results were immediate.  Instead of having to price their assets at a realistic level, ie one where someone might buy them, banks were permitted to use “substantial discretion” in their book-keeping.  “Mark to fantasy,” some called it, but suddenly Wall Street was booming again, along with bonuses.  Notional profits were further bolstered by shrinking “loan loss reserves” – money put aside against a rainy day – on the balance sheets.  Since all those assets were at healthy valuations again, who needed to provide for losses?

But of course the underlying reality never changed,  except for the worse.  Loans defaults continued their inexorable climb. Desperate to hoard whatever actual cash they did have, largely courtesy of Fed largesse, the banks eschewed anything as risky as actually lending money to businesses who might use it to give jobs to people.  No one, at least in government or on Wall Street, was prepared to admit the ongoing reality of major bank insolvency.

As one clear-eyed observer of Wall Street told me earlier this week: “Bank of America earnings were out today and you need an advanced degree in bullshit to understand half of it.  The whole thing is malarkey piled on crap. I don’t know how to separate the garbage from the decent and neither do (the banks). It’s the main thing that’s stopping any bank recovery, the denial and the inability or unwillingness to take their medicine.”

However, there is a way out of the morass.  Congress did pass the 2010 Dodd-Frank financial reform bill.  Though assiduously laced with loopholes and escape hatches, the law does contain one crucial element that would, if implemented, allow the seizure of the banks and the loans they control.

That’s the part of the 2010 financial reform act  that gives the FDIC the necessary authority “to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.”  It goes on to mandate that “creditors and shareholders will bear the losses of the financial company,” while management should not only be fired but also held personally liable (“bear losses consistent with their responsibility”)  for the wreckage they have caused.

God knows how this got past the lobbyists, but it’s on the books.  Let’s use it, dismantle JP Morgan, Wells, etc.  At that point the Federal Deposit Insurance Corporation would actually own all those loans that homeowners and other borrowers have been struggling to repay.  The banks have been obstructing any reduction of principal by allowing subprime borrowers to refinance at affordable rates.  But a government takeover, which is entirely in the administration’s power, would permit just that.  As a result, homeowners etc would be able to afford their payments, with cash to spare.
Too bad it won’t happen.

ANDREW COCKBURN is the co-producer of the feature documentary on the financial catastrophe American Casino.  He can be reached at

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Friday, April 29, 2011

Charles Davis: At Peace With War

Ron Paul is far from perfect, but I'll say this much for the Texas congressman: He has never authorized a drone strike in Pakistan. He has never authorized the killing of dozens of women and children in Yemen. He hasn't protected torturers from prosecution and he hasn't overseen the torturous treatment of a 23-year-old young man for the “crime” of revealing the government's criminal behavior.

Can the same be said for Barack Obama?

Yet, ask a good movement liberal or progressive about the two and you'll quickly be informed that yeah, Ron Paul's good on the war stuff -- yawn -- but otherwise he's a no-good right-wing reactionary of the worst order, a guy who'd kick your Aunt Beth off Medicare and force her to turn tricks for blood-pressure meds. By contrast, Obama, war crimes and all, provokes no such visceral distaste. He's more cosmopolitan, after all; less Texas-y. He's a Democrat. And gosh, even if he's made a few mistakes, he means well.

Sure he's a murderer, in other words, but at least he's not a Republican!

Put another, even less charitable way: Democratic partisans – liberals – are willing to trade the lives of a couple thousand poor Pakistani tribesman in exchange for a few liberal catnip-filled speeches and NPR tote bags for the underprivileged. The number of party-line progressives who would vote for Ron Paul over Barack Obama wouldn't be enough to fill Conference Room B at the local Sheraton, with even harshest left-leaning critics of the president, like Rolling Stone's Matt Taibbi, saying they'd prefer the mass-murdering sociopath to that kooky Constitution fetishist.

As someone who sees the electoral process as primarily a distraction, something that diverts energy and attention from more effective means of reforming the system, I don't much care if people don't vote for Ron Paul. In fact, if you're going to vote, I'd rather you cast a write-in ballot for Emma Goldman. But! I do have a problem with those who imagine themselves to be liberal-minded citizens of the world casting their vote for Barack Obama and propagating the notion that someone can bomb and/or militarily occupy Afghanistan, Pakistan, Iraq, Somalia, Yemen and Libya and still earn more Progressive Points than the guy who would, you know, not do any of that.

Let's just assume the worst about Paul: that he's a corporate libertarian in the Reason magazine/Cato Institute mold that would grant Big Business and the financial industry license to do whatever the hell it wants with little in the way of accountability (I call this scenario the “status quo”). Let's say he dines on Labradoodle puppies while using their blood to scribble notes in the margins of his dog-eared, gold-encrusted copy of Atlas Shrugged.

So. Fucking. What.

Barack Obama isn't exactly Eugene Debs, after all. Hell, he's not even Jimmy Carter. The facts are: he's pushed for the largest military budget in world history, given trillions of dollars to Wall Street in bailouts and near-zero interest loans from the Federal Reserve, protected oil companies like BP from legal liability for environmental damages they cause – from poisoning the Gulf to climate change – and mandated that all Americans purchase the U.S. health insurance industry's product. You might argue Paul's a corporatist, but there's no denying Obama's one.

And at least Paul would – and this is important, I think – stop killing poor foreigners with cluster bombs and Predator drones. Unlike the Nobel Peace Prize winner-in-chief, Paul would also bring the troops home from not just Afghanistan and Iraq, but Europe, Korea and Okinawa. There'd be no need for a School of the Americas because the U.S. wouldn't be busy training foreign military personnel the finer points of human rights abuses. Israel would have to carry out its war crimes on its own dime.

Even on on the most pressing domestic issues of the day, Paul strikes me as a hell of a lot more progressive than Obama. Look at the war on drugs: Obama has continued the same failed prohibitionist policies as his predecessors, maintaining a status quo that has placed 2.3 million – or one in 100 – Americans behind bars, the vast majority African-American and Hispanic. Paul, on the other hand, has called for ending the drug war and said he would pardon non-violent offenders, which would be the single greatest reform a president could make in the domestic sphere, equivalent in magnitude to ending Jim Crow.

Paul would also stop providing subsidies to corporate agriculture, nuclear energy and fossil fuels, while allowing class-action tort suits to proceed against oil and coal companies for the environmental damage they have wrought. Obama, by contrast, is providing billions to coal companies under the guise of “clean energy” – see his administration's policies on carbon capture and sequestration, the fossil fuel-equivalent of missile defense – and promising billions more so mega-energy corporations can get started on that “nuclear renaissance” we've all heard so much about. And if Paul really did succeed in cutting all those federal departments he talks about, there's nothing to prevent states and local governments -- and, I would hope, alternative social organizations not dependent on coercion -- from addressing issues such as health care and education. Decentralism isn't a bad thing.

All that aside, though, it seems to me that if you're going to style yourself a progressive, liberal humanitarian, your first priority really ought to be stopping your government from killing poor people. Second on that list? Stopping your government from putting hundreds of thousands of your fellow citizens in cages for decades at a time over non-violent “crimes” committed by consenting adults. Seriously: what the fuck? Social Security's great and all I guess, but not exploding little children with cluster bombs – shouldn't that be at the top of the Liberal Agenda?

Over half of Americans' income taxes go to the military-industrial complex and the costs of arresting and locking up their fellow citizens. On both counts, Ron Paul's policy positions are far more progressive than those held – and indeed, implemented – by Barack Obama. And yet it's Paul who's the reactionary of the two?

My sweeping, I'm hoping overly broad assessment: liberals, especially the pundit class, don't much care about dead foreigners. They're a political problem at best – will the Afghan war derail Obama's re-election campaign? – not a moral one. And liberals are more than willing to accept a few charred women and children in some country they'll never visit in exchange for increasing social welfare spending by 0.02 percent, or at least not cutting it by as much as a mean 'ol Rethuglican.

Mother Jones' Kevin Drum, for example, has chastised anti-Obama lefties, complaining that undermining – by way of accurately assessing and commenting upon – a warmonger of the Democratic persuasion is “extraordinarily self-destructive" to all FDR-fearing lefties.

“Just ask LBJ,” Drum added. The historical footnote he left out: That LBJ was run out of office by the anti-war left because the guy was murdering hundreds of thousands of Vietnamese. But mass murder is no reason to oppose a Democratic president, at least not if you're a professional liberal.

There are exceptions: Just Foreign Policy's Robert Naiman has a piece in Truth Out suggesting the anti-war left checking out Gary Johnson, the former governor of New Mexico who's something of a Ron Paul-lite. But for too many liberals, it seems partisanship and the promise – not even necessarily the delivery, if you've been reading Obama's die-hard apologists – of infinitesimally more spending on domestic programs is more important than saving the lives of a few thousand innocent women and children who happen to live outside the confines of the arbitrary geopolitical entity known as the United States.

Another reason to root -- if not vote -- for Ron Paul: if there was a Republican in the White House, liberals just might start caring about the murder of non-Americans again.

Charles Davis ( is an independent journalist who has covered Congress for public radio and Inter Press Service.

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