Monthly Archives: February 2009

This was an article I read from the Naked Capitalism blogs and I found it to be quite interesting. It was based on a joint statement (http://treasury.gov/press/releases/tg38.htm) released by the treasury, FDIC, OCC, OTS, and the Federal Reserve and discussed how the entire financial system is extremely important to the economic system in the U.S. and how this Capital Assistance Program will ensure that financial institutions will be provided with capital. Basically financial institutions have gained the attention of financial regulators and felt that they needed to reassure everyone how important it is to keep these institutions up and running. It argues how the U.S. needs a healthy banking system to run and to sustain growth, and it should remain in private hands in order to achieve that. But this is interesting considering that banks have always remained in private hands, but whenever they suffer through tough times as in this current crisis, they go running to the government and to the taxpayers for help. Here’s how that statement started off:

“A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments”.

Here’s where the argument for the sustainability of the financial sector is emphasized. Also as pointed out by Yves Smith, they acknowledge that they are in serious trouble but don’t suggest how the government “will ensure” that things will be ok or will at least be back to normal. It seems as if they are trying to make things appear like it’s going to get better, but what they’re really doing is just keeping their fingers crossed and hoping for the best. The statement goes on:

“We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment”.

Shouldn’t this have occurred before things went bad? So they just now decided to create such a program to ensure that these banks are appropriately capitalized (emphasis on appropriately)?  Maybe things wouldn’t have turned out as bad if this was already in place.

“Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers”.

This is where things don’t make any sense. So the government will overcapitalize these banks on the caution of them occurring future loses instead of just giving them enough capital to cover current or near term loses? Wouldn’t that run the risk of giving these banks extra capital to say “fool” around with and maybe make mistakes that they have already made in the past. If you were to give them just the amount that they needed maybe they will be more careful of how they operate and invest it. The statement concludes with:

“Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands”.

As Yves Smith points out, this particular statement is comical in the sense that they HAVENT been managed properly and have put themselves in the mess that they are in now. I’m all for capitalism, but if these institutions are so adamant about being remained privatized  then they should handle their operations with better and more responsible care and not run to the government and the taxpayers for help. I think it’s also important for the government to place some limited restrictions on these institutions that are receiving help, in terms of how they must use the extra funding and how they must handle their operations. The taxpayers shouldn’t have to bear the responsibility of these institutions and they also shouldn’t have to bear the governments poor decisions to overcapitalize and invest with taxpayer money.

Cramer: “The Multi-Trillion Dollar Question: Whose Consumption Drives the Economy?”

I’m reading the article from Radical Perspectives on the Crisis. This editorial caught my attention because it addresses an issue that involves everyone. We can hear that “consumer-driven economy” but is it true?

“Our economy is a Capitalist economy. We need to appreciate, as well as understand, that. Capitalism is based on production for profit. No profit, no production.” 

In capitalistic economy, businesses are privately owned and operated. The government’s role in the business world is limited. Its main function is to protect each part of the economy-big business, small business, and consumers-from abuse. However, we can see that this is not happening.

“Government spending on public works programs detracts from capital that could be spent in private profit-making industries.”

Government turns a blind eye on private businesses actions but at the same time help them to take away workers’ benefits. People try very hard to earn income for their families. These earnings later will drive the economy, but when the revenue is lower, spending is lower. Than government shows up, gives money to industries, and recovers their losses instead of helping lower-wage people. In this conditions,

“(…) under our economic system (Capitalism), public (nonprofit) spending on domestic programs that directly benefit you and me will not jumpstart capitalist (for profit) production.”

By this sentence, author tries to show that people-consumers do not have a lot to say. Our system is for businesses that want to earn money without caring for people and their interest. Money is their goal and they will try to reach it by any cause and any prize.

“Most of the government spending on infrastructure will not be to fix the streets of inner city neighborhoods or the roads of small towns and rural area. It will be used to build super commercial highways, transportation facilities and technology useful to private corporations—more government (taxpayer) subsidies to help boost private industrial profitability.”

This part of article explains everything such as where taxpayers’ money goes. Government spending most affects private sectors than public. In our capitalistic system, government should not interfere in private businesses; however, most actions benefit theses segments.

“Working people’s consumption of everyday necessities is being cut, while billions of taxpayer dollars goes to “bail out” financial institutions who have no incentive to loan those funds to low income people (or to companies) now that most of the fraudulent transactions and speculative securities are supposedly under closer scrutiny.” 

Companies’ main goal is to have surplus. Therefore, they can invest money and produce more goods. But what happens when they fail? Nowadays, we can see that government comes up and give them money so they will not bankrupt. Nevertheless, when people lose jobs, they get low unemployment or even not. How this is different from companies that get millions and people gets nickels? But this is how our government pursues capitalism.

“Efforts to overcome this “recession,” like all preceding ones, will focus on lowering workers’ incomes and consumption (consumer goods), while transferring as much economic wealth, labor time, and resources as possible to corporate expansion and capital accumulation (producer goods).”

Therefore, we come to the question “whose consumption drives the economy?”  People cannot buy goods because their wages were cut or they lost their jobs. How they can purchase goods without money; they go to banks and loan it. However, bank cannot lend them because people have low income. Then companies cannot produce goods because people do not buy merchandise. The question goes back and forward. I can assume that people-consumers are the ones that run the economy, but then private companies show up with their actions, and I get even more confused. In addition, government is between these two. This is very though question, but to answer it we will have to get all information and analyze it very well, but I believe after that we will get crazy.

I read an interesting article in the Naked Capitalism Blog (http://www.nakedcapitalism.com/2009/02/object-lesson-consumer-frugality-in.html) on how the people of Japan have been handling the current economic crisis. As we all know, since WWII, Japan has been looked at as the case study on how capitalism can be brought to a foreign land and thrive because of it. However, today Japan’s economy has fallen almost 30 percent and consumer spending has decreased an enormous amount because of it. You may think with such a decrease might lead to an emptiness in the urban areas of Japan , however “infrastructure is well maintained, people are neatly dressed, restaurants, bars, and tea houses look busy”. Where one can really see the changes is in the homes and day-to-day lives of the working class people.

“Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.”

“The Takigasaki family in the Tokyo suburb of Nakano goes further to save a yen or two. Although the family has a comfortable nest egg, Hiroko Takigasaki carefully rations her vegetables. When she goes through too many in a given week, she reverts to her cost-saving standby: cabbage stew.”

This kind of penny-pinching even hits families where both parents have stable jobs as in the Takigasaki family the mother works part time at a home for the disabled and the father “has a well-paying job with the electronics giant Fujitsu”, but just like here in the US, neither knows how long their jobs will last.

It’s funny to think about what we in the US would think if we had to wash our clothes in the bathtub or ration out vegetables and eat cabbage stew regularly, especially if both breadwinners had stable jobs. These kind of cost-cutting measures are almost the anti-thesis to what the middle-class culture in the US preaches. We always want to look as if we don’t need the assistance or don’t need to be frugle, when in actuality, we probably would be better off if we were. In the Blog post it said that in Japan it is easier to achieve these frugle ways because “Japan has very little income disparity, the fact that the belt-tightening is widespread no doubt makes it somewhat easier to bear”.

If everyone you knew also had to wash their clothes in a tub instead of laundromat, the stigma of being a penny-pincher would essentially be washed away.

In an article in the New York Times, author Charles Duhhig talks about Fannie Mae and their new program to help relief renters who face eviction.

Fannie Mae will:

“sign new leases with renters living in foreclosed properties owned by the company”

Fannie Mae is the first nationwide company to provide relief for those customers whose houses have been foreclosed. As John Taylor, president of the National Community Reinvestment said:

“There are renters all around the country who have been holding up their end of the bargain and paying their rent faithfully, but the landlord got into trouble, and so the renter is now unfairly facing eviction…It’s really good news that Fannie Mae is doing this. Now the question is whether private sector will follow suit.”

Now this is a great offer for those customers whose house’s are owned by Fannie Mae, but what is going to happen to those customers whose houses aren’t?  Fannie Mae, instead of being a government controlled mortgage finance company, had become the landlord of thousands of houses that face eviction.  Are other private sectors going to follow and adapt this program?

Thomas Kelly, a spokesman for JP Morgan Chase said:

“We’re not in the business of managing rental properties, and we’re not in the business of being a landlord…clearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.”

In defense, John Taylor again says:

“If your loan is owned by Fannie Mae, you get to stay in your home. If your loan is owned by someone else, you’re on the street…these banks need to realize they’re in the property management business now, whether they like it or not.”

The government has also tried to help out customers with foreclosed homes.  The House tried passing a bill where the new owner of a foreclosed property will have to notify renters 90 days in advance before an eviction.  This bill failed to pass the senate.

The article ends with a story about a customer who was evicted from a foreclosed house and couldn’t find an apartment.  She says she worked very hard to pay her rent and still pay her other bills.  Thanks to Fannie Mae and their new policy she will be allowed to stay in her home.

This article just makes me think about America’s problems with foreclosed homes.  It’s a very hard to say whose fault it is.  After researching and talking to some people, I found out that some real estate agency’s give out their mortgages and then increase them two or three years later.  A lot of home owners dont know this and that’s one of the reasons why they cannot make those payments and their house become foreclosed.  These home owners should read their contract front and back before signing any agreement, look for opinions from experts, not get into a mortgage that they know they are not going to be able to pay back, and therefore they could save themselves a headache a few years later.  Another reason that we should take into account is all the unemployment going on in America.  Wealthy companies such as Merrill Lynch and the Lehman Brothers have filed bankruptcy and left thousands without jobs.  One day they had everything they needed, and the next day everything was gone.  Lastly banks should really take a deeper look into a customers credit history before giving them a loan for the house.  If you have bad credit history then i think you should not be given thousands of $$$ in a loan.

I think Fannie Mae is doing a great effort to make sure there customers do not get evicted from their homes.  I think other private sectors should adapt to this program or maybe something similar that way these customers don’t end up without a home.

By: Armenis Perez

I am reading an interesting article from CounterPunch newsletter on the America history of restoring a crisis.

In this article, the author explains how our economic system manages to remain afloat even when it seems like there are more “assets” (debt) for the government to buy up than there are actual profits turning.  She explains that these huge failing financial institutions are saved by simple redistribution.  In the authors words:

today we hear about the federal government buying up “assets” of the failing banks and other financial institutions.  These “assets” are, of course, also debts, and very bad debts that can’t be repaid.

Essentially, the president acts as Robin Hood, but instead of taking money from the rich and dispersing it to the poor, he takes the money of the labor workers and tax payers and fills the deep pockets of corporations.  You may be wondering how exactly the president does this.  It is more complex than simply raising taxes and then creating a budget that only funds bailouts.  One way is to create inflation:

Significant injection of government spending into industrial production, rather than into the production of “consumer goods,” results in inflation.  The price of daily necessities goes up due to shortages or rationing, and the real value of workers’ wages goes down.

Inflation is basically the same thing as cutting a workers wage without actually doing so.  The price of goods go up because of the change of government funding. The worker is now able to afford less goods.  This way he is still putting in the same labor, sometimes even more, but using less of the production, basically consuming less.  This leaves more resources and more of his income for expanding industry.  War is another good way to boost the economy.

“911” resulted in an enormous increase in presidential powers, and that both private military contractors and the oil industry profited tremendously from the US invasion of Afghanistan and Iraq. At the same time, cuts in wages, lay-offs, unemployment, increases in hours and worker productivity without increases in pay or jobs, have continued to insure that working peoples’ real incomes decline.

During a war, Marxism critique of Capitalism goes into full throttle.  With the powers of the bourgeoisie or president expanding, he takes full advantage of the proletariat, exploiting him fully for his labor all in the name of industry (PR for making CEOs, his fellow bourgeoisie members, richer instead of holding them accountable for their failed business decisions).  Sometimes exploiting the workers is not enough to salvage  failing industry.  At this point outsourcing becomes the redistribution of choice.

When this usual method of economic competition is not sufficient to turn around a deep economic crisis, taking the resources of another country by military force, while reducing its population to beggars willing to work for starvation wages, is another way to reallocate or “redistribute” economic wealth and resources.

The article wraps up with a question:

how long will working people, consumers and taxpayers stand for paying the costs of larger, deeper, more wide-spread economic busts that lower our standard of living, destroy social programs, and bankrupt our pubic institutions and infrastructure…We need to decide for ourselves which road we want to take in creating a system of production and distribution that truly provides for us all.

I’m personally not sure what the real answer is.  It is clear that our system is flawed, but it is unclear if there is another system that is ideal.  Is her Utopia possible in our American reality?

this is the content of my post

I am reading an article from the brooklyn rail

here is is a general summary of what i thought was interesting about reading this article. maybe a main point or two and even my oiwn perspective if I had one.  then I’m going to walk the reader through this article with my blog post.  so, I’ll start with a quote:

In response to the weakened economy, the Fed cut interest rates between 2001 and 2003 from 6.5% to 1%. This led, as intended, to a massive increase of debt, personal and corporate. In particular mortgage lending took off, from $385 billion in 2000 to $963 billion in 2005. This, together with the refinancing of homes, was the basis for the post-2002 expansion of the American—and so, to some extent—of the world economy, along with the massive inflow of foreign funds in exchange for U.S. Treasury securities.

so now that I’ve quoted I wwill explain why i chose that quote, what it tells us, and then lead into another quote….

How did fictional investment come to have so dominant a place in economic reality? And how far is the depressionary wolf from the door? My next article, in the November Rail, will explore the roots of the current crisis in the development of the world economy since World War II; a third, in December, will examine that development in relation to the cycle of prosperity and depression that has characterized the capitalist economy since the early nineteenth century.

and then I saw more, etc. etc. conclusion