Author Archives: jgoldstein

Hi guys,

When I was reading newspaper,  I found this article very interesting Continuing Job Losses May Signal Broad Economic Shift  and I decided to post it for you. It talks about how government assures that they will build our economy however, this isn’t coming very well.

“A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

Companies go bankrupts, people lose jobs, and who is going to change that? Unemployment increases so badly that now everyone tries to catch any job he/she can get.

“We are now falling at a near record rate in the postwar period and there’s been no change in the violent downward trajectory.”

“Who’s going to put me to work?” he asked. “Where’s the work at? It’s just a great big black hole.”

Therefore, our car industry used the money that government gave, and now they ask for more because they will bankrupt and lay off many people. What will happen with our economy? We can just wait and pray that someone will come with very good idea.

Over the months of these tough economic times, the government has been providing a stimulus for major U.S. companies, such as AIG, Citigroup, etc. Now this may seem like an obvious way to start rebuilding the economy, but the problem is that these companies don’t know how to manage themselves. In other words, they have corrupt and terrible management. For example, recently the government had injected into AIG some  20 billion dollars. Next thing you know, the executives are off spending that money in some fancy resort. Even Citigroup was granted a bailout, and then attempted to purchase a 50 million dollar private jet for the top executives. In my eyes, these people are sick and corrupt. How can one even think about spending a single dollar when they’re in the situation that they are in? Anyhow, besides the terrible managing skills, my next question is: If you are the government, why are you still injecting more money into these companies and banks? The other day, the government injected another $26 billion into AIG. Honestly, the same people that can’t get them out of this situation are the same people that got them in. It’s clear that these companies are not responsible. And essentially, it’s only wasting our taxpayer’s money.

Now this is what Baker means when he say’s “let’s kill all the Zombies.” The zombies are the banks that are in the same position as AIG is in. No matter how much money we keep injecting into the banks, they’re eventually going to still have problems and it will never end or it will take a really long time. In other words, they are HOPELESS. Smith believes that we should organize the banks into three groups: the healthy, the needy, and the hopeless.

As he states, “Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.”

To clarify it, there are the healthy banks, the ones who can still manage themselves right now without the government’s health. Then there are the needy banks, which are the ones that aren’t too deep and can still revive themselves with a little help by the government. Finally, there are the hopeless banks, which are the ones what are going to fail no matter how much stimulus there is. They practically are the living dead aka zombies. They are pretty much useless. However, Baker does not mean to literally get rid of these hopeless banks. Instead, he means that the government has to get rid of the current management and take over. A good example of this would be what the government did with Citigroup last week. I believed that Citigroup was hopeless, until the government came in and took over. Maybe now they might have a chance, but it will be a long process. As for AIG, even though it is not a bank, I would consider it a hopeless company. What the government did with these two companies are two different things.
And in my personal opinion, I believe that Bank of America is a hopeless bank. I think that they’re debt is too large and essentially, it will take too long for them to come back. Realistically, injecting more money into the company is no use.

Anyways, the government needs to stop injecting money because honestly it just doesn’t work. If we keep doing so, eventually after the economy gets better, the government is going to be low on money and eventually raise the taxes. This is what happened in Japan 10 years ago. The same scenario happened to the Japanese and the country’s economy collapsed. America even advised Japan to stop stimulating the banks because it’s going to damage their economy more in the long run. And now we look like hypocrites by doing the same thing. Smith even says “the US is on its way to repeating the Japanese error of propping up dud banks and creating a moribund economy as a resuly.” We should stop now before it gets worse. And even if it does get worse, it’s better than being viewed as a fool.

Our economy is going down the drain, sales are not being made and profits are being lost. People are losing their jobs, people cannot find a job and people wages are being cut down. The prices of everything is going up, except people’s salary. If everything is going up, then why is people still spending money on clothing, cars, restaurants and other unnecessary things? Well one ecologist by the name of Adam Smith explains this in his book “Wealth of Nation” by saying that we all as consumers are being led by the ‘invisible hand’ which basically is supply and demand. Demand by consumers are what make the rich companies richer because big companies supply what consumers demand. We all live in a consumer driven economy because people all demand for consumer goods. And of course retailers are going to be making and selling goods that the public demand because they only care about making their profits. Especially if demand is high and supply is low then retailers would sell their goods higher in turn making more than ever. Of course there are competitions out there among many companies that make the same items. If supply is plenty and demnd is low from consumers then retailers might be losing in profits instead of making and profit at all. But retailers are smart, this is where the media comes in and make a bigger impact on consumers. Retailers turn to advertisements to sell their goods. And of course since media appeal to alot of consumers, they actually go out and buy the goods even if they don’t need it or have the money for it. When a consumer wants something there is a way to get. Back to consumers’ demand and retailers’ supply, no one is forcing any consumer to buy goods, they are all doing it by our their self-interest. Retailers are simply supplying what customers demand. Some ecologist even agree that the ‘invisible hand’ leding people to purchase goods is a good thing because it makes the economy grow, by production and manufacturing rates go up stimulatiing GDP, having more exports and offering people work.

The simple answer is that Capitalists do operate in their own self-interest in pursuit of profits in order to stay competitive, expand their production and increase their accumulated capital. That is the object of economic activity in our system of production and distribution. Capital accumulation is the goal; profitability the driver; wage-labor the sine qua non.  Most workers know this.  The bigger question is why does that system fail periodically; and fail on a grander and more global level each time?  Greenspan’s ideology cannot explain these repeated economic crises we experience periodically; and it does not allow for acknowledgement that they are endemic to our economic system. -Cramer

Numerous investors and economists have noted that this financial crisis is just the tip-top of the iceberg.  That the problems with the underlying “real economy” have been going on for over thirty years.  They state that we have to get back to manufacturing real things, not betting on inflated financial paper with no material backing or real value. (Even Dennis Kucinich was heard to exclaim after passage of the bailout bill, “We are going backwards, from an industrial economy to a financial economy!”)  Having acknowledged the larger, underlying problem, all critics— whether radical, progressive, leftist or conservative— quickly return to gossiping about the sexy intrigues of bankers, hedge fund manages, and other irresponsible lenders accused of having built the financial house of cards.  It really does remind one of the drunk who insists on looking for his car keys under the street light, rather than were he lost them in the dark shadows. -Cramer

Today we are nearing the end of the old ideological road. Our political and economic system is undergoing radical change.  The ideological “autobahn” under construction is being built for us by a government representing the needs of the largest industrial corporations and financial institutions.  We can continue to suffer the consequences of letting them chart the way of change, or we can plan a new path forward, grounded in everyday material reality and values, designed to benefit the entire people. Seeing through the myths of “consumerism,” and the ideology of “this most perfect of all economic systems” is a necessary first step.

I am reading an interesting article from Radical Perspectives on the Crisis. Nouriel Roubini, the celebrity NYU professor of economics,  who is best known as “Doctor Doom” argues that nationalizing our failing banks temporarily is a more “market friendly solution”.

When I and others put it in the context of the Swedish approach [of the 1990s] — i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector — it’s clear that it’s temporary. No one’s in favor of a permanent government takeover of the financial system.

The Swedish banking crisis response, according to a post by Anders Åslund, can be applied to our current financial crisis. In other words, the Obama administration should use the swedish approach to write off those bad debts from normal banks and transfer them to bad banks (private equity fund) that it controls. Transferring bad debts to bad banks in order to avoid contaminating good loans in cleansed banks just as selling off those assets over several years in order to avoid trading undervalued assets. As a temporary form of nationalization, the Swedish approach seems like a better alternative than the corporate bailouts under TARP (Troubled Assets Relief Program).

The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks.

Unlike the corporate bailouts, temporary nationalization seems less than a simple redistribution- taking taxpayers’ money to fill the deep pocket of corporations. Temporary nationalization ultimately minimizes costs to taxpayers, according to Thomas Ferguson, a contributing editor of The Nation. Temporary nationalization gives taxpayers temporary ownership until banks become healthy again and the public’s shareholdings can be sold back to private investors at a profit.

Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system. De facto, the government is already controlling a good chunk of the banking system. The question is: Do you want to move to the de jure step.

The Obama administration may have avoided using the word nationalization because of its negative connotation (a political risk) given that we are capitalist society, but I am not sure that the new administration has embraced bailouts over temporary nationalization for ideological reasons. As more people like Alan Greenspan and Republican senator Lindsey Graham (two advocates of financial deregulation) show support for temporary nationalization, the Obama administration is more likely to nationalize banks (temporarily) in the next few months according to Roubini. Another good reason for nationalizing banks temporarily

we started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. (…) You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.

Take AIG for instance, one of the world largest insurance corporations is about to receive $30 billion, which will be the fourth government rescue since September. AIG alone has already received $150 billion in government loans, yet it’s socialism when the government tries to help Main Street. How did we get into this mess?

(…) the last decade was one of self-regulation. But in the financial markets, without proper institutional rules, there’s the law of the jungle — because there’s greed! There’s nothing wrong with greed, per se. It’s not that people are more greedy now than they were 20 years ago. But greed has to be tempered, first, by fear of losses. So if you bail people out, there’s less fear. And second, by prudential regulation and supervision to avoid certain excesses.”

Where is the “Invisible hand” when we need it? But wait! The “invisible hand” is why we are this mess in the first place.

Nouriel Roubini is a Professor of Economics at NYU, and is has been forecasting this econcomic meltdown for some time.  It has earned him the nickname of “Doctor Doom”.

To Mr. Roubini, the most interesting question isn’t the one of who got it right. Instead, he asks why we “over and over again, get into these periods of irrational exuberance, when not only is there an asset bubble and a credit bubble, but people believe these are sustainable over a long time — Wall Street, policy makers, rating agencies, academics, journalists . . . .”

This article is worth reading in its entirety, and I hope you do, but here are the key quotes that relate to Mr. Roubini’s belief that many – or maybe all? – banks will be nationalized within six months:

—“… [if] you take banks over, you clean them up, and you sell them in rapid order to the private sector — it’s clear that it’s temporary.”

—“The kind of government interference in the economy that we saw in the last year of Bush was unprecedented. The central bank — supposed to be the lender of the last resort — became the lender of first and only resort!”

—“People like [Senator Lindsey] Graham and [Former Federal Reserve Chief Alan] Greenspan have already given their explicit blessing. This gives Obama cover [to nationalize banks].  I think that we’re going to see [banks nationalized] in the next few months . . . in six months or so.”

—“We started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. J.P. Morgan took over Bear Stearns and WaMu. BofA took over Countrywide and then Merrill. Wells Fargo took over Wachovia. It doesn’t work! You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.”

I have seen Mr. Roubini many times on Charlie Rose, and he is usually the opinion leader on the panel as being the person who was right.  I’m not sure how to summarize any better the article than the quotes above do.  I have edited the quotes down.

In this article, Roubini faults journalists for being cheerleaders during these bubbles instead of asking tough questions.  I think that’s an excellent point.

Lastly, I would like to include this information from a different post I saw on Naked Capitalism which I believe likely plays a factor into why banks aren’t being “taken over” perhaps more quickly:

This article was found on the Radical Perspectives website.When reading this article by Rick Wolff there is one ongoing central idea. The capitalist class structure of system is the blame for our current economic problems. This article is very straightforward. The first line of the article reads “At the capitalist system’s core lies its central conflict” This conflict is between corporations and the workers/employees. The board of directors represents the corporation in this article. Wolff uses this situation as a background of the article.

He then continues to describe the conflict. This includes the fact that the corporations cut workers wages. In the other hand the workers seek to improve their income and job benefits. With the actions of corporations outsourcing and workers losing jobs Wolff suggests if workers “were workers to become their own collective board of directors, they would not likely reduce wages or outsource jobs” This would cause job retention.

Now that the background information is given, Wolff then gives examples of what the class structure has done to economy. Using past data Wolff states the class conflict has always contributed to instability economically. Wolff gets straight to the point when he says “But a taboo blocks consideration of one such cause namely capitalism’s class structure.”

I think Wolff even by his title is trying to reawaken the public and point to what is really going on. His article stresses that is not a recent problem. His analysis of post Wold War II recessions emphasizes that the class struggle needs to be revealed and analyzed for the general public. This article appeals to the worker and definitely not the corporations. It is like he is telling the reader this is common sense it’s the class struggle and nothing else. I believe this article is a conversation starter to the issues at hand with this economic crisis. However I think the article can be too black and white. This crisis is very complicated and there are much more factors then what is presented in the article.

Dhanha Bien-Aime

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