Elizabeth Warren on CNBC is my kind of TV: The plain-spoken brilliance of the Okie-gone-Harvard versus the savvy hectoring of the anchors-gone-Wall Street.
Last Friday, the senator made an appearance on “Squawk Box” to promote her 21st Century Glass-Steagall Act, which she’s co-sponsoring with John McCain, and while there might not have been blood and teeth left on the floor, it was a TKO for Warren.
She makes CNBC’s Brian Sullivan looks downright foolish here:
SULLIVAN: Senator, I will push back, though, on the relative security that you are portraying Glass-Steagall to have given us, because Continental Illinois in the early ’80s was the seventh largest bank in America. It failed. Almost set off another major banking crisis. Shouldn’t we just tell the American consumer that no matter what we do there will be bank boom and bust cycles no matter what the laws and regulations? You can’t protect everything.
WARREN: No! That is just wrong.
SULLIVAN: Why?
WARREN: Look at the history
SULLIVAN: I did look at the history. We’re filled with booms and busts from the Dutch Tulip Crisis to now.
Sullivan is flat wrong, as Warren points out in the clip above (make sure to watch the clip. The transcript doesn’t quite capture Sullivan’s tone and the resulting smackdown). There were no banking crises in the U.S. after the New Deal reforms of the 1930s until the early 1980s. Tough regulation, which separated investment banking from commercial banking, prevented over-consolidation, and reined in speculation, worked.
And then, bit by bit, the financial system was deregulated beginning in the mid-1970s. The Depository Institution Deregulation and Monetary Control Act of 1980 set the stage for the collapse of Penn Square Bank, which triggered the collapse of Continental Illinois and also helped unleash the S&L crisis, the first major banking collapse since the Great Depression reforms.
Sullivan’s dumb question is followed by a straw man question from Joe Kernan about how Glass-Steagall—all by itself—wouldn’t have prevented the financial crisis. Warren has amiably knocked that one down before (not coincidentally, it came from CNBCer and NYTer Andrew Ross Sorkin), and she does here as well.
And then there’s the savvy question, brought up by Amanda Drury:
With all due respect, Senator, every report I’ve read, every person I’ve spoken to says that there’s a very, very, very slim chance of this even passing.
To which an exasperated Warren responds, “Well, let me put it this way: If you don’t fight for it, the chances are zero.”
Kernan doubles down, sneering, “You’re making a statement, but we want Congress to do things that actually have a chance of happening and become law.”
Which sets Warren up to deliver the final blow:
I remember going on television multiple times, including here, when I talked about the Consumer Financial Protection Bureau, when the big banks were spending more than a million dollars a day lobbying against it, and when everybody told me ‘you’ll never get that thing through. Why are you even trying. The chances of passing it are slim to none.’
And yet look around: We now have a good strong Consumer Financial Protection Bureau. We got that agency because we got out and fought for it. I actually believe in that.
It’s always revealing to compare how CNBC treats Wall Street critics and how it treats Wall Street itself. It would be one thing if the network treated big bank CEOs like it does Warren and Paul Krugman and Eliot Spitzer.
As it turns out, JPMorgan Chase’s Jamie Dimon was on the network that day with Jim Cramer, who conducted the glowing interview entirely on Dimon’s turf.
It’s quite the contrast.
You’d think the Warren interview couldn’t end on a worse note for CNBC, but Joe Kernan then starts talking about how she “looks great.”
Cramer doesn’t comment on Dimon’s appearance.
And today comes Jim Cramer's tweet:
There is some weird strain of thought that CNBC got beaten by Senator Warren.
I l ike the senator but she had NO impact. Sorry..
Translation: "we at CNBC are too dense to understand Warren's plain English".
What complete fools.
#1 Posted by Greg Kilcup, CJR on Wed 17 Jul 2013 at 08:46 AM
Yeah, Jim's a sweetheart. When I tweeted the article to him and said how rude it was - he called me a "buffoon" and referred to my "ilk". Misogynistic jerk. Thanks for this follow-up article, I was able to tweet it right to him over coffee this morning. :-)
#2 Posted by Bobby, CJR on Wed 17 Jul 2013 at 09:23 AM
Someone should 'school' the Cherokee Maiden on a concept called 'trade-offs'. The era of 'no banking crises' was also the era of low yields on banking products, courtesy of the Feds. Then came the mysteriously-forgotten (by left-leaning writers, anyway) Great Inflation of the 1970s to destroy savings quite as effectively as any outcome of deregulation. People were seeking investments that protected their assets more effectively than inflation-ravaged bank deposits. That's why deregulation happened. Risk-averse political cultures decay.
If Warren's school of thought about the wisdom of the State above all (except in matters relating to women's reproduction and not much else) were true, California would not be the high-unemployment, fiscally-dysfunctional chronic case that it has become. President Obama's Illinois would not be a joke and desperate to hand out tax abatement to lure in business after a round of Warrenesque political action. And Warren's own Massachusetts would not be giving up another Congressional seat after every Census thanks to relatively poor performances in job creation and population growth.
#3 Posted by Mark Richard, CJR on Wed 17 Jul 2013 at 11:08 AM
The "great inflation" was caused by beginning the habit of putting wars onto revolving credit cards, along with OPEC putting in 40 years of inflation adjustment on what they got for crude all at once. In the middle of that was Nixon's disastrous disruption of supply demand with price controls.
The concept that "banking products" contribute to productivity is a joke. Financialisation of the economy as a panacea for the failure to modernise industry and infrastructure then did help set off Penn State, Continental, and (if a failing memory serves) Gen Re et al, in a feedback loop that has regular lockups, like 2008.
Societies where risk is born by the "47%" while profits accrue to the "1%" have imploded as long as political history is available.
#4 Posted by baltbear, CJR on Wed 17 Jul 2013 at 12:59 PM
Really? I thought Cramer had some tough questions in there, about how Dimon's bank contributed to the crisis and its aftermath and whether there should be perp walks on Wall Street. What would you have asked Dimon that Cramer didn't?
#5 Posted by Ajay, CJR on Wed 17 Jul 2013 at 02:54 PM
I watched Jon Stewart's take down of Jim Cramer several years ago and I have to say it extraordinarily well done. At the time Mr. Cramer appeared appropriately contrite. I suppose things have turned around very well, although only because the financial sector was essentially bailed out by the Federal Reserve for a price that has yet to be realized.
But the hubris is back. Anyone with any doubts about the markets or Wall Street, is openly denigrated. I suppose that should not surprise, as the show is intended to be opinionated and showy. In any event if I tune out his rants, I am able to listen to his show and he is no buffoon.
Still I believe Mr. Cramer blew the opportunity following his take down by Jon Stewart, to become the sharp end of financial journalism. Instead he is merely an apologist for the status quo.
One final point. Mr. Cramer could have internationalized his coverage. He could have picked apart Eurozone issues, Japan, China, BRICs etc. BBC Hard Talk (not so hard these days) meets Mad Money. He might rue the day he failed to do so.
He may yet be taken down again! Like a boomerang, what goes around usually comes back around.
#6 Posted by Ben Chua, CJR on Wed 17 Jul 2013 at 03:06 PM
'Someone should 'school' the Cherokee Maiden'
And right there I can stop reading. You're a goof, Mark.
#7 Posted by Thimbles, CJR on Wed 17 Jul 2013 at 03:27 PM
Mark Richard, baltbear has answered you well, but let me add that as inflation rose, so did interest rates, long before the wonders of deregulation opened up a Pandora's box of fraud and theft.
#8 Posted by Robert Taylor, CJR on Wed 17 Jul 2013 at 04:46 PM
To Baltbear, Johnson's policy of putting the Vietnam war on a credit card put much pressure on the Federal Reserve to inflate, but the Federal Reserve did inflate. Fuel price increases by themselves are not inflationary (as we have seen recently) in the sense of general inflation, such as we had across the board in the 1970s, but governmental efforts to ease the pain by printing more money are. I agree that Nixon's wage/price controls was bad policy.
In any event, that doesn't question the principle assertion, that the inflation helped undermine monetary savings in bank deposits.
I'm not sure what Robert's point is - interest rates did rise with prices, in a lagging manner, for borrowers as well as for savers. If you bought a house in 1974, you took a ride on the inflation express, but if you had your money in interest-bearing bank accounts, you got gouged. 'The wonders of deregulation' slew chronic inflation by 1984 - Reagan's deregulation of fuel prices ended 'the energy crisis', for example, something apt to be overlooked by orthodox liberal journos. Not even Democratic honchos have proposed re-control of oil prices since, which shows that they got the lesson in spite of the blustery rhetoric of their party.
'Fraud and theft' are always risks, whether in a deregulated economy or not. The journalists here who advocate more economic regulation don't want to talk about the 'fraud and theft' rampant in heavily-regulated statist economies in Europe, a place often regarded by the naive as a model for the U.S. Freedom from regulation permits shoddy journalism and hateful speech, too, but that's what I insist on calling a 'trade-off'. I direct you to the conditions mentioned in more heavily-regulated states that I reference in my original post. Regulation is always a panacea, from 'getting tough' in criminal justice law to airport security inanities to cracking down on speech - it's always going to be better than the alternative, see. The present administration over-reacted to the 2008-09 crash, and the result is the longest period of such high unemployment since the Great Depression. By contrast, unemployment was 10.8% midway through Reagan's term in 1982, but 7.2% and falling by the time of his re-election two years later - and inflation had been seriously reduced. This administration would like to have fnumbers like that, wouldn't you agree?
#9 Posted by Mark Richard, CJR on Wed 17 Jul 2013 at 05:16 PM
"To Baltbear, Johnson's policy of putting the Vietnam war on a credit card put much pressure on the Federal Reserve to inflate, but the Federal Reserve did inflate."
The US war in Vietnam (and I denote that because the war really began with the French) really started from 1963 to 1972. What's inflation like during that time?
http://en.wikipedia.org/wiki/File:US-Inflation-by-year.png
Not much, and that was during Johnson's and Kennedy's anti-poverty spending campaigns and the spending that put men on the moon. Valuable R&D. Valuable
investments in infrastructure and development.
And then you had 1973 and 74 after the Vietnam War. That was the first oil crisis. Inflation jumped.
Then you have the Iranian revolution 1978, 79. Inflation jumped.
Those are external causes, not internal.
"Fuel price increases by themselves are not inflationary (as we have seen recently)"
Wrong.
I can make the same argument that George Bush Junior putting 2 wars on a credit card while giving billionaires tax cuts and expanding the National Security Bureaucracy proved not to be inflationary, nor were the money printing actions of 2002 and 2008 by the Federal Reserve, therefore neither was Johnson's nor the Federal Reserve's back then, but that would be silly now.
Oil supply contractions caused an increase in input prices. The increased cost of goods increases the cost of living. That increased cost can be handled in a couple of ways.
1) One way is destructive to the value of savings. It works like this, to account for the increased cost of living, employees have to demand higher compensation. Higher compensation increases the price of labor input. This increases the price of goods, which increases the cost of living. This is a typical wage price inflation spiral which takes time to work out of a system. It requires a labor base that is sufficiently organized and politically represented to make demands of the businesses employing them. Had the system been given time, the discoveries of new oil resources would have brought down that input price pressure and the wage / price relationship would have settled into a new equilibrium, but this would have eroded the value of savings during that time.
Paul Volcker instead brought down inflation by using a type of financial repression, by increasing the interest rates so that the cost of capital was enormous. He triggered a recession until demand had been reduced enough to stabilize the cost of living and, therefore, negate the need and the ability of labor to demand compensation. The value of savings was saved by destroying the Federal Reserve's commitment to full employment.
(Look to this account of the beginnings of the Volcker/Greenspan Federal Reserves
http://www.thomaspalley.com/docs/articles/selected/Legacy%20of%20Greenspan.pdf
and post, it's one of the best papers I've seen on the subject and, considering it was written in 2005, it was extremely predictive of what would lead to the credit crash)
more in a sec
#10 Posted by Thimbles, CJR on Wed 17 Jul 2013 at 06:53 PM
ahh, the abandonment of the full employment condition..
Good place to start of on
2) Another way you can deal with an input price increase, watch as everything goes to shit. You see, in the Greenspan era, we have seen labor lose its ability to negotiate. This has been considered a great success by most elites until very recently.
It was the dominant economic thought that full employment was, by nature, inflationary. If the supply of labor was short and the demand for labor was high, the price of labor would naturally have to go up. Therefore, it became policy to avoid full employment.
But while we were avoiding full employment, we were also reducing the ability of labor to negotiate through:
the expansion of access to global labor supply (globalization),
the eroding of labor's political representation,
the destruction of governmental independence from the businesses they oversaw,
the erosion of tax bases supplied to government and the expansion of capital given to owners,
all of these things (and other policies) made labor organizations toothless and workers terrified to ask for compensation related to their increased costs. Their qualities of living eroded.
http://billmoyers.com/2013/07/10/two-american-families/
(which led to the erosion of household savings and the reliance on household credit)
Thus, when the Clinton boom happened, certain people like Greenspan celebrated because you had full employment and little inflation. It was a new age.
But you also had an indebted, indentured population who was falling further behind. They were told to make up the gap by putting their savings into 401k's and the stock market. They lost 8 trillion dollars during the dot com crash. They were told to buy houses because Greenspan lowered interest rates to levels they had never seen before.
But the institutions giving credit were crooks and rigged their products to explode. People in 2005 were just pulling along with refinancing and low wages funding their SUV trips to the new suburbs.
When the oil price gouge hit in 2007-08, there was no where to go. Employees couldn't ask for higher wages or more credit, so they lowered demand. They defaulted.
When you lower demand, you lower sales. When you lower sales, unemployment goes up. When you raise unemployment you lower demand. Depression.
But the people who have savings stay happy. Yes, their investments don't do so well, but the government will step in and save those (TBTF) and that nasty inflation problem disappears.
Why? You have surplus labor on the market. Nobody is going to demand higher wages when everybody is scared of losing the jobs they have. Insecurity is profit to big enterprise.
I hope that clears up your misunderstandings, you goof.
#11 Posted by Thimbles, CJR on Wed 17 Jul 2013 at 07:24 PM
To summarize: you can deal with price shock by increasing wages and inflation or you can do it by ignoring wages and watch the belt tightening deflate the economy.
Now, on the topic of Glass Steagal, every conservative should want it reinstated.
It was Glass Steagal which prevented consumer financing and deposits from risk taking. It was the wall that kept your money safe.
It was that wall which allowed the government to guarantee your bank deposits if, in the course of normal / low risk banking operations, a bank should somehow fail.
When we allowed banks to do risk taking, we incentivized their taking risks with our deposits through an expectation of high rewards.
The pursuit of high rewards did not come with a necessary fear of high loss because the deposits at risks did not only belong to other people, but they were insured by the taxpayers.
Investors who are aware of this 'government guarantee' feel they can lend more to banks at a lower rate because their investment is protected by government. These institutions can expand and risk take freely because they are insulated from the downsides of their transactions.
THIS WAS WHAT CONSERVATIVES HATED ABOUT FREDDY MAC AND FANNY MAE.
If you hated the GSE's, you should be dying to defang Systemically Dangerous Institutions who have a TBTF guarantee that they cannot crash and that the money they put at risk is insured.
They should be raring to put a Glass Steagal law into place.
Hell, the original Citigroup guys who wrecked Glass Steagal want it back in place:
http://billmoyers.com/segment/john-reed-on-big-banks-power-and-influence/
http://www.rollingstone.com/politics/blogs/taibblog/when-did-sandy-weill-change-his-mind-about-too-big-to-fail-and-why-20120803
The only reason why some people don't want it back is because they haven't really thought about this dimension or because they are bought into the idea that gains should be privatized and losses should be socialized.
Government should be securing our money to prevent bank runs on low risk / stable institutions, not to cover the bets of d*ck swinging investment bankers who'd shank us in a second if they could sell us by the pint on the blood market.
#12 Posted by Thimbles, CJR on Wed 17 Jul 2013 at 07:59 PM
Last post for the time being, I swear.
There have been a couple of studies on finance on whether an industry which takes up 8% of GDP and captures 40% of corporate profits is too big in general.
http://www.kauffman.org/uploadedFiles/financialization_report_3-23-11.pdf
This link discusses the release of an IMF paper by one of its authors:
http://www.nextnewdeal.net/rediscovering-government/can-tighter-financial-regulation-and-smaller-financial-sector-increase
#13 Posted by Thimbles, CJR on Wed 17 Jul 2013 at 08:19 PM
These guys need a good ol fashioned busting up:
http://dealbook.nytimes.com/2013/07/17/jpmorgan-in-talks-to-settle-energy-manipulation-case-for-500-million/
"JPMorgan Chase, the Wall Street giant whose reputation in Washington has eroded in a matter of months, is now moving to avert a showdown over accusations that it manipulated energy prices.
The nation’s largest bank, which has previously clashed with its regulators, is seeking to settle with the federal agency that oversees the energy markets, according to people briefed on the matter. The regulator, the Federal Energy Regulatory Commission, found that JPMorgan devised “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” a commission document said."
Aww, is
EnronJP Morgan suffering from a bad reputation? Maybe a 500 million dollar present will make all the bad stuff go away."The accusations against JPMorgan surfaced this spring in the confidential commission document, reviewed by The New York Times, that outlined a pattern of illegal trading in the California and Michigan electric markets. The document, a warning that investigators would recommend that the agency pursue civil charges, also claimed that a senior JPMorgan executive, Blythe Masters, gave “false and misleading statements” under oath."
I like this by the NYTimes, identifying the individual in the company responsible for the company's crimes? That could work as an incentive to prevent corporate officers from being unethical under the protection of a corporate name. Perhaps if this person got threatened with jail time, the others would scurry away from personal risk.
Oh wait...
"It is unclear whether Ms. Masters would be included in the potential settlement, but people close to her said that the regulator was unlikely to file a separate action against her. Initially, investigators planned to recommend that the agency hold Ms. Masters and three of her employees “individually liable,” a move that would have cast a shadow over her long career on Wall Street, where she is known for developing complex financial instruments."
Oh, boo hoo. The Enron lady's reputation might take damage, so we won't prosecute her for an 83 million dollar crime? I want to try that defense next time I rob a jewelry store.
And you also mean the pioneer of the credit default swap has a reputation to loose?
Augh. She's the anti-Elizabeth Warren.
Bust these people up. Why the hell are JP Morgan drones in the position to manipulate energy markets? Cut these guys up with glass.
Bring back Glass Steagal!
#14 Posted by Thimbles, CJR on Thu 18 Jul 2013 at 01:16 PM
In regards to
EnronJP Morgan, we should give a listen to two classic Senator Elizabeth Warren hearingsElizabeth Warren asking the OCC whether they are doing their jobs or whether the banks are too big to trial:
http://www.youtube.com/watch?v=dxhyUAWPmGw
Elizabeth Warren asking the OCC and the Federal Reserve whether their actions are to protect consumers or to protect the banks:
http://www.youtube.com/watch?v=2HPxj0j4l4s
As Charley Pierce would say:
'My god, these are some kicking of the ass. Sooner or later, they're going to realize that you really do have to bring the A-game on this stuff to the Senior Senator, or she is going to smile her Okie smile and the hook is going to come off the jab and, as the great Jimmy Breslin once put it, you will leave the ring in a blanket. She does mean business. Someone should start to believe that."
#15 Posted by Thimbles, CJR on Thu 18 Jul 2013 at 01:36 PM
Prolix as always, Thimbles nevertheless makes some valid arguments, without the usual vigorous, though in my opinion second-rate, personal abuse of anyone who disagrees with him. But anyone who thinks that rising fuel prices, and not governmental policies, were the cause of the Great Inflation of the 1970s has still not digested the close analyses of monetary vs. fiscal policies that drove debate during that time. Unemployment declined steeply even as inflation rates were falling thanks to Volcker/Reagan in the early 1980s. The Keynesian/fiscal school could not explain this very coherently.
As for Elizabeth Warren's 'brilliance', all Ihear from her is the standard ideas of the chattering classes - that lawyers and politicians and academics should make economic policy, and that private industry should know its 'place'. Harvard sure takes its role as producer of a ruling class seriously - it tarts up old statist arguments in new dress to justify it. If you are a member of the chattering classes, I suppose that sounds like a hot new idea backed by the fact that the world is imperfect, and capitalism has its temporary booms and busts. To repeat, neither Elizabeth Warren nor Paul Krugman nor anyone else has a coherent explanation of why countries (such as in western Europe) or states (California, Massachusetts, etc.) with heavy regulatory and tax regimes have been unable to tax and regulate their way to greater prosperity than more robustly market-oriented countries (the Asian tigers) and states (most obviously, Texas).
Charley Pierce? Isn't he the laughing-stock (outside hard-liberal circles) who helps provide a boring interval on Bill Littlefield's sports show on public radio? The one who cited the JFK assassination as the most important event of the 20th century? Who wrote that it's too bad Mary Jo Kopechne didn't survive Chappaquiddick to enjoy all those wonderful laws pushed by In-the-Drink Eddie Kennedy during his fragrant career? (Parody is impossible here.) Who dismissed those who saw the phoniness of another rich 'leftist', John Edwards, in the run-up to the 2008 election season as the kind of nitwit he appears to be? That Charley Pierce?
#16 Posted by Mark Richard, CJR on Fri 19 Jul 2013 at 12:48 PM
Thanks for this. But it is par for the course for
the regular news media.
I like the way she doesn't back down and has the facts
and content to back up her views.
I'd vote for Warren in a second.She would be so much better
than Clinton.
#17 Posted by Roldo Bartimole, CJR on Fri 19 Jul 2013 at 03:40 PM
"But anyone who thinks that rising fuel prices, and not governmental policies, were the cause of the Great Inflation of the 1970s has still not digested the close analyses of monetary vs. fiscal policies that drove debate during that time."
Q: When did Reagan become president?
A: January 20, 1981.
Q: When was Volcker replaced by Charles Keating connected Alan Greenspan?
A: August 11, 1987
Q: What was unemployment like during this time?
A: http://en.wikipedia.org/wiki/File:US_Unemployment_1890-2008.gif
Q: What about oil prices?
A:http://en.wikipedia.org/wiki/1980s_oil_glut
You don't see a drop in unemployment until 1985 which coincides with a big drop in oil prices.
You do see a huge drop in inflation from 1980 to 1983 as Volcker jacked up interest rates to 15% and regularly jacked them up whenever inflation threatened to go above 3 or 4% (about 2% was just right)
And, according to old reports to the New York Times, that was why he was booted (All ready hit my 2 link limit, you can google search the quotes).
"One reason for apparent White House reluctance to have Mr. Volcker remain is fear that he would not hesitate to raise interest rates - thereby slowing the economy - during the 1988 campaign if he thought this necessary to check inflation or, in a related vein, to support the dollar."
Inflationary pressure was caused by energy costs which upped living costs. You had inflation when labor could demand their compensation adjust to the cost of living.
Volcker took away the ability of businesses to adjust compensation by constricting credit. This killed inflation and raised unemployment.
Reagan took away labor's ability to negotiate through actions like the PATCO strike.
This was described by Greenspan (look up the quote) as:
"[P]erhaps the most important, and then highly controversial, domestic initiative was the firing of the air traffic controllers in August 1981. The President invoked the law that striking government employees forfeit their jobs, an action that unsettled those who cynically believed no President would ever uphold that law.
President Reagan prevailed, as you know, but far more importantly his action gave weight to the legal right of private employers, previously not fully exercised, to use their own discretion to both hire and discharge workers. There was great consternation among those who feared that an increased ability to lay off workers would raise the level of unemployment and amplify the sense of job insecurity.
It turned out that with greater freedom to fire, the risks of hiring declined. This increased flexibility contributed to the ability of the economy to operate with both low unemployment and low inflation. Whether the average level of job insecurity has risen is difficult to judge, but, if so, some offset to that concern should come from a diminished long-term average unemployment rate."
When you had the 1980's oil glut and financial deregulation + credit proliferation, it didn't matter whether the economy was fully employed or not because labor compensation was no longer tied to productivity nor labor supply and demand.
Of course, the unemployment rate still fluctuated because there were these new financial crashes happening with increased regularity and severity, but you didn't have inflation. No, you had the "Watch As Everything Goes To Shit" approach to economics and the “Greenspan Put” approach to inevitable crisis.
I don't consider the WAEGTS and GP approaches an improvement upon what we had under Glass Steagal, but hey, I'm not a freaky deaky Ayn Rand disciple.
#18 Posted by Thimbles, CJR on Fri 19 Jul 2013 at 07:24 PM
PS:
Interesting.
http://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg
Glass Steagal comes into play in 1933. Look at the history before 1933.
Regular negative inflation (deflation) regular financial system crashes.
After 1933, you have a dip because of a premature withdrawal of fiscal intervention in 1937, a dip in 1949 from ww2 wind down, a dip in 1955 from the Korean War wind down, and then relative stability fiscal crisis wise.
We had a system that worked until we kicked the pillars out from under it. Then it was dependent on Milton Friedmanesque Federal Reserve activism - under Greenspan and Bernanke - to moderate the instability until even the money printers and interest rate setters collapsed.
Now the banks know we have to save them. A far far better strategy is to dismantle them so that we don't have to save them.
Otherwise, we're going to keep wasting huge amounts of resources to keep proving Hyman Minsky right.
http://digitalcommons.bard.edu/hm_archive/378/
#19 Posted by Thimbles, CJR on Fri 19 Jul 2013 at 07:50 PM
Ryan (D), American Indians still want Ms. LIE-a-lot (D) to explain how someone from a third-tier law school got to Harvard Law.
No one with a brain believes a word she says, just like OweBama (D).
#20 Posted by Clayton Bigsby, CJR on Fri 19 Jul 2013 at 09:47 PM
"Ryan (D), American Indians.."
Oh good, I can stop reading there. You're a goof, Clayton.
In other news, I've been reading some old Minsky papers, some I agree with, others no, but there were a couple of things which stuck out.
1) "Reagan's Victory: Over Labor and Inflation"
http://digitalcommons.bard.edu/cgi/viewcontent.cgi?article=1053&context=hm_archive
It basically lays out what I've been saying above to a higher than I expected degree.
2) The Minisky Kindleberger model
http://books.google.ca/books?id=nBb-xYi9O-sC&pg=PA26&source=gbs_toc_r&cad=4#v=onepage&q&f=false
If you ever wanted a model that explained investor and institutional behavior during a bubble, this is it. They basically break it down into 5 components:
Displacement: The new condition, exploitation, mechanism for profit.
Credit Expansion: Investors (ie: banks) looking for returns start putting money into the displacement, giving it rapid growth.
Euphoria: The rate of growth and the rates of profit are projected into the future. "You can't loose!" becomes the cliche of the week.
Profit taking: The insiders see that cliches are for the rubes, they look at trends and watch for the plateau indicating displacement saturation - the commitment of new resources to the displacement show diminished returns and increased risk. They sell while everyone else is high, further diminishing displacement value. This is the ponzi stage.
Panic/Revulsion: When everyone realizes they own part of a ponzi and sell all at once.
#21 Posted by Thimbles, CJR on Sat 20 Jul 2013 at 04:00 AM
This closely parallels the work by Romer & Ackerlof on Bankruptcy for Profit, where the limited liability of corporate officers incentivizes them to borrow large amounts of money, create the impression of (fraudulent) growth, take compensation based on that growth, and run when it becomes clear the whole thing was a ponzi.
http://www.brookings.edu/~/media/projects/bpea/1993%202/1993b_bpea_akerlof_romer_hall_mankiw.pdf
And William Black on the three Des that lead to a criminogenic environment: deregulation, desupervision, & defacto decriminalization combine with perverse compensation to produce control frauds.
http://neweconomicperspectives.org/2009/07/two-documents-everyone-should-read-to.html
One of the reasons these work parallel is because you can see how the deregulation / desupervision would act as the displacement which attracts the credit capital leading to euphoria.
And the profit taking would be done not by those who figured the market out, but by those who had rigged it to fail.
Any regulation, such as Glass Steagal II, should look at these characteristics and figure out the policies required to protect against loss and prevent 'panic'.
#22 Posted by Thimbles, CJR on Sat 20 Jul 2013 at 04:34 AM
Speaking of bubbles:
http://www.youtube.com/watch?v=MkQHF-FGiXE
http://www.cbsnews.com/video/watch/?id=50142079n
What the hell is happening in China? (Watch the Vice program if you can find it on your cable)
It's a bubble with actual displacement (of poor people living on farmlands and in shanties).
They built a freaking empty Paris on a cabbage patch... Surplus housing in a country poised for a demographic population crash (due to one child policy). What a complete SNAFU.
#23 Posted by Thimbles, CJR on Sat 20 Jul 2013 at 05:17 AM
Hi, Thimbles, and thanks - your links exactly confirm my assertions that (a) unemployment dropped sharply from its high in late 1982 and was continuing to fall two years later, when Reagan won 49 of 50 states (even Massachusetts, amazingly enough); and (b) that oil prices started falling almost immediately when Reagan took office - coincidentally when he lifted price controls, and was denounced by dummies on the left, unaware as always that they are assisting outcomes they think they hate.
As for the rest, some interesting stuff, some monomania, but food for thought. I still can't help noticing that the people who admire Warren can't explain the relatively poor performances of heavily-regulated polities vs. relatively more market-oriented ones, in this country especially. If California and Massachusetts and Illinois are the future, times will be grim indeed, except for the rich and entrenched political classes. Do you and Ryan really think some of us are just irrational for looking askance at these examples of a power-driven administrative class getting the power it wants, and producing such outcomes?
#24 Posted by Mark Richard, CJR on Sat 20 Jul 2013 at 10:30 PM
"Hi, Thimbles, and thanks - your links exactly confirm my assertions that (a) unemployment dropped sharply from its high in late 1982 and was continuing to fall two years later, when Reagan won 49 of 50 states (even Massachusetts, amazingly enough)"
And all it took was for Paul Volcker, who Reagan had little control over (which was why he was eventually dismissed), to shave 10% off of the federal interest rate high of 19% and for oil prices to drop $10 a barrel from the nominal price high of $40. That was enough to get about 7% unemployment, and you didn't get close to full employment until oil dropped another $20 in 85/86.
"oil prices started falling almost immediately when Reagan took office - coincidentally when he lifted price controls"
From the Oil Glut link:
"In April 1979, Jimmy Carter signed an executive order which was to remove market controls from petroleum products by October 1981, so that prices would be wholly determined by the free market. Ronald Reagan signed an executive order on January 28, 1981 which enacted this reform immediately, allowing the free market to adjust oil prices in the US."
So yeah, if you want to make the argument that Reagan putting Jimmy Carter's free market oil policy into place 8 to 9 months early made a huge difference, go for.
But, from what I can see, Reagan's early economic successes are not due to any policy specific to him, with the exception of the PATCO union crush which doesn't look all that good in retrospect.
He was a lucky actor.
The rest of the country so wasn't lucky, of course:
http://en.wikipedia.org/wiki/File:Budget_Deficit_1971_to_2001.png
#25 Posted by Thimbles, CJR on Sun 21 Jul 2013 at 12:10 AM
What the hell.
I just watched the Vice special on Made in China Paris and made my Minsky comments yesterday. If it weren't for the fact Kruggy wrote this a day before, I'd say he was a fan of our comments section.
http://www.nytimes.com/2013/07/19/opinion/krugman-hitting-chinas-wall.html
"China is hitting its Lewis point at the same time that Western economies are going through their “Minsky moment,” the point when overextended private borrowers all try to pull back at the same time, and in so doing provoke a general slump. China’s new woes are the last thing the rest of us needed."
Personally, I think he's wrong in a sense. The "Lewis Point" assumes that the lack of labor supply will create pressure to raise wages, which will reduce global competitiveness.
Krugman is underestimating the labor supply in China. There are plenty of laborers, I've heard estimates that 16.5% percent of the Chinese population are migrant labor, and one of the reasons the Chinese keep building in the face of all this tremendous surplus is to keep them doing something.
And here's the thing, when China was growing at 10% a year for 3 decades, it was doing so on an export basis. If, "western economies are going through their “Minsky moment,” then the factories which employed Chinese labor aren't going to struggle to get more labor from the "surplus peasants". They are shedding labor, not growing it.
http://www.forbes.com/sites/kenrapoza/2013/06/28/in-china-full-employment-no-more/
A glut of college graduates have degree wielding workers shoveling soil, joining the People's Liberation Army, and doing construction. There will be wage pressure when the working age people retire and the one child policy population has to take over, but that's not now.
#26 Posted by Thimbles, CJR on Sun 21 Jul 2013 at 05:13 AM
Right now you have a savings glut because Chinese banks practice financial repression.
http://krugman.blogs.nytimes.com/2012/06/11/financial-repression-chinese-style/
http://econintersect.com/wordpress/?p=23869
Thus Chinese are looking for investments that will produce a greater rate of return than the Chinese Government can devalue (to maintain its US peg and its monetary competitive edge) and aren't dependent on exports.
They (the Chinese financial firms) were burned to the tune of $107.5 billion on US Mortgage Backed Securities and the people are limited by law in what they can invest in.
But they were granted the right to invest in a house, so they've been investing in 5 at a time as investment vehicles.
The problem is that these house projects are built with the expectation that they will generate returns. The value of the unit sales are not allowed to float. Therefore, these houses do not sell, because nobody can afford them but other speculators.
Therefore, these units sit empty. China is in the profit taking stage where the smart money is leaving. China is on the verge of a Minsky bubble moment.
#27 Posted by Thimbles, CJR on Sun 21 Jul 2013 at 05:47 AM
And speaking of displacement, what is going on in China when you've got developers pulling this crap:
http://www.dailymail.co.uk/news/article-2363990/Chinese-man-refused-luxury-home-scheme-left-marooned-developers-surround-home-MOAT.html
In the Jiangsu province where there's enough empty houses to begin with?
http://www.businessinsider.com/chinese-ghost-cities-2011-5
It's crazyville and it's going to crash very hard. Japan lost decade size crash, easy.
#28 Posted by Thimbles, CJR on Sun 21 Jul 2013 at 05:58 AM
Thimbles, you've almost outlasted me but not quite. You are correct that Carter, facing reality and to the dissatisfaction of the left-wing of his party, intended to remove oil price controls. But in typical dithering fashion, he delayed it, choosing 'phasing out' over a period of time instead of taking the necessary risk, proably to hold out the possibility of reversing course in case there was a temporary spike in prices. Your link does not show oil prices falling until Reagan issued his order decontrolling price controls.
Volcker himself has said that the Fed could not have slain inflation without cooperative policies from the executive branch. We have seen in the past decade that oil prices can rise (they have about doubled since Obama took office) and deficits can be run and wars can be financed without a general inflationary effect - that has to be the work of the central banks and only the central banks. Even Paul Krugman would probably agree with that, since he urges more stimulus (military spending is public spending, after all) and denies that by itself it would have an inflationary outcome.
#29 Posted by Mark Richard, CJR on Mon 22 Jul 2013 at 12:46 PM
In the early 1980's Continental of Illinois loaned $38 million to known mafia figures on Miami Beach allegedly for the purpose of buying and renovating ten Art Deco Hotels that met the 100 room criteria for Casino Hotels under a pending statewide Casino Gambling referendum. The properties were worth at best $9 million.
The referendum failed, the unrenovated derelict hotels went into foreclosure, the RTC wound up with all of the properties. The taxpayers got stuck with the bill. The mafia figures and their kickback collecting board members at Continental of Illinois split the take.
So does anyone really believe that better regulation would not have prevented this? Does anyone really believe that it won't happen again if regulations continue to be reduced?
#30 Posted by Charlie Smith, CJR on Thu 25 Jul 2013 at 12:48 PM
Oh Hai Mark.
"Your link does not show oil prices falling until Reagan issued his order decontrolling price controls."
Again, if you're going to make the argument that 9 months makes all the difference, it's not a super strong one.
"Volcker himself has said that the Fed could not have slain inflation without cooperative policies from the executive branch."
Where? Link?
"We have seen in the past decade that oil prices can rise (they have about doubled since Obama took office) and deficits can be run and wars can be financed without a general inflationary effect "
And I explained that, throughly in my "ways to deal with inflationary pressure" posts. See above.
If labor cannot negotiate wage increases to deal with a price increase, inflation does not go up, quality of living goes down. If credit is being used to finance the quality of living gap, you can get a crash when everybody begins to mass default.
Which relates to your "doubled since Obama took office" remark since they are about half of what they were in the middle of 2008, just before the global financial crash, which Obama was in the middle of when he took office.
Only Mark would use the puttering economic recovery as an argument about "Obama's oil inflation", and I'm the guy who's been pushing Obama to kick some ass on the oil speculators driving up the price.
PS. That price is not going down:
http://www.smartplanet.com/blog/take/peak-oil-isnt-dead-it-just-smells-that-way/963
"Reagan's luck" ain't going to work for the next conservative.
"Even Paul Krugman would probably agree with that, since he urges more stimulus (military spending is public spending, after all) and denies that by itself it would have an inflationary outcome."
No, he's urging fiscal stimulus because monetary stimulus is at it's limits. The US, and much of the rest of the globe, is in a deleveraging phase. I've gone through this with the "Balance Sheet Recession" posts which Elizabeth Warren was first out of the gate on as evidenced by her Planet Money interview.
http://www.cjr.org/the_audit/so_thats_why_the_press_wont_co_1.php
The fed has been pushing ZIRP and cannot get the economy to pick up because when it hits the zero bound limit, it can't really pay people to borrow money (charge a negative rate of interest). Fiscal policy is not going to be inflationary until the government jobs constrict the labor supply. People are too busy paying debt with low paying jobs to get into the price wars over goods which cause inflation.
And inflation would be a wonderful thing right now because the debts which are depressing the economy could be paid back in devalued dominated dollars.
But instead, the country is puttering along using conservative policy and protecting the rentiers instead of helping the people.
Do you know any economics, Mark? This has been basic stuff since 2007.
"The taxpayers got stuck with the bill."
Small sticking point, the FDIC got stuck with the bill which meant the cleanup was funded by the bank premiums.
This was standard operating procedure until the 95% of the banks just stopped paying their premiums from 1996 to 2006.
Yay deregulation. Who needs Glass Steagal.
#31 Posted by Thimbles, CJR on Thu 25 Jul 2013 at 04:36 PM