Category: free-market ideology

Krugman Asleep at the Wheel of History ….. the elite has not been interested for forty years…

The August 1st New York Times carries the latest Paul Krugman opinion piece, “Defining Prosperity Down“. He is depressed because it is dawning on him that the elite is in the process of redefining the level of structural unemployment that is normal to adjust to the significant likelihood that we will be living with 9%+unemployment on into the future.

Where has Krugman been? He is old enough to remember that back in the 1960s structural unemployment was defined in college textbooks as 3%. Then during the later years of the Nixon regime this got redefined to 6%. This to meet the emerging pattern of chronic unemployment and no real growth in wages for working and middle class families that has now characterized the last 40 years in the US. Where has Krugman’s head been? Paul Samuelson author of the most widely used college introduction to economics was on the faculty at MIT when Krugman studied there in the 1970s. Has Krugman not checked the shift in the definition of structural unemployment from one edition to the next during those years?

Krugman is right that the Obama administration and the Congress has no real interest in the laggard performance of the economy when viewed for the bulk of the population in the working and middle classes. What is unacceptable is not to recognize and clearly state that the elites in the US have not cared about this matter since the days of LBJ and earlier. How can one explain that not only has the definition of structural unemployment crept inexorably higher, but the stagnation in real incomes of average Americans over the last forty years has roused no effective policy directions under either the Republicans or Democrats.

The elite has been busy over the past forty years fighting so-called wars against various boogeymen, the Soviets, dominoes, drugs, communism, terrorism, and so on. The elite has been busy sustaining a global military machine and imperial presence that has consistently placed US spending on armaments in the range of 40% to over 50% of total world spending on war.

The elite has been engaged in a religious venture called ‘free market capitalism’ for this whole period. This war, aided by the religious rhetoric of Milton Friedman and his cabal of coreligionists at U. Chicago, dismantled the protections in the financial markets build up after the debacle of the Great Depression.

What is the elite has been doing is taking care of its patrons. The rich have gotten richer during this whole period and enormous so in the last twenty years. But the patrons are not fooled by the religious free market rhetoric. They have gotten richer through the fleecing of the economy through predatory tax breaks, tax havens, and the protected gambling of the ultra rich in the financial market places of Wall St. and The City.

Free Markets – free? markets? – lessons not learned

“Free market” has always struck me as a rather strange phrase. Never more so than in this period of financial market disasters. The phrase ‘free market’ continues to be used reflexively. Just as commentators go right on speaking of Wall St. as a source of capital and innovation, few want to ask out loud why we need most of  Wall St.’s “services”; few people are openly using the most obvious words to describe these services as gambling; and, we go right on using this phrase, “free market” to describe an economy that is not free and in many sectors not a market. A recent exception to this are the comments of Ben Friedman, a professor of economics at Harvard, who said, speaking on the PBS Newshour1  of the continuing high percentage of our “best and brightest” going to employment on Wall St., “…it’s all the more troubling when I think that, after they leave us, so many of them go into activities that are not economically productive for the country, for society, even, just narrowly, for the economy.”

  1. http://www.pbs.org/newshour/bb/business/jan-june10/makingsense_06-04.html []

Do We Need Wall St. and all the other gamblers in the financial services world?

What Is the Function of Wall St.?

The global financial meltdown of 2008 – 2009 with its ongoing sequelae seems not to have definitively demonstrated the dangers of our continuing belief in the religion of “free markets” nor shaken, especially it seems in the Obama administration, our thrall with Wall St. and all things financial. We are seeing the combined effects of Wall St.’s funding of the Democrats and Republicans, the primacy of Wall St-ers in positions in government,1 and the tendency of the rest of us to want to beat the table and make wonderfully large profits (winnings). A deeper question here is what is the function and usefulness of gambling in the financial markets for our overall economy and society?

  1. Obama did not invent this situation; Wall St-ers have held most of the important economic positions in the government for generations of presidencies. []

How Did We Come To Consider Corporations to Be Natural Persons? – What To Do Next?

This week’s decision by the US Supreme Court to allow corporations, including unions, to hold full rights to free speech and political action under the First Amendment to the Constitution once again reminds me of the strange practical and ethical relationship we have with corporations. In the 1886 ruling, Santa Clara County v. Southern Pacific Railroad Company1, the court reporter wrote in a summary: “The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.”  I have not read very much at all about the history of how corporations came to be persons and I will not enter into the disputes about how this came to be. It is clearly a well established fact in our laws that corporations are people.

With this new policy handed down by the Supreme Court,  corporations can now spend unlimited amounts of money carrying out political activities. The are many troubling aspects of this situation.  Besides the obvious fact that an artificial socio-economic artifact like a corporation can not possibly be a natural person, there are numerous features of corporations that make them particularly dangerous to us human beings. Corporations never die, excepting the rare death by dissolution. Corporations act globally with many agents in place to carry out policies that favor the corporation wherever and whenever required. Through the wonders of contracts and financialization of assets corporations can appear and disappear from any locality at will. One can observe an example of this phenomenon several years ago when corporations like Tyco International moved its headquarters to an off-shore island to avoid US corporate taxes. This, despite the fact that Tyco had dozens of manufacturing facilities and other operations employing thousands here in the US.

Controlling Gambling by Wall St. and the Big Banks – Bad for Business?

Anti-Wall St Does Not Mean Anti-Business

President Obama’s proposals to break up the “too large to fail” mega banks and otherwise reapply the Glass Steagall Act to the financial sector has predictably brought loud complaints that this is populist and anti-business. Even the rhetoric of the reporters and expert talking heads reflects a general bias that anything that we might do to prevent a re-occurrence of last year’s global financial meltdown is anti-business.

How Is It Anti-Business To…. or

Is the New Rule of Banking, “Privatize profits, but socialize losses (risk)”?

As a business person and a citizen I have to point out that having a sector of our economy that caused so much damage to the rest of the economy and citizens continue to conduct themselves in a fashion that is likely to cause a repeat breakdown is not a good state of affairs. How is it anti-business to want to control the gambling addictions of the financial services sector? How is it anti-business to prevent banks and other financial firms to become so large that they can place another call on the the nation’s treasury to bail them out because they indulge another round of gambling with other people’s money through dangerous leveraging? How is it anti-business to want the banking system to perform their primary function that is necessary to make the economy run, that is to take in deposits and make loans? Or, to capture this in a current diddy, we have an economy where for the financial services sector they follow this unique rule of crony capitalism, “Privatize profits, but socialize losses (risk)”.

How Is Gambling With Other People’s Money Good For Us?

Book Review: Manias, Panics, and Crashes: a history of financial crises by Kindleberger

Manias, Panics, and Crashes: a history of financial crises, fourth edition by Charles P. Kindleberger (New York: Wiley 2000)

Manias,Panics,and Crashes by KindlebergerA recent Wall St Journal article described this book as a “must read” classic for anyone involved in financial markets. I have been involved directly in financial markets in two ways recently. First, I spent a year chasing around chasing angel investors and venture capitalists during the DotCom boom to fund Valuedge (the software company I co-founded in 1999 and left in 2004, though I still hold a large ownership interest).  Second, I receive quarterly statements for my 401K retirement investments. Primarily driven by my experiences with Valuedge and the phenomenal boom time of the DotCom era, I read through Kindleberger’s durable book (originally published in 1978 and never out of print since).

Although I have come to refer to the year 2000 as the Tulip Phase of Valuedge after the well-known Dutch tulipmania in the 1630s. Little did I know that financial bubbles, booms, and the inevitable crashes and depressions are a very common feature of capitalism. The first couple of chapters describe or mention dozens of bubbles and booms located around an amazing array of geopolitical centers. These have been focused on anything and everything: the well-known tulips in the 1630s; railroads; copper; English country houses; agricultural land; private companies going public (Britain 1888, US 1928 and IPOs 1998-2000); and many others.

The first lesson, then, is that booms and speculative bubbles are a commonplace feature of the capitalist world.

So, why do these bubbles and speculative manias occur? The answers are complex, involving human psychology, malfeasance, regulation (or lack), banks, and government. Read Kindleberger .

An important explicit message from Kindleberger is that economists’ models of “homo economicus” and “the market” are far from a useful mirror of what actually goes on. People are not even vaguely rational in their economic behavior and markets never constructively approach the model of a market found in Econ 101 or for that matter anywhere else that I have ever heard of.

This is not just an academic concern. In recent years our politics has displayed a dominant rhetoric that calls for the application of “market solutions” to almost every area of our lives, particularly those where traditionally we expect government to provide services, regulations, etc. Instead, we now reflexively think that “market solutions” are inherently more efficient and effective than government services. Liberals, trapped in their abandonment of even the moderate criticism of capitalism that the Catholic Church, for instance, engages, have provided no useful critique of “market solutions” as a universal policy approach.

At a practical level, this public policy fixation on “market solutions” combined with a generalized attack on all government spending, is driving a generalized impoverishment of the public infrastructure of our civil society and not coincidentally an enrichment of the wealthy and particularly the super-rich.

I recommend this book to anyone with an interest in the day-to-day political and economic life of the world.

Just Another Cost of Doing Business? – Pfizer’s $2.3 billion penalty and fine

Is $2.3 billion really a lot of money?

The Obama administration is touting the action taken this week against Pfizer for illegal promotion of several of its drugs. The $2.3 billion sounds like a lot of money to me, and I suspect most people. Is it really a lot of money or just an annoyance to a large company, just another cost of doing business?

Take a look at Pfizer’s Income and Balance Sheets (see their 2008 Financial Reports ) and a very clear picture appears. Pfizer had net incomes of $8.1 billion in 2008 and 2007 and a whopping $19.3 billion in 2006. They also have cash and short term investments (these are your well-known “quick assets” – meaning they are cash or near cash) on their balance sheets of $26 billion at the end of 2008. Now, look again at the $2.3 billion and the number looks quite different. To those who have watched the stream of pharmaceutical company ethical and legal transgressions over the years, this looks like a very manageable cost of doing business.

Enron, Trust and Malfeasance

January 23, 2002 (revised 1/29/02)

The collapse of energy giant Enron over the last six months has produced a surprising level of outrage especially for a cynic like me.

As this drama continues to unfold, I have been trying to understand how Enron structured their business and made money. Until just last night I was operating on the belief that the cleverness and sophistication of Enron’s managers simply outstripped my analytical skills. But, as I have been following the writing in the NY Times and Wall St. Journal, slowly it has come to me that they don’t understand the maze of structures and deals employed by Enron for years either.

Then, last night, on the Jim Lehrer News Hour on PBS, Paul Solman, one of the regular financial reporters, gave his analysis of what has been going on. After listening to Solman’s report, it is clear that Enron has been engaging in massive deceit, deception, and downright criminal activity for years.

Now, I must admit to some familiarity with the habits and attitudes of managers. I am used to the aggressive behavior of managers trying to stretch the accounting systems to make the most recent quarter look good. In fact, I have participated in such activities. But, Enron has engaged in a long-term shell game aided and abetted by its accounting firm, Arthur Andersen, LLC. The failure of the government (the SEC) and more importantly, the audit companies, to provide oversight, transparency, basic facts, and above all the application simple commonsense ethics to a huge company’s activities is outrageous. It undermines the credibility of the economy. If Arthur Andersen, one of the oldest and most prestigious audit firms can be so blind over so many years, what are we to make of their, and other audit firms’ reliability for oversight of all the other firms so many of us hold in our 401K funds?

It will be interesting to see how the government and the financial institutions of capitalism react to this. It is a basic tenant of the capital and equity markets that timely, transparent information is essential not only to the best and highest use of our capital resources, but also to the maintenance of trust in a reasonably fair play space.

You can see the Solman report on the PBS web site (opens in a separate window)

And, from Friday January 25, 2002, here is more Solman on Enron (opens in a separate window)