3/11/06: Digests of my previous posts for busy people
Welcome! This post provides digests of all my posts prior to March 11, excluding FHPN, not in chronological order.
2/11/06 The Global Speculative Financial System as “Enabler” of America’s Addiction to Oil link
This article's digest contains some Core Ideas that run through my blog, it's a good place to start or review, longer than other digests below.
Perhaps the U.S. would be less addicted to oil, and mountains of other consumer imports (the 2005 trade deficit was just reported at $726 billion), if it actually had to pay for all this stuff in a hard currency that it had to earn through exports. Instead, the U.S. pays in dollars it prints, which is then recycled back into dollar capital markets by OPEC, in the case of oil, and by East Asia, for everything else.
A better functioning global financial system would have incentivized the U.S. to compete to service its current account deficit, which is more than 6% of its GDP and nearly 2% of global GDP. If the U.S. had to run a reasonably balanced current account, like every other nation on earth, the U.S. would export more to pay for the imports it buys using the home equity ATM.
This would have created a shift away from more excessive low-tech McMansion consumption excess, and towards much higher tech-based capital goods for export, as characterized by the much more balanced current accounts of Germany, Japan, and S. Korea, including their account with China. This may have created millions of higher tech U.S. jobs, rather than the much more common Wal-Mart-type service sector jobs that average half the compensation selling all that imported stuff.
The value of the dollar is currently dependent on the perceived sustainability of the power of the U.S. in the world political/economic system. Because of this power, including over the global oil market, the dollar is the world’s reserve currency used for oil and other international trade.
All other nations have what some economists call the “original sin” of needing to earn foreign exchange to pay their import bills and service their foreign debt. The U.S. alone can simply print more dollars to stimulate its economy, pay its import bills, service its debts, and let other nations, such as China, try to adjust to the global liquidity flood it unleashes as best they can.
A fundamental problem of the global speculative financial system is that it is extremely heavily skewed in favor of seeking ultra-high short-term “paper” capital gains, usually through quick gimmicks and essentially using private "insider" knowledge, ultimately at the public's expense.
Hedge funds and proprietary trading desks chase huge speculative returns on all sorts of highly leveraged so-called "carry trades" financed by the ultra-cheap liquidity provided by major central banks. Private equity funds look for a big killing on their leveraged debt deals through essentially "flipping" "business fixer uppers," by imposing layoffs, eliminating legal contractual benefits and pensions, often under the threat of outsourcing and/or bankruptcy, etc,. then selling their cosmetically-repaired handiwork back into the less-informed public securities markets.
Global mega-corporations seek a quick boost to growth via m&a, rather than expensive "organic" development of innovative new products and services. Venture capitalists push for the fastest exit/liquidity event strategies, by selling out their companies to the global mega-corporations desperate for growth and, like the private equity firms, to the less-informed public securities markets, which was the essence of the 1990s TMT equity bubble.
I.e., the hedge funds and proprietary trading desks can make huge profits from overly leveraged trades in the explosively growing, very opaque private credit and derivatives markets (the latter now $300-400 trillion in notional value) because they have an implicit public guarantee of insurance via liquidity provision from the central banks should their trading models ever prove wrong.
And the private equity firms, who also use leverage, and venture capitalists essentially arbitrage off their private knowledge as insiders to take advantage of the mispriced valuations in the heavily regulated public securities markets.
Little of the most highly speculative, unrelenting chase after the very big quick buck is ultimately fair and honest, nor is it economically productive and viable, relatively short-term appearances to the contrary.
Rather, it greatly distorts the global market allocation of resources, since it results in the massive under-funding of basic, long-term projects that are the foundation for generating real wealth, but which can’t compete for capital allocation against short-term speculative capital gains offering much higher returns. Speculative finance capital, aka hot money from all sorts of unregulated private funds, is replacing sound productive long-term investments.
These private funds and proprietary traders can get over-leveraged because of the perhaps most well-known way in which the Fed has distorted capital market allocation, the infamous “Greenspan put.” This is the universal belief held for many years in capital markets that large speculators can take excessive risks because Greenspan could always be counted upon to bail them out. Those who still believe in the myth of free capital markets simply are not in touch with the strong speculative incentives created by this “moral hazard.”
Another way in which the Fed distorts market forces, less talked about in polite company than the Greenspan put, is its asymmetrical policy re asset and wage inflation. Greenspan never seemed concerned about the former, claiming that he couldn’t recognize asset bubbles in advance (which obviously seemed strange since he helped create them).
But he never hid the fact that, like a good Wall Street banker, he was vigilant against even the slightest hint that the employment cost index might increase faster than price inflation, i.e. that real wages might actually rise after declining 17% since 1972 (see "2006 Economic Report of the President," Table B-47, pg 338, link), despite huge increases in real GDP per capita, productivity, and profits.
This highly rigged game is only surprising to the naively gullible who still believe in a “free market” and think that the Fed is actually a so-called “independent” institution (which in itself would be problematic under our Constitution, let alone given the Bush administration’s constant preaching of global democracy).
3/8/06 Enron trial misses point: Corp America responds to distorted incentives of speculative financial system; Sarbox counterproductive link
The corporate scandals of 2001-2002 during the crash of the TMT equity bubble led to the passage of Sarbanes-Oxley (Sarbox). The Wrong Solution to corporate governance problems such as those exposed at Enron is to saddle productive corporate America with all sorts of very burdensome busywork bureaucratic rules and regulations, a la Sarbox.
Besides being economically counter-productive, Sarbox is also very unfair and not in the American tradition of presumed innocence and fair dealing. Corporate America, which all but an infinitesimally small part of (on which the mass media focused) is honest, productive and well-meaning, was put in the perpetual Sarbox penalty box. Sarbox has just been the Wrong Solution to the Wrong Problem all along.
The Real Problem running through all the corporate scandals of 2001-02, which the mass media NEVER got right despite the huge coverage, was, and still is, that corporate America, through the direct link via CEO stock options to actions to maximize short-term shareholder value, for many years now has been explicitly governed to slavishly respond to the grossly distorted market price signals and profit incentives created by global speculative financial markets.
This very close corporate governance-global capital markets link might be fine if the latter were operating properly. But they are not, they are clearly very overly speculative, hence they are misallocating real activity and real resources in the real economy via the distorted financial signals that the corporate CEOs are responding to.
The TMT equity bubble of the late 1990s essentially Caused the corporate governance scandals, not the other way around. If the banks, venture capitalists and Greenspan had taken away the bubble, which they were not incentivized to do (the financial system has no real anchor), then that would have had the effect of also removing the distorted market incentives that led to the corporate scandals.
A Real Solution to the Real Problem that caused the corporate scandals must address the core issue of the increasingly pressing need to start to rein in the worst excesses of the global speculative financial system. In this credit cycle, these excesses may be even more out of control than during the TMT equity bubble. But up until now, they remain far more hidden from the media and public view in the credit and derivative markets.
2/14/06 “Mommy, Where Do McMansions Come From?” link
In a speech given at the annual Jackson Hole, Wyoming confab last August 26, Greenspan made a critical point, not surprisingly relegated to a mere footnote, which virtually no economic commentators or politicians with oversight of the Fed ever mention, at least in the U.S.:
“The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 ” “6. Capital gains do not add to GDP…Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment.” [Emphasis added.]
Please think about the bold-faced sentences for just a minute and let it sink in. Perhaps do a little “thought experiment” and focus on real production of goods and services, to try to finally cut through one’s “money illusions.” How does massively marking up the prices of already existing homes actually shift any real production from consumption into new investments to produce new real wealth? It can’t, as Greenspan clearly footnoted.
But if you believe Greenspan, then where do those real savings for real investment actually come from? As taught in econ 101, with very little savings of its own, U.S. so-called “paper wealth creation” is in fact necessarily based upon real savings from real income from real production in the rest of the world.
This is reflected in the fact that the U.S. is singularly running a huge current account deficit with the rest of the world of more than 6% of U.S. GDP, nearly 2% of world GDP, sucking in about 70-80% of the world’s so-called “savings glut.” (Bernanke's inaccurate term)
It is not that the econ 101 distinction between paper speculative capital gains, on the one hand, and real economic production and real savings = real productive investment, on the other, is intellectually difficult to understand, but rather psychologically and politically hard to grapple with, due to self interest.
It is just psychologically difficult to come to grips with the fact that the often hundreds of thousands dollars in capital gains on homes is essentially “unearned,” ultimately simply due to sheer speculation in the global financial system.
At this point, the vast majority of Americans seem simply unaware of the difference between real economic wealth creation from creating new goods and services from investing real savings from real income from real production, versus “paper wealth creation” from capitalized speculative financial gains.
To almost all Americans today, after years of watching how people have become very wealthy through speculative capital gains and through intense “positive reinforcement” conditioning by distorted market incentives, these two different economic concepts, real wealth creation and speculative financial gains, have melded into one and the same thing. (A good example of this are the large, enthusiastic audiences that turn out for real estate "wealth creation" seminars.)
2/27/06 The New, Old Thing: Silicon Valley, Hollywood, Madison Ave—Oscar, Emmy, Clio, or “Amateur Night at the Apollo” link
Generally, the global economy obviously is more interconnected than ever before, so it is more important that the disparate regions of the world understand each other much better. More specifically, the U.S. now heavily relies on foreign savings/capital to maintain its living standards.
Yet the average American, whose home value is ultimately heavily dependent on savings not from his local S&L, as was the case thirty years ago, but now on mortgage-backed securities held all over the globe, is blissfully unaware of the lives of his creditors.
There is an implicit global deal, what some economists have misleadingly labeled Bretton Woods II, which links the U.S. with other nations, especially those in East Asia. This deal assumes a viable, mutually beneficial creditor-debtor arrangement between vastly different societies, mediated through supposedly rational global capital markets.
But behind these capital flows are very real human beings organized into sovereign nations with potentially very different notions of the fairness and justice of these implicit deals, arranged and supported by so-called "independent" central banks, on which the people have not been consulted and with which they ultimately might not be very happy with, much to the surprise of American debtors.
I.e. since Americans now owe foreigners a lot of money, it might at least be polite to know how they live and what they’re like.
During the very same period in which the U.S. has become by far the world's largest debtor, to much of the rest of the world, as indicated by numerous public opinion polls, the current U.S. government hubristically has come to believe that as the self-proclaimed "sole superpower,” it alone has the unique right, historical mission, and even godly duty to tell the rest of the world what to do, regardless of national sovereignty.
Thus, it would be more than a little helpful if the American population in whose name this government is acting had a better understanding of how the rest of the world lives, and how it perceives the self-interested actions of the U.S.
In the 2000’s, the “new new thing” has been Silicon Valley’s love affair with media, advertising and consumer electronics. Unfortunately, this doesn’t seem to be working nearly as well as the previous major transformations. On the contrary, it comes across as amateur night at the Apollo, with little meaningful impact so far, with perhaps a few exceptions.
Rather than helping Americans become truly informed about the world, Silicon Valley seems pre-occupied with the rather mundane but more profitable pursuits of serving up prodigious amounts of very ordinary movies and music, web searches for the latest on Lindsay Lohan and Angelina Jolie, the nonstop adolescent gossip on MySpace.com, etc
Yet, despite this chase after the quick buck, Silicon Valley seems to think it is once again at the forefront of earth-shattering change to overturn the established corporate order. But Silicon Valley is not immune to speculative global market forces.
In the 1990’s it allied with (some might say sold out to) Wall Street to create the TMT equity bubble. In the 2000s, with the government and big banks orchestrating a global consumer/real estate boom, Silicon Valley found media, advertising and consumer electronics after the TMT equity bust.
Yet, at the end of the day, nothing really changes, the oligopolistic corporate media still controls what the majority of Americans see and hear, and Wall Street moves from bubble to bubble without a pause.
Silicon Valley’s regional economy, once the dynamic model for the world, is now, like the rest of the U.S., mainly dependent on rampant real estate and stock market speculation. Meanwhile, the main action has moved five hundred miles southeast, to the epicenter of American social excesses and the record-breaking real estate speculation of this decade, Las Vegas.
We want to make it very clear that we don’t “blame” Silicon Valley or hold it primarily responsible for its potential slide. Like the rest of America, Silicon Valley clearly has been seduced to go for the quick buck in its business models, product developments, etc. by greatly distorted market signals from the global speculative financial system that benefits Wall Street and its own venture capitalists.
2/12/06 The Home-Equity ATM of Blue-State Liberals and the Lopsided Inequitable Funding of American Education link
According to a January 19 story in IBD newspaper, estimated gross home equity extraction in the U.S. ran at a $990 billion annual rate in the third quarter. That’s equal to an incredible 11% of disposable personal income by my calculation.
The article quotes no less an authority than Greenspan in a very rare Fed paper he co-authored in Sept: "It is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction." The article notes that “Greenspan said in October that home equity withdrawals might explain much of the decline in the personal savings rate, which has turned negative in recent months.”
With average worker real earnings now once again resuming a thirty-three year 16% downtrend, and, relative to previous economic expansions, employment growth still lagging and business investment mediocre, the U.S. consumer, hence global economy, has been critically dependent the past five years on home equity extraction from the real estate ATM.
Those huge home equity gains were created by deliberately, drastically distorting the “free market” allocation of real resources and capital by: Greenspan’s previous three-year policy of deeply negative real interest rates (directly through lower mortgage rates and indirectly through asset allocation shifts); $200 billion per year in tax subsidies on mortgage interest and capital gains; the explosive growth of multi-trillion dollar government-sponsored entities implicitly guaranteeing the massive mortgage-backed securities market; zoning laws hindering development to protect property values.
These policies were justified both explicitly as government support of home ownership and as necessary for economic stabilization following the collapse of the huge TMT equity bubble in 2000. Significant changes in these market-distorting government policies would of course have strong negative effects on the real estate market.
Most home owners of course fully realize that real estate is a highly rigged game in their favor, not a “free market,” that’s one of the key reasons to own a home. Nevertheless I think that most still prefer to believe that that they somehow have “earned” their lottery-like gains in home equity the past five years or so through their own hard work in diligently paying their mortgage, at least the interest if not principal. And I suspect that almost all homeowners implicitly strongly expect the government to do everything in its power to support their home values, their version of the infamous “Greenspan put” in the capital markets that I discussed in a previous article.
Some of the more speculative real estate players even seem to harbor the belief that they are cowboys/girls riding the suburban free ranges in their gas-guzzling multi-SUV families, and that their speculative gains are justly due to their risk-taking. Of course with such massive government support of the real estate market, nothing could be further from the truth, but it’s a comforting delusion for those who still miss the closing of the American frontier more than a century ago (even then government policies strongly favored real estate speculation).
We want to make it very clear that Americans do work very hard for what they have. The problem, however, lies with what they work at, due to distorted market incentives from the global speculative financial system.
Nor are we “blaming” homeowners for seeking to prosper from the speculative capital gains created by the global financial system, whose main beneficiaries are the huge financial entities and those who work in them.
It just makes simple common sense to go for the “free lunch” offered by global speculative finance, if there doesn’t seem to be any cost. And it is just human nature to unconsciously deny or rationalize away what’s really going on if it clashes with one’s strongly held beliefs and values.
2/10/06 Bush’s American Competitiveness and Advanced Energy Initiatives: “Deja Vu All Over Again” Twenty-five Years Too Late? link
In his State of the Union Address, President Bush put out his new agenda for improving America’s competitiveness and energy independence. As the quotes above indicate, these ideas have been around for over twenty-five years. Unfortunately, we think this is probably, yet once again, going to be far too little, far too late, long after the horses have been leaving the proverbial barn.
Most of what Bush proposed in his State of the Union speech seems to be re-cycled, re-packaged, already-existing programs, with a small bump up in additional funding. With the U.S. budget running deep deficits far into the baby boomer retirement horizon, and Bush’s “political capital” currently quite low, the Administration evidently feels it is not in a position for bold new initiatives.
Much more fundamentally, the major problems confronting the U.S. probably can’t be solved unless the U.S. seriously addresses flaws in how the market allocation of resources is being massively distorted by the global speculative financial system. Unless and until that is changed, tinkering at the margin with government programs, while perhaps well meaning, simply won’t have much impact in the real world, and is likely to miss the mark anyway, given the current array of political forces.
The reasons for the lack of seriousness of purpose and tangible results regarding much-needed reforms, which would not be tolerated in corporate America, seem simple. First, globalization has meant that the leaders of increasingly nation-less global, including financial, corporations simply do not feel seriously enough affected by these issues, since they can seemingly sidestep many of their more dire domestic consequences simply by outsourcing and offshoring. And second, the housing boom of the past eight years, offseting the ongoing five-year stagnation of workers' average real earnings (which are down 16% since 1972), has provided enough new “paper wealth” for the middle class voter to feel somewhat satisfied with the current state of things, for the time being.
3/6/06 Book Comment: Cramer's "Real Money: Sane Investing in an Insane World" link
Jim Cramer is almost a stock market cult figure right now on his tv and radio shows and web site, www.thestreet.com, with stocks immediately jumping upon his recommending them. Regardless of one's opinion of Cramer's personality, style, and/or clout, his many fans seem to worship him.
I also believe that Cramer's latest book gives the best feel for the current equity market environment dominated by aggressive hedge funds. It very clearly describes exactly how a certain type of very successful equity hedge fund manager, which Cramer was, actually makes big returns over many years in the financial markets, which Cramer did.
Although it is not his purpose, Cramer's remarkable candidness, after a slow start he really does tell how he makes money in stocks, also exposes how the vaunted U.S. equity market, often held up as a model for the rest of the world, actually allocates capital by the herd mentality, often seemingly out of whack with the fundamentals.
However, even as Cramer perhaps is at the height of his popularity, the fact is that his type of equity market speculating has been less significant in the overall financial scheme of things than it was in the late 1990s.
During the 2000s all sorts of trades in much more esoteric credit and derivative markets (the latter now on the order of $300-400 trillion in notional value) have exploded as the main speculative vehicles of choice by the major financial players.
Their importance is usually not popularly understood, because they are largely private transactions (the close to the vest big players would probably blanche at the idea of becoming popular tv personalities), deliberately hidden from both Cramer's main audience of aggressive equity fund managers and individual investors in publicly traded stocks, whose transparency has increased, and even from the monetary authorities, to the latter's increasingly professed uneasiness.
This is one reason why most stock market players today, including most equity hedge fund professionals, don't have an adequate understanding of the potential systemic risks in the current market, imho.
These largely private transactions, however, ultimately depend on expectation of public bailouts via central banks should they ever spin out of control, as they did in 1998. I.e. huge private speculative financial gains are ultimately underwritten by public "crisis insurance," as in the U.S. S&L crisis, Mexican bond crisis, Asian financial crisis, Russian default crisis, Argentine crisis, U.S. TMT equity bubble crash, etc., etc. Ask yourself, is that fair and honest?
3/6/06 Book Comment: Sirota's "The Enthusiastic Employee: How Companies Profit by Giving Workers What They Want" link
It makes the unequivocal challenge that "there are three primary sets of goals of people at work" and "that a manager does not need to know much more about human motivation at work":
1) "Equity. To be treated justly in relation to the basic conditions of employment." The authors contend that "enlisting the willing cooperation of a workforce in achieving the aims of an enterprise is impossible unless people have a sense of elemental fairness in the way they are treated."
2) "Achievement. To take pride in one's accomplishments by doing things that matter and doing them well; to receive recognition for one's accomplishments; to take pride in the organization's accomplishments." "Most people enter a new organization and job with enthusiasm, eager to work, to contribute, to feel proud of their work and their organizations. Perversely, many managers then appear to do their best to demotivate employees!"
3) "Camaraderie. To have warm, interesting, and cooperative relations with others in the workplace." "The quality of interaction in organizations is obviously greatly affected not just by friendliness and mutuality of interests, but also by co-workers' competence and cooperation."
Refreshingly and honestly, the authors say "the three goals we propose are distinct needs that, unfortunately, cannot be substituted for each other. For example, enriching the content of a job does not increase satisfaction with pay or cause an employee to minimize the importance of his pay dissatisfaction. Discontent with pay can be ameliorated only by more pay! Similarly, unhappiness with a boring job can be solved only by restructuring the job or transferring the employee to work that is more interesting."
Since 1972, worker average real (inflation-adjusted) weekly earnings have declined 17% (according to the 2006 "Economic Report of the President") while CEO compensation has skyrocketed (to something around 400 times that of the average employee).
All during that time, CEO's have incessantly told their employees, with a straight face no less, that we're all in this together, that we all have to make sacrifices for the good of the company. Then they lay off large numbers of workers and demand "concession bargaining," sometimes under the threat of bankruptcy, on wages, pensions, benefits, working conditions, etc., while granting themselves huge stock options.
Has anyone ever heard of a CEO giving back his compensation due to mediocre company performance or a bad m & a deal? Once again, I ask, is that fair and honest? Who do CEO's think that fools or pleases, other than Wall Street and the mass media? And how can there be a "free market" for corporate executives when the results are so patently out of whack with reality?