Capitalism and Crisis

This article deserves a thoughtful response and perhaps even a call to action. At the present all eyes are on Obama as he struggles with the prescribed remedies hoping that it will do some good somewhere. Then he will try to preach a wait and see approach while we all pray that the economic ship can turn around. In the meantime he has the coin to run around playing Peter at the dyke.

The sharp lowering of mortgage interest rates will allow the housing industry to refinance over the next four years but it will still leave a lot of damaged credit that will take the four years to restore. It should work itself out. I have suggested a way to make it faster and more furious with an excellent chance to be very profitable to the government. It is too radical to be tried for now.

This still leaves massive amounts of stranded money all over the globe as everyone retrenches their economies. Europe has not finished their nightmare and the institutional systems are likely not sufficient to fix Eastern Europe let alone Europe in general. They barely understand how bad the financial system is.

There is wreckage elsewhere but most were a lot better insulated than recognized. What is happening though is every country is first internalizing fresh demand to get their own system back on the tracks.

In a way there was a massive balloon of funny money created by our wall street idiots that was never able to land anywhere for the past several years into real goods and was used to support an ever enlarging credit Ponzi scheme. Had any of it actually so landed we would have had massive inflation to contend with. Instead it was kept up in the air until the music stopped.

Since the bubble has burst, all this credit and coin has abruptly disappeared, and we are now living through a very painful readjustment where we reinstate the cost structures of 2000.

A result of this scheme is that governments actually thought that they had tax money to spend over the past several years. Now they have to print money to replace that money that was lost and spent in the past several years sinking the banks. Again the bail out money is merely replacing capital lost and already in circulation. You got the benefit of all that money. You are been taxed to pay it back.

That is where we are at. So what about the question that this article poses? It is obvious that something is wrong. It was not wrong in terms of its thirty years of expansion. No one wants to end that part of the movie.

In fact Reagan bequeathed a much superior system to what went before and it is easy to locate the diddling that finally took it of the tracks.

The fundamental problem with our economic system is that while it harnesses greed properly and allows it to naturally enrich us all and that is good, our institutions are open to been gamed. More clearly, we are all at the poker table, and the game works because there are fifty two cards, four suites and thirteen separate card types. This is immutable.

In our current financial system, we have never settled on a final design for the deck of cards and this has led to every market enthusiasm converted into fraud.

Let me put it another way. How many lawyers do you need to run a poker table?

They tried to lock the cards down in the thirties but did not really appreciate what they were doing. That rule book was thrashed by the end of Clinton’s presidency and we had a B.Com type minding the store since who could not be expected to grasp the gravity of what was transpiring. We can not even blame him because the subtlety of what was happening was beyond only a few.

If the will exists to produce a superior financial system, and I question that, then we begin by constructing a lawyer free rule book. I think Napoleon made a good stab at it and other comparables might help.

Obviously I have plenty more to say about all this but we will leave this for now. I am beginning to appreciate that I actually had an economic research lab at my beck and call for ten years of my life. It is possible for me to actually propose valid changes and understand the underlying foundations.

I will leave you with this thought. Greed is uncontrollable. It can only be regulated through immutable rules. Regulation and greed cannot be combined. A lawyer is paid to combine them. Uncontrolled regulation and greed is treason.

And how in hell can Obama be up to any of this?

The Economic Crisis Isn't All Bad; It's a Chance for Us and Obama to Reimagine How We Live Our Lives

By Benjamin R. Barber, The Nation. Posted January 28, 2009.

Capitalism is on its knees and now we have a chance to create higher ideals beyond career climbing and mindless consumerism.

As America, recession mired, enters the hope-inspired age of Barack Obama, a silent but fateful struggle for the soul of capitalism is being waged. Can the market system finally be made to serve us? Or will we continue to serve it? George W. Bush argued that the crisis is "not a failure of the free-market system, and the answer is not to try to reinvent that system." But while it is going too far to declare that capitalism is dead, George Soros is right when he says that "there is something fundamentally wrong" with the market theory that stands behind the global economy, a "defect" that is "inherent in the system."

The issue is not the death of capitalism but what kind of capitalism -- standing in which relationship to culture, to democracy and to life? President Obama's Rubinite economic team seems designed to reassure rather than innovate, its members set to fix what they broke. But even if they succeed, will they do more than merely restore capitalism to the status quo ante, resurrecting all the defects that led to the current debacle?
Being economists, even the progressive critics missing from the Obama economic team continue to think inside the economic box. Yes, bankers and politicians agree that there must be more regulatory oversight, a greater government equity stake in bailouts and some considerable warming of the frozen credit pump. A very large stimulus package with a welcome focus on the environment, alternative energy, infrastructure and job creation is in the offing -- a good thing indeed.

But it is hard to discern any movement toward a wholesale rethinking of the dominant role of the market in our society. No one is questioning the impulse to rehabilitate the consumer market as the driver of American commerce. Or to keep commerce as the foundation of American public and private life, even at the cost of rendering other cherished American values -- like pluralism, the life of the spirit and the pursuit of (nonmaterial) happiness -- subordinate to it.

Economists and politicians across the spectrum continue to insist that the challenge lies in revving up inert demand. For in an economy that has become dependent on consumerism to the tune of 70 percent of GDP, shoppers who won't shop and consumers who don't consume spell disaster. Yet it is precisely in confronting the paradox of consumerism that the struggle for capitalism's soul needs to be waged.

The crisis in global capitalism demands a revolution in spirit -- fundamental change in attitudes and behavior. Reform cannot merely rush parents and kids back into the mall; it must encourage them to shop less, to save rather than spend. If there's to be a federal lottery, the Obama administration should use it as an incentive for saving, a free ticket, say, for every ten bucks banked. Penalize carbon use by taxing gas so that it's $4 a gallon regardless of market price, curbing gas guzzlers and promoting efficient public transportation. And how about policies that give producers incentives to target real needs, even where the needy are short of cash, rather than to manufacture faux needs for the wealthy just because they've got the cash?

Or better yet, take in earnest that insincere MasterCard ad, and consider all the things money can't buy (most things!). Change some habits and restore the balance between body and spirit. Refashion the cultural ethos by taking culture seriously. The arts play a large role in fostering the noncommercial aspects of society. It's time, finally, for a cabinet-level arts and humanities post to foster creative thinking within government as well as throughout the country. Time for serious federal arts education money to teach the young the joys and powers of imagination, creativity and culture, as doers and spectators rather than consumers.

Recreation and physical activity are also public goods not dependent on private purchase. They call for parks and biking paths rather than multiplexes and malls. Speaking of the multiplex, why has the new communications technology been left almost entirely to commerce? Its architecture is democratic, and its networking potential is deeply social. Yet for the most part, it has been put to private and commercial rather than educational and cultural uses. Its democratic and artistic possibilities need to be elaborated, even subsidized.

Of course, much of what is required cannot be leveraged by government policy alone, or by a stimulus package and new regulations over the securities and banking markets. A cultural ethos is at stake. For far too long our primary institutions -- from education and advertising to politics and entertainment -- have prized consumerism above everything else, even at the price of infantilizing society. If spirit is to have a chance, they must join the revolution.

The costs of such a transformation will undoubtedly be steep, since they are likely to prolong the recession. Capitalists may be required to take risks they prefer to socialize (i.e., make taxpayers shoulder them). They will be asked to create new markets rather than exploit and abuse old ones; to simultaneously jump-start investments and inventions that create jobs and help generate those new consumers who will buy the useful and necessary things capitalists make once they start addressing real needs (try purifying tainted water in the Third World rather than bottling tap water in the First!)

The good news is, people are already spending less, earning before buying (using those old-fashioned layaway plans) and feeling relieved at the shopping quasi-moratorium. Suddenly debit cards are the preferred plastic. Parental "gatekeepers" are rebelling against marketers who treat their 4-year-olds as consumers-to-be. Adults are questioning brand identities and the infantilization of their tastes. They are out in front of the politicians, who still seem addicted to credit as a cure-all for the economic crisis.

And Barack Obama? We elected a president committed in principle to deep change. Rather than try to back out of the mess we are in, why not find a way forward? What if Obama committed the United States to reducing consumer spending from 70 percent of GDP to 50 percent over the next ten years, bringing it to roughly where Germany's GDP is today? The Germans have a commensurate standard of living and considerably greater equality. Imagine all the things we could do without having to shop: play and pray, create and relate, read and walk, listen and procreate -- make art, make friends, make homes, make love.

Sound too soft? Too idealistic? If we are to survive the collapse of the unsustainable consumer capitalism that has possessed our body politic over the past three decades, idealism must become the new realism. For if the contest is between the material body defined by solipsistic acquisitiveness and the human spirit defined by imagination and compassion, then a purely technical economic response is what will be too soft, promising little more than a restoration of that shopaholic hell of hyper-consumerism that occasioned the current disaster.

There are epic moments in history, often catalyzed by catastrophe, that permit fundamental cultural change. The Civil War not only brought an end to slavery but knit together a wounded country, opened the West and spurred capitalist investment in ways that created the modern American nation. The Great Depression legitimized a radical expansion of democratic interventionism; but more important, it made Americans aware of how crucial equality and social justice (buried in capitalism's first century) were to America's survival as a democracy.

Today we find ourselves in another such seminal moment. Will we use it to rethink the meaning of capitalism and the relationship between our material bodies and the spirited psyches they are meant to serve? Between the commodity fetishism and single-minded commercialism that we have allowed to dominate us, and the pluralism, heterogeneity and spiritedness that constitute our professed national character?

President Obama certainly inspired many young people to think beyond themselves -- beyond careerism and mindless consumerism. But our tendency is to leave the "higher" things to high-minded rhetoric and devote policy to the material. Getting people to understand that happiness cannot be bought, and that consumerism wears out not only the sole and the wallet but the will and the soul -- that capitalism cannot survive long-term on credit and consumerism -- demands programs and people, not just talk.

The convergence of Obama's election and the collapse of the global credit economy marks a moment when radical change is possible. But we will need the new president's leadership to turn the economic disaster into a cultural and democratic opportunity: to make service as important as selfishness (what about a national service program, universal and mandatory, linked to education?); to render community no less valid than individualism (lost social capital can be re-created through support for civil society); to make the needs of the spirit as worthy of respect as those of the body (assist the arts and don't chase religion out of the public square just because we want it out of City Hall); to make equality as important as individual opportunity ("equal opportunity" talk has become a way to avoid confronting deep structural inequality); to make prudence and modesty values no less commendable than speculation and hubris (saving is not just good economic policy; it's a beneficent frame of mind). Such values are neither conservative nor liberal but are at once cosmopolitan and deeply American. Their restoration could inaugurate a quiet revolution.

The struggle for the soul of capitalism is, then, a struggle between the nation's economic body and its civic soul: a struggle to put capitalism in its proper place, where it serves our nature and needs rather than manipulating and fabricating whims and wants. Saving capitalism means bringing it into harmony with spirit -- with prudence, pluralism and those "things of the public" (res publica) that define our civic souls. A revolution of the spirit.

Is the new president up to it? Are we?

US Bank Weakness

This is a creditable assessment of the total exposure of the financial system to the deflation that is taking place. The scope of the problem is working out to be well over one trillion dollars. If the problem is not tackled, the USA will have Zombie banks until it is resolved by the methods proposed here at the least. It may turn out to be twice that and the banks are not helping matters by keeping the grief to themselves.

If the problem is solved as suggested, then the banks will commence lending again and slowly they will start to come out of the present disaster.

My contention is that we can do a lot better than that. Setting a mark to market say today and implementing the half and half program that I have previously described will likely cost less than that proposed , while putting the property owners back in the game as good customers. This will have the effect of taking all the bad assets off the market and allow a nice bounce in the market if not a land rush to clean up all the impaired properties.

In the meantime you will find this to be a sober and clear report on the present situation. If it is not fixed, we will have a building downward pressure on asset prices that will continue until it becomes unbearable on asset prices and a reset takes place that puts all debt underwater.

Right now we have a balance in place between remaining credit and outstanding good debt. This is remaining stable for now.

I read recently that Japan tolerated 15 years of declining real estate prices before they cleaned up the zombie banks. We are entering perhaps year three or so. And the problem created here is every big as the Japanese disaster.

Remember folks, none of this is possible if financial disclosure became mandatory world wide. The system can be gamed only in secret, not with the other six billion stakeholders looking over your shoulder. This is a radical remedy, but I know no other way to circumvent human greed

Large U.S. banks on brink of insolvency, experts say

By Steve Lohr Published: February 13, 2009

http://www.iht.com/articles/2009/02/13/business/insolvent.php

Some of the large banks in the United States, according to economists and other finance experts, are like dead men walking.

A sober assessment of the growing mountain of losses from bad bets, measured in today's marketplace, would overwhelm the value of the banks' assets, they say. The banks, in their view, are insolvent.

None of the experts' research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are insured by the U.S. government. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.

But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department's plan outlined this week.

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.

It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years. Such forceful action was belatedly adopted by the Japanese government from 2001 to 2003, by the Swedish government in 1992 and by Washington in 1987 to 1989 to overcome the savings and loan crisis.

"The historical record shows that you have to do it eventually," said Adam Posen, a senior fellow at the Peterson Institute for International Economics. "Putting it off only brings more troubles and higher costs in the long run."

Of course, the Obama administration's stimulus plan could help to spur economic recovery in a timely manner and the value of the banks' assets could begin to rise.

Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed in the United States range to $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.
Meanwhile, the loss estimates keep mounting.

Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.

Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad.

"The United States banking system is effectively insolvent," Roubini said.
For its part, the banking industry bridles at such broad-brush analysis. The industry defines solvency bank by bank, and uses the value of a bank's assets as they are carried on its books rather than the market prices calculated by economists.

"Our analysis shows that the banks have varying degrees of solvency and does not reveal that any institution is insolvent," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a trade group whose members include the largest banks.

Edward Yingling, president of the American Bankers Association, called claims of technical insolvency "speculation by people who have no specific knowledge of bank assets."

Roubini's numbers may be the highest, but many others share his rising sense of alarm. Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the United States banks have a capital shortage of $500 billion. "In a more severe recession, it will take $1 trillion or so to properly capitalize the banks," said Johnson, an economist at the Massachusetts Institute of Technology.

At the end of January, the IMF raised its estimate of the potential losses from loans and other credit securities originated in the United States to $2.2 trillion, up from $1.4 trillion last October. Over the next two years, the IMF estimated, United States and European banks would need at least $500 billion in new capital, a figure more conservative than those of many economists.

Still, these numbers are all based on estimates of the value of complex mortgage-backed securities in a very uncertain economy. "At this moment, the liabilities they have far exceed their assets," said Posen of the Peterson institute. "They are insolvent."

Yet, as Posen and other economists note, there are crucial issues of timing and market psychology that surround the discussion of bank solvency. If one assumes that current conditions reflect a temporary panic, then the value of the banks' distressed assets could well recover over time. If not, many banks may be permanently impaired.

"We won't know what the losses are on these mortgage-backed securities, and we won't until the housing market stabilizes," said Richard Portes, an economist at the London Business School.

Raghuram Rajan, a professor of finance and an economist at the University of Chicago graduate business school, draws the distinction between "liquidation values" and those of calmer times, or "going concern values." In a troubled time for banks, Rajan said, analysts are constantly scrutinizing current and potential losses at the banks, but that is not the norm.

"If they had to sell these securities today, the losses would be far beyond their capital at this point," he said. "But if the prices of these assets will recover over the next year or so, if they don't have to sell at distress prices, the banks could have a new lease on life by giving them some time."

That sort of breathing room is known as regulatory forbearance, essentially a bet by regulators that time will help heal banking troubles. It has worked before.

In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.

In the current crisis, experts warn, banks need to get rid of bad assets quickly. The Treasury's public-private investment fund is an effort to do that.

But many economists and other finance experts say that the government may soon have to move in and take on troubled assets itself to resolve the credit crisis. Then, they say, the government could have the patience to wait for the economy to improve.

Initially, that would put more taxpayer money on the line, but in the end it might reduce overall losses. That is what happened during the savings and loan crisis, when the troubled assets, mostly real estate, were seized by the Resolution Trust Corporation, a government-owned asset management company, and sold over a few years.

The eventual losses, an estimated $130 billion, were far less than if the hotels, office buildings and residential developments had been sold immediately.

"The taxpayer money would be used to acquire assets, and behind most of those securities are mortgages, houses, and we know they are not worthless," Portes said.

Eric Dash contributed reporting.