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Archive for February, 2010

When Matt Taibbi published his Rolling Stone piece about Goldman Sachs, a number of people accused him of being sensationalist and even misleading about Goldman’s influence and malfeasance. The enduring image from that story was the Vampire Squid, a giant and blood-sucking creature that will seek (and succeed at) profitting off of pretty much anything. The continuous flow of news stories about outsized profits from a range of activities have seemed to vindicate Taibbi. Of course, there is some value in more measured academics taking on Goldman and Wall Street in general, so here’s Randy Wray:

Forget the bonuses…And, yes, they are blowing the black hole of financial insolvency bigger day by day even as they thumb their noses at Washington…But what is even more disturbing is that Wall Street is still maniacally creating risk, inventing new ways to bet on the death of “peasants”, economies, and nations…

A Wall Streeter buys the life insurance policies of individuals with terminal illnesses, packages them into securities, and profits when the underlying collateral dies…Now we learn that firms continue to carry life insurance on former employees, hoping they will die untimely deaths so that the firm can collect…Death is the new profit center, packaged and sold by Wall Street insurers…

Second, there is of course Greece. Goldman Sachs sold them financial products to disguise their budget deficits. Of course, Goldman argues that it was doing nothing unusual—it has been creating complex products to hide risk for decades…Goldman gets huge fees, but of course the risks always come back to bite its suckers…We don’t know whether Goldman has placed its own bets on the death of Greece—nor is it clear what role Goldman has played in whipping up hysteria about the likelihood of default, but the bank is almost certainly benefiting by the booming business in default “insurance”…it looks like the European Union, which is launching a major audit, just might banish the bank from dealing in government debt…

Finally, according to a report, Citi is going to launch a new derivative that will allow gamblers to bet directly on financial crises…The CLX products are supposed to hedge the liquidity risk of a spike of funding costs. The problem, of course, is exactly the one faced by those who had bought CDS “insurance” from AIG: counterparty risk…Only the government can cover unlimited losses. Hence, only the chosen few “too big to fail” sellers of this kind of insurance will be able to play the game. That is, folks like Goldman, J.P. Morgan, Citi, and Bank of America. And guess who will get stuck with the bill when the whole scheme crashes? You betcha, it will be the Treasury…

And that is what this whole Wall Street house of cards boils down to: risky bets, private profits, socialized losses. Worse, yet, it misaligns interests so that Wall Street profits are higher if there is economic and social instability…Until Wall Street is constrained and downsized, it will continue on its path of death and destruction.

In spite of all the happy talk about the end of the recession and the successful resolution of the financial crisis, things are much worse today than they were two years ago…Be prepared for another global crisis by summer. And also get ready for another Washington bail-out…

So here’s the best policy. Unwind the $23 trillion committed by the Treasury and the Fed. Let the market operate. It wants to close down all the “too big to fail” institutions. The market is right—these institutions are not necessary, indeed, they represent the biggest problem facing the financial sector…it makes far more sense to allow default to wipe out the bets, and then work to save the productive activity, jobs, and income.

I know that Wall Street’s protectorate, led by Geithner, Rubin, and Summers, will claim that failure of the behemoths will create an economic disaster. But that is not true. All real economic fall-out can be contained and the economy will emerge much healthier. Replace Wall Street’s life support with support for mainstreet…True recovery would begin immediately, and we’d be out of the mess by summer.

Wray’s plan sounds great, but it’s obviously pie-in-the-sky politically. If Wray is right about an impending double-dip, though, then perhaps a second window for real financial reform will be opened. The problem is that with Geithner calling the shots, it seems inevitable that “risk management” will continue to carry the day on Wall Street, while unbounded uncertainty, systemic risk, and overleverage lurk in the shadows. 

Wray’s article is a reminder of the lengths to which banks will go to seek profit, the destruction they will leave in their wake, and how far we are from reining this process in. Capital has gone wild, and unless reform addresses the inner workings and profit motives of the vampire squid, and aligns them with the whole country’s economic interests, we will find ourselves back here not only in six months, but also in six years.

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Gar Alperovitz, Ted Howard, and Thad Williamson, who study and work towards alternative economic models, have an article in The Nation today  a rise of worker-owned cooperatives in Cleveland.

Something important is happening in Cleveland: a new model of large-scale worker- and community-benefiting enterprises is beginning to build serious momentum in one of the cities most dramatically impacted by the nation’s decaying economy. The Evergreen Cooperative Laundry (ECL)–a worker-owned, industrial-size, thoroughly “green” operation–opened its doors late last fall in Glenville, a neighborhood with a median income hovering around $18,000. It’s the first of ten major enterprises in the works in Cleveland, where the poverty rate is more than 30 percent and the population has declined from 900,000 to less than 450,000 since 1950…

These are not your traditional small-scale co-ops. The Evergreen model draws heavily on the experience of the Mondragon Cooperative Corporation in the Basque Country of Spain…

The Evergreen Cooperative Laundry, the flagship of the Cleveland effort, aims to take advantage of the expanding demand for laundry services from the healthcare industry…After a six-month initial “probationary” period, employees begin to buy into the company through payroll deductions of 50 cents an hour over three years…

Thoroughly green in all its operations, ECL will have the smallest carbon footprint of any industrial-scale laundry in northeast Ohio…A second green employee-owned enterprise also opened this fall as part of the Evergreen effort. Ohio Cooperative Solar (OCS) is undertaking large-scale installations of solar panels on the roofs of the city’s largest nonprofit health, education and municipal buildings…Another cooperative in development ($10 million in federal loans and grants already in hand) is Green City Growers, which will build and operate a year-round hydroponic food production greenhouse in the midst of urban Cleveland…

A fourth co-op, the community-based newspaper Neighborhood Voice, is also slated to begin operations this year. Organizers project that an initial complex of ten companies will generate roughly 500 jobs over the next five years. The co-op businesses are focusing on the local market in general and the specific procurement needs of “anchor institutions,” the large hospitals and universities that are well established in the area and provide a partially guaranteed market. Discussions are under way with the “anchors” to identify additional opportunities for the next generation of community-based businesses…

Significant resources are being committed to this effort by the Cleveland Foundation and other local foundations, banks and the municipal government. The Evergreen Cooperative Development Fund, currently capitalized by $5 million in grants, expects to raise another $10-$12 million–which in turn will leverage up to an additional $40 million in investment funds. Indeed, this may well be a conservative estimate…

Strikingly, the project has substantial backing, not only from progressives but from a number of important members of the local business community as well. Co-ops in general, and those in which people work hard for what they get in particular, cut across ideological lines–especially at the local level…

What’s especially promising about the Cleveland model is that it could be applied in hard-hit industries and working-class communities around the nation. The model takes us beyond both traditional capitalism and traditional socialism. The key link is between national sectors of expanding public activity and procurement, on the one hand, and a new local economic entity, on the other, that “democratizes” ownership and is deeply anchored in the community…

Whereas the Cleveland effort is targeted at very low-income, largely minority communities, the same principles could easily be applied in cities like Detroit and aimed at black and white workers displaced by the economic crisis and the massive planning failures of the nation’s main auto companies. Late in October, in fact, the Mondragon Corporation and the million-plus-member United Steelworkers union announced an alliance to develop Mondragon-type manufacturing cooperatives in the United States and Canada…

Since mass transit is a sector that is certain to expand, there is every reason to plan its taxpayer-financed growth and integrate it with new community-stabilizing ownership strategies…

President Obama has endorsed a strategy for making high-speed rail a priority in the United States…

Providing infrastructure and transportation for this expanding population will generate a long list of required equipment and materials that a restructured group of vehicle production companies could help produce–and, at the same time, help create new forms of ownership that anchor the economies of the local communities involved…

the principles implicit in the nascent Cleveland effort point to the possibility of an important new strategic approach. It is one in which economic policy related to activities heavily financed by the public is used to create, and give stability to, enterprises that are more democratically owned, and to target jobs to communities in distress…

The Cleveland experiment is in its infancy, with many miles to go and undoubtedly many mistakes to make, learn from and correct. On the other hand, as New Deal scholars regularly point out, historically the development of models and experiments at the local and state levels provided many of the principles upon which national policy drew when the moment of decision arrived. It is not too early to get serious about the Clevelands of the world and the possible implications they may have for one day moving an economically decaying nation toward a new economic vision.

I’ve been drawn to cooperatives as an economic alternative since I first learned about Mondragon in a Catholic Social Teaching course. Worker-owned enterprises are a fruitful third way in the traditional public-private dichotomy. Promisingly, the Cleveland model shows that they do not require national political support to arise. However, to increase their scale and scope, it’s imperative to get the word out and show how these efforts cut across the spectrum. In the current political morass, it is certainly possible that even these cooperatives could become a political football, especially if they are integrated into mass transit plans. However, I’m hoping that their local success and the current populist outcry for jobs allows cooperatives to become a key part of future job proposals.

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Have a great long weekend!

Serious Links

Daniel Little posts on work councils and on the inexact science of economics.

Larry Becker’s review of Bert Westbrook’s Between Citizen and State.

Annie Lowrey on the sad reality of Haiti, one month later.

Sebastian Jones’ must-read on the lobbying-media complex.

Chris Hayes breaks down the stimulus with Josh Bivens.

The top 10% are experiencing full employment.

In case you were wondering, the snow does not disprove global warming.

Andrew Fischer: “The Perils of Paradigm Maintenance in the Face of Crisis” (pdf)

Diversions

If Wes Anderson directed Spiderman.

The valentine you probably shouldn’t give (xkcd):

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Rick Wolff argues that the rise in income inequality, and the false scapegoating around its causes, have prevented systemic change:

There is no mystery about why income inequality got so much worse.  The real wages of average workers stopped rising during the 1970s (after having risen for a century or more).  Meanwhile those workers’ productivity kept rising…

Most American workers have not understood, nor were they informed, why they were falling ever further behind…They did not grasp that their decline flowed fromchanged social conditions that ended the tradition of rising wages for rising productivity. First among those conditions were thecomputers that replaced so many jobs…Second, there were the millions of US housewives and immigrants newly looking for paid work in the US after the 1970s — out of necessity and desires for better lives.  The US labor market thus experienced a combination of shrinking demand for workers just as more workers looked for jobs.  Employers from Main Street to Wall Street took advantage of the changed conditions…

Few among the lower 90 per cent understood how the changed social conditions combined with the economic system to cause their falling income shares.  Instead, many blamed themselves or friends and family or found still other scapegoats…but, more importantly, missed a chance to see and solve the problems of the economic system…

What malfunctioned over the last 30 years was the economic system; it generated a divisive, depressing, and dangerous pattern of economic development.  It was the system of production — where employers and employees endlessly seek advantages at each other’s expense — that stopped raising workers wages. It was the financial part of the system that pushed unsustainable loans…It was the political part of the system that looked the other way…

After all, the leading ideologues in the US — politicians, media personalities, and academics — had mostly bought into the system with enthusiasm…

To remove this or that scapegoat while leaving the system in place is no solution…Regulations constraining what private enterprises can do for profit only provoke them further to manipulate and/or corrupt politicians to evade, alter, or remove the regulations.  The system works that way and normally compels its parts to do likewise.  That is what “system” means.  But a systemic crisis like today’s is “abnormal,” a window onto possible system-change that would be terrible to waste.

I think Wolff is right on with focusing on the issue of scapegoating. In fact, this process, broadly defined, is the main reason why the economic crisis has not swung the regulatory/labor-capital pendulum back in favor of labor and regulation. Ignorance about the roots of the crisis (mainly abetted by scapegoating) have muddled the calls for changes. Modern populism has taken a very odd form, in which much ire is directed against regulation and labor unions.

Thus, while I once strongly believed in the backlash predicted by social structure of accumulation theory, the last 12 months have constrained my optimism. The failure of passing an adequate stimulus, real health care reform, EFCA, financial regulatory reform, and even cap and trade, have left me somewhat hopeless. How do we go about de-scapegoating? A lot of the bloggers are doing yeoman’s work on this stuff, but one questions whether these posts reach policy makers, much less lower and middle class Americans. Maybe things like the Zinn Education Project can bring about a broader conception of how our economic and political system actually produces unequal results. Maybe not. However we get there, de-scapegoating seems necessary for real change.

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Via Mark Thoma, Maxine Udall argues that, “If economists were physicians, we would be sued for malpractice.”

Economics, mathematized and divorced from moral philosophy, was effectively neutered after WW II, at the point when its relevance to “serious economic argument” might have been established and developed. The outcome was perfectly aligned with market forces that would continue to shift the national narrative in ways that would finally succeed in convincing people that “government is the problem”…

Now add to this the promotion and tenure policies at even second rate economics departments that require and only reward publication in journals that favor morally vacant, mathematically rigorous, theoretically obtuse existence proofs that more often than not bear no relation to reality as we know it. One is then left with an economics literature that few people, including some who have majored in economics as undergrads, can truly understand, either in its content or in its relevance to the important moral and economic issues that confront us today…

Economics provided the theory and language that supported the drive to the ditch we find ourselves in. We did it by allowing economics to become divorced from moral philosophy. Now the economy is on life support and most people in this democracy can’t tell the “difference between cynical posturing and serious economic argument,” but they can and will vote. (emphasis mine)

And Notre Dame is demoting a handful of economists who have attempted to stand against this process. Reading Udall’s post also makes me wish more people who cite Adam Smith would read Gavin Kennedy’s blog first; at least then, they would have to confront their sin of falsely positivising (excuse the neologism) their discipline.

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Students at Notre Dame managed to put the dissolution of ECOP high on the agenda at the Board of Trustees meeting yesterday. Student government representatives placed this issue second on their agenda, after the GLBT issues I’ve blogged about before. Here’s The Observer’s report:

 Students are concerned by College of Arts and Letters Dean John McGreevy’s lack of transparency as he moves to dissolve the Department of Economics and Policy Studies, student government chief of staff Ryan Brellenthin said.

“The decisions were made without student input and the process was not revealed to the student body,” Brellenthin said.

“It was almost as if they were hoping students weren’t paying attention,” he said.

Students are concerned that closing the department will narrow the economics education at Notre Dame, Brellenthin said. They are also concerned that this decision sets a precedent that students will be excluded from future academic decisions

“Very little attention has been focused on the 400 students who are economics majors,” Brellenthin said. “No efforts have been made to engage student opinion on the topic.”

Schmidt said he is an economics major, but he first heard about the plans to dissolve the department from The Observer.

“We weren’t told about it,” Schmidt said.

The dissolution of Economics and Policy Studies will be voted on at the next meeting of the Academic Council, Brellenthin, who is one of the four students who serve on the academic council, said. “We can make statements against the dissolution, and we certainly will, but it has been on the agenda to dissolve before we could put it on the agenda to discuss,” he said.

Brellenthin said faculty members are also concerned about the dissolution of the department.

“They are asking what will happen if professors who teach something that isn’t the mainstream theory are pushed out,” he said.

“The fear is that the academic council is just going to be a rubber stamp” on McGreevy’s decision to dissolve the department, Schmidt said.

One trustee expressed her surprise after Weber ranked the dissolution of the department as the second most critical issue for students, but the issue is about students’ wanting to be respected, according to Brellenthin.

Brellenthin cited reports that McGreevy described the dissolution of the department as “too sensitive an issue for debate.”

“We respect the administration and the professors as top-tier educators, but we want to be respected as top-tier students,” Brellenthin said.

It may be too late, as the Academic Council meets in three weeks. However, as I indicated in my open letter, it is imperative that these issues not be swept under the rug, whatever the outcome. Clearly, the students involved should be praised for their willingness to speak truth to power on an issue that sometimes seems less relevant or pressing than other concerns.

The Faculty Senate also took up the issue on Tuesday, passing two resolutions. The first, which passed with only a couple objections, held that faculty should not be separated from their department except under extreme circumstances. The second, which passed with a slightly narrower margin, said that the reconstituted Department of Economics should allow any former members of that dept (i.e. pre-split) to rejoin if they so choose.

The writing has been on the wall for a while, but we can hope that the tension and protest being raised results in an outcome that is better for students and for pluralism.

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As two feet of snow barrel towards the DC metro area, I leave you with some weekend reading in advance of my early dismissal from work. Enjoy the weekend!

Serious Links:

Mel Watkins reviews John Cassidy’s New Yorker piece “How Markets Fail” (MRZine)

Questions and Answers about Chartalism (Rogue Economist Rants)

David Ruccio points to a distinctly non-capitalist food co-op. (Anticap)

Glenn Greenwald questions state assassination powers (Salon)

Amy Goodman remembers Howard Zinn (Truthdig)

Juan Pablo Pardo-Guerra asks “whither mainstream economics?” (RWER)

A long and persistent middle class squeeze (EPI)

How GDP betrays the economy (CrisisMaven)

Ta-Nehesi Coates probes the deeper meanings of fast food and systemic racism

Demand question time in Congress

Diversions (Saints/Lil’ Wayne edition)

“I Will Forever Remain Faithful: How Lil Wayne helped me survive my first year teaching in New Orleans” by David Ramsey

The New Yorker profiles Lil Wayne

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