Friday, November 20, 2009
Example of the Commercial Real Estate Crash: Silverdome Sells for $583K
In an example of the collapsing real estate market, the Detroit Silverdome - which was almost sold last year for $20 million dollars - was just sold for $583K.
Taxpayers paid $55.7 million to build the Silverdome in the 1975, the Pistons played there between 1978 and 1988, and the Lions played there from 1975–2001.
The Daily Finance points out that $583k sounds more like the price for a New York Studio than a giant sports arena.
Thursday, November 19, 2009
House Financial Services Committee APPROVES Bill to Audit the Fed (Rejecting Watt's Fake Alternate) and Votes to Rein In Foreign Currency Swaps
Congressman Watt tried to de-rail the bill to audit the Federal Reserve (H.R. 1207) with a fake alternate bill. See this, this, this and this.
Fortunately, the House Financial Services Committee approved H.R. 1207 by 43-26, and rejected Watt's bill.
In addition, Congressmen Grayson and Paul's bill requiring written concurrence by the Treasury Secretary prior to the Federal Reserve engaging in a foreign currency swap passed the House Financial Services Committee by a voice vote today.
If you haven't already seen it, watch Congressman Grayson grill Bernanke about foreign swaps:
If you don't know what foreign currency swaps are, or why the Fed has been running amok with them, watch Congressman Grayson discuss the amendmnet:
Congressman DeFazio: "We May Have To Sacrifice Just Two More Jobs (Summers and Geithner) To Get Millions Back For Americans"
Congressman DeFazio said yesterday:
We think it is time, maybe, that we turn our focus to Main Street ...
Unfortunately, the President has an adviser from Wall Street, Larry Summers, and a Treasury Secretary from Wall Street, Timmy Geithner, who don't like that idea. They want to keep the TARP money either to continue to bail out Wall Street...or to pay down the deficit. That's absurd...
"[Obama] is being failed by his economic team ... We may have to sacrifice just two more jobs to get millions back for Americans.
Wednesday, November 18, 2009
January 9th Is "National Citizens Day"… A Day to Show That WE Get to Decide Which Politicians Are Fired or Elected and Which Companies Fail or Succeed
In response to an article I wrote, Carol says:
We need is someone to set the agenda, to Name a Day for the country's disenfranchised to show up in Washington. And I believe we're all disenfranchised at the moment.
Alright, unless somebody has a better idea ...
I'm declaring January 9th National Citizens Day.
National Citizens Day will be a day to:
(1) Honor and celebrate the power of the American Citizen
(2) The fact that the American Citizens own the country, the government, and all its employees, who serve at their will
and
(3) The fact that the American consumer - who drives 70% of the American economy - dictates which companies succeed and which fail with his or her purchasing decisions
Here are traditional and appropriate ways to celebrate National Citizens Day:
- Show up in Washington D.C. and show that you've got the power
- Move your money from one of the companies that are treating the American Citizen like we work for them and who are holding the economy hostage to a company which has not been bailed out by us, and is not taking our deposits and using them to speculate in casino style gambling
May you have a happy and empowering National Citizens Day. It's the American thing to do.
6 Congress Members Demand Complete Audit of Fed in Light of AIG Counterparty Fiasco
Emailed to me by a contact in Congress.
November 18, 2009 The Honorable Barney Dear Chairman Frank and Chairman Dodd: In light of Tuesday’s report released by the Special Inspector General for the Troubled Assets Relief Program, Neil Barofsky – Factors Affecting Efforts to Limit Payments to AIG Counterparties – we write to request your assistance in addressing major issues displayed prominently in the report. On March 25, 2009, I requested, joined by 26 fellow members of Congress, that Mr. Barofsky investigate the events surrounding AIG’s payments to Goldman Sachs, Merrill Lynch, Societe Generale and other firms to settle certain open derivative transactions. As a result of the findings in the report, there should be a comprehensive Congressional review of the Federal Reserve System and an exploration of possible changes in its governance model. More immediately, a complete and public audit of the system should be made part of the regulatory reform bills currently moving through your committees. The following issues illustrate a set of circumstances that grant tremendous power to a body that is subject to minimal accountability, thus giving rise to my request. First, Mr. Barofsky cites the unwillingness on the part of officials at the Federal Reserve Bank of New York (FRBNY) to negotiate “haircuts” with AIG counterparties. FRBNY has argued that it was acting as an AIG creditor, not as a regulator. I believe it is intellectually disingenuous to separate these roles in this case, [1] and frankly, how effective a regulator can the Federal Reserve be if it is unwilling to strive for good public policy through its regulatory powers? Second, there is an inherent conflict in the manner in which regional reserve branch presidents are selected – in that representatives of the member banks select the regional president. It seems counterproductive, yet the banking system has provided case after case of regulated entities selecting their own regulator. Third, the Federal Reserve has continually resisted efforts to engage in discussion on structural and governance reform at the System. Most recently, Bloomberg reported yesterday that the Federal Reserve has rejected a White House request that [the Federal Reserve] conduct a public review of its structure and operations. Despite a request from the administration that provided ample opportunity for the Federal Reserve to have input into its own reforms, the central bank has simply refused. It is because of this attitude that I argue that real financial regulatory reform cannot occur without an examination into the structure of this entity. Fourth, and most importantly, the Federal Reserve has shown a repeated unwillingness to accept efforts to improve transparency for the System. As we are reminded in the report, it was only through your persistence, Chairman Dodd, that we were finally able to grasp the nature and extent of the counterparty payments. Despite repeated objections by the Federal Reserve System that the release of this information would have a detrimental effect on the health of AIG, their counterparties, and the markets, we now have the requested information, and the markets continue to function. As Mr. Barofsky stated – “the sky did not fall”. As I and so many others have stated since the bailout first began – transparency must be the hallmark of any use of government funds. Concluding, we respectfully request that for the reasons enunciated herein, that a Congressional examination of the governance structure at the Federal Reserve be undertaken, and also that the regulatory reform bills moving through your committees include a complete and public audit of the Federal Reserve System. The actions requested would shine much needed-light on this creature of Congress. Please contact me or Martin Levine on my staff at 202.225.4741 or at martin.levine@mail.house.gov with questions. Sincerely, Elijah E. Cummings Lloyd Doggett Alan Grayson Maurice Hinchey John F. Tierney Tim Walz Peter Welch [1] Mr. Barofsky points out that Treasury and the Federal Reserve were willing to use their power as regulators in order to get banks to accept the initial $125 billion of TARP funding.
Chairman, House Financial Services Committee
2129 Rayburn House Office Building
Washington, DC 20515
The Honorable Christopher Dodd
Chairman, Senate Committee on Banking, Housing, & Urban Affairs
534 Dirksen Senate Office Building
Washington, DC 20510
Obama: More Debt Could Push U.S. Into Double-Dip Recession | Biden: "Socialism For The Rich And Capitalism For The Poor" | Holder: Prosecute Fraud
President Obama, Vice President Biden and Attorney General Holder all made some very hard-hitting statements yesterday.
Obama told Fox news that the United States' climbing national debt could drag the country into a double-dip recession:
"I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."
Obama is finally acknowledging that the enormous debt overhang is a drag on the U.S. economy.
However, just as the administration's talk of a "strong dollar policy" isn't credible, I am not sure that Obama's talk about debt is credible, given that America is still involved in multiple giveaways in favor of too big to fails, two costly wars, and other multi-trillion dollar spending binges.
Biden told Jon Stewart that bailing out the giant banks is:
Socialism for the rich and capitalism for the poor.
I agree, as do Joseph Stiglitz, Nouriel Roubini and Nassim Taleb.
But Biden is still drinking the kool aid:
He defended his administration's decisions to rescue Wall Street institutions from the brink of failure. "Because if we did not bail them out, we would have been in a position where there was a literal depression, not a recession."
That's a myth, Joe.
And Holder announced:
The launch of an interagency Financial Fraud Enforcement Task Force to combat financial crime.
Holder claims that the Task Force will go after both past and future fraud.
Sounds good to me.
But given Holder's failure to keep his word in other important areas - like discontinuing Bush administration policies of spying on Americans - I'm taking a wait and see approach.
Unions and Consumer Groups Support Bill to Audit the Fed: Call Congress To Support The Effort
A number of unions and consumer groups have signed a letter endorsing Ron Paul and Alan Grayson's call to audit the Federal Reserve.
Here's their letter:
House Financial Services Committee
2129 Rayburn House Office Building
Washington, D.C. 20515November 18, 2009
Dear Chairman Frank, Ranking Member Bachus, and Members of the Committee,
As members of Americans for Financial Reform, a coalition of nearly 200 consumer, employee, investor, community and civil rights groups, we write you today to convey our strong support for the amendment to H.R. 3996, the Financial Stability Improvement Act of 2009, offered by Representatives Ron Paul and Alan Grayson.
This amendment subjects the Federal Reserve to an audit by the General Accountability Office within one year of enactment. This audit would shed light on questions the Fed has so far refused to answer, including the names of financial institutions that have received special loans and the conditions under which those loans were made. To shield policy discussions from political influence, the amendment exempts transcripts or minutes of meetings of the Board of Governors or of the Federal Open Market Committee. It also provides for delayed release of audit information dealing with individual market actions.
In responding to the financial crisis, the Federal Reserve has committed more than
$1 trillion to aid troubled financial institutions through loans and asset purchases –
without any of the restrictions on such things as executive compensation that came with funding from the Treasury under the Troubled Asset Relief Program (TARP). Also, unlike the Treasury, which has posted all TARP transactions on its website, the
Fed has kept most of the transactions secret.In creating the Federal Reserve nearly 100 years ago, the Congress envisioned a central bank free from political pressure. But the structure that may have once ensured independence now appears to put the Fed much closer to the financial industry than the American people, who deserve to know who the beneficiaries are.
We strongly support transparency at the Federal Reserve and the Paul-Grayson Amendment.
Sincerely,
Americans for Financial Reform
A New Way Forward
AFL-CIO
Accountable America
Campaign for America’s Future
Change to Win Investment Group
Consumer Action
Empire Justice Center
International Brotherhood of Teamsters
National Association of Consumer Advocates
National Association of Investment Professionals
Neighborhood Economic Development Advocacy Project (NEDAP)
New Jersey Citizen Action
Public Citizen
US Action
US PIRG
Congressman Watt is trying NOW to kill Ron Paul/Alan Grayson's bill to audit the fed with his own fake trojan horse bill. Call Congress and demand yes to the Paul/Grayson bill and no to the Watt bill.
Call the Congressional switchboard: 1-866-220-0044
Tuesday, November 17, 2009
The Fed Talking About Reducing Leverage Is Like A Crack Cocaine Dealer Handing Out "Just Say No" Stickers
The New York Federal published a report in July entitled "The Shadow Banking System: Implications for Financial Regulation".
One of the main conclusions of the report is that leverage undermines financial stability:
Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.
And as a former economist at the New York Fed, Richard Alford, writes today:
On Friday, William Dudley, President of FRBNY, gave an excellent presentation on the financial crisis. The speech was a logically-structured, tightly-reasoned, and succinct retrospective of the crisis. It took one step back from the details and proved a very useful financial sector-wide perspective. The speech should be read by everyone with an interest in the crisis. It highlights the often overlooked role of leverage and maturity mismatches even as its stated purpose was examining the role of liquidity.
While most analysts attributed the crisis to either specific instruments, or elements of the de-regulation, or policy action, Dudley correctly identified the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system. The body of the speech opens with: “..this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”
In fact, every independent economist has said that too much leverage was one of the main causes of the current economic crisis.
Federal Reserve Bank of San Francisco President Janet Yellen said today it’s “far from clear” whether the Fed should use interest rates to stem a surge in financial leverage, and urged further research into the issue.“Higher rates than called for based on purely macroeconomic conditions may help forestall a potentially damaging buildup of leverage and an asset-price boom,” Yellen said in the text of a speech today in Hong Kong.And on September 24th, Congressman Keith Ellison wrote a letter to Bernanke and Geithner stating:
As you know, excessive leverage was a key component of the financial crisis. Investment banks leveraged their balance sheets to stratospheric levels by using short-term wholesale financing (like repurchase agreements and commercial paper). Meanwhile, some entities regulated as bank holding companies (BHCs) used off-balance-sheet entities to warehouse risky assets, thereby evading their regulatory capital requirements. These entities’ reliance on short-term debt to fund the purchase of oftentimes illiquid and risky assets made them susceptible to a classic bank panic. The key difference was that this panic wasn’t a run on deposits by scared individuals, but a run on collateral by sophisticated counterparties.On November 13th, Bernanke responded to Ellison (I received a copy of the letter from a Congressional source):
The Treasury highlights this very problem in its policy statement before the recent summit of G-20 finance ministers in London. To address this problem, the Treasury advocates stronger capital and liquidity standards for banking firms, including “a simple, non-risk-based leverage constraint.” The U.S. is one of only a few countries that already has leverage requirements for banks. Leverage requirements supplement risk-based capital requirements that federal banking regulators have in place pursuant to the Basel II Accord, an international capital agreement. While important features of our system of financial regulation, leverage requirements only apply to banks and bank holding companies and therefore have not covered a wide array of financial institutions, including many that are systemically important. Moreover, leverage requirements have generally not captured the considerable risks associated with off-balance-sheet activities.
Of course, the Administration looks to address the shortcomings in the existing regulatory system through a proposal to regulate large, systemically-significant financial institutions as Tier 1 Financial Holding Companies (FHCs). Building upon its existing authority as the consolidated supervisor of all BHCs (which includes FHCs), the Federal Reserve would be responsible for overseeing and regulating the Tier 1 FHCs under the plan. In the legislative draft of the proposal, the Federal Reserve would have the authority to prescribe capital requirements and other prudential standards for these institutions that are stronger than those for all other BHCs. To that point, the text specifically says, “The prudential standards shall be more stringent than the standards applicable to bank holding companies to reflect the potential risk posed to financial stability by United States Tier 1 financial holding companies and shall include, but not be limited to—(A) risk-based capital requirements; (B) leverage limits; (C) liquidity requirements; and (D) overall risk management requirements.”
The application of leverage limits – as advanced by the Treasury’s G-20 policy statement and by the Administration’s financial regulatory reform plan – is a simple and elegant way to limit risk at specific financial institutions (and within the overall financial system). The financial crisis has underscored the importance of leverage requirements and manifested the problems associated with relying upon risk-based capital requirements alone ...
Nevertheless, there are some open questions regarding exactly how a leverage requirement should be applied. Some scholars and policy experts have advocated putting in place a leverage requirement for banks and other financial institutions that is set in statute. As Congress moves forward on comprehensive financial regulatory reform, it may consider such a requirement. I would therefore be interested to hear your views regarding the wisdom of such an approach.
As you know, setting capital standards requires decisions regarding what institutions would be covered, how capital would be defined, and what levels the requirements would be set. In light of that, what specific difficulties would you anticipate Congress facing with respect to specifying such a requirement? In addition, would a statutory requirement be too inflexible and place too many constraints on regulators with respect to refining regulatory capital requirements and negotiating with bank regulators from other countries?
The Board's authority and flexibility in establishing capital requirements, including leverage requirements, have been key to the Board's ability to require additional capital where needed based on a banking organization's risk profile. One of the lessons learned in the recent financial crisis is the need for financial supervisors to have the ability to react quickly to changing circumstances, as in the capital assessments conducted in the Supervisory Capital Assessment Program. The Board and other federal banking agencies initiated this program to conduct a comprehensive, forward-looking assessment of the capital positions ofthe nation's 19 largest bank holding companies (BHCs). The Board's authority to mandate specific levels of capital was critical to this exercise because each BHC had a unique set of risks and circumstances that demanded careful supervisory scrutiny and evaluation in order to identify the amount of capital appropriate for its safe and sound operation. The Board required corrective actions on a case-by-case basis and continues to assess the capital positions ofthese institutions as well as all others under its supervision.The Supervisory Capital Assessment Program Bernanke refers to were the infamous "stress tests". There's just one little problem: the stress tests were a complete complete sham.
We note that in other contexts, statutorily prescribed minimum leverage ratios have not necessarily served prudential regulators of financial institutions well. Previously, the minimum capital requirements for the housing government-sponsored enterprises Fannie Mae and Freddie Mac (collectively, "GSEs") were fixed in statute; the risk-based capital requirement for the GSEs was based on a stress test that was also set forth in statute; and the GSE's regulator, the Director ofthe Office of Financial Housing Enterprise Oversight (the predecessor agency to the Federal Housing Finance Authority) did not have the authority to establish additional capital requirements for the GSEs. This limitation was different from the authority that the federal banking agencies have to set the leverage and risk-based capital requirements for banking organizations. In 2008, Congress enacted the Housing and Economic Recovery Act of 2008, which created FHFA and empowered it to establish additional minimum leverage and risk-based capital requirements for the GSEs.
With regard to the Board and other U.S. banking agencies' efforts to join with international supervisors to strengthen capital requirements for internationally active banking organizations, the Basel Committee is working on proposals for an international supplement to minimum risk-based capital ratios. While this work is in process, it is likely that these efforts will take the form of a minimum leverage ratio. It will be important for the international regulatory community to carefully calibrate the aggregate effect ofthis initiative, along with other efforts underway that are intended to strengthen capital requirements, to ensure that they protect against future financial crises while not raising capital requirements to such a degree that the availability of credit to support economic growth is unduly constrained. The current authority and flexibility the Board has to establish and modify leverage ratios as a banking organization regulator is very important to the successful participation of the Board in the process of establishing and calibrating an international leverage ratio.
In reality, the Fed has been one the biggest enablers for increased leverage. As anyone who has looked at Bernanke and Geithner's actions will tell you, many of the government's programs are aimed at trying to re-start securitization and the "shadow banking system", and to prop up asset prices for highly-leveraged financial products.
Indeed, Bernanke said in February:
In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF).And he said it again in September:
The Term Asset-Backed Securities Loan Facility, or TALF ... has helped restart the securitization markets for various types of consumer and small business credit. Securitization markets are an important source of credit, and their virtual shutdown during the crisis has reduced credit availability for many borrowers.The Fed talking about reducing leverage is like a crack cocaine dealer handing out "just say no" stickers.
Indeed, the central bankers' central banker - BIS - has itself slammed the Fed:
In a pointed attack on the US Federal Reserve, [BIS and its chief economist William White] said central banks would not find it easy to "clean up" once property bubbles have burst...
Nor does it exonerate the watchdogs. "How could such a huge shadow banking system emerge without provoking clear statements of official concern?"
"The fundamental cause of today's emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low," [White] said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning...
"Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.
As Spiegel wrote in July of this year:
[BIS] observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market ...The head of the World Bank also says:In January 2005, the BIS's Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being "fully appreciated by market participants." Extreme market events, the experts argued, could "have unanticipated systemic consequences".
Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the 'real economy' of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.(Large amounts of leverage increase bubbles, and so the two concepts are highly interconnected.)
Remember also that Greenspan acted as one of the main supporters of derivatives (including credit default swaps) between the late 1990's and the present (and see this). Greenspan was also one of the main cheerleaders for subprime loans (and see this). Both increased leverage, especially since the shadow banking system - CDOs, CDSs, etc. - were largely stacked on top of the subprime mortgages.
In fact, as I've repeatedly pointed out, Bernanke (like Summers and Geithner), is too wedded to an overly-leveraged, highly-securitized, derivatives-based, bubble-blown financial system. His main strategy, arguably, is to re-lever up the financial system.
The financial system is undergoing a period of deleveraging that cannot be stopped. For example:
- Barrons is running an editorial entitled "The Crash Must Come: Intervention can't stop the business cycle".
- The Economist writes, "Once started, the process [of deleveraging] is hard to stop."
- The Financial Times quotes the Bank of Tokyo-Mitsubishi in saying, "There seems little what the authorities can do to reverse the process of deleveraging that is taking place with financial institutions all contracting their balance sheets at the same time".
As former head BIS economist William White wrote recently, we have to resist the temptation to re-start high levels of leverage and to blow another bubble every time the economy gets in trouble:Ultimately, “all the king’s horses and king’s men” cannot prevent the de-leveraging of the financial system under way.
***
Like a giant forest fire the de-leveraging process cannot be extinguished. Thoughtful actions can create firebreaks that limit preventable damage to the economy and the international financial system until the fire burns itself out.
The Fed may be talking like Smokey the Bear, but it continues to hand out matches trying to increase leverage.Forest fires are judged to be nasty, especially when one’s own house or life is threatened, or when grave harm is being done to tourist attractions. The popular conviction that fires are an unqualified evil reached its zenith after a third of Yellowstone Park in the US was destroyed by fire in 1988. Nevertheless, conventional wisdom among forest managers remains that it is best to let natural forest fires burn themselves out, unless particularly dangerous conditions apply. Burning appears to be part of a natural process of forest rejuvenation. Moreover, intermittent fires burn away the undergrowth that might accumulate and make any eventual fire uncontrollable.
Perhaps modern macroeconomists could learn from the forest managers. For decades, successive economic downturns and even threats of downturns (“pre-emptive easing”) have been met with massive monetary and often fiscal stimuli...
Just as good forest management implies cutting away underbrush and selective tree-felling, we need to resist the credit-driven expansions that fuel asset bubbles and unsustainable spending patterns. Recent reports from a number of jurisdictions with well-developed financial markets seem to agree that regulatory instruments play an important role in leaning against such phenomena. What is less clear is that central bankers recognise that they might have an even more important role to play. In light of the recent surge in asset prices worldwide, this issue needs urgent attention. Yet another boom-bust cycle could have negative implications, social and political, stretching beyond the sphere of economics.
Japan: Not Out of the Woods
My first reaction at seeing the headlines that the Japanese economy grew more than expected in July-Sept was excitement.
After all, the main news coming out of Japan has been gloom and doom recently (and see this).
But as Bloomberg points out:
The acceleration of Japan’s economy to the fastest growth pace in more than two years masked a slide in prices of goods and services that threatens to temper the nation’s recovery...
Sustained price declines threaten to curtail a corporate- profit rebound that’s already been insufficient to spur a rally in Japan’s shares this quarter. The report prompted Deputy Prime Minister Naoto Kan to say the government may outline an emergency-spending package as soon as today, adding that “I’m concerned we’re entering into a deflationary situation.”
“This isn’t sustainable growth and the government knows it -- that’s precisely why they’re talking about the GDP deflator,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “On the face of it, 4.8 percent growth is a positive for the Democrats, but they’re not reading it as a reason to abandon their economic policies”...
A report today showed that demand for services unexpectedly fell for the first time in four months in September, a sign that the effects of government stimulus measures may be fading...
“It might be a decade before the job market returns to the level of health we had a year or two ago,” [Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the central bank] said. “The number of jobs may recover but not wages. It’s very fragile.”
And Nouriel Roubini does a great job of putting the Japanese GDP figures in perspective:
- Export growth was steady at 6.4% q/q, same pace as the previous quarter.
- Public investment no longer the fastest growing component of GDP. It decreased 1.2% q/q.
- Private residential investment continued to plunge (-7.7% q/q, -27.5% y/y in Q3)
- Private demand turned positive, up 1.0% q/q, 4.2% y/y, driven by consumption and commercial investment.
- Gross fixed capital formation again decreased 0.3% q/q, 1.3% y/y.
- GDP deflator slowed further to 0.2% q/q. Domestic demand deflator was -2.6% q/q.
- An inventory-driven rebound in exports to emerging markets may drive a cyclical recovery in Japan. However, a strong, sustained recovery is unlikely without a revival in domestic demand, which is currently on life support from fiscal stimulus packages. Excess capacity will continue to weigh on employment, dampening consumption. As RGE expected, fiscal stimulus lifted consumer spending in Q3 but the stimulus effect will fade going forward as public spending comes under strain from a heavy debt load.
- Louise Curley of Haver Analytics: "It should be noted that the data are preliminary and some of the components, notably the change in inventories, is only updated during the 2nd preliminary release. Given the volatility and the large positive and negative contributions of inventory changes to total growth, as shown in the second chart, it is highly likely that the missing element in Japan's third quarter growth was due to inventory accumulation."
- Takehiro Sato of Morgan Stanley: "Economic strength overseas could allow Japan to avoid a sharp retreat in October-December and January-March 2010...A modest second dip in the economy will be inevitable in the first half of FY2011 as the growth rate reacts to the drop in public investment...the second dip [will] be much shallower than...January-March this year."
- Caroline Newhouse-Cohen of BNP: GDP growth may rebound slightly in Q2 & Q3 before a further fall in Q4. GDP should thus fall more than 7% in 2009, its sharpest fall on record. The drawdown in inventories is set to trigger an upswing in production and exports over the coming months before economic activity contracts again toward the end of 2009 due to weak domestic demand despite the fiscal stimulus.
- Mitsumaru Kumagai of Daiwa: "Real GDP will decline 3.2% in FY2009 but increase 1.2% in FY2010. However, the possibility that Japan's economy will experience a lull from end-2009 will increase, partly due to public works spending running out of steam. In any event, Japan's economy is unlikely to see a full-fledged recovery before FY2010 when the US economy is expected to trace a firm uptrend."
Overview: Japan's real GDP growth accelerated to 1.2% q/q (seasonally adjusted) in Q3 2009, up from 0.7% in Q2, and stopped contracting on an annual basis. 4.8% y/y growth in Q3 2009 ended a five quarter streak of negative annual figures, thanks mostly to inventory restocking and a modest contribution from fiscal stimulus-driven household consumption. However, as Japan remains in deflation, nominal GDP growth figures present a more realistic picture of the economy: nominal GDP contracted 0.1% q/q, 0.3% y/y in Q3 (seasonally adjusted)...
Beyond Q3 2009
In other words, deflation us so severe in Japan that nominal GDP is actually negative. And just as with the American economy, signs of recovery are due to massive stimulus, and when heavy government intervention ceases, the Japanese economy will probably contract again, especially given the huge drag from massive debt.
Monday, November 16, 2009
Special Inspector: AIG Counterparty VOLUNTEERED to Take a Haircut, But Geithner Refused
I received an advance copy of the Special Inspector General for Tarp's Report called "Factors Affecting Efforts to Limit Payments to AIG Counterparties", which will be released tomorrow (posted below).
The report reveals that at least one counterparty indicated that it was willing to take a reduced payout on its credit default swaps. In other words, then-head of the Federal Reserve Bank of New York - Tim Geithner - wouldn't have had to even play hardball to get a concession from the counterparty.
But Geithner ended up dictating that all of AIG's counterparties get full payment - with no haircuts for anyone (except the American taxpayer).
The report includes these gems:
- As a policy matter, FRBNY was unwilling to use its leverage as the regulator for several of the counterparties to compel concessions, in part because in the negotiations it was acting as a creditor of AIG and not as the counterparties' primary regulator
- Also as a policy matter, FRBNY was uncomfortable with violating the principal of sanctity of contract.
Well sure, that makes sense. A creditor doesn't want to negotiate hard and demand concessions from its debtor, now does it?
Apparently, while Geithner was concerned with the sanctity of the CDS contracts (which - I would argue - were all based on fraudulent representations concerning how safe an investment they were), he didn't care very much about the sanctity of the agreement of a government to do what is best for its people.
But actually, the New York Fed isn't a government agency. The Fed itself maintains that:
While the Fed’s Washington-based Board of Governors is a federal agency subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.
So really Geithner - as head of the private bank-owned and managed New York Fed - was simply serving his constituency: the giant New York money center banks. Geithner's constituency never was the American public.
The giant banks were the creditors of the giant banks. Like two sock puppets putting on a big show of good cop / bad cop show, the New York Fed pretended that it was negotiating hard, but ended up making sure that the boys got their full cut.
Update: The New York Times says that the bank which agreed to a haircut was UBS.
Bernanke Blames Banks For Slow Recovery and High Unemployment . . . Then Gives Them a Pat on the Back and a Wink
As I have repeatedly written, unemployment will worsen because the too big to fails aren't lending. See this.
Bernanke just said the same thing:
Federal Reserve Chairman Ben Bernanke on Monday blamed banks for slowing the recovery and keeping unemployment high.
Despite hundreds of billions in dollars in taxpayer bailouts, the nation's banks have dramatically reduced their lending this year.
"Banks' reluctance to lend will limit the ability of some businesses to expand and hire," Bernanke said. "Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth."
Bernanke predicted that the unemployment rate will get worse before it gets better. "The best thing we can say about the labor market right now is that it may be getting worse more slowly"...
"Access to credit remains strained for borrowers who are particularly dependent on banks," Bernanke said. "Bank lending has contracted sharply this year...[and] banks continue to tighten the terms on which they extend credit for most kinds of loans."
But as I wrote in February:
The government could have forced the banks to use their bailout money for loans.
For example, unlike taxpayers in European countries - who get voting shares in return for their bailouts - the U.S. taxpayers have no say in the management of the companies they are giving their hard-earned money to.
And European bailouts included provisions protecting against excessive dividends and executive bonuses, and requiring loans to homeowners and small businesses:
Now, the Fed is begging banks to put the money into new loans or bolster loss reserves, instead of paying dividends for shareholders."Five days before Paulson struck his deal with the banks, British Prime Minister Gordon Brown negotiated a similar bailout — only he extracted meaningful guarantees for taxpayers: voting rights at the banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, and a legal requirement that the banks lend money to homeowners and small businesses.
In sharp contrast, this is what U.S. taxpayers received: no controlling interest, no voting rights, no seats on the bank boards and just five percent in dividend payouts to the government, while shareholders continue to collect billions in dividends every quarter. What's more, golden parachutes and bonuses already promised by the banks will still be paid out to executives — all before taxpayers are paid back."
But the left hand doesn't know what the right hand is doing. For example, the Treasury Department encouraged banks to use the bailout money to buy their competitors, and has pushed through an amendment to the tax laws which rewards mergers in the banking industry.
Moreover, as the above-linked article from Huffington Post shows, Bernanke is protecting the too big to fails:
Bernanke also touched on "too big to fail." ... Bernanke said in response to a question, that "making banks smaller isn't going to do it."
So while Bernanke is criticizing the banks on the one hand, he is patting them on the back with the other hand and giving them a big wink.
At Least One Central Bank Held Fake Gold
Rob Kirby seems like a fairly respectable fellow. But I am thoroughly agnostic about Kirby's claim that a large portion of the world's gold has been cut with tungsten. Big claims require big evidence, and I haven't seen it yet.
True, as Mike Hewitt points out, a Chinese company boasts about making gold-plated tungsten:
A coin with a tungsten center and gold all around it could not be detected as counterfeit by density measurement alone ... We are well accustomed to exploit more innovative applications of tungsten products. Gold-plated tungsten is one of our main products.But there is no evidence that gold-plated tungsten has been used as a counterfeit.
However, we do know that at least some gold held by central banks is fake. For example, as the BBC noted last year, some 90kg of gold held by Ethiopia's central bank was really gold-plated steel.
Obviously, this is not a first world country or banking center we're talking about. Ethiopia is one of the world's poorest countries.
But the fact that any central bank has fallen for fake gold means - in a rational world - that a full audit of the gold holdings of central banks worldwide should be conducted.
Chanos Shorts China
Famed short trader Jim Chanos thinks that China's economy has real problems and is overvalued. He's therefore shorting China.
As Politico writes.
Now, Chanos says he has found another “trust me” story: China. And he is moving to short the entire nation’s economy. Washington policymakers would do well to understand his argument, because if he’s right, the consequences will be felt here.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.
This, Chanos and others argue, is happening in sector after sector in the Chinese economy. And that means the Chinese are in danger of producing huge quantities of goods and products that they will be unable to sell.
The Pivot Capital report was extremely popular in Chanos’s office and concluded, “We believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom.”
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”
Can We Save America?
How come the Wall Street robber barons who brought on the financial crisis are still calling the shots and pillaging the economy?
Congress is bought and paid for, and the fox is guarding the chicken coop in the Executive Branch, with Summers and Geithner calling the shots.
The American people are furious at the giant banksters who have picked their pockets so they can make huge bonuses. But - so far - the American people have for the most part kept their volcanic anger to themselves.
Make A Little Noise
As MSNBC news correspondent Jonathan Capehart tells Dylan Ratigan, the main problem is that people aren't making enough noise. Capehart says that the people not only have to "burn up the phone lines to Congress", but also to hit the streets and protest in D.C.
Even though most politicians are totally corrupt, if many millions of Americans poured into the streets of D.C., a critical mass would be reached, and the politicians would start changing things in a hurry.
As PhD ecnonomist Dean Baker points out:
Baker is right about Vietnam.The elites hate to acknowledge it, but when large numbers of ordinary people are moved to action, it changes the narrow political world where the elites call the shots. Inside accounts reveal the extent to which Johnson and Nixon’s conduct of the Vietnam War was constrained by the huge anti-war movement. It was the civil rights movement, not compelling arguments, that convinced members of Congress to end legal racial discrimination. More recently, the townhall meetings, dominated by people opposed to health care reform, have been a serious roadblock for those pushing reform….
A big turnout ... can make a real difference.
Specifically - according to Daniel Ellsberg and many others - Richard Nixon actually planned on dropping a nuclear bomb on Vietnam Nixon also said he didn't care what the American people thought. He said that -- no matter what the public did or said -- he was going to escalate the war in Vietnam.
However, a well-known biographer says that Nixon backed off when hundreds of thousands of people turned out in Washington, D.C. to protest an escalation of the war.
Similarly, no matter how completely sold-out to the Wall Street giants D.C. politicians are, they would start paying attention to their real employers - the American people - if we make enough noise.
If 3 million Americans all peacefully surrounded the White House and Capitol Hill, holding signs saying "We're Not Leaving Until the Too Big to Fails which Caused the Economic Crisis are Reined In", things would change pretty fast.
3 million might sound like a lot of people. But many millions of people read popular alternative financial and economic news sites. You are probably one of millions of people who will read this essay (by the time it is published by some of the larger sites).
In other words, it's not even a question of convincing other people to go. We - those who read alternative financial websites - could do it ourselves.
If millions of us don't go protest in D.C., it's because we are choosing not to sacrifice a tiny bit in order to change things.
The bad guys are only winning because we - the American people - aren't making enough noise.
Not Now . . .
It is human nature to try to put things off until tomorrow. Tomorrow, when things are easier, we'll do it...
It is easy to despair that it is already too late. Should we whine and give up hope?
Well, about a month before the American Revolutionary War, Patrick Henry said:
They tell us, sir, that we are weak; unable to cope with so formidable an adversary. But when shall we be stronger? Will it be the next week, or the next year?If not now, when? Like Patrick Henry asked, when will we be stronger? When will the robber barons be weaker?
If we're going to save America through non-violent protests, now is the time.
To hell with circumstances; I create opportunities.
- Bruce Lee
There is no act too small, no act too bold. The history of social change is the history of millions of actions, small and large, coming together at points in history and creating a power that governments cannot suppress.
- Howard Zinn, historian
The power of an aroused public is unbeatable.
- Dr. Helen Caldicott
The most powerful weapon on earth is the human soul on fire.
-Ferdinand Foch
In times of danger large groups rise to the highest pitch of enthusiasm, courage and sacrifice . . . Mankind will be refashioned and history rewritten when this law is understood and obeyed.
-Helen Keller
Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it's the only thing that ever has.
- Margaret Mead
We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.
-Sonia Johnson
You let one ant stand up to us - then they all might stand up. Those puny little ants outnumber us a 100 to one. And if they ever figure that out, there goes our way of life.
- Hopper (a grasshopper who is the leader of the gang of thugs who are stealing money from the other bugs, speaking to fellow grasshoppers in the Disney/Pixar movie A Bug's Life)
If you don't like the news, go out and make some news of your own.
- Scoop Nisker
Sunday, November 15, 2009
"War ALWAYS Causes Recession"
PhD economist Marc Faber predicts that the U.S. will launch a war to distract people from the bad economy.
China's largest media outlet - Sohu.com - wrote in October 2008 that the Rand corporation, a leading U.S. military advisor, lobbied the Pentagon for a war to be started with a major foreign power in an attempt to stimulate the American economy:
According to French media, well-known U.S. think tank RAND Corporation ... has submitted [to the Pentagon] an evaluation report assessing the wage a war to shift the feasibility of the current economic crisis...
(Google's translation services are crude approximations, but Yihan Dai confirmed the translation of the original).
Continued deepening of the U.S. sub-prime mortgage crisis and economic downturn, developed to a certain extent, is likely to trigger a war in order to achieve the purpose of the crisis passed.
Is Faber right? Is the Sohu.com report accurate?
I don't know. For example, I won't take the Sohu.com claim very seriously until someone can point to the French media source, so that I can assess it's credibility.
However, "military Keynesianism" - using military spending to stimulate the economy - has been U.S. policy for half a century. And the economist who coined that term said that such a policy always and "inexorably" leads to "an actual war" in order to justify all of the military spending.
Therefore, any studies which disprove the efficacy of war as an economic stimulus -see this and this - are important for balance.
To try to sort some of this out, I spoke with a PhD professor of economics with a background in international conflict in July 2008 to find out whether war is really good for the economy.
I asked if conventional wisdom that war is good for the economy is true, especially given that all of the spending on the war in Iraq seems to have weakened America's economy (or at least, greatly increased its debt).
The economist explained the seeming paradox:
"War always causes recession. Well, if it is a very short war, then it may stimulate the economy in the short-run. But if there is not a quick victory and it drags on, then wars always put the nation waging war into a recession and hurt its economy."Given that America has been fighting both the Afghanistan and Iraq wars longer than it fought WWII, the exception obviously doesn't apply.
Can America go beat up some poorly-armed country to get a quick war?
It is more unlikely than many assume. Given that many believe that the U.S. started the Iraq war based on false pretenses, and that the Iraq war was really about oil (see this, this, this, this and this), I am skeptical that many would buy America's stated justifications for another war.
Indeed, the Sohu.com article – even if wholly untrue – proves my point.
In addition, even a war against a small, poorly-armed and resource-poor country could be considered a proxy war. In other words, other heavily-armed countries might fight the U.S. through local proxies, dragging the war out for years, just as the U.S. did with Russia in Afghanistan. America today is not the empire it was even 10 years ago, and - as Afghanistan and Iraq show - America no longer has the financial resources to project force and impose its will world-wide.
The bottom line is that anyone advocating for war to help our economy is mistaken.
Saturday, November 14, 2009
Former Vice President of Dallas Fed: Tarp Didn’t Restore Health of Banking System
Newsweek has a one year retrospective on the Tarp bailouts which contains the following important quotes:
"It hasn't done what [Paulson] said it would," says Jerry O'Driscoll, a former vice president of the Dallas Federal Reserve and a senior fellow at the Cato Institute. "Yes, it saved some banks from going under, but did it restore the health of the banking system? Absolutely not."
***
"They didn't extract sensible terms," says Simon Johnson, former chief economist at the IMF. Johnson points out that Paulson didn't ask of its own banks what the U.S. regularly asks of developing countries when cleaning up their banking systems. "One of the first things that's done is to fire the managers that oversaw the problems," says Johnson. "Yet shockingly, this hasn't happened in the U.S. These guys are still there for the most part."
Hayek: “Emergencies Have Always Been the Pretext on Which the Safeguards of Individual Liberty Have Eroded”
Well-known Austrian economist Friedrich von Hayek wrote:
"Emergencies” have always been the pretext on which the safeguards of individual liberty have eroded.
Rahm Emanuel famously said:
Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before.
Naomi Klein documented in the Shock Doctrine that the Neoliberals and Chicago school followers advocated a kind of "disaster capitalism". Specifically, whenever a natural, economic, war-related, or other disaster strikes, these folks pounce and use the opportunity to quickly impose a brand of economic policy which benefits the elite at the cost of everyone else (by increasing unemployment, pushing the cost of essential goods through the roof, and otherwise increasing poverty), while people are still in shock and before they can react.
Publishers Weekly's review of the Shock Doctrine puts it this way:
The neo-liberal economic policies—privatization, free trade, slashed social spending—that the Chicago School and the economist Milton Friedman have foisted on the world are catastrophic in two senses, argues this vigorous polemic. Because their results are disastrous—depressions, mass poverty, private corporations looting public wealth, by the author's accounting—their means must be cataclysmic, dependent on political upheavals and natural disasters as coercive pretexts for free-market reforms the public would normally reject.
Amazon's review of Klein's book states:
"At the most chaotic juncture in Iraq'' civil war, a new law is unveiled that will allow Shell and BP to claim the country's vast oil reserves… Immediately following September 11, the Bush Administration quietly outsources the running of the 'War on Terror' to Halliburton and Blackwater… After a tsunami wipes out the coasts of Southeast Asia, the pristine beaches are auctioned off to tourist resorts… New Orleans residents, scattered from Hurricane Katrina, discover that their public housing, hospitals and schools will never be re-opened." Klein not only kicks butt, she names names, notably economist Milton Friedman and his radical Chicago School of the 1950s and 60s which she notes "produced many of the leading neo-conservative and neo-liberal thinkers whose influence is still profound in Washington today."And Pulitzer prize winning journalist David Cay Johnston provided an interesting example of disaster capitalism, noting that 2 days after 9/11, Congress was thinking about how to help the ultra-wealthy:
I am not passing judgment on whether estate taxes are good or bad. I am simply saying that emergencies and disasters are always used by the powerful to make the changes they want - even if wholly unrelated to the emergency.[Johnston]: Both parties are doing this. They’re doing it because they’re listening to a narrow group of very well to do people who do not want to pay taxes, who do not want to share in the expenses of the country that has made them rich. And they want you to pay their taxes. Those are the people who get access. Every politician will say you to, you can’t buy my vote. Generally, that’s true. The problem is that you and I don’t have the real access, and the proof that Congress is thinking about the super rich came two days after 9/11. The House Republican leadership introduced ten bills to address 9/11. One of them was a tax bill. What did it do? It gave estate tax relief, which did nothing for the firefighters and police officers and army sergeants at their desk and nurses and the busboy at the World Trade Center. All of those people that were killed. A tiny handful of people, but that’s what Congress thought these people needed, was estate tax relief even though 99% wouldn’t pay estate taxes.
[Interviewer:] It’s slipping it in as a very opportune time.
[Johnston]: That was just for this group of people. That was just for this group of people, but it’s indicative of what Congress is thinking about, what’s on the minds of Congress are not the concerns of ordinary Americans who want to educate their children, you know, who want to engage in enjoying life. Their concerns are about the super rich and within the super rich, those who are very anti-tax.
Would Our Government Really Start a War to Try to Stimulate the Economy?
I've written two essays attempting to disprove "military Keynesianism" - the idea that military spending is the best stimulus. See this and this.
In response, a reader challenged me to prove that anyone would advocate military spending or war as a fiscal stimulus.
In fact, the concept of military Keynesianism is so widespread that there are some half million web pages discussing the topic.
And many leading economists and political pundits sing its praises.
For example, Martin Feldstein - chairman of the Council of Economic Advisers under President Reagan, an economics professor at Harvard, and a member of The Wall Street Journal's board of contributors - wrote an op-ed in the Journal last December entitled "Defense Spending Would Be Great Stimulus".
And as the Cato Institute notes:
Bill Kristol agrees. Noting that the military was "spending all kinds of money already," Mr. Kristol wondered aloud, "If you're buying 2,000 Humvees a month, why not buy 3,000? If you're refurbishing two military bases, why not refurbish five?"Professors of political economy Jonathan Nitzan and Shimshon Bichler write:
***This is not the first time that defense spending has been endorsed as a way to jump-start the economy. Nearly five decades ago, economic advisers to President Kennedy urged him to increase military spending as an economic stimulus...
Similar arguments are heard today. The members of Connecticut's congressional delegation have been particularly outspoken in their support for the Virginia-class submarine, and they haven't been shy about pointing to the jobs that the program provides in their home state. The Marine Corps' V-22 Osprey program wins support on similar grounds. Despite serious concerns about crew safety and comfort, the V-22 program employs workers in Pennsylvania, New Jersey, Delaware and Texas, and a number of other states.
Theories of Military Keynesianism and the Military-Industrial Complex became popular after the Second World War, and perhaps for a good reason. The prospect of military demobilization, particularly in the United States, seemed alarming. The U.S. elite remembered vividly how soaring military spending had pulled the world out of the Great Depression, and it feared that falling military budgets would reverse this process. If that were to happen, the expectation was that business would tumble,unemployment would soar, and the legitimacy of free-market capitalism would again be called into question.Are they right about NSC-68?
Seeking to avert this prospect, in 1950 the U.S. National Security Council drafted a top-secret document, NSC-68. The document, which was declassified only in 1977, explicitly called on the government to use higher military spending as a way of preventing such an outcome.
Well, PhD economist Robert Higgs confirms the importance of NSC-68:
Previously administration officials had encountered stiff resistance from Congress to their pleas for a substantial buildup along the lines laid out in NSC-68, a landmark document of April 1950. The authors of this internal government report took a Manichaean view of America’s rivalry with the Soviet Union, espoused a permanent role for the United States as world policeman, and envisioned U.S. military expenditures amounting to perhaps 20 percent of GNP. But congressional acceptance of the recommended measures seemed highly unlikely in the absence of a crisis. In 1950 “the fear that [the North Korean] invasion was just the first step in a broad offensive by the Soviets proved highly useful when it came to persuading Congress to increase the defense budget.” As Secretary of State Dean Acheson said afterwards, “Korea saved us.” The buildup reached its peak in 1953, when the stalemated belligerents in Korea agreed to a truce.And Chalmers Johnson - Professor emeritus of the University of California, San Diego, and former CIA consultant - writes:
This is military Keynesianism — the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.You can read NSC-68 here.This ideology goes back to the first years of the cold war. During the late 1940s, the US was haunted by economic anxieties. The great depression of the 1930s had been overcome only by the war production boom of the second world war. With peace and demobilisation, there was a pervasive fear that the depression would return. During 1949, alarmed by the Soviet Union’s detonation of an atomic bomb, the looming Communist victory in the Chinese civil war, a domestic recession, and the lowering of the Iron Curtain around the USSR’s European satellites, the US sought to draft basic strategy for the emerging cold war. The result was the militaristic National Security Council Report 68 (NSC-68) drafted under the supervision of Paul Nitze, then head of the Policy Planning Staff in the State Department. Dated 14 April 1950 and signed by President Harry S Truman on 30 September 1950, it laid out the basic public economic policies that the US pursues to the present day.
In its conclusions, NSC-68 asserted: “One of the most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living”.
With this understanding, US strategists began to build up a massive munitions industry, both to counter the military might of the Soviet Union (which they consistently overstated) and also to maintain full employment, as well as ward off a possible return of the depression. The result was that, under Pentagon leadership, entire new industries were created to manufacture large aircraft, nuclear-powered submarines, nuclear warheads, intercontinental ballistic missiles, and surveillance and communications satellites. This led to what President Eisenhower warned against in his farewell address of 6 February 1961: “The conjunction of an immense military establishment and a large arms industry is new in the American experience” — the military-industrial complex.
By 1990 the value of the weapons, equipment and factories devoted to the Department of Defense was 83% of the value of all plants and equipment in US manufacturing. From 1947 to 1990, the combined US military budgets amounted to $8.7 trillion. Even though the Soviet Union no longer exists, US reliance on military Keynesianism has, if anything, ratcheted up, thanks to the massive vested interests that have become entrenched around the military establishment.
Leading political journalist John T. Flynn wrote in 1944 :
Militarism is the one great glamorous public-works project upon which a variety of elements in the community can be brought into agreement.But Flynn warned that:
Inevitably, having surrendered to militarism as an economic device, we will do what other countries have done: we will keep alive the fears of our people of the aggressive ambitions of other countries and we will ourselves embark upon imperialistic enterprises of our own.Indeed, the creator of the theory of military Keynesianism himself warned that those who followed such thinking would fearmonger, appeal to patriotism and get us into wars in order to promote this kind of economic "stimulus". As The Independent wrote in 2004:
I disagree that this is a partisan issue. The Independent piece portrays the "neo-liberal right" as special warmongers; I don't believe there is much difference with the "neo-liberal left", or "neo-conservative right", or whatever. Indeed, political labels are fairly meaningless. What is important is the actions one takes, not his rhetoric about his actions.Military-fuelled growth, or military Keynesianism as it is now known in academic circles, was first theorised by the Polish economist Michal Kalecki in 1943. Kalecki argued that capitalists and their political champions tended to bridle against classic Keynesianism; achieving full employment through public spending made them nervous because it risked over-empowering the working class and the unions.
The military was a much more desirable investment from their point of view, although justifying such a diversion of public funds required a certain degree of political repression, best achieved through appeals to patriotism and fear-mongering about an enemy threat - and, inexorably, an actual war.
At the time, Kalecki's best example of military Keynesianism was Nazi Germany. But the concept does not just operate under fascist dictatorships. Indeed, it has been taken up with enthusiasm by the neo-liberal right wing in the United States.
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