Sunday, August 14, 2011

Run, Bernie, Run!

I’m speaking of Bernie Sanders, the Senator from Vermont, of course. He can’t run in the Democratic primary because he’s an independent, not a Democrat. But, he probably won’t run in the general election either, because he caucuses with the Democrats and probably doesn’t want to become a political pariah like Ralph Nader. But, he should run. And, here’s why.

I predict the Republicans will pick Governor Rick Perry of Texas to be their candidate. He’s the perfect candidate for the Republican Party.  He’s religious, a southerner, has better looks and more charisma than the last Republican president, and can speak in complete sentences that his constituency understands. He's also very acceptable to the sane wing of the party, unlike most of the other contenders. And, he's not the recent Mormon governor of a blue state. What more could the Republicans ask of a candidate? If he is the candidate, his party will be energized and, unlike the Democrats and a lot of progressive independents, many of whom can't stand Obama and will sit out the election, will turn out for him in big numbers at the polls. In that situation, Obama, the Republican lite, will be toast.

Even if Obama were to win, do the Democrats really want four more years of Obama continuing to cave to the Tea Party agenda of austerity and no new taxes? Or would they be more successful as an energized opposition party? Look how successful the Republicans have been as the opposition party. With the distinct likelihood of another meltdown due to the austerity measures being pushed by both parties now, won’t the Democrats be better off laying it off on a one term Republican president as the Republicans are now doing with Obama?

If  progressive Democrats had a good spokesperson stumping for their progressive agenda including reducing wealth and income disparities, a single payer health insurance program, investments in education and infrastructure, etc. they would be on a good path to being a successful opposition party and have better prospects for winning in 2016. An energized progressive electorate would also get people to the polls to elect more of their constituency to the Congress.

Bernie Sanders is such a spokesperson. If you haven’t heard him, take a listen to him on the Senate floor here. There is no Democrat that comes close to him in stumping for the progressive agenda.

Monday, August 08, 2011

Why the Government has to Spend when the Private Sector decides to Save

What is necessary for a healthy, stable economy is a balance between savings to provide capital for new productive activity, and spending to sustain demand for goods and services. When these forces get out of balance instability happens.

If everyone decides to save more all at the same time, spending is reduced and economy goes into recession. If everyone decides save less at the same time, spending increases demand and prices go up. If the new spending is to buy assets rather than consumables, asset bubbles develop.

If the balance shifts to to0 much saving of capital, there is more capital chasing a limited number of investment opportunities, rates of return on capital drop, and owners of capital seek ways to stimulate demand for credit, or turn to leverage and speculation to increase returns. This is what happened prior to the current recession. Owners of capital turned to derivatives and leverage to increase returns. When that wasn’t enough, they turned to liar loans in the housing industry to stimulate demand for credit. As the housing bubble built, housing investors got the idea that the housing market could only continue to go up, and started using their home equity as a piggy bank for spending, driving themselves ever deeper in debt. This is what caused the housing bubble. When the loans could no longer be serviced as variable rates went up the bubble burst.

When the bubble burst, the piggy bank closed, the markets dropped, and the rush was on to deleverage and pay down debt. This required spending less and saving more by nearly everyone around the world. So we return to first scenario where there is too much saving and too little spending, and into recession we go.

The difference between this and milder recessions is that this time it happened to nearly everyone, even around the world, because of the strong linkage between financial institutions worldwide, due to the mitigation of risk through investment insurance like credit default swaps on collateralized debt sold as stock. Credit rating agencies were paid by the banks issuing the collateralized debt to give it a high rating so it could be easily sold around the world. All this was done to increase returns on capital because there was way too much capital for the investment opportunities that existed.

Instead of restructuring the banks that had issued the junk debt, allowing the owners and stock holders to take the hit, the government bailed out the banks and allowed them to keep the junk loans, now deeply devalued, on their books at face value rather than market value. So instead of destroying the junk debt, they put repayment in full on the backs of taxpayers. Now everyone is panicked, no one wants to spend, lend, or investment. This is what’s called a liquidity crisis.

Returning to the theme presented at the outset, when everyone in the private sector decides to save at the same time, the government is the only source of spending available to maintain the balance between spending and saving that is required to stabilize the economy. Instead, we now have a bunch of politicians who think they’re at a Tea Party and the government is just another private budget manager that needs to save like the rest of us. They don’t understand the basic need to balance spending and saving overall to stabilize the system. To make things even worse, they think that the wealthy capitalists who created the problem should be exempt from participating in the solution. In fact they think their taxes should be reduced even further. Until taxpayers and politicians understand the basics of how an economy functions, we will continue to be mired in the quagmire and things will only get worse.

Saturday, August 06, 2011

Some Long Range Consequences of the World Economic Crisis

It’s a sad day when a single company can cause world economic turmoil by downgrading the credit worthiness of the world’s only superpower. Standard & Poor’s, the same company that gave junk collateralized debt obligation a AAA rating to cause the current crisis, has downgraded the USA rating to a AA+, and the world goes along with it. This raises the question of whether or not the world has gone seriously off the rails.

How did we come to this point? How did the developed nations of the world become deeply indebted to an oligarchy of private financiers? How did the leading developed democratic nation in the world, the USA, become indebted to a developing authoritarian nation, China to the tune of several trillion dollars? The answer lies in letting wealth become concentrated in the hands of a few wealthy individuals and institutions and allowing a colluding central bank to create credit by simply making entries in its accounting journals.

The creation of credit and the abundant supply of cheap energy are the main ingredients that have lead to the rapid development of the developed nations in the  last several centuries. This has allowed the standard of living in these countries to advance way beyond that of undeveloped and developing countries. Accompanying this phenomena has been the emigration of labor from undeveloped to developing countries where this is possible.

But, advances in transportation and communication, and trade agreements in the last several decades, have allowed the free flow of goods and capital across international borders. This has directed the flow of private capital to countries with low production costs and away from developed countries. Businesses have become multinational, reducing the loyalty of their home countries and accelerating relocation to developing countries.

If international agreements were in place, this could have led to increasing the standard of living in developing countries to to the level of developed countries without reducing the standard of living in developed countries. But, instead, the way this has happened has been left mainly to private interests, resulting a decline of labor rates and employment, and increased debt, in developed countries while developing countries like China have become creditors. Instead of allowing the standard of living of  Chinese workers to rise to the level of developed countries, the Chinese government has accumulated the wealth from its development and used it to fund debt in the countries buying its products.

What remains to be seen is how this will all work out. In ancient times, wealth became concentrated in the hands of kings and their aristocratic cohort and debt in those outside the ruling circles. Periodically, there were Debt Jubilees, where debts would be forgiven and a new cycle of wealth and debt accumulation started. Since, in the modern world, wealth accumulates in private hands, and narrow private interests control government through contributions to politicians, there is no possibility of debt forgiveness.

All signs point to protecting wealthy private interests at the expense of working people. Eventually, debt service eats up all the resources that are needed to sustain productive enterprise and the system collapses. The question people should be asking is whether humans are smart enough to make corrections before the system collapses? The second ingredient of development, energy, may make the decision for us sooner rather than later. As fossil fuel resources decline and debt grows we face a double threat to the world economy and the standard of living of its citizens.

Monday, August 01, 2011

Obama, a Disaster for Progressives

Obama’s appointments and actions during his presidency have shown him to be a moderate Republican. His substituting of mediation with Republicans for leadership in fighting for progressive policy ceded the high ground to Republicans and caused the catastrophe that was the 2010 election. Since then he has ceded even more ground to Republican policy, including the disaster of cutting federal spending in the middle of a deep recession.

He has actually adopted Republican talking points in many of his speeches about the economy, buying into the false comparison between what voters should do in a recession, and what the federal government should do. As Obama has moved to the right in his policy decisions, the Republicans have moved even further to the right, until now Republican policy is essentially wacko Tea Party policy.

It is hard to see what he will do differently in a second term. It is not that he’s fought the good fight for progressive policy and been blocked by Republicans. He has actually agreed more with Republicans than with his progressive constituency. And, it is even harder to see how he will motivate progressive voters, which he needs to win, to the polls in 2012.

On the Republican side, if they win the presidency and both houses in 2012 will they continue their radical Tea Party policies when the results will be laid wholly to their doorstep? Not likely. Having a weak Democratic president that can be easily pushed around, and with their stated paramount objective being to make Obama a one term president, the Republican party has become radicalized. If they should win it all with a candidate like Romney, who is not a Tea Party wacko, they would likely return to a more responsible way of governing, especially if Democrats in Congress kept their feet to the fire and used the filibuster in the Senate the way Republicans have used it.

The time when a president can ignore his own constituency and get reelected has passed. Unless the Democrats field a viable candidate to oppose Obama in the primary, the energy on the Democratic side of the election will be so low it’s hard to see how voters will turn out in the large numbers needed to win. All the excitement will be on the Republican side of the election. If Obama were to win a challenging primary, that made him spell out how he is going to govern, it would give his constituency renewed energy to elect him. If not, it might result in a better candidate, or at least increase the turnout in the general election, which is necessary to maintain control of the Senate as a minimum.