Will Chinese Private Debt Trigger the Next Great Crash?

Private (non-government) debt of six nations as a percentage of GDP from 1952 (source; click to enlarge).

by Gaius Publius

A quick-hits piece, just to put the idea on your radar. I've been reading for months about brewing trouble in the Chinese economy due to any number of factors, and have been meaning to write this up, since if it comes, the "next great crash" may well have a Chinese trigger that starts it and world-wide private debt that fuels it (click the link above to see why).

The following seems the easiest-to-grasp way to present the idea. It's from a piece that appeared at Naked Capitalism, written by Richard Vague, managing partner of Gabriel Investments. The piece was originally published at Democracy Journal.

Before you read, note the chart at the top. The Y-axis shows private debt (debt held by persons and non-government entities, like businesses) by six nations as a percentage of each nation's GDP. Note the spike in Chinese private debt to 225% of its GDP, up from less than 75% in the late 1980s. Chinese private debt (a) far outstrips the others on the chart at the present time, and (b) has the kind of shape and spike associated with a coming crash, as discussed below.

For comparison, now look at the spikes in Japanese private debt coming into the 1990s, and the similar spike in U.S. private debt in the run-up to 2008.

The piece is long and well worth a read. I'm going to quote just a bit of it, just to make this a clean idea to grasp. Richard Vague writes (my emphasis):

Private debt is a beneficial and essential part of any economy. However, as it increases, it can bring two problems. The first is dramatic. Very rapid or “runaway” private debt growth often brings financial crises. Runaway private debt growth brought the 2008 crisis in the United States, the 1991 crisis in Japan, and the 1997 crisis across Asia, to name just three. And just as runaway debt for a country as a whole is predictive of calamity for that country, runaway debt for a subcategory of debt, such as oil and gas or commercial real estate, is predictive of problems within that subcategory.

The second problem it brings is much more subtle and insidious: When too high, private debt becomes a drag on economic growth. It chips away at the margin of growth trends. Though different researchers cite different levels, a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth.

When private debt is high, consumers and businesses have to divert an increased portion of their income to paying interest and principal on that debt—and they spend and invest less as a result. That’s a very real part of what’s weighing on economic growth. After private debt reaches these high levels, it suppresses demand.

Except for Germany, private debt is above 150% for all countries included in the chart, and year-over-year GDP growth, the usual measure, is low (again my emphasis):

The United States is the world’s largest economy. Yet, in the last two decades, like in the case of many other developed nations, its growth rates have been decreasing. If in the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.

To put Mr. Vague's point more simply — and more politically — if every banker and corporate creditor must be made whole, with no debt ever forgiven or discharged and each debt paid in full, as the highest priority of U.S. economic policy, our economy — and the world's — will grind to a standstill, a condition of "running in place," since for most of us, the lower 80%, only necessities can be bought while crushing personal debt is serviced yet never discharged. 

Which sets us all up nicely for the "next great crash." Trigger warning: watch China.  

GP 

About The Next Great Crash

Aggregate private household debt, 1990-2014. Consumer debt is measured on the left-hand scale; mortgage debt on the right-hand scale (source).

by Gaius Publius

"In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way [money is created] is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."

—Bank of England ("Money creation in the modern economy")

Governments create money and banks create money. Governments create money by spending. They send you $100 for, say, several cartons of paper from your small paper supply store, after which you have $100 and they have paper. Where did the $100 come from? The government "printed it," perhaps literally. Nevertheless, you have $100 to spend and are in debt to no one.

Banks create money by lending. You go to a bank for a $100 loan. They add $100 to your side of the ledger as an asset they've given you, and add $100 to their side as a debt you own them. You walk out with $100 you can spend, and they look forward to collecting interest until you pay it back.

(No, banks don't take money from reserves or deposits to lend you money. If the government had a rule that said banks had to hold no reserves, they could still lend you money. Read the quote at the top again from a Bank of England paper, or consider this Forbes article, "Banks Don't Lend Out Reserves," which says essentially the same thing: "[W]hen a bank creates a new loan, it also creates a new balancing deposit. It creates this 'from thin air', not from existing money: banks do not 'lend out' existing deposits, as is commonly thought.")

Those are in fact almost the only ways that money — the thing in your wallet and the number in your bank account — come to exist. (A third way of money-creation is for governments to issue treasury bonds — also a form of "printing it" — but that way is entirely optional and doesn't pertain to this discussion. They could still just print the money directly, as money, if they wanted, and use that money to buy things. Treasury bonds are created for an entirely different purpose. Paying taxes, of course, uses money already created.)

Both of these ways of creating money — by governments and by banks — create an asset. But when governments create money by spending, people own the asset. When banks create money by lending, they own the asset, which they lend, and people own a debt — the obligation to pay it back with interest.

This is a Great Truth and should be memorized. In general, government-created money puts an asset in your hands. Bank-created money puts an asset in their hands.

Obviously, bankers would always prefer the economy to be supplied with new money by banks than by the government. Which is why governments are always being forced by bankers, to the greatest extent possible, into austerity budgets. It means more business, more profit, for them.

Bank-Created Money Competes with Government-Created Money

Banks — and the bankers who grow rich running them — love it when governments run budget surpluses, which means the government takes more money out of the economy than it puts into it. (A government budget surplus means that at the end of the year, the government spent less money than it took in. In other words, budget surpluses shrink the supply of money, making money less available to the public)

When governments run surpluses (which is sold to the public as enacting "responsible" budget policies), the economy is relatively starved of government-created money. Every dollar that the government does not spend is a dollar that's not available to anyone. So to get additional dollars — to make up the difference between what the public needs and what they have — the public has to go to banks and other lending institutions and put themselves in debt.

It should be obvious from this that banks will always favor "responsible" pro-austerity government policies, and will always work to enact them. When bankers succeed at enacting austerity budgets, they increase their take from loans and make out like bandits.

That's where we are now. Bankers have captured the political process and staffed the government with its own ex- and future employees. On the Democratic Party side, this practice of bankers running government budget policy goes back through Barack Obama to Bill Clinton, his banker-turned-Treasury Secretary Robert Rubin, and their proud budget surpluses. (Rubin went from Goldman Sachs to Treasury Secretary to Citigroup. He even gave his name to this set of policies: "Rubinomics.")

Bankers like Rubin and their Democratic Party acolytes preach austerity for government, try to run budget surpluses instead of deficits (i.e., take money out of the economy instead of supplying it), and the whole rest of the nation goes into debt to bankers when people need what the government failed to provide.

(Republicans preach austerity too, but run budget deficits when they have power. Deficits do create an asset, the money itself, but the money doesn't go to the general public. Most of it goes straight to their friends, often in the military-industrial-security industry. This time a lot of it will also go to the climate-change-creating fossil fuel industry.)

The Goal of Both Parties Is to Keep Household Debt High

While the total private debt — commercial or business debt and household debt — affects the whole economy as we'll see shortly, the household debt now drives our politics. And maintaining high household debt has been a goal of both parties.

When Democrats hold power, the government directly starves the economy of money (strives for "responsible" budgets) and bankers get rich creating debt. That's why households are so debt-ridden today, with mortgage debt, student debt, credit card debt and the like. It's why the whole rest of the country, the bottom 90% whose voices are never heard, no matter who they vote for, are feeling so fatally crushed, so ... pre-revolutionary, if you will.

When Republicans hold power, the government enacts deficit-creating budgets, but still keeps the giant mass of private debt in place so commercial banks and other lenders can continue extract interest.

Where does this leave the public? Drowning in debt by design, under either party.

Where does this leave the country (in addition to poised on the verge of revolt)? Poised on the precipice, the edge, of the next Great Crash, because unrestrained debt-creation drives boom-and-bust cycles.

The Structural Problem With Debt-Driven Economies

Earlier I wrote about the current U.S. debt overhang (the large amount of debt that businesses and the public are suffering under) and said, "No U.S. economic recovery is possible until the government stops protecting creditors at all costs and starts making it possible (or mandatory) for personal debt to be forgiven." I'm not alone in saying that.

That statement is still true, but the situation is actually worse than I said. It's not just that a recovery is impossible; it's that the crash part of the boom-and-bust cycle is on its way as well. The mass of private debt — household debt and business debt — is now so great that it will cause the next economic collapse, just as debt caused the last one in 2008. This is a global problem, since major economies around the world have refused to put the brakes on debt creation. (One of the worst offenders, by the way, is China, but they're certainly not alone. Economic growth in almost all Western nations is strangled by the overhang of private debt.)

Michael Hudson explains this in a review of a new book by Steve Keen called "Can We Avoid Another Financial Crisis" (h/t Naked Capitalism for the link; emphasis mine). Hudson starts with Keen's view of debt growth as systemic to unregulated banking activity. First, debt growth creates an economic boom, when the new money acts as a stimulus. But later, bankers become "exuberant," lend far, wide and recklessly to increase their own income, and debt repayment comes to dominate the economy, strangling it. This puts the economy in a downward spiral, leading to a crash. In a society that does not restrain bankers, rinse and repeat.

Hudson puts it this way:

It is simple enough to show that the mathematics of compound interest lead the volume of debt [both household and commercial debt] to exceed the rate of GDP growth, thereby diverting more and more income to the financial sector as debt service. Keen traces this view back to Irving Fisher’s famous 1933 article on debt deflation – the residue from unpaid debt. Such payments to creditors leave less available to spend on goods and services.

In explaining the mathematical dynamics underlying his “Minsky” model, Keen links financial dynamics to employment. If private debt grows faster than GDP, the debt/GDP ratio will rise. This stifles markets, and hence employment. Wages fall as a share of GDP.

This is precisely what is happening [today].

Mainstream (neoliberal) economics has no way to take this debt-driven boom-bust cycle into account, or even to see it for what it is, since neoliberal economics doesn't see debt as a driver of the economy at all. As Hudson says below, for them it's the old logic that "debt doesn't matter, because 'we' owe the debt to 'ourselves.'"

But mainstream models ignore the overgrowth of debt, as if the economy operates on a barter basis. Keen calls this “the barter illusion,” and reviews his wonderful exchange with Paul Krugman (who plays the role of an intellectual Bambi to Keen’s Godzilla). Krugman insists that banks do not create credit but merely recycle savings – as if they are savings banks, not commercial banks. It is the old logic that debt doesn’t matter because “we” owe the debt to “ourselves.”

[But the] “We” are the 99%, the “ourselves” are the 1%. Krugman calls them “patient” savers vs “impatient” borrowers, blaming the malstructured economy on personal psychology of indebted victims having to work for a living and spend their working lives paying off the debt needed to obtain debt-leveraged homes of their own, debt-leveraged education and other basic living costs.

For Keen, Hudson, Minsky and a number of others, this kind of economy — depending on unrestrained debt for stimulus, leading to debt-driven crashes — is malstructured and the boom-bust cycles are inevitable, built in. The only long-term solution, of course, is a restructured, debt-restrained economy, which implies quite a lot of government intervention — anathema to free market, neoliberal, Rubinomics true believers (and the bankers who keep them in power).

Barring that restructuring, economies entering bust cycles have only two choices — pop the bubble now, or keep the party going a little longer — and they generally take the worse one:

Keen explains why, mathematically, the Great Moderation leading up to the 2008 crash was not an anomaly, but is inherent in a basic principle: Economies can prolong the debt-financed boom and delay a crash simply by providing more and more credit, Australia-style. The effect is to make the ensuing crash worse, more long-lasting and more difficult to extricate. [...]

Again, this is where we are now. The U.S. economy and the world economy are both limping along at almost no growth, and have been since the 2008 crash. No one has seen a recovery except the very wealthy, the upper 1%, plus the upper 10% who run things for them. Banks are doing fine, better than fine in fact, because government policy both here and in Europe is to let no debt go unpaid. You can see the result. I hope you can also now see where this is leading.

"Irrationality" and Bank Lending

Classic, neoliberal economics sees the world as made up of "individuals" making rational decisions. Here's Keen quoting Ben Bernanke, a classic neoclassical economist (source here; my emphasis):

"Hyman Minsky (1977) and Charles Kindleberger (1978) have in several places argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior. [A footnote adds] 'I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.' (Bernanke, 2000, p. 43)"

But the irrational often rules us all, especially hyper-wealthy bankers driven mad with greed, what Alan Greenspan, another classic neoliberal economist, quaintly called "irrational exuberance." Pathological monomania is another characterization, and it's not an anomaly, but a characteristic of this part of the cycle. (Even economist Jeffrey Sachs labeled as "pathological" the Wall Street bankers he had to personally deal with, a surprising statement coming from someone who used to work at the IMF.)

According to Hudson, Keen's solution to this failure of vision is to see the economic world as populated, not with individuals like "prudent savers" (banks) and "spendthrift" borrowers (their customers)," but with "basic economic categories – creditors, wage earners, employers, [and] governments [who are] running deficits (to provide the economy with money) or surpluses (to suck out money and force reliance on commercial banks)."

A Choice — "Modern Debt Jubilee" or the Next Great Crash

Keen does have a solution to the problem of avoiding the next great crash. He calls it a "modern debt jubilee," a massive conversion of debt into equity. Hudson describes this as essentially a swap of equity for debt. About this, Hudson writes, "The intellectual pedigree for this policy to keep debt within the ability to pay was laid two centuries ago by Saint-Simon in France. ... As a transition from [today's] debt stagnation, [Keen] suggests that the central banks create a lump sum to put into everyone’s account. Debtors would be required to use their gift to pay down the debt. Non-debtors would keep the transfer payment – so as not to let demagogic political opponents accuse this plan of rewarding the profligate."

That is, everyone gets a gift of money in their bank account from the central bank — the government's bank, which again creates new money. Debtors are required to apply the gift to their debt. Non-debtors get the gift as well to avoid the inevitable political attack that, if only debtors got the gift, we'd be rewarding only the "undeserving."

Pretty slick idea. Some wealth rebalancing (though not much), considerable debt destruction, with a side of economic stimulus. That would keep the next crash at bay.

When Pigs Fly, or Sanders is Senate Majority Leader

Keen's suggestion will also, my realistic socialist mind tells me, never happen. If it did, we'd be living in a world in which the Democratic Party chooses Bernie Sanders to replace Chuck Schumer as Democratic leader of the Senate, and chooses to win elections again by standing with the people instead of big money donors, many of them bankers, who now provide most Party funding.

This could occur, of course, but look what happened to Sanders the last time he challenged the Party — every part of its ecosystem, including its media, worked to defeat him. And if Democrats won't stand for the people — and save the nation from the debt that's drowning it — who will? In our deliberately constricted political system, there's only one other alternative, and they'll always be no help at all.

Our Debt Is Their Income Stream

A final note — the newsy part of this piece, about the coming crash, is not the most important part. The paragraphs leading up to the news — my opening sections prior the discussion of Steve Keen's book — is much more significant, since it explains all you need to know about why banker-captured Western governments are so in love with austerity economics; why austerity guarantees your indebtedness; and why that's entirely by design.

Again: Government-created money puts an asset in your hands. Bank-created money puts an asset in their hands.

Our debt is their "income stream," and they will always stop at nothing to keep it that way, including inducing the first black president to destroy the wealth of his own community for their benefit (see "Obama's Other Legacy").

This austerity-created income stream must be interrupted and reversed, or we really will get that revolution I've been alluding to, and not just at the ballot box. (More on that problem in a later piece.)

GP
 

Junk Bonds Are in Worse Shape than Before Lehman Collapsed

Percentage of S&P junk bonds and leveraged loans considered "distressed" (click to enlarge)

by Gaius Publius

We know that there will be another economic "big one" like the crisis of 2008. All of the pieces are in place — Wall Street greed and literal pathology, the even greater size of too-big-to-fail institutions, a literal get-out-of-jail free card that almost blesses continued financial fraud, and the like. We just don't know when it will occur, or what will trigger it. Last time it was triggered by the collapse of the bubble-sized home mortgage market. The time before that, it was the bubble-sized tech stock valuations. Where's the bubble now, or the inverse bubble, the market hole that may be forming somewhere?

Many people are looking at collapsing oil prices and soaring supplies, which is causing the collapse of over-leveraged carbon companies of all types (coal, oil and methane), as a potential cause of the next crash. Others say that the collapsing price of oil is "contained" — unique and isolated — and is not contaminating other markets.

The following piece by Wolf Richter argues the opposite point — that the collapse in the carbon market is not contained at all, and that collapse is in danger of spreading via the increasing price of junk bonds. Is this a precursor to the next "big one"? See what you think.

Wolf Richter (my emphasis throughout):

Now It’s Even Worse Than it Was When Lehman Collapsed, But It’s “Contained”

“Distress” in Bonds Spirals into Financial Crisis Conditions

The pile of toxic corporate bonds in the US, euphemistically called “distressed” debt, ballooned 15% in the single month of February to $327.8 billion, up 265% from a year ago, according to S&P Capital IQ. The number of S&P rated US companies with distressed debt rose 9% in February to 353, up 128% from a year ago.

The last time the pile of distressed debt had soared to this level was in November 2008, and the last time the number of distressed issuers had shot up to these levels was in October 2008; Lehman had declared bankruptcy in September.

These “distressed” junk bonds sport yields that are at least 10 percentage points above US Treasury yields, according to S&P Capital IQ’s Distressed Debt Monitor. 

Note the definition in the final paragraph above. Bonds are considered "distressed" if they have to offer 10 points or more greater yield than U.S. Treasuries in order to attract buyers. Obviously, any company whose financing depends largely on these bonds is at risk of bankruptcy.

As a chart, the above data looks like this. Take a minute to study it.

The Y-axis is both number of issuers (bar graph) and billions of dollars issued (line graph). Click to enlarge.

Richter adds this about the S&P "distress ratio" for junk bonds and leveraged loans (see chart at the top):

The ratio hit the highest level since July 2009, when it was coming down from the Financial Crisis. But this is the spine-chilling part: Back in September 2008, before the Lehman bankruptcy had fully registered in the ratio, but when the Financial Crisis was already gaining a good amount of momentum, and when stocks were crashing left and right and prudent people were wearing hardhats while out on the sidewalk, the distress ratio was “only” 28.9[.]

Richter quotes the report he cites as saying that a rising ratio is “typically a precursor to more defaults.” If he's right, we could be headed into the same soup we took years getting out of. And this time, it will be a political soup as well, since the country, both left and right, is in zero mood for another massive government bailout.

Not Confined to Oil and Gas

Nor is the damage in these markets confined to the carbon sector. Richter again:

And it’s not just the oil-and-gas and the minerals-and-mining sectors that are getting crushed. Of the 607 distressed bond issues in the ratio, 172, or 28%, are oil-and-gas related and 80 bond issues, or 13%, are minerals-and-mining related. The remaining 59% are spread across other the spectrum.

“Spillover effect,” is what S&P Capital IQ calls this. It has contaminated “the speculative-grade spectrum as a whole.”

The article has more along these lines, including a list of sectors affected, how many billions of dollars in debt are distressed in those sectors, and the main companies affected in each sector. It's quite eye-opening.

Will Commodity Prices Cause the Next Collapse?

I've been personally watching all of this with interest. There is a bubble in commodities — especially those things that the very very wealthy are interested in (for example, Manhattan real estate and high-end art) — but really, in commodities in general. There's also a major crack in the commodities bubble connected to carbon products (coal, oil and methane). I've wondered before if collapsing oil prices would spark a collapse in other commodities (stocks, for example) via the highly leveraged, and therefore highly vulnerable, nature of many fracking companies in the U.S.

It's possible we'll get an answer soon ... or not. Still, this is worth watching. If you're interested, Richter's website, Wolfstreet.com, is worth checking on a regular basis.

GP

Why Are the Largest Corporations Sitting on Trillions in Cash?

As the value of money rises, the value of things goes down, and vice versa (illustration by Constance Heffron, Happy Days, 1951, Allyn and Bacon; source).

by Gaius Publius

Why are the world's largest corporations sitting on trillions in cash? Thom Hartmann's answer is — they know a crash is coming.

The Relationship Between Money and Things

Before we look at Hartman, however, let's consider the relationship between "money" and "things." Money and the things that money buys are, by definition, on opposite sides of a kind of see-saw or teeter-totter. When "things" (goods, commodities, services) become more valuable — when their side of the teeter-totter rises — they cost more, and it takes more "money" (dollars) to buy them. That automatically means the value of money goes down, since it take more of it to buy something that used to cost less.

As a concrete example, if the price of a loaf of bread goes from $1 to $2, two things always happen — bread becomes more valuable (it costs more) and a dollar becomes less valuable (it buys less). This is a literal inverse relationship, unlike a lot of false inverse relationships you hear about (for example, less government = more freedom and vice versa.)

Most of us are used to a world in which money slowly becomes less valuable; in fact, this is the "normal" world most of the time. The cost of goods goes slowly up (we call that "inflation"), and the value of the dollar goes slowly down. We've been in this kind of world, an inflationary world, since the Great Depression ended.

The opposite is a period of "deflation," in which the cost of things goes down (often suddenly and drastically) and the value of money goes correspondingly up (often way way up). In that world, the cost of a loaf of bread falls from $1 to perhaps 50 cents; at the same time, one dollar becomes twice as valuable. Deflationary times are associated with "hard times," the Great Depression, for example, because falling prices are usually associated with times when people just can't afford things at "normal" prices because they're just too poor. If a baker just can't sell bread for $1 per loaf, she'll sell it for whatever folks can afford, and the price will fall.

 When only the rich have money, spending slows and prices collapse.

Now do a thought experiment, and as you do, keep the teeter-totter relationship between money and things in mind. In "good times," would you rather be rich in things or rich in cash? Things (goods), of course, since in inflationary times the value of things keeps going up and the value of money (cash) keeps going down.

So what would you rather hold in "hard times," or if you thought hard times were coming? In "hard times" I want to hold cash and buy only what I need. Why? Because in deflationary times, cash increases in value while the price of things keeps falling. (In fact, in my very small way, I've been mainly "invested" in cash since before 2007 and plan to remain that way. I'm sure many of you are as well — something to remember as you read on. You're not the only ones with that idea.)

One last thought. Consider debt in good times and bad. Most people will tell you, correctly, to hold less cash and more debt in good times, since you borrow a dollar that's worth $1 at the time, then pay it back with a dollar that's worth, say, 95¢. A pretty good deal, right? But debt in bad times is a very bad idea, because the math now works against you. You borrow a dollar that's worth $1 at the time, but you have to pay it back with a dollar that's worth $1.05, or worse, and that's before you add in the interest.

Bottom line: If you think hard times are coming, hold the most cash and the least debt you can. Now on to Hartmann and something he wants to point out.

Thom Hartmann and "The Crash of 2016"

In his terrific book, The Crash of 2016, Thom Hartmann identifies something you've likely heard about but haven't given much thought to. Modern mega-corporations are hoarding cash. Hartmann from Chapter 11 (my emphasis, so you notice how large the numbers are):

If you want to know which way the wind is blowing, keep an eye on the billionaires.

So what are the billionaires telling us just ahead of the Crash of 2016?

Well, in 2012, four years before the Crash of 2016, Moody’s Investors Service noted something peculiar. It noticed American companies are hoarding record amounts of cash.

For example, in 2012 Apple was discovered to be sitting on $137 billion worth of cash. Investors actually sued the company to make it pass some of that wealth down to shareholders.

But what Apple was doing was comparatively minor. Altogether, US companies stashed away $1.45 trillion in cash in 2012, a 10 percent increase from 2011.

They aren’t investing it, they aren’t expanding their businesses with it, they aren’t hiring more workers. They’re just sitting on it. They aren’t even paying taxes on it, since, as Moody’s discovered, 68 percent of all that cash is stashed overseas.

Wall Street is also hoarding enormous amounts of money. Dan Froomkin at the Huffington Post explained in July 2012, “The latest report from the Federal Reserve shows that big banks’ cash reserves peaked in the third quarter of 2011, but are still near their all-time high at just under $1.6 trillion—an astonishing 80 times the $20 billion they held in reserve in 2007.”154

But it’s not just in the United States; it’s all around the world.

The Wall Street Journal wrote on Europe’s banks holding cash at the end of 2012: “A dozen of Europe’s largest banks reported holding a total of $1.43 trillion of cash on deposit at various central banks.”

It adds, “That represents at least the sixth consecutive quarter that the banks have increased their overall central-bank deposits. Since the end of 2010, the banks have boosted the amount they are stockpiling at central banks by 84%.”155

The Institute of International Finance, a Washington-based organization, calculated that companies in the United States, United Kingdom, Eurozone, and Japan were sitting on nearly $8 trillion worth of cash.156

Altogether, the wealthiest people on the planet have as much as $32 trillion stashed away in overseas financial institutions, according to a study by the Tax Justice Center in 2012.

All of this is taking place just as the stock market was reaching historic new levels, and profits in corporate America reached the highest levels as a percent-of-GDP ever recorded. Yet, in early 2013, Money News reported that “a handful of billionaires are quietly dumping their American stocks,” including Warren Buffett, John Paulson, and George Soros. ...

If the economy really is doing so well, then why are the wealthy giving signs of the opposite, quietly leaving markets and just sitting on the sidelines?

The answer is they know what’s coming. They know 2008 was just the precursor, and 2016 will be the real catastrophe.

The billionaires are preparing for a series of economic shocks on the horizon, probably beginning in Europe and spreading across the planet ...

Is a great crash coming in 2016? Predicting the future is almost as hard as predicting the past (just ask a historian), so I don't claim to know if Hartmann is right about the timing. But I do know that a crash is coming, and I'm by far not the only one saying so.

Do the rich know something we don't? They may not notice when torches and pitchforks reach critical mass, but I'll bet they do know about economic crashes ... sometimes. Something to think about.

GP

How the Very Rich Are Misusing Miami Beach

This painting sold in 2013 for $142 million (source). Are the very very wealthy driving an asset bubble? If so, how large a bubble?

by Gaius Publius

This is a follow-up to this piece, "Can Miami Beach Survive Global Warming?" about Miami Beach, south Florida, and climate change. There we talked about the disconnect between the pace of development, high land valuations, and inevitable sea level rise.

That disconnect flies in the face of an inevitable collapse. But I don't mean physical collapse (though at some point, that too is inevitable). I mean economic collapse, something less deadly perhaps, but for many, still very painful.

While I didn't make the point there (I have elsewhere), please keep in mind that sometimes economic collapse — a collapse in prices — precedes the event that causes it. That is, because we are an anticipatory species, a species that can anticipate events, we also act on anticipation. Thus, it may well be true that, as soon as the seed is planted that "you're going to lose money buying in Miami Beach," it may well follow that anticipation makes the future immediately present.

And frankly, once prices for any product collapse, the stampede is on — simply because there's a stampede. Many prices do recover over time. The price of Florida real estate, for example, recovered after the disastrous collapse in the mid-1920s. The difference now, however, is this — once it's over for the economy of south Florida, there won't be a recovery until people see the sea stop rising. Meaning, never.

The Very Rich and the Miami Beach Bubble

The problem in Miami Beach, unlike the general problem is south Florida, is that it's the playground of the very very wealthy, who have turned luxury condos and homes into the same kind of competitive "investments" that condos and homes in Manhattan and the very best parts of London have become. In other words, a massive asset bubble, the same kind of bubble that the fine art market has become, and one that only the very very wealthy can create:

A sale earlier this week of Post-War and contemporary art brought in more than $691 million, the largest haul in the history of the art market, according to the auction house Christie's.

The highlight was a painting [above] by Francis Bacon, "Three Studies of Lucian Freud," which went for over $142 million, the highest price ever for a piece of art sold at auction.

Over at Sotheby's (BID), a silk-screen painting by Andy Warhol sold Wednesday for $105 million.

The art market has heated up just as Wall Street has been setting records of its own. Stocks are holding near all-time highs. So there may be a spillover to the art market as the already wealthy grow now even richer. There are obvious spillovers into certain real estate markets as well.

Here's what that looks like in Miami Beach, from the same Vanity Fair article quoted previously (my emphasis):

[Harold Wanless, chairman of the Department of Geological Sciences at the University of Miami], who is among the scientists whose work is cited in Hansen’s paper, told me that he and Hansen take issue with the current models for projected sea-level rise—most of which top out at around six feet as the absolute worst-case scenario for 2100—because they don’t account for how rapidly the world’s glaciers and ice sheets are going to melt in the decades to come. “If you ever fly over Greenland, which I’ve done, it’s unbelievable,” he said. “The ice sheet is already melting from global warming, and now it’s also dirty on top, because of dust and soot blowing in from other parts of the world.” The darkened ice absorbs heat more quickly than clean, white ice, hastening its melt rate. Given such factors, Wanless said, he predicts that Miami Beach will experience something in the range of 10 to 30 feet of sea-level rise by the end of the century. I was so stunned by these numbers that I asked him to repeat them, to make sure I had heard him right. He did.

A pause to think. If that is true (I personally think it is, given the many non-linearities — and the history of negative surprises — in the climate prediction world), then it follows that people will figure this out way ahead of time. That's the anticipation I mentioned above.

But that's for later, for after prices start falling. In the present there's no end of optimism, even among the local scientists:

I received a more optimistic take on South Florida’s future from Ben Kirtman, a climate-modeling expert at the University of Miami’s Rosenstiel School of Marine and Atmospheric Science. While not shying away from dire climatic trends or from the extraordinary measures that will be required to contend with them, he sounded a lot like Mayor Levine, believing that there remains time for human ingenuity to save the day. “I want to see Miami Beach survive,” he said. “When we acknowledge a problem, we diagnose the problem, and then we start to develop really good technology to fix the problem. I believe in that.”

And that optimism, plus more than a little greed, is driving a very hot real estate market:

It’s this sort of determination that allows [Mayor] Levine to believe that the current boom of building and buying, far from being a crazy bet on what’s destined to become Waterworld, makes perfect sense. “If you can show me the first owner of real estate who’s panicky, who would like to sell cheap, please let me know—because I’d like to be the buyer,” he said. “And I have about 100,000 people right behind me.”

The real-estate figures bear him out. Peter Zalewski, the founder of CraneSpotters.com, a Web site and consulting service that monitors the high-end condominium market in South Florida, told me that, while the pre-2008 real-estate boom was actually bigger in terms of units sold, “from a price perspective, this is the biggest boom by far. It’s triple or quadruple anything we’ve ever seen.” To wit, two years ago, Alex Rodriguez sold his mansion on North Bay Road, for which he had paid $7.4 million in 2010, for $30 million. In June, Phil Collins paid $33 million for a home, also on North Bay Road, that had once belonged to Jennifer Lopez—and which Lopez had sold, 10 years ago, for $14 million.

Two of the foremost brokers in this super-luxury market are Jill Eber and Jill Hertzberg, a pair of glamorous, mediagenic Coldwell Banker agents who bill themselves as The Jills®, and who, three years ago, bagged themselves what was then, pre-Faena House, the county record for a single-family dwelling, selling a mansion at 3 Indian Creek to a Russian buyer for $47 million. I met with Hertzberg at her office, where even she expressed surprise at what people are paying for properties nowadays—not just in desirable South Beach but in areas like the one where the Edition and the Faena properties are (“They’re calling it ‘Mid-Beach,’ but no one had a name for it before,” she said) and in the quiet town of Surfside, just north of Miami Beach proper, where the developer Nadim Ashi and the architect Richard Meier are making over the Surf Club, that toffs’ haunt from the 1930s, as a Four Seasons-branded hotel-and-residential complex. It won’t be completed until next year, yet Hertzberg has already sold one of its penthouses for $35 million.

Many of The Jills’ well-off buyers are from overseas and pay for their purchases in cash. For her foreign customers, Hertzberg explained, Miami Beach is precisely the opposite of a risky investment; rather, it’s a safe harbor in which to park their money (and often their extended families) when things get volatile at home. There is even a colorful real-estate term for the cash spent in this fashion: flight capital. Selling super-luxury real estate, Hertzberg said, has provided her and Eber with a continuing education in political unrest around the globe. “Years ago, when they started having all the kidnappings in Bogotá, and newspeople and judges were getting killed, we started to have Colombians coming in,” she said. More recently, she noted, there has been an influx of customers from troubled Argentina. With Miami Beach offering beautiful views, a temperate climate, a stable national political system (well, relative to other countries), and properties that seem to only appreciate in value, sea-level rise is not foremost among the considerations of today’s eight-figure buyer. In fact, when I asked Hertzberg how many of The Jills’ clients have even raised the subject, the answer was precise: one. And that client still proceeded with his purchase.

Which isn’t to say, Hertzberg hastened to add, that her customers are oblivious or delusional. “I don’t want to belittle my clients, because I think they’re very sophisticated, world-traveled, and well read,” she said. “What it is, I think, is that they have confidence that the city will figure it out.”

Zalewski, the condominium analyst, takes a more cynical view. “Rising sea levels are in the back of everyone’s minds, but it’s all about immediate gratification,” he said. “I would wager that less than 10 percent of these purchases are long-term investments. It’s more like ‘I will buy into that position, I will hold for three, five, seven years, and then I will exit that position.’ I like to say that in New York you trade stocks, in Chicago you trade commodities, and in South Florida you trade condos.”

The capstone — Miami Beach has status it doesn't want to surrender:

It’s an index of Miami Beach’s ascendant cultural status that it now sits alongside New York, London, St. Barth’s, Portofino, and Aspen on the circuit of the International Set—as the site of a “third, fourth, or fifth home,” in Zalewski’s words, that will sit unoccupied for the better part of the year.

Money chasing money chasing status and money. $30 million, $33 million, $47 million for one condo, one home — there are other markets like these but not many. Yet these men and women aren't the only property owners in Miami Beach or mainland Miami. They're just the trend-setters.

So what happens when trend-setting money flies off in a swarm?

There was a horrible collapse in real estate prices in Florida in the mid 1920s, a presage of the 1929 collapse that caused the Great Depression. I'm not predicting the second — a new great depression — but the first, a price collapse in Miami Beach that will last generations, is certain. Even if the ripples of that fall encompass only the rest of south Florida, the crisis may look to the nation like a wake-up call. I hope.

GP

Is the world economy headed into the dumper? One thing's sure, says Ian Welsh: Western elites are losing control of the global economic narrative

"[T]here is more pain to come, but there always was. The decision was made in 2008 and 2009 to not allow an actual recovery and to protect the rich at all costs. There was a cost; it has been paid for the last six years, and this is yet and simply another one of those costs. China, as an exporting power, cannot carry the world economy when the people to whom it exports insist on various levels of austerity (be clear, the US is in austerity too, just not as bad an austerity as Europe)."

-- Ian Welsh, in his post this evening, "As the Dow Jones Drops"

by Ken

I think Drew Harwell's late-afternoon washingtonpost.com report, "Global sell-off turns to chaos in rocky day for financial markets," is representative of at least the American coverage of the day's financial events. It begins (links onsite):

A worldwide selling frenzy on Monday bruised U.S. stocks and sent the Dow Jones Industrial Average plunging nearly 600 points, as investors worried over China’s slowing economy extended a global-market meltdown.

The Dow fell more than 1,000 points within six minutes, its largest single-day slump in history, before staggering back to close down 588 points, or 3.6 percent, its lowest point in 18 months. It marked the second straight day of a 500-point-or-more loss for the Dow, a blue-chip index of 30 large companies.

The Standard and Poor’s 500, a broader look at the market, and the Nasdaq Composite, a tech-heavy index, posted similarly dismal starts before swinging wildly then sinking again to losses of close to 4 percent.

The global whiplash underscored investors’ shaken confidence in China’s slowing economy and central bank. The world’s second-largest economy is now reeling over what China’s state media is calling “Black Monday,” during which its markets just recorded their biggest one-day nosedive in eight years.

WHEN LAST WE LOOKED AT CHINA'S PLUNGING EQUITY MARKETS --

in early July, Tufts professor Daniel Drezner, in the washingtonpost.com post "The politics of China's stock market collapse," was quoting he Financial Times's Tom Mitchell saying that "if anything, a three-week, 30 per cent correction after a 12-month, 150 per cent surge seemed like a welcome adjustment." Experienced watchers of the Chinese economy were pointing out that, given the size of the bubble that had inflated the Chinese markets, and in combination with news of the Chinese economy's slowdown, there was still a heckuva lot of bubble deflating to be done. So I don't think there should be any great surprise that the Chinese markets have done more plunging.

However, there was (and still is) much interest in the Chinese government's handling of the situation, notably the hardly precedented effort to appear to allow its currency to sort-of-float while simultaneously being seen making various quite conspicuous, even frantic efforts to maintain control (that's the control-freak PRC we're accustomed to) -- frantic and notoriously unsuccessful. In the less than two months since, the government's efforts to get control of the situation have mostly served to show how little actual control it has.

Nevertheless, as Ian Welsh points out in the post I've referenced at the top of this post, China retains the distinction of having an economy that's actually producing actual stuff,.

China is the key maker of goods. There are a few other countries that also make goods as the most important (not largest, most important) part of their economy. Everyone else is a commodity producer, a financier, or trying to sell intangibles (intellectual property, whether inventions or fiction or branding).

This means that China has to buy resources from somewhere to be able to make stuff and has to have markets where they can sell the stuff they make. So the Chinese economy, already in slowdown, has been further vulnerable to world increases in resource prices and to fall-off in consumer demand in its once-humming export markets.

During this period we had repeated currency devaluations in an attempt to increase the competitiveness of exports. These devaluations had marginal effect at best, didn’t work at least.

China’s growth had been slowing (thus the reduction in their demand for commodities), they encouraged a stock market bubble as consumers were proving reluctant to continue piling into real-estate. They printed vast amounts of money, at least twenty times as much as Europe, Japan, and the US combined, but exports were no longer leading growth. Regular Chinese and private firms have massive amounts of debt.

To put it simply, China had reached the point where export-led mercantilism was no longer working. They needed to shift to domestic consumer demand.  They chose to try and inflate bubbles instead.

Virtually every country in the world was either rolling off a cliff, or struggling to keep their head above water. Most of the South of Europe had never really recovered (Ireland is a partial exception). Latin America was diving, Turkey’s real-estate driven, neo-liberal growth was stalling, India’s “miracle” was always more of a paper tiger than most made out, being concentrated to a minority even as the average number of calories consumed in the country dived.

To Ian it's significant that the economic "contagion" started in China, "spread to emerging economies, money fled to the US and a few other safe havens, China’s economy continued to stall, its stock market fell despite radical attempts to keep it inflated, and that has now come home to New York." He points out that he has been saying for years that the next 1929-style crash "would start in China." Whether this is actually the new 1929 "we won't know for a while," Ian says -- "just as they did not know in 1929 that it was 1929."

"Welcome to the new world," says Ian.

The US and Europe put a LOT of effort into moving as much industrial production as possible to China. China just promised that a very few people would get very rich doing it, and those people made sure it happened. (Look up the profit margins on iPhones.)

I will note that there are still bubbles. Real-estate bubbles (Canada, Britain, a few important US cities, Australia, etc.) and a vast amount of highly leveraged derivatives have been pumped back out since the 2008 crash, since no one actually bothered to regulate or forbid them. And banks and financial companies are now larger and fewer, making the economy and financial markets both more subject to contagion.

The elites learned from 2008 that the important thing to do in a financial crisis is to just print enough money and relax enough accounting rules–extend and pretend. That will be the play again this time if this contagion turns truly serious. I would guess that it will work, sort of: More zombies will be created, they will need higher profits, the real economy will be even more stagnant. And people like Corbyn, Trump, Sanders, and so on will reap the rewards electorally.

Printing money is a viable strategy only as long as the elites control the regulatory apparatus (including prosecutors, finance departments/treasuries, and central banks), legislators, and executives. The reason people are screaming so loudly about Corbyn is not because he can’t win in England, it’s because if he did, and he’s serious about his policies, he will inevitably have to confront them. And an English PM with a majority he controls is pretty much a dictator.

"A LOT IS AT STAKE HERE," SAYS IAN

And he explains this stake in a way I don't think you'll be seeing in your regular infotainment nooze outlets:

Our elites are losing control over the electoral apparatus and the common narrative. In both cases, the signs aren’t terrible yet, but they are there; the rise of the old right and the old left is visible.

"So," Ian says, "there is more pain to come,"

but there always was. The decision was made in 2008 and 2009 to not allow an actual recovery and to protect the rich at all costs. There was a cost, it has been paid for the last six years, and this is yet and simply another one of those costs. China, as an exporting power, cannot carry the world economy when the people to whom it exports insist on various levels of austerity (be clear, the US is in austerity too, just not as bad an austerity as Europe).

Ian can't help but take note of "the way the Chinese are fumbling this crisis," which convinces him, he says, "that they are now past the point where enough competent people who remember poverty and fear remain in power."

Ian concludes: "We continue to live in interesting times."

#

Pay no attention to the Lying Liars of the Right -- inequality of economic opportunity was NOT always the law of the land

The sainted Ronald Reagan bequeathed Americans the right to revel in their ignorance, bigotry, and savagery even as they were being so carefully lined up in the bent-over position.


"What [William Lazonick] has uncovered is a shift in corporate conduct that transformed the U.S. economy -- for the worse. From the end of World War II through the late 1970s, he writes, major U.S. corporations retained most of their earnings and reinvested them in business expansions, new or improved technologies, worker training and pay increases. Beginning in the early '80s, however, they have devoted a steadily higher share of their profits to shareholders."

-- Harold Meyerson, in his Washington Post column
"In corporations, it’s owner-take-all"

by Ken

Last night I shared Jen Sorensen's lovely Daily Kos comic strip that neatly and crucially made the connection between the institutionalized social inequality on display in Ferguson and the institutionalized economic and legal inequality on display in Bankster America. And as I said, while I was focusing yesterday on the social-inequality side of this coin, tonight I planned to flip the coin over to the economic-inequality side, noting that they are the twin legacies of the sainted Ronald Reagan.

When it comes to Saint Ronnie, I write a lot (to whoever said "incessantly," was that really helpful?) about his disastrous sociopolitical legacy, the benediction he bestowed that whatever you believe to be, or even wish to be, reality is the real thing -- assuming, of course, that it's compatible with an ultra-right-wing way of looking at, or not looking at, the world. I guess that's the side of the Reagan Legacy that usually makes me crazy, since the consequences are incalculable.

That benediction, after all, comes with an official Seal of Good Americanism for every crackpot chemical impulse flits through a person's brainm such that if it feels right, or just feels good, to you, then it's for real -- again assuming it's compatible with ultra-right-wing doctrine. Not to put too fine a point on it, the "it" here includes every species of ultra-right-wing hatred, savagery, bigory, and urge to violence. If you feel it, preached Saint Ronnie, and if it's real American (translation: compatible with ultra-right-wing doctrine), it's real.

It's called, you know, "Morning in America."

But I tend not to dwell on the other branch of the Reagan legacy, the more nuts-and-bolts kind. For while Saint Ronnie was bestowing upon Americans without access to the levers of power this blessing of unlimited ideological insanity, to those Americans manning the levers of power he was bestowing the country itself, tied in a bow -- again, assuming that those lever-manners subscribed to the ultra-right-wing vision of "free-market capitalism" wherein the mission of government is to force Americans without power to their knees, bent over, ready to receive what ever might be shoved up their posteriors.

It's possible to construct a working model whereby either branch of Reaganism can be seen as providing "cover" for the other. But the power of money being what it is -- which is to say the power of money -- if you were a betting person, you would probably want get behind the view that the crackpot, emotionally exhilarating savagery of Ronnie the empowerer of the masses was providing cover for the rape of those masses by followers of Ronnie the phony free-market capitalist.

One of the crucial elements of the permanent institutionalizing of crackpot ultra-right-wing reality, of course, was Saint Ronnie's open war on labor unions. And doggone if his folksy, largely reality-free or even reality-defying schmoozing skills weren't perfectly suited to turning large numbers of Americans against the only institution our economy has (or rather had) to resist the pulverizing will of the Economically Empowered. He pulled the trick of making the Great American Masses feel empowered while joyfully positioning themselves in the Great Bend-Over.

Now, it has probably always been true that if you tried to talk about equality of economic equality, the right-wing powers who depend so heavily on inequality of opportunity cried, "Class warfare!" And who would know better than the people who had made class warfare a way of life, except on their terms, which are roughly the class-war equivalent of the military-war C-in-C Reagan waged on Grenada. Make sure they're bent over for optimal insertion.

However, over the last decade or two, as the War on Equality of Opportunity has become the American Way, a wrinkle has been added: pretending that the way things are now is the way things have always been, so shut your pieholes, you whining "takers." Don't you know it's Morning in America?

With Labor Day approaching, Harold Meyerson -- bless his soul -- is here to tell us that uh-uh, this is not how it has always been, and what's more, there was a time in the not-so-distant past when this was understood by almost as many Republicans as Democrats. I provided a link last night to Meyerson's Washington Post Labor Day-themed column. For those who haven't already read it, and perhaps even those who have, it begins: "Labor Day -- that mocking reminder that this nation once honored workers -- is upon us again, posing the nagging question of why the economy ceased to reward work."

He ticks off a couple of frequently proposed culprits, globalization and technological change, but then directs "anyone seeking a more fundamental answer" to the article "Profits Without Prosperity" by William Lazonick in the September Harvard Business Review, which he later says "does nothing less than decode the Rosetta Stone of America’s economic decline."

Like Thomas Piketty, Lazonick, a professor at the University of Massachusetts at Lowell, is that rare economist who actually performs empirical research. What he has uncovered is a shift in corporate conduct that transformed the U.S. economy — for the worse. From the end of World War II through the late 1970s, he writes, major U.S. corporations retained most of their earnings and reinvested them in business expansions, new or improved technologies, worker training and pay increases. Beginning in the early ’80s, however, they have devoted a steadily higher share of their profits to shareholders.

How high? Lazonick looked at the 449 companies listed every year on the S-and-P 500 from 2003 to 2012. He found that they devoted 54 percent of their net earnings to buying back their stock on the open market — thereby reducing the number of outstanding shares, whose values rose accordingly. They devoted another 37 percent of those earnings to dividends. That’s a total of 91 percent of their profits that America’s leading corporations targeted to their shareholders, leaving a scant 9 percent for investments, research and development, expansions, cash reserves or, God forbid, raises. [Emphasis added.]

"As late as 1981," Meyerson writes, "corporations directed a little less than half their profits to shareholders." But then came Morning in America.

[T]he shareholders’ share began rising in 1982, when Ronald Reagan’s Securities and Exchange Commission removed any limit on corporations’ ability to repurchase their own stock and when employers — emboldened by Reagan’s destruction of the federal air traffic controllers’ union — began large-scale union-busting. Buybacks really came into their own during the 1990s, when the pay of corporations’ chief executives became linked to the rise in the value of their company’s shares. From 2003 through 2012, the chief executives of the 10 companies that repurchased the most stock (totaling $859 billion in aggregate) received 58 percent of their pay in stock options or stock awards. For a CEO, getting your company to use its earnings to buy back its shares might reduce its capacity to research or expand, but it’s a sure-fire way to boost your own pay.

And it gets better, Meyerson notes. "With companies lavishing virtually all their net income on shareholders and executives, the way many of them cover their actual business expenses -- their R-and-D, their expansion -- is by taking on debt through the sale of corporate bonds." And better still:

A number of companies, however — most prominently, IBM — borrow specifically to increase their payout to shareholders. And IBM is not alone. Friday's Wall Street Journal reported that U.S. companies are currently incurring record levels of debt, much of which, the Journal noted, “is being used to refinance existing debt, being sent back to shareholders as dividend payments and share buybacks, or banked in the corporate treasury as executives consider how to potentially deploy funds as the economy expands.” Many of the companies that have spent the most on buybacks, Lazonick demonstrates, have also received taxpayer money to fund research they could otherwise afford to perform themselves.

"What Lazonick has uncovered," Meyerson writes, "is the present-day American validation of Piketty’s central thesis that the rate of return on investment generally exceeds the rate of economic growth."

Indeed, Lazonick has documented that wealth in the United States today comes chiefly from retarding businesses’ ability to invest in growth-engendering activity. The purpose of the modern U.S. corporation is to reward large investors and top executives with income that once was spent on expansion, research, training and employees. To restore a more socially beneficial purpose, Lazonick proposes scrapping the SEC rule that permitted rampant stock repurchases and requiring corporations to have employee and public representatives on their boards. [Emphasis added.]

"The lesson for Labor Day 2014 couldn't be plainer," Meyerson says. "Unless we compel changes such as those Lazonick suggests to our model of capitalism, ours will remain a country for investors only, where work is a sucker’s game."

#

"Bernanke earns more in one day than he did all of last year as Fed chief" (Reuters/AOL headline)

Awww, isn't this adorable? Big Al 'n' Big Ben, together! Are they on the clock? Holy bank balance, Batman! Or maybe it's like one of those glossy National Geographic photos of a lion or tiger mama tending to one of her cuddly little offspring. (The official caption reads: "US Federal Reserve chairman Ben Bernanke (R) speaks with former chairman Alan Greenspan during a ceremony marking the centennial of the founding of the Federal Reserve in Washington, DC on December 16, 2013.")

"Lawyers and agents say Bernanke, 60, should be able to command around $250,000 per speech for a while to come. The paycheck 'sounds reasonable to me,' said one speaking-circuit agent who did not want to be named. Bernanke could have a 'very long shelf life,' he added."

-- from "Bernanke earns more in one day than he did
all of last year as Fed chief," Reuters via AOL

by Ken

Several points before we proceed:

(1) That head that I've made the title of this post, "Bernanke earns more in one day than he did all of last year as Fed chief" -- it's correct, but maybe understates the claim made in the lead for this story by Jonathan Spicer and Mirna Sleiman, which reads: "Ben Bernanke earned more in 40 minutes on Tuesday than he made all of last year as head of the U.S. Federal Reserve" [emphasis added].

(2) Anyone care to hazard a guess as to why the speaking-circuit agent quoted above by Spicer and Sleiman even asked for, let alone was granted, anonymity? This is someone who really (and realistically?) believes that he/she puts him/herself at some sort of risk by saying that the quoted figure of $250K per speech "sounds reasonable"? Huh? Note that I'm not questioning the judgment of "reasonableness," or his opinion that Big Ben could have a very long shelf life. After all, the Reuters reporters note that the reported fee leaves Big Ben "well short of former President Bill Clinton -- the gold standard of Americans turning charisma into cash -- who has, by some estimates, earned two or even three times that much for some appearances in recent years." All I'm questioning is the secret source's trepidation at being identified as someone who judges the fee "reasonable" and thinks Big Ben could be riding this gravy train for much time to come.

(3) The Reuters dateline on the story reads "NEW YORK/ABU DHABI, March 4." Does that tell you anything?

NOW THAT THAT'S OUT OF THE WAY . . .

Let's get back to the news. Former Fed Chairman "Big Ben" Bernanke, our faithful Reuters scribes report,

was paid at least $250,000 for his first public speaking engagement, in Abu Dhabi, since stepping down in January, according to sources familiar with the matter. That compares to his 2013 paycheck of $199,700, and the appearance was only the first of three around the world this week.

Now let me say that I'm not sure it's fair to use Big Ben's Fed salary as a reference point, since it was after all an artificially low salary explained by his fervent desire to serve. It's the sacrifice our ruling class makes. Not that I sneer at the $199.7K, apart from its implicit reproach that the wage slave in question just couldn't slip on up over the $200K line. (Or was the salary intentionally held below that line? Perhaps in the knowledge that if he passed over it, he would have to pay for his own light bulbs and postage stamps?) I would think that with certain economies (e.g., buying supermarket store brands wherever possible, relying on Groupons and similar vouchers for as much as possible of one's entertainment and travel needs, scaling back the price level of the strip clubs and hookers one patronizes), it should be possible to squeak by tolerably well on that not-quite-$200K. But the point is, why should so august a personage as Big Ben have to suffer the indignity of such paltry compensation, so far from what he and his people consider his just worth?

At the same time, amusing as it is to characterize the putative $250K payday as compensation for 40 minutes' work (or less, if he had the sense to heed the fidgeting that surely set in long before the 15-minute mark), the fact is that a good deal more time was expended on the speaker's part than those 40 (or however many) minutes. Unless, for example, he happened to be in Abu Dhabi anyway, he would have had to allow travel time -- surely a minimum of a day before and a day after. So already instead of $250K for 40 minutes, Big Ben is taking down hardly more than $83K a day! Or, well, maybe not quite. You see, today Big Ben was scheduled to speak at "a Johannesburg forum hosted by the financial firm Discovery Limited," and on Friday he's in Houston to "discuss the U.S. energy boom at a conference hosted by Siemens and IHS." (I'm assuming that travel expenses and meals, including snacks, were divvied up by the Abu Dhabi, Joburg, and Houston hosts.)

The conference was sponsored by the National Bank of Abu Dhabi, and attendees were charged $2000 a head to soak up the wisdom of Big Ben -- and assorted other speakers, among them former Treasury Secretary "Big Larry" Summers. There doesn't seem to be any information about the size of Big Larry's honorarium, but the Reuters team does note that when Big Ben's predecessor, "Big Al" Greenspan, make his post-Fed trek to Abu Dhabi in 2008, he "garnered a similar fee."

It's pointed out, though, that Big Al ran took some flak when he transitioned from Fed chief to speaking whore.

Greenspan drew criticism for giving high-paying investors a potential leg up on their competitors with closed-door remarks about interest rates shortly after he left office, and for comments in March 2007 on the probability of a U.S. recession that roiled financial markets even as Bernanke was reassuring investors about the outlook. . . .

Greenspan took to the speaking circuit one week after departing office in January 2006 with an appearance at a private dinner hosted by Lehman Brothers. That brought in a reported $250,000, while a private telechat with investors in Japan that same day brought in about $120,000.

Greenspan's take on that first day is equivalent to $433,000 today after adjusting for inflation.

Anyway, the Abu Dhabi banksters were shelling out the full $250K for 40 minutes of Big Ben's yammering. It seems only fair to ask they get for their money. That is, not counting whatever suck-up value may have accrued to an organization prestigious enough to hire whores like Big Ben and Big Larry for a meet-and-greet.

Bernanke, who is now a distinguished fellow at the Washington-based Brookings Institution think-tank, did not discuss monetary policy, and only brushed on prospects for the U.S. economy. Instead, he choose to elaborate on his experience as chairman, acknowledging the Fed could have done more to battle the financial crisis.

Questions from the audience were relatively soft, leading to a discussion about family and baseball. . . .

Through a Brookings spokeswoman, Bernanke declined to comment on his speaking engagements.

NOW HOLD ON JUST A DARNED SECOND!

Back up, back up! Our Ben acknowledged that the Fed could have done more to battle the financial crisis???

And none of the $2000-a-pop swells had any, you know, follow-up questions? They just wanted to hear about family and baseball??? It might have been nice at least to know on whose behalf Chairman Ben "could have done more to battle the financial crisis." It might be that the "more" he might have done would have been on behalf of, well, people like the nice folks he was speaking to there in Abu Dhabi. Maybe the rest of us should count ourselves lucky that our man Ben didn't do more to battle the financial crisis.

The one thing we can say with reasonable certainty about those speaking fees that are being paid to distinguished citizens like "Big Al" Greenspan, "Big Bill" Clinton, and "Big Ben" Bernanke is that they give us a pretty good idea on whose behalf they were actually working during their years of "public" service.

But then, we already knew that, didn't we?

Never mind.

#

If you worried that ex-Treasury Sec'y Tim Geithner would wind up on food stamps (or no food stamps), you can rest easy

Daily Kos caption: "Ka-CHING!!!"

TIMOTHY F. GEITHNER TO JOIN WARBURG PINCUS
AS PRESIDENT AND MANAGING DIRECTOR

New York, November 16, 2013 –- Warburg Pincus, a leading global private equity firm focused on growth investing, today announced the appointment of Timothy F. Geithner as President and Managing Director. Mr. Geithner also will be a member of the firm’s Executive Management Group.

In his role, Mr. Geithner will work closely with Warburg Pincus’ Co-Chief Executive Officers, Charles R. Kaye and Joseph P. Landy, on overall firm strategy and management, investing and portfolio management, organizational and funding structure, and investor relations.

by Ken

in my recent post "Ooh, that Obama," I showcased some of Ian Welsh's November 14 musings on "The Obamacare Fiasco," musings that are highly relevant to tonight's subject. "The problem with Obama," Ian wrote,

has always been this sickening need to be one of the boys. He appears to genuinely like and genuinely admire the people who have "made it" in this society -- people like Jamie Dimon and the people who run insurance and drug companies. He thinks you can make deals with these people, and make sure everyone wins. You can't. These people are the most successful parasites ever produced by our nasty form of sociopathic capitalism. You can only give them what they want or you can rip them from the body politic, so they stop sucking the blood from the host they're killing.

An important observation was subsequently tucked into parentheses: "Rest assured, Obama, like Clinton, will make tens of millions miraculously quickly on leaving office." Isn't this, after all, what keeps the whole system going? We like to pretend that our public servants are working for, you know, us, when in fact they're working for "the people who have 'made it' in this society," and are consequently rewarded -- or threatened with nonreward or even punishment -- according to their performance for their real bosses.

Which brings us to former Treasury Secretary Tim Geithner, aka "The Tiniest Tim of Them All." Off his performance through the Great Economic Meltdown and its aftermath, well-wishers could be forgiven wondering whether he would ever work again.

But that's looking only at Timmy's performance on behalf of Us the People. And here I have to disagree with Daily Kos's brooklynbadboy, in "Geithner cashes in . . . ahhhhhh," whose take is:

Must be nice.

Tim Geithner, of course, has no experience as a banker, an investor, a trader, a venture capitalist, a speculator, or businessman of any sort. So naturally he will be boss of those that actually do. No no. He has been, all his life, that special breed of person known as the Ivy League Economist. He's worked at think tanks, in government, and for the Federal Reserve. He comes from a Mayflower family. His education has been mostly the study of Asia.

It is from these credentials that he now, following his mentor Larry Summers, proceeds in heading up the private equity branch of one of the world's most storied banking families. He is certain, like Summers, to become very, very rich doing...something that almost certainly is not work. Instead, he will most likely make a bundle on carried interest, which is how private equity executives avoid paying taxes like the rest of us.

The American elite establishment ladies and gentleman, for your viewing pleasure. From being asleep at the wheel as a banking regulator during the worst financial crash since the Depression, to wealthy millionaire banker.

Failing Up. It's the new American way.

The image of our Timmy as "asleep at the wheel" seems to me correct only if you're measuring him by that standard I was just talking about: serving the American public. All the accounts I've heard, however, indicate that far from being a financial-sector Heckuva Job Brownie, Timmy was a veritable whirling dervish of activity regarding the bailout and the myriad regulatory issues that descended upon us in the meltdown's wake. It's just that he was working tirelessly to ensure that the sorting out of winners and losers was done correctly, meaning that the kind of people he regarded as born to rule wound up being rewarded and made whole, or as whole as circumstances permitted, and the check for it was picked up by, well, somebody else.

Similarly, it seems to me that BBB is way too hard on our Timmy credential-wise. In all career -- including those five-plus years as president of the New York Fed (to describe this as "working for the Federal Reserve" seems to me wildly misleading) and four years as Treasury secretary -- he has been involved, and often intimately involved in many of those areas of finance that come into play in his new job. Perhaps more importantly, he knows at least as anyone walking where the mythical line between the "allowable" and "unallowable" regarding government interference in free enterprise may be found. Are there many people who wouldn't return his phone calls?

That said, I assume he will have the sense to allow the people who will be working "for" him to ply their expertise, and there will be other people around the premises to fill in the gaps in his specific knowledge. Although it appears to have fallen to Warburg Pincus to provide Timmy with his first jolt of payback for years of faithful service, I don't think they'll begrudge the little feller as much as a dollar of his compensation. They have every reason to hope that his presence will amply repay their modest investment.

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Paul Krugman asks if we should be surprised that "Republican assertions about what ails the economy are pure fantasy"

"I can't think of a time when a party's economic doctrine has been so completely divorced from reality."

-- Paul Krugman, in his NYT column today, "Phony Fear Factor"

by Ken

"So Republican assertions about what ails the economy are pure fantasy," Paul writes in his column, "at odds with all the evidence. Should we be surprised?"

Well, no, of course this isn't a surprise, he says -- at least "at one level."

Politicians who always cater to wealthy business interests say that economic recovery requires catering to wealthy business interests. Who could have imagined it?

But in fact our Paul does find himself surprised. "It seems to me that there is something different about the current state of economic discussion."

Political parties have often coalesced around dubious economic ideas -- remember the Laffer curve? -- but I can't think of a time when a party's economic doctrine has been so completely divorced from reality. And I'm also struck by the extent to which Republican-leaning economists -- who have to know better -- have been willing to lend their credibility to the party's official delusions.

We should back up a bit to the nature of the consensus arrived at by the right-leaning economists. On the one hand, says Paul, it's encouraging that "after spending a year and a half talking about deficits, deficits, deficits when we should have been talking about jobs, job, jobs we're finally back to discussing the right issue."

The bad news: Republicans, aided and abetted by many conservative policy intellectuals, are fixated on a view about what's blocking job creation that fits their prejudices and serves the interests of their wealthy backers, but bears no relationship to reality.

Listen to just about any speech by a Republican presidential hopeful, and you'll hear assertions that the Obama administration is responsible for weak job growth. How so? The answer, repeated again and again, is that businesses are afraid to expand and create jobs because they fear costly regulations and higher taxes. Nor are politicians the only people saying this. Conservative economists repeat the claim in op-ed articles, and Federal Reserve officials repeat it to justify their opposition to even modest efforts to aid the economy.

And Paul tells us that the first thing we need to know is "that there's no evidence supporting this claim and a lot of evidence showing that it's false."

The argument on the right, I gather, is that the only way to explain our jobless recovery is that business owners are afraid to invest because of government regulation. I'm rather surprised that Paul feels it necessary to counter "the assertion that the sluggishness of the economy's recovery from recession is unprecedented," simply because it's "the starting point for many claims that antibusiness policies are hurting the economy."

As a new paper by Lawrence Mishel of the Economic Policy Institute documents at length, this is just not true. Extended periods of "jobless recovery" after recessions have been the rule for the past two decades. Indeed, private-sector job growth since the 2007-2009 recession has been better than it was after the 2001 recession.

We might add that major financial crises are almost always followed by a period of slow growth, and U.S. experience is more or less what you should have expected given the severity of the 2008 shock.

Okay, but don't we all know -- and hasn't Paul in fact been pointing out repeatedly -- that this recovery has been worse than the others of modern times? I don't think he had to reach this far to establish the counterfactual nature of the right-wing arguments. "If anything," he argues, sketching the grim reality of business and consumer confidence, "business spending has been stronger than one might have predicted given slow growth and high unemployment." And it makes sense that businesses raking in record profits aren't investing in growth "when they're not using the capacity they already have." But still . . . .

Anyway, what matters to me is that the right-wing view still has no evidence. Is anything actually proved by all that whining from the business community about taxes (which we know are at or near historic lows) and regulation (which has been dangerously weakened)? Of course not. As Paul points out, business owners always whine about taxes and regulation.

Mr. Mishel points out that the National Federation of Independent Business has been surveying small businesses for almost 40 years, asking them to name their most important problem. Taxes and regulations always rank high on the list, but what stands out now is a surge in the number of businesses citing poor sales -- which strongly suggests that lack of demand, not fear of government, is holding business back.

To return, then, to the right's divorce from economic reality, aided and abetted by economists who should know better.

Partly, no doubt, this reflects the party's broader slide into its own insular intellectual universe. Large segments of the G.O.P. reject climate science and even the theory of evolution, so why expect evidence to matter for the party's economic views?

And it also, of course, reflects the political need of the right to make everything bad in America President Obama's fault. Never mind the fact that the housing bubble, the debt explosion and the financial crisis took place on the watch of a conservative, free-market-praising president; it's that Democrat in the White House now who gets the blame.

But good politics can be very bad policy. The truth is that we're in this mess because we had too little regulation, not too much. And now one of our two major parties is determined to double down on the mistakes that caused the disaster.

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