The Rational Market Myth: Armageddon Without Nukes
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Paul Craig Roberts | Saturday, June 22, 2013, 23:10 Beijing
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One of the myths of economics is that markets are rational. Theories are based on this assumption, and the belief that markets are rational fuels the argument against regulation. The market response to the Federal Reserve’s June 19 statement that it will taper off its bond purchases if its forecast comes true is unequivocal proof that markets are irrational.
The Federal Reserve’s statement that it “currently anticipates that it would be appropriate to moderate the monthly pace of purchases [of bonds] later this year” depends on a very big if. The if is the correctness of the Fed’s forecast of moderate economic growth and employment gains.
The Fed has not stopped purchasing $85 billion of bonds each month. So nothing real has changed. Indeed, there was no new information in the Fed’s statement. It has been known for some time that, according to the Fed, its bond purchases will gradually cease.
In response to this repeat of old information, the stock and bond markets sold off in a major way on June 19-20. This market response to the Fed’s statement indicates that the Fed’s forecast is unlikely to come true. Low interest rates and a high stock market are totally dependent on the liquidity that the Fed is injecting by printing $1,000 billion per year. If this liquidity is not injected, what will sustain the markets? If the markets crash and interest rates rise, how can the Fed expect recovery?
In other words, the participants in the stock and bond markets know that the markets are bubbles created by the printing press. There is no real basis for the high stock and bond prices. The prices are an artificial reality created by the printing press. Rational markets would take into account the printing press element and would price stocks and bonds at a much lower level.
Zero real interest rates mean that there are no risks. But how can there be no risk in Treasury bonds when the debt is growing faster than the economy?
Normally, high stock values mean strong profits from strong consumer income growth and retail sales. But we know that there is no growth in real median family income and real retail sales.
I suspect that the reason the Fed made the announcement, which seems to be derailing the Fed’s forecast of recovery on which the announcement depends, is to relieve pressure on the US dollar. For several years the Fed has been printing 1,000 billion new dollars each year. There is no demand for these dollars. So far these dollars have inflated stock and bond prices instead of consumer prices. But the implication for the dollar’s price or exchange value in currency markets is clear. The supply is increasing faster than the demand. If the dollar falters, the Fed would lose control. Rising import prices would soon drive domestic inflation and interest rates far higher than the Fed’s targets.
Washington has succeeded in getting Japan and the EU to print yen and euros in order to eliminate the likelihood of flight to other large currency alternatives to the dollar. Smaller countries have also had to print in order to protect their export markets. With so many countries printing money, the Fed’s statement implying that the US might stop printing makes the dollar look good, and, indeed, the dollar rose on the currency exchange markets.
Having neutralized the alternative currency threat to the dollar, the Fed and its agents, the bullion banks, the banks too big to fail, are still at work against the gold and silver threats to the dollar. Massive short selling of gold began at the beginning of April. Again on June 20 massive shorts of gold were sold at a time of day chosen to maximize the price decline. Only those who intend to drive down the price would sell in this way.
Since QE began, the Fed has deprived retirees of interest income and has forced retirees to spend down their capital in order to pay living expenses. Judging from the initial market response, the Fed’s latest policy announcement is adversely impacting bond, stock and real estate investors, and the manipulation of the bullion markets continues to wreak destruction on wealth stored in the only known safe haven.
How can a recovery happen when the Fed is destroying wealth?
The Fed’s irrational behavior could be seen as rational if the assumption is that the Fed’s intent is not to save the economy but to save the banks. As the Fed is committed to saving the banks “too big to fail,” it is likely that the banks know of the Fed’s announcements in advance. With inside information, the banks know precisely when to short the stock, bond, and bullion markets. The banks make billions from the inside information. The billions made help to restore the banks’ balance sheets.
Guy Lawson’s book, Octopus (2012), shows that front-running on the basis of inside information has always been the source of financial fortunes. In order to save the banks, the Fed now supplies the inside information.
How is this going to play out? I suspect that the recovery, although officially a weak one, does not really exist. However, thanks to statistical artifacts that understate inflation and unemployment and overstate GDP growth, the Fed and the markets think that a recovery of sorts is in process and that the unprecedented money printing by the Fed will succeed in shifting the economy into high gear.
No such thing is likely to happen. Instead, as 2013 progresses, a further downturn will become visible through the orchestrated statistics. This time the Fed will have to get the printed money past the banks and into the economy, and inflation will explode. The dollar will collapse, and import prices–as globalism has turned the US into an import-dependent economy–will turn high inflation into hyperinflation. Disruptions in food and energy deliveries will become widespread, and a depreciated currency will cease to be used as a means of exchange.
I wouldn’t bet my life on this prediction, but I think it is as likely as the Fed’s prediction of a full recovery that allows the Fed to terminate its bond purchases and money printing by June 2014.
Americans, who have been on top of the world since the late 1940s, are not prepared for the adjustments that they are likely to have to make. And neither is their government.
http://www.4thmedia.org/2013/06/22/the-rational-market-myth-armageddon-without-nukes/
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The Failure of Laissez Faire Capitalism and Economic Dissolution of the West
The one percent have pulled off an economic and political revolution. By offshoring manufacturing and professional service jobs, US corporations destroyed the growth of consumer income, the basis of the US economy, leaving the bulk of the population mired in debt. Deregulation was used to concentrate income and wealth in fewer hands and financial firms in corporations “too big to fail,” removing financial corporations from market discipline and forcing taxpayers in the US and Europe to cover bankster losses. Environmental destruction has accelerated as economists refuse to count the exhaustion of nature’s resources as a cost and as corporations impose the cost of their activities on the environment and on third parties who do not share in the profits. This is the book to read for those who want to understand the mistakes that are bringing the West to its knees.
The surprising conclusion to an important new book
Book Review: The Failure of Laissez Faire Capitalism and the Economic Dissolution of the West (Towards a New Economics for a Full World), by Paul Craig Roberts
About the author: Dr. Roberts was educated at Georgia Tech, University of Virginia, UC Berkeley, and Oxford University. He was Assistant Secretary of the US Treasury in the Reagan Administration, associate editor and columnist for the Wall Street Journal, Senior Research Fellow at the Hoover Institution, Stanford University, and holder of the William E. Simon Chair in Political Economy at Georgetown University. His honors include the US Treasury’s Meritorious Service Award, and France’s Legion of Honor.
As evident from this description, Paul Craig Roberts writes from a very solid establishment background in academic political economy, financial journalism, and high public office. His radical critique of today’s economics and public policy will no doubt be surprising to some, but it is based on impressive knowledge and experience, as well as irresistibly convincing honesty. He did not inherit his present understanding of political economy, but developed it through study and experience, with openness to the persuasive power of facts, and willingness to question economic dogmas of both the right and the left.
The book is of special interest to ecological economists, not only for the explicit and insightful support his reasoning gives us, but also for the larger financial and political context in which he places steady-state economics. Although written mainly from a US perspective, the book includes a very clear and informative explanation of the European crisis.
Perhaps the best way to whet the prospective reader’s appetite is to reproduce the brief conclusions with which the book ends, and to testify that the rest of the book solidly supports these conclusions by clear reasoning from relevant facts.
“This book demonstrates that empty-world economic theory has failed on its own terms and that its application by policymakers has resulted in the failure of capitalism itself. Pursuing absolute advantage in cheap labor abroad, First World corporations have wrecked the prospects for First World labor, especially in the US, while concentrating income and wealth in a few hands. Financial deregulation has resulted in lost private pensions and homelessness. The cost to the US Treasury of gratuitous wars and bank bailouts threatens the social safety net, Social Security and Medicare. Western democracy and civil liberties are endangered by authoritarian responses to protests against the austerity that is being imposed on citizens in order to fund the wars and financial bailouts. Third World countries have had their economic development blocked by Western economic theories that do not reflect reality.
All of this is bad enough. But when we leave the empty-world economics and enter the economics of a full world, where nature’s capital (natural resources) and ability to absorb wastes are being exhausted, we find ourselves in a worse situation. Even if countries are able to produce empty-world economic growth, economists cannot tell if the value of the increase in GDP is greater than its cost, because the cost of nature’s capital is not included in the computation. What does it mean to say that the world GDP has increased four percent when the cost of nature’s resources are not in the calculation?
Economist Herman Daly put it well when he wrote that the elites who make the decisions “have figured out how to keep the benefits for themselves while ‘sharing’ the cost with the poor, the future, and other species (Ecological Economics, vol. 72, p. 8).
Empty-world economics with its emphasis on spurring economic growth by the accumulation of man-made capital has run its course. Full-world economics is steady-state economics, and it is past time for economists to get to work on a new economics for a full world.”
http://www.resilience.org/stories/2013-03-12/the-surprising-conclusion-to-an-important-new-book
The Failure of Laissez Faire Capitalism and Economic Dissolution of the West
Americans’ Economic Prospects And Civil Liberties Have Been Stolen
Author’s Note
I receive numerous questions from readers about our economic situation and the condition of civil liberty.
There is no way I can answer so many inquiries, and no need. I have written two books that provide the answers, and they are inexpensive. I have done my job. It is up to you to inform yourself. Kindle Reader software is available as a free online download that permits you to read ebooks in your own web browser.
My latest, The Failure Of Laissez Faire Capitalism And Economic Dissolution of the West , is available as an ebook in English as of March 2013 from Amazon.com and from Barnes&Noble.
My book is endorsed by Michael Hudson and Nomi Prims and has a 5 star rating from Amazon reviewers (as of March 23, 2013). Pam Martens’ review at Wall Street On Parade is available here
Libertarians who have not read the book have had an ideological knee-jerk reaction to the title. They demand to know how can I call the present system of crony capitalism laissez faire. I don’t. The current system of government supported crony capitalism is the end result of a 25-year process of deregulation.
Deregulation did not produce libertarian nirvana. It produced economic concentration and crony capitalism.
Amazon provides as a free read the introduction by Johannes Maruschzik to the German edition. Below is my Introduction to my book.
Paul Craig Roberts, March 27, 2012
Not only has your economy been stolen from you but also your civil liberties. My coauthor Lawrence Stratton and I provide the scary details of the entire story in The Tyranny of Good Intentions [5]. In the US law is no longer a shield of the people against arbitrary government. Instead, law has been transformed into a weapon in the hands of the government.
Josie Appleton documents that in England also law has been turned into a weapon against the people. http://www.spiked-online.com/site/printable/13420/ [6] Anglo-American law, the foundation of liberty and one of the greatest human achievements, lies in ruins.
Libertarians think that liberty is a natural right, and some Christians think that it is a God-given right. In fact, liberty is a human achievement, fought for by Englishmen over the centuries. In the late 17th century, the achievement of the Glorious Revolution was to hold the British government accountable to law. William Blackstone heralded the achievement in his famous Commentaries On The Laws Of England, a bestseller in pre-revolutionary America and the foundation of the US Constitution.
In the late 20th century and early 21st century, governments in the US and Great Britain chafed under the requirement that government, like the people, is ruled by law and took steps to free government from accountability to law.
Appleton says that the result is a “tectonic shift in the relationship between the state and the citizen.” Citizens of the US and UK are once again without the protection of law and subject to arbitrary arrests and indictments or to indefinite detention in the absence of indictments.
In the US, citizens can be detained indefinitely and even executed without due process of law. There is no basis in the US Constitution for these asserted powers. The unconstitutional powers exist only because Congress, the judiciary and the American people have accepted the lie that the loss of civil liberty is the price paid for protection against terrorists.
In a very short time the raw power of the state has been resurrected. Most Americans are oblivious to this outcome. As long as government is imprisoning and killing without trials demonized individuals whom Americans have been propagandized to fear, Americans approve. Americans do not understand that a point is reached when demonization becomes unnecessary and that precedents have been established that revoke the Bill of Rights.
If you are educated by these two books, you will be better able to understand what is happening and, thus, you will be in a better position to survive what is coming.
Introduction to The Failure of Laissez Faire Capitalism and Economic
Dissolution of the West: Towards a New Economics for a Full World
The collapse of the Soviet Union in 1991 and the rise of the high speed Internet have proved to be the economic and political undoing of the West. “The End Of History” caused socialist India and communist China to join the winning side and to open their economies and underutilized labor forces to Western capital and technology. Pushed by Wall Street and large retailers, such as Wal-Mart, American corporations began offshoring the production of goods and services for their domestic markets. Americans ceased to be employed in the manufacture of goods that they consume as corporate executives maximized shareholder earnings and their performance bonuses by substituting cheaper foreign labor for American labor. Many American professional occupations, such as software engineering and Information Technology, also declined as corporations moved this work abroad and brought in foreigners at lower renumeration for many of the jobs that remained domestically. Design and research jobs followed manufacturing abroad, and employment in middle class professional occupations ceased to grow. By taking the lead in offshoring production for domestic markets, US corporations force the same practice on Europe. The demise of First World employment and of Third World agricultural communities, which are supplanted by large scale monoculture, is known as Globalism.
For most Americans income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled. University graduates unable to find employment returned to live with their parents.
The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income. The Federal Reserve’s policy of extremely low interest rates fueled a real estate boom. Housing prices rose dramatically, permitting homeowners to monetize the rising equity in their homes by refinancing their mortgages.
Consumers kept the economy alive by assuming larger mortgages and spending the equity in their homes and by accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.
Financial deregulation, which began in the Clinton years and leaped forward in the George W. Bush regime, unleashed greed and debt leverage. Brooksley Born, head of the federal Commodity Futures Trading Commission, was prevented from regulating over-the-counter derivatives by the chairman of the Federal Reserve, the Secretary of the Treasury, and the chairman of the Securities and Exchange Commission. The financial stability of the world was sacrificed to the ideology of these three stooges that “markets are self-regulating.” Insurance companies sold credit default swaps against junk financial instruments without establishing reserves, and financial institutions leveraged every dollar of equity with $30 dollars of debt.
When the bubble burst, the former bankers running the US Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed. The Federal Reserve joined the rescue operation. An audit of the Federal Reserve released in July, 2011, revealed that the Federal Reserve had provided $16 trillion–a sum larger than US GDP or the US public debt–in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes. Political accountability disappeared as all public assistance was directed to the mega-rich, whose greed had produced the financial crisis.
The financial crisis and plight of the banksters took center stage and prevented recognition that the crisis sprang not only from the financial deregulation but also from the expansion of debt that was used to substitute for the lack of growth in consumer income. As more and more jobs were offshored, Americans were deprived of incomes from employment. To maintain their consumption, Americans went deeper into debt.
The fact that millions of jobs have been moved offshore is the reason why the most expansionary monetary and fiscal policies in US history have had no success in reducing the unemployment rate. In post-World War II 20th century recessions, laid-off workers were called back to work as expansionary monetary and fiscal policies stimulated consumer demand. However, 21st century unemployment is different. The jobs have been moved abroad and no longer exist. Therefore, workers cannot be called back to factories and to professional service jobs that have been moved abroad.
Economists have failed to recognize the threat that jobs offshoring poses to economies and to economic theory itself, because economists confuse offshoring with free trade, which they believe is mutually beneficial. I will show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory. Indeed, as we reach toward a new economics, cherished assumptions and comforting theoretical conclusions will be shown to be erroneous.
This book is organized into three sections. The first section explains successes and failures of economic theory and the erosion of the efficacy of economic policy by globalism. Globalism and financial concentration have destroyed the justifications of market capitalism. Corporations that have become “too big to fail” are sustained by public subsidies, thus destroying capitalism’s claim to be an efficient allocator of resources. Profits no longer are a measure of social welfare when they are obtained by creating unemployment and declining living standards in the home country.
The second section documents how jobs offshoring or globalism and financial deregulation wrecked the US economy, producing high rates of unemployment, poverty and a distribution of income and wealth extremely skewed toward a tiny minority at the top. These severe problems cannot be corrected within a system of globalism.
The third section addresses the European debt crisis and how it is being used both to subvert national sovereignty and to protect bankers from losses by imposing austerity and bailout costs on citizens of the member countries of the European Union.
I will suggest that it is in Germany’s interest to leave the EU, revive the mark, and enter into an economic partnership with Russia. German industry, technology, and economic and financial rectitude, combined with Russian energy and raw materials, would pull all of Eastern Europe into a new economic union, with each country retaining its own currency and budgetary and tax authority. This would break up NATO, which has become an instrument for world oppression and is forcing Europeans to assume burdens of the American Empire.
Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by US troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?
http://www.globalresearch.ca/the-failure-of-laissez-faire-capitalism-and-economic-dissolution-of-the-west/5328685
Laissez-Faire Capitalism Has Failed
Nouriel Roubini, 02.19.09, 12:01 AM EST
The financial crisis lays bare the weakness of the Anglo-Saxon model.
It is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. While we are already in a severe and protracted U-shaped recession (the deluded hope of a short and shallow V-shaped contraction has evaporated), there is now a rising risk that this crisis will turn into an uglier, multiyear, L-shaped, Japanese-style stag-deflation (a deadly combination of stagnation, recession and deflation).
The latest data on third-quarter 2008 gross domestic product growth (at an annual rate) around the world are even worse than the first estimate for the U.S. (-3.8%). The figures were -6.0% for the euro zone, -8% for Germany, -12% for Japan, -16% for Singapore and -20% for Korea. The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production, employment, exports and imports is accelerating rather than decelerating
To avoid this L-shaped near-depression, a strong, aggressive, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper cleanup of the financial system and reduction of the debt burden of insolvent private agents (households and nonfinancial companies) is necessary in the U.S. and other economies.
Unfortunately, the euro zone is well behind the U.S. in its policy efforts for several reasons. The first is that the European Central Bank is behind the curve in cutting policy rates and creating nontraditional facilities to deal with the liquidity and credit crunch. The second is that the fiscal stimulus is too modest, because those who can afford it (Germany) are lukewarm about it, and those who need it the most (Spain, Portugal, Greece, Italy) can least afford it, as they already have large budget deficits. The last reason is that there is a lack of cross-border burden sharing of the fiscal costs of bailing out financial institutions.
With its aggressive monetary easing and large fiscal stimulus putting it ahead, the U.S. has done more. Except for two elements, both key to avoiding a near-depression, which are still missing: a cleanup of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks, even some of the largest ones; and a more aggressive, across-the-board reduction of the unsustainable debt burden of millions of insolvent households (i.e., a principal reduction of the face value of the mortgages, not just mortgage payments relief).
Moreover, in many countries, the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.
Traditionally, only emerging markets suffered--and still suffer--from such a problem. But now such sovereign risk, as measured by the sovereign spread, is also rising in many European economies whose banks may be larger than the ability of the sovereign to rescue them: Iceland, Greece, Spain, Italy, Belgium, Switzerland and, some suggest, even the U.K.
At some point a sovereign bank may crack, in which case the ability of governments to credibly commit to act as a backstop for the financial system, including deposit guarantees, could come unglued.
Thus the L-shaped, near-depression scenario is still quite possible (I assign it a 30% probability), unless appropriate and aggressive policy action is undertaken by the U.S. and other economies.
This severe economic and financial crisis is now also leading to a severe backlash against financial globalization, free trade and the free-market economic model.
To paraphrase Churchill, capitalist market economies open to trade and financial flows may be the worst economic regime--apart from the alternatives. However, while this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments.
There is the failure of ideas--such as the "efficient market hypothesis," which deluded its believers about the absence of market failures such as asset bubbles; the "rational expectations" paradigm that clashes with the insights of behavioral economics and finance; and the "self-regulation of markets and institutions" that clashes with the classical agency problems in corporate governance--that are themselves exacerbated in financial companies by the greater degree of asymmetric information. For example, how can a chief executive or a board monitor the risk taking of thousands of separate profit and loss accounts? Then there are the distortions of compensation paid to bankers and traders.
This crisis also shows the failure of ideas such as the one that securitization will reduce systemic risk rather than actually increase it. That risk can be properly priced when the opacity and lack of transparency of financial firms and new instruments leads to unpriceable uncertainty rather than priceable risk.
It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on several factors: self-regulation that, in effect, meant no regulation; market discipline that does not exist when there is euphoria and irrational exuberance; and internal risk-management models that fail because, as a former chief executive of Citigroup (nyse: C - news - people ) put it, when the music is playing, you've got to stand up and dance.
Furthermore, the self-regulation approach created rating agencies that had massive conflicts of interest and a supervisory system dependent on principles rather than rules. In effect, this light-touch regulation became regulation of the softest touch.
Thus, all the pillars of the 2004 Basel II banking accord have already failed even before being implemented. Since the pendulum had swung too much in the direction of self-regulation and the principles-based approach, we now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on.
But the design of the new system should be robust enough to counter three types of problems with rules. A tendency toward "regulatory arbitrage" should be kept in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them. Then there is "jurisdictional arbitrage," as financial activity may move to more lax jurisdictions. And, finally, "regulatory capture," as regulators and supervisors are often captured--via revolving doors and other mechanisms--by the financial industry. So the new rules will have to be incentive-compatible, i.e., robust enough to overcome these regulatory failures.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
http://www.forbes.com/2009/02/18/depression-financial-crisis-capitalism-opinions-columnists_recession_stimulus.html
By Pam Martens: March 7, 2013
Paul Craig Roberts is one of the most prolific economic writers in America today. As a former Wall Street Journal editor and former Assistant Secretary of the Treasury, Roberts is a walking encyclopedia on monetary policy, economic theory and Wall Street history. After publication in Germany in 2012, his latest book, The Failure Of Laissez Faire Capitalism And Economic Dissolution Of The West, is now available in the U.S. as an eBook.
If you’ve read a Roberts’ column over the past few years, you know there’s nothing timid or constrained in his writing. The same can surely be said for this current work. Roberts expertly details how the one percenters have masterminded a political and economic takeover that just keeps on giving to the one percent as the economy wobbles, the U.S. debt explodes and the middle class is hollowed out.
Roberts sees the last two decades as an era where losses in salaries to the average American worker (as their jobs were moved offshore) reverted back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. “The distribution of income,” says Roberts, “worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled.”
Roberts does not miss a key construct in how the game was able to continue for so long: “The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income.” To make the mountains of debt magically disappear into thin air, it was “securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.” Now, explains Roberts, the debt has come home to roost: consumers are buried under credit card and mortgage debt and lack the wherewithal to spend.
When the bubble finally burst, says Roberts, “the former bankers running the U.S. Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed.” Roberts recounts the fact that an audit of the Federal Reserve – which it fought against for years in court – revealed that it “had provided $16 trillion – a sum larger than U.S. GDP or the U.S. public debt – in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes.”
Roberts correctly believes that the seriousness of the financial crisis has focused too exclusively on Wall Street without proper focus on the attenuating factor – that the dramatic expansion in consumer debt was used as a substitute for the lack of growth in consumer incomes as jobs were offshored.
If you think about nothing else in this book, think deeply about this paragraph describing why we can’t stimulate our way out of the Great Recession:
“Monetary and fiscal policy cannot help when the problem is that American jobs have been relocated offshore. Because of offshore production, stimulating demand stimulates production in China and other offshore sites. As high-productivity jobs have been offshored, American incomes, except for the super-rich, have ceased to grow. Thus, there is no effective way to boost consumer spending short of printing money and giving it to the population, or handing out tax rebates accommodated by monetary expansion…Trade deficits mean that consumers have spent their money on goods produced abroad at the expense of domestic GDP and employment growth…”
To this critical piece of the puzzle, I would add that when a country concentrates the majority of its wealth and income within the hands of a tiny numerical percentage of its population, the rest of the population does not have the purchasing power to buy the goods and services produced by the corporations owned by the one-percent class. (According to the Economic Policy Institute, as of 2010, the top 5 percent of the wealthiest Americans own 67.1 percent of all publicly traded corporations while the bottom 80 percent own 8.3 percent.) Thus, we enter a perpetual cycle of mass layoffs and downsizings, producing ever less purchasing power for the masses. It should serve as a dire warning that Gross Domestic Product (GDP) limped in at a feeble one-tenth of one percent in the fourth quarter of 2012.
Unlike Jack Lew, our newly installed Treasury Secretary, Roberts has no problem laying the blame for the Wall Street collapse in 2008 squarely at the feet of financial deregulation. Lew, a former executive of the mega bailoutee, Citigroup, testified before Congress that he didn’t feel deregulation was the cause. That might have something to do with the fact that with Lew’s blessing, his former boss, President Bill Clinton, is the man who deregulated Wall Street and put the gambling casino/investment banks inside the commercial banks holding insured deposits — an incendiary combination that blew up the marketplace just nine years after Clinton signed the legislation, the Gramm-Leach-Bliley Act of November 12, 1999, overturning the depression era investor protection legislation, the Glass-Steagall Act.
Roberts says in his book, “Not only have the resurrection of laissez faire capitalism and the claim that markets are self-regulating failed, but also the two main justifications of market capitalism have been destroyed by the emergence of financial institutions that are ‘too big to fail’ and by jobs offshoring. If markets do not eliminate failures, then capitalism’s claim to efficiently allocate resources is undermined…”
Capitalism’s claim to efficiently allocate resources stands in stark contrast to the reality of how Wall Street actually operates today. Investors have suffered not one, but two massive scams in little over a decade. First, in the late 90s, investor capital was allocated by Wall Street into pump and dump schemes in dot.com startups glamorized as the New Economy. Writing in the New York Times, Ron Chernow described the ensuing bust as follows: “Let us be clear about the magnitude of the Nasdaq collapse. The tumble has been so steep and so bloody — close to $4 trillion in market value erased in one year — that it amounts to nearly four times the carnage recorded in the October 1987 crash.” Chernow likened the NASDAQ to a “lunatic control tower that directed most incoming planes to a bustling, congested airport known as the New Economy while another, depressed airport, the Old Economy, stagnated with empty runways. The market functioned as a vast, erratic mechanism for misallocating capital across America.”
After this epic failure of capital allocation, one might have expected Congress to set Wall Street back on the road to proper functioning. But instead of bringing new companies with new innovations to market to ensure good jobs in the future, Wall Street turned itself into a manufacturing and warehousing operation for subprime mortgages – debt on residential homes – having nothing to do with innovation or creating new industries for the future.
Roberts explains in his book: “The economic and financial mess in which the U.S. and Europe find themselves,” says Roberts, “and which has been exported to much of the rest of the world is the direct consequence of too much economic freedom. The excess freedom is the direct consequence of financial deregulation…Free market economists have made a mistake by elevating an economy that is free of regulation as the ideal. This ideological position overlooks that regulation can increase economic efficiency and that without regulation external costs can offset the value of production.”
Roberts makes an insightful connection between offshoring manufacturing jobs and the reduced inability of a country to innovate. “No one seems to understand,” says Roberts, “that research, development, design, and innovation take place in countries where things are made. The loss of manufacturing means ultimately the loss of engineering and science. The newest plants embody the latest technology. If these plants are abroad, that is where the cutting edge resides.”
Roberts offers some bold ideas for reform. One stand-out idea is to eliminate management performance pay for short-term profits. Currently, corporate executives of publicly traded companies are forced to focus on the next quarter’s earnings report at the sacrifice of longer term success of the business.
At times, it is hard not to wince at Roberts’ view of the U.S., where he has served in high public office and still resides. But then again, few people have looked as deeply as Roberts at the problems he describes. In one passage, Roberts writes that “Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by U.S. troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?”
A few of the chapters you may want to read twice: “The Myth of Benevolent Globalism,” “Where Did the Money Go,” and “Fraud By Banksters.”
http://wallstreetonparade.com/2013/03/paul-craig-roberts%E2%80%99-primer-on-why-the-great-recession-is-the-new-normal/