The Road to Economic Hell 69 comments
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By Simon Johnson
Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.
Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.
This is the prospect now faced by the United States.
Treasury has made it clear that they will proceed with a “mix-and-match” strategy, as advertised. And people close to the Administration tell me things along the lines of ”it will be messy” and “there is no alternative.” The people involved are convinced - and hold this almost as an unshakable ideology - that this is the only way to bring private capital into banks.
This attempt to protect shareholders and insiders in large banks is misguided. Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven’t these boards resigned?), but the government’s policy is creating toxic financial institutions that no one wants to touch either with equity investments or - increasingly - further credit.
Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup (C) last Thursday when it said Vikram Pandit will stay on as CEO? If that wasn’t a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company?
Will debtholders be forced to take losses and, if so, how much and for whom? As part of last week’s Citigroup deal, preferred shareholders - whose claims had debt-like characteristics - were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market. Junior subordinated Citigroup debt (securities underlying enhanced trust preferred shares) were yesterday yielding 26%.
Who can explain exactly how AIG (AIG) has lost so much money? Drip-drip injections of government money are not a proper clean-up; there has been no complete recognition of losses and, almost six months later, that company still cannot move on. Time horizons presumably remain short or are getting shorter for all involved. This points to a bleak future more generally.
What do rapidly widening credit default spreads for nonbank financial entities (such as GE Capital and many insurance companies) signify? Is it something about expected behavior by the insiders or by government, or by some combination of both?
Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way - mostly from Europe, but also potentially from Asia.
The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.
The road to economic hell is paved with good intentions and bad banks.
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On Mar 05 01:48 PM cash wrote:
> Bush was unfortunately a vacuous idiot. Unfortunately, Obama has
> an agenda
Oh, wait. He's gained weight, can walk again (when he's not on drugs), and changed his name to Limbaugh.
On Mar 05 01:36 PM Tesa wrote:
> Aristophanes, do you really think there is an actual John J Wall.
> I am not so sure.
On Mar 05 09:19 AM pockyclips 2020 wrote:
> Of course, the party in power is using crisis to benefit themselves,
> just as always.
> As long as there are Replicrats and Democans, the system will not
> change (until we go bankrupt). We didn't go into the crapper in just
> the last 6 weeks.
On Mar 05 12:49 PM patio wrote:
> I'm with you...
>
> Dear American liberals, leftists, social progressives, socialists,
> Marxists and Obama supporters, et al:
> We have stuck together since the late 1950's, but the whole of this
> latest election process has made me realize that I want a divorce.
> I know we tolerated each other for many years for the sake of future
> generations, but sadly, this relationship has run its course. Our
> two ideological sides of America cannot and will not ever agree on
> what is right so let's just end it on friendly terms. We can smile
> and chalk it up to irreconcilable differences and go our own way.
>
>
> Here is a model separation agreement:
>
> Our two groups can equitably divide up the country by landmass each
> taking a portion. That will be the difficult part, but I am sure
> our two sides can come to a friendly agreement. After that, it should
> be relatively easy! Our respective representatives can effortlessly
> divide other assets since both sides have such distinct and disparate
> tastes.
>
> We don't like redistributive taxes so you can keep them. You are
> welcome to the liberal judges and the ACLU. Since you hate guns and
> war, we'll take our firearms, the cops, the NRA and the military.
> You can keep Oprah, Michael Moore and Rosie O'Donnell (You are, however,
> responsible for finding a bio-diesel vehicle big enough to move all
> three of them).
>
> We'll keep the capitalism, greedy corporations, pharmaceutical companies,
> Wal-Mart and Wall Street. You can have your beloved homeless, homeboys,
> hippies and illegal aliens. We'll keep the hot Alaskan hockey moms,
> greedy CEO's and rednecks. We'll keep the Bibles and give you NBC
> and Hollywood .
>
> You can make nice with Iran and Palestine and we'll retain the right
> to invade and hammer places that threaten us. You can have the peaceniks
> and war protesters. When our allies or our way of life are under
> assault, we'll help provide them security.
>
> We'll keep our Judeo-Christian values.. You are welcome to Islam,
> Scientology, Humanism and Shirley McClain. You can also have the
> U.N.. but we will no longer be paying the bill.
>
> We'll keep the SUVs, pickup trucks and oversized luxury cars. You
> can take every Subaru station wagon you can find.
>
> You can give everyone healthcare if you can find any practicing doctors.
> We'll continue to believe healthcare is a luxury and not a right.
> We'll keep The Battle Hymn of the Republic and the National Anthem.
> I'm sure you'll be happy to substitute Imagine, I'd Like to Teach
> the World to Sing, Kum Ba Ya or We Are the World.
>
> We'll practice trickle down economics and you can give trickle up
> poverty your best shot. Since it often so offends you, we'll keep
> our history, our name and our flag.
>
> Would you agree to this? If so, please pass it along to other like
> minded liberal and conservative patriots and if you do not agree,
> just hit delete. In the spirit of friendly parting, I'll bet you
> ANWAR which one of us will need whose help in 15 years..
>
>
> Sincerely,
>
> John J. Wall
> Law Student and an American
>
> P.S. Also, please take Barbara Streisand & Jane Fonda with you.
>
Free markets inevitably lead to monopolies. The end result of "successful" capitalism is a crisis of over-production. In my opinion, we are seeing the
decline and fall of the American Empire
Just as it happened in the 1930's when capitalism unleashed forces which threaten Western Civilization, forces are now in motion which, once again, pits the survival of Western Civilization against the "free markets". In the choice between barbarism or civilization, who will choose barbarism?
You have to look at capitalism from its entire 500 year history. From the time of the European voyages of discovery, starting in the 1500's, to now, one can observe that capitalism, as an economic model practiced world wide, has now reached its "natural" conclusion: a crisis of over production. The methods of production have accumulated into too few hands so what we are experiencing is the culmination of the "success" of first regional capitalism, then nation state capitalism and now, finally, the "success" of global capitalism.
About twenty years ago the capitalist ruling class was euphoric after the fall of the Berlin Wall and the proper demise of the caricature of socialism, built up by the monster Stalin, which was the USSR. We were promised a world of peace and prosperity, a new economic paradigm of constant uninterrupted growth, but now all those promises have been shown to be false.
The last 20 years have been difficult for the working class, their average wage have shown no increase, after inflation, and were instead forced to resort to massive debt accumulation to maintain working class living standards and the continued smooth functioning of the globlal "free markets". In summary, for the working class, with the global economy came not prosperity but, as is clear now to most observers, global economic crisis...
Now, trying to look at things from the perspective of the ruling class, the best solution they can deploy, like they did in the Depression of the 1930s, to save capitalism, is a reformist President along the lines of F. D. Roosevelt who will introduce something like the New Deal. If not, we will end up with a REAL dictatorship. Is Obama that man? I don't know, he certainly talks the part.
However, the fact is, America is already ruled by a dictatorship - the dictatorship of Money, of the "corporate masters" who make all the real decisions while giving the masses the illusion of democracy. But democracy in America, as in Europe and elsewhere in the West, is only a sham, a hollow shell. They pay no attention to the Constitution, the Bill of Rights, or anything else. Everything is decided by the one percent of the population who own America.
In my opinion, the Republic ended in 1950. Since then we have had an imperial system. What are the chief characteristics of this system? First, the USA intervenes in an aggressive way in every part of the world. According to published research, since 1950, the USA has waged at least 300 wars in different parts of the globe.
Even our much-vaunted American freedom is largely fictional: three percent of the population is either in jail or on parole, connected up by electric devices to the prison administration. There is very little real freedom. Freedom of the press? The press and the media are owned and controlled by "our corporate masters".
What about living standards in the USA? Eighty percent of Americans have been falling behind since 1973. That is the date they usually cite for the oil crisis. Nowadays a husband and wife make less money than the husband alone made at that time. Before the "financial crisis" twenty percent did support the Empire. These are the lawyers, the journalists, politicians and bankers and so on. But even the twenty percent that is in the service of the one percent is now also getting the "axe", and getting it heavily.
"Forced From Executive Pay to Hourly Wage"
www.nytimes.com/2009/0...
Citizens' rights have been demolished in our country. The Bill of Rights has been either suspended or cut down. Bill Clinton started the process at the time of the Oklahoma bomber. Then they passed the US Patriotism Act, a document of thirty pages that nobody bothered to read. It permits the government to organize surveillance, arrests and deportations. In fact, if you criticize the government you could be arrested for "giving comfort to the enemy". And Congress passed this Act and the President signed it immediately! But in practice it did not work.
It is an American Empire, but as the "financial crisis" has shown, it is more like a colossus with feet of clay. Quite simply, America is in the process of overreaching itself just as the Roman Empire overreached itself.
On the bright side, there's no need to worry about the American people. The establishment treats us as if we are fools, but we are not fools. Information is still widely available and the American people can learn, both online and from relevant books. They will learn most from the greatest book of all - the book of life itself. And when that happens, the American people will move as one...
More information below:
"Destruction of Demand"
seekingalpha.com/artic...
littlurl.com/b8z3e
"Recent Policy Decisions and a Greater Depression"
seekingalpha.com/artic...
littlurl.com/2it28
"The Fed's War on the Middle Class"
mises.org/story/2983
"What's Behind the Financial Market Crisis?"
mises.org/story/3111
"Economic Fascism and the Bailout Economy"
mises.org/story/3333
"How to Avoid Another Depression"
mises.org/story/3103
On Mar 06 12:09 AM User 270430 wrote:
> Decline and fall of the American Empire
>
> Free markets inevitably lead to monopolies. The end result of "successful"
> capitalism is a crisis of over-production. In my opinion, we are
> seeing the
>
> decline and fall of the American Empire
>
> Just as it happened in the 1930's when capitalism unleashed forces
> which threaten Western Civilization, forces are now in motion which,
> once again, pits the survival of Western Civilization against the
> "free markets". In the choice between barbarism or civilization,
> who will choose barbarism?
>
> You have to look at capitalism from its entire 500 year history.
> From the time of the European voyages of discovery, starting in the
> 1500's, to now, one can observe that capitalism, as an economic model
> practiced world wide, has now reached its "natural" conclusion:
> a crisis of over production. The methods of production have accumulated
> into too few hands so what we are experiencing is the culmination
> of the "success" of first regional capitalism, then nation state
> capitalism and now, finally, the "success" of global capitalism.
>
>
> About twenty years ago the capitalist ruling class was euphoric after
> the fall of the Berlin Wall and the proper demise of the caricature
> of socialism, built up by the monster Stalin, which was the USSR.
> We were promised a world of peace and prosperity, a new economic
> paradigm of constant uninterrupted growth, but now all those promises
> have been shown to be false.
>
> The last 20 years have been difficult for the working class, their
> average wage have shown no increase, after inflation, and were instead
> forced to resort to massive debt accumulation to maintain working
> class living standards and the continued smooth functioning of the
> globlal "free markets". In summary, for the working class, with
> the global economy came not prosperity but, as is clear now to most
> observers, global economic crisis...
>
> Now, trying to look at things from the perspective of the ruling
> class, the best solution they can deploy, like they did in the Depression
> of the 1930s, to save capitalism, is a reformist President along
> the lines of F. D. Roosevelt who will introduce something like
> the New Deal. If not, we will end up with a REAL dictatorship.
> Is Obama that man? I don't know, he certainly talks the part.<br/>
>
> However, the fact is, America is already ruled by a dictatorship
> - the dictatorship of Money, of the "corporate masters" who make
> all the real decisions while giving the masses the illusion of democracy.
> But democracy in America, as in Europe and elsewhere in the West,
> is only a sham, a hollow shell. They pay no attention to the Constitution,
> the Bill of Rights, or anything else. Everything is decided by the
> one percent of the population who own America.
>
> In my opinion, the Republic ended in 1950. Since then we have had
> an imperial system. What are the chief characteristics of this system?
> First, the USA intervenes in an aggressive way in every part of the
> world. According to published research, since 1950, the USA has
> waged at least 300 wars in different parts of the globe.
>
> Even our much-vaunted American freedom is largely fictional: three
> percent of the population is either in jail or on parole, connected
> up by electric devices to the prison administration. There is very
> little real freedom. Freedom of the press? The press and the media
> are owned and controlled by "our corporate masters".
>
> What about living standards in the USA? Eighty percent of Americans
> have been falling behind since 1973. That is the date they usually
> cite for the oil crisis. Nowadays a husband and wife make less money
> than the husband alone made at that time. Before the "financial
> crisis" twenty percent did support the Empire. These are the lawyers,
> the journalists, politicians and bankers and so on. But even the
> twenty percent that is in the service of the one percent is now also
> getting the "axe", and getting it heavily.
>
> "Forced From Executive Pay to Hourly Wage"
> www.nytimes.com/2009/0...
>
> Citizens' rights have been demolished in our country. The Bill of
> Rights has been either suspended or cut down. Bill Clinton started
> the process at the time of the Oklahoma bomber. Then they passed
> the US Patriotism Act, a document of thirty pages that nobody bothered
> to read. It permits the government to organize surveillance, arrests
> and deportations. In fact, if you criticize the government you could
> be arrested for "giving comfort to the enemy". And Congress passed
> this Act and the President signed it immediately! But in practice
> it did not work.
>
> It is an American Empire, but as the "financial crisis" has shown,
> it is more like a colossus with feet of clay. Quite simply, America
> is in the process of overreaching itself just as the Roman Empire
> overreached itself.
>
> On the bright side, there's no need to worry about the American people.
> The establishment treats us as if we are fools, but we are not fools.
> Information is still widely available and the American people can
> learn, both online and from relevant books. They will learn most
> from the greatest book of all - the book of life itself. And when
> that happens, the American people will move as one...
>
>
> More information below:
> "Destruction of Demand"
> seekingalpha.com/artic...
>
> littlurl.com/b8z3e
>
> "Recent Policy Decisions and a Greater Depression"
> seekingalpha.com/artic...
>
> littlurl.com/2it28
>
> "The Fed's War on the Middle Class"
> mises.org/story/2983
>
> "What's Behind the Financial Market Crisis?"
> mises.org/story/3111
>
> "Economic Fascism and the Bailout Economy"
> mises.org/story/3333
>
> "How to Avoid Another Depression"
> mises.org/story/3103
>
I agree with: " Anybody out there who hasn't figured out that politicians in both parties are only out for themselves and their politically connected cronies simply hasn't been paying attention for the last 20 years."
AND: "They are both morally and ethically corrupt, just in differing ways"
AND: "If anyone should be asked to leave our country, it's the politicians and bureaucrats of all types in Washington, DC. Let the people live their lives without the gub'mint butting in all the time for a change. We'd all be a lot better off I'm thinking."
One must ask though if there is enough evidence that people will unerringly conduct themselves in a way that won't impinge upon another? I'm not seeing it.
Until and unless people begin acting responsibly, and that's to say without indifference, there must be an agreed upon set of behaviors.
As we seem to agree the current system is corrupted, and in my case beyond repair, and we both realize that people refuse to behave how do you propose we govern?
On Mar 06 12:22 AM Smarty_Pants wrote:
> I am amazed at how quickly the comment stream turned into an ad-hominem
> pissing contest.
>
> Secondarily, I am reluctant to admit I read through most of it for
> no other reason than amusement.
>
> Anybody out there who hasn't figured out that politicians in both
> parties are only out for themselves and their politically connected
> cronies simply hasn't been paying attention for the last 20 years.
>
>
> They are both morally and ethically corrupt, just in differing ways:
>
>
> Democrats/Socialists believe it is OK to take money from people who
> earned it and give it to people who need it, "just because". That
> it is OK to restrict the ways you live your life based on what they
> believe is best for the planet / the poor / the lazy / the old /
> the children / the unions / etc.
>
> Republicans/Fascists believe it is OK to allow their political cronies
> to avoid taxes or have special privileges. They think it is OK to
> tell everyone on the planet what sort of things they can or can't
> do in their own country. What sort of things their own citizens
> can or can't ingest or own. They think it is OK to bomb a foreign
> country into ruins because they MIGHT want to attack us one day in
> the future. Diplomacy is not an option.
>
> The main problem with BOTH groups is that THEY THINK THEY HAVE A
> RIGHT TO RUN OUR LIVES.
>
> If anyone should be asked to leave our country, it's the politicians
> and bureaucrats of all types in Washington, DC. Let the people live
> their lives without the gub'mint butting in all the time for a change.
> We'd all be a lot better off I'm thinking.
I'm thinking you don't have to worry about being in the same position a year from now. Undoubtedly it will be much worse.
On Mar 05 12:12 PM bricki wrote:
> The question is do you want to keep all the damage concentrated in
> one place (seekingalpha.com/symbo...) or let it blow up
> in many places? It isn't going to be pretty no matter what your choice.
> I don't see that letting AIG fail, and then have the counter parties
> fail too is going to be a better answer. It may not be worse, but
> I don't see how it is better.
>
> The other aspect of the issue is that it is not really bottomless.
> AIG has reduced its CDS exposure from 500 billion to 300 billion
> in about 4 months. Hopefully they will be able to get rid of the
> rest in another 6 months or so.
>
> It would be really really bad if we were still in this same position
> a year from now.
>
> On Mar 05 09:31 AM prudentinvestor wrote:
On Mar 05 12:27 PM user344210 wrote:
> Actually, one of the main problems facing this country is that your
> definition of "fact" and my definition of "fact" are two different
> things and only one of us can be correct. I think it's me. You think
> it's you. It's irreconcilable and it's stupid to pretend otherwise.
> We should just split the country in two and come back and compare
> notes in 50 or 100 years. Believe me, I'm just as tired of you as
> you are of me (using "you" and "me" as generic representative pronouns
> for people who think a certain way).
"Until and unless people begin acting responsibly, and that's to say without indifference, there must be an agreed upon set of behaviors."
Until we stop protecting people from the consequences of their own irresponsible acts, people will act irresponsibly. In fact, by subsidizing irresponsible behavior, we guarantee a never-ending supply of it.
I too have lived in socialist countries.
71% tax rate, rationed health care, unemployment/welfare, apartments instead of houses (ever hear an addict staggering over your head?), VAT taxes, and rude service from protected workers. As for free education, I was in Paris when doctors (DOCTORS!) rioted for more money - I'm sure taxes went up to accomodate them. Americans get plum stupid sometimes, but normally have to go to work instead of rioting [Detroit being the exception that proves the rule].
If there is any place that shows what a sense of entitlement leads to, go to socialist Europe. I left the USA in disgust - I came back loving freedom and opportunity that did not exist in the countries I toured.
So what if some over-extended Californian spend-addicts lose their 5,000 sq ft houses? Few in Europe or Japan would have ever had a house to begin with.
The American financial/political system (same difference) is unfixable. But a USA plummetting downward still lives better than 99% of the rest of the world.
On Mar 05 11:03 AM plumstupid wrote:
> Patio:
> I've lived in socialist countries. Everyone seemed to be doing quite
> well. Good jobs, nice homes or apartments, good free health care,
> good free education thru PhD if ability and interest was there, clean
> streets, well maintained infrastructure, one month paid vacation
> every year.....
>
> Looked pretty good to me!
see united states constitution and bill of rights. it should help with your misunderstanding. protecting our borders is a duty of the federal govt.. healthcare is not. you have the right to buy the best you can afford. you have no right to force others through the collective to pay for it.
take care of yourself.
as i told a young man from holland in the 80's who came to work every morning bitching about our nukes and troops in holland. "you are correct. it costs u.s. taxpayers millions to protect your crappy little country. it is nothing to us. let the russians have it." he shut up about it.
what does ussr stand for? marx said he coined the term communist to replace socialist because socialism was despised. socialism, marxism, communism, fascism are essentially the same beasts.
looks like it must be drive by day on seeking alpha.
do not confuse caitalism with a free market and a free society. even commies are capitalists. the state just owns all of it. the suffix ism implies an affectation or flaw. we were given a free society and market. it lasted until congress discovered it could buy votes with illegal legislation.
The People Are Not The Government; Nor Are They Currently Represented By It !!!
If you think you have representation in Washington then you are truly part of the problem. The "Team" May Have Changed - The Attitude Did Not.
Our Government Is Not Capitalist - It Has Not Been Since After Jackson took down the Second National Bank and we had a reset. (find out Why Jackson took the bank on and you will understand our current situation better)
Your argument for labels inspires emotion that clouds understanding.
Government Intervention is the Root Cause of all the ails you rail about; It is too bad that you do not understand the complexity and interdependence of the forces at work.
You would make a great ally if you understood the unintended consequences of force.
On Mar 05 10:07 AM Tesa wrote:
> SW Richmond, what is interesting is that you capitalist didn't have
> any money for health care but lots of of money for military. Half
> the federal budget.
> vis.berkeley.edu/cours...
Again, I would point out that you have not delved enough into the complexity of the issue you are championing solution for.
The health care system is in a state of disrepair because of Governmental interaction and Lottery Lawsuits for malpractice.
65% of all medical bills paid in the US are from Medicare and Medicaid. Shortfalls from the lawsuits, the insurance to guard against them and the "Free" medical handed out BY MANDATE at the emergency room are made up by Raising The Costs Of Health Care and using the government to stay in business.
ALL Business passes ALL costs on to the consumer; otherwise you are not in business long.
If you want true health care reform start to champion the Idea of vouchers tied to the person who will use them without the mandate of where to use them. Doctors and Hospitals would compete and thus the incentive would be in the correct place.
Single Payer, as it is currently envisioned, does the opposite of incentivize. If their is no choice and the doctors and hospitals get paid no mater what they do, then what is the incentive to excel and what is the incentive to keep prices low?
Another disconcerting fact is that when your health becomes an accounting entry to the government you become expendable.
Unintended consequences are rarely beneficial. Force always has unintended consequences.
On Mar 05 01:54 PM Tesa wrote:
> user344210, its interesting that would assess the benefits of socialism
> in negatively and could not really describe the benefits of capitalism
> other than claiming that the right wing people have all the money!.
> You must feel that it a club.
>
> Americans can not claim either better health care or education.<br/>
>
> American health care system has massive cracks and your are criticizing
> countries that have narrower cracks. With 25% of US population not
> being covered and medicare that is not as good as what the socialist
> offer, you should not be throwing stone from your fragile glass house.
>
>
> How is a single payer system worse than fraudulent multi-payer system
> that extracts profits while consuming massively more percentage of
> GDP than the socialist countries. Health care club for the right
> wing is not offering better life expectancy either.
i feel your pain. no wit pun or jab intended. you see the root of the problem. it looks to be an overwhelming task to correct it. still i guess things looked even worse to the continental army. don't get discouraged. you are free until you surrender. it is tempting to let the ship sink. i know water is running over the deck. guess we better bail faster.
I spent a few years transporting many chronic patients for care. Had they been in Britian, they would have been cut off after one year. And the care in Europe is like a county health department.
But the point is moot:
Treasury will have bankrupted itself on bad banks before Congress has a chance to implement socialized care.
On Mar 06 04:34 PM PainfullyAware wrote:
....Another disconcerting fact is that when your health becomes an accounting entry to the government you become expendable.
It's good to see you posting again. Your sound thinking is a breath of fresh air.
Both parties should consider:
1. Good ideas do not have to be mandated by government.
2. Bad ideas should especially not be mandated by government.
Too bad politicians can't just be pure passive parasites who left the economy alone other than skim it. Instead they must also try to "help" it.
Pounding the drum, most social and economic evils can be traced to government backed money and banking cartels.