Relevant and even prescient commentary on news, politics and the economy.

Bank of America, Kafka, and I – A Continuing Relationship

by Mike Kimel

Bank of America, Kafka, and I – A Continuing Relationship

A year and a half ago I wrote a post about how Countrywide, by then a division of Bank of America, had filed to foreclose on our home, apparently on the basis that someone with a similar name to the previous owner of the home owed them money. Needless to say, we were surprised given that a) we had no relationship with B of A, b) we had made a point to always pay more than was due on our mortgage each month, c) nobody with the name of the person they were trying to collect from had ever owned the home (I’ve seen the property records going back to when the house was built) and d) as surreal and the whole thing was, we had to hire an attorney to make the whole mess go away.

In part because of that experience, some time after that my wife and I closed out all of our B of A accounts. Or so I thought. In the process of closing out my account, our account balance by definition became zero. This is important because when one’s balance is below $2,500, one is charged a monthly service fee. Apparently, we have been assessing monthly service fees since the point where we thought we closed our accounts. It seems that now we are carrying a negative balance that happens to equal a multiple of the service fee on an account that I closed a while ago.

Now, the Supreme Court has stated that corporations are essentially similar to a person. But imagine if a person did something like this. Imagine what would happen to me, for instance, if I filed papers to foreclose on a branch of B of A using, as an excuse, the fact that someone that B of A had no relationship with owed me money. And what would happen if I followed that up some time later by sending B of A a bill for services they not only had not requested, but had been most vehement that they didn’t want. In addition to being charged with fraud, I imagine at this point it would also be considered harassment.

In general, a human being behaving this way would face consequences. Even a human being well-connected enough not to have to worry about being arrested by the cops or prosecuted by the DA still has to worry about whether the next time his intended victim would be waiting with a shotgun. B of A, on the other hand, truly has no constraints on its behavior. No matter how unprofitable its behavior, it has been deemed too big to fail. And society, having made the decision to privilege some sociopaths, also implicitly made the decision that everyone else qualifies as prey.

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Gerrymandering the Jobs Bill

op ed by run75441

Think Progress offers a look at relevant parts of the ‘jobs bill’. In the US, the winds of Washington Politics don’t blow, they suck.

Gerrymandering the Jobs Bill:

The piece of the jobs bill Republicans will pass would end a requirement that the government withhold three percent of the cost of projects contracted out to private companies, to assure tax compliance. It’s a rule that Congress adopted during the Bush administration to cut down on tax cheating by government contractors.”

The proposals would incorporate a permanent repeal of the withholding which today saves $10 billion in lost taxes. To counter the revenue loss the Republicans have a solution (as paid for by Medicaid/SS recipients):

“all legislation other than permanent tax cuts for wealthy people must be paid for — typically with cuts to federal programs. So Republicans have selected a provision from Obama’s deficit reduction recommendations that would limit Medicaid eligibility for people who also receive Social Security benefits.

A concept called Modified Adjusted Gross Income is used to determine Medicaid eligibility. Currently, it only incorporates the taxable portion of Social Security income in that calculation. Under t a new proposal, it would factor in all Social Security benefits. That means some seniors who currently qualify for Medicaid would no longer be eligible. Doing this would save about $14.6 billion over 10 years — more than the cost of repealing the 3 percent withholding compliance measure.” GOP Lays Trap for Obama on Jobs Bill”

Finance the tax cheats and sacrifice Medicaid and SS recipients.

Watching Your Back???

In Order to open negotiations with the Repubs, the Dems on the Super Committee

“are offering to cut Medicare and Medicaid benefits as part of a roughly $3 trillion grand bargain, which would well exceed the $1.2 trillion minimum goal the committee is tasked with meeting.

The Democratic plan proposes cutting the deficit by $2.5 trillion to $3 trillion and calls for between $200 billion and $300 billion in new stimulus spending to boost an ailing U.S. economy. It would be paid for with lower interest payments from reducing deficits.

It also seeks around $400 billion in Medicare savings, with half coming in benefit cuts and the other half in cuts to healthcare providers. Details of that proposal were scant but tackling the popular Medicare program is always politically risky for politicians in Washington, especially Democrats.

The Democratic proposal also identifies $100 billion in cuts to the Medicaid healthcare program for the poor, according to a lobbyist in contact with the committee.”

Dems Seek $3trillion in Savings

Fortunately, The Repubs would not accept a tax increase on the income rich even with throwing Grandmother under the bus to finance it . . .

The Party of “No”rquist

It appears that many of the signers of the pledge representing “No”rquist beliefs and the Repub party over the constituency which elected them have feet made of sand as the currents of public anger are over whelming the views proffered.

ATR currently has signatures from 238 House representatives, 41 Senators, 13 governors, and all of the GOP presidential candidates except former Utah Governor Jon Huntsman.”

Anti-Tax Crusader Grover Norquist’s Grip is Slipping

Who elected these turkeys??? Hmmm, that’s right, we did and the views they are espousing? Even that ever lovable former Senator from that wilderness state west of the Hudson Wyoming is calling for a resistance to outside influence (ATR) which has no impact on getting elected again. And Senator Coburn challenged Norquist on Ethanol subsidies? Such bravado . . .

“Have we really reached a point where one person’s demand for ideological purity is paralyzing Congress to the point that even a discussion of tax reform is viewed as breaking a no-tax pledge?” Senator Wolf asked.

And the man with the perpetual sun tan Boehner asked of Norquist’s relevance.

“some random guy,

Grover told me that he saw himself as the Lenin of the conservative revolution and that Ralph Reed was his Trotsky and Jack Abramoff was his Stalin.”

As Oliver Wight used to say “Cement heads!” Someone has sounded the “abandon ship” alert as the Repub-titanic has struck the iceberg of public dissent. Maybe Occupy America has struck a nerve? It doesn’t take a weatherman . . . We will make the same mistake again and re-elect these turkeys.

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Health and (or rather of) the Gingrich Campaign

All You Need to Know about Newt

The Gingrich health center’s support for such a mandate was part of an “Insure All Americans” plan that appears to have disappeared from the center’s Web site Thursday.

See that there is nothing here
http://www.healthtransformation.net/cs/insure_all_americans

But it is still here

Key quote

Require that anyone who earns more than $50,000 a year must purchase health insurance or post a bond.

I know that Gingrich is a psychopath, but he likes to pretend that he is smart and techno savvy. It seems that no one who knows about the wayback machine is willing to work for him.

Nothing could be more pointless than a screen shot of a waybackmachine page, so here it is.

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The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner

By Mike Kimel

The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner

I’ve been having a bit of a back and forth with Scott Sumner of The Money Illusion over the degree to which monetary policy, in particular the devaluation of the dollar, affected the economy in 1933. (My most recent post on the issue is here.)

In private correspondence, Sumner provided me with the draft for three chapters of a manuscript he is working on. I can safely say that whether or not I agree with his findings, Sumner has done his homework – the draft is meticulously researched and abounds with details corroborating his findings. Of particular interest to me was a Table 8.2, which shows weekly figures for a number of series from April 15, 1933 to the first week of February, 1934. Sumner has graciously agreed to let me post that table. I don’t want to freeride on his efforts to much, so I’m only reproducing the first few columns.

Figure 1

I believe the most interesting thing in the table is – what has been the cause of some discussion between the two of us – is the Gold Index. From the footnote to the table in the manuscript:

The gold index is the Annualist Index of Commodity Prices measured in gold terms.

Sumner collected that data manually from old trade journals. I haven’t been able to find that data online. What the data shows, to quote Sumner, is that “an ounce of gold could buy more internationally traded goods in 1934 than 1933. That’s what the 815 to 650 is showing—falling prices in gold terms.”

Here’s a graph of the series:

Figure 2

Addendum by Ken: Here’s the Gold Index data listed above with the Vertical Axis rescaled:

Figure 3

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Comments on Inequality, Leverage, and Crises

Clifford Clark’s post at ataxingmatter* is worth a more complete look. This also brings to mind Steve Keen’s work on private debt and the economy on his blog Debt Watch as well as Lane Kenworthy’s exploration of poverty and severe poverty at Consider the Evidence, and Angry Bear Robert Waldmann’s recent posts here and here.

Comments on Inequality, Leverage, and Crises–Kumhof & Ranciere Nov 2010 IMF working paper

[guest post by Clifford D. Clark]

Michael Kumhof’s and Romain Ranciere’s November 2010 paper relates income inequality to national economic crises, particularly those experienced as the Great Depression and the Great Recession. They conclude that increases in income inequality –comparing the top 5% of households to the bottom 95%–in the years leading up to the two crises exerted a determining influence on the economy.

First, income inequality grew in similar ways in the years before the depression and the recent deep recession. …. The authors find a link between the two phenomena: income inequality increased at a greater rate than consumption expenditures in the years before the two crises. The public was spending at rates greater than increases in their income.

Second, in the years before the recent downturn the growth in household debt was due almost entirely to the bottom 95%. Real hourly wages of the top 10% of households increased by an accumulated 70% between 1967 and 2003, while the median households decreased by 5% and wages at the bottom 10% decreased by about 25%. … That represents a clear switch: whereas in 1983 the top wealth group was more indebted than the bottom 95%, by 2007 the reverse was true. By then the bottom 95% had debts equal to 140 % of income, nearly twice that of the top 5%. They conclude that almost all of the change in the debt to income ratio in aggregate was due to the bottom 95%.

Third, an increase in debt requires and increased need for financial intermediation: accordingly, the size of the financial sector between 1980 and 2007 increased considerably. Measured by the ratio of private credit of deposit banks and other financial institutions to GDP, that quantity increased from 90% in 1981 to 210% in 2007…

Their conclusion is succinctly stated.

The key mechanism, reflected in a rapid growth in the size of the financial sector, is the recycling of part of the additional income gained by high income households back to the rest of the population by way of loans, thereby allowing the latter to sustain consumption levels, at least for a while. But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.” Id. at 22.

* correction of source

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The Hill reports on "supercommittee"

by Linda Beale

The Hill reports on “supercommittee

Alexander Bolton reports that “With Supercommittee Deadlocked, leaders Reid and Boehner meet“, The Hill (Nov. 15, 2011).  Reid (Dem) and Boehner (GOP) met Tuesday, but aides told The Hill that “They’re not about to dive in” to the negotiations.  But as the committee seems to be at an impasse close to the 11/23 deadline, the leaders must be discussing what is likely to be the next step.  The arrangements for the group (in case no bipartisan deal could be reached) called for across-the-board cuts that impose reasonable cuts on Defense but limited cuts for social safety net/earned benefit programs (medicare limited to 2% cuts to insurance companies and health care providers/Social Security and Medicaid exempt).

The GOP members, of course, are casting it as a Dem problem. For example, Hensarling (a very far right member of the group, from Texas) blamed the Dems for not accepting the Toomey proposal for a piddling $300 billion in new tax revenue.  With Supercommittee Deadlocked, leaders Reid and Boehner meet.

The across-the-board cuts would cut Defense by $500 billion.  Various GOP members of Congress have said they want to change the deal to avoid the cuts to the military.  Tea Party favorite and radical right-winger Jim DeMint has essentially admitted that he never intended to stick with the sequester deal, saying that the GOP has “until next election to fix this thing.”  GOP stalwarts want the US to maintain its exorbitant spending as “the world’s only military superpower” even while being willing to cut health care and pensions to the vulnerable and even while the country’s infrastructure–essential for business–crumbles in ruins.  McCain and Graham urged the Senate to reject the sequester of military funds, fearful it would “set off a swift decline of the United States as the world’s leading military power.” Dems gain upper hand in deficit talks, The Hill (Nov. 16, 2011).  This attitude seems to believe that defense spending, no matter what the cost to the country, is okay, while spending on poor people is a waste and raising taxes on the rich is an impossibility.  Apparently GOP McKeon considered that possibility, but then later backtracked.  Certainly, Grover Norquist has been making sure the pressure is on from the corporate masters of our pseudo-democracy–the Hill notes Norquist’s statement Monday that both Senate and House GOP leaders had “assured him they would not raise taxes to reduce the deficit.”  Id.

So we have elected representatives in Congress who willfully ignore the will of the majority of people in favor of higher taxes and higher taxes on the rich and corporations in particular; ignore the facts that show that higher taxes on the rich and a more equal economy are better for everybody; and ignore the fact that their own policies (preemptive war and tax cuts during deficits from 2001-2008 under Bush) represent the substantial reason for long-term deficits–all in order to continue to support extraordinarily disproportionate spending on the military rather than on public infrastructure, education and health and in order to be able to continue to use the self-created “debt crisis” to push for further impoverization of America’s middle class.  What a backwards value system that represents can’t be expressed in a public blog.

But at least Reid has said that method of reneging on the agreement won’t be allowed to happen: “Democrats aren’t going to take an unfair, unrealistic load directed toward domestic discretionary spending and take it away from the military.”    See Id.; see also Reid: Dems will oppose efforts to spare Defense from automatic cuts, The Hil (Nov. 14, 2011).

As one of the commenters on The Hill notes (quoting an NPR program), the supercommittee is set up to force one of two bad choices–reducing the social safety net or cutbacks during economic recession.  What we should be doing is increasing taxes now on the rich and on corporations, and then allowing the Bush tax cuts to expire at the end of next year–in their entirety.  We should make judicious spending cuts in wasteful programs–and the military certainly should be a target of some of those cuts.  And we should make judicious spending increases in infrastructure, research and educational support programs to add stimulus to keep the economy going.

Case in point–the New York Times story today about a small town in Kentucky that decided to increase taxes to pay for infrastructure improvements that are putting the two back on the map.

originally published at  ataxingmatter

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Scaling to New Depths* with Scott Sumner

by Mike Kimel

Scaling to New Depths* with Scott Sumner

I’ve been having a bit of back and forth with Scott Sumner. Here is his latest post, helpfully entitled: “A suggestion for Mike Kimel.”

His key suggestion:

“Please take a close look at the data from the Great Depression, before doing more posts claiming I don’t know the facts.”

He then goes on to point out he’s been studying the 1933 period for 20 years. From there he goes on to explain my first mistake:

He insists that FDR’s dollar depreciation program began in October 1933, even though all economic historians agree in began in mid-April 1933, when the exchange rate for the dollar began declining (against gold and against other currencies.) He insists prices began rising before FDR took office off, which is not true. He presents a graph that he claims shows prices rising before FDR took office, but his graph shows inflation rates, not the price level. In fact, the graph actually supports my argument that inflation didn’t turn positive until after FDR took office. There’s a difference between the rate of inflation and the price level.

OK. Let’s redo the graph showing not inflation but rather the price level. And I’ll keep it very simple… I will limit it to two points. Well, three, though the third is not exactly on the curve so to speak. As before, I’m still using PPI because its the publicly available source most closely related to the prices Sumner seems to be discussing, and I’ll use the graphics tool at the Federal Reserve Economic Database (FRED)

Figure 1.

The graph shows the PPI for February and March of 1933. FDR took office in March 1933.

As I noted in my previous post,

You can see the decline in prices halt and start reversing even before he took office.

Now, I don’t remember arguing that inflation didn’t turn positive before then. To me, its a big deal that PPI hit rock bottom and reversed itself. Getting out of free-fall was in itself a big deal. Here’s a graph for 1929 to 1934 to give you an idea:

Figure 2.

Note that February 1933 happened to be the low point for PPI during its entire history, and the PPI had been calculated since 1913.

But there’s another important point in the quote I provided above, namely this:

He insists that FDR’s dollar depreciation program began in October 1933, even though all economic historians agree in began in mid-April 1933, when the exchange rate for the dollar began declining (against gold and against other currencies.)

This isn’t quite right. As I’ll make clear, I don’t think the dollar actually depreciated against gold until January 1934. Sumner was so insistent on this depreciation occurring before then that I spent a bit of time on google and found a story by Jesse Jones, head of the Reconstruction Finance Corporation, about how FDR had him and soon to be Treasury Secretary Morgenthau help him (FDR) revalue the price of gold.

Now, I am not an economic historian, and I’m not sure I know any these days, so for all I know, Sumner is correct about what all economic historians agree happened. I am, instead a data guy. I like data. Scratch that. I love data. I go through data in my spare time. Most of the stuff I do at this blog, for instance, has absolutely nothing to do with my day job. Nothing. But its an opportunity to play with data. My wife usually scratches her head wondering why I do this kind of thing, but everyone needs a hobby and I don’t watch tv.

One thing I’ve learned with data is that its generally important to go back as close to the original source of data as possible. Another is to know something about your sources. Go through the data. Read footnotes.

So in that spirit, I decided to try see what I can learn by looking for data from the era or thereabouts, ideally coming directly from the folks who collect it. I have not succeeded in finding a series that shows what Sumner claims. In fact, data from around that era, particularly on gold prices, isn’t easy to come by. But I have found a few examples.

For instance, Table Number 230 of the 1936 Statistical Abstract of the United States shows the supply of gold in the United States on June 30 of each year (going back annually to 1887, and with selected years before then). The data seems to originate with the Treasury and the Fed, though I haven’t been able to locate the contemporaneous originals.

Footnote 1 reads in part:

By a proclamation of the President dated Jan. 31, 1934 the weight of the gold dollar was reduced from 25.8 to 15 5/21 grains of gold, 0.9 fine. The value of gold is therefore based on $35 per fine ounce beginning June 1934; theretofore it is based on $20.67 per fine ounce.

In other words a couple months after Sumner and other economic historians believe the dollar had started losing value against gold, the Fed and/or the Treasury were reporting to the Census (which publishes the Statistical Abstract) that the price of gold was still exactly the same as it had been.)

Now, its possible the Census or the Fed or the Treasury made a mistake and it went uncorrected by the time of the 1936 Statistical Abstract. So one source is not enough, especially when Sumner and “all economic historians” agree it is wrong.

Which leads to a Fed document called Banking and Monetary Statistics 1914 – 1941. This is from the section on gold (bottom paragraph, left hand column, page 522)

All figures are in dollars, calculated at the rate of $20.67 per fine ounce of gold through January 1934 and $35 per fine ounce thereafter (except that the figures for the year 1934 in Table 159 are based upon the $35 gold price). The change in rate results from the fact that on January 31, 1934, the dollar was devalued by 40.94 per cent in terms of gold in accordance with a proclamation issued by the President.

If you’re curious, $35 – $20.67 = $14.33. $14.33 happens to be 40.94% of $35.

The document is chock full of tables that show, including other things, the monthly value of US gold holdings. Where dollar figures are involved, those tables also carry a helpful note indicating the price as $20.67 an ounce through January 1934, and $35 an ounce thereafter. Note that the Fed valued monthly holdings at $20.67 an ounce in April, May, June, July, August, September, October, November and December of 1933 when, all along, according to Scott Sumner who spent 20 years studying the era and “all economic historians,” insist the price of gold had been rising at the time.

I’ve stumbled on a few other sources as well but they don’t look any different. I’m just not seeing the series that shows the dollar price of gold rising during the months from April 1933 to January 1934.

So what is going on? I’m going to split the baby here and suggest that both Scott Sumner and “all economic historians” are right that there was a devaluation, and the Fed and the Treasury and the Statistical Abstract of the United States were (and are) right that there wasn’t. But the way in which they are right is very definitely not a good thing for Scott Sumner and “all economic historians.”

See, as I said above, I’m not an economic historian, but I did spend my formative years in South American in the 1970s and 1980s. As anyone who spent roughly the same years in the region as I did could tell you, or as any Zimbabwean can do today, during times of turmoil (which can last decades) the official exchange rate can come to bear no relationship with the actual price at which a currency trades against something that is considered more stable and more desirable to hold. Heck, you don’t have to track down someone from Arrgentina or Zimbabwe – ask any European who ever visited the Soviet Block and traded in some Western currency at the airport or the border about how unrealistic official exchange rates could be. In many an economic basket case, the likelihood that a transaction takes place at anything resembling the official exchange rate is similar to the probability that someone walks into a Chevrolet dealership and pays the MSRP, in cash.

And like the MSRP, the official exchange rate has a purpose. Yes, there’s always someone clueless or coerced enough to pay that price. But for the most part, its a fiction that either serves as a baseline for something or papers over something the government wants to really do, usually printing money. Its a handy excuse to get from point A to point B, and if the excuse doesn’t fly, another one will do.

My guess, and I’ll repeat that I’m not an economic historian, is that when FDR and Jones and Morgenthau were picking prices out of the air, it was in that vein. The country was in turmoil when FDR took office, and there were fears that if things got worse there would be an armed insurrection. It wasn’t a time for half measures. My guess is the mood in the White House at the time was best summarized by a quote decades later from the immortal John Candy, “There’s a time to think, and a time to act. And this, gentlemen, is no time to think.”

So what did the fiction of changing the price gold accomplish if nobody else believe that the price had actually changed? I suspect it meant, in practice, that the Reconstruction Finance Corporation could pay more than $20.67 an ounce for gold. And why would the RFC (which, I note, could borrow outside the budget) want to pay more than $20.67 an ounce for gold if that was the price everyone was accepting?

Think of the RFC the way you think of the Fed trying to bail out banks in recent years – loaning money at below market rates to banks who then used the money to buy Treasuries which paid higher rates. In effect, paying more than $20.67 an ounce was a way to funnel riskless profits to banks. (Of course, the RFC often replaced management, but things have gotten permissive as well as more sophisticated in recent decades.)

Which brings us back to Sumner and “all economic historians” being right, at least technically. Yes, the currency was being devalued throughout much of 1933, but no, it wasn’t. Not really. There were a series of fictional devaluations that served a specific purpose, but which nobody else made believe was real (and its possible which almost nobody else was aware were happening – don’t ask me, I’m not an economic historian). Pretending otherwise, and using that fictional data to do an analysis is the equivalent of trying to understand the East German economy in 1974 using the exchange rates a traveler would have received at Checkpoint Charlie during that year.

* The title comes from a book put out by Mad Magazine in the 1970s or 1980s. Sorry I can’t be more specific – it has been a while

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Federal regulation versus jobs…not much there

The Washington Post points us to a study on the overall impact of regulations and jobs:

The critique of regulations fits into a broader conservative narrative about government overreach. But it also comes after a string of disasters in recent years that were tied to government regulators falling short, including the financial crisis of 2008, the BP oil spill and the West Virginia mining accident last year.

Data from the Bureau of Labor Statistics show that very few layoffs are caused principally by tougher rules.

Whenever a firm lays off workers, the bureau asks executives the biggest reason for the job cuts.

In 2010, 0.3 percent of the people who lost their jobs in layoffs were let go because of “government regulations/intervention.” By comparison, 25 percent were laid off because of a drop in business demand.

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