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Tenneco CEO’s Wall St. Journal on "American Capitalism"

by Linda Beale
crossposted with Ataxingmatter

Tenneco CEO’s Wall St. Journal on “American Capitalism”

Gregg Sherrill, the CEO of Tenneco, Inc., seems to think that Capitol Hill and the White House are “bashing” the “entire free enterprise system”–saying that the business world has “taken a pounding on Capitol Hill and at the White House” but except for the copmanies that were part of the “easy credit and disguised risk that so spectacularly collapsed”, American business “has nothing whatsoever to apologize for.” Speaking up for American Capitalism, Wall. St. Journal Op-Ed, Jul. 15, 2010, at A17.

But the op-ed is a straw man argument tilting at windmills.

First, Sherrill notes a study cited by The Economist that finds that most Americans “prefer the free enterprise system to any collectivist alternative.” Reading that, you’d think that there was a major debate in this country about switching from capitalism to socialism. But there’s no such thing going on. Nobody is pushing a socialist agenda, in which the government would permanently take over means of production. Many politicians are reluctant to speak out strongly for the traditional American values of a market that is regulated for the common good rather than allowing corporate titans (and their wealthy elite shareholders) set the laws to suit themselves. In fact, the push for the last four decades (dating from Reagan’s swearing in) has been the opposite–to change America’s system of tempered capitalism to one of no-holds-barred “free markets” along the lines espoused by the Chicago School’s Milt Friedman, who didn’t care much about democracy but did care a lot about starving government and letting capital have a free reign no matter what the detriment to ordinary folks.

Second, Sherrill himself explicitly acknowledges that business cannot function “without the appropriate regulation and incentives government can provide.” That is what tempered capitalism is all about–encouraging people to establish and run businesses but restraining the more harmful aspects of rent-seeking profitmaking. Key to decent democratic government is the role of government in protecting consumers from overweening corporate power and the public interest from the kind of reckless private greed that can lead to the “socialization of losses, privatization of gains” that we have seen in the causes of our Great Recession. Forty years of Reaganomics bred negative attitudes towards government regulation fostered within government itself and gave brutal, greed-is-good capitalism a chance to wreak havoc on the economy and on the lives of vulnerable Americans not in the elite upper quintile.

But most of the rhetoric in the piece is straight from the “starve the beast”, free marketarian guidebook of the Cato Institute and other think tanks pushing the Chicago School version of “free enterprise.” It uses the rhetoric of “the moral case for free people and free markets.” It argues against enlarging government “in a way that would fundamentally shift its level of involvement in our overall economy.” Yet Sherrill knows that there is no such thing as “free” enterprise–since without contracts and social networks and societal restraints, his corporation would be nothing but a local business, involved in a dog-eat-dog world with everybody enabled to act like the Mafia and exact whatever “protection payments” brute force permitted. He also knows that “free market” is not synonymous with “free people”–in fact, there is a good deal of tension between the two terms, since a people is only free when the democratic freedoms that underlie our way of life are not subordinated to the power of megalithic market enterprises. Unrestrained markets with monopoly players are antagonistic to genuine human freedom: labor is treated as quasi-property (remember Lochner) and wealth is treated as quasi-god.

And finally, he knows that there is no consideration in the offing for an enlargement of government in a way that would “fundamentally shift its involvement in the economy.” First, government is inherently “involved in the economy”, since government must make decisions about revenues, expenses, programs and public interest every day, and every decision about taxing, spending, punishing, rewarding and encouraging behavior has economic consequences. second, corporations like Tenneco push avidly for government to fundamentall shift its involvement in the economy with every lobbying dollar spent, which is intended to influence government to enact business and corporate-favorable programs. Subsidies of the oil industry that exist right now–that’s government involvement in the economy. And the oil companies are fighting to retain all of them. Implicit and explicit guarantees of the financial system–that’s an incredible involvement in the economy, providing cheap funding for banks. And investment banks clamored to be eligible for the largesse, even as their version of casino capitalism spun out of control. So while the rhetoric warns about government involvement, the reality cozies up to government subsidies and merely frowns when government involvement means acting to balance the relationship between business and consumer, as in the fight against the consumer protection agency provisions of the financial reform legislation and the intensive lobbying by the auto dealer industry for an exemption (i.e., for permission to go on ripping off auto consumers as they have frequently been doing).

But the most pernicious part of Sherrill’s op-ed is his warning that “people will buy into the false perception that government can fix our current crisis, which will lead to policies making our economic recovery more difficult.” Business can’t fix the crisis alone, because business as usual has become too short-sighted and too intent on rentier profits. However, government, with economic stimuli targeted to those at the bottom who are hurt the most, can do much to avert the harm of the Great Recession for its people and to provide a path for a sustainable economy out of the recession. But this blather about fearing that people will depend too much on government covers an agenda on the right to make sure that government isn’t there to make a difference for the people, so that Big Business can continue its self-interested focus without the kinds of restraints that make democracy and the economy sustainable.

Buyer beware. Much that comes in the guise of setting the record straight about American capitalism is just more of the same attempt to mislead Americans into distrust of their government and reliance on Big Business instead.

Speculation and Finance: Good for you? (part III)

by Linda Beale
Speculation and Finance: Good for you? (part III)

In a couple of prior postings (Part 1 and Part 2), I considered (1) Darrell Duffie’s op-ed in the Wall St. Journal asserting that financial institution speculation in the markets is “good” for us and (2) the question of financial institution speculation in credit default swaps on Greek debt as a possible factor in the worsening of Greece’s financial situation.

Speculation seems to be on everybody’s mind these days. The Economist, for example, is running a debate on the question of the value of financial innovation, here. Volcker famously has commented that about the only financial innovation of the last century that was really worth anything was the ATM, as the moderator noted inher opening remarks.

A few years ago America’s sophisticated financial system was hailed as a pillar of its economic prowess. The geeks on Wall Street and their whizzy new products symbolised the success of American capitalism just as much as the geeks in Silicon Valley. Today things look very different. After the worst financial crisis and deepest recession since the 1930s, Wall Street has become synonymous with greed and irresponsibility in the public mind. And while no one doubts that financial innovation made a lot of financiers extremely rich, a growing number of people question whether it did much, if any, good for the broader economy. Paul Volcker, former chairman of the Federal Reserve and an advisor to President Obama, has famously claimed that he can find “very little evidence” that massive financial innovation in recent years has done anything to boost the economy. The most important recent innovation in finance, he argues, is the ATM. Id.

The debate is about cutting edge financial innovation as came into style in the 1980s–mortgage-backed securities, collateralized debt obligations, credit default swaps and other financially engineered derivative instruments and innovations like exchange-traded funds and inflation-protected bonds. So who are the voices for the Con and Pro side on “love that speculation and financial innovation” at The Economist? It’s Joe Stiglitz, Nobel prizewinning neo-Keynesian (who should, in my opinion, have been appointed to the position that Larry Summers holds in the Obama administration) arguing against the value of most financial innovation–the “right kind” he says, could help financial institutions fulfill their core functions more efficiently, saving money and therefore contributing to economic growth. “But for the most part, that’s not the kind of financial innovation we have had.” Most of the recent financial innovations have been primarily accounting gimmicks and inventions designed to game the tax system–In my terms, those are not productive investments that move technological innovation, but shell games to fool regulators and pocket the windfall for the wealthy few. Een the inventions that had the potential to stablize the financial system actually ended up destabilizing it, because of their abuse in the furtherance of greed. And in the other corner, it’s Ross Levine, Professor of Economics at Brown, who thinks financial innovation is “crucial, indeed indispensable” for economic growth.

Not surprisingly, I think Stiglitz has the winning argument here about the questionable value of most of the late 20th century financial innovation.

We should not be surprised that the so-called innovation did not yield the real growth benefits promised. The financial sector is rife with incentives (at both the organisational and individual levels) for excessive risk-taking and short-sighted behaviour. There are major misalignments between private rewards and social returns. There are pervasive externalities and agency problems. We have seen the consequences in the Great Recession which the financial sector brought upon the world’s economy. But the consequences are also reflected in the nature of innovation, which, for the most part, was not directed at enhancing the ability of the financial sector to perform its social functions, even though the innovations may have enhanced the private rewards of finance executives. (Indeed, it is not even clear that shareholders and bondholders benefited; we do know that the rest of society—homeowners, taxpayers and workers—suffered.)

Some of the innovations, had they been appropriately used, might have enabled the better management of risk. But, as Warren Buffett has pointed out, the derivatives were financial weapons of mass destruction. They were easier to abuse than to use well. And there were incentives for abuse.

More on speculation: Banks, Credit Default Swaps, and Greece’s Debt

by Linda Beale

More on speculation: Banks, Credit Default Swaps, and Greece’s Debt (Part 2)

Yesterday, I commented on Darrell Duffie’s defense of speculation in the Wall Street Journal, here. I noted that the idea that speculation is a positive because it absorbs risk others don’t want and helps reveal the “true price” by providing more information about the speculated item seems more of a stretch in the midst of this crisis than we might have thought before. Absorption of risk only works if there is a more or less even playing field, with some long and some short, but that adds little to information or price. If there is an abundance of information on price–because traders are shorting the stock or rushing for credit default swaps, then that information will tend to swing the price and make it much more difficult for speculators to absorb the risk, as the market teeters offbalance on that item and pushes the item more and more to the cliff that the speculators have predicted.

Whatever the underlying problem in Greece, financial speculation has been a factor in tilting the balance towards disaster. The price of credit default swaps has gone up, and each time that Greece tries to borrow to pay its debt, it has to pay more and the CDS cost goes up and Greece looks riskier in a vicious cycle threatening illiquidity. Thus, one commentator notes that “credit default swaps give the illusion of safety, but actually increase systemic risk. See Banks Bet Greece Defaults on Debt They Helped Hide, NY Times, Feb 25, 2010.
crossposted with ataxingmatter

Bankers Bonuses and Bank Reforms: why they are needed, what they might include, and are you angry yet?

by Linda Beale

Bankers Bonuses and Bank Reforms: why they are needed, what they might include, and are you angry yet?

A big title for a tiny little sketch of a post, I know. Not much time today folks, but if you can read only one blog posting, read the one at Naked Capitalism at the link provided at the end of this paragraph. Yves comments on the Independent’s article on bankers’ bonuses and the Wall Street firms’ incredible egos and greed. See US Banks Reject Effort by UK Bank Execs to Reign In Pay, Naked Capitalism, 022

 Beale here: As you all know, A Taxing Matter has been hitting that same nail with my tiny little hammer. I think the evidence suggests that we need to take some rather drastic actions, which might include any or even perhaps all of the following:
  • break up the investment banks;
  • regulate their leverage and their bonuses,
  • ban their flash trading
  • heavily regulate their involvement in speculative gambling with derivatives (i.e., betting on positions that they don’t own). And given that their resurging profits are due to two things–(1) resuming the same casino gambling that caused the 2008 crisis and Great Recession and cost millions their jobs and (2) feeding off the public trough for TARP direct funding (the AIG bailout, etc going directly into Goldman and JPMorgan Chase’s pockets) and implicit guarantees resulting in very cheap cost-of-funds permitting Goldman et al to make profits with federal loans–we need to add a new tax for the big banks as a charge for the government guarantee that they are getting rich off of (again). The tax should be a substantial enough bite that it will force the banks to both significantly reduce their leverage and significantly reduce their bonus payment system. It can be either in the form of an excise tax based on their leverage (since their borrowed funding is what costs the government in terms of bailout potential) or in the form of an income tax surcharge that is progressively structured so that the highest rate applies to banks with the greatest amount of leverage. It could even be a tax structured as a tax on each derivative position like credit default swaps entered into that isn’t backed by a long position (so not a true hedge but a speculative bet). I don’t knw for sure which form is best (comments welcome) but I sure as heck think some version or another should be passed, and soon, else we are in for a repeat that is more disastrous than the GOP-gifted Great Recession we are already experiencing. _________________________________

crossposted with ataxingmatter

Quote of the Day, Economic Recovery Edition

Floyd Norris cites John C. Dugan, the man whose agency was charged with regulating AIG Financial Products in the NYT:

[T]hey believe that the banking system on its own is unlikely to have the ability to provide enough credit to sustain an economic recovery in the United States.

Gosh, really?

Norris quotes Dugan:

“We need a vibrant, credible securitization market to help fund the real economy going forward,” Mr. Dugan said this week. He was preaching to the choir — a meeting of the American Securitization Forum — but it is an opinion widely held in financial markets.

Remind me again why all those banks were “bailed out”? Wasn’t it supposed to be to kick-start the economy again?

Another View of the Data

While I applaud the cautious optimism of Spencer and Tom, I’m more inclined to quote Joseph Brusuelas:

[T]he January payrolls added a dollop of Zen like logic to a recovery that is shaping up like no other. An additional 111,000 workers entered the labor force, yet the unemployment rate fell to 9.7% while private sector employment continued to contract. Hours worked, demand for temporary workers and the hiring in the service sector all improved. However, without the benchmark revisions, the unemployment rate would have increased to 10.6% which better captures the condition of an economy that has seen 8.4 million workers displaced during the recession.

The bump in manufacturing was more than balanced by the drop in the Service Sector, as more and more flower shops cut staff in the face of slack demand and unavailable credit.

If the bank bailout was to bailout the banks—defibrillating them to kick-start the economy’s heart, as it were—then it appears to be time to admit that that program was too small. Or to stop the other programs that are making it more advantageous for banks to hold funds than lend them. Any way you look at it, the optimistic view that declining unemployment has started doesn’t appear to be the way to bet.

Tax Gimmicks then and now–sunsetting tax cuts; temporary tax hikes

by Linda Beale

When the Republicans wanted to enact huge tax cuts for individuals and businesses in 2001 and 2003 (as well asadditional cuts in other years), they realized that it would result in long-term deficits of unforgiving amounts. So they scaled back their package with a gimmick–a sunsetting tax provision that, like Cinderella’s fairy godmother, caused everything to go back to its former (natural) state on the stroke of midnight–midnight 2010, that is. Thus, they were able to claim that their package of cuts was much less costly than it would be if their plan to make the cuts permanent before 2010 rolled around materialized. It was smoke and mirrors–“we’ll do this and claim our cuts are cheap; once the cuts are enacted, we can accuse anyone opposed to making them permanent of raising taxes and no one will remember it was our gimmick to cover the real cost of the cuts. ”

The gimmick succeeded in many ways.

  • First, Barack Obama felt his chances of election were threatened enough by the status quo devotion to the current rates that he promised, in an election that was his to lose, that he would not raise taxes on anyone making less than $250,000 a year. That was nuts, for several reasons. For one, the economic crisis: By the time of the election, we were in the midst of a calamitous crisis brought on by the reckless Reaganomics of deregulation, privatization, militarization and tax cuts, with programs already underway of huge outlays from the federal treasury to compensate for the credit crisis and expectations on every side of a need for a gigantic stimulus package to re-start the economy. For two, the problem of appearing to engage in class warfare. While I think the wealthy should be targeted for much higher taxation after years of preferential treatment for their income, it would have been simpler just to argue for letting the Bush tax cuts die their natural death and then instituting in finely targeted tax cuts that would be much more beneficial to economic growth, along with finely targeted tax increases to do the same (such as elimination of the capital gains preference). Didn’t happen.
  • Second, once rates are in place, the right-wing propaganda machine starts churning and repeating a twisted version of reality. Americans aren’t very well trained in economics or finance, and we are too easily swayed by people that come across as genuine–we still buy snake oil from the traveling salesmen. So Beck and Hannity and their ilk have been pedaling the snake oil that letting the Bush cuts lapse is a tax increase, that government is evil and all taxes are theft, that it’s the Democrats who’ve caved to the Wall STreet millionaires (rather than the Bush regime, with its talk of its constituents being the “haves and the have-mores”). So people are primed to think they are overtaxed and get nothing for it.

As a result, there’s a good chance that most of the tax cuts–including the low capital gains rates and treating dividends as capital gains and all the tax breaks for multinationals– will be made permanent, or at least extended from year to year.

Will it work the same for the reverse application of the gimmick? Bill Richardson, governor of New Mexico, is trying to find a way to balance the state’s budget. States are suffering especially now during the crisis, as tax receipts are down at a time when folks are struggling with foreclosures and loss of jobs and need more in social services, not less. Richardson, who will propose a new executive budget to the Legislature on Jan. 19, plans to ask for a temporary $200 million tax increase as part of the means of meeting a $300 million budget gap for fiscal year 2011. The governor isn’t proposing specific tax hikes, but leaving it up to negotiations with the Legislature. Regretably, he has said that he is opposed to increasing capital gains taxes or personal income taxes or decreasing business tax credits and incentives, so he hasn’t left room for much other than the “sin” taxes that tend to be exceedingly regressived or other types of excise taxes (gas production has been mentioned).

Governor’s should remember that what they do now has long term effects. Naming something temporary doesn’t mean it will actually be temporary. States might do well to think about their long-term needs, and whether a change to the way they tax capital gains or a more progressive personal income tax or an addition of a VAT tax might be the best way to increase revenues for now and for the future.

crossposted at ataxingmatter

What the Frock was the reason for TARP, TALF, etc. then?

Rahm Emanuel accidentally Tells the Truth and Shames the Devil:

“We have to get them off the sidelines and get them to play a more active role in our economic recovery,” Rahm Emanuel, the White House chief of staff, said on Sunday. “They play an essential role in helping the economy grow.”

Gosh, the Administration has noticed that the banks have been “on the sidelines” (read: reaping windfall profits from tax dollars and funneling those funds to themselves). Guess

Brad DeLong probably will be next. (At least, he seems savable.)

Subtle hint to the Chicago School (who are not savable): the reason we don’t believe Monetary Policy works is that it hasn’t worked.

(h/t Lance Mannion’s Twitter feed)

A Year and Counting: re-regulation of Wall Street

by Linda Beale

A Year and Counting: re-regulation of Wall Street

On Monday night, I participated in a symposium on the Financial Crisis: One Year Later, sponsored by the Center for the Study of Citizenship and others. With me were Larry Ingrassia, Business Editor of the New York Times, and Chip Dickson, CFO of W2Freedom, a private equity fund that purchases community banks. We talked about the causes and potential solutions to the financial crisis and the Great Recession that it had spawned. Much of our focus was on the way financial institutions had grown “too big to fail”, creating a “casino mentality” that assumed that the government would come to the rescue if needed, thus socializing losses while privatizing gains.

As Amity, a commenter on Salon’s post by Andrew Leonard on Wall Street’s risk-taking, noted:

The whole point of society is to moderate and channel wild animal impulses into productive forms. In keeping with that purpose, we as a civilization once saw fit to impose on high finance a series of regulatory restrictions and frameworks for oversight so as to moderate and channel the risk-taking behaviors of financiers.

Then we as a civilization saw fit to remove those restrictions and oversight. The result was as foregone, and as predictable, as if we were stalling an aircraft and letting gravity take over.

I kicked off the discussion session of the symposium with the following question:

It’s been a year now since we were hit with a financial system tsunami, and recognized that we had let banks get “too big to fail” and speculation in derivatives explode. Yet here we are, one year later—we’ve actually encouraged banks to grow larger; we have not yet enacted any regulation of derivatives; we have not yet enacted any tighter regulation of hedge funds and private equity funds or the “shadow banking” system generally, we have not yet formed a consumer financial protection agency—in fact, we’ve done essentially nothing to change the conditions that apply. What does this mean, in terms of the stability of the financial system?

I’m not sure that there is a satisfactory answer to that question. Because it suggests that our political processes are now so beholden to the corrupting influence of the financial behemoths that we will not be able to find the will to rein them in. See, e.g., Robert Reich, so much happening in D.C., so little to show for it, (Oct. 9, 2009) (lamenting the fact that “Congress is overwhelmed with corporate and Wall Street lobbyists”).
(cross posted from ataxingmatter 10/09/2009)

Update: Barney Frank and the SEC on derivatives, Naked Capitalism