Sunday, February 24, 2013

Today's links

1---Drop-off in first-time homebuyers troubling, Seattle Times

2--Housing starts fall as confidence declines, yahoo finance

3---Big banks are as risky as ever, economist warns, CBS

From putting in a safety net in order to have a safer system, we ended up enabling more borrowing," Admati said. "As a result, equity levels declined almost continuously from 25 percent down to the single digits over the 20th century. And then, in the last 20 or 30 years, banks have found clever ways to borrow through derivatives markets and other innovations. That allowed more borrowing and also more hiding of leverage."
Debt-laden banks have little margin for error. When financial conditions sour and their assets lose value, they can get into trouble in a hurry. Indeed, this debt "overhang" can destabilize lenders even before a downturn hits. That's because borrowing amps up a bank's financial gains -- including executive bonuses -- while losses are shared by creditors. Given this misalignment in incentives, borrowing begets borrowing.
"We have to fight back against this addiction to debt," Admati said. "It's as if someone is driving too fast -- we have to slow them down. There's too much collateral damage."...

Admati's preferred fix is for big banks to use much more equity to fund their assets and investments and much less debt. After all, just as homeowners are less likely to get foreclosed the more equity they have in their houses, so banks are more likely to remain solvent the more equity they have in their business. Enhancing a financial institution's ability to absorb losses by requiring them to hold more equity also reassures a lender's depositors and creditors, guarding against the kind of crippling bank runs that paralyzed the financial system in September 2008

4---The Wage Theft Epidemic, In These Times

5---Is the US facing a housing shortage?, sober look

Homes available for sale as well as the housing supplies measured in months are now at pre-recession levels, while household formation continues to recover (see post). This development was predicted by William Wheaton back in 2009

Forbes: - Most striking however is the fact that inventory has contracted to its lowest level since December 1999, more than 13 years ago. The number of available homes, which is not seasonally adjusted, fell 4.9% from December and is 25.3% lower than a year ago. With 1.74 million homes on the market, at the current sales pace, supply will be exhausted in just over four months. It represents the lowest housing supply since April 2005. In a normal market, a healthy supply level is about six months.A number of economists continue to talk about the shadow inventory - the millions of homes that are "about to hit the market" as homeowners have or shortly will fail on their mortgages. Some evidence suggests that in the more depressed housing areas banks are indeed sitting on foreclosed properties, unwilling to sell. But a number of banks have also been aggressively modifying mortgages, reducing principal and interest, and therefore cutting delinquencies.

Clearly many more homes will be hitting the markets this year. But it really doesn't make much difference if people who move out of these homes end up buying or renting - they need to live somewhere. And according to the Census Bureau, rental vacancies are near a 10-year low.

6---Major Banks Aid in Payday Loans Banned by States, NYT

7---Insane Levels of Inequality – Which Hurt the Economy – Are Skyrocketing, washington's blog

But inequality in America today is actually twice as bad as in ancient Rome , worse than it was in in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America.

Bloomberg reports:
The financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy [to the banks by the public]. The result is a bloated financial sector and recurring credit gluts.
Indeed, the big banks literally own the Federal Reserve. And they own Washington D.C. politicians, lock stock and barrel

8---The stock market bubble, wsws

9--Marx vs Keynes, Yanis Varoufakis

Marx’s theory of capitalism is, thus, a splendidly narrated tragic tale which captures beautifully the basic contradictions built into capitalism’s foundations. However, and here I think Keynes’ contribution enters the stage, there is something important missing in Marx’s analysis of crashes and crises. What? The possibility that, when the ‘faeces hits the fan’, and some monumental, as opposed to run-of-the-mill, Crash occurs (as it did in 1929 and then again in 2008), capitalists will simply fail to play the game that Marx said they will. What game is that? Of investing in capital goods, production, labour, every penny they have accumulated as a result of past and present profits. Instead, as Keynes so eloquently said: “The modern capitalist is a fair-weather sailor. As soon as a storm rises, he abandons the duties of navigation and even sinks the boats which might carry him to safety by his haste to push his neighbour off and himself in.

The main point here is that Keynes rejects a standard assumption all his predecessors made, including Marx: that all profits are automatically re-invested. Keynes’ argument is that whether they are or not depends on average optimism; recall the little game that I used in the original post as an illustration of the importance of optimism. Marx left no room for optimism in his analysis. This is why crises, in his theory (e.g. Vol. 1 of Das Kapital), are redemptive: they generate misery but, also, they immediately start the process for the next recovery.

Why did Marx not consider the possibility that a recession, a crisis, can lead to a depression, a capital ‘c’ Crisis? Because, the answer is, he was in the business of, what David and I refer to, immanent criticism (see below for more). And what is immanent criticism? In brief, it is the following: You take the establishment theory, the dominant paradigm, and you refrain from criticising its basic presumptions. What you do is to show that, by its own criteria, on the basis of its own assumptions, the model (or theory) which the Establishment accepts as valid, produces ‘subversive’ results. Nothing upsets the Establishment more than to have something like this demonstrated; that its ‘favourite’ theory recommends views and policies which are detrimental to the Establishment’s own ideology.

In practical terms, what Marx did was to take the model of capitalism that had the most kudos in his time (i.e. the theories of Adam Smith ad David Ricardo) and show that, by their own criteria, and under the force of their own assumptions, even the most efficient, most competitive, corruption-free capitalism would, unavoidably generate crises. To show this, Marx strove to demonstrate that, even if all profits were automatically saved, capitalism would periodically fall in deep holes of its own making. This was quite an achievement; one with lasting value. For it alerts us to reasons why crises occur in capitalism; reasons that go well beyond the creation of (Austrian, Hayek-like) bubbles, of a depletion in optimism (negative animal spirits, as Keynesians might have called it), of over-indebtedness by governments, corporations etc.

And Keynes? Without ever having acknowledged Marx’s contribution, he instinctively understood something important about capitalism that Marx did not allow himself to dwell upon: that when capitalism digs a hole and then falls into it, it is perfectly capable of failing to climb out again. You see, the difference between Keynes and Marx was that Keynes believed in capitalism; he thought of it a little like Churchill thought of democracy (a terrible form of government but the best of all available alternatives). In fact, Keynes was eager to save capitalism from itself; to identify faults in its functioning and fix them so as to prevent crises from turning into implosions with the capacity to undermine its long term future.

Marx, on the other hand, had an agenda for transcending capitalism (socialism, he called the ‘next’, more developed, phase). For this reason, his analytical endeavours were all about concentrating on a utopian capitalism (one in which, for example, all profits are automatically invested) in order to show that, even in its utopian guise, capitalism is irrational, inefficient, unnatural, wasteful.

Which brings us to Great Recessions and the likelihood that they may turn into Depressions. Marx had no time for this question, dedicated as he was to showing that even an ideal form capitalism ought to be ‘overcome’. Keynes did. Having questioned the automatic investment of all accumulated profits, his mind was ready to explain the 1930s Depression in terms of a failure of the redemptive powers of the capitalist dynamic. Today, here in Europe, Keynes would busily apply this insight to explain the eurozone’s failure to respond to austerian policies and to recover even though labour costs and interest rates are falling fast. Whether Marx would have done the same, or rather concentrate on treating the Crisis as an opportunity for bringing about a socialist eurozone, is not a question that I think it is fair (to Marx) to answer.
So, back to David’s original question: Am I overly concerned about ‘recovering’ the ‘real’ Keynes? No. Indeed, I am utterly uninterested in any of the dead white men per se. I am just keen to retrieve Keynes’ precious idea during the time of Crisis (and, in the case of Greece, a Depression): that once negative expectations dominate the mind of capitalists, drops in wages and interest rates will do nothing to restore investment and growth. Why? Because these negative expectations suffice to generate a negative-expectations (a ‘bad’) equilibrium that Keynes grasped (in the manner I explained in my previous post) but which his IS-LM-Samuelsonian ‘Keynesian’ followers are forced to bypass (courtesy of their models’ construction).
Finally, at the political level, David’s question boils down to this: Is the Crisis not an opportunity to go beyond a discussion of how to bring about capitalism’s recovery? Is it not the right time to discuss ways and means of transcending capitalism? My answer is simple: Like David, I too disagree with Keynes on the intertemporal merits of capitalism. Marx was right: capitalism cannot be civilised by means of some benevolent government that applies the right dosage of fiscal and monetary policy at the right time.

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