Economics - Article sent by Jonathan A Weiss Esq. Elder Law           


Preface

Contemporary economics is in a mess. The field contains only three seminal geniuses, Marx, the last of the classical economists, Veblen, the iconoclast, and Keynes the man who delved into complexity. The reality discloses, analogous to abstraction, how matters not only take on a life of their own, but can contain entities and concepts not originally included in the initial concrete reality confronted. The characters are therefore concrete, derivatives from these, and derivatives from derivatives. The plot is how people are affected on the one hand and how constructed environments operate on the other. The style depends on who is speaking, classical economics, free market, laissez faire, pseudo mathematics (borrowed from obsolete physicists formulae and game theory), social commentary, and abstract analysis. The following observations in this framework move from the general to the current disaster occurring as I write.


The Field of Economics

Economics deals with goods, activities, assets, desires, and the theories involving their transactions. Goods are objects used by individual for sustenance, creativity, and even enjoyment (sometimes called “labor.”  Activities are what people do to use, produce or obtain such goods. Transactions are how these goods are obtained; and then how items employed are used as goods in their own right. Desires include motivation, attitudes investing goods will values in themselves, attitudes towards those items used for transactions such as barter, raising capital, and dealing with capital in the field.

A most difficult subject is the nature of money. Marx and Keynes have written brilliantly about its history and meaning. We can accept that its origin is in a means of facilitating barter as items of no intrinsic worth (although sometimes valued for its uses - e.g. gold, diamonds) but it does take on a life of its own.

The classical view is that value is measured by the labor required to produce it. Both Adam Smith and David Ricardo based their theories upon it. The former then moved to believe that markets which are facilitated by money operate rationally to argue for laissez faire to let the markets work with reference to protecting some industries, ethics, and the market itself (hence an opposition to monopolies - horizontal and vertical can be introduced.) Ricardo developed three important theories: the Iron Law of Wages, the Iron Law of Rent, and the doctrine of Comparative Advantage which prescribed that when one country could produce product a cheaper than product b and another vica versa that they should only produce the cheaper item and sell the comparatively more expensive item to each other.. The first two were used to by Marx to prove that capital accumulates to the detriment of workers (engrafted on a mistaken Hegelian use of history to produce inevitable change towards a proletariat utopia). The third led to “free trade” producing banana republics, thinking of production as static rather than evolving, and not calculating the cost of exchanges. The first two also postulate that the value ascribed to thing (see money) is the result of supply and demand (although later disciples accept “inelastic demand” for those things valued highly no matter what and so sought.) They would be better described an need and potential productivity to be useful in any system.

After Marx’s proof that classical economics led to an economic disparity inducive to a revolution, the doctrine of value based of “supply and demand”began then to dominate.  Value was then calculated as the effect of these two forces in a “free market” (implicitly ignoring macroeconomic forces, speculation, time lags, and intensity of those forces, etc.). Some even reduced this theory to mathematics, the first I believe, Quesnay. This doctrine was thoroughly demolished by Veblen yet surprisingly it arose in the mid-20th century (the “Chicago” school whose theories when implemented caused so much harm.) The result in the academic world was the importation of obsolete theories in physics; in the financial market it was used politically to the advantage of those who had (and often hoarded) great wealth be they individuals or corporations.

No one has focused sufficiently on the value of things in themselves. We enjoy arts, nature, and each other (even loving some individuals) without labor to produce them or money able to stand for them. The labor produced is valued often by money.  And money is often used to obtain goods of value but it functions as one among many factors including speculation. What you possess of these forms assets.

Veblen destroyed the basis of classical economics by demonstrating it rested upon a mistaken view of human beings that they were immediately acting economic units responding to changing possibilities.. He further destroyed the idea (first Quesnay at the end of the 19th Century) that economics could be studied by mathematics.

Among Keynes’ contributions is the multiplier effect. He pointed out that a dollar spent is different than a dollar hoarded for it can be used by many people to have its effect be as of many dollars spent. Such an idea leads to directing money to those who spend it.

The Mess We Are In 2008 -  - Or Some Relevant History

The original idea behind the Stock Market was that it would raise capital by investment so people could purchase items and ideas to create products that were worthwhile by giving them capital in return for a profit for that investment. It then grew like Topsy. Stocks took on a life of their own (as did commodity futures - paying in advance for goods at a lower price to get money to farmers and then selling them at the higher price when delivered “in theory”). People started to buy and sell in order to make money without concern of on what they were based. (Fundamentals used to mean the price of the stock based on how much it earned - or expectations thereof). People were allowed to go out on “margin” and purchase stocks by only putting up a percentage of what the stocks cost which could work for speculation if the stock went up but work disaster when the stock was “called” and the rest of the money demanded for stocks worth less than the original price. Recently betting on betting developed: puts and calls, selling short or long - promising to buy without putting the full money in at a later date based upon the individuals estimate of what they were worth in the future. Into this area in this epoch of deregulation, derivatives arrived..

Derivatives are treated as if they were money which is based upon some value but they are not. They are based upon “leverage” constructing price out of manipulation. So mortgages are sold in groups (be they ARMs, Ninjas, or suibprime) and those groups into other groups so the value of the final product can be many times (e.g. 25) the value of their claimed basis. These derivatives are further complicated as swapped as if they were real money assets between banks, auctioned, used as a basis for loans between banks and others, etc. There are also derivatives based on capitalistic predation. Private equity firms purchase “distressed assets” assume the debts for various accounting and tax purposes then segment, package, and sell those debts (which are worthless if the purchasers plans fail.)

At the same time, we have a credit  loan transactions occurring. Although they should be treated as contracts and subject to fraud claims and usury they are not. (In this country the usury problem results, in part,  because the Supreme Court allowed credit cards to charge interest based on the State laws they picked.) These transactions deal with more money in the future (usually extended over time) than they do in the present. Student loans in which installments are paid over long times and payments applied against the principle can amount to more owed after years than borrowed. Credit cards with additional devices make purchases cost more over the long run by quite a bit. Installment purchases always cost more than cash. The result is a creditor expectation of increased money over time which has to come some way from the consumers. Bankruptcy allowed for some individual adjustments but recent changes have made it impossible to get rid of credit card and student loans. It is quite likely that the next real “liquidity” crunch, e.g. future expectations of credit payments frustrated will come from the accumulated credit card debt, particularly when people are collectively earning less.

It should also be noted that creative accounting enters. Not only are corporate structures, payments, and benefits unscruitnised, hedge funds, derivatives, and commodities kept out of view, but accountants can make money status look differently than it is. (Sometimes it is not even necessary as when banks swap loans to list the loans due as if they were assets at the amount expected.) The calculation of assets, the estimation of receipts, the probability of payment, the exposure to law suits, the liabilities to other organisations, the costs projected can all be manipulated so that no one has a clear idea of what the actual monetary inflow and outflow really is. In this way, people, who are not insiders (and even they sometimes) can be mislead about the value of a company, project, or stock.

With the repeal of the Glass Steagall bill, banks were allowed to do more than lend on value (the loans of course effecting the value set in money) and allowed to engage in investments such as in derivatives and companies. (This is also how they were - and financial institutions - war allowed to grow so large that it was claimed they were too “big to fail.) It should be noted in this connection that the Madoff Ponzi scheme was enabled because he kept all three functions, custody, investment “management”, and brokerage together under secrecy. Insurance companies were allowed to create reserves from which to pay claims (administration and profit - which should also mean CEO salaries) while stripping regulation and oversight from other transactions (e.g. commodities) in the same repeal pushed by Phil Gram and back by Bill Clinton and Bobby Rubin.. Yet these insurance companies ratings were necessary to assure people of the value of what they purchased (See municipal bonds ratings - like AAA) rather than the probability of payment according to promise. They also were allowed to engage in predatory loans with a system that those who obtained the loans were paid commissions and bonuses before the loans were paid off resulting in subprimes (some even with no payment down “ninjas”) and payment systems in which the interest went suddenly up. These were the loans that are now considered “toxic” and were bundled with other loans and rebundled to create leverage - instruments achieved which were multiples of the original loan’s theoretical values (as evaluated at a present moment before the loans were even partially paid significantly)

At the same time, two terrible problems arose. (1) Risk was encouraged (2) Things are done in secret. Hedge funds exemplify both. Large sums of money are handed to their handlers (note there is no specific training or licensing to be a “financial manager”) with nothing but a “trust me, I have done well” and restrictions about taking it out. As they got 2% for each transaction and 20% for increase in money valuation, if they have a successful big risk they do well; if it fails they can walk away with the money they had obtained by risking others money. CEOs are paid in stock options as well as outrageous salaries. If they gamble and the stock goes up, they cash in; if it fails they can walk away with their swag.

A Ponzi scheme is when you sell something based on little or nothing and other people keep on buying. (Never forget all these people are geniuses in the rising “market” and by the law of distribution some will always do well). Ponzi schemes abounded in real estate (e.g. Florida) just as mortgages become due to those who could not pay but were persuaded by predators earlier they could do so. The result was a collapse of real estate and bad mortgages.

Picture a pyramid on its tip. The tip is rotten so it starts to fall. Putting bricks in above (the outrageous “bail out” a gift of power to the monetarist from Goldman Sachs to buy anything after his monetarist theories were proven failure - monetarists are those that believe in manipulating money flow by interest rates, etc. is a major or the major determinative factor in stock and other markets) is sure to fail.

Another way to understand this situation is to return to the concept of leverage in which instruments are created with higher prices than the components as we described (sometimes by a multiple of 25.) When the system collapses the leverage grows in reverse. Worse, the effect upon the psychology of those who buy what comprised the material basis of the original value is not to buy so that the reversal can go below even the previous basis.

Both of these models are more favorable than the reality. The new concept is “toxic assets.” Ninja loans (no income no job no assets), “subprime” mortgages (i.e. bad credit risk), “under water” mortgages (ie. house will sell for less than the mortgage) means that there is less of a point for the pyramid than even ½5 th of the leveraged accounts. Ironically capitalist greed exacerbated this condition. By excluding from bankruptcy credit card and student loans, an individual can not go bankrupt and continue to pay and own a house since those debts must be “serviced.” The loss of home leads often to loss of income from dislocation so all the debts interact to build on each other.

Three other factors have been ignored. The first is the role of Private Equity firm unsupervised and hidden maneuvers in purchasing weakened companies (often public in the sense of having stocks) for tax advantages, for leverage using the companies obtained as collateral, and exercising monopolistic control of some markets sometimes, etc. Not only might these leveraged buyouts collapse but also at best they destroy local faculties and jobs. The second lurks behind the cliche “too big to allow to fail” for investment companies since the remaining companies are now much larger having swallowed the smaller ones. The implication is clear - they can act with impunity and immunity, of course, including executive compensation. The third is the repeal of the Capital Gains tax (1997) for house sales which led to overinvestment in the housing market.

Behind all of this lies years of social policy (ultimately as destructive as the radical roll back of the progressive income tax and “excess” profits) designed to make people buy houses with the often explicit assumption that real estate investments always appreciated in value (compounded in tax as policy giving deductions for mortgage payments.) It should also be noted that this part of the “American Dream” was associated with cars and resulting highways, suburbs, shopping malls, etc. Peoples’ assets were tied up in houses so to spend they sought credit not only based on their ownership but by installment purchases (particularly cars computer connected devices and appliances, credit cards, and loans. In the recent past, the price of houses ascended rapidly (as they are now descending). To keep up the American worker now works much more (and has family members who do so too0 with increases in productivity going into profits pocketed by the rich furnishing a Marxist scenario. (In Europe, in contrast, workers’ hours are down.))

All of this disaster was not only predictable but with clear historical precedent, even if the economy and “investment”  now much more complicated, and if anything, more secret from the public and their “expert advisers.”  J. K. Galbraith’s , The Great Crash: 1929 detailed what happened then (substitute the improperly called “hedge funds” for “investment trusts” which bought collections of investments in the market and margin as generic for “puts and calls” etc.). Leveraged investments went into reverse also reflecting the “fundamental” problems in the economy such as under capitalisation, foolish speculations, expansions, production diminution, and interaction with foreign markets. (Galbraith pointed out that among Churchill’s many sins, including racism, was tying the Pound to gold resulting in an honored request for loosening of American market credit.) This book is well known, the parallels obvious, but the monetarists (and authors of the “bailout” better termed the “failout” aka Goldman Sachs, a fool in 1929 too, attempts to bail out Goldman Sachs) and their expert partners in complicitly, claim surprise and belief that the market will eventually work by some unproven but magically inherent stability.

Currently, too little too late, the monetarists now are giving guarantees to banks (in 1929 the failed guarantors of “organised support” to the market) so they can lend money without risk therefore theoretically freeing up credit (ie. the general ability to borrow and lend). Even if there is more credit, it will not create enough of a multiplier effect. The banks, again can save neither market or buyer aversion (although belated attempts to be strict with credit - unaffected by giving them easy money - does constrict the market.)  Of course, banks continue to operate in secrecy with much executive outrageous pay packages and cumbersome administration in expensive real estate so money given to them is not accounted for and likely not countable or traceable. What is needed. instead,  is money in the hands of those who will spend it in their communities  - the poor and working class. Bring back the New Deal, the Great Society, mass transportation and create high speed trains and ecological advances. Remember the Keynsian multiplier so money should not go into capital hoards but where it will be spent where other people will spend in term multiplying its effect.

Even if various markets recover many will still have been victimised to a point that only direct money payments will restore their lives. For years employees were required to buy stocks in their company as “savings”, pressured to put their investments into the company’s stock, and often their pension was based on that company’s stock. As companies collapse (e.g Enron) these people have nothing on which to live except some Social Security in some cases. Those who have lost their homes even if some mortgages are now kept going are, by definition, homeless.
Individual catastrophes multiply to have a negative economic effect on those whose greed distorted even a “free market” fantasy model. Meanwhile the focus, again ironically, is on mismanaged investment companies who are “too big to fail.” The cart which broke down should not be put before the living horse but the political power of these financial manipulators has led to this inhumane and unwise priority.

There is a depression well underway. Expectations of credit valuations holding up have collapsed along with real (e.g Maddoff_  and pseudo Ponzi schemes. Whether one is a Marxist or a Keynsian the only way to solve the matter is to have many people at work producing value and able to increase the amount of payment to institutions that provided and will provide credit. The government can inject money into the system which may give temporary liquidity but that will not address the long term problems and contractions.

Worse than 1929 and not widely noted is the fact that manufacturing which used to about a quarter of the (GNP now GDP) is now near 10%, while “finance” or finance services has reversed those percentages. The tip of the pyramid is more full of air holes than ever before.
Also, of course, money now has to be printed to pay off the enormous money “lent” and “bailing out” large entities, let alone to invest in the infrastructure and help the victims. Inflation, more than now which is considerable but not mentioned (waiting for the other oily shoe to drop too) which the monetarists would want to control by raising interest rates but are now committed to keep low (e.g. for for treasury bonds). A double bind as it were.


Oversight and reregulation are necessary but not sufficient with implementation. In my opinion, prosecutions with the aim not only of deterrence but restitution against those who have accumulated wealth by knowingly “gaming the system” is one first step. Vigorous enforcement of regulations is another. Of course, a new Glass Steagall bill is necessary, prevention of usury, and elimination of leveraging and combining etc. Is also desirable. But at the end, it all comes down to prevention of treating future expectations as current money except as necessary for long term productivity, having people create what is valuable in use for others, and preventing the Marxist nightmare of concentration of wealth in a few.



Current Solutions - Or How To Avoid A Marxist Outcome

The short term solution can come from Keynes. There should be money directed to those who will spend it immediately particularly with those who will also spend it quickly such as local stores, etc. Obviously a lot into entitlement programs food stamps, unemployment, medicaid, medigap, even increasing Social Security, welfare in part as we knew it Particular immediate attention must be given to those who lost their homes, jobs, and savings due the predation and financial failures.. The Pension Guarantee fund should be filled with money so it can cover pension commitments, a stop and reversal of pension destruction implemented so retired people are not destitute but have money to spend. Funds indexed to inflation should reflect a properly calculated figure (rather than the current CPI with happiness and substitution components) such as one based on empirical data of what normal purchases and necessities cost for the majority of consumers who buy them .Regulation must be instituted to expand through the next stages.

The middle term solution is three fold, connecting social policy and the Keynesian solution. Bring back the programs of both the New Deal and Great Society to do environmental work (AAA), lodgings, repair the infrastructure, replacing then tearing down high-rise public housing, job training, Head Start, Peace Corps, Vista, artistic projects (WPA), day care, neighborhood (senior) centers with social work (and outreach), home economics, living placements, community activities. Then a massive investment in inter-city high speed rail and local mass transit. Big financial institutions should be dissembled (capitalism works best at a local competitive level in any event.) Private equity taking over companies should be outlawed or radically reformed with strict regulations protecting workers, communities, and competition.
Government should return to regulation pre Carter days even more strict, comprehensive, and universal for corporations and finances. Big financial institutions should be broken up into little community responsive agencies not “too big to fail” and opaque with large capital sources apart from the government coffined to specific fields where the capital provided is based on clear projections and limited to them rather than acquisitions leading to excess power and monopolies.

The long term solution invokes social policy, Marx and Veblen in a cultural context. First, abolish all derivatives and securities (treated like money) so that stocks are investment almost exclusively in future productivity, put in a real progressive income tax, a highly progressive estate tax. Agrobusiness should be broken up - loans to farmers to grow Federally controlled on reasonable expectations and interest to be paid at harvest. Owning a house should not be considered part of the “American dream” or the major lifetime investment but rather low cost housing should be provided for those on fixed incomes mainly from pensions and the government, rent control extended universally (including small commercial enterprises) with renting encouraged. Commensurate with the expansion of rail transportation, although there should be no tolls on motorways (let alone for private industry) car ownership should also not be considered part of the “American Dream.” Of course, for those who are destitute (and who will spend money immediately) all assistance should be given, housing, transportation, food, and income, considered finally as rights. To pay for all of these changes, in addition to increased tax revenues, the shrinkage or abolition of spy and war agencies should occur, including the FBI, CIA, Pentagon, Bureau of Alcohol, Tobacco, and Gun control. Imprisonment should be protection from proven wrong doers rather than a growth industry predicated on police misconduct and drug laws. The past capitalist predators should be jailed, however, for the deterrent effect. Monopolies must be broken up, including the media (licenses granted for short duration on first come first served basis with a waiting list) with a movement to have co-operatives and labor run (and sometimes owned  - syndacilism, Daniel DeLeon)  factories, etc. Obviously the Taft Hartley law should be repealed and protections for unions installed.
The tax code makes economic and social policy. The progressive tax system (even as it was under Eisenhower), heavy estate and luxury taxing (private yachts, jets, etc.) And “excess” profit taxing will also both restore some good social policies and raise revenues. A return of Capital Gains tax on house sales will redirect investment and garner money for the Federal government.


Is any of this realistic? Some. Will any of it be done? Let us hope so.

Lot's of Good Articles to complete the Argument


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How Obama Can Fix Another Bush Disaster: The War on Workers
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Krugman on Obama's Massive Tax Cuts Plan: 'Bad News'
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Rep. Hoyer Says Employee Free Choice Act Will Pass In 'Early Spring'
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People have been worried about how committed Democratic leaders are to passing the bill. Hoyer set everyone straight this morning. Read more »