Too big to bail banks are still a problem

by Glen Wallace

 A decision needs to be made regarding financial institutions as to whether they are a capitalist private enterprise or a public utility -- they shouldn't try to be both at the same time. Well, a bank can be both at the same time but we saw the consequences of attempting those dual roles in 2008. I'm concerned though that the government regulators and politicians have not learned the valuable lessons of the great recession. Instead there seems to continue to be an intermingling of poorly regulated or completely unregulated speculation on risky derivatives by the same financial institutions providing both needed business and personal lending and insurance, and also wealth management of retirement and life savings of individual citizens.

 If, say, the speculations on derivatives were to fail spectacularly, as they did for the failed financial institutions in 2008, would any jeopardizing of large bank standing on the losing end of those bets, amount to a corresponding jeopardization of the flow of lending capital keeping the business world running and the funds of savers entrusting their savings and investments in those jeopardized banks? If so, then it seems that would be prudent to take measures to completely separate banks engaging in traditional lending and cautious, well regulated investing, from investment banks that are willing to take on the risks associated with derivative trading.

 A possible world needs to be envisioned where we imagine that a given bank fails, and decide whether letting it fail will jeopardize the entire economy of the country and therefore will need to be bailed out by the country or if it will be largely just a loss for the shareholders of the bank. If it is the former, then either a separation of the risky investment banking element from the conservative traditional banking element needs to be done, or the bank needs to be broken up into smaller pieces in a manner similar to the actions by Teddy Roosevelt on Standard Oil Corporation. We need to keep taking those measures until we wind up not having to bail out any financial institution, outside of insured deposits, regardless of the scenario.

Michael Hudson, how do we extricate the economic parasites from the main street host?

Comment I posted following the above youtube video speech by economist Michael Hudson.

by Glen Wallace

I still have some questions.  I guess my main question, from which all my other questions or concerns regarding Michel Hudson's philosophy, revolves around how to safely extricate the parasitic elements of FIRE (finance, insurance and real estate) from the main street host.  I  say, the parasitic elements of FIRE, because I think it oversimplifies things to imply that all of FIRE is a parasitic malevolent force on society.  But reading and listening to Mr. Hudson, it isn't entirely clear to me whether he thinks all of FIRE is parasitic or for what aspects are so, how do we go about the extrication process safely.  It would seem to me that we living in a much more complicated situation insofar the parasite and the host are sharing the same 'blood supply', so to speak.  Therefore, just yanking off the parasite could be very hazardous to the health of the host.  While the top 5 percent may own the bulk of stock equities, I think a lot more than 5 percent of the population own a significant amount of stocks, usually through their 401k's or 403b's and IRA's.  So any actions that has knock-on effect of crashing the stock market and a lengthy trough could be financially devastating to much of the remaining middle class population.  While maybe the markets and the economy could have let Citibank fall, I'm not so sure about AIG.  While lending may be currently tight, correct me if I'm wrong, but I believe there is still a great deal of small business lending going on with banks and credit unions providing loans for businesses very frequently.   However, if that lending were to really dry up completely as we were warned could have happened if not for the infusion of stimulus cash into the economy soon after the fall of Lehman Brothers, then wouldn't we be facing an economic crisis on a scale severe enough to lead to a civil emergency similar to a natural disaster?

Further complicating matters, isn't that there is a legitimate element to each area of FIRE.  How are we going to, in any parasite extraction process, separate any legitimate actors from the malevolent ones?  I'm not saying it can't be done, but we need to make sure we aren't throwing the baby out with the bath water, so to speak.  To take an analogy from the movies that I think has some realistic relevance to main street finance -- let's make sure we don't take measures that bring down the Bailey's Savings and Loan of the world while trying to go after the Potter's empire of the world, from the movie 'It's a Wonderful Life'.  And to take examples not from the movies but straight from today's economic realities -- in terms of a mass discharging of debt, that sounds nice for the students facing mounting student loans but it doesn't sound so nice for the current and future retirees expecting municipalities and corporations to meet their highly underfunded pension debt obligations.

I don't mean to be a naysayer but we need to come up with a plan where we have covered all the bases so that we can not only answer the tough questions, but also to get to where we are to trying to go.   Indeed, I'm concerned that if we were to implement a plan, for instance, that did crash the markets and dry up small business loans, then the parasitic malevolent elements would sweep in like the Potter character from the movie previously mentioned, and say to the effect "see, you were wrong all along, so from now on let me do the thinking and planning while I buy up all of your land and shares for pennies on the dollar."

I have all sorts of ideas myself for how to go about the parasite extraction process.  I think Bernie Sanders has some good ideas that are a good start, but I think we can safely be a lot more aggressive with progressive reforms than even he is suggesting.  For instance, I haven't heard Sanders even mention what I think we need to delve into and that is Federal asset taxes on corporations and the top one tenth of one percent of individuals.  That, and we need to access revenue from other novel sources as well such as a Wall Street high frequency trading machine transaction tax.  We can also get revenue from increased Tariffs and Excise taxes.  We should also be better leveraging revenue when natural resources are extracted from federal lands.  Personally I would rather Federal lands be preserved as much as possible in their natural state, but if it is already decided to sell some of the land's resources, we might as well do so in a financially responsible manner.  So, instead of selling off the rights to all the timber in a tract of Federal land in a no-reserve auction, sell the timber for the going rate per board foot just as a private landowner would.  Additionally, the US Treasury could bypass the private Federal Reserve, and increase the money supply by minting more coins in larger denominations.  Then all this new revenue and money could be used towards instituting an FDR type of civilian conservation corp like program to rebuild our nations infrastructure.  Additionally we will be needing a lot of revenue if we are to have any chance of making up for the looming pension shortfalls that, if not remedied, will be hard on not only the pensioners, but also the overall economy due to the resultant lowering of aggregate demand from retirees have much less dollars to spend in their pockets.  

Wealth Redistribution to Lift All Boats

The dwindling middle class indicates that the only boats rising are yachts sitting in the torpid pools of wealth amassed by the capitalist sharks. Meanwhile, the middle class tributaries are running bone dry, leaving the middle class row boats sitting on dust. Therefore, the only logical solution is to install pumps in the form of asset taxes into those stagnant wealth pools to insure that the wealth gets rerouted and redistributed back into those tributaries. Trickle down economics has been proven false time and again. However, getting money into the hands of those who will in turn put those funds back into circulation by spending it, the middle class, has been shown to have a tremendous positive knock-on effect throughout the overall economy. But to keep the economy booming you need to keep those tax pumps going to insure money doesn't start stagnating again and rotting in those torpid wealth pools.

Everything is pointing to Hayek being completely wrong -- in fact he had everything backwards. Instead of a free-market being the road to freedom, it turns out that the term 'free-markets' is just a rebranding of the term 'laissez faire'. And laissez faire has always been and always will be the direct route to serfdom -- and with the struggling middle class we are seeing that first hand in the form of the handywork of Hayek's intellectual descendants, the Chicago School of economics. And despite the clear evidence that the Chicago school's laissez faire or freemarket methods of hands-off through repeal of Glass-Steagall and lack of oversight and control of the derivatives market lead directly to the great recession, there has been little corresponding acknowledgment or recognition of the evident refutation of the Chicago School's economic paradigm.

We can get the middle class back on its feet again, but we need judicious government oversight and regulation along with a good amount of wealth redistribution. One excellent means of redistributing the wealth would be through programs similar to FDR's programs involving the Civilian Conservation Corp. A massive government program to repair, rebuild and reinforce our nations infrastructure would go a long ways towards getting money back into the economy and refresh and enhance the conduits of commerce. It would be a win win for everyone, including the much more heavily taxed very wealthy who didn't even know what to do with all that they had, but with such a program, could be proud that their tax dollars were put to such good use; rebuilding a great America.

Free markets can not exist but the label is a tool of manipulation

By Glen Wallace

Advocating for a free market is like advocating for a square circle -- an impossibility.  Markets operate much like a game, and just like a game needs rules that all the players are bound by for the game to work, so does a market require rules that players are bound by as well in order for that market to operate at all.  The terms 'bound' and 'free' are mutually exclusive terms. 

I've never heard of a free market advocate suggesting, for instance, abandoning the Universal Commercial Code (UCC) that most all businesses abide and are bound by.  Instead there is a general recognition that there needs to be some set of rules that everyone in the business community more or less agrees to bound by in order for the markets to run smoothly.  The UCC is just one example of the myriad of different types of rules, laws and contracts that the market is bound by, both within and without, that even the free market advocates would agree are entirely necessary for the markets to exist at all, let alone run smoothly.

The 'free market' just seems to be some vague pie in the sky variable ideal that people fit into all their fanciful capitalistic hopes and dreams.  The problem with vague goals is that some powerful forces can use them as a means to reach their own personal goals by leveraging the masses that struggle for their goals using as their goal what they think is the same goal as the ruling elite.  What the masses never realize, is that the goal of the ruling elite and the masses never was the same but rather the goal of the elite is at the expense of the masses.  But still the elite create this deliberately vague goal that they call a 'free market' and convince the masses that reaching this goal will lead to
everyone's hopes and dreams being realized.  And of course the elite will give the masses step by step instructions on how to reach that goal.  The instructions are given because the elite cannot reach their own goal without riding on the backs of the masses who mistakenly think not that they are carrying the load of the wealthy and powerful trying to get more wealthy and powerful, but rather that they are working to achieve their own goals that they have fitted into the label of 'free market.'

But it has never been the plebs that have designed the so called 'free market' but rather it is the bourgeois that have designed the market system to operate in their best interest at the expense of the proletariat that have carried on their backs the bourgeois to any given market system.

Inevitably for those who fail in any market they either will blame themselves or blame the markets for being not free enough and often then will just work harder to create a system that the winners who have already designed the current system say that needs to be done to create a 'truly free market.' But what the winners who design the market system just try to do is tweak the markets in whatever manner will allow them to squeeze out a little more profit because there is never enough profit for them and it is always a fun challenge for them to see how much more they can gain the system in their own advantage.

But the point is there is a vague goal created such that a great variety of goals in the minds of individuals can easily fit their own goal into the vague goal in the sky.  Now you have a great number of people chasing after the goal with one label and therefore everyone chasing that goal with the same label thinks that they are chasing after the same thing even though the goal of each individual in the chase varies widely.  The only question left then, is who is going to design the path to the goal with the same label.  It will of course be those already with power that design the primrose path that
everyone follows because they are convinced that is the one route to their seemingly shared goal.  Now, everyone with different goals in their minds effective pull the ropes that pull the bourgeois chariot down the primrose path by advocating for legislation that the proletariat  have become convinced will help them reach what they believe is the same shared destination but in reality is the route to a very exclusive destination for the ruling elite that in all likelihood each member of the middle and lower classes has already been excluded from reaching.     

On the Need for Regulations and Tariffs

By Glen Wallace

I think we tend to take for granted the regulations that protect the consumer.  As an example there was the problem with the toxic drywall from China that had it been manufactured in the US perhaps the existing regulations in this country would have prevented the problems from occurring in the first place.  Additionally there are certain food and drink manufacturing regulations that we count on to insure that those products are safe to consume.  But these are the sorts of regulations that the consumer both wants and needs.  I think both of those factors must be present before regulatory restrictions are implemented on any given product.  If the consumer wants to consume something that the government believes is unsafe for the consumer, then the consumer should still be allowed to consume the product.  The government should not be taking on a 'Big Brother knows best' approach where they exist to be our masters that protect us from ourselves.  Rather government should be the servant of the people and only takes on the role of protector when we ask it to, but quickly backs off when ordered to do so as well.

The following is a post I wrote somewhere in response to a speech/testimony by Peter Schiff:

Mr Schiff is so selective in his arguments, only pulling out the best examples that appear to support his positions while selectively ignoring the glaring refutational examples.  For instance in the case of Henry Ford the workers and the economy benefited by the wisdom and benevolence of Mr Ford.  But given human nature we can not count on all the heads of business to have such virtuous characteristics.

All too many in business suffer from a case of tunnel vision nearsightedness, where if they can get away with squeezing every last dime of productivity without killing their employees they will do it.  I'm thinking of the sort of characters as Scarlett O'hara from 'Gone with the Wind' and her treatment of the prison laborers in her husbands lumber mill.  It is for those sorts that government regulation is absolutely necessary to protect the worker from abuse by the Scarlett O'haras and pre-epiphany Ebenezer Scrooges of the world.  I also think back to the working conditions as featured accurately in Upton Sinclair's book 'The Jungle'.  There wasn't much unions or government regulation then either.  What did the free market do for those workers Mr Schiff?

But on the other hand I believe supporters of heavy regulation in the US often have an out-of-sight-out-of-mind approach in ignoring how a lack of regulations on foreign businesses with regard to workers rights and the environment, creates an incentive to offshore work to those countries with factories that abuse the environment and their workers due to lack of regulations.  But when it comes time to import those foreign made goods, the pro regulation set is silent and by their silence, imply that it is perfectly fine to buy those goods and thereby support those foreign factories that may be paying slave-like wages and polluting the environment.

It doesn't make any sense to support regulation under the pretext that it is being done to protect the workers and the environment when there is no disincentive to offshore the work to countries where workers and the environment are not being protected.  As a solution I would suggest implementing a tariff system that varies inversely with the level of regulation in the country of manufacture for a product.  For instance, a very high tariff would be levied against Chinese made goods whereas little to no tariff would be put on products made in Germany.

Categories of Capitalism

By Glen Wallace

In the movie Wall Street the character Gordon Gekko makes a famous speech before shareholders where he states "greed, for a lack of a better word, is good." I would counter that 'greed' is neither necessarily good nor bad. Greed, rather, is simply a motivational tool that can, if allowed, motivate people to make money by taking advantage of workers and the environment. But greed can also motivate someone who has lost their job to start a new small business that provides a needed good or service, along with perhaps some jobs to provide or manufacture the goods, to the community. Therefore the correct approach to greed and capitalism is a pragmatic one. Greed and capitalism should be seen as a powerful team of horses that needs to be directed to aid society, but if not guided would run wild trampling people everywhere. Herein lies the fundamental flaw of the free market capitalists: they seem to be in some kind of fantasy land where they only imagine how capitalism can be beneficial to society and assume that it then is always beneficial if allowed to roam freely unfettered by regulation or laws imposed by the government. First they don't recognize the fact that where the capitalistic business has benefited society, that business has been carefully directed to so by intelligent people with benevolent intent. Therefore, it is not capitalism itself that is acting like some intelligent machine or robot looking for ways to help humanity, it is people that are directing the machine properly. But if the robot of business is being run without regard to humanity by its operators, anyone in the way of that robot better scramble away or hope for luck that the robot randomly veers away from your direction. The only way that we can insure that the robot of business is directed in a manner benefiting the community is to have a powerful government oversight imposing regulations that mandate that the business robot or the team of greed horses are directed in a manner that will benefit the community and not trample it. How else can we insure that the human designers and operators of the capitalistic business are driving their machine with benevolent intent? The free market capitalists, however, never bother looking at the manifold examples that refute the belief that unfettered capitalism is so great for the whole world. The free marketeers would rather live in their lala land where every business is this nice mom and pop operation that pays all their employees great wages, never dumps any toxic sludge out the back door, provides a product or service that the community greatly needs and would be facing hardship if the business never existed in their community. This brings me to my theory of the three basic forms of capitalism: 1) Crony 2) Parasitic 3) Symbiotic. The free marketeers in the fantasy land of their own minds prefer to imagine that if it were only allowed to roam free, then all businesses would be operating under the third form of capitalism, symbiotic. The symbiotic form is one that exists much like the mom and pop business example I described above where there exists a mutual benefit between the owner of the business and community where that business exists. The parasitic form of capitalism is where someone finds a way to drain money off of the flow of currency without putting anything back from where the money was drained. The best example of the parasitic capitalist brings us back to the start of this essay: Gordon Gekko. In the movie he gives the example of a painting he bought for X amount of dollars and could turn around and sell it for a much greater Y amount of dollars today. He didn't do anything to the painting -- he didn't improve it in any way. That is the goal in parasitic capitalism -- to take out from the flow of currency more than you put in. Any example of 'flipping' is an excellent example of parasitic capitalism. The term flipping is often used in the sale of houses where someone buys a house and immediately turns around and sells it for a profit without doing any improvements to the house. If that is the definition, buying something and without improving it in any way, sells it for more than what was payed for it, then most all forms of stock market trading would be considered flipping. The only possible exception would be if someone in buying shares used that opportunity to use their stake in the corporation to influence the board of directors as to how the company is run. It is a little ironic that we come back to him since he's the one that said that greed is good. But in parasitic capitalism the only sense of 'good' exists for the parasite himself. Now it sounds like I'm painting a rather bad picture of parasitic capitalism, but I think just as with capitalism as a whole we should treat this subset of capitalism pragmatically as well. While due to its nature, it's hard to see how parasitism could be beneficial to the community at large, I do think there can be, like in the biological world of parasites, where the negative effect for the host is either insignificant or nonexistent. Perhaps, to a degree, I'm trying to defend myself since I have in the past and am currently trying to 'play the markets.' In so doing I'm trying to come up with some way to realize some capital gains, but I'll have to admit I don't see how what I'm doing in playing the markets, in itself, will benefit humanity. However, if I succeed, that will leave me with more time to write essays like this one with intent to benefit mankind and without regard to the commercial success it might have with whatever I write. Additionally, especially considering the very small amounts I have to play with, I'm lead to believe that I'm engaging in the neutral form of parasitic capitalism where there is little or no negative impact on the host of commerce. But like in nature where there can be parasites that are very harmful to the host, the same problem exists in the world of commerce. An example of malevolent parasitic capitalism exists in the movie Wall Street (and I suppose I should issue a **spoiler alert** for what follows for those who haven't seen the movie) where Gekko tries, after buying it, to break up and sell off in parts the fictional Blue Star Airlines. Along with the break up, all the jobs would be lost along with the all benefits of the airline to the community where it was based. Gekko was planning to sell the airline, in parts, simply because he thought he could suck off more capital gains that way than by running it as a symbiotic business. Of course there is very often a great deal of overlap in all the categories of capitalism when looking at real world examples of how businesses are run. A business may alternately by parasitic at times and symbiotic at others or some parts or divisions of the same business may each be engaging in the different categories. However, its hard to imagine that one particular business act could be simultaneously parasitic or symbiotic. It would seem that the two terms are mutually exclusive if were using them as the business equivalents of the same two categories in the biological field. That is, if the relationship between two or more entities is mutually beneficial then I don't think that in biology that it would be correct to call the relationship parasitical. Rather the relationship if mutually beneficial would necessarily be called symbiotic. While the free marketeers seem to be completely oblivious to the reality of capitalism often devolving into malevolent parasitism, they do, to their credit, recognize the harm to society of capitalism engaging in its third basic form: Cronyism.