The Economy

On Sunflowers, Sunlight, and Sovereignty


The occupation, by several hundred students, of Taiwan’s Legislative Yuan on March 18th, and the subsequent birth of what has been called the “Sunflower Student Movement” has inspired millions of people around the world. More importantly, for me, it has inspired a whole new generation of Taiwanese young people to take an active interest in national politics. After over two weeks, however, the time has come to be a little reflective about the movement’s hopes, goals and aspirations. As I see it, the movement highlights one of the central contradictions of progressive politics in Taiwan: the tension between sovereignty and democracy. Putting it this way may shock a few readers, since so many people who care about Taiwan tend to equate the two. Since there is so much ignorance and misinformation about the topic it is necessary for me to first make a few preliminary remarks about Taiwanese sovereignty. Those already familiar with the basic facts might wish to skip ahead. Read More

Blaming the feminazis

The NY Times reports some on some “really alarming trends in life expectancy” among poor whites:

The decline among the least educated non-Hispanic whites, who make up a shrinking share of the population, widened an already troubling gap. The latest estimate shows life expectancy for white women without a high school diploma was 73.5 years, compared with 83.9 years for white women with a college degree or more. For white men, the gap was even bigger: 67.5 years for the least educated white men compared with 80.4 for those with a college degree or better.

Meanwhile, Rush Limbaugh reports on another disturbing trend.

#CTUStrike FAQ

What is at stake in the Chicago Teachers Union strike? Here are some links to articles I’ve found useful/interesting in the form of a FAQ. I will attempt to keep this post updated as best I can.

What are teachers in Chicago striking about?

Diane Ravitch has a good summary.

According to most news reports, the teachers in Chicago are striking because they are lazy and greedy. Or they are striking because of a personality clash between Mayor Rahm Emanuel and union president Karen Lewis. Or because this is the last gasp of a dying union movement. Or because Emanuel wants a longer school day, and the teachers oppose it.

None of this is true.

And a more in-depth overview at Mother Jones: What’s Happening With the Chicago Teacher Strike, Explained

And this post, by a parent and former teacher is also a good corrective to some misperceptions about the union’s demands. Read More


Translated from Unexceptionalism: A Primer, By E. L. Doctorow. Thanks to the anonymous translator.











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Moral Hazard

Writing in the WSJ about a program to provide food security to India’s poor, Rupa Subramanya reveals her ideological bias in towards the end of the article:

After all, if someone is offering to give you free food, why would you bother to get a job and earn income so that you can feed yourself? Economists recognize this problem as “moral hazard” in which a welfare program leads to perverse incentives which perpetuate its existence.

I would really like someone to apply this logic to CEO pay. After all, many CEOs are now paid more in a single year than most people need in a lifetime, even taking into account differences in “lifestyle.” Shouldn’t they just be given the bare minimum to live from year to year in order to keep them motivated to work the next year as well? Or does moral hazard only apply to poor people?


Photo by Ereine

Photo by Ereine

Former Clinton White House adviser and prominent blogger, Brad DeLong says: “We have to ask ourselves: Do we want to revive our economy, or do we want to punish the bankers?” But critics of the Geithner plan are not saying he’s being too soft on the bankers because they want to see blood. They are saying it because the bankers are the problem and as long as they are calling the shots we won’t be able to revive the economy. Take a look at the following charts:


The charts come from an excellent article by Simon Johnson, a former chief economist of the International Monetary Fund, who blogs at Baseline Scenario. If you are still trying to make sense of the financial crisis I recommend starting with his Financial Crisis for Beginners page (the radio programs he links to now have their own page as well). When Johnson worked for the IMF it was his job to tell countries what they had to do to get out of a financial crisis:
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Toxic Sludge


In my last post I attempted to make sense of the origins of the current economic crisis in the subprime mortgage debacle. In this post I look at the solutions being offered and ask: Why do we need a bailout?

As explained in the last post (make sure to view the cartoon slideshow on the subprime lending crisis) the current scandal is the product of banks packaging bad loans as AAA quality securities which could be resold in a deregulated financial marketplace. As a result, the entire financial system is now based on a lot of bad paper. The technical term for this is “toxic sludge.”

The problem is that nobody, not the banks, not the government, knows how much of this toxic sludge they own. And they don’t know how much the other banks own either. So nobody can trust anyone else. As a result banks are unwilling to lend money to each other. That’s why the government needs to step in and buy up this toxic sludge.

That’s why having the Treasury Department buy up all those toxic assets is probably a good idea. Recapitalization isn’t enough if it leaves banks still owning securities with values so variable that it’s too risky to lend to them anyway. We need to get that stuff off their balance sheets in order to make their financial position more transparent and we need to increase their capital base (which the Paulson plan accomplishes by paying above-market prices for the toxic sludge in return for a guarantee of equity down the road if the sludge eventually has to be sold at a loss). That combination has a better chance of working than either one alone.

And why is the toxic sludge so hard to value? Can’t we just make banks open their books and provide detailed information on all this stuff? Sure. But you’ve still got two problems. First, in the later days of the mortgage free-for-all, mortgages were packaged up with no documentation at all. So no one, not even the banks, knows for sure just how good or bad their mortgage portfolios are. Second, even if we knew that, their value would still depend on how much farther down home prices have to go. And that’s anyone’s guess.

Where will the money come from?

Paul Krugman put it best: “it doesn’t have to come from anywhere. Ultimately, the Paulson Plan will move money in a circle.”


James Gailbraith elaborates:

Despite the common use of language, the capital cost of this bill does not involve “taxpayer dollars.” It authorizes a financial transaction, exchanging good debt (U.S. Treasury bills and bonds) for bad debt (the “troubled assets”). Many of those troubled assets will continue to earn income for some time, perhaps a long time. The U.S. Treasury commits itself to paying the interest on the debts it issues. The net fiscal cost — which is also the net fiscal stimulus — of this bill is the difference between those two revenue streams.

In a more recent post Krugman explained further:

The effect would be that if the financial firms did well, taxpayers would share in their good fortune via those stock holdings; if firms did badly, they could meet their obligations by selling some of those bonds, which would cut into the value of all their stock, including the stuff Uncle Sam owns. So as in the case of Wachovia, what’s really happening is that the taxpayers are taking on some of the risk.

How much risk?

The answer is that we really don’t know. James Gailbraith suggests that it will cost about $50 billion a month, and so $700 billion just buys us about a year’s worth of time.

But it isn’t going to be enough, not even by a long shot. Structural changes are needed and everyone’s best hope is that we can simply keep the system going until we elect someone competent who can restore trust in the system.

That person is not John McCain whose main economic policy advisor is Phil Gramm, “the arch-deregulator, who took special care in his Senate days to prevent oversight of financial derivatives — the very instruments that sank Lehman and A.I.G., and brought the credit markets to the edge of collapse.” Just take a look at McCain’s economic policies and you’ll see how beholden he is to the whole conservative orthodoxy which got us into this mess.

The original bailout plan was based on the idea that the toxic sludge is undervalued and that, in the long run, it will be worth what it was originally worth. But almost every leading economist said this was simply not the case – that invariably some of it will be undervalued and we will loose money.

the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

In other words, its not exactly a full circle as the above diagram suggests – but we simply don’t know what the difference between the two revenue streams will be. Its possible the government/taxpayers will even make some money in the deal – if its written correctly. That’s why there was a call to redo the plan with some protections for the tax payers. The Dodd-Frank bailout offers some of those protections. Here is James Gailbraith on the strengths and weaknesses of the plan.

There is no question that the current bailout bill represents an enormous improvement over the original Treasury proposal. Unlike the original proposal, this bill protects the public interest with requirements for disclosure and audit, for reporting to Congress both on procedures and results, and with protections against arbitrage, conflict of interest, and fraud, with provisions requiring the secretary of the treasury to try to minimize foreclosures, to acquire warrants, and with limitations on executive compensation, especially golden parachutes.

In several respects, the language could still be improved. …

So that’s where we are now. It isn’t the plan most people think would be ideal, but it is much better than nothing and it seems most (sane) people agree it is sorely needed. I strongly recommend you look at this chart to see how your representative voted. If they voted “No” on the Dodd-Frank plan, give them a call and ask them to change their minds. I did.



This post is the first of my attempts to make sense for myself of the current financial crisis. In this post I ask the question: How did we get into this mess?

The simplest explanation is that encouraging people to take mortgages was the easiest way to create investment opportunities for surplus capital:

The result was that the wealthy—the investment class—had more money to invest, or lend, than there were people and businesses looking to borrow.

The easiest way to bring more borrowers into the system—and to create more of a market for money—was to promote homeownership in America. This is precisely what the Bush administration did, touting home ownership as an American right. Of course, they weren’t talking about home ownership at all, but rather pushing people to borrow money tied to the value of a house.If people could be persuaded to take mortgages on homes, real estate values would go up for those already invested (like land trusts and real estate funds) and banks would have a market for the excess money they had accumulated.

Even before Bush, regulation had been pushed through eliminating New Deal era restrictions on finance capital:

in 1999, Congress dismantled the Glass- Steagall Act, a pillar of the New Deal, which separated commercial and investment banking. That enormous change was undertaken with no thought or effort — or desire — to regulate the world that it would help to create. Now we know that an entire “shadow banking system” has grown up, without rules or transparency, but with the ability to topple the financial system itself.

But perhaps no deregulatory effort had more catastrophic effect than the 2000 law that explicitly excluded derivatives, including those credit default swaps, from regulation under the Commodity Exchange Act of 1936.

It was in this climate that some very “inventive” schemes were developed to repackage bad loans as AAA quality securities. The people doing this knew it was a bad thing to do, but a culture was created in which everyone was profiting and nobody seemed to be getting hurt, so it continued unabated. The best accounts of this I’ve come across are both in narrative form and both focus on the issue of “subprime” loans. Obviously the current crisis has evolved beyond the subprime loan issue into an international credit crunch, but subprime lending is still at the heart of the story. First there is this amazing episode of This American Life, “The Giant Pool of Money” (they deserve lots of awards for this), and second this roughly drawn but well written cartoon slideshow.

I’m still a little unsure as to exactly how this untenable system came unraveled at the very end – resulting in the international credit crisis we now have, but it seems the whole thing simply fell apart like the house of cards that it was, bringing down the rest of the financial system with it.

[For more information, see my next post on the bailout.]

UPDATE: Here is a map of the foreclosures the NY Times published back in April:

The New York Times

UPDATE: Also see this excellent piece by Robert Kuttner in The American Prospect. It adds some important details about the role of hedge funds as well as how deregulation has changed the role of the Federal Reserve.

Indeed, until Congress dismantled financial regulation, the Fed was not called upon to mount these heroic rescues, which have become so common in recent years. Until the 1960s, the central bank could keep interest rates low, confident that they would underwrite the growth of the real economy rather than risky financial speculation, for the simple reason that entire categories of speculation did not exist.

But during the past quarter-century, as deregulation has turned the economy into a casino, the Federal Reserve has had to mount major rescues at least six times.

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