Too Big To Fail – Page 2 – The Wrongologist

Capitalism, It’s Not You, It’s Me

There is a meme that has gone global since the early days of the Occupy movement. Here it is as a wall graffiti from Greece that uses the same meme we first saw in NYC in 2011:

Capitalism Lotek

Just kidding capitalism, it really is you.

The artist is a Greek who styles himself as Lotek. The name Lotek is derived from the short story (and later, a film) by William Gibson called Johnny Mnemonic. The story is set in 2021, in a world ruled by corporations. An anti-authoritarian gang that are called Lo-Teks, fight the power. They are in fact not low tech at all, but are high tech hackers. Sound familiar?

Greece is surely a place at war with neoliberalism and free market capitalism. So is it also time for us to reconsider capitalism?

Consider this from Mark Blyth in Foreign Affairs:

An inherent tension exists between capitalism and democratic politics since capitalism allocates resources through markets, whereas democracy allocates power through voting.

The compromises both systems have struck with each other over recent history shapes our contemporary political and economic world. Blyth observes:

In the three decades that followed World War II, democracy set the rules, taming markets with the establishment of protective labor laws, restrictive financial regulations, and expanded welfare systems.
Starting in the 1970s, a globalized, deregulated capitalism, unconstrained by national borders, began to push back.

And today, capital markets and capitalists are setting the rules, and democratic governments follow them.

Some background: Cutting taxes in the 1980s caused government revenues to fall. Deficits widened, and interest rates rose as those deficits became harder to finance. At the same time, conservative governments, especially in the UK and the US, dismantled the regulations that had reined in the excesses of the financial service industry since the 1940s.

The financial industry began to grow unchecked, and as it expanded, investors sought safe assets that were highly liquid and provided good returns: the debt of developed countries.

This allowed governments to plug their deficits and spend more, all without raising taxes.

But the shift to financing the state through debt came at a cost. Since WW II, taxes on labor and capital had provided the foundation of postwar state spending. But, as governments began to rely more on debt, the tax-based states of the postwar era became the debt-based states of today.

This transformation had profound political consequences. The increase in government debt has allowed capitalists to override the preferences of citizens:

Bond-market investors can now exercise an effective veto on policies they don’t like by demanding higher interest rates when they replace old debt with new debt.
Investors can use courts to override the ability of states to default on their debts, as happened recently in Argentina
They can shut down an entire country’s payment system if that country votes against the interests of creditors, as happened in Greece in 2015.
Citizens United dictates who runs for office in the US, and in many cases, who wins.

Now that the financial industry has become more powerful than the people, should we blindly follow capitalism’s meme as the only way forward?

Free-market rhetoric hides the dependence of corporate profits on conditions provided for, and guaranteed by, governments. For example:

Our financial institutions insist that they should be free of meddlesome regulations while they depend on continuing access to cheap credit from the Federal Reserve.
Our pharmaceutical firms have resisted any government limits on their price-setting ability at the same time that they rely on government grants of monopolies through our patent system.

To use a sporting metaphor, it’s as if the best football team purchased not only the best coaches and facilities, but also bought the referees and the journalists as well. Those responsible for judging economic competition have lost all authority, which leaves the dream of ‘meritocracy’ or a ‘level playing field’ in tatters.

In our country, the divide between the business oligarchs, the political class and “the people” increasingly appears unbridgeable, marked by hostility and deep distrust. When people are told for a generation that government mustn’t make decisions that interfere with free markets, it is inevitable that people will lose faith in democratic governance, and in government’s capacity to help them solve their problems.

Capitalism in its current form no longer works for the people. We have seen a reaction in the start of movements by Occupy, by Bernie, and by others in Europe.

Remember that the greatest prosperity in living memory in the US came during the brief social democratic moment, in the 1950s and 1960s, when the constraints on business were the greatest.

More democracy and more economic justice are the necessary foundations for the path to a more prosperous, and sustainable economy.

A reformed capitalism must be a part of what emerges from that fight.

Will We See a Recession Soon?

With Trump vs. Clinton vs. Sanders sucking all of the oxygen out of the news cycle, it is probable that you missed the release by the Federal Reserve on May 18^th of its delinquency and charge-off data for all commercial banks in the first quarter. It isn’t a pretty picture.

Heres a few nuggets:

Delinquencies of commercial and industrial (C&I) loans at all banks, after hitting a low point in Q4 2014 of $11.7 billion, have ballooned. C&I loans are classified delinquent when they are 30 or more days past due.
Between Q4 2014 and Q1 2016, delinquencies have increased by 137% to $27.8 billion. Currently, they are halfway to the all-time peak during the Financial Crisis in Q3 2009 of $53.7 billion. And theyre higher than they were in Q3 2008, when Lehman Brothers melted down.

Below is a chart of delinquencies released by the Board of Governors of the Fed. The shaded areas are times of economic recession. Wolf Richter of Wolf Street added the emphasis in red to point out where we stand in relationship to the 2008 Lehman moment:

C&I Deliq Q1 16

As you can see from the chart, business loan delinquencies are usually a leading indicator of economic trouble. They begin rising at the end of the credit cycle since loans made in the good times start to go bad when the economic situation changes. Then, the obligations of interest payments and loan repayments begin to pose a problem for weaker borrowers whose sales, instead of rising as expected when times were good, may be flat or shrinking while expenses can be rising. Suddenly, there is not enough money to service the loan.

It is however important to also consider Economic Injury Disaster Loans (EIDLs). Although no one can accurately predict what might happen in the future to an absolute degree of certainty, economists should always consider the possibility that we might see an increase in businesses seeking SBA eidl status in the event of a recession.

That being said, this all started with the oil and gas sector reacting to lower crude oil prices in 2015, but it has moved beyond the oil patch. Total US commercial bankruptcy filings in April, 2016 rose 3% from March, and are up 32% from a year ago, to 3,482, according to the American Bankruptcy Institute.

This is happening at an interesting time.

First, the health of the economy will be a huge deal in the General Election. Both Trump and Clinton have a stake in saying it isn’t as good as it could be. Yet, it is highly unlikely that we will be in a recession in November 2016, because our current economic momentum will carry us for at least another 6 months.

Second, the Fed is now indicating that it believes the economy is strong enough to raise rates for a second time this year, perhaps as soon as June, according to the Feds recent Open Market Committee minutes. That supports the idea that no recession is imminent.

But we still have this pesky loan delinquency data.

Loan delinquencies must be cured within a specified time. If not, they’re taken from the delinquency bucket and dropped into the default bucket. If defaults are not cured within a specified time, the bank deems a portion (or all) of the loan balance uncollectible and writes it off, therefore moving it out of default and into the write-off bucket. This is a factor in many different loan types, such as the usda business loans on the market.

That’s why the delinquency statistics usually do not get very large loans and don’t stay delinquent for a very long period.

Of course, there are other loans that might be impacted by these trends too. For example, it would be interesting to analyze the trajectory for merchant funding options such as a business cash advance loan for businesses in need of a financial boost. Ultimately, only time will tell what the future holds for loans and the financial sector in general.

Regardless, the Fed has painted itself into a corner. They have to raise rates because low rates are destroying many pension funds and they hurt retirees who rely heavily on interest-bearing investments. Pension funds have been modeled on interest rates of between 6%-8%, which have not been seen for at least 10 years.

But, a Fed rate hike would add more risk of more loans becoming delinquent.

And the largest American corporations are awash with the debt that they used to fund buy-backs of their shares. That debt has to be renewed periodically. If rates rose high enough to help pension funds, it could wound quite a few large companies.

If that wasn’t bad enough, South America, Europe, and the Chinese are looking increasingly fragile. Even if the Fed engineers a domestic miracle of sorts, it may not be enough. The financial world can be a minefield when we are trying to hang on to our hard-earned money.

So, prepare to hear both Trump and Hillary tell you they have the answers.

Since their global corporate benefactors now rule the world, they should be able to figure out what to do with it.

Are Trump and Sanders a Ripple of Populism, or a Wave?

Since sophomoric jokes have failed to derail Donald Trump’s presidential campaign (e.g., running silly pictures of Trump, mocking his soundbites while ignoring his policies and his authoritarian condemnations), let’s try understanding what’s happening.

So, is Trump a problem, or just a symptom of the problem? And folks, what is the problem? The Donald captured the essence of “the problem” in his Super Tuesday victory speech: (Brackets and emphasis by the Wrongologist)

People in the middle-income groups are making less money than they were 12 years ago. And in her speech, [Hillary Clinton] said, ‘they’re making less money.’ Well, she’s been there with Obama for a long period of time. Why hasn’t she done anything about it?

Trump for the win! He asks a question that neither Hillary Clinton, or the Establishments of both parties, have a satisfying way to answer (so far), something like what we said about John Kerry being “for the war before he was against it.”

The nation’s real problems are those articulated by Bernie Sanders, but he is not a messenger who can win in the fall. But his popularity, and that of Donald Trump show that we are looking at the swelling of a populist wave in America. Maybe it is still far from the beach; maybe it is just a ripple. We will know in November, but early signs are that the wave could be big when it hits us.

Consider Trump’s victory in the Massachusetts primary – 310,847 voted for Donald Trump. That gave him 49.3% of the vote in a five-candidate race. A pretty overwhelming endorsement, even considering that independents can vote in either primary, and many use that option to vote against a candidate.

The next day, Massachusetts’ Republican Governor Charlie Baker refused to endorse him. He said that he did not vote for Trump on Tuesday and:

I’m not going to vote for him in November.

Charlie Baker is immensely popular with pretty much every segment of the state’s voting population; his job approval numbers are about 70%. He’s perceived as highly competent at running the government, he’s socially liberal, and people just plain like him. So, Baker doesn’t need the Trump wing of the GOP.

Trump isn’t going to carry Massachusetts in November, Clinton and Sanders totaled 1,190,500 votes between them. But the current populist resurgence will not end with Bernie’s failure to win the Democratic nomination, or with a Trump general election loss in November, because the underlying anger isn’t going away. Remember that Trump and Sanders totaled 897,500 votes in MA, to Hillary’s 603,800. From Fabius Maximus:

Populism’s resurgence has, as always, terrified our ruling elites and their servants. Since most journalists don’t understand it, Campaign 2016 is a series of surprises to them.

Maximus goes on to say that from the start of Trump’s campaign, the similarities between Trump and Andrew Jackson were obvious: Trump’s isolationist foreign policy (but bellicose towards threats), his hostility to minorities and Wall Street bankers, his concern for the poor, his appeal to national greatness — these same views also astonished the elites in 1830 when Andrew Jackson rode the wave to the White House. The 1830 elites despised Jackson like today’s elites despise Trump today.

Jacksonians were the first populists in America to gain power. Even today, their strain of suspicion of federal power, skepticism about both domestic and foreign do-gooding (welfare at home, foreign aid abroad), opposition to federal taxes, but obstinately fond of federal programs seen as primarily helping the middle class (Social Security and Medicare, mortgage interest subsidies) continues.

These “Crabgrass Jacksonians” constitute a large political bloc in America. Crabgrass Jacksonianism sees the contemporary homeowner working on his/her modest suburban lawn, as a hero of the American story.

The Establishments of both parties may have fun demonizing their populists, but they ignore the similarities between the strategies of Trump and Sanders, and the appeal both have to significant numbers in both parties. Separately, progressives and populists are weak. If they can be combined as they were at the time of the New Deal, they can be a huge force for change.

US News reports that historical patterns and political data all show that the real presidential election battle takes place in just seven states: Florida, Ohio, Virginia, Colorado, Nevada, Iowa and New Hampshire. Based on recent Clinton vs. Trump head-to-head polls in these seven states, Trump is within striking distance of winning the general election against Clinton.

For those who believe a Trump presidency is not really possible in today’s America, you may want to re-think that proposition.

That populist wave may be closer to the beach than you think.

Monday Wake Up Call – June 29, 2015

Mylan, a generic drug maker based outside Pittsburgh, abandoned its status as a US corporation, gaining tax advantages by moving its headquarters to the Netherlands. The move reduced the taxes the company pays on profits from sales of drugs overseas, but Mylan continues to maintain most of its operations in Pennsylvania.

Mylan was viewed by some in Congress and the Obama administration as a symbol of corporate greed when they undertook a corporate inversion that placed profits above any commitment to its home country.

But now, Mylan is demanding that the US Federal Trade Commission (FTC) protect it from a hostile takeover bid by an Israeli company, Teva Pharmaceuticals. Mylan asked the FTC to examine Teva’s purchase of Mylan stock for possible violation of the requirement that large purchases of stock of US firms must be reviewed by antitrust authorities, because Mylan is still listed on the NYSE. The company claims that its principal office remains in Pennsylvania, which makes it a “US issuer” of stock for federal anti-trust purposes.

The irony of this is not lost in Washington. Rep. Chris Van Hollen (D-MD), the senior Democrat on the House Budget Committee said:

Mylan is trying to have its cake and eat it too…It is an intolerable abuse of a loophole when US corporations pretend they are based overseas in order to get out of paying their fair share and duck their responsibilities to the United States. It’s just plain hypocrisy when one of those same inverted companies claims that it is actually a US company because it needs the special protections US law gives to American companies.

Mylan may have a case. Its plea for help from the US government could pass legal muster but, the optics of a company that abandoned its US citizenship in order to pay less in federal taxes, and then seeking the protection of a federal agency is problematic.

Compounding the farce, Mylan is attempting its own hostile takeover of Perrigo, in order to stave off Teva.

Mylan’s unabashed lack of shame is impressive. Maybe the FTC’s decision-making on this case should take quite a while.

So, wake up Congress, and deal conclusively with corporate inversions! Our wake-up calls for the next few weeks will be songs about summer. We start with the Lovin’ Spoonful’s only #1 hit, “Summer in the City”:

For those who read the Wrongologist in email, you can view the video here.

Monday’s Hot Links:

The return trip often seems shorter than the initial trip, even though the distance traveled and the actual time spent traveling are identical. This is called the “return trip effect”. Two studies say it is real, but you already knew that.

Trucker jobs will be the first casualty of driving robots. Trucker salaries average $40,000/year. Most truck accidents are due to user error: Driving too fast, driving while tired, or driving while intoxicated. Robots don’t drink, don’t get tired, and won’t drive unsafely in order to get to a destination faster. Drivers will still be needed for inner-city driving (at least initially), but most long-haul operations will quickly vanish as soon as licensing is complete in most states.

Three years ago, Saudi Arabia announced a goal of building, by 2032, 41 gigawatts of solar capacity by 2032, slightly more than Germany has today. The Saudis burn about a quarter of the oil they produce—and their domestic consumption has been rising at 7% a year, nearly three times the rate of population growth. According to a British think tank, if this trend continues, domestic consumption could eat into Saudi oil exports by 2021 and make the kingdom a net oil importer by 2038.

Privail Diagnostics, has developed a simple, portable blood test that can detect the HIV virus (not antibodies) for the first time. That means an earlier diagnosis, and reduced infection rates. Privail’s at-home testing device is like a diabetes test, needing only one drop of blood. It shows the results in a color bar, like an at-home pregnancy test or digital output, like a diabetes meter. Invest at your own risk.

Hackers have apparently cracked the computer systems responsible for issuing flight plans to pilots of every airline. The apparent weak link? The flight plan-delivery protocol used by every airline. Ground computers calculate the appropriate flight plan for planes, and someone on ground approves the plan before distributing it to pilots. Pilots receive plans before taking off, as well as enroute, when a change occurs during a flight. Plans are uploaded to planes via a datalink. Once a hacker figures out those protocols, it is possible to issue a bogus flight plan. But, the industry says, not to worry.

Your thought for the week: Giving money to poor people is socialism, or even communism…..giving money to AIG or Goldman Sachs is capitalism, and that’s what made this nation grrrreat!!!

Monday Wake Up Call – April 27, 2015

Last week saw the sentencing of David Petraeus, former CIA director and the highest-profile general from our wars in Iraq and Afghanistan, to two years’ probation for providing classified information to his mistress. Mr. Petraeus was also fined $100,000.

Petraeus remains a four-star US Army general. His retired pay is $220,000/year, plus the perks of shopping at the PX and the commissary store, full medical benefits, free travel on government aircraft, free legal advice; the list goes on.

A US officer convicted in a US civilian court of a felony is subject to dismissal from the service, at the discretion of the service secretary. A dismissal is the equivalent of a dishonorable discharge for an enlisted soldier. It strips the former member of all the perks, everything.

What Petraeus was convicted of would normally be a felony in a civil court. But he was charged by the Obama Administration with a misdemeanor so he wasn’t vulnerable to an administrative dismissal. This misdemeanor conviction will have about the same impact on his life as a conviction for littering. From the New York Times:

As part of the plea agreement, Mr. Petraeus admitted that he gave his lover, Paula Broadwell, who was writing a biography about him, black notebooks that contained sensitive information about official meetings, war strategy and intelligence capabilities, as well as the names of covert officers.

War strategy. That would be the strategy written by the guy giving it to Broadwell, along with the names of covert officers? Compare that to the crimes for which Jeffrey Sterling and 8 others are facing hard time in prison. Sterling was convicted on 9 counts of violations of the Espionage Act for providing much lesser information to a guy writing a book, James Risen. Manning got 35 years, John Kiriakou gets 2, Assange is holed up in the Ecuadorian embassy for 3 years and counting, Snowden is on the run, and no military brass is doing time for Abu Ghraib.

Petraeus gave Broadwell that information for personal profit. It helped him in his amorous adventure and, most likely, helped the sales of her book. He has since moved on to Kohlberg Kravis Roberts & Co. L.P., a New York investment firm where he is a partner.

That makes Petraeus just another example of too big to fail.

The Justice Department and the Obama administration need today’s wake-up, for not pursuing Mr. Petraeus to the fullest extent of the law.

So here is your Monday wake-up, the White-Throated Sparrow. These guys are all over our property right now:

If you read the Wrongologist via email, you can view the video here.

Your Monday Hot Links:
Everyone wants to appear smart when in a meeting. Here are a few tricks:

Kochs were defeated in Montana after spending a bundle to defeat Medicaid expansion. What? Medicare expansion passed in a Red state?

How much water is in your food? See this graphic. Everyone should look at this, not just Californians.

Wall Street Journal says more people are out of the stock market than are in it. About 52% of Americans are not investing in the stock market, and 53% of them say they don’t have the funds to invest. A different study from the National Institute on Retirement Security found that 45% of working-age households had no retirement savings at all; among the 55-64 age group, the average was only $12,000.

Friday Music Break – January 30, 2015

“We know something about billionaire consumption, but it is hard to measure some of it. Some billionaires are consuming politicians, others consume reporters, and some consume academics.” – Thomas Picketty

Today’s music has a populist message designed to help you fight the Plutocracy over the weekend. It is “First We Take Manhattan, Then We Take Berlin”, written and performed by Leonard Cohen. The song was originally recorded by Jennifer Warnes for her 1987 album, “Famous Blue Raincoat”. Cohen recorded it a year later for his album, “I’m Your Man”. This version was recorded in London in 2009:

It has become an occasional anthem for Syriza, the Greek Populist Party that just won power on an anti-austerity, anti-European Union platform. In Greece, it was played with the words, “First we take Athens, then we take Madrid!”

Sample Lyrics:
They sentenced me to twenty years of boredom
For trying to change the system from within
I’m coming now, I’m coming to reward them
First we take Manhattan, then we take Berlin
I’m guided by a signal in the heavens
I’m guided by this birthmark on my skin
I’m guided by the beauty of our weapons
First we take Manhattan, then we take Berlin.

You loved me as a loser,
but now you’re worried that I just might win,
You knew the way you could have stopped me,
but you never had the discipline,
So many nights I prayed for this,
to let my work begin.

See you on Sunday

Monday Wake Up Call – December 15, 2014

Today’s Wake-Up Call is for Congress and the president. Mr. Obama’s support of the “CRomnibus” year-end spending package showed how the next two years in Washington will play out, and it doesn’t bode well for anyone (you) who doesn’t employ a registered lobbyist.

You already know that the budget bill included a rollback of derivatives reform, and a nearly ten-fold increase in the donation limits for party committees. What may have been less obvious is that the bill cuts $60 million from the EPA and $346 million, about 3%, from the IRS. The IRS cuts tell wealthy earners that tax avoidance is safe, with little expectation of an audit.

The White House basically turned on its own party, accepting roll-backs of liberal priorities. It’s clear that this kind of legislative sausage-making will be the rule in 2015.

Other benefits for specific lobbies:

• Private Pension Plan trustees could cut pension benefits to current retirees, reversing 40 years of promises to workers who earned their retirement packages.
• Voters in DC who approved legalized marijuana will see their initiative die, since Congress prevented the DC government from taxing or regulating the drug’s sale.
• Trucking companies can make their employees put in an 82-hour work week without mandatory time off.
• Pell grants for college students will be cut, with the money diverted to private student loan contractors.
• Blue Cross and Blue Shield will be allowed to count “quality improvement” measures toward their mandatory health spending under Obamacare’s “medical loss ratio” provision, a windfall that saves millions of dollars.
• The EPA is blocked from regulating certain water sources for farmers.
• Reduced nutrition standards in school lunches and the Women, Infant and Children food aid program was a gift for potato growers.
• The bill halts the listing of new endangered species.
• It stops the regulation of lead in hunting ammunition.

The White House never threatened a veto of the CRomnibus over these riders, and actually supported the bill. House Democrats complained of being “lobbied by the White House” on the legislation. This is sure to be a recurring policymaking feature of the next two years.

So this is the new normal on Capitol Hill. The precedent for making changes on headline issues by tucking rollbacks into must-protect or must-pass legislation has been set with the White House’s active cooperation.

In other words, there’s your proof that elections have consequences.

Here are a couple of wake-up tunes for Monday. First, in keeping with the prime directive (well, maybe it’s the sub-prime directive), that the banks can never fail again, here is the late Pete Seeger doing “The Banks are made of Marble”:

The song was written by Les Rice in 1948 or 1949. Rice was a farmer in Ulster County, NY. Seeger lived across the Hudson from him, and apparently they met on several occasions.

Our second tune is in keeping with the other prime directive of a holly, jolly season. Captain Picard does “Let it Snow”:

https://www.youtube.com/watch?v=i-zdMkOZTKs&app=desktop

Monday’s Hot Links:

The US attempted to co-opt Cuba’s hip-hop scene to foment revolution: USAID tried to recruit underground rappers in Cuba to sow unrest against Raul Castro’s government. They failed. Compared to the CIA torture story, this is small potatoes, but still another example of how we can’t stay out of any country’s internal affairs. Because, freedom!

The 2nd U.S. Circuit Court of Appeals in New York ruled that insider trading is ok as long as the person accused of insider trading didn’t know that the original tipper disclosed the information in return for personal gain. Guessing that you’ll never know.

Thirty years after the Bhopal chemical accident, the worst in history, the spill’s effects are hitting a new generation. Professional clean-up hasn’t happened and there are no signs that the environmental catastrophe will end.

Congress and the President are going in the opposite direction from the Federal Reserve. The Fed is making the banks pony up more reserves to protect their balance sheets, while Congress and Obama are saying “go big on derivatives baby, we’ve got your back”.

Study supports the theory that all ‘men are idiots’. Well, it wasn’t a scientific study, but it looked at 318 Darwin Awards cases, of which 282 Darwin Awards went to males, and just 36 awards were given to females. Males made up 88.7% of Darwin Award winners.

Old news department: The latest Wall Street Journal/NBC News poll says that 56% of Americans say the country’s economic and political systems stacked against them. Different result from the NYT survey last week.

Your thought for the week:

I had two options, to remain silent and then be killed. Or I could speak up, and then be killed. I chose to speak up. – Malala Yousafzai, from her Nobel Peace Prize speech

Sunday Cartoon Blogging – December 14, 2014

Tough week trying to pick the worst from among the many, many wrongs this week:

• Congress passes a budget that defangs Dodd-Frank: Citibank got Congress to let the big banks place their risky derivatives business back under the protection of taxpayer-paid insurance. So we get to shoulder the losses when the next big bank failure comes. The Congress attached it to the CRomnibus spending bill that the president won’t veto. We can dig through the couch cushions for spare change to bail out the banks next time. Simon Johnson said it best:

Give enough clever people the wrong incentives and they will destroy anything.

• Congress also lowered funding for the EPA, and stuck in a provision that allows private funding of national conventions. They were previously publicly funded.
• Some detail on “we tortured some folks” became public with the publishing of the CIA Lite torture report. If that wasn’t wrong enough, many pols and pundits just gave up, and said torture was useful and necessary. One right thing was John McCain’s speech on the floor of the Senate debunking torture as a means of getting information.
• There was more wrong-headed messaging about the Ferguson/Garner cases. But there was also many “die-in” demonstrations around the country along with the usual finger-pointing about the demonstrators’ reactions, both peaceful and not-so-peaceful.

Dick Cheney continued his spirited defense of the indefensible: