One-Percenters And The System's Collapse
Branko Milanovic, lead research economist at the World Bank, argues in The Crisis of Maldistribution that the real driver behind the collapse of the international economic systems is the over-accumulation of wealth in the few which arose as part of the vast inequality in income between the very wealthy and everyone else over the last two or three decades prior to the financial collapse. The super-rich, having no place to invest their money began "throwing money at anyone who would take it" without understanding the risks.
The current financial crisis is generally blamed on feckless bankers, financial deregulation, crony capitalism, and the like. While all of these elements may be true, this purely financial explanation of the crisis overlooks its fundamental reasons. They lie in the real sector, and more exactly in the distribution of income across individuals and social classes. Deregulation, by helping irresponsible behavior, just exacerbated the crisis; it did not create it.
The numbers Milanovic cites -- all before the collapse -- are staggering.
To go to the origins of the crisis, one needs to go to rising income inequality within practically all countries in the world over the last 25 years.
- In the United States, the top 1% of the population doubled its share in national income from around 8 percent in the mid-1970s to almost 16 percent in the early 2000s. (Piketty and Saez, 2006). That replicated the situation that existed just prior to the crash of 1929, when the top 1% share reached its previous high watermark.
- In the UK, the top 1% receives 10% of total income, a share greater than at any point since World War II (Atkinson, 2003, Figure 3).
- In China, inequality, measured by the Gini coefficient (the most common measure of inequality), almost doubled between 1980 and 2005. The top 1% of the population is estimated to garner around 9% of national income.
- Even more egregious were developments in Russia, where the combined total wealth of thirty-three Russian billionaires listed on the Forbes list in 2006 was $180 billion as against total country’s GDP of about $1,000 billion that same year (Guriev and Rachinsky, 2008).
Milanovic then points to a couple of the most egregious anecdotes.
Just before his downfall, the richest oligarch, Michael Khodorovsky had an estimated income equal to average Russia-wide incomes of 250,000 people. (The same number for Bill Gates and the United States in 2005 was 75,000.) Think of it. With his income alone, that is without touching a penny of his wealth, Khodorovsky could create (if need be) an army of quarter million people. No wonder the Kremlin took notice, and Khodorovsky ended up in jail. . . .
Similarly, in Mexico, Carlos Slim’s wealth, prior to the crisis, was estimated at more than $53 billion. Assume a conservative return of 7% on his assets, and that gives an annual income of $3.7 billion with which, given Mexican GDP per capita in the same year, Slim could command even more labor than Khodorovsky: 440,000 people. These are only a few examples. But they were replicated, albeit on a smaller scale, in practically all countries of the world.
Interesting theory. Read on for more...
On Looting
Now that we own their sponsor, U.S. taxpayers should get a free Man U jersey with income tax payment. Or we should be able to have Rooney punch a banker. Either way.
Does listening to pundits discuss he financial crisis make your head spin, leaving you both angry and confused? Do you know that something in the discussion is just not right... in an Orwellian sense? Do you feel like you're watching the aftermath of the largest theft in the history of the world?
If so, you're not alone... and you're right to feel this way.
In the early nineties, a pair of economists classified the behavior that led to this debacle, described the environment that would make such behavior likely, and suggested that it would happen again as the natural result of that environment.
Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”
The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that . . . investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.
In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.
The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”
[Emphasis added.] Sound familiar?
On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders.These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business. These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage.
For more on how these loans were abused by lenders, see this Washington Post article from 2007. (And if you have more time, devote an hour to listen to "The Giant Pool of Money," a fantastic report by This American Life.)
So what about the idea that a lot of smart people just made innocent mistakes, or that this is a systemic problem that no one could have predicted? Looting is not just an error in judgment, but knowing, self-interested behavior.
The term that’s used to describe this general problem, of course, is moral hazard. When people are protected from the consequences of risky behavior, they behave in a pretty risky fashion. Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses.
[The distinction between moral hazard and looting is an important one.]
With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.
Knowing that their financial institutions were too big too fail, bankers made choices that were only rational in an environment where personal gains were all that mattered, and where a government bailout was seen as inevitable. The government was the escape route, the getaway driver... and the thieves got away scot free.
We should be angry. We've been robbed.
It Kind Of Makes Me Hate Baseball
One of the few players willing to speak honestly about his cheating. (image via deadspin)
C and I have a running dialogue regarding the terrible behavior of everyone involved in MLB's steroids scandal -- owners, players, press, agents (I know, redundant) -- everyone.
These guys are liars and cheats. They've made millions while ticket prices have skyrocketed and municipalities have raised taxes to pay for new ballparks, and even though they've been caught red-handed, all but a couple have refused to admit any wrongdoing. Who'd have thought that only Jose Canseco would be honest and forthright with the public? Disgusting.
Yet it's not a problem that is limited to baseball. Just look at the real estate industry over the last decade. Or at Wall Street. Or at how W and company sold the invasion of Iraq and then defended his decision. Or at how Republicans in Congress spent money they didn't have while they were in power, but now that they're out of power claim that spending is always morally wrong and bad for America. Changing the story, being disingenuous, refusing to take the blame -- all persist and are symptoms of a deeper social problem, a disease that is causing our society to rot from leaf to root.
I guess baseball truly is America's sport.
As always, The Sports Guy kills it in his most recent mailbag...
We always talk about the tangible effects of the Steroids Era (it screwed up the numbers historically, compromised the competitiveness of the games and tainted some of the nicer memories we had as fans from 1990 to 2007), but the underrated effect was the realization that some of our greatest players were scumbags. Should we have realized this after the Pete Rose scandal? Yeah, probably. But look at some of the greats from the past 50 years. Rose lives in Vegas and spends his days betting on horse racing. Barry Bonds seemed like a truly awful person even before he let his buddy rot in jail for him. Clemens was willing to sell everyone out, even his wife and friends, to try to keep his name clean. Mark McGwire doesn't have the decency to admit that he cheated. Neither does Sammy Sosa or Raffy Palmeiro. A-Rod lied in 2008 on national TV, then lied about the lie. There are 103 names from that 2003 random drug-test list still out there, only none have the balls to come out and say, "You know what? I'm probably on there and I'm ashamed of what I did." And when you think about how many All-Stars cheated over the past two decades -- is the number 70 percent? 75 percent? 80 percent? -- the unwillingness of the commissioner's office and the player's union to apologize publicly or admit any culpability whatsoever is really staggering. Why is Bud Selig still the commissioner? THIS HAPPENED ON HIS WATCH! Why is Gene Orza still running the players' union? THIS HAPPENED ON HIS WATCH! Everyone's collective "apology" this winter seemed to be, "Let's move on, it's spring training, the World Baseball Classic will be fun, fantasy baseball is starting up ... no use crying over spilled milk."
Ask yourself this: Do you feel like the players, union leaders, owners and executives even feel bad about what happened? Because I don't feel like they do. And it makes me kind of hate baseball. I will still follow it, and I will still love the Red Sox, and I will still do the League of Dorks ... but at the same time, when the sport flounders because of the economy this summer, part of me will be thinking, "What goes around comes around."
The Economy Is In Worse Shape Than We Realize
Maybe some sacrificed chickens will fix the economy...
East Coast Economics has posted a dramatic visual explaining just how much borrowing our government has been doing over the last few months.
Check out the following which shows the $$$ amount borrowed by US banks from the Fed through Dec 2007; the spike marks the Savings & Loan Crisis at the end of the 1980s with borrowing maxing out at $8b.
[Then scroll down and] take a look at the [second] chart. It is the same graph as above, but [at a different scale, panned out, and] updated through the beginning of November ‘08.
So where is all of this borrowed money going? Paul Krugman delves into the details of the ongoing policy debate about how to deal with failing banks.
Old-fashioned voodoo economics - the belief in tax-cut magic - has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.
But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.
[Krugman sets up an excellent hypo detailing how this would work -- well worth reading.]
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word - nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover.
Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I'm wrong, but I suspect that taxpayers are about to get another raw deal - and that we're about to get another financial rescue plan that fails to do the job.
[Both articles via Robot Wisdom, image by Olly Moss.]
Bankers Caused The Price Of Oil To Spike
60 Minutes tonight delivered a tremendous report on a complicated issue.
The bottom line: strong circumstantial evidence exists showing that bankers and investors -- yes, the same guys that we're bailing out -- were using post-deregulation loopholes in the remaining system of regulations to cause a spike in prices. $4/gallon gas, says the report, wasn't caused by demand in China or collusion from OPEC, but by Wall Street.
In 2000, Enron pushed for and were given a degregulated futures market by President Bush and his Republican-controlled Congress. At the same time, Enron was causing brownouts in California and jacking up prices for energy there, too. Enron soon crashed, but the traders who worked there landed on their feet. Wall Street saw a chance to profit, so scooped up these traders to work for them. Now companies like AIG and the former Lehman Bros. own large supplies of oil and natural gas. Unreal. From the report...
"Who was responsible for deregulating the oil future market?" Kroft asked Michael Greenberger.
"You'd have to say Enron," he replied. "This was something they desperately wanted, and they got."
Greenberger, who wanted more regulation while he was at the Commodity Futures Trading Commission, not less, says it all happened when Enron was the seventh largest corporation in the United States. "This was when Enron was riding high. And what Enron wanted, Enron got."
Asked why they wanted a deregulated market in oil futures, Greenberger said, "Because they wanted to establish their own little energy futures exchange through computerized trading. They knew that if they could get this trading engine established without the controls that had been placed on speculators, they would have the ability to drive the price of energy products in any way they wanted to take it."
"When Enron failed, we learned that Enron, and its conspirators who used their trading engine, were able to drive the price of electricity up, some say, by as much as 300 percent on the West Coast," he added.
"Is the same thing going on right now in the oil business?" Kroft asked.
"Every Enron trader, who knew how to do these manipulations, became the most valuable employee on Wall Street," Greenberger said.
But some of them may now be looking for work. The oil bubble began to deflate early last fall when Congress threatened new regulations and federal agencies announced they were beginning major investigations. It finally popped with the bankruptcy of Lehman Brothers and the near collapse of AIG, who were both heavily invested in the oil markets. With hedge funds and investment houses facing margin calls, the speculators headed for the exits.
"From July 15th until the end of November, roughly $70 billion came out of commodities futures from these index funds," Masters explained. "In fact, gasoline demand went down by roughly five percent over that same period of time. Yet the price of crude oil dropped more than $100 a barrel. It dropped 75 percent."
Asked how he explains that, Masters said, "By looking at investors, that's the only way you can explain it."
Krugman Wins The Nobel Prize For Economics
Professor Krugman (photo via the NY Times)
One of our great economists won the Nobel Prize today. He won for his work...
[O]n international trade and economic geography. In particular, the prize committee lauded his work for "having shown the effects of economies of scale on trade patterns and on the location of economic activity."
He has developed models that explain observed patterns of trade between countries, as well as what goods are produced where and why. Traditional trade theory assumes that countries are different and will exchange different kinds of goods; Mr. Krugman’s theories have explained why worldwide trade is dominated by a few countries that are similar to each other, and why some countries might import the same kinds of goods that it exports.
I began reading Krugman's op-eds in the NY Times in 2001, and have found great relief in his clear, focused, in-depth analysis of the Bush tax cuts, the costs of Bush's proposed social security privatization, the effects of different proposed national health care plans and the debunking of the Bush administration's national economic health numbers, doctored and manipulated to make everything seem rosy.
The one topic Krugman nailed before I heard it mentioned anywhere else, (much to his own dismay, I'm sure), is the economic crisis currently rippling across the globe. Krugman criticized Greenspan early and often for his complicity in the Bush tax cuts, and then again in his decision to keep interest rates too low for too long. He understood that the housing bubble was real, and that most of the value inflating the economy was junk. Professor Krugman saw this coming and shouted that the heavens were falling, but no one listened.
Many of his detractors use words like shrill, pessimist, anti-American when they describe Krugman and his writing. Yet he has been such a beacon of hope in the darkness for so many of us over the last eight years that, after receiving a number of requests to do so, Krugman also started writing political opinion pieces in the Times. He also started a blog to discuss timely matters or those not worthy of an entire column. (How he has the time to do all of this writing on top of his teaching is a mystery.)
Still, I always prefer when the Professor sticks to economics. He has a gift for cutting to the core of economic issues and for explaining what is really going on, pointing to the crucial indicators and showing his readers what to look for and what to expect in the future.
As we've seen from the repeated disasters of the Bush administration, one of the most important factors a citizen should consider when casting their vote is to look at who that candidate would appoint to key positions in the executive branch. I expect that if Obama is elected President next month, Krugman will be named as one of his economic advisors, and today's award suggests that the world would welcome this nomination. Well done Professor! Thank you, and keep up the great work.
(Also see: The Unofficial Paul Krugman Archive)
Lessig on Obama's FISA vote
Obama has not shifted in his opposition to immunity for telcos: As he has consistently indicated, he opposes immunity. He voted to strip immunity from the FISA compromise. He has promised to repeal the immunity as president. His vote for the FISA compromise is thus not a vote for immunity. It is a vote that reflects the judgment that securing the amendments to FISA was more important than denying immunity to telcos. Whether you agree with that judgment or not, we should at least recognize (hysteria notwithstanding) what kind of judgment it was. The amendments to FISA were good. Getting a regime that requires the executive to obey the law is important. Whether it is more important than telco immunity is a question upon which sensible people might well differ. And critically, the job of a Senator is to weigh the importance of these different issues and decide, on balance, which outweighs the other.
This is not an easy task. I don't know, for example, how I personally would have made the call. I certainly think immunity for telcos is wrong. I especially think it wrong to forgive campaign contributing telco companies for violating the law while sending soldiers to jail for violating the law. But I also think the FISA bill (excepting the immunity provision) was progress. So whether that progress was more important than the immunity is, I think, a hard question. And I can well understand those (including some friends) who weigh the two together, and come down as Obama did (voting in favor).
Trio of health care articles
(1) Hospitals Look to Nuclear Tool to Fight Cancer
There is a new nuclear arms race under way — in hospitals. In Loma Linda Medical Center's fixed beam treatment room, where brain and eye tumors are treated, a machine is readied for a patient. The patient's head will be immobilized by the mask at left.Medical centers are rushing to turn nuclear particle accelerators, formerly used only for exotic physics research, into the latest weapons against cancer.Some experts say the push reflects the best and worst of the nation’s market-based health care system, which tends to pursue the latest, most expensive treatments — without much evidence of improved health — even as soaring costs add to the nation’s economic burden.
(2) Finding Alzheimer’s Before a Mind Fails
Ms. Kerley is part of an ambitious new scientific effort to find ways to detect Alzheimer’s disease at the earliest possible moment. Although the disease may seem like a calamity that strikes suddenly in old age, scientists now think it begins long before the mind fails. “Alzheimer’s disease may be a chronic condition in which changes begin in midlife or even earlier,” said Dr. John C. Morris, director of the Alzheimer’s Disease Research Center at Washington University in St. Louis, where Ms. Kerley volunteers for studies.But currently, the diagnosis is not made until symptoms develop, and by then it may already be too late to rescue the brain. Drugs now in use temporarily ease symptoms for some, but cannot halt the underlying disease.Many scientists believe the best hope of progress, maybe the only hope, lies in detecting the disease early and devising treatments to stop it before brain damage becomes extensive. Better still, they would like to intervene even sooner, by identifying risk factors and treating people preventively — the same strategy that has markedly lowered death rates from heart disease, stroke and some cancers.So far, Alzheimer’s has been unyielding. But research now under way may start answering major questions about when the disease begins and how best to fight it.
(3) Medicare Private Plan Abuses
Heavily subsidized private Medicare plans are continuing to prey on elderly Americans despite state, federal and industry efforts to stop them. It is yet another reason to rein in these operations by eliminating their unjustified subsidies. These plans are a financial drag on Medicare as the government pays them about 12 percent more, on average, than the same services would cost in the traditional Medicare program. All too often, the private plans are an ethical horror as well. . . .[U]nscrupulous insurance agents have tricked people into dropping traditional Medicare coverage and enrolling instead in private plans that do not meet their needs. Agents typically receive $350 to $600 for each patient they enroll in a private plan. Some try to boost sales by pretending to be Medicare officials, forging signatures or hiding the fact that a patient’s doctor will not be part of the private plan. Others barge into homes and use high-pressure tactics to push poor, semiliterate people into a private plan.
More than meets the eye
Dear Mr. Prime,
We have received your accident-claim reports for the month of June—they total 27. I regret to inform you that GEICO will not be able to reimburse you for any of those repairs. I feel that I have sent the same letter to you once a month for the last six months, and I am now sending it again.
Since becoming a GEICO customer in January of this year, you have reported 131 accidents, requesting reimbursement for repairs necessitated by each one. You have claimed not to be responsible in any of them, usually listing the cause of the accident as either "Sneak attack by Decepticons" or "Unavoidable damage caused by protecting freedom for all sentient beings."
Full Letter >>
Minor cut-up
Had surgery on my left knee yesterday. A scope and cleanup - I think it went pretty well. Some observations...
- The procedure was done at the Presidio Surgical Center (PSC). Despite the name, it isn't located in the Presidio. It's also nowhere near the hospital where my doctor's office is located. Tricky, no?
- The PSC has a funny setup to minimize liability. They only provide equipment, space and support - all of the doctors are independent contractors otherwise unaffiliated with the Center. Because of this formal separation, even though it feels like a standard hospital to the patient, if something goes wrong during surgery, the patient will have no claim against the PSC (which has a lot of assets) and will only be able to sue the doctor. This is true even though the doctors can be part owners of the PSC... very sneaky.
- The ceiling panels at the PSC are the modular type, common in hospitals. After every five or so panels, however, the standard grey panel is replaced by a backlit photo of a blue sky with white, fluffy clouds. Amazing what a difference a small change like this can make. These few panels made the otherwise standard hospital space feel much more open and relaxed. Imagine what will happen when thin LCDs get so cheap that they can be used instead - the Hogwart's dining room roof will be a reality!
- Didn't need much Vicodin - the good doctor did an excellent job - which is a good thing. Turns out that Vicodin knocks me the hell out. Instantly. An off switch in pill form. Good to know.
- I had to initial a form stating that if my insurance company didn't cover the cost of crutches I would be responsible for payment. For $30 crutches after a $4,000 procedure. Some insurance policies will cover the surgery but not the crutches. Yeah. Our health care system is in great shape.
- My knee wrap looks like something Barry Bonds would wear if he were a mummy. Much better than a cast though, so no complaints from me.