What Is A Robber Baron?

A little etymology is in order.  Fortunately, Timothy Taylor in his blog "The Conversable Economist" saves us the trouble of poring over the archives.

He explains the origin of the term in the Middle Ages here and provides some helpful examples from Nineteenth Century oratory using the term in very descriptive ways.

Where are the orators of our day?

W.C Flagg, president of the Illinois State Farmer's Association, was such an orator in his day. He explains the results of the Robber Barons' in the field of transportation: "There-by you, the citizens of a democratic-republican country, are enabled to know how cruel, relentless, and unscrupulous a thing is arbitrary power in the hands of a few. Regulation by combination means that the railroad managers are feudal lords, and that you are their serfs."

An 1870 article in Atlantic Monthly draws a picture that seems all too familiar today:

"They make money so rapidly, so easily, and in such a splendid sensational way, that they corrupt more persons by their example than they ruin by their knaveries. As compared with common rogues, they appear like Alexander or Caesar as compared with common thieves and cutthroats. As their wealth increases, our moral indignation at their method of acquiring it diminishes, and at last they steal so much that we come to look on their fortunes as conquests rather than burglaries."

The article might have been referring to the practice of high frequency trading, where margins of time in microseconds result in vast stock trading fortunes as described this week in the New York Times. In times past, such people were also described as parasites. 

How Cyprus Affects Europe

Here's a pretty straight report on what's wrong with Europe's approach to Cyprus.

Bottom line: the European Central Bank and IMF are practically inviting a run on European banks.

It may take awhile to develop, but it will be hard to turn around. Then what will happen to the Europe project?

Bank Heist In Cyprus Threatens Eurozone

Over the weekend, IMF, ECB and Cyprus banking officials agreed to a plan to swipe depositor's funds to pay for a bailout. Small depositors rush to get their funds out of banks. The mattress looks safer. Will this trigger a run on banks in other European countries?

More evidence that the Eurozone is a flawed monetary union.

What can they be thinking.

Germany remains confident in austerity.

One view of the decision:

World Wide Shortages: Wisdom, Compassion, Humanity

"Do you not know, my son, with how little wisdom the world is governed?"

Axel Oxenstierna, Chancellor of Sweden to his son (1648).

I reflect on this quote from time to time and conclude that nothing has changed since 1648. That was about two decades before my first European ancestor arrived in Virginia.

I would like to believe that the American Experience has added to the world's stock of wisdom, but the more I study our own history, the less my confidence in that hope.

Still, I think it is at least a mixed bag. Some wisdom, some foolishness, some downright selfishness and inhumanity.

Today's Washington Post  has a very illuminating article on the SNAP program (formerly known as Food Stamps) in Woonsocket, Rhode Island. The article is worth reading for a number of reasons. First, it illuminates the amount of work that poor families have to go through to take advantage of SNAP. more importantly, it makes it clear that SNAP is much more than a program assisting individuals and families. It keeps whole communities alive.

Without safety net programs like SNAP, even more small businesses would have closed and small towns across the land would have become ghost towns. As the article explains:

"At precisely one second after midnight, on March 1, Woonsocket would experience its monthly financial windfall — nearly $2 million from the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. Federal money would be electronically transferred to the broke residents of a nearly bankrupt town, where it would flow first into grocery stores and then on to food companies, employees and banks, beginning the monthly cycle that has helped Woonsocket survive."

More importantly, programs like SNAP, Unemployment compensation, Medicaid, Medicare, and Social Security help us avoid persistent regions of deep poverty and hunger that once existed across Appalachia and other rural areas of the country.

But if you read the article, be sure to also read and reflect on the many mean-spirited comments made by Washington Post readers.

And ask yourselves the question: "What kind of country do we want to be when we grow up?"

How The Romans Handled Debt And Credit

Two researchers at the New York Fed have been looking into money and credit in ancient Rome. How did they use debt and credit to move money around?

Turns out they could move large amounts of money by paper transactions. Not unlike our modern "shadow" banking system.

Bookkeeping must have been a challenge without having zeroes to play with.

Even without zeroes, Romans managed to move a lot of money around without hauling physical gold and silver.

Here's how.

Debt Ceiling Blather

We got by the "fiscal cliff" without too much damage, though I think the agreement between the administration and the Republicans is damaging enough under the circumstances. The recovery is not yet self sustaining and any reduction in aggregate demand will not help. Right now we need more, not less government spending.

But cheer up - things could be worse. (As the old joke says, "so I cheered up and sure enough, things got worse!") Some Republicans are gearing up for another drive toward the cliff of default, the debt limit.

Let's be clear. The debt limit has nothing to do with controlling spending. That is done by Congressional action on taxes and appropriations. When the Treasury borrows, it only does so to pay the nation's bills already authorized by Congress. The debt limit makes no sense, and should be abolished.

Here are some thoughts by eminent economists the last time this reached crisis proportions. I share those thoughts.

But there is a new idea: the platinum coin. The Treasury would mint one or more platinum coins in very large denominations and deposit them with the Fed. It would then draw on those deposits to pay its bills. Paul Krugman explains the scheme.

Sound crazy? No more crazy than Congress telling the administration how much money to spend and what to spend it on; how much tax to raise and how to raise it, and then erect a barrier to actually paying the resulting bills. Now THAT's crazy!

It also violates a key provision of the Fourteenth Amendment to the Constitution, included with the precise reason of preventing Congressmen representing states of the former Confederacy from preventing the federal government from repaying loans that financed the Civil War. Now it is mainly the descendants of those former Confederates who are pushing the debt ceiling ploy.

I prefer the Constitutional route of telling these economic terrorists to go fly a kite. End this debt ceiling nonsense forever. My second choice is the platinum coin route.  The problem I see with that is, the Treasury's authority to strike platinum coins can be removed by legislative action.

Constitutional amendments are harder.

Just do it!

Meanwhile, Across The Pond....

On economics blogs this week, the big news has been the latest World Economic Outlook published by the International Monetary Fund (IMF). The heart of the report:

"The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7."

Multipliers? What's that about?

It is a dispute as old as the formal study of economics. Say and certain classical economists contended that government spending will have no effect on the economy as a whole. Government spending will "crowd out" private spending. There is  thus no "multiplier" from government fiscal measures that will improve the economy. In the long run the economy will fix itself.

"In the long run," economist John Maynard Keyenes quipped, "we will all be dead."

In recent years, the dispute has manifested itself in arguments over how big the multiplier is. Some have said, if it exists, the multiplier effect is very small. Not long ago the IMF official position was to that effect.

The new report says, in effect, "we were wrong."

Why is this important? Because the position of the IMF and that of some other powerful commentators has been that countries must reduce debt, even when their economies are experiencing little or no growth. The new insight: contractionary policies contract economies.

Duh.

Economist Kate McKenzie explains here. Australian economist Bill Mitchell explains here. Mitchell summarizes:

"1. The IMF is incompetent not because its staff are stupid but because the staff use the wrong models and operate in a make-believe world.
2. The world economy is enduring on-going stagnation because there is not enough spending.
3. Monetary policy – whether it being normal interest rate management or the aytpical operations such as quantitative easing – will not resolve a situation where the non-government sector is intent on not spending and the government is intent of pursuing fiscal austerity. The obsession that the policy watchers have with “what is the central bank going to do” is revealing but a waste of time.
4. Fiscal policy activism is desperately required and most nations should introduce new stimulus programs, targetted at direct job creation, to kick-start spending in their economies and provide some optimism to the private sector. This will also allow national income growth to occur, which, in turn, underpins the current desire of households and firms to reduce their precarious levels of debt (following the neo-liberal-inspired credit binge)."

Bottom line: now is not  the time to obsess over deficits and balanced budgets. Now is the time to put idle productive capacity to use by government spending.

I have said this before, but of course no one is paying any attention to me. Maybe some will listen to the IMF.

The core issue: "Who benefits and who pays?"

Related process: "blame the victim."

Chorus of the wealthy and the powerful: "There is nothing the government can do to fix the economy and it's all the president's fault."

Go figure.

This Land Is Whose Land? Guilford County Register Of Deeds

There is a really interesting video of recent foreclosure issues in Greensboro, NC. Well worth watching:


 

 at: http://www.youtube.com/watch?v=5vpkAdRw7u8&feature=related

J.P. Morgan: Mistakes Were Made

"Mistakes were made;

I didn't do it;

And if I did;

There's nothin' to it"

Jim Ragan - "For The People"

Europe On The Edge

This weekend's elections in France may portend a serious shakeup in European politics. Nicolas Sarkozy lost the first round of elections to the Socialist candidate, Francois Hollande. There will be a runoff election between these two leading candidates on May 6.

I had previously suggested that the first decade of the Euro could well be the last. For awhile, it appeared that the Greek government might be the most vulnerable in Europe to a repudiation by the electorate of austerity measures. Clearly this past weekend, French voters sent a strong signal. It seems increasingly likely that European voters in other countries will reject the austerity forced on them by the European Central Bank under the strong influence of Germany.

"It [the election] may also represent the first stirrings of a challenge to the German-dominated narrative of the euro crisis, which holds that public debt and runaway spending are the main culprits and that austerity must precede growth." - NY Times.

It has been obvious to what I would call the sensible economists (those of a Keynesian bent) for a long time that austerity in a time of recession will not lead to growth. It should have been equally obvious to political leaders that intentionally causing a depression in one's own country is not a recipe for reelection.

Over the weekend, the Dutch government failed to gain majority support for austerity measures, and more Czechs turned out to protest a tax increase and budget cuts than any protest since 1989.

Other countries whose voters increasingly press for growth instead of austerity include Great Britain, Spain and Italy.

It may be possible to rescue the Euro, but it looks more and more difficult.

European Economy Update

I haven't written lately about Europe. The news isn't good. While the European Central Bank has recently taken useful measures to ease the crisis, the political leadership is doing the opposite - seeking more austerity.

Are there no wise leaders in Europe? Apparently not.

If debt is the problem, it doesn't help people repay that debt when unemployment rises. In Spain, unemployment is close to 25% - for young people, it is 50%. By the way, before the economic crisis, Spain's budget surplus was greater than Germany's. The problem has been private, not public debt.

The whole problem in Europe, it has become clear, is caused by fixed exchange rate (inherent consequence of the Euro) and intellectual rigidity. The continent could easily descend into a new recession/depression. Economist Nouriel Roubini explains:

"The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming."

The US could easily avoid a similar fate by a robust fiscal stimulus, except one of our major political parties has effectively halted any effort by the administration to improve the economy. The only thing we have going for us is the Fed and its monetary measures, including quantitative easing. So far it seems to be working, but much too slowly.

More On Hungary - News Isn't Good

Paul Krugman has posted another update on Hungary by his colleague, Kim Lane Scheppele. The news is really not good. Hungary is on the cusp of becoming a despotism.

Class Differences

One of the delights and frustrations of the internet is that one often receives compelling information or thoughts passed on from some unknown source. It makes footnotes problematic.

Here is one such comment that came my way today. I don't know where it originated. Maybe it is a new apocrypha.

Enjoy:

"In the US we are all expected to work. Here is how the system is set up:

 

"If we are in the moneyed class, we can create toxic assets, sell them to unsuspecting marks, short the market with these same assets, and win billions, while getting tax-payer money from the government to pull our institutions out of disaster. We end up with even more money than before and collect handsome, even obscene, bonuses, while the country gets shafted, the economy takes a dive and millions lose jobs, 401(k)s and homes. It’s called capitalism, the best system in the world for building wealth for the “job creators”. But it might also be called socialism for the corporate caste.

 

"If we are in the not-so-moneyed class, middle-class people and working-class stiffs, especially the 33% who are poor, should begin to work at the age of nine (or earlier) and start with mopping the floor, checking books into libraries, and various other menial and non-menial tasks. They have no role models who work nor do they know what work means (Gingrich knows that this is a fact, although he won’t reveal his sources). This is called introducing the poor to the work ethic. But it sounds like the 19^th century all over again. It’s actually capitalism for the rest of us.

 

"The Newtster, meanwhile, works hard at influence-peddling and collects his own share of the pie, parlaying his hard-worn insider’s knowledge about government into a method for making his clients rich. But that might be called legalized corruption."

 

Debt Ceiling Analysis (Apologies To Sistine Chapel)

Here is a link to an article in GQ magazine with illustrations of the major players in the debt ceiling controversy.  Take a look. How many can you identify?

Euro - The First Decade

Next year will be the tenth anniversary of the introduction of the Euro into circulation.

We were living in Europe (though not in the Euro Zone) at the time. As I recall, the Euro was worth about 85 cents when it was introduced. It was a great convenience to travelers, who over much of Europe no longer had to convert dollars into a dozen different currencies.

But I always wondered how the common currency would work in practice. We now know the answer - not very well.

Unless the Europeans get their act together, the first decade of the Euro may well be the last.

Greece, Italy And Now...Germany?

News from Europe isn't improving. Today, Germany attempted a bond auction and couldn't find buyers for about a third of the bonds. Looks like investors are casting a jaundiced eye even on Germany as a safe haven.

In truth, by some measures (primary deficit), Italy is performing better than Germany.

Austerity doesn't seem to be working for anyone. Investors, both in Europe and in the US, seem to be less concerned about deficits and sovereign debt and more concerned about the possibility of further deflation, recession and economic contraction. Americans should worry about what is happening in Europe, because a breakup of the Euro could drag the US economy down with it.

Keep your fingers crossed.

By the way, the US Treasury is having no trouble marketing securities at historically low rates.

So much for Standard and Poor's.

Mario Monti, Technocrat, To The Fore

So now, at the insistence of Brussels technocrats, economist Mario Monti has become Prime Minister of Italy.

This completes the process begun in the 1980's and 90's when Italian technocrats, briefly in control of Italy's government, sought to exchange Italian economic independence for German central bankers.

There were many economists who warned that a plan where countries had to borrow money in someone else's currency would eventually not work.

Eventually may be this year, next year or the year after, but looks like sooner rather than later.

Many Italians cheered the departure of Berlusconi and the arrival of the technocrats. Lat's see what they say a year from now.

Europe - Is Anybody Watching?

Europe doesn't seem to be getting its act together. The new head of the ECB does look more willing to take action, but the pressure for austerity in the peripheral countries is strong. This seems likely to drag those countries further into debt and economic distress.

I believe this is economic foolishness on a grand scale. These are contractionary policies and European countries aren't going to be able to reduce their debt burden without expanding their economies. The big question is whether they have already entered a death spiral. The Euro zone is looking more and more shaky.

Last month I mentioned that the discussion blaming Greek and Italian debt entirely on improvident actions by Greece and Italy reminded me of discussions in the sixties and seventies about balance of payments issues.

British economist Gavyn Davies makes the connection explicit and clear in a recent blog post "The Eurozone Decouples From the World."

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"It is normal to discuss the sovereign debt problem," Davies explains,  "by focusing on the sustainability of public debt in the peripheral economies. But it can be more informative to view it as a balance of payments problem." I think that analysis is exactly right. He goes on to provide statistics: "Taken together, the four most troubled nations (Italy, Spain, Portugal and Greece) have a combined current account deficit of $183 billion. Most of this deficit is accounted for by the public sector deficits of these countries, since their private sectors are now roughly in financial balance. Offsetting these deficits, Germany has a current account surplus of $182 billion, or about 5 per cent of its GDP."

So what should be done?  If it is a balance of payments problem, Davies explains, "it is clear that there needs to be a capital account transfer each year amounting to about 5 per cent of German GDP from the core to the periphery. Without that, the euro will break up. Until 2008, this transfer happened voluntarily, by private sector flows, mainly in the form of bank purchases of higher yielding sovereign bonds in the peripheries, and to a lesser extent via asset purchases (notably housing in Spain). Since 2008, these private flows have dried up, and in fact reversed, so the public sector has had to step in. It has done so in the form of direct sovereign loans, and more importantly by international transfers which have been heavily disguised within the balance sheet of the ECB. Although disguised, these transfers are very real." What Davies fails to explain as clearly as he might, is that the reason the current account balance is a problem is that: a) the periphery countries don't have their own currency, but are forced to borrow in a currency over which they lack control; b) they are precluded from achieving balance by devaluation (that is, they have a very fixed exchange rate); and c) they still have all of the burdens of sovereignty with respect to things like funding armies, police forces, social programs, etc.

Davies goes on: "The eurozone’s proposed solution to this problem – budget contraction plus economic reform in the debtor nations, with no change in policy in the creditor nations – is very familiar to students of balance of payments crises in fixed exchange rate systems such as the Gold Standard or the Bretton Woods system in the past. It is not impossible for these solutions to work, but they are very contractionary for economic activity, and very frequently they fail. When they fail, they lead to devaluations by the debtor economies, normally because the required degree of contraction proves politically impossible to undertake. That is where Greece probably finds itself today. Others may be in the same position before too long."

Now Davies reaches the crux of the matter. The EU has decreed a punishing regime for Greece and soon will for Italy. It isn't clear how long Greek and Italian voters will stand for the solution. Leaving the Euro zone will not be painless, but it may turn out to be the best solution.

"The reason why the eurozone strategy is so difficult to implement is that both of its required actions are likely to make the European recession worse in the immediate future. This has already become clearly apparent in the negative feedback loops which have developed as budgetary policy has been tightened. None of the austere budgetary plans which have been announced during 2011 will achieve their fiscal targets in 2012 in the context of the recessions which will probably be encountered by many countries, and that includes France. There is no such thing as “expansionary austerity”, certainly not in countries which cannot devalue or reduce their long term interest rates. These countries are now chasing their own tails."

"Less widely appreciated," Gavyn explains,  "is the fact that structural economic reform will also make the recession worse in the next couple of years. This reform is absolutely essential in countries like Italy, which are otherwise facing a future of indefinite stagnation, but IMF research shows that in previous similar examples, labour market reform has initially led to higher unemployment and lower GDP as workers are shaken out of unproductive employment. The IMF warns that these reform programmes work best when economies are beginning to recover from recessions, and when there is scope in government budgets to compensate the losers through tax cuts or other measures of support. Neither of these conditions apply today."

"Is there," Gavyn asks,  "any way of improving the chances of success for the eurozone’s chosen strategy? Theoretically, yes. Germany, as the main creditor nation could choose to grow faster, and accept higher domestic inflation for a while, in order to ease the process of adjustment. In practice, Germany shows no sign of accepting this, but it is the best solution available, not only for the debtor economies, but also for Germany itself."

So the logical conclusion is, if the Euro zone collapses, it should not be Greece or Italy which shoulders the blame, but Germany.

Greece And The Euro

Looks like Prime Minister Papandreou has backed off of his plan to hold a referendum on the EU "rescue" [read: punishment] plan for Greece. Lots of pressure from EU members, especially France and Germany, and also from the US.

I could be wrong, but in the end I think it will make no difference. The Euro zone was a jerry-built house that is likely to collapse sooner or later, what ever happens with Greece. The Greek people could still trigger a fall of the Papandreou government and cause early elections. Even if that doesn't happen, the mood of the electorate is not likely to be any better when elections are scheduled next year. That is, I don't think another year of pain and austerity, recession, lost jobs and poverty in order to avoid displeasing German bankers who dominate the European Central Bank will improve their willingness to passively accept their fate.

What might alleviate the displeasure in Greece as well as in Italy, Spain and Portugal would be an ECB program to expand the economy. That doesn't seem to be in the cards. The beatings will continue until morale improves.

It can't help the situation that the European Commission agent in Athens to "help" the Greeks is Horst Reichenbach, a German former official of the European Bank for Reconstruction and Development. Not surprisingly, older Greeks remember the last time that Germans came to run the affairs of Athens. They aren't fond memories.

The late historian Tony Judt, in his seminal history, Post War, revealed the extent to which young Europeans of the World War II generation received their first experiences of government planning during German occupation. They learned the techniques and were exposed to a vision of the possibilities. The European project has been, to a greater extent than most Americans realize, an outgrowth of that experience. One legacy has been a tension between a generation who view themselves as European and an overlapping generation who take a more nationalist view of self-determination as an ideal.

It isn't yet clear how the tension will be resolved in Greece. I wouldn't bet against a return of nationalism.

It Isn't Greece - It's the Euro

Strong concerns yesterday about the European debt package adopted last Wednesday/Thursday by the EC were expressed Friday by both economists and investors. Economist Kash Mansori reported the results of Friday's auction of Italian bonds.

I have cruised the internet this morning, reading blogs of respected economists, and haven't found a single one who is confident that the rescue plan will work. It's no longer about Greece - it's about Italy and Spain and more importantly, about the survival of the Euro project itself. It would be more reassuring if the European Central Bank seemed committed to doing everything necessary. No such signals have been received.

What should the message be? How about: "It's the Euro, stupid!"