Archive for November, 2010
An interesting battle is brewing in Taunton, Massachusetts. There, the city council—in response to a strong push by the United Electrical, Radio and Machine Workers union—appears on the verge of using eminent domain to take over a factory that the owners would rather close than sell to its workers.
The factory, which employs 100 workers, is owned by Easterline Technologies, a major aerospace and defense contractor. Easterline has been doing quite well lately, posting profits of nearly $120 million last year and paying its CEO more than $6 million. Unfortunately for the Taunton workers, although their plant has been profitable, Easterline has decided to move its production to non-union operations in Mexico and California.
Yves Smith of the blog Naked Capitalism describes what happened next:
Here’s where it gets ugly. Esterline had given the union, the United Electrical, Radio and Machine Workers union, the right of first refusal to buy the facility and operate it itself. But the company decided to renege on the deal when the union had to insist that the company obey Massachusetts law and pay for three months of medical care after employees were let go. Esterline started dealing in bad faith, and said it would cut the already-agreed-upon severance package by $143,000. That’s not kosher; it’s called “regressive bargaining” and the unions have filed charges with the National Labor Relations Board.
Esterline has now turned punitive. Its latest position is that it needs to compensate for these additional severance costs (since when is complying with the law an add on?) and has scheduled an auction for the plant’s equipment. The union went to the Taunton town council and have secured a preliminary commitment for it to use its eminent domain powers under the Fifth Amendment, which permits governments to take control of private property for public purpose (the council is waiting for the results of a legal analysis before it takes a formal vote). Huffington Post reported that the town solicitor presented his preliminary findings, and the council voted unanimously to call on Esterline to postpone the auction while he completes his research.
Gee—using public power to defend the public interest—what an interesting idea. Wonder if it might catch on elsewhere?
The evidence is clear that many people have been forced into foreclosure illegally. As Shahien Nasiripour reports:
The ongoing “turmoil” roiling megabanks and their faulty home foreclosure practices may represent deeper, more systemic problems regarding the origination, transfer and ownership of millions of mortgages, potentially putting Wall Street on the hook for billions of dollars in unexpected losses and threatening to undermine “the very financial stability that the Troubled Asset Relief Program was designed to protect,” a government watchdog warns in a new report. Recent revelations regarding mortgage companies’ use of “robo-signers” when processing foreclosure documents “may have concealed much deeper problems in the mortgage market,” according to the Tuesday report by the Congressional Oversight Panel, an office formed to keep tabs on the bailout. . . . In the worst-case scenario . . . the “robo-signing of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure,” the panel said in its report. “In essence, banks may be unable to prove that they own the mortgage loans they claim to own.”
You can see statements by some of these robo-signers here. Among their admissions: they signed thousands of documents without reading them, have no idea of how many different companies they were signing for, and in some cases other people affixed their names to documents without their knowledge.
If you want to see some powerful images highlighting the extent of the housing/foreclosure crisis in the U.S. visit this site.
Perhaps the best illustration of the complexities that underpinned the securitization and churning of mortgages, and thus the housing bubble and its eventual collapse, comes from Dan Edstrom, whose job it is to perform securitization audits. He spent a year creating the diagram below, which illustrates what happened to his own mortgage.
Any guesses how this will turn out? One thing is for sure–millions of people are losing their homes and little is being done to help them.
Where do our federal taxes go? A Wall Street Journal blog post recently reported on the results of a study done by a group called Third Way, which was designed to answer this question.
The Wall Street Journal asked Third Way to produce an “itemized receipt” for the federal taxes that would be paid by two different couples. The first has two children (13 and 17 years of age) and one spouse that earns $150,000 and another that earns $50,000. The second couple receives $100,000; both individulas are retired and have no dependents.
As I looked at the itemized receipt below, I was struck by the number of military related uses of our tax money. I therefore decided to see how much of our tax money was going to support military related activities.
First, I removed the tax money going to social security and medicare from my calculations. The reason is that both of these programs have their own specific taxes that can be used only to fund their respective operations.
I was more interested in considering how our general tax dollars are used. In other words, we pay lots of taxes that go into the general fund. These funds can be used anyway our government decides. It was the distribution of these general tax funds that interested me.
Because my staff of highly trained researchers happened to be working on other important projects, I was forced to do all the work on this post myself. Therefore, I decided to look only at the figures for the “working couple.”
I first added up all the itemized tax payments (leaving out social security and medicare for reasons highlighted above). The total came to $19, 005.82.
Then I added up all the itemized tax payments that went to activities that were obviously dedicated to military related purposes. This included operations, personal, weapons purchases, research and testing, veterans health care, and retirement benefits.
Then I added to that total 50% of the amount spent on the Department of Energy, because that is where our nuclear weapons program costs show up, and 80% of the amount spent on interest on the national debt, because it has been military spending that has generated most of our past deficits. Both of these adjustments are in line with the practice of other scholars. Finally, I also included in my military total the tax payments that go to fund the CIA.
The grand sum of all military items (including the three additions for nuclear weapons, interest, and covert operations) was $11,632.32.
So, divide $11,632.32 by $19,005.82, and it turns out that 61.2% of the general tax payments made by our hard-working couple are going to fund military activities, past, present and future. Said differently, out of every tax dollar that this couple pays into our general tax fund, Congress is sending approximately 61 cents to support military activities.
Assuming that this ratio is generalizable to other taxpayers, it is no wonder we have little left over to do other things.
Here is an excellent 7 minute, 47 second video on the production of electronics and why the industry’s strategy of “designing for the dump” is toxic for people and our planet.
This strategy highlights the economic concept of “market failure.” Market failures occur when private producers are not forced to internalize all their production costs. Private producers go about their business producing to maximize profit. But because private costs are less than social costs, we get market outcomes that actually lower social welfare.
For more information on the problem and responses to it, check out the story of stuff website here.
[youtube] http://www.youtube.com/watch?v=sW_7i6T_H78 [/youtube]
Here is a visual, produced by the Economic Policy Institute using Congressional Budget Office data, that helps to highlight the deep distributional inequities that characterize our economy. Our collective efforts create great wealth, but clearly only a very few get to enjoy most of it.
As the Chart below shows, 38.7 percent of all of the income growth over the period 1979-2007 went to the top 1 percent of income earners. This top group received more income over this period than did the entire bottom 90 percent of the population (whose share was only 36.3 percent).
Note: “Upper-middle fifth” (60-80 pecent) refers to those in the income scale who make more than 60 percent of earners but less than the top fifth. “Lower-middle fifth” refers to those who fall in the lower 20-40 percent range of the income scale.
Economists are fond of presenting themselves as above the fray. They theorize that people are self-interested maximizers. Well, all people but economists. Economists don’t have any vested interest in policy outcomes. They just study economic dynamics and argue for policies that are in the public interest.
Well, that is the story they tell. Perhaps they believe it, perhaps not.
What is true, is that many of our leading economists have significant financial ties to powerful economic interests who are not above the fray and have a real material stake in promoting continued liberalization and deregulation regardless of its effect on the overall economy.
Here are some examples drawn from an article by Charles Ferguson (who is also director of the documentary “Inside Job” which highlights the growing conflict of interest that appears to affect many prominent economists):
Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6 million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.
Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.
Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks’ Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6 million to $17 million.
Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.
Larry Summers, who recently resigned from his position as Obama’s leading economic advisor, is probably the poster economist for this problem.
Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.
After Summers left the Clinton administration, his candidacy for president of Harvard was championed by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as treasury secretary. Rubin, after leaving the Treasury Department—where he championed the law that made Citigroup’s creation legal—became both vice chairman of Citigroup and a powerful member of Harvard’s governing board.
Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency. During this time, Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.)
Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world’s leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people’s money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a “full-blown financial crisis” and a “catastrophic meltdown.”
When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a “Luddite,” dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)
Soon after that, Summers lost his job as president of Harvard after suggesting that women might be innately inferior to men at scientific work. In another part of the same speech, he had used laissez-faire economic theory to argue that discrimination was unlikely to be a major cause of women’s underrepresentation in either science or business. After all, he argued, if discrimination existed, then others, seeking a competitive advantage, would have access to a superior work force, causing those who discriminate to fail in the marketplace. It appeared that Summers had denied even the possibility of decades, indeed centuries, of racial, gender, and other discrimination in America and other societies. After the resulting outcry forced him to resign, Summers remained at Harvard as a faculty member, and he accelerated his financial-sector activities, receiving $135,000 for one speech at Goldman Sachs.
Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations—quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back.
Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers’s career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.
So—tell me—how much trust do you have in our leading economists and the advice they give?
Sometimes a picture is worth a thousand words. Here is a two minute video clip from the film Inside Job that showcases the above mentioned Professor Frederic Mishkin and his “objective” research on Iceland.
[youtube] http://www.youtube.com/watch?v=yygWXpYoab4 [/youtube]