A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Wednesday, May 16, 2012


Okay. Today. Apology. May 15 has come and gone and the final first edition of Demand Side Economics is still not out. No excuses. Should have been done.

Now we're looking at June 1. Did I mention Steve Keen liked it? I sent him the Review and Comment edition and he had it up on his Debtwatch blog in twelve hours. Provided a fine spate of buyers. He SHOULD like it.
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Today I'm going to throw audio at you. From Wall Street. From AEI, the American Enterprise Institute. And it's not idiot of the week. Imagine that. It's the great JP Morgan hedge debacle.

Let me set it up briefly. This is a casino. Hedge is a betting word. Minsky uses it to describe rollover financing, but that's not what the big boys are doing. They are trading paper in hopes of getting the stuff with the biggest numbers at the end of the game. There is absolutely no roads, bridges, houses, plant, equipment, involved. It is speculation.

Second, the exposure is tremendous. You'll hear Charles Peabody talking with Tom Keene in a minute about $5 trillion of notional value on JP Morgan's book, with Morgan Stanley close behind. Not net, they say, but notional. What is the net exposure? They say they have bought credit protection on their positions, but what is the point of that? If everything is symmetrical, Why bother? And when we hear it is going to take months, quarters, years to unwind the trade, we get to the point. It depends on liquidity. Can you buy, sell, trade today? If you can't, here comes the rollover. And it's not rolling over.

Third, second, first, this is a casino. We're seeing why we need real investment in real stuff. Rail, electrical grids, schools, climate change mitigation, infrastructure. That will produce real value, savings, improvement in capacity, a livable planet. What about bonds to retrofit buildings with efficient heating a cooling? Pays off in seven years in energy savings. Use an eighth year to pay the interest. You'd have retirees lining up around the block. I can't keep the disgust down when I hear we need the Keystone pipeline for jobs. We need to build environmentally questionable infrastructure for a doomed technology for jobs? But we don't need half a million construction workers, materials suppliers, engineers and technicians to fit us out for the real future?

Sorry. That's not today. Today is JP Morgan. Too much money. Looking for risk, not value. Thank you, Ben Bernanke. Finding it in the demise of the Eurozone.

It's not even a bet. Or at least it's not even a question. The madness of austerity in order to pay off the banks for their previous bad bets is not going to work. It has never worked. The IMF has imposed the Washington Consensus across the globe. Where is the example of success? You can't shrink your way to growth. You can't kill the host or the parasite will die too.

I listen to a lot of Bloomberg. That's where I lifted today's audio. Every other economist is talking about how Europe needs to take the pain. These guys are from the banks, and they're getting desperate. Europe needs to take the pain because the banks are so shaky, they can't take even a token write-down.

But how can you tell the Greeks, whose standard of living is cut in half and its debt problems actually growing that austerity works? They've watched it on the ground for three years. Or the Spanish. Or the Irish.

I'd better get the book out soon or the last chapter on Euro breakup won't be a forecast.

But lastly, the Fed's zero interest under Ben Bernanke is working just about as well as its one percent interest under Alan Greenspan.

Now, here, from AEI. Maybe I should have kept that attribution for the punch line. Here, from the well-endowed Right Wing think tank, the American Enterprise Institute, John Makin.


Wow. AEI. Who would have thunk.

Now, a couple of pieces on JP Morgan and its blunder, beginning with investor Vince Farrell and continuing with analyst Charles Peabody, one of the best banking analysts. We featured him back in 2007 excerpts from a National Economists Club lunch. He is still calling it as he sees it.

Finally, we have some Chris Whalen from before the blunder to get the general outlook for banks absent the potential from this blunder. Whalen actually has a lot more to say than this, but its in Street jargon.


Wow. These guys are not Occupy Wall Street. They ARE the Street.

If I hear any more about exogenous shocks, I'm going to plant a black swan in Ben Bernanke's bed.

With the size of the too big to fails, the incentives to risk, the absense of control of markets, the fevered feeding of cheap chips into the casino, and the insistence on austerity rather than investment, How could anything ELSE happen? These aren't shocks coming from outside the system. They are the impact of the rocks we've been steering toward. This is the inevitable consequence of bad economics for the benefit of the powerful. This is no accident. It is incompetence.

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