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

Monday, April 30, 2012

Relay: Greenberger & Guilford Q&A

Today completing the Congressional hearing on commodity market manipulation featuring Michael Greenberger and Gene Guilford. Our regrets for not getting this up earlier. Tech reported the audio was blocked by "unclosed token at line 3." Sounded serious. Actually it sounded trivial, but time-consuming. Then just in the last half hour we discovered a backup file.

Reminding you to mark the Attorney General's investigation which received new impetus this month against the price of commodities. Outlawing the chips in the game, the commodity index swaps and the synthetic exchange traded funds would save us all a lot of cost and risk. So here, the Q&A between the Senators and representatives.
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Friday, April 27, 2012

Transcript: 499 Oil and Gene Guilford, with chart

Today continuing with oil and speculation, Greenberger and Guilford. Brought to as usual by Demand Side the book, see DemandSideBooks.com. Look for the final first edition on May 15. Today is mostly a relay, continuing from the hearing of the Democratic Steering and Policy Committee, here with Gene Guilford.

A Couple of notes. First on the Enron loophole, which is mentioned at the outset. The Enron Loophole was the exemption from government regulation for most over-the-counter energy trades and trading on electronic markets. It was enacted in the Commodity Futures Modernization Act of 2000, signed by Bill Clinton and drafted by the man who today is President Obama’s Treasury Secretary, Tim Geithner.
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In September 2007, Carl Levin led the passage of Senate Bill S 2058, it passed the house, was vetoed by Geroge W. Bush, but overridden by both the House and Senate. Mr. Guilford says here, "almost" closed the loophole, because the CFTC has yet to begin enforcement of its provisions, some say on account of legal challenges, some say because the CFTC is undermanned, some say because its current head Gary Gensler is a former Goldman Sachs executive. Thanks in part to F. William Engdahl and the post on axis of logic, link on line. We append that article to the trnascript of today's podcast. Also we'll put up the extensive and interesting Q&A as a separate relay broadcast tomorrow.

We at Demand Side have noted that the very idea of investing in commodities is distorted. Commodities are not appropriate vehicles for investment, they should be the product of investment. Investing in commodities is speculation, and the rush into commodities creates a bubble, exacerbated by the easy money from the Fed. Demand Side also directed your attention, over the last half of 2011, to the improbably regular pattern of bunny hops in all commodity markets. The algorithm hop, we should call it.

That pattern was replaced by the inexorable rise Guilford mentions here. And to be clear about this testimony, and perhaps adding rather than subtracting from its credibility, is to note that the peak in gasoline prices occurred on April 4, 2012, precisely the date this was recorded. We include a chart of the four major commodity indexes on the blog for your reference.

Now continuing with Gene Guilford


Behind Oil Price Rise: Peak Oil or Wall Street Speculation?
By F. William Engdahl Voltairenet.org
 Sunday, Mar 18, 2012

While the drop in oil demand and enhaced production should be pulling prices down, fuel has never been more expensive. Engdahl dismisses explanations linked to saber-rattling and the peak oil theory. He points instead an accusing finger at oil price speculation and manipulation by Wall Street banks, with the collusion of the Government Agency which should be regulating their activities but whose chairman - a "former" Goldman Sachs asset - has been asleep at the wheel.

Since around October last year, the price of crude oil on world futures markets has exploded. Different people have different explanations. The most common one is the belief in financial markets that a war between either Israel and Iran or the USA and Iran or all three is imminent. Another camp argues that the price is rising unavoidably because the world has passed what they call “Peak Oil”—the point on an imaginary Gaussian Bell Curve at which half of all world known oil reserves have been depleted and the remaining oil will decline in quantity at an accelerating pace with rising price.

Both the war danger and peak oil explanations are off base. As in the astronomic price run-up in the Summer of 2008 when oil in futures markets briefly hit $147 a barrel, oil today is rising because of the speculative pressure on oil futures markets from hedge funds and major banks such as Citigroup, JP Morgan Chase and most notably, Goldman Sachs, the bank always present when there are big bucks to be won for little effort betting on a sure thing. They’re getting a generous assist from the US Government agency entrusted with regulating financial derivatives, the Commodity Futures Trading Corporation (CFTC).

Since the beginning of October 2011, some six months ago, the price of Brent Crude Oil Futures on the ICE Futures exchange has risen from just below $100 a barrel to over $126 per barrel, a rise of more than 25%. Back in 2009 oil was $30.

Yet demand for crude oil worldwide is not rising, but rather is declining in the same period. The International Energy Agency (IEA) reports that the world oil supply rose by 1.3 million barrels a day in the last three months of 2011 while world demand increased by just over half that during that same time period. Gasoline usage is down in the US by 8%, Europe by 22% and even in China. Recession across much of the European Union, a deepening recession/depression in the United States and slowdown in Japan have reduced global oil demand while new discoveries are coming online daily and countries like Iraq are increasing supply after years of war. A brief spike in China’s oil purchases in January and February had to do with a decision last December to build their Strategic Petroleum Reserve and is expected to return to more normal import levels by the end of this month.

Why then the huge spike in oil prices?

Playing with ‘paper oil’
A brief look at how today’s “paper oil” markets function is useful. Since Goldman Sachs bought J. Aron & Co., a savvy commodities trader in the 1980’s, trading in crude oil has gone from a domain of buyers and sellers of spot or physical oil to a market where unregulated speculation in oil futures, bets on a price of a given crude on a specific future date, usually in 30 or 60 or 90 days, and not actual supply-demand of physical oil determine daily oil prices.

In recent years, a Wall Street-friendly (and Wall Street financed) US Congress has passed several laws to help the banks that were interested in trading oil futures, among them one that allowed the bankrupt Enron to get away with a financial ponzi scheme worth billions in 2001 before it went bankrupt.

The Commodity Futures Modernization Act of 2000 (CFMA) was drafted by the man who today is President Obama’s Treasury Secretary, Tim Geithner. The CFMA in effect gave over-the-counter (between financial institutions) derivatives trading in energy futures free reign, absent any US Government supervision, as a result of the financially influential lobbying pressure of the Wall Street banks. Oil and other energy products were exempt under what came to be called the “Enron Loophole.”

In 2008 during a popular outrage against Wall Street banks for causing the financial crisis, Congress finally passed a law over the veto of President George Bush to “close the Enron Loophole.” And as of January 2011, under the Dodd-Frank Wall Street Reform act, the CFTC was given authority to impose position caps on oil traders beginning in January 2011.

Curiously, these limits have not yet been implemented by the CFTC. In a recent interview Senator Bernie Sanders of Vermont stated that the CFTC doesn’t "have the will" to enact these limits and "needs to obey the law.” He adds, "What we need to do is…limit the amount of oil any one company can control on the oil futures market. The function of these speculators is not to use oil but to make profits from speculation, drive prices up and sell." [1]

While he has made noises of trying to close the loopholes, CFTC Chairman Gary Gensler has yet to do so. Notably, Gensler is a former executive of, you guessed, Goldman Sachs. The enforcement by the CFTC remains non-existent.

The role of key banks along with oil majors such as BP in manipulating a new oil price bubble since last Autumn, one detached from the physical reality of supply-demand calculations of real oil barrels, is being noted by a number of sources.

A ‘gambling casino…’
Current estimates are that speculators, that is futures traders such as banks and hedge funds who have no intent of taking physical delivery but only of turning a paper profit, today control some 80 percent of the energy futures market, up from 30 percent a decade ago. CFTC Chair Gary Gensler, perhaps to maintain a patina of credibility while his agency ignored the legal mandate of Congress, declared last year in reference to oil markets that "huge inflows of speculative money create a self-fulfilling prophecy that drives up commodity prices." [2] In early March, Kuwaiti Oil Minister Minister Hani Hussein said in an interview broadcast on state television, "Under the supply and demand theory, oil prices today are not justified." [3]

Michael Greenberger, professor at the University of Maryland School of Law and a former CFTC regulator who has tried to draw public attention to the consequences of the US Government’s decisions to allow unbridled speculation and manipulation of energy prices by big banks and funds, recently noted, "There are 50 studies showing that speculation adds an incredible premium to the price of oil, but somehow that hasn’t seeped into the conventional wisdom," Greenberger said. "Once you have the market dominated by speculators, what you really have is a gambling casino." [4]

The result of a permissive US Government regulation of oil markets has created the ideal conditions whereby a handful of strategic banks and financial institutions, interestingly the same ones dominating world trade in oil derivatives and the same ones who own the shares of the major oil trading exchange in London, ICE Futures, are able to manipulate huge short-term swings in the price we pay for oil or gasoline or countless other petroleum-based products.

We are in the midst of one of those swings now, one made worse by the Israeli saber-rattling rhetoric over Iran’s nuclear program. Let me go on record stating categorically my firm conviction that Israel will not engage in a direct war against Iran nor will Washington. But the effect of the war rhetoric is to create the ideal backdrop for a massive speculative spike in oil. Some analysts speak of oil at $150 by summer.

Hillary Clinton just insured that the oil price will continue to ride high for months on fears of a war with Iran by delivering a new ultimatum to Iran on the nuclear issue in talks with Russian Foreign Minister Lavrov, “by year’s end or else…” [5]

Curiously, one of the real drivers of the current oil price bubble is the Obama Administration’s economic sanctions recently imposed on oil transactions of the Central Bank of Iran. By pressuring Japan, South Korea and the EU not to import Iranian oil or face punitive actions, Washington has reportedly forced a huge drop in oil supply from Iran to the world market in recent weeks, giving a turbo boost to the Wall Street derivatives play on oil. In a recent OpEd in the London Financial Times, Ian Bremmer and David Gordon of the Eurasia Group wrote, “… removing too much Iranian oil from the world’s energy supply could cause an oil price spike that would halt the recovery even as it does some financial damage to Iran. For perhaps the first time, sanctions have the potential to be ‘too successful,’ hurting the sanctioners as much as the sanctioned.”

Iran is shipping 300,000 to 400,000 a barrels a day less than its usual 2.5 million barrels a day, according to Bloomberg. Last week, the US Energy Information Administration said in a report that much of that Iranian oil isn’t being exported because insurers won’t issue policies for the shipments. [6]

The issue of unbridled and unregulated oil derivatives speculation by a handful of big banks is not a new issue. A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

The report pointed out that the Commodity Futures Trading Trading Commission had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.” Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” [7]

Where is the CFTC now that we need such limits? As Senator Sanders correctly noted, the CFTC appears to ignore the law to the benefit of Goldman Sachs and Wall Street friends who dominate the trade in oil futures.

The moment that it becomes clear that the Obama Administration has acted to prevent any war with Iran by opening various diplomatic back-channels and that Netanyahu is merely trying to use the war threats to enhance his tactical position to horse trade with an Obama Administration he despises, the price of oil is poised to drop like a stone within days. Until then, the key oil derivatives insiders are laughing all the way to the bank. The effect of the soaring oil prices on fragile world economic growth, especially in countries like China is very negative as well.

[1] Morgan Korn, "Oil Speculators Must Be Stopped and the CFTC “Needs to Obey the Law”: Sen. Bernie Sanders," Daily Ticker, March 7, 2012.
[2] Ibid.
[3] UpstreamOnline, "Kuwait’s oil minister believes current world oil prices are not justified, adding that the Gulf state’s current production rate will not affect its level of strategic reserves," 12 March 2012.
[4] Peter S. Goodman, "Behind Gas Price Increases, Obama’s Failure To Crack Down On Speculators," The Huffington Post, March 15, 2012.
[5] Tom Parfitt, "US ’tells Russia to warn Iran of last chance’," The Telegraph, 14 March 2012.
[6] Steve Levine, "Obama administration brushes off oil price impact of Iran sanctions," Foreign Policy, March 8, 2012.
[7] F. William Engdahl, "‘Perhaps 60% of today’s oil price is pure speculation’," Global Research, May 2, 2008.  

Thursday, April 26, 2012

Transcript 498: Michael Greenberger on Commodity Market Manipulation

Today it is wall to wall oil. In a few moments we'll begin the testimony of Michael Greenberger and Gene Guilford before the House Democratic Steering and Policy Committee on oil speculation and prices.

If you will recall we started off 2011 saying the rise in oil prices would trigger a general economic downturn, just as it had in 2008. Since we didn't believe we in the recovery in a business cycle sense, we could not call it a double dip, but we did suggest sub zero percent GDP growth by the onset of 2012. Growth was closer to zero than to the consensus 4.5 percent in 2011. Pending any revisions, we did not get below zero. We'll look into the reasons in future podcasts. Possibly the bite out of demand from the rise in oil prices was offset by the expansion of credit and to some degree by tax cuts. We assumed restrictions to credit would replicate higher interest rates. This is true for the mortgage market, but other consumer debt, student loans, and corporate credit continues apace.
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There's a lot we don't know about oil, oil prices, oil companies, the oil sector, Texas, and North Dakota, but some things we do know.
  1. An oil-based economy is a doomed economy, because oil is a dead end environmentally.
  2. Oil interests have an inordinate influence on public policy. That is, they own the place, along with finance.
  3. Oil prices are not supply and demand prices.
  4. Oil prices are a primary driver of what is termed inflation.
  5. As oil goes up in price, labor goes down, in real terms. Oil inflation is wage deflation.
  6. Oil extraction and distribution, from exploration to drilling to setting up infrastructure to the point of final sale produces fewer jobs per dollar than any other sector.
This final point deserves a bit of expansion. Why is it that oil prices have less effect on Europe where the price is higher per gallon, or liter? Part of the reason is that the transportation system of Europe is less dependent on oil. Part of the reason is that it is a smaller shock when a dollar is added to a gallon of gas and pushes it from seven to eight dollars. And part of the reason is that the price in Europe is high because of taxes and those taxes finance jobs and demand from those incomes. In the U.S., when the price goes up a dollar a gallon it is just a tax – in the Tea Party sense, a net loss – to the oil companies and speculators. Much is made of the fact that new oil drilling in North Dakota is creating jobs, or in Pennsylvania. Now these jobs that involve more intrusion into geological integrity may be different than the traditional drop a straw into a pool jobs, but traditionally, they do not last. They go away even as the cost of the oil they produce stays around. And North Dakota is a quarter the size of Brooklyn. So a boom....

If we taxed gasoline consumption as the Europeans do and returned that money in the form of jobs, or reductions in other taxes, or even in cash as the Cantwell-Collins Cap and Rebate plan from a couple of years ago, usage would go down, adjustment to the future would go up, and the economic impact of speculation would be far less.

Before we get to Greenberger and Guilford, there are some disturbing notes from Argentina, that the country has nationalized a major oil company there.

We abridge an article here from Mark Weisbrot off the Real World Economics Review blog, issued under the title
Argentina’s critics get it wrong again
April 20, 2012

The Argentine government’s decision to re-nationalize its formerly state-owned oil and gas company, YPF, has been greeted with howls of outrage, threats, forecasts of rage and ruin, and a rude bit of name-calling in the international press.

We have heard all this before. When the Argentine government defaulted on its debt at the end of 2001, then devalued its currency a few weeks later, it was all gloom and doom in the media. The devaluation would cause inflation to spin out of control, the country would face balance of payments crises from not being able to borrow, the economy would spiral downward into deeper recession.

Nine years later, Argentina’s real GDP has grown by about 90 percent, the fastest in the hemisphere. Employment is at record levels, and both poverty and extreme poverty have been reduced by two-thirds. Social spending, adjusted for inflation, has nearly tripled.

All this is probably why Cristina Kirchner was re-elected last October in a landslide victory.

Of course this success story is rarely told, mostly because it involved reversing many of the failed neoliberal policies – backed by Washington and its International Monetary Fund — that brought the country to ruin in its worst recession of 1998-2002. Now the government is reversing another failed neoliberal policy of the 1990s: the privatization of its oil and gas industry, which should never have happened in the first place.

Repsol, the Spanish oil company that currently owns 57 percent of Argentina’s YPF, hasn’t produced enough to keep up with Argentina’s rapidly growing economy. From 2004 to 2011, Argentina’s oil production actually declined by almost 20 percent and gas by 13 percent, with YPF accounting for much of this. And the company’s proven reserves of oil and gas have also fallen substantially over the past few years.

The lagging production is not only a problem for meeting the needs of consumers and businesses, it is also a serious macroeconomic problem.

The shortfall in oil and gas production has led to a rapid rise in imports. In 2011 these doubled from the previous year to $9.4 billion, thus canceling out a large part of Argentina’s trade surplus. A favorable balance of trade has been very important to Argentina since its default in 2001. Because the government is mostly shut out of borrowing from international financial markets, it needs to be careful about having enough foreign exchange to avoid a balance-of-payments crisis.


So why the outrage against Argentina’s decision to take – through a forced purchase — a controlling interest in what for most of the enterprise’s history was the national oil company? Mexico nationalized its oil in 1938, and – like a number of OPEC countries – doesn’t even allow foreign investment in oil. Most of the world’s oil and gas producers – from Saudi Arabia to Norway – have state-owned companies. The privatizations of oil and gas in the 1990s were an aberration – neoliberalism gone wild. Even when Brazil privatized $100 billion of state enterprises in the 1990s, the government kept majority control over Petrobras.

As Latin America has achieved its “second independence” over the past decade and a half, sovereign control over energy resources has been an important part of the region’s economic comeback. Bolivia re-nationalized its hydrocarbons industry in 2006, and increased hydrocarbon revenue from less than 10 percent to more than 20 percent of GDP (the difference would be about two-thirds of current government revenue in the United States). Ecuador under Rafael Correa greatly increased its control over oil and its share of private companies’ production.

So Argentina is catching up with its neighbors and the world and reversing past mistakes in this area. As for their detractors, they are in a weak position to be throwing stones. The ratings agencies are threatening to downgrade Argentina. Should anyone take them seriously after they gave AAA ratings to worthless mortgage-backed junk during the housing bubble and then pretended that the U.S. government could actually default? And as for the threats from the European Union and the right-wing government of Spain, what have they done right lately, with Europe caught in its second recession in three years, nearly halfway through a lost decade, and with 24 percent unemployment in Spain?
It is interesting that Argentina has had such remarkable economic success over the past nine years while receiving very little foreign direct investment and being mostly shunned by international financial markets.
And here we see that there have been questions about how oil prices are reported.

Price reporting agencies, so-called PRA's, are under scrutiny by the International Organization of Securities commissions, or IOSCO, at the behest of the G-20.

Articles from Reuters say
PRA benchmark prices are referenced by many key exchange-traded commodity derivatives contracts, clearing platforms and by a very significant number of OTC commodity derivative contracts. As such, PRAs have significant impact on the overall functioning of commodity derivatives markets, on the price discovery process and on risk management. They may also have significant systemic impact given the importance of oil to the global economy. These factors are central to IOSCO’s continued attention on PRAs.

PRA's are Media, such as Argus Media and McGraw Hill Cos (MHP)-owned Platts. Their journalists' surveys are used to settle billions of dollars worth of trade and help establish oil benchmarks used globally to set oil prices.

Fox business says
However, despite their importance to the oil market, PRAs aren't subject to third party regulatory oversight or a special degree of accountability and have come under increasing scrutiny amid attempts to better control oil market volatility following the spike and crash in oil prices of 2008.
"The range of potential approaches to PRA oversight may realistically lie between recommending a form of self regulation to recommending a direct governmental regulatory system for PRAs," IOSCO said in its consultation report.

Read more: http://www.foxbusiness.com/news/2012/03/01/iosco-consults-on-regulation-oil-pricing-agencies/#ixzz1svxK7Niw
Reuters says,
Price assessments for over-the-counter (OTC) oil trade and derivatives produced by industry reporters are used to settle billions of dollars worth of deals and to help settle trade on benchmark futures exchanges.
The International Organization of Securities Commissions said reported prices were at risk of being manipulated by submission to the agencies of selective or false prices.
Under pressure to curb speculation blamed for huge swings in oil markets, the Group of 20 (G20) top economies last year asked IOSCO to look at the role of price reporting agencies (PRAs). The lead agencies are Platts, owned by McGraw-Hill (MHP.N), and privately-held Argus Media.
IOSCO recommended a range of ideas for physical oil market PRAs, including a possible independent regulator, which could be a step towards greater supervision of over-the-counter oil markets that are now lightly regulated by comparison with derivatives.
The IOSCO report highlighted a number of possible problems with oil price reporting. Sometimes assessments of oil prices were based on a very small number of trades, it said.

"The number of transactions in certain benchmark assessments can often be less than five and not infrequently there are no prices submitted," the report said.

Journalists at reporting agencies assess prices by calling up as many traders as possible and contacting them via instant messaging to ask where they see the market, trying to avoid pitfalls such as reflecting only a buyer's or seller's view.

In some markets, such as the North Sea market which sets the price of global oil benchmark dated Brent, many of the day's deals are done in a 30-minute period known as the "window," aimed at increasing transparency.
Even so, many other physical and derivatives oil deals are done bilaterally and are not captured by the window process, making some corners of the market relatively opaque. Oil traders in the physical markets are rarely permitted to speak to pricing agencies on the record.

[One dealer quoted said] increased transparency would provide a better deal for consumers, and rules could help to encourage that.

"At the moment you get (major oil companies) trading a million tonnes of paper and it's completely invisible," the dealer said. "You need government legislation to get limits on size."
IOSCO members regulate more than 95 percent of the world's securities markets in more than 100 countries, including the U.S. Securities and Exchange Commission, Britain's Financial Services Authority and Japan's Financial Services Agency.

Now let's turn to oil prices and speculation.

Here with Michael Greenberger, Professor at the University of Maryland, formerDirector of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) where he served under Brooksley Born., and with him Gene Guilford, Executive Director and CEO of the Independent Connecticut Petroleum Association

Before they start, just a note on the question of whether oil prices are set in these derivatives markets. That is, Do futures determine the spot prices? Professor Krugman, among others, has said, no they don't. These witnesses make sure you know that in practice, they do.

As Yogi Berra said, "In theory there's no difference between practice and theory, in practice, there is. " Nothing more illustrative than the moment, when the rise in oil prices comes with the official excuse of Iran-Israel war breaking out any day. But storage is full. There is no war now. The spot price follows the futures price up, as the speakers say, in lock step.

That is the practice.

If you want a truly disturbing conspiracy vision, imagine the money that will be made if war actually does break out.

Enough of that, here is part one of Michael Greenberger, then Gene Guilford, appearing at a hearing led by Nancy Pelosi and Rosa De Lauro.


Saturday, April 21, 2012

Relay: Part 3, Thomas Palley at the National Economists Club

Wrapping up the relay of Thomas Palley's remarks to the National Economists Club, which I hope you found as instructive as I did, with Q and A

And mentioning Demand Side the Book Review and Comment edition is out in many formats, see Demand Side Books dot Com. To prove we are not trying to sell you the same book twice, but are really keen on getting comments, we have the special or unique offer to our listeners. Buy this version, comment, and we'll send you the final first edition at no charge. Send those comments into demandside at live dot com. The final version will be substantially the same as this, with Ms. Taylor's corrections, and whatever further tweaks are called for from your notes.

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Friday, April 20, 2012

Relay: Part 2, Thomas Palley at the National Economists Club

We neglected to mention that Thomas Palley's talk, here part 2, and the conclusion of his prepared remarks, is based on his new book From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics

Available for $52.26 link online.

We also neglected to mention that Demand Side the book, Review and Comment edition is now out in the print version. $10. See DemandSideBooks.com link online.

Here is part 2 of Palley's presentation to the National Economists Club.
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Thursday, April 19, 2012

Relay: Thomas Palley at the National Economists Club, Part 1

Today with a relay from Thomas Palley, speaking to the National Economists Club, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics.
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Links on line.

The relay and podcast are brought to you by Demand Side the Book Review and Comment Edition, find that at DemandSideBooks.com. There's a link at DemandSideEconomics.net. The book is complete and substantially in its final form. We're looking for mistakes in substance and clearing it with the various economists, those who are still alive, anyway, and their agents. We look to have the final first edition out in about a month, say May 15. Again, special offer for listeners to the podcast. Buy the book in whatever format, comment, and receive a free copy of the final.

So here is Thomas Palley, very instructive.

February 16, 2012 National Economists Club - "From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics"
Thomas Palley, Ph.D., Associate, Economic Growth Program, New America Foundation

 Summary of Remarks by
Thomas Palley
Associate, Economic Growth Program
New America Foundation
February 16, 2012
Thomas Palley addressed the NEC and SGE on the topic of his new book published by Cambridge University Press, 2012.

The US economy is still struggling to recover from the 2008 financial crisis. Currently, the country is engaged in a great debate about the causes of the crisis and the appropriate policy response. This debate represents a war of ideas, the outcome of which will have a lasting effect by determining the course of economic policy.
Many economists claim the US faces a “lost decade”, similar to that of Japan.  In fact, the stakes are much higher. What is at risk is the permanent destruction of prosperity. 

The US economy suffered a massive fall of real GDP in December 2007 at the start of the crisis, and the economy remains significantly below potential output. Optimists project a recovery by 2016.  “Lost decade” pessimists say it will be longer, and it is also possible economists may simply lower estimates of potential output thereby achieving “recovery” by redefinition.

The problem with “lost decade” language is that it is fundamentally misleading because it conveys the impression everything will be fine if we can just return to potential output. The reality is the US economy was broken before the crisis and the data suggests we have already had at least two lost decades.
Real wages and compensation of non-supervisory workers have been stagnant for almost thirty years, and the link between wages and compensation was severed in the late-1970s. The labor share of GDP has trended steadily down since 1981, while the pre-tax income share of the top 1%, which had bottomed in 1970, is back to the pre-Great Depression levels. Talk of a “lost decade” implicitly endorses the false notion that things were ok before the crisis.
In the current economic debate, there are three positions: 1) the Neoliberal position, which can also be termed the government failure hypothesis; 2) the Third Way position, which can be termed the market failure hypothesis; and 3) the Progressive position, which can be termed the destruction of shared prosperity hypothesis.
The Neoliberal position maintains the crisis was rooted in the housing bubble, which in turn was caused by failures of monetary policy and government intervention in the housing market that encouraged homeownership beyond people’s means. 

The Third Way position maintains the crisis was caused by inadequate financial regulation, which led to excessive risk-taking by banks. Perverse pay structures also promoted loan pushing rather than sound lending. 

The Progressive position maintains that the crisis has far deeper roots than just regulatory failure. Instead, it was the result of a generalized economic policy failure resulting from adoption of a flawed economic paradigm in the late 1970s and early 1980s.  

From 1945 to 1975, the US had a virtuous circle growth model, the logic of which was as follows. Productivity growth drove higher wages; higher wages fuelled demand growth; demand growth ensured full employment; full employment spurred investment, which in turn caused productivity growth. This economic model held in one form or another globally – in North America, Europe, Latin America, and Japan.
After 1980 the virtuous circle growth model was abandoned in favor of the neoliberal growth model. The key features of the new model were abandonment of commitment to full employment and adoption of policies that helped corporations sever the link between wages and productivity growth. The new model weakened the position of workers and strengthened the position of corporations.

The model can be understood in terms of a policy box that fenced workers via a policy mix promoting small government, labor market flexibility (i.e, anti-union policies), corporate globalization, and abandonment of full employment. Moreover, with the help of the IMF and World Bank the neoliberal model was implemented on a global basis, in North and South, which multiplied its impact. 

The new model gradually undermined the US economy’s income and demand generating structure, but the growing demand gap was filled by borrowing and asset price inflation.  Such a process was always bound to hit the wall as there are limits to debt and limits to how high asset prices can go. However, the process went on far longer than expected, which made the collapse far deeper when it eventually happened. It also means escaping the aftermath is far more difficult as the economy is burdened by debt and destroyed credit-worthiness.

How the crisis is explained will shape the US policy response.  The neoliberal hypothesis recommends further deregulating markets, deepening central bank independence, and shrinking government while imposing fiscal austerity.  The Third Way hypothesis recommends financial reform and temporary fiscal stimulus. But other than this it recommends continuing with the policies enshrined by the neoliberal box.
The progressive hypothesis recommends a fundamental change of policy direction. This involves replacing the neoliberal model with a structural Keynesian model that “repacks the box” by taking workers out and putting corporations and financial markets in. The new box would restore the goal of full employment; promote a social democratic concept of government; promote solidarity-based labor market policies in place of labor market flexibility; and replace corporate globalization with managed globalization.

Each hypothesis carries its own policy recommendations. The explanation that prevails will therefore influence the policies adopted. At the moment debate is dominated by the Third Way and neoliberal positions, represented by the Obama administration and Republican Party respectively.

If the neoliberals win the war of ideas the result will be depression. If the Third Way wins the result will be stagnation. Either way, it is likely we face an end to shared prosperity via further entrenchment of corporate power, evisceration of remaining worker power, and destruction of public safety nets, public education, public health, and public pensions. 

However, just as happened in the Great Depression of the 1930s, it is possible the ugly reality of stagnation will force a shift in ideas and politics toward the progressive position. The one thing we can be sure of is any such shift will be politically contested as powerful elites have an interest in preserving the current economic paradigm. 

Dr. Thomas Palley is an economist living in Washington DC. He holds a B.A. degree from Oxford University, and a M.A. degree in International Relations and Ph.D. in Economics, both from Yale University. He has published in numerous academic journals, and written for The Atlantic Monthly, American Prospect and Nation magazines. Dr . Palley was formerly Chief Economist with the US-China Economic and Security Review Commission. Prior to joining the Commission he was Director of the Open Society Institute’s Globalization Reform Project, and before that he was Assistant Director of Public Policy at the AFL-CIO. 

Rapporteur: Meg Doherty

National Economists Club
P.O. Box 19281
Washington, DC 20036

Saturday, April 14, 2012

Transcript: 494: Demand Side the Book, Stephen Roach and an Affirmation of the Demand Side Forecast

Today brought to you by Demand Side the book, now available for your e-book pleasure via Demand Side Books dot com. Soon to be available in print at Amazon. Actually this is the review and comment edition, and I am soliciting your input with a special, or at least unique, offer. More about that at the end of today's podcast.

Listen to this episode

Some may think we've actually been waiting for bad news, such as Friday's jobs print before we raise our heads on the podcast again. Such is not the case. Our forecast has remained gloomy throughout the "things are getting better period." Over the past six months we've heard the good news is that global warming wiped away a winter, making everything from auto sales to home selling more attractive. Good news is in the eye of the beholder I guess, and not just about global warming. I don't care how many autos were sold, overall consumer spending is still moping along at 0.5 percent per year, as it has over the past four years. Beyond this, we expect downward seasonal adjustments to past good news from a bias the data has toward bigger companies, who are doing better than the smaller companies.

Yes, we confirm our forecast/backcast. The U.S. is still in recession by our call. The business cycle is broken and there is not even tepid recovery in the business cycle sense, because there is no investment, particularly in construction. We will continue to bounce along the bottom, a bottom sloped downward, a bottom littered with the craters of potential crises.

The way out is hiring by the public sector, either directly or through contracting, to do the things that need to be done, for education, infrastructure and the environment. This addresses the primary burden, the enormous debt in both public and private sectors, by creating income and – perish the thought – inflation to reduce real debt burdens. Other debt that cannot be repaid must be written down. We'll have stagnation until we do.

The great obstacle is the power of entrenched corporate interests, with their control of the political machinery in all three branches of the federal government. One arm of corporate control is the financial sector, whose existence in its present form relies on maintaining debt on their books and maintaining a structure of too big to fail casino capitalism.

Just to reprise, debt in itself is not so bad, but it needs to be in constructive, productive assets – like education, infrastructure and climate change mitigation. It cannot be in Ponzi structures. The real economy is now hostage to the financial sector.

On Wednesday I had the chance to sit in on a briefing by the San Francisco Fed's roving voice Yelena Takhtamanova. She was very engaging and clear about the Fed's forecasts and their style, and I was very grateful for her overview. You had to wonder how long the leash was when she had to split the hair between "modest" and "moderate" recovery and between "non-traditional" and "unconventional" monetary policy. She let us in on something I guess I already knew, that the Fed's Open Market Committee spends more time crafting their statement to the Market than they do deliberating on the decisions.

the new "transparency" under Ben Bernanke was a topic of the presentation, as well. I for one appreciate it. The minutes and forecasts let us know just how bad the economics is that goes on up there. By the way, I saw Titanic the Concert last night. The captain had a Bernanke beard. Just sayin'

Not that the Fed is claiming huge results from its various activities, at least for jobs. 700,000 jobs have been created (or saved, I presume) by the various QE's, she said. Somebody piped in from the audience that at a cost of $7 trillion, it came out to $1 million per job. I didn't really follow that.

In any event, the various numbers Ms. Takhtamanova presented were not all that rosy. Output is finally back above the pre-recession number, lo these many years later. Jobs are halfway back. Hopefully we can get hold of the PowerPoint and put it up. Much more clear than other presentations I have seen.

So there she was, at the end of the talk, right in the cross hairs, available for me to ask whatever biting questions I wanted. Why if the economy is doing so well, is it still on life support? What happened to the money supply? U1 spikes, broad money lays low. And Isn't QE mostly for the stock market? That isn't on the dual mandate. Or any one of a number of questions she would have fielded deftly, but would have made her squirm.

I didn't do it. Didn't have the energy, sad to say. Some sort of post-partum blues with regard to the book, I guess. Before we get to that, let's get some audio.



That was April 5 on Bloomberg and Liz Ann Sonders, chief investment strategist at Charles Schwab Corp.,

Yikes, so much wrong. Deleveraging the pub lic sector is definitely a headwind, I guess you would say. See our next audio. QE, of course, as we said, is the reason for commodity and stock strength, or inflation. What else? Oh, the economy is operating with its own engine. Why the huge deficits, then. Why the zero interest rates? And the stock market as a leading indicator. We wish. Hit its highs after, yes AFTER, the start of the Great Recession. Now on life support. The real threat is that Bernanke is operating monetary policy for the benefit of the stock market.

Liz Ann Sonders Idiot of the Week

Here is a bit from David Resler, chief economic adviser at Nomura Securities International.


Seems to be a difference of opinion. The difference between negative 4 percent growth and now is federal fiscal policy, mostly tax breaks that support consumer spending. Fiscal drag, it is called. Ah, maybe it is just debt migrating to the public sector. And by the way, from these two examples, and more we could play, the monolithic Market speaks in many voices, as many as it has interpreters, it seems. Seems to demand a variety of actions. One wonders whether sacrifices of virgins is not too far away.

Now just a bit from Stephen Roach, Morgan Stanley executive last in China as non-executive chairman for Morgan Stanley Asia.


Stephen Roach

Yes, we've been gone these past ten weeks or so. Thank you for noticing. We appreciate very much the notes we've gotten. We were gone to finish the book Demand Side Economics, subtitle "A System that Works" and we have prepared the review and comment edition. Ten dollars, soon at Amazon or $3.99 for your kindle or iPad or other e-book format. Check out Demand Side Books Dot Com. This is the review and comment edition. Don't tell our e-book conduit, and our unique offer is if you buy the book and send us your comments, we will send you a clean version of the final first edition at no charge.

Demand Side Economics, the book, is a treatment of the demand side perspective through the work of nine of its notable exponents plus a few chapters at the end. We go from John Maynard Keynes and the Great Depression through visits with Leon Keyserling, Truman's chief economist, John Kenneth Galbraith, Hyman Minsky, James K. Galbraith, Joseph Stiglitz, George Soros, Steve Keen all the way to Nouriel Roubini and crisis economics. Yes, history, personalities, and most importantly the system they developed that works even as we see the Neoclassical and market fundamentalist schools fumbling away the future.

You can link to it via Demand Side Economics, the site of the transcripts for our podcasts and occasional postings and relays on this and that. Also Demand Side Books. Don't be confused. Demand Side Books Plural, even though there is only one at this point, Dot Com.

This is an attempt to show economic thought is not as bankrupt as the neoclassical free marketeers make it appear to be. Keynes and Keyserling and the Galbraiths and Minsky, Stiglitz, Soros, Keen and Roubini have actually explained the shape and the working parts of the economy and described why it has gone off the rails. And they check their answers with reality.

Listeners to this podcast should find the book very accessible, and that is the point of the review and comment edition. We are actively soliciting feedback, with the special inducement. When you're ready to make that connection, drop us a line at demandside@live.com and we will give you the appropriate address. Say something nice, and we might include it on the cover. So, get your history, theory and polemic in one place.

April 4 (Bloomberg) -- Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley Asia, says the U.S. economy is "out of the emergency room" and Federal Reserve "rates should start to rise on a regular basis."

April 4 (Bloomberg) -- David Resler, chief economic adviser at Nomura Securities International, says the U.S. economy "has a lot of slack in it," and until we get an unemployment rate closer to 6%, "we will have downward pressure on wages and prices

April 5 (Bloomberg) -- Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., says the U.S. economy is "operating with its own engine right now." Sonders talks with Bloomberg's Ken Prewitt and Tom Keene on Bloomberg