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, October 31, 2012

Transcript: The real economy and Europe with Loukas Tsoukalis

Today on the podcast, some audio from Loukas Tsoukalis, a Greek perspective on the European situation, sober, reasoned, even if it is not entirely our view.

First a note:

The economy is real

Nothing is more real than this letter from Bill McKibbin:
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Dear friends,

We woke up this morning with a deep sense of sadness.

Hurricane Sandy has brought serious hardship to many of the people we love and places we treasure. Large parts of New York City are underwater, millions are still without power, and tens of thousands have been evacuated from their homes. Last night the flood waters were swirling around the bottom floor of our Brooklyn offices.

Right now, the most important thing we can do is come together as a community and support the relief efforts that are already underway.

But we're not going to simply mourn our losses. The images coming out of the Atlantic seaboard, and from the refugee camps in Haiti, made us not just sad but angry. This storm was literally unprecedented. It had lower barometric pressure, a higher storm surge, and greater size than the region had ever seen before. It's as out of kilter as the melting Arctic or the acidifying ocean. And if there were any poetic justice, it would be named Hurricane Chevron or Hurricane Exxon, not Hurricane Sandy.

These fossil fuel corporations are driving the climate crisis and spending millions to block solutions. Instead of buying climate silence, the fossil fuel industry should be funding climate relief.


The fossil fuel industry has spent over $150 million to influence this year’s election. Last week, Chevron made the single biggest corporate political donation since the Citizens United decision. This industry warps our democracy just as it pollutes our atmosphere. And we’ve had enough.

In the coming year, we’re going to fight both forms of this pollution. Our biggest organizing effort ever begins one week from tomorrow, the Do the Math tour that will, we hope, ignite a long-lasting campaign to force the fossil fuel industry to change. We need you to get involved -- by coming out for the show, by spreading the word and joining this fight.

Sandy is what happens when the temperature goes up a degree. The scientists who predicted this kind of megastorm have issued another stark warning: if we stay on our current path, our children will live on a super-heated planet that's four or five degrees warmer than it is right now. We can't let that happen.
So let's get to work.

Many thanks,

Bill McKibben for the whole 350.org Team

The climate is real, and

The economy is real

We live in a real economy, most of us. The financial economy is a dissociated casino on the hill. We're fascinated by the action there. There seems to be so much money and power and wealth and self-confidence. But you don't have to look away very far to see the real economy is failing. Unemployment is stagnant at a high level, infrastructure is falling apart, obvious challenges are going unmet and even unacknowledged because there is no money.

Our young people are not able to find work and are borrowing their way to an education that too often graduates them into part-time restaurant and service work. At a time when roads and bridges and schools and public buildings are suffering irremediable damage for want of maintenance or reconstruction, we have millions of experienced construction workers idled.

I am not going to debate what value is, but I am going to point it out. Value exists in a healthy population, a government unburdened of poverty mitigation, an educated population, efficient transportation, efficient housing, in food, clothing, housing health care, education, transportation, communication. These are the vertebrae of a healthy real economy.

In other podcasts we might go off on the line that the financial economy has sucked the value to itself, not being willing to share the price of its own failure, and preferring instead to keep squeezing the stone in search for blood.

Today we just want to pose this question. Is it about jobs, jobs, jobs. Or is it about incomes?

Leon Keyserling is one of the featured economists in our book, Demand Side Economics, see it at DemandSideBooks.com. Keyserling was a key draftsman of the New Deal and later chief of the Council of Economic Advisers under Truman, probably the most powerful ever to hold that post. Leon Keyserling said this:
If I wrote on the left wall the policies most needed for economic growth, and on the right wall I wrote the policies most needed for distributive justice, they’d come to the same thing. I have indicted the economists for never seeing this.
Leon Keyserling

Later, out of government, Keyserling remained stalwart. In 1971 he wrote:
The bulk of economists never have realized that the whole problem, the whole American economic problem, is ultimately the improved distribution of income. If we solve that, we solve all of the problems. That’s all the inflationary problem really is, because it doesn’t matter if prices are going up through programs which improve the distribution. If we had had the price inflation [written in May, 1971] that we have had in the last few years through policies which created full employment and did justice to the old people, and cleared slums and renewed our cities and cleared up polluted air and water, the same amount of inflation purchased at that cost would be the best bargain you could ever drive.
The fact is that the financial crisis and economic malaise has risen with the rise of income inequality, and it is no accident. The multipliers in the real economy work when people are exchanging work for goods, not when they are servicing debt. The economy produces far more goods than bads when the distribution of income is better. Read Wilkinson and Pickett. The promise of technology was prosperity in the form of leisure.

So. Just to put that in the back of your mind.

The discussion today is dominated by the financial economy, money, and the measures to keep financial markets afloat. On a recent visit to a heterodox discussion, I found people looking at the IS/LM model and working out how it could work. IS/LM is the product of John Hicks, who actually won a Nobel for it, but later recanted. Because in the real world it doesn't work, it only serves as a nice mathematical demonstration of a false Keynesianism. Even modern monetary theory, as sound as it is, is focused on the financing. MMT will be proven in practice. No amount of discussion or persuasion will bring around the masses of uninformed. That practice ought to be direct employment, big public works, and so on.

So there, went on too long.

Now for a look at the European crisis from a Greek perspective. It is offered here not because we completely agree, but because it is offered in a historical and political context that makes it a useful antidote to the crisis a week and what do we do now mentality dominating policy these days.

This is Loukas Tsoukalis, Loukas Tsoukalis is Jean Monnet Professor of European Integration at the University of Athens and Visiting Professor at the College of Europe. He is President of the Hellenic Foundation for European and Foreign Policy, and has been Special Adviser to the President of the European Commission. He has taught at the University of Oxford, London School of Economics, Sciences Po and the European University Institute of Florence. He has written books and articles on European integration and international political economy.

He is speaking at the Institute of International and European Affairs, a top think tank in Dublin., Ireland.

Sunday, October 28, 2012

528 Wall Street with Gary Shilling

Today on the podcast, after a brief introduction, we have the relay of a conversation between A Gary Shilling and Bloomberg's Michael McKee.

Shilling has been making money for decades for his investor clients, operating with a clear Demand Side framework and telling it like it is. One practice has been to buy and hold Treasuries. "You can't make money in Treasuries," we've heard for decades. Well, when the price keeps going up and the coupon stays the same, you're profiting at both ends. When you're in safety and everyone else is in risk, you look like a fool until the bubble bursts.
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We'll set that up with the political business cycle. You'll notice in the interview Shilling points out a drop in defense spending, aircraft and exports in August. We have been recalling the political business cycle, which is the practice of the incumbent president to gin up the economic numbers in advance of the election, a practice which we said was being intentionally frustrated by the efforts of Congress. In any event, when we heard federal spending was down, we were concerned, and went looking. Has the political business cycle really been frustrated?

Rick Davis analysis at Econ Intersect reassured us:
"GDP Report: Improving Growth or Continued Weakness?"

In their first ("Advance") estimate of the US GDP for the third quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was growing at a 2.02% annualized rate, some 0.76% higher than for the prior quarter and at very nearly the same level as reported for the first quarter of 2012.

... [skipping down here]

– Over 30% of the headline growth rate came from a $27 billion surge in Federal defense spending, possibly an artifact of fiscal year budgetary manipulations and advance contracting in anticipation of the “fiscal cliff.”

So with Rick Davis, link online:


And the report is also a mixed bag when looking at the details: the headline was boosted by a burst of Federal spending and an extremely favorable set of deflaters — while fixed investments weakened and exports collapsed. Even the consumer numbers were mixed, with the up-tick in goods spending at least partially offset by weakening growth in the consumption of services.

There were also surprises in the new numbers that probably merit caution moving forward:

– The sharp contraction in exported goods is not a good sign for the economy. This was the largest contraction in exports since the first quarter of 2009, and it is certainly a sign that the US economy is not immune to contagion from overseas.

– The contraction of per-capita disposable income simply means that households continue to be under pressure. As we have argued before the growth of consumer spending is not coming from fatter paychecks — it is coming instead from other sources, including refinancing, strategic defaults and student loans.
Frankly, we had expected the report to show an improving economy — although in this report the improvement is modest enough to be politically correct. Ultimately we find the headline 2.02% masking a somewhat weaker underlying reality.

So, you know the Demand Side Forecast, hasn't changed. Bouncing along the bottom, downside risks, financial crises, Europe, austerity politics, China.

Now on to Gary Shilling who begins with a few comments on the data.

Noting all our audio is edited, for form, not substance. Taking the repetitive "ah's" out of Joseph Stigltiz, for example, or excising repetition or half-finished thoughts. Thus the result is more concise and more accessible to the ear. That said, we do select for quality to begin with. You don't hear Dick Bove, Glen Hubbard, Greg Mankiw, or any one of more than 90 percent of American Economic Association Members -- further digression, join the World Economics Association -- You don't hear a laundry list of nonsense by people who were wrong, but still seem to dominate on the airwaves and in Academia.


There. A Gary Shilling.

Today's podcast brought to you by early childhood education. Returning six-to-one on investment. A dollar of early childhood education buys or saves the equivalent of six in terms of higher productivity and lower societal costs. Might help in quality of life, too. And hey, these are the people who are going to pay your Social Security. So, vote yes on the next special levy for early childhood education.

Friday, October 26, 2012

Transcript 528 Economists a joke or just irrelevant, plus Joseph Stiglitz

From Dean Baker

There is an old story from the heyday of the Soviet Union. As part of their May Day celebrations they were parading their latest weapon systems down the street in front of the Kremlin. There was a long column of their newest tanks, followed by a row of tractors pulling missiles. Behind these weapons were four pick-up trucks carrying older men in business suits waving to the crowds.
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Seeing this display, the Communist party boss turned to his defense secretary. He praised the tanks and missiles and then said that he didn’t understand the men in business suits. The defense secretary explained that these men were economists, and “their destructive capacity is incredible.”

People across the world now understand what the defense secretary meant. The amount of damage being inflicted on countries around the world by bad economic policy is astounding. As a result of unemployment or underemployment, millions of people are seeing their lives ruined. The current policies have led to trillions of dollars of lost output. From an economic standpoint this loss is every bit as devastating as if a building had been destroyed by tanks or bombs. And people have lost their lives, due to inadequate health care, food and shelter, or as a result of the depression associated with their grim economic fate.

If an enemy had inflicted this much damage on the United States, the countries of the European Union, or the countries elsewhere in the world that have been caught up in this downturn, millions of people would be lining up to enlist in the military, anxious to avenge this outrage. But, there is no external enemy to blame. The villains are the economists, still mostly men, in business suits.

Now it may be a good joke, but Baker is wrong. It is like blaming the mandarins for the actions of the emperor. Economists are trained, selected, employed based on their ability to say yes to the right people. Ben Bernanke, for example, is not employed because he is aware of how money or the Fed actually works, but because he believes it works in a way that is compatible with the needs of the Wall Street commissars. In fact, the pick-up should be filled with politicians and the boss should be looking down from a Manhattan skyscraper. But the joke is already becoming less funny.

How do we know that it is not the practitioners of the quasi-science of Economics that are driving the economic program?

The third presidential debate closed without a single word on climate change. Climate science is a hard science. The climate crisis is ever more apparent. The future of the planet is in the balance. Not a single word in any one of the three presidential debates.

So to blame the Mandarins of economics for not knowing economics is beside the point. They were selected exactly because they describe a cosmos where the powerful are in their positions by necessity and real and effective alternatives are not available.

Here with Joseph Stiglitz courtesy of Bloomberg


An update of conditions in Greece.

It appears that ECB and IMF bailouts to Greece along with their conditionalities of austerity are sucking money out of Greece rather than putting it in, quite the opposite of the advertisement.

From our friends at Real World Economic Review,

we see that the ECB and IMF are ever more eager to give the Greek's money to prevent their leaving the Eurozone. Unfortunately that money is not going to the Greek economy. A chart online shows the collapse of the money supply in Greece, a deeply deflationary spiral that is consistent with the madness of austerity.

The money supply collapsed beginning in 2009 and has been contracting at a rate of 10 percent or more a year since. Now at around minus 20 percent. A ten percent growth in the money supply is a level consistent with recovery, says Merijn Knibbe


Prime Minister Antonis Samaras on Friday expressed certainty that a 31.5-billion-euro tranche of the EC-ECB-IMF bailout package will be disbursed by mid-November, preferably in its entirety, as soon as a report by the troika is adopted.

Speaking in Brussels at the end of a two-day EU summit, Samaras explained that a new summit will not be required to approve the disbursement, adding that the country's current cash reserves would run out on November 16.

As Calculated Risk says,

Greece gets money, along with austerity and societal breakdown

Also via Calculated Risk, we see that the situation in Spain is darkening as well. The likelihood that Spain will follow Greece into the ECB's austerity program is not high.


From the WSJ: Bank of Spain Warns on Deficit Targets

Spain's central bank said Tuesday the country's economy contracted slightly less than expected in the third quarter but repeated a warning that tax-revenue shortfalls could cause the government to miss its 2012 budget-deficit target.

The euro zone's fourth-largest economy contracted by 0.4%, the same as in the second quarter, the Bank of Spain said in a quarterly report. On an annual basis, the contraction was 1.7% ...

The government has said its deficit will rise to 7.4% of GDP this year ...

[Demand Side Comment: this is lower than the U.S. deficit by a substantial amount.]

"The efforts to lower spending at the public sector have had a net contracting effect (on the economy) in the central months of the year," the central bank said. "We see drops in consumption and investment by all levels of government above those seen in previous quarters."

Today we begin serious advertising on Demand Side.

We have avoided this in the past because we are not likely to get very much revenue and we wanted you to enjoy a commercial-free space, but then we began to wonder What if? It seems like the only folks advertising are those who are toxic to the economy. Witness the enormous and destructive advertising in the political season. Witness the oil companies beginning their happy ads with the word "Clean." We're more capitalist than the capitalists here at Demand Side, because we see that to have a car, you need a road. So maybe we'll start advertising for roads.

And you have heard us plug our book, Demand Side Minds. Find it at DemandSideBooks dot com.

But to begin the new regime, we begin with :

My mom. Now ninety years old, living in a mountain town in the Black Hills of South Dakota, watching the seasons change and being grateful. She is sharp, discouraged like the rest of us, but interested still. Things have changed. Growing up in the Hills as the oldest daughter of miners turned farmers turned postal workers turned whatever could put food on the table, she survived smallpox in adolescence, served in the Navy as a DC secretary, took the GI Bill to Black Hills Teachers College, came out with three kids and a life as a first grade teacher, supported these and other kids over a long period, and then went on to a brilliant career as a hand quilter.

We invite you to send your appreciation to her. Or as she says, "You don't owe me anything. I paid my parents by raising you. Now whatever obligation you have to me, pass it on. This is not the way of every relationship. But what you get from the older, you give to the younger."

Or something like that.

Brought to you by Mom,

Sunday, October 21, 2012

Relay: A short history of money and debt from Michael Hudson

Today a short history of money and debt and the burden of debt with Michael Hudson. Our relay comes from a conference "Modern Money and Public Purpose," Professor Hudson's piece here is  specifically titled "Money and Debt."  Michael Hudson is the president of the Institute for the Study of Long-Term Economic trends. 

And today we're talking very long-term. Think paleolithic and Sumeria and Hammurabi. 
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The link is online:


Friday, October 19, 2012

Transcript: Forecast Friday and Michael Hudson

Today we have a return of Forecast Friday and an introduction to our relay of Michael Hudson scheduled for Monday.

The Forecast is the one you have heard, only embedded in a letter to the chief of our state's Forecast Council, who recently presented to our group of economists. In another of our hats, we are responsible for getting the speakers into the Seattle Economics Council, the region's association of economists. For this season, we elected to start off with the new chief forecaster for the State of Washington, Steve Lerch.
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But first to the less mundane, Here is Michael Hudson interviewed earlier this year, in May, I believe, but with comments that are no less timely now. Contrast this to the common view, which seems to change daily. This on the crisis in Europe and the fate of the euro.


Now on to our more local efforts.

The previous holder of the office of director of the Washington State Economic and Revenue Forecast Council, Arun Raha has taken employment elsewhere. This followed, though was not necessarily necessitated by a series of optimistic forecasts for revenue that caused state legislators to scramble to fill big revenue holes. This experience was not by any means unique among states. In fact, it is probably more the norm than the exception.

The new chief forecaster, Steve Lerch, spoke to the Seattle Economics Council on October 12. We should note that since he has taken office, the forecasts have been dramatically improved. Whether this is because stagnation is now accepted, where recovery was just around the corner before, we do not hazard to guess.

Previewing: We suspect the problem of bad forecasts lies in the DSGE, Dynamic Stochastic General Equilibrium models, and in particular, by the reliance on Global Insight, a shop specializing in producing baseline forecasts for states and other governments. Another problem, one we've pointed out here before, is that a common practice is to take the average of the blue chip consensus of forecasters and use it as a probable outcome.

The economics profession is the last to know.

But in any event, here is the letter.

Just a note to say we very much enjoyed your presentation to the Seattle Economics Council this past Wednesday, particularly the transparency with which you presented your model update and the forecast and the various questions whose answers might alter things. I think all of us welcome you in your new post.

Following are a few comments particular to me, and reflect a view likely not widely shared among our members.

The fact that ERFC does not formally use a DSGE model is one thing, but it is very likely that those models are reflected by the practice of using the blue chip consensus to constrain your GDP forecast. This is important because it introduces an assumption of equilibrium which I do not believe we are seeing in the actual track of the economy. These models also ignore the role of debt and the financial sector. To be clear, I think what we see in the tepid recovery of the economy since the crash is not so much a tendency to equilibrium as it is a response to policy, trillion dollar federal deficits which support consumer demand and zero percent interest rates which mitigate the credit contraction.

The primacy of debt, household deleveraging, business caution, and so on, means that we are in a long-term stagnation of incomes and employment. Since the debt issue is not being resolved in a straight-forward manner, we should expect possible downside shocks, but not upside surprises.

These are exciting times for economists. As you pointed out, the models completely failed to predict the biggest event of the past seventy-five years. It should be a time to learn, but I'm afraid we are not. Karl Popper once said, "Forecasts and explanations are symmetrical and reversible," which I take to mean, if your forecasts are not good, then your explanations are not good. As a discipline, economics has yet to review the fundamentals of its explanations in light of the financial crisis. We continue to use these DSGE models, which ignore debt and credit, have a very primitive time component, and assume an equilibrium that is not apparent.

I would suggest, though I do not know, that Global Insight suffers from the same credibility problems as other forecasters, and your predecessor's problems may be based on reliance on their projections. There are forecasters who predicted the financial collapse, though not the precise timing (so they may be less useful to state budgets). Some, such as Nouriel Roubini, have predicted a hard landing in Europe and China which ought to be the baseline view.

With regard to the B&O tax receipts coming in stronger than other revenue sources: This could be a function of its biggest flaw – that it is not based on income, but on gross activity. That is, while sales taxes go up and down with discretionary income, and obviously income taxes also, the net income of businesses is not what is taxed by the B&O, but rather the top line receipts. A service business operating at a profit in the pre-crisis period may have to operate at a loss afterward to keep the doors open, but its B&O liability does not shrink so much. And further, the B&O captures sales in food and drugs, which are likely more stable in downturns than the consumer discretionaries subject to the sales tax.

There is no upside visible. Zero interest rates are translating into stronger stock and commodity markets, and to higher commodity prices, but not into any appreciable business investment (nationally). Households are burdened by debt and are deleveraging as much as stagnant incomes will allow (although younger households are taking on debt in the form of student loans that will permanently stunt their prospects). The European crisis cannot be resolved by the current policies of austerity. The structural adjustments demanded by the ECB and IMF for bailouts make our fiscal cliff look like a speed bump. Ultimately the imbalances in Europe translate to a banking crisis, as their financial institutions are very thinly capitalized and cannot withstand even a modest write-down of sovereign debt. The U.S. policy of trillion-plus deficits could probably work economically insofar as no great inflation is likely without recovery in investment spending, but whether it can work politically is very questionable.

There is downside visible in the short term. In particular, what is called the "political business cycle," where the executive in power generates as much government activity as possible leading up to the presidential election. This has been the practice of every president since Nixon, except Jimmy Carter, and although the most recent Congress has made overt attempts to frustrate such spending, it is not likely they have completely succeeded. That means that a post-election slump is very likely.

So projections for recovery are premature. Even in housing. Bright spots may appear, e.g., the Seattle metro area, but they may be countered by dead zones. (We've had too many false dawns in housing to be confident in this one.) Where credit is available, activity will pick up, e.g., auto sales, education.

Downside shocks are certain. If there is no actual financial crisis in Europe, it will only be because the core has bought time in the form of stagnation in the periphery – and now the periphery seems to include Spain and Italy. (The terminology seems to be changing from "core" to "North" and "periphery" to "South." In any event, the imbalances are only exacerbated and extended by current ECB and IMF policy, and the fundamental restructuring of the currency union is well out of reach of their austerity approach.

Households will be under pressure for years to come, so long as they are burdened with debt. Personal incomes are stagnant and will remain stagnant. Local bright spots, e.g., Amazon, are gloomy spots for competitors, which often are long-established brick and mortar businesses.

So. Even if you were to accept all this, it likely means little for the forecast in terms of the precision that may be essential for state budgeting, although it may be useful to add an estimation in some way of the prospective risks, as they impact directly state expenditures in social services. In that vein, it may also be a, perhaps Quixotic, idea to gauge expenditure estimates on a per capital basis as you do revenue estimates. Cohorts of aging citizens or school-age citizens or unemployed citizens may require more, while an influx of active workers may require less.

I hope these comments are useful, or at least entertaining. Thanks again. We are very pleased to see the quality of the new forecasts and the chief forecaster. I hope you have the job for many years to come. Washington will be well served.

Alan Harvey

Sunday, October 14, 2012

Transcript: Punch List October 15

Today we're going to virtually all audio.

The opinions of economists are a lagging indicator. The joke is that they've predicted five of the last three recessions. But the real joke is that they've predicted two of the last zero recoveries. And as you'll hear later from Vincent Reinhardt, by now we should be in expansion, rather than recovery. The fact that the consensus is still talking anemic recovery means they are well behind any curve.
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Yale's Robert Shiller does not call a housing bottom or recovery. He of the Case-Shiller, and his sense is continuation downward.

Seabreesez's Doug Kass is shorting the markets on weak fundamentals, along with MFR's Josh Shapiro.

RBC's Tom Porcelli says the jobs report reflects continuing and troubling weakness.

Nomura's Alistair Newton says Europe's woes are not close to being over.

Morgan Stanley's Vincent Reinhardt sees economic stall speed.

and back to MFR's Josh Shapiro saying shared sacrifice is the only sacrifice that can be made.

Remember, when you hear forecasts, they not talking about the future. These are Q3 and Q4 forecasts. We were doing this last year. More or less.

Here is Robert Shiller: Is the latest bump off the bottom a recovery?


Doug Kass on the Markets. Josh Shapiro from MFR chimes in. Undoubtedly the Fed's cheap chips are making a difference in the game, but what happens when at the end of the night the lights go out?


Now Tom Porcelli with a primer on the latest jobs report.


Alistair Newton. Now of Nomura. Two years ago, all would be well if the tiny economy of Greece just accepted the austerity pushed by the ECB and IMF. Last year, the U.K. elected austerity. How is that working out?


Vincent Reinhardt, formerly of research at the Greenspan Fed, now with Morgan Stanley sees a few bumps.



Not quite the right spin. The dual mandate was issued in the Humphrey-Hawkins bill of 1978, the so-called full employment act, to counteract the Fed's insistence on shutting down the economy to combat inflation. Congress wanted them to coordinate with fiscal policy to avert a recession. Bill passed. The Fed under the now sainted Paul Volcker said, No, thanks. Economy stalled. Now the shoe is on the other foot. The Fed has continuously lowered interest rates and made credit cheaper, not, we suspect, for the benefit of the unemployed, but for the stock market. All right, there is the trickle down theory. But the Congress is stalled.


And back to Josh Shapiro for some closing remarks.


Sunday, October 7, 2012

Transcript: Relay of Gerald Epstein of the PERI Institute

Today we have a relay courtesy of the Real News Network. Gerald Epstein of UMass Amherst and the PERI Insitute talks with Paul Jay about the financialization ofthe economy. It is historical perspective on the centrality of debt in the boom, crash and future of the world's economies from then to now.
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Gerald Epstein is codirector of the Political Economy Research Institute (PERI) and Professor of Economics. He received his Ph.D. in economics from Princeton University. He has published widely on a variety of progressive economic policy issues, especially in the areas of central banking and international finance, and is the editor or co-editor of six volumes.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

What happens to an economy and a society when the finance sector becomes increasingly dominant? Some people call much of the finance sector parasitical. And if that's the case, then what happens when parasitical capital becomes so dominant?

Here's a graph that gives some sense of just how important a question this is. You'll see in this graph that starting around 1860, 1880, the GDP share of the U.S. financial industry starts to grow. It more or less goes up steadily until around the crash of '28, '29, '30, in that area, where it reaches something like about 6 percent of GDP. It goes down steadily and reaches a dip at around just after 1940 and during the war, and then starts to climb again continuously. Sometime around 1980 it gets back to that 6 percent peak, but it keeps going. By early 2000s, based on this graph, it hits over 8 percent. And then we have the crash in 2008.

Now joining us to talk about these numbers and more is Gerry Epstein. He's coordinator of the political—codirector, I should say, of the Political Economy Research Institute. He's a professor of economics. And he joins us now from Amherst, Massachusetts. Thanks for joining us, Gerry.

GERALD EPSTEIN, CODIRECTOR, PERI: Thanks for having me, Paul.

JAY: So, first of all, talk about this graph. Why are these numbers significant? So why should we care that the finance sector gets so big? Maybe that just shows us the economy's doing well.

EPSTEIN: Well, this graph by Thomas Philippon at NYU is a very important one, because it illustrates this problem that Keynes, among others, talked about. You know, Keynes said that there's enterprise and there's speculation. Speculation is undertaken by the financial sector, enterprise by manufacturers and other parts of the real economy. And he says when enterprise is dominant, when speculation is just a bubble on the sea of enterprise, the economy can grow and it can develop. But when enterprise is just a little bubble on the swirl of speculation, that can destroy the economy. And we saw that.

If you look at this graph that you started with, when finance became a larger and larger share of the economy, it was associated with the crash of the 1930s. And then, when it kept going up and up and up again by 2008, we again saw another crash.

And it represents, among other things, this dominant short-termism of speculation and, most importantly, of private debt in the economy, which makes it much less stable.

JAY: Now, the issue of the percentage of GDP is one thing, but percentage of profits is also astounding.

EPSTEIN: That's right. If you look at some other data, what you'll see is that by around 2007, 2008, the profits going to the financial sector was 40 percent or more of total profits in the United States. So when you have such a dominance by one sector of the economy—which, by the way, does not really produce much of anything; it's an intermediate product; it's supposed to be helping the rest of the economy grow—when you have it taking over so much of the profit and such a large part of the economy, it can lead to a number of significant problems.

JAY: Now, one of the things I thought was very interesting about this graph is that it isn't something new that finance gets so big, that—if you look at the first part of the 20th century, the same process took place. And I know there's a lot of weight put on Glass–Steagall as the legislation that was passed in the 1930s that tried to mitigate this, but this idea that finance becomes so dominant, I've seen some people analyze that this is kind of a natural phenomenon with capitalism, that when you get industry at such a massive scale and the need for massive amounts of capital to buy the kind of equipment it takes to do auto manufacturing or any of the mass manufacturing processes, that that necessarily puts finance in this driving-seat position in relationship to the rest of the economy.

EPSTEIN: Well, certainly finance is important to capitalism, and finance under certain conditions can play a very productive role. Joseph Schumpeter, the famous economist, thought that finance played really dynamic role in financing innovation and financing the real economy. And so part of what one sees in these data from the 1860s, 1880s, is in fact the role of finance in helping to finance a lot of very important, real activity in the U.S.—manufacturing, the building of the railroads, canals, a lot of infrastructure, the whole development of the United States as the workshop of the world during that period. So, clearly, finance, when it's well-organized and functioning in the service of the economy, is very important.

So part of what we saw in those early data from that graph is finance playing that role. But then eventually what happened in the 1920s and so forth is that finance started playing a highly speculative role on the stock market and so forth. And that's what Keynes was talking about in that quote that I mentioned. And so when finance becomes primarily a speculative activity, that is, investors making bets on what other investors are doing rather than actually financing jobs and real investment, then it becomes a problem.

JAY: And the banks would play this role of they would loan money to company A, and then they'd loan money to company B to buy stuff from company A, and they'd be greasing the wheels on all sides, which I guess is part of what some of the legislation was meant to mitigate. But I guess my point is: is it not inherent in this stage of capitalist development?

EPSTEIN: It's a danger, just as you said. You know, if you look across the world, there are different kinds of financial systems, different kinds of relationships between finance and industry. And historically in Germany and in France and Italy there were much closer relations between the banks and the industrial companies, the manufacturing companies and so forth, and there were ways in which that kind of close relationship was bettered, that the banks could take a longer-term perspective on investment, they didn't have such a short-term perspective that required returns, you know, every quarter or every month. And so for the industrial development in Germany and France in the 19th and early 20 century, this kind of longer-term connection was actually productive. Same in Japan—we had this kind of longer-term connection between finance and industry.

But what you're saying is absolutely right. When finance begins to get the upper hand and to agglomerate business so that it can become a monopoly and exploit consumers and workers, when they start using this leverage to grease the political system and to engage primarily in speculation and not longer-term investment, this creates not only massive inequality of incomes but inequality of power.

And I think that's what we saw in the United States and increasingly in other countries: we saw that there was a deregulation of finance here in the United States that was really promoted, starting in the 1980s. You pointed to the graph where the shares started going up around 1980 with—when Ronald Reagan became president, Paul Volcker was head of the Fed. And then, when Carter and Clinton came in, they got rid of many more controls over finance.

And so then finance became really an engine of speculation, an engine of agglomeration. Part of this was helped by the economics profession. This thing started called the shareholder value movement, the idea that companies should do whatever—they should start acting like financial firms, industrial firms like General Motors or GE, to start acting like financial firms, and should maximize the short-term earnings of their shareholders and forget about the stakeholders, the workers and others. And the economics profession thought that this was really the way to maximize the productivity of the industrial economies.

And so what we saw as a result of this is that CEOs of corporations started caring just about their stock options and the short-term returns that they could get on their stock rather than making the long-term investments in their corporations. William Lazonick, among others, has written about this. And this has facilitated an enormous increase of inequality by both the financiers and the CEOs of these companies. In fact, what we saw was a financialization of nonfinancial companies.

JAY: And this idea that finance, you know, helped create everything, that's only partially true, because most of the big infrastructure projects, from roads to canals to power, dams and such, was all public money. It wasn't that—it wasn't the banks were the only source of finance to spur manufacturing or the creation of these things. Public finance played a decisive role in many parts of the economy.

EPSTEIN: Yeah, that's right. In fact, I think that's part of the reason why by the middle of the Great Depression, Keynes had gotten to the point where he was saying, you know, if he had his way, we'd really reduce the role of private finance, socialize most of this big investment, socialize most of finance, because that's the surest way, in his view, to reduce this role of speculation and to maximize the longer-term term perspective for society as a whole.

You know, we do have this big problem now, as we have this aging population, the baby boomer population—the U.S. is aging, and elsewhere in the world—who are trying to figure out how to save for their old age. And we've totally privatized or almost totally privatized the mechanisms for transferring wealth from when you're young to when you're old so you can retire.

And with the financial industry, one of the reasons it's grown so much is that by financial liberalization, by reducing the amount of socialized savings, or Social Security and defined benefit plans and so forth, they've managed to grab most of these savings that people my age have tried to put into the system to figure out how we're going to survive when we're old.

And what they've done with most of these savings is siphoned off massive incomes for the CEOs and for the financial sector, made poor investments in the real economy. And so in the end, when those people, my generation or a little bit younger, retire, there's not going to be a lot of wealth created for people to retire on.

And again, this gets back to what Keynes was saying. Our ability to retire really depends on how productive our economy has been over the previous 20 years and how the rewards of that productivity are shared among the population. We need to return to a financial system and an economic system where we can really invest in true productivity in the economy, where those returns can be shared widely. And only then will people have real income, real wealth to retire on.

JAY: But when you say "return", we're at a point now where finance capital is so powerful, and not just as a percentage of the GDP, but so powerful politically, that you can barely pass the flimsiest regulation to try to control what's happening, whether it's in derivatives markets or other forms of banking activity. You know, the joke has been they own Congress. I guess it's not a joke. It's a sad truth. [incompr.] get to that point, it's not—what can you return to? Don't we have to move toward something new?

EPSTEIN: Right, we have to move to something new. And what we have to look at—let's look at the Occupy movement, for example. There's a new initiative there that I think is very important. It's called Strike Debt. And it's using the fact that when you look at these financial returns, these financial profits, you have to understand that the other side of that is debt and the fact that households are indebted, mortgages, student debt, small businesses, a huge amount of debt, and the way the whole legal system has been restructured and the political system, as you said, has been restructured, where now the dominant goal of much of our political and legal system is to make sure that people try to—have to repay this debt. And so what Strike Debt is saying is, no, there has to be debt resistance; we have to have change in laws so that it's easier for households and students to go bankrupt, to wipe the slate clean.

You know, as David [greIb3`] in his book Debt: The First 5,000 Years pointed out, historically, if you look back thousands of years, societies get overindebted. They tend to—they start to weigh down the progress of the society. And leaders of the political system have to call jubilees. We have to strike the debt, and I think we're at that point now in the United States. Certainly they're at that point in Europe. And we have to be part of this movement to really—to give debt relief to the vast majority of Americans who are now weighed down by debt. And it's this debt that is one of the major burdens that's making it very difficult for our economy to get going again.

JAY: AlL right. Thanks for joining us, Gerry.

EPSTEIN: Thank you.

JAY: And thank you for joining us on The Real News Network.


Saturday, October 6, 2012

Transcript: 522 Housing and the Macro Game

Part Three of the Housing presentation from here at Demand Side.

Part One was a digression on how the housing problem is really the investment problem. You were convinced that we are overbuilt in housing. We are overbuilt in consumer goods production. And what we need is big investment in public goods, specifically education, health care, transportation and energy infrastructure.

Part Two A relayed the simplistic housing market theory. Housing is recovering by the numbers. Stable prices. Higher home sales. Not much higher. You wouldn't be able to detect the uptick in a twenty-year chart. But in a five-year chart, sure. The housing bottom is in. We heard it from Calculated Risk, Bill McBride.
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Part Two B was the bifurcated market theory. On both the demand side and the supply side, there are two classes. Buyers are now split between traditional homeowners and vulture funds and others moving in because there's no money elsewhere, and besides capital is cheap. Lever up, boys.

Sellers are split between traditional sellers and distressed sales. Even the traditional sellers are taking a bath on what they thought their home was worth. Other homes are coming out of one or another phase of foreclosure. There are cross-currents between the two parties on the two sides.

Now is part three. The macro game. Here we see the Fed and the Treasury have positioned themselves as heroes defending the bridge. They have leveled their guns in defense of ... the banks. By which we mean the private holders of the bad debt. The treasury has abandoned the homeowner and the legitimate write-down of the debt in favor of mark-to-whatever. The Fed, largely led by Bernanke, has determined that mortgage backed securities, if bought, will be the key. Private buyers of these securities are in the market only because the Fed is there, keeping up the price.

First let's dispense with the notion that this is about jobs. First the happy talk from Ellen Zentner of Nomura Securities.


Here is a riposte from Robert Eisenbeis, formerly of the Atlanta Fed, now of Cumberland Advisors.


Now, of course, $980,000 is not the net cost per job. Since the securities on the Fed's balance sheet have some resale value, the real cost is the difference between the purchase price and the sale price. If you believe the Fed will ever sell these.

This is keeping the prices of these down and forcing money into the economy. The Fed is buying with dollars it is inventing. Those dollars are going to float the financial markets. They are not going to buy food. It is not the excess cash to rich people that is driving up the demand for food and gasoline and so on that is creating the consumer price inflation, such as it is. It is the excess cash that is going to rich people that is driving up the prices of these as they speculate in those markets, the risk markets. It is a commodities bubble driven by speculation. It is a stock bubble driven by search for yield. You actually hear this more and more among the professional analysts.

This is monetary policy. It is not working. It will not work. It cannot work. The most it can do is keep the financial markets floating. The inflation hawks are right at the Fed and elsewhere. The inflation is not locked in some time capsule, pressurized time capsule, ready to be released on the world at some unknown future date. The inflation is bubbling up the commodity markets, the stock markets, the bond markets, the securities markets. This is the intent of Fed policy and it is working.

The transmission of that into a job is not working, whether it is the intention of the Fed or not.

Unfortunately, it is not the real economy. If one-tenth the capital used in this effort to save the banks were used to actually hire people to do things that need to be done, yes, you would see some inflation, but you would also see a recovery in the real economy. If the credit expansion that is the source of automobile sales and student debt were in the public sector creating jobs doing things that need to be done, the real economy would take off.

But the real economy is captive to the financial economy. The jailers are the Fed and Treasury and Wall Street's control of the political process. All are active in the futile attempt to avoid an inevitable and ongoing deflation of asset prices. Deflation? Yes, deflation. We have made the point that there are two types of inflation/deflation, in consumer prices and in investment goods. When there is no investment, there is a natural tendency for the economy to stagnate. But how do we know investment goods are deflating? One, prices are going down. We saw a collapse in the primary category of investment over the 2000's – housing. Two, we see people prefer cash to investing. There is a lot of talk about uncertainty, but the uncertainty is not government regulation. The uncertainty is demand, and more than that, whether there is a need for more investment to meet an upturn in demand. Housing is overbuilt, and industrial capacity is overbuilt, both as a result of decades of public subsidy mostly through the tax rules.

Demand Side begins with the premise that the economy is constrained or is driven, depending on your verb, by the demand side. We don't create employment by favoring business and banks, we create employment by creating employment, and that favors businesses and banks. Where you see income growth or credit growth now, associated with the real economy, you see growth growth. Where you see the Fed buying massive amounts of securities. you get nothing, or at best a slowing of deflation. Effective demand is composed of the change in debt and income. The change in debt is largely to the downside in the private sector as households delever, that is household austerity. Businesses lead in the austerity race. States and municipalities are driven to austerity by balanced budget frameworks. Now the federal government is in a posturing war that may force it to austerity. Do we expect a different outcome for ourselves than Greece? Probably not. That's why we call it the fiscal cliff in the U.S. instead of austerity.

Deleveraging should be done by writing down debt. Debt that did not produce the revenue to service it should be written down.

It is a strange and bizarre world we live in where half a decade of evidence is ignored in favor of the paradigm that created a crisis.

Monday, October 1, 2012

Transcript: 521 This isn't your father's housing market

We promised an episode on housing, and here it is, featuring Bill McBride – formerly known as Calculated Risk, Michael Fader of Radar Logic with some very cogent observations, also Ellen Zentner of Nomura Securities and Robert Eisenbeis formerly of the Atlanta Fed, disagreeing on the effect of Fed policy. We have argued that Fed policy is not targeting housing, but housing securities.
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Setting this up, and this will be the outline of a chapter in the next Demand Side book, the Evidence,

By the way, be sure to look at Demand Side the book, history, economists, concepts, the whole nine yards that background our approach to economics, with some of the great economists. We don't do enough promotion, but we appreciate your support there, check it out at Demand Side Books dot com.

The housing market has bifurcated, both on the buyers' side and the sellers' side. Ten years ago and probably for the entire period after the New Deal and before the Great Financial Crisis, the housing market was comprised of homeowners selling their homes to homebuyers, to move on, up, out, resize down, or whatever. Because of the collapse of housing, you see now two new major players. The banks who own the houses – REO it's called—and investors looking to buy up housing to rent, the return of the slumlord question mark, or to resell.

So there's a natural match, but there are cross-currents as well.

The traditional home-buyer cannot get the loan he or she could get ten years ago. Downpayments are much higher, and personal and family wealth much lower. Lending standards are more strict. Jobs are scarce. A source for downpayments has dried up, for example, because that source was the sale of the previous home and using the equity. No more equity.

The traditional home-seller is reluctant to sell his or her home at a price that may be well below that paid or that penciled into the retirement plan

The distressed sale has a different dynamic. The home is somewhere in the foreclosure process. As you'll hear, these homes sell at a one-third discount to the others in the neighborhood. We call these distressed, although many homes that are sold that are not called distressed are still transactions made to get out from under big payments or outsized accommodations. The family is gone, etc., etc. One can imagine plantations of McMansions in this category.

It is reported elsewhere that a greater and greater number do not go through the foreclosure process to its end, but involve the bank agreeing to a short sale. Look at this closely. As we've said, with the active conspiracy of the Fed and Treasury, banks are carrying an enormous number of loans on their books at inflated, pre-crisis values. Mark to market accounting would display clearly why banks are hoarding cash. So on a one-by-one basis, as they can, they are accepting the writedown of the loan value through a short sale. Probably as much as they can. They as much as the rest of us, or more, need a recovery in the housing market for solvency's sake.

And in the background of the Fed's action is the fact that it doesn't address the enormous debt burden of homeowners, nor those with outsized mortgages. That burden is left to Darwinian economics, while the socialized activity is directed at the banks and the stock markets. Get your heads on straight FoxNews.

But the point here is, as you'll hear below. Investors have turned away from distressed sales and moved in to buy from the traditional homeseller, who is not underwater, but who is taking a huge hit on his or her pre-crash value. The number of distressed sales is actually lower. Yes lower. Lower than at any time in recent history. This can only be because that huge inventory of distressed properties is not making it to the market. Where is it? It is on the constricting supply side of the attempt to boost home prices.

On the increasing demand side of this attempt to manipulate the market is the Fed and its purchases of Mortgage backed securities. This is, in our opinion, the Bernanke focus. Still seeing the reflation of this popped market as the key, Ben is betting trillions that he can do it. What it does is inflate commodity prices, stock prices, and allow those with enough wealth to afford it to refinance and have more income. These are not the stressed parts of the economy.

But let's go through this with the help of our experts. Leading off with Calculated Risk, Bill McBride, whose view is the superficial view. Kudos to McBride for his Calculated Risk blog, and we recommend it for its wonderful presentation of economic data, and kudos to him for calling the housing collapse as it happened in 2007, but we think he has joined an optimistic consensus both on calling for a housing recovery and a broader economic recovery. Actually he has called a bottom to housing, not a significant recovery, at least we can't find it at airtime. His call for the economy is recovery, though.

Let's give him his due. In February, that is 2012, he wrote:

The Housing Bottom is Here
by Bill McBride on 2/06/2012 12:13:00 PM
There have been some recent articles arguing the “housing bottom is nowhere in sight”. That isn’t my view.

First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.

For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear on what we mean.

For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.

Back in 2009, when I first wrote about the two bottoms, I thought we were close on housing starts and new home sales - but that it was "way too early to try to call the bottom in prices." In real terms, house prices have fallen another 10% to 15% since I wrote that post according to the CoreLogic and Case-Shiller house price indexes.

And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.

There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices. Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales.

And this doesn't mean prices will increase significantly any time soon. Usually towards the end of a housing bust, nominal prices mostly move sideways for a few years, and real prices (adjusted for inflation) could even decline for another 2 or 3 years.

But most homeowners and home buyers focus on nominal prices and there is reasonable chance that the bottom is here.
Not calling a recovery, and consistent with the Demand Side view that we are bouncing along the bottom. But our view is the bottom is sloped downward, so there is further weakness to come. That seems to be the trend in more recent months.

Again from Calculated Risk, we quote
From the NAR: Pending Home Sales Decline in August
The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 2.6 percent to 99.2 in August from an upwardly revised 101.9 in July but is 10.7 percent above August 2011 when it was 89.6. The data reflect contracts but not closings.

The PHSI in the Northeast rose 0.9 percent to 78.2 in August and is 19.9 percent above August 2011. In the Midwest the index declined 2.6 percent to 95.0 in August but is also 19.9 percent higher than a year ago. Pending home sales in the South slipped 1.1 percent to an index of 110.4 in August but are 13.2 percent above August 2011. With broad inventory shortages in the West, the index fell 7.2 percent in August to 102.5 and is 4.2 percent below a year ago.

This was below the consensus forecast of a slight increase.

Even though sales are still very low, new home sales have clearly bottomed. New home sales have averaged 362 thousand SAAR over the first 8 months of 2012, after averaging under 300 thousand for the previous 18 months. Most of the recent revisions have been up too.
The data actually show a pickup in home sales in the early part of the year, but that has not taken off, and sales are now trending weaker

So let's call this the monolithic market view. Let's find somebody who sees the bifurcated market. Ah, Here is Michael Feder of Radar Logic.


We're running long today, we'll pick up with Zentner, Eisenbeis and Bernanke later in the week.