Too Big to Fail Should Be Too Big to Exist

Posted by Jim Luke — October 9, 2011

Against Monopoly has a great graphic that shows a big part of the problem with our financial sector and our economy.

How the Too Big To Fail Banks Got So Big

The four banks shown above are the four largest banks in the U.S.: JP Morgan Chase, Citi, BofA, and Wells Fargo. Together they dominate the financial industry. If you add in Goldman Sachs and Morgan Stanley, the domination is near complete. They all received large bailouts in the 2008-09 crisis. Today they are much larger than when we entered the crisis. As the graph shows, none of these banks grew so large by “natural” or “organic” means. They didn’t grow because they offered better or more efficient services to customers. They didn’t “win in the marketplace” by competing better. They simply bought the competition. It’s domination by merger. The U.S. banking system which at one time was very competitive and decentralized with literally thousands of very competitive banks is now dominated by a few. We call it oligopoly on the way to monopoly.

When very, very large banks get too big, they become “Too Big To Fail”. That means, if the banks were allowed to fail because of bad decisions, bad management, or bad investments, it would set off a domino effect throughout the economy and financial system. That would punish all of us and not just the bank’s owners. This, of course, is what happened in 2008 when Lehman Brothers was allowed to fail. It set off a financial panic where banks wouldn’t / couldn’t loan to each other (or anyone else). Result: big bailouts of big banks.

But it doesn’t have to be this way. Yes, once we have a “too big to fail” bank and it fails, then there’s pretty much no choice but to bail them out. There are choices about the structure of the bailout. We could have set up the bailouts in a way that the economy wins and the failed managers and bank owners suffered. We didn’t. The Federal Reserve, the Bush administration, and then the Obama administration made it a priority to keep the bank managers and bank owners whole. The economy has suffered from a slow recovery partly as a result.

But bailouts shouldn’t be necessary because we shouldn’t allow the banks to become this big in the first place. Again, we have a choice. We could have prevented some or all of these mergers. The laws are on the books to do it. Washington, following the failed anti- antitrust philosophy of the Chicago school since the 1980′s simply doesn’t challenge many mergers these days. It’s bad for campaign contributions. Besides we’re supposed to believe that a market fairy will make it all right. Instead of challenging and stopping some of these mergers, both the government and The Federal Reserve have actually facilitated and acted as match-maker for many of the mergers. In March 2008, when Bear Stearns failed, The Federal Reserve offered a deal to JP Morgan Chase. If Chase would buy Bear Stearns, The Fed would reimburse Chase for any losses over a set amount. Heads Chase wins. Tails Chase wins. Nice deal.

We have other choices as well. In other industries historically when the private competition in the market led to monopoly or near-monopoly outcomes, the government chose to regulate the industry as a public utility. We did it in the 1920′s and 1930′s with the electrical industry. Your local electrical company wasn’t always a regulated utility. At one time it was ravenous and rapacious private monopoly just like these banks are becoming. When Standard Oil became a monopoly over a hundred years ago, we sued and broke it up into a bunch of other companies.

This complicity in allowing the big banks to become Too Big To Fail is among the types of policies that the protesters of #OccupyWallStreet want changed. Me, too.

Gov. Rick Snyder Invokes the Magic Job Genie

Posted by Jim Luke — May 13, 2011

The mantra of Republican governors (and in Congress) has been that taxes must be cut in order to create jobs. In previous posts I’ve dealt with the confusion about how federal level changes income taxes might or might not affect the strength of the economy. Most of the federal tax discussion focuses on individual income taxes. But at the statehouse level, Republican governors have been pounding a theme that claims business tax cuts will drive economic growth in general and job creation in particular.

In Michigan, Republican Governor Rick Snyder has just pushed through a massive restructuring of Michigan taxes. The old Michigan Business Tax (a complicated scheme applying to all businesses) was repealed. In it’s place is a new corporations-0nly 6% profits tax. The new tax collects only a small fraction of the revenue the old tax did, so individual tax burdens have been increased, particularly on seniors and low-income folks. In summary, it is a giant tax shift: lower taxes for businesses and higher taxes for individuals, especially the poor and seniors.

Why? Jobs, we’re told. The Governor, a self-proclaimed very smart person (“nerd”), keeps telling people that Michigan needs new jobs and the way to create them is to cut business taxes. Even before the new tax cuts were officially passed, the evidence is starting to come in that the idea doesn’t work, as shown here. But the governor continues to claim jobs will result if we only cut business taxes. I’m skeptical, but willing to listen. After all, he’s a really smart person (his campaign ads keep telling us that, so it must be true, right?) So I was very excited this morning as I’m driving to work and listening to Michigan Public Radio (recording of program as MP3 available here) to hear the Governor would be on the show live. Maybe he could enlighten me about how this “tax cuts create jobs” stuff works.

The very first question was fantastic. An alert listener asked (I’m paraphrasing from memory): “Precisely what empirical evidence exists that your business tax cuts will create additional jobs and just how many jobs should we expect?” Snyder couldn’t give a straight answer. He immediately responded with “It’s just a matter of basic economics. When a business have more money or resources it can create more jobs” (again paraphrase).

Unfortunately for the people of Michigan, Snyder has it all wrong. That’s not basic economics. He’s thinking basic accounting. Basic economics says businesses will hire more workers when they perceive there’s demand (spending) for their product at profitable prices. Taxes don’t really enter into it. That’s not just basic economics theory, it’s also confirmed by repeated surveys of business managers. Tax rates, particularly state tax rates, are waaaaay down the list of factors important in deciding on hiring and staffing levels. Snyder should know better. He himself, when he was CEO of Gateway Computers, moved the company from South Dakota, a low tax state, to California, a very high tax state? Why would he have done that if taxes were so important?

The moderator, Rick Pluta, to his credit, didn’t bail out Snyder but moving quickly to the next question. Instead we were treated to the Governor claiming that “it’s not possible to pinpoint exactly how many or which jobs might be created by the tax cuts, but we believe it will happen”. That’s my point here. There is no evidence. There is no sound theory. Instead, what we have is a faith-based policy. We cut taxes for businesses in total and eliminated them completely for thousands of businesses in belief that jobs will be created. There’s no real evidence. There’s just a belief in the magic jobs genie*. The jobs genie only comes out when taxes are cut. And when taxes are cut, the genie just magically appears and inspires businesses to go crazy and say “Hey let’s hire people. Let’s create jobs!”

Snyder then proceeded to offer his only empirical evidence. “We have some surveys where many of these small and medium businesses say they would consider creating new jobs in response to this bill”. The Governor’s a lousy social scientist and economist. Contrary to Snyder’s claims, it is possible to study and quantify this stuff. Applied economists have done this stuff for decades. It’s our bread-and-butter. There are many studies on the jobs impact of state business tax cuts. The evidence does not support Snyder’s position. Indeed, contrary to his claims that they don’t know how many jobs will be created, the state treasurer and budget office must necessarily make estimates of state employment under different tax schemes in order to make budget forecasts. Snyder is hiding because the evidence doesn’t support what he wants to claim. He prefers to conjure magic beings like the jobs genie.

Snyder did say that employment is how he should be measured as governor. What he didn’t say is that the appropriate measure is how much Michigan’s employment grows relative to the national average. If the U.S. as a whole simply manages to not have a major recession while he’s in office, then Michigan employment will grow. The U.S. economy as a whole is the dominant influence on Michigan employment, not what the state government does. But, the policies of the state government have a major influence on whether the state does better or worse than national average. For the last approx. 15 months, Michigan has performed significantly better than the national norm, albeit Michigan started in the worst condition. (Nevada has that title now). The clock is ticking now. It’s up to Snyder to prove that, contrary to historical evidence and his own prior business decisions, that state business tax cuts will create faster than national average job growth.

* The magic Jobs Genie is only one of a pantheon of magical creatures that animate the economic theories of many politicians these days. There’s also the Banking Unicorn and the Investment Confidence Fairy and others. I’ll talk about those in future posts.

Home Foreclosures – Write Your Attorney General

Posted by Jim Luke — December 13, 2010

I support this from Yves Smith at Naked Capitalism. The law must be upheld. Fraud is fraud. It is not “paperwork glitches” or “snafus” or “correctable errors”. It has been the policy of the banks and mortgage servicing organizations to file en mass false statements and false documents in our courts. These practices will not stop unless the senior executives are held accountable for the actions of the organizations they lead.

“Crime Shouldn’t Pay”: Tell the State AGs You Want Mortgage Fraud Prosecuted

Tomorrow, a group of homeowners is meeting with Iowa’s attorney general Tom Miller, who is leading the 50-state effort which is investigating foreclosure and mortgage lending abuses.

This group is presenting a letter to Miller asking them to prosecute bank executives for mortgage fraud and wants to show broad-based support for this idea via having concerned citizens sign it.

Here is the text of their letter:

Dear Attorneys General,

We, the undersigned thank you for investigating fraudulent and illegal foreclosure practices by the nation’s biggest banks.

Your investigation is the best hope for homeowners and communities since this crisis began. Americans are watching. Our expectations are high that we will see justice for the millions of families who have lost their homes, the millions more who are at risk of foreclosure, and the neighborhoods across the country devastated by falling housing values and vacant properties as a result of widespread mortgage fraud.

The bank executives who committed fraud should be prosecuted. Any settlement needs to go beyond fixing paperwork, fully addressing ongoing abuse and ending the flood of unnecessary foreclosures.

We demand that any overarching settlement agreement contain mandatory loan modification programs, including principal reduction for owner-occupant families facing foreclosure and remedies for those families who have already lost their homes.

Now is the time for bold leadership from the nation’s Attorney Generals to hold big banks accountable for the damage they have done to families, communities and the nation’s economy.

I have signed this letter and strongly encourage you to do so. Please visit the site, www.crimeshouldntpay.com to support this effort. Thanks

The GM Tale

Posted by Jim Luke — November 20, 2010

Earlier this week General Motors, the new post-bankruptcy GM, issued it’s Initial Public Offering. Initial signs are very encouraging in several ways, which I’ll describe. But first let’s take a note. Only 20 months, less than two years, The conservatives and tea party types were howling for GM to go bankrupt and for the government to not step in – just let it and Chrysler die along with what would probably have been nearly a million good U.S. jobs and the State of Michigan. Let’s revisit those events for a moment below the fold:

Continue reading →

Poorer Boomer Retirees: Macro Implications of Proposed Pension and SS Benefit Cuts

Posted by Jim Luke — October 29, 2010

In many political circles this year, a mantra has emerged: we cannot afford the public sector pension plans and we cannot afford Social Security – we must cut the future benefits. For example, George Biggs of the conservative, right-wing think tank American Enterprise Institute argues that even though public sector workers receive lower pay than comparable private sector jobs, it’s “just not fair” for public sector workers to have secure, attractive pensions:

There is no reason public-sector employees should receive retirement benefits that are either larger or more secure than those received by private-sector workers.

But like most one-liner economics arguments, when we consider the macroeconomic effects, we have to conclude it’s not that simple! In fact, we (as a macro economy and society – all generations) might not be able to afford to cut future benefits, despite the growing portion of society that will be over age 65 and not working when baby boomers retire.

Here’s why. Consumer spending is 70% of GDP. Reductions in consumer spending rapidly translate into stagnant growth and/or recession resulting in lower employment and fewer jobs. Even slowdowns in the growth of consumer spending have negative job consequences. Consumer spending benefits us two ways: the spending supports a higher lifestyle (both quantitatively and qualitatively) by the people doing the spending, but it also provides the income for the workers who produce the goods. This is what in economics is called the circular flow. Spending by seniors is today a significant part of the circular flow. Now picture the future. We know that seniors and retirees will be a larger portion of the population for at least the next 30-some years as the baby boom generation moves from working age to retirement and eventually dying. Retirees are a critical part of the consumer spending. As boomers retire, they become an even larger portion of consumer spending, both because there’s more retirees and because typically it’s the middle-aged and seniors that have the money to spend. McKinsey estimates how much of that consumer spending will be accounted for by the boomer retirees: 40%! As reported by Diane Jean Schemo:

At every stage of their lives, Boomers, the generation born between 1946 and 1964, have exerted a singular force on the economy. Cradled in the relative prosperity of the post-war years, they graduated from college in higher numbers and earned higher incomes than both their parents and their children. Boomers saved less and spent much, much more. By their sheer numbers and appetites, what Boomers do — how much cash they have in their pockets, and whether they save it or spend it — matters. Consumer spending accounts for 70 percent of economic activity, according to government figures. By 2015, Boomers will account for 40 percent of that consumer spending, according to a 2007 report by McKinsey Associates.

At present, lawmakers, politicians, and fiscal worriers are claiming that the future (typically distant future) pension and social security liabilities (promised benefits) are too much. Governments cannot afford them today with today’s assets, incomes, an deficits they claim. Now there’s a serious flaw in logic there: cutting future benefits/liabilities will do nothing to cut a present-day budget deficit, but let’s ignore that for a moment. So, they argue for cutting promised benefits (often argued for SS) and/or shifting all of the risk to the future retirees themselves instead of the employers or government. Typically this is done by proposing to end defined-benefit pension plans for public employees (much like the private sector did 20 years ago) or by calling for privatization of Social Security. But like most arguments from one-liner economists, the world doesn’t work that way. The macroeconomy is more complex. These people assume that there’s no connection between today’s economy and the future promised benefits other than the government having to record a liability on it’s books. Wrong.

You see, people make plans and those plans are based on expectations of the future. What people spend now is based on how confident they are of their future income. So let’s go back to our future scenario. Let’s now assume these one-liner economists have been successful. Defined-benefit pension plans for public sector employees are either eliminated or cut back. Maybe even Social Security has been partially privatized or future benefits cut. Our aging boomer cohort sees it’s future retirement income as lower and as more risky and uncertain. That means they cut back today’s spending now to rationally protect themselves against this increased risk. As they cut back today’s spending, that reduces overall consumption spending now. That lowers employment and GDP now. Lower GDP and lower employment now means even bigger government budget deficits now (this effect would swamp any projected future savings – see the 2009 Federal deficit that resulted from lower employment).

Now none of this analysis should be new or surprising. It’s basic stuff macroeconomists learned 80 years ago in the Great Depression. But unfortunately, good macroeconomic analysis doesn’t lend itself to one-line political slogans.

The bottom-line: If public sector defined benefit pension plans and/or Social Security future benefits are cut or privatized, it will have a negative effect today on government budgets – deficits get worse. It will also mean a much leaner lifestyle for baby boom retirees. How much? The model developed by/for Social Security and Urban Institute projects that simply converting existing public sector defined benefit plans to quasi-private defined contribution plans could easily reduce the average boomer’s retirement spending by as much as $4,000 per year.

In the state of Utah, they have already debated and decided to end public sector defined benefit pension plans. Yet amazingly, they never considered the huge impact this would have on the Utah economy now and in the near future (from Schemo article in Remapping Debate – emphasis is mine):

Cutting pensions in Utah

Utah, one of 18 states to revamp its pension system since 2005, held a lively, often contentious, debate before moving to end its current defined benefit system for new workers earlier this year. It replaced it with a two-tiered system allowing new hires to choose either a defined contribution or a defined benefit plan. For the latter, the new rules limit the state’s contribution to 10 percent of an employee’s salary, allow retirement after 35 years’ service instead of 30, and lower the maximum benefit to 52 percent of an employee’s salary.

And yet, John Nixon, the state budget director, said he does not recall the impact of the changes on consumer spending coming up much in the debates over pension remedies. Nixon had neither heard of or nor seen a February 2009 report by the National Institute on Retirement Security, which uses Census and other government data in 2006 to assess the impact of state and local pension plans on the larger economy.

The study, entitled “Pensionomics,” found that every $1 Utah taxpayers spent in public pension benefits spurred $6.36 in economic activity in the state. State and local governments in Utah provided 37,186 retired workers benefits averaging $1,471 a month. These payments, the report found, triggered $1 billion in economic output, concentrated most heavily in retail sales and health care.

Nixon said that lawmakers in Utah, alarmed by a $6.5 billion fall in the pension fund’s assets in 2008, focused on the long-term liability to the state of its obligations to retirees, not on the repercussions of possible benefit cuts to the state or local economies — a discussion that usually focuses on a shorter time frame of 12 to 24 months.

“As far as the impact on consumer spending, that’s a whole different dialogue,” Nixon said.

RIP: Efficient Markets Hypothesis – 70% of stock trades last 11 seconds or less

Posted by Jim Luke — October 24, 2010

One of the economic theories that dominated a mainstream economic theory during the last few decades is Efficient Markets Hypothesis. Essentially, an important part of the concept is that asset prices, such as stock prices on the stock exchange, accurately reflect all available information about the future earnings of the firm. Further, it implies that stock price movements reflect changes in these perceptions. There’s a lot wrong with the theory as is explained quite well in Zombie Economics by John Quiggin. But let’s add this little bit from Washington’s blog and Naked Capitalism.

→ Washington’s Blog

The Fourteenth Banker writes today:

In the stock market, program trading dominates volume. I heard recently that 70% of trade positions are held for an average of 11 seconds.

He’s correct.

As the New York Times dealbook noted in May:

These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said

Similarly, FT’s Martin Wheatley pointed out last month:

I know of one HFT firm operated out of the west coast of the US that boasts its average holding period for US equities is 11 seconds

And market analyst Peter Cohan writes at AOL’s Daily Finance:

70% of trading volume on the major exchanges is conducted by high-frequency traders who hold a stock for an average of 11 seconds.

The fact that the vast majority of stock market trades are held for 11 seconds shows that the stock market is not a real market with real traders governed by the law of supply and demand, and with no real price discovery.

Leadership FAIL: Again

Posted by Jim Luke — October 18, 2010

This time I’ll outsource the job to Paul Krugman at the New York Times. I don’t always agree with Paul, but he’s spot on with this. The Obama administration never misses an opportunity to miss an opportunity, especially if it involves banks.

Epitaph For An Administration

In today’s report on the foreclosure mess, a revealing sentence:

As the foreclosure abuses have come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

Surely this can serve as a generic statement:

As NAME ISSUE HERE has come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

Stimulus, bank rescue, China, foreclosure; it applies all along. At each point there were arguments for not acting; but the cumulative effect has been drift, and a looming catastrophe in the midterms.

Or to put it another way, the administration has never missed an opportunity to miss an opportunity. And soon there won’t be any more opportunities to miss.

Distribution of Wealth: Reality vs. Ignorance

Posted by Jim Luke — October 16, 2010

Americans of all persuasions, right and left, progressive and conservative, apparently actually want the same distribution of wealth. We want to be like Sweden. Yes, the “socialist” Sweden. But, we don’t know that and we don’t agree on policies because we don’t accurately perceive what the current distribution of wealth. A fascinating study by behavioral economist Ariely as reported at tax.com by David Cay Johnston:

…When it comes to wealth and taxes, the vast majority of Americans are modern Know-Nothings. The disconnect between belief and reality is being exploited by those who laugh all the way to the bank with their tax savings and the burdens they have subtly shifted off themselves and onto the rest of us.

The ideal wealth distribution chosen by the 5,522 people who took the online survey has the top fifth of Americans owning between 30 percent and 40 percent of the wealth.

That means Americans believe the ideal distribution of wealth is that of Sweden. Moreover, 90 percent of Republicans share that belief. (Actually, 90.2 percent, as the survey coauthor, Prof. Daniel Ariely of Duke University, noted when we met to discuss his work.)

The survey sample, with more than 10 times the 504 people often used in polls, is robust and credible. (For the report, see Doc 2010-21608.)

The genius in the survey was to avoid questions using loaded terms like “estate tax” and “death tax.”

Instead those surveyed were shown pie charts and asked what they thought was the ideal distribution of wealth and what they estimated to be the wealth distribution in America. They were not told that one of the pie charts was Sweden’s actual wealth distribution, but people gravitated to it like moths to a flame.

What did those surveyed think was the actual distribution of wealth in America?

Figure 1

The actual United States wealth distribution plotted against the estimated and ideal distributions across all respondents. In the “Actual” line the bottom two quintiles are not visible because the lowest quintile owns 0.1 percent of all wealth and the second lowest quintile owns 0.2 percent.

Source: Norton and Ariely Survey.They estimated that the top fifth of Americans owns about 60 percent of the wealth.

The reality? Eighty-five percent.

So what about the bottom 120 million of us? Those surveyed said that ideally, the bottom 40 percent would own 20 to 25 percent of all wealth. When asked to estimate the share of wealth actually owned, the collective guesses were between 8 and 10 percent.

Reality: 0.3 percent.

BTW: Sweden isn’t really “socialist”. It’s more of a social democracy.

The Economy: Back to the Future, only Worse

Posted by Jim Luke — October 13, 2010

Regular readers and my students in class can probably detect a distinct pessimism in my comments on the U.S. economic prospects. They are right. I am pessimistic. Not necessarily because things have to be gloomy (they don’t – there are alternative policies), but because I just don’t see the politics allowing such policies. Instead, we are going back to the future. Or, rather our future is looking a lot like the recent past, only worse.

In the decade (really 2-3 decades) prior to the Great Recession beginning in 2007 and the Wall Street implosion of 2008, the U.S. was moving along toward an oligarchy. Increasing inequality of income and increasing political power and economic power for a narrow elite of truly over-the-top rich led by FIRE, the Financial-Insurance-Real Estate sector (Wall Street). Of course this trend was aided and abetted by too many in the economics profession who not only forgot the lessons of the past, but also reanimated economic dead ideas (see Zombie Economics). I thought (hoped) that with the crash of 2008 and the severity of the Great Recession, that change might arrive. Well, we didn’t get change and now there’s not much hope, either.

The New York Times has an article about why, despite being technically “over”, the Great Recession still stings. Here are a few excerpts that nail my concerns fairly well (red emphasis is mine, as are the comments in brackets and italic):

…an enormous oversupply of houses and office buildings and crippling debt. The decision last week by leading mortgage lenders to freeze foreclosures, and calls for a national moratorium, could cast a long shadow of uncertainty over banks and the housing market. [this could be worse than the Lehman/AIG failure] Put simply, the national economy has fallen so far that it could take years to climb back.

The math yields somber conclusions, with implications not just for this autumn’s elections but also — barring a policy surprise or economic upturn — for 2012 as well:

¶At the current rate of job creation, the nation would need nine more years to recapture the jobs lost during the recession. And that doesn’t even account for five million or six million jobs needed in that time to keep pace with an expanding population. [we are looking at a lost generation of potential workers] Even top Obama officials concede the unemployment rate could climb higher still.

¶Median house prices have dropped 20 percent since 2005. Given an inflation rate of about 2 percent — a common forecast — it would take 13 years for housing prices to climb back to their peak, [house prices are more likely to decline further first] according to Allen L. Sinai, chief global economist at the consulting firm Decision Economics.

¶Commercial vacancies are soaring, and it could take a decade to absorb the excess in many of the largest cities. The vacancy rate, as of the end of June, stands at 21.4 percent in Phoenix, 19.7 percent in Las Vegas, 18.3 in Dallas/Fort Worth and 17.3 percent in Atlanta, in each case higher than last year, according to the data firm CoStar Group.

Demand is inert. Consumer confidence has tumbled as many are afraid or unable to spend. Families are still paying off — or walking away from — debt. Mark Zandi, chief economist of Moody’s Analytics, estimates it will be the end of 2011 before the amount of income that households pay in interest recedes to levels seen before the run-up. Credit card delinquencies are rising.

“No wonder Americans are pessimistic and unhappy,” said Mr. Sinai. “The only way we are going to get in gear is to face up to the reality that we are entering a period of austerity.”

This dreary accounting should not suggest a nation without strengths. Unemployment rates have come down from their peaks in swaths of the United States, from Vermont to Minnesota to Wisconsin. Port traffic has increased, and employers have created an average of 68,111 jobs a month this year.

After plummeting in 2009, the stock market has spiraled up, buoying retirement accounts and perhaps the spirits of middle-class Americans. As a measure of economic health, though, that gain is overstated. Robert Reich, the former labor secretary, notes that the most profitable companies in the domestic stock indexes generate about 40 percent of their revenue from abroad.

Few doubt the American economy remains capable of electrifying growth, but few expect that any time soon. “We still have a lot of strengths, from a culture of entrepreneurship and venture capitalism, to flexible labor markets and attracting immigrants,” said Barry Eichengreen, an economist at the University of California, Berkeley. “But we’re going to be living with the overhang of our financial and debt problems for a long, long time to come.”

New shocks could push the nation into another recession or deflation. “We are in a situation where our vulnerability to any new problem is great,” said Carmen M. Reinhart, a professor of economics at the University of Maryland.

It’s that “vulnerability to any new problem” that bothers me most. We have a growing foreclosure fraud crisis that could become a big bank failure problem. We have a Eurozone so committed to austerity and protecting German banks that it is willing to sacrifice GDP and millions of jobs in the process. The banks, despite their record profits of the last 15 months aren’t really all that healthy. We just allowed them to extend and pretend that many of the loans on their books are good, when they most likely won’t be.

I don’t need to watch the annual October crop of fright movies to get scared. I just read the economic news. What I see happening is that we are re-building the debt-based, banks-are-king system we had before the crash, but only bigger. Instead of recovery, we have return.

EconProph

Category Archives: US econ system