Strange Bedfellows

Strange Bedfellows

“The pen is mightier than the sword.”

    - Edward Bulwer-Lytton

"I believe that banking institutions are more dangerous to our liberties than standing armies."
    -  Thomas Jefferson

By J.M. Hamilton  10-3-15

There’s nothing boring about the Fed and Janet &Co.  Between the charts, graphs, moving economic targets, and promises to – maybe someday – wind down of the Fed’s extraordinary efforts, as a result of the 2008 Wall Street crisis…. lies a highly volatile stock market and American politics.  It seems that every time the Fed Chair speaks, or proceeding her speech, the market either experiences a taper tantrum, or spikes up in delight, post-speech, that the banker gravy train (i.e. free money at near zero percent interest) will continue.  Any talk of taking away the punch bowl and the market turns surly, and the VIX soars.  Apparently, Wall Street, bankers, and shadow banking like their money free and easy, not that this translates into easier lending terms, write downs, or debt restructuring for the 99%.  Nice.  (Ms. Yellen’s latest speech appears to be the exception to the rule, when the stock market continued its recent descent, unabated, from Denali like valuations.)

Politicians too, particularly the party in power, like a stock market with an upward trajectory, keeps the big name donors and the plutocracy happy; and if the economy is less than stellar, and unemployment is high, an ascending stock market is a pleasant distraction.  But nearly a decade into the Fed’s easy money policies, a rather nasty habit is developing, not unlike an addiction.  Interest rates have been down for so long, nobody truly knows what the ramifications will be when the Fed starts raising interest rates again.   

One thing we do know: there will be consequences, both intended and unintended.  However, we can glean some information from history and by observing the factions for and against a rate hike.

All of which brings us to the premise of today’s piece:  Politics, economics, and finance make for strange bedfellows.  We don’t see it too often in American politics, and perhaps less in economics and finance, but every now and then, when the moon is full and the stars are aligned, two diametrically opposed camps come together.  Political camps that generally loathe each other – economic schools of thought that generally agree to disagree – on occasion are united by a similar theme.  We can see this now, particularly in politics, with the wave of outsider populist rising in the 2016 POTUS campaign polls.  Messrs. Sanders and Trump immediately come to mind.  A couple of iconoclasts have tapped into a nerve, often written about on this web site, a populist revolt against the crony economy, and an establishment that has neglected the country and the American people.

Political alignment is unusual, but rarer still, how often does one see Keynesians/liberals, or salt water economist, aligned with the Wall Street banker crowd, in support of the continuation of the Fed’s easy money policies?  And yet, that’s exactly what we have today…. Liberals and more than a few bankers and corporate executives, aligned and praying that the Fed keeps the pedal to the metal just a little while longer (Their Augustian prayer: Please Lord make me chaste, but several decades from now, and preferably when I'm dead).  As alluded to above, we can learn a great deal from the arguments/motives put forth by both camps as to the pending fallout, and also get some sense of the tremendous pressure that the Federal Reserve is under.

Let’s start with the Liberals, whose arguments some of us are generally sympathetic too.  Here goes:

·      The poor and the middle class, what remains of it, will bear the brunt of a rate hike.

·      State and Federal government borrowing costs will rise, as will the debt service load, which mean less revenue to be redistributed to those in need and still struggling, in a sub-par economy.

·      The majority of mortgages are, to this very day, adjustable, so a rate hike means higher monthly mortgage payments; add in adjustable subprime automobile notes (currently in vogue), and the lower middle class stands to be hit by rising interest rates, particularly folks who are still upside down on their mortgages.

·      Higher monthly interest payments for mortgages, car loans, and student loans, means less discretionary income and less aggregate demand, which may create headwinds for the economy.  In short, more money going to those – least in need – bankers, shadow banking, and private equity firms (Many of these financial entities, hedge funds and private equity, have waded into the housing market, post crisis, and bought up much of the distressed property at fire side sales prices, courtesy of GSEs, and turned said properties into rental units – so expect rents to climb too).

·      The U.S. economy is not fully healed, and with slowdowns in China and in emerging markets, now is not the time to raise rates.  This point touches upon an argument currently making the rounds, that the world economy is now so interconnected that the Federal Reserve is, and should be, the world’s central bank (here, look to the IMF’s counsel to the Fed and repeated warnings).

·      Let’s face it, egos and politics play a role in all this too.  If the Fed does hike rates, and there is a subsequent economic down turn, members of the Fed will be blamed as will Fed policy; and such a down turn, could possibly cost the Democratic Party, particularly one Bernie Sanders, a trip to the White House.  Alas, for liberals, there will never be a convenient time to raise interest rates.

These are all legitimate arguments and rational concerns.

And now, the Wall Street, and corporate suite, arguments for the continuation of the Fed’s easy money policies.  Some of these are arguments you aren’t likely to hear every day in the financial press or main stream news media, but then, one does not read JMH to hear mainstream arguments.  So here goes:

·      Our economy is debt fueled, and the less expensive the debt, the lower the cost of doing business for banks and corporations.

·      Private Equity, Wall Street, shadow banking, and M&A are fueled by inexpensive debt…. Raise interests rates, and profit margins for all debt fueled business takes a hit, particularly for those businesses already carrying a significant amount of debt (observe: businesses that are highly leveraged are particularly prone to rate hikes).

·      During these uncertain times, and with employment and the consumer not fully recovered, translating into lower top line growth than what we would expect at this stage in the recovery, many corporations have turned to financial engineering to raise stock valuations.  A great deal of this financial engineering (i.e. stock buyback, M&A, corporate restructuring – layoffs, and regulatory, labor, and tax arbitrage) and globalization was, and is, financed by the Fed’s easy money policies.

·      When the Fed raises interest rates, the dollar will rise versus foreign currencies, which means foreign multinational earnings – reported back in dollars – will slump and take a hit.

·      If and when the Fed raises interest rates, capital flows will stream to the U.S., and already cratering emerging markets, and BRICS, will struggle that much harder, particularly to pay back loans denominated in U.S. dollars.

·      Globally, nearly all central banks are engaged in the currency devaluation game.  Therefore, America/The Fed must play the same game, so that the U.S. can continue to remain export competitive.

Ironic isn’t it?  Two worlds, one liberal – striving to look out for the poor, and another - monopolist and pro-Street - solely interested in profit taking, making the same case, albeit by differing logic and circuitous argumentation (that the Fed – nearly a decade into this fiasco - should not prematurely hike interest rates).  Again, all legitimate arguments and rational concerns, given the grave problems this nation faces.  And just to be clear, there are many liberals and banker/raider/corporate types, who do not agree with the Fed’s dovish policies.

So what are the counterarguments?  And why are some of the aforementioned arguments problematic?

·      Probably the greatest fable told about the ’08 financial crisis was that the Fed’s extraordinary efforts would be a temporary measure to address the withdrawal of liquidity from markets, and to allow time for both the consumer and the government to pay down their debt.

·      Now, seven to eight years later (and with the Fed expanding its own balance sheet by 4 to 5 trillion dollars), public and private sector debt, combined, has risen in China, across the E.U., Japan, and in America – to unsustainable sums, well past the 200% threshold.  And collectively, globally, central banks are still doing back flips, in an attempt to keep their respective economies and stock markets afloat.

·      In essence, Fed policy, long known to be a tool of the plutocracy and the financial elite, was used to paper over a financial crisis, and bailout the plutocracy and Wall Street on the backs of the poor and the middle class, who were faced with austerity.  In essence, Messrs. Bernanke, Geithner, Paulson, and Mme. Yellen kept the pitch forks at bay, and in the process created trillions of taxpayer backed liabilities out of thin air.

·      The bailout was highly successful for less than one percent of the population, and everyone else was left to fend for themselves (when similar actions are taken w/ tax policy, it’s called “trickle down").  The rich grew wealthier, as the Fed pumped up asset prices (particularly the stock market), and Wall Street banks grew more concentrated and today, control assets worth at least 65% of national GDP.  Moreover, the financial weapons of mass destruction that left a smoldering Hiroshima in the global economy, derivatives and swaps, have continued to expand exponentially offshore, in Merry ol’ London (700 trillion in notional value and counting).  And the U.S. taxpayer is still on the hook.

·      One of the greatest crimes perpetrated by Federal Reserve policies is that none of the lessons from the crisis were learned, so quick was the Fed to rush in, and provide a smoke screen.  In short the very structural problems the nation faced in 2008 have only exacerbated over the following years:  the crony economy; a morally bankrupt political system that is for sale to the highest bidder; monopolies and cartels in nearly every sector of the economy, preying upon the public; wars w/out end financed by the Fed & a credit card empire – funded by you guessed it, the Fed; and a political party – dominated by billionaires -  that still believes in fairy tales, like laissez faire and trickle down economics, and "free trade."  And we wonder why U.S. economic mobility is in decline, and wage and wealth inequality are on the rise.

·      Indeed, a crisis is a terrible thing to waste, because – thanks to the Fed - rather than address the structural issues that ordinary American’s face daily, eight years later the same problems exist, only worse: the poor have become poorer; the middle class - that made this country great – is beset on all sides by the malefactors of privilege & wealth; and the uber wealthy – in a perpetual game of chance called Wall Street speculation – continue to grossly mismanage the country.  Why start up a new business and create jobs, when the Robber Barons are allowed, by our government, to run money printing and job killing monopolies and cartels?

·      As if the printing up of trillions of dollars in debt to bailout the elite wasn’t enough, the Federal Reserve also shafted the middle and upper middle class by artificially suppressing interest rates, in one of the greatest transfers of wealth, and crime sprees, known.  In short, the Robber Barons of Wall Street, Banks, Hedge Funds, and Private Equity, all received free money via Fed suppressed interest rates, a secondary bailout that exists to this very day.  Conversely, the Fed took away legitimate interest income from: savers, retirees, the elderly, people who do not want to gamble in a corrupt and manipulated stock market, and pension funds and 401Ks.  This interest income was effectively transferred to the aforementioned usual suspects.  Which brings up a legitimate question: At the end of the day, has the Federal Reserve any conscience or sense of decency?  Thanks to the Fed’s revolving door and the riches Wall Street has to offer, apparently not. 

·      As for the diminishment in government services, as a result of a prospective Fed rate hike, well that would actually force the Congress of the United States to govern and be held accountable.  The Fed has enabled the world’s greatest deliberative body, so that it can campaign 24/7, instead of making very hard choices.  How much longer will a Republican Party last, which is already staring into the precipice, when it starts cutting social services – like social security and Medicare, so that the nation can continue to finance foreign wars, its empire, the private contractors at the MIC/surveillance state, and tax cuts for the wealthy?  Thanks to the Fed, the GOP doesn’t have to make those choices; thanks to the Fed, a dying political party rages on.  Ironically, the biggest welfare states are Red states.

·      Moreover, how much longer can the Fed, or global central banks, continue to finance, by printing money, a national debt that has spun out of control and is essentially a Ponzi scheme?  Write downs and haircuts are in order for irresponsible lenders, and have been for a long time…. As they say on the farm, "It’s nut cutting time."  And woe be unto the bond/debt holders.

·      As for the corporations and financial engineering, their focus – thanks to Fed largess – has been myopic.   Short term fixes like stock buybacks and M&A - financed by debt - rarely if ever address real macro and micro problems, like inadequate wages – resulting in low aggregate demand, raging income and wealthy inequality, upgrades in consumer service/CAPEX, a dearth of R&D spending, and the lack of top line growth.  These are all heady issues that will require thinking, and government intervention into the market place: like mandating the payment of a living wage; caps on profit taking, like a windfall profits tax; regulations to save capitalism from predatory monopolies and cartels; the breakup of said monopolies and cartels; and the establishment of global labor, regulatory, and tax equilibrium (so as to eliminate arbitrage and nation states being played off of one another in a race to the bottom).

·      My guess is once the Fed raises interest rates, if ever, global central banks will be forced to do the same, in varying degrees, to eliminate capital flows out of their respective countries, which should help to restore some semblance of equilibrium in exports and imports.

The bottom line, the U.S. central bank has a lot to answer for (unlike every other Federal branch of government, there are no checks and balances), and it too, needs to be reformed.  As with any political institution, without oversight and control, it becomes corrupt.  The Fed, perhaps, is the most powerful branch of government in these United States, and few Americans understand it, and it is not subject to the democratic process.   And the fat cats on Wall Street, and in multinational suites, like it that way. 

Most economist – especially Keynes – recognize that monetary policy is a very crude substitute for well-managed fiscal policies’ ability to address economic crisis, and smooth out the bumps in the road created by capitalism. 

As such, the greatest failing of the Fed over the last eight years was not the effort expended, but that its efforts were directed towards bailing out perpetrators of the crisis, at the expense of everyone else.  In order for an activist monetary policy to truly be effective, it should be directed at the 99%/the demand side of the curve.  The Fed could have done this by embracing the unorthodox:  quantitative easing focused upon financing consumer debt write downs, residential debt/mortgage restructuring (especially since most mortgages are held by government/taxpayer owned enterprises), and desperately needed financing for infrastructure improvements.  In this manner, all would have benefited from the Fed’s extraordinary measures, as opposed to an elite few.

P.S. 

J.M.H. has warned about a potential bond/debt bubble created by the Fed and global central banks, where yields – for a tsunami of debt - inadequately reflect the risk involved, and fail to accurately account for the underlying risk/reward.  By raising interest rates gradually, the Fed may be able to take some of the pressure off this bubble, or it may find itself wading into another illiquid market and providing yet another massive bailout. 

Whatever the Fed does with interest rates, in terms of debt bubble creation and the inevitable collapse, it may be too late.  As such, the Fed may decide “damn the torpedoes – full steam ahead” is the best policy, leaving desperately needed political reform, and economic restructuring unaddressed and for another crisis.  After all, under current campaign finance law, a crisis may lead the Congress to reform, but only the plutocracy can make the Congress enact reform.

Finally, once again, we saw this week that it wasn’t ninja jihadis Americans have to fear, but yet another Caucasian mental defective with a damaged Y chromosome.  Let us pray that the next narcissist/nihilist with a pathological sense of entitlement - to mete out death to the general public - takes his own life before he can harm others.  It’s a shame these losers aren’t educated, or stable, enough to realize that the pen is mightier than the sword; and that everyone remembers Christ, Gandhi, and MLK, but nobody remembers the malcontents who killed them. 

(Correction:  CNN reports the assailant was of mixed race, with a Caucasian father, and a Republican.)

Copyright JM Hamilton Publishing 2015

ESTABLISHMENT

ESTABLISHMENT

I never will, by any word or act, bow to the shrine of intolerance or admit a right of inquiry into the religious opinions of others.  – Thomas Jefferson

By J.M. Hamilton (Originally published 6-14-12)

A conservative at the NY Times, Mr. David Brooks, was complaining about the lack of respect accorded by the general population to the “establishment” this week, and I couldn’t help but find myself amused and relieved.  For here Mr. Brooks offered up a political counterpoint to an editorial written by Mr. Luigi Zingales (of Chicago School of Economics fame).  Both editorials, make perfect bookends to this week’s JMH editorial.  Mr. Brooks laments the lack of good “followers” in America today; and Mr. Zingales – a bit of a conservative in his own right, and certainly a libertarian with strong capitalist credentials, fears the corruption of the political and business establishment culminating, or metastasizing, into crony capitalism.  Mr. Zingales holds up Italy’s corrupted economy and government by way of comparison, and the path he asserts the U.S. is headed down, if we are not careful.

JMH, of course, has argued for some time that we are already there.  Witness the idolatry and blind deference U.S. Senate members accorded Mr. Dimon this week.

Now none of this is to say Mr. Brooks is not a great guy and a worthy polemicist… Shucks, about six years ago and for nearly all of my adult life – starting at the age of two- I would have agreed with nearly everything Mr. Brooks put down on paper.

But something happened in 2007 and 2008 that called into question my entire belief system, and apparently the belief systems of many U.S. Citizens (99%), or what Mr. Brook’s refers to as “followers,” who are having a exceptionally hard time buying what the “establishment” is now laying down as gospel.

What could have awoken the masses from their apathy and slumber, and motivated the “followers” to turn against their master, the establishment?   Was it, as Mr. Brooks asserts, that our own personal “vanity” has made Tea Partiers and disenfranchised libertarians and liberals jaded, or was it something else that turned us off on the ruling economic and political elite?

Was it the fact that for the last thirty years the establishment underwrote the greatest Keynesian raid heretofore known to man, whereby the one percent/establishment crushed democracy and redistributed wealth and expropriated political powers for themselves?

Perhaps it’s the intergenerational wealth larceny that has become today’s FED policy, again all in the interest of keeping the rescued Cartel/establishment afloat, at the expense of savers and retirees.

Or maybe it was the toxic assets that have been transferred from the Cartel’s/establishment’s balance sheet and onto the public sectors balance sheets at list price, only to be sold back, selectively, to the Cartel and shadow banking at a discount.

Was it the fact that the political establishment just could never say “no” to big business or the Chamber of Commerce, and allowed them under the rubric of free trade and capitalism to transfer jobs, tax base, and the U.S. manufacturing economy offshore?

Was it the fact that the establishment showed us the true meaning of socialism with endless bank bailouts – running into the tens of trillions- while hypocritically attempting to light a match to the social contract, and seeking significant reductions/privatization in Medicare, Medicaid, and social spending?

Was it the insider trading cases and the manifestation of a two-tiered stock market: one for the insiders/establishment, and the other for the followers.

Perhaps it’s the two tiered justice system: where white collar criminals/the establishment are rarely if ever convicted, and then there’s the justice system for the rest of us — the “followers” facing the criminal justice industrial complex and corporations profiting from the incarceration of individuals for victimless crimes (so that the U S has the highest incarceration rate among western democracies).  If we are to believe the numbers, the U.S. incarceration rate, per Wikipedia, is 39% higher than Russia’s and several hundred percent higher than China’s….. What’s wrong with this picture?

Or perhaps it’s our beloved supreme court, which like our Republican led congress, suffers from very low follower opinion polls; and why should followers be upset when this very same court tells us that corporations/establishment are people too, who may and will collectively purchase our government under a Citizens United decision.

Perhaps it’s the abuse the establishment has heaped upon our fighting men and women with endless wars, so that the U.S. soldier suicide rate now exceeds are monthly casualty rate.  But heh, those soldiers/followers volunteered for it, so that makes it all okay.

Just maybe as Mr. Zingales notes, from the freshwater school of economics no less, that the U.S. establishment has abandoned meritocracy, industriousness, and capitalism…. for cronyism, speculation/private equity schemes, and monopoly.

Maybe its the real unemployment and underemployment rate in this country, and for much of Europe, is in the high teens— or in some instances in the neighborhood of twenty percent or more; as noted in the Times this week many U.S. citizens have watched their net worth crumble to 1990 levels in the span of four years.

Thank you, Establishment!

Mr. Brooks went on to note: “To have good leaders you have to have good followers— able to recognize just authority, admire it, be grateful for it and emulate it.”

To which JMH responds, which part would you like us to emulate Mr. Brooks?

Democracy is a wonderful thing. It makes people feel empowered, no matter how distorted the representative reality from the ideal.  Take that away, or the ability to protest, or form new political parties, or rebel against the established order of things…. And we find ourselves living in another elitist dictatorship, or government by the establishment.  The very things are founding fathers fought against.

Americans of all stripes understand human failings in the economic and political establishment; what the followers cannot understand is blatant political corruption, economic theft leading to lost decades and lives, and the death of opportunity – strangled by the corporatist and monopolist.  Hence, the rise in America and Europe of extremist political parties, like Occupiers, the Tea Party, and in Europe — Socialist, Anarchist and Communist.

When the establishment abandons the 99%/followers, the followers look for solutions outside mainstream political parties.

P.S.

To his credit, Mr. Brooks wrote admiringly of Mr. Jefferson, whom he referred to – longingly – as a “graceful aristocratic democrat.”

Remarkably, Mr. Jefferson wrote the defining document of the American Revolution and provided the ultimate act of rebellion against the established British aristocracy, with the Declaration of Independence.  One wonders what our third U.S. president would have had to say about what the Wall Street Cartel/establishment has done with his Agrarian Dream, or additional thoughts Mr. Jefferson may have had on the establishment of his day?

We need not wonder, here are a few quotes from Mr. Jefferson on the establishment of his day:

“All tyranny needs to gain a foothold is for people to remain silent.”

“In every country and every age, the priest has been hostile to Liberty.”

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich upon the poor.”

His thoughts on globalism?  “Merchants have no country.  The mere spot that they stand on does not constitute so strong an attachment as that from which they draw their gains.”

“The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”

“Experience hath shewn, that even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted into tyranny.”

“Friendship is but another name for an alliance with the follies and misfortunes of others.  Our own share of miseries is sufficient:  why enter then as volunteers into those of another.”

“I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength, and bid defiance to the laws of this country.”

“I believe banking institutions are more dangerous than standing armies.”

“A Bill of Rights is what the people are entitled to against any government, and what no just government should refuse, or rest in inference.”

Given our nation’s current predicament, I wonder if Mr. Jefferson would have been in favor of an economic bill of rights?

Copyright JM Hamilton Publishing 2015

Power to the Market!

Power to the Market!

“Because the free market system is so weak politically, the forms of capitalism that are experienced in many countries are very far from the ideal.  They are corrupted (diluted) versions, in which powerful interests prevent competition from playing its natural, healthy role….”
     Luigi Zingales – The University of Chicago Booth School of Business

“For Smith, the market moves toward monopoly; it is the job of the philosopher to define, and of the sovereign state to restore, free play.”
              Adam Gopnik – Market Man, The New Yorker

By J.M. Hamilton  (Originally published 8-11-12)

The Moral imperative of capitalism is its incredible ability, when fully functioning, to create goods and services on a spectacular scale.  And service a large number of people, the market, with quality goods and services.  Its ability to foster ancillary jobs and innovation are well known phenomenon.

It is the competitive feature of capitalism, and the government - when fully functioning - in its supportive role, that protects the market (the people) from the merchant's/proprietor's worst impulses, which are greed, the quest for unlimited market share and profits, and the elimination of competition.

The bastard child of competition and of capitalism, indeed what Mr. Adam Smith warned us against, is crony capitalism.  As crony capitalism is produced, fostered and sanctioned by the state, it is perhaps the most debilitating economic feature of our time that we have the means to control: crony capitalism ultimately leads to monopoly and an unprecedented concentration of wealth and power. Possibly more insidious than communism itself because it wraps itself in the cloak of free enterprise, crony capitalism is the "anti-capitalism," and as such, it leaves a debilitating stain upon the most productive economic system known to man.

More frightening still, because of the link between crony capitalism (monopoly) and true capitalism (competition on the supply side of the curve), capitalism is under attack like never before, so that record numbers of people are turning to the state for assistance.

Monopoly begets monopoly:  At a micro level, monopoly in one market, say big oil, inevitably leads to monopoly in other markets, say cellular service, as one market provider attempts to duplicate the profit taking success of another market governed by a monopoly or cartel; separately, because at any given time discretionary income for a nation is fixed, if a monopolistic supplier preys upon a market with inelastic demand, say energy or big oil, this results in diminished demand for other goods and services, as capped discretionary income is eroded by monopolistic profits/taxation.  This in turn leads suppliers of other competitive markets to seek out combination, as a means to shore up reduced earnings, sales and income.

Politicians under the dogma of laissez faire capitalism have allowed combination ad nauseum to the detriment of the worker, corporate top line growth, tax revenue, and most importantly the market.  Why? Simply put because monopolistic profits, lead to monopoly sized campaign contributions, and intellectual and political hegemony over the body politic.  Bottom line, monopolistic profits are the mother’s milk of American politics, like a fist inside a velvet glove or muppet.  Some of the largest GOP and DNC campaign contributors come from markets dominated by cartels, oligopoly, or monopoly.

Government, fiscal and monetary policy, can provide a short term fix to problems created by crony capitalism and monopoly; but they are not a long term substitute for structural reform (i.e. the breakup of these organizations)

Of course monopolistic profits and predatory pricing ultimately are anti-market, crush the welfare of the people, savage competitive markets and top line growth, and lead to the collapse of markets.  Witness the record profits made by big oil leading up to the 2007-2008 economic collapse.  Witness the individual investor flight out of the stock market, due to the flash crash, rigged stock markets, problematic IPOs, program trading, insider trading, and opaque markets, like dark pools.

"Anti-Capitalism" causes instability across the globe, observe the Egyptian military's vast control over broad swaths of the Egyptian economy, ditto Iran's Revolutionary Guard and its extensive ownership and control over that economy.  Ultimately, if enough markets are dominated by cartels and monopolies, the cabal at the top can collude to chart a nation's political future, and manipulate a macro economy via capital strike and finance.

By breaking up the concentration of wealth, power, and some of these monolithic institutions, we actually create more opportunity and a larger number of jobs, not just among the rank and file but also among management and the executive class.  Specifically in regards Wall Street banks - stock valuations demand it, the dearth of the return on equity demands it, and the market demands the break up of these banking institutions.

Diseconomies of scale, failed management, and egregious risk management insist upon it.

(Don't get me wrong, I am not writing against the scale and size of business, as long as big business operates, side by side, with competitors, and government provides effective "rules of the road" or regulation to protect said market and consumers from predatory behavior.)

As often as not, the excuse for these catastrophic combinations, provided by management, is that it is "in the interest of the stockholder;" however, when the break up value of these monstrosities is greater than the stock valuation by a wide margin-- seemingly and conveniently, the interests of management always trumps stockholder value.  Observe Wall Street’s reaction to Mr. Sandy Weill's embrace of the proposed return of Glass Steagall.

Just as politicians created the monopolies and cartels- it can aid the market (i.e. the American people) and the economy by breaking up these statist monstrosities, which often can only exists by state backstop and support.

Possible solutions to our economic crisis are simple:  support the interests of the market, or the demand side of the curve, and economic recovery will follow.  Here are a few simple thoughts and ideas:

1) Leverage the great American market!  Insist that if business sells in America - they produce the goods and services sold in this country with American labor.  If a business doesn’t hire American, that’s fine but than access to the American market would be cut off.  Since this rule would apply across the board to all domestic and foreign companies selling in the US, no one could complain that they were unfairly treated or at a competitive disadvantage.

2) Close all tax loopholes and dodges, which would allow for a lower corporate tax rate--- since it would be a requirement that US labor be utilized for goods and services sold in the US, there would be no opportunity for tax and labor arbitrage for domestically produced goods and services.  If larger business begins paying taxes at a lower effective tax rate (in lieu of paying little or no taxes at all), the consumer could theoretically, enjoy a lower tax rate since they are no longer subsidizing businesses that have the skills and the means to engage in tax avoidance.  This too would help stimulate the economy by increasing consumer/market discretionary income (i.e. aggregate demand).

Eliminate the American tax for goods and services sold overseas by American companies, as long as they employ Americans for goods and services sold in the U.S., with one exception.  Some percentage of the cost of the US military industrial complex (MIC) should be carried by all foreign governments and multinationals based upon their respective contribution to global GDP and global international sales, respectively.  The US military protects and provides stability for global markets, and the beneficiaries of that protection should pay their fair share.  If this in turn relieves additional tax burden on the American consumer/market, it means more income and opportunity flowing into our economy, and less consumer/market money flowing into the MIC, via the government.

That's another half trillion dollars, or more, the US taxpayer (domestic businesses and individuals) would no longer be burdened with - that could flow directly into our economy, or be allocated to deficit reduction.

3.) Cap the election season, so that politicians may only run for office the three months proceeding the election, in lieu of the two year - continuous period presently allotted; and cap the amount of campaign contributions taken in per politician, so as to end the financial/contribution arms race that is core to the modern day election cycle.  By capping both the duration of the election cycle and campaign contributions, we put a huge dent in the power of cartels and monopolies to control political candidates.  In this manner elections become about ideas, and not who has the biggest wad of cash. 

4) Break up cartels and monopolies.

Power to the market! 

Copyright JM Hamilton Publishing 2015

Welfare Queen

Welfare Queen

“Whether the British ruling class are wicked or merely stupid is one of the most difficult questions of our time, and at certain moments a very important question.”

-       George Orwell

By J.M. Hamilton (8-27-15)

London, England -  At first, it didn’t make sense.  My sister, forever the Anglophile, insisted that we visit London, England this summer (a/k/a The Big Smoke).  The exchange rate sucks, I objected, and several family members noted we should go to Europe, with the weaker Euro.  But in retrospect, it all made perfect sense, and the family was glad we visited London.  Last year we were fortunate enough to have visited Germany and Berlin.  For a student of history, and an American, the two cities are perfect twentieth century bookends. 

Two world wars pitted Germany against England, and the Cold War united the two nations, and America.  When you think of the history emanating from these two capitols, Berlin and London, the mind reels.  Tales of empires won, lost, and thwarted.  London England, today, is the Mecca of all things financial (derivatives and swaps worth hundreds of trillions in notional value, and rehypothecation), but geographically a shadow of its former empire; Berlin Germany, today, having won – what it couldn’t take within two world wars – European economic conquest, and hence, European rule.  Love it or hate it, German economic and financial imperialism dominates the E.U.

London is a beautiful city, and as similarly observed in Berlin last year, there were more construction cranes in the air then one could count.  Building is booming.  Like Berlin, London is pristine with little of the grunge or grime one might expect; even the handful of punk rockers I ran into in the borough of Camden were squeaky clean and well behaved.  London is truly a city for the elite.  The ratio of Audis, Ceds, Jags, Beemers, and Porsches on the road, to ordinary cars and cabs, was possibly one to four.  There’s an incredible amount of wealth emanating from England’s capitol, not just from the financial district, but some of it is inherited and legacy wealth (foreign oligarchs and royalty are also in the city).  It is expensive to live here.  So much so, that many Londoners are fleeing the Island for Berlin, not unlike ordinary Manhattanites fleeing to the outer boroughs and suburbia. 

While visiting London, one is quick to observe that the surveillance and police state George Orwell warned us against is very much alive and thriving.  The citizen to CCTV camera ratio is said to be 11 to 1.  Add in facial recognition technology, and your invasion of privacy is complete.  But unlike Germany, where there was, and remains, an uproar over Mr. Snowden’s revelations (typewriter sales were said to have soared, post-Snowden), the British seem okay with sacrificing their freedoms and privacy on the altar of, alleged, greater personal safety.  Notably, many Germans disdain the surveillance state, and they suffer no monarch; the British largely, accept the surveillance state, maybe embrace it, and they enjoy the House of Windsor (f/k/a Saxe-Coburg and Gotha).  Hmmm.

Politically, England faces two hot button issues: one, what to do with the wave of immigration sweeping through Southern Europe and lapping up on England’s shores; and two, whether or not to continue E.U. participation?  Seems, like in America, immigrants are seeking out Western democracies, and hoping to escape the wars being fought in their home countries, whether the wars be of a religious nature or wars from America’s failed drug prohibition policies.  This, despite the fact that upward mobility, and the promise capitalism used to deliver – that of opportunity – has been thwarted throughout the West, by crony capitalism, the insider economy, monopolies, and cartels.  Ironically, despite immigration being such a hot debate topic in the U.S., many immigrants from South of the U.S. border have returned home, post- 2008 crash.

As for the European experiment, the British shrewdly chose to hang onto their own currency, and that decision has paid dividends ever since.  As mentioned, sterling is strong, vis a vis alternative currencies, despite facing similar machinations and manipulations that are in vogue among all the world’s central banks.  Alas, like America, London has an economy that is dominated to a considerable degree by banks, hedge funds, speculators, and private equity.  And not a few of the larger British banks, also like in America, had to be bailed out and nationalized, as a result of the 2008 crash.  Unlike America, Britain didn't fail in giving some mega-bank CEOs the boot.

Today, London has a melting pot vibe, perhaps more so than Manhattan.  Maybe because it was vacation season, maybe not, seemed that the number of persons of color was nearly equal to the number of white faces.  Remarkably, nearly every person I ran into spoke the Queen’s English, or was multilingual.  Impressive.  And the Tube, London’s underground railway system, is a dream of cleanliness, punctuality, and modernity compared to Boston’s T or New York’s MTA.

But most amazing of all was our visits to Buckingham Palace and Parliament.  The latter is bicameral, consisting of the House of Lords (appointed by her majesty, and historically a hereditary institution), and the House of Commons (an elected body and the house that, thankfully, holds the most power).  Rounding out Britain’s democracy is the P.M. or prime minister, and a Supreme Court (which was established in 2009).  Seems that the House of Lords used to be the highest court in the land, but like many of this chamber’s powers, this too has been stripped away.

As with any democratically elected government, there are pros and cons/positives and negatives, so let’s start with the pros first.  The fact that the P.M. gets up in front of House of Commons every Wednesday, and gets drilled, grilled, and questioned, is absolutely wonderful.  One may watch the debate on C SPAN in the states, and it’s incredible.  The opposition parties actually verbally abuse and do their best to embarrass, outwit, and shame the P.M., and the intelligence, intellect, and argumentation surrounding the debate is often on a much higher order, than what we see in the U.S. Congress.  To put this in perspective, imagine, if you will, Presidents Obama, or Bush, appearing before the House of Representatives weekly, and getting hammered – and hammering back.  I love it, and my guess is these debates are both productive and do much to educate the British people.   Too bad it only lasts for thirty minutes, weekly.

Unfortunately, the money flowing into members of parliament (M.P.) is not limited, but the amount of campaign expenditures are capped (so yes, like the U.S. Congress – the M.P.s too, are bought).  However, election for all M.P.s, which includes the P.M., must occur no later than every five years, and the campaign season starts when the Queen dissolves Parliament, or five weeks before Election Day.  Imagine, five weeks of campaigning, versus the unlimited campaigning that takes place in the U.S., and that’s an easy positive for British democracy.  It appears that the British actually expect their pols to govern, rather than campaign 24/7/365 and raise unseemly sums. 

What a novel idea.

Post Gulf-War II, it appears that the British and their government have lost their appetite for failed nation building exercises, and unlike P.M. Tony Blair, are less likely to be led into another U.S. war.  In fact, Britain just reopened its embassy in Iran, and there is even some political opinion (from his own political party, Labour) that former P.M. Blair could be brought up on war crimes.  This lack of jingoism, and the sated thirst for war, comes from a conservative/Tory government, no less.  Perhaps America can send over some of our Republican leaders for learning and reeducation? 

All of this is to say, the commercial conquest of Iran is underway, at least in Britain.  Is the U.S. Chamber of Commerce and the Business Roundtable aware?

And now for the “con,” or downer side of the British government.  I’m sorry, as an American, I don’t get the whole monarchy thing, and the Disneyfication of said monarchy.  You know, where we tell every American girl, and presumably British girls, that you too, can and should be a princess.  It’s not unlike the Horatio Alger fairy tale we like to tell in America, that with hard work and perseverance, that you too, can be Mr. Donald Trump or an aristocrat.  It’s complete tripe.  Upward mobility is abysmal in both countries, wage and wealth inequality are growing to unacceptable extremes, and the royals, with all due respect, are symptomatic of the aristocracy and class system that exists in both England and the U.S.

Imagine, if you will, taxpayers paying an American family $60 million – annually (add in several hundred million more for security and special events), tax free, putting them up in castles owned by the state, and asking them to do P.R. work for the government – on occasion?  Monarchy and aristocracy are both throw backs to the dark ages, before the age of reason and enlightenment.  It’s based upon the premise that by divine, that is Goddess given, right, they are ordained to rule over us mere mortals.  That somehow their, historically, inbred progeny are more refined and better than everyone else, and most importantly, above the law.  Flies in the face of the premise that all people are created equal… doesn’t it?

It’s the kind of insult and injury that revolutions are fought over.

Some have argued the royals are parasites living in gilded cages - making their living sucking off the taxpayer and the underrepresented worker…. In the U.S., the elite often pass their estates and riches down to “widows and idiot sons,” perpetuating our own class system.  The aristos in both America and England living a lie and double standard, heretofore unimaginable… hypocrisy defined and slaves to the crony/insider economy.   

The political right in both countries, Tory and Republican, both like to look down their nose at the indigent and those in need of government assistance, with great derision and scorn; and yet, the biggest “welfare queens” are:  the British monarchy, and wealthy corporations and plutocrats residing in both countries.  Remarkably, the free market deity, Adam Smith, the moralist for capitalism, appears on the back of the Queen’s twenty pound note.  Prince Charles reduced to writing black spider memos and pleas to government ministers, seeking favors from the British government.
  
Austerity is great for the middle class and the poor in both countries, but don't dream of imposing austerity upon the ruling class.

 Adam Smith, the Godfather of Capitalism.

Is the American system any different?  Hardly.  Both governments run by, and for, the corporation and the financial aristocracy, and the citizenry are taken for an unpleasant ride.  This is what post-modern democracy has become: Dry rot and decay, a free ride for the rich, at the expense of the middle class and those truly in need.

What defect residing within human DNA causes many Americans, and British alike, to praise and worship: the royal mafia; CEOs heading up criminal organizations (e.g. Hedge Fund and Private Equity firms); leaders within crony governments – owned and operated by banking cartels; and the House of Windsor?

And more importantly, can it be cured? 

Maybe genetic engineering is the answer?  Why the need for the public to go gaga over a baby royale, who will – more than likely - grow up to place a Russian oligarch‘s shear rapacity to shame?  All the while, one in four children in Britain, and the U.S., live in poverty.  Now, there’s a statistic to be proud of, right?  What could people possibly be thinking?  Why not rally around a flag, or country, or a belief or ideal, like equality, freedom, or justice…. Maybe even the Goddess above?   Do something completely fatuous and mad, like fall in love, but to worship the lowest common denominator, the predatory House of Windsor… it’s beyond the pale.

Yes, the crown jewels and Buckingham palace brings in money and tourism, but my guess is that same money would flow into the British economy, w/out an expensive royal family.  So why not downsize the House of Windsor, hand out pink slips to the royals, and enhance England’s bottom line?  J.M.H. won’t even charge for that word of advice, but McKinsey & Co. would.  (If the British want to save more, sack the anachronistic House of Lords, go Unicameral.)

And yet, they, the British people, love ‘em, and more than a few Americans love the royals, too.  Pining for a strongman… why not go all the way and worship Putin?  Some Republicans do.

In the end, the greatest tribute I can pay to America’s former master is this:  The British seem not to mourn their loss of empire; they are perfectly content not to rule the world; they are inwardly focused on their island and appear the better and healthier for it.  They appear content and happy, and feel no need to spend unseemly sums on a military, at the expense of its nation or people.   

Conversely, America, embarrassingly, spends more money on the fraud and waste that is our military industrial complex, and surveillance state, than the G-20, combined (gross fiscal mismanagment).  And blowback and liabilities from the MIC, and the resulting deficit spending, are mounting, in ways both foreseen and unforseen.

The British are watchful, aware, and on their guard, but appear to have abandoned the Bush/Blair doctrine, or the policies of preemption and certainly, nation building.

And for that, the British deserve praise.

I wonder if Pax-Americana, in her twilight, will recognize that we have something to learn from Britain? 

How to behave, post-empire.

Copyright JM Hamilton Publishing 2015