Archive for December, 2008

Economics Debunked

Monday, December 29th, 2008

The Predator State, James K. Galbraith, 2008

James Galbraith’s father John Kenneth Galbraith (The New Industrial State 1967), in 2006 from his deathbed, suggested that James write this book. It was published in the spring of 2008 before the total meltdown of the financial system threw the economy into a downward spiral whose bottom we have yet to see.

The Keynsian Johns

Both Galbraiths are Keynesian economists, those forgotten guys. The basic tenet of Keynesian economics is that only aggressive government policy can stabilize the economy which is otherwise subject to massive swings, creating enormous problems such as run away inflation, failing financial institutions, failing corporations, and massive unemployment. But, hey, today everyone in Washington is a Keynesian, right? After forty years of Chicago school dominance, Keynes is back.

James Galbraith outlines a history of the world economy starting with the Bretton Wood Conventions following WWII which established the U.S. economy and the gold backed dollar as the standard on which all foreign currencies would be based. The breakdown of this system, started when Nixon went off the gold standard and allowed the dollar to float, provides the backdrop to a consideration of the major economic theories of the conservatives advanced to fill the void left by the abandonment of Bretton Wood; monetarism, supply side economics (with trickle down), balanced budgets, and free trade. Even the Democrats became advocates of balanced budgets and free trade.

One by one Galbraith exposes these theories to be false with no empirical evidence. Unlike Kline’s Shock Doctrine, which portrays Milton Friedman and his colleges as co conspirators in a massive transfer of wealth, Galbraith, who remains friends with some conservative economists, views them as benignly misdirected, living in their ivory towers where they consistently ignore the facts.

While the Presidents from Reagan through Clinton felt the need to incorporate conservative economists into their administrations to give a veneer of academic respectability, George W Bush felt no such need and simply appointed cronies who poured the public coffers directly into the pockets of lobbying client firms without any resort to economic theoretic justification.

Today there is open discussion of the role of Alan Greenspan in the current crisis. There is no corresponding discussion or remembrance of the role of his predecessor, Paul Volcker, who held interest rates at rates as high as 20%, ruining the economies in much of Africa, Asia, and Latin America who had borrowed heavily from the Chicago school dominated IMF who insisted on shock therapy changes as a condition of their loans. Unsurprisingly the struggling countries were unable to pay off the loans at the new extortionary levels. This led to a collapsed overseas markets for American products and to greatly strengthening the dollar, permanently weakening steel and auto production in the US as it was unable to compete with cheaper products from Germany and Japan. Galbraith points out that inflation is another thing economists are unable to understand or control. It seems to appear and disappear out of nowhere.

Galbraith attributes the fall of the Soviet Union largely to their inability of pay off their massive loans in an environment of super high interest. The rise of China and India as an economic powers was made possible precisely because they did not borrow heavily from the IMF or adopt shock therapy.

What actually ended inflation in 1984 was the incoming flood of foreign investments looking for high returns from the interest rates and the stability of the American government. It had nothing to do with monetarism, the supposed justification for the extortionary interest rates. Yet, worryingly, this same Volcker has been named to the new Obama economic team, presumably because of his “expertise” in fighting inflation. Lord, save us from the experts.

One concept, that of the free economy, Galbraith points out is without any meaning at all except perhaps to very large multinational corporations, yet all politicians who hope to be successful must pay lip service to it just as they must attend church even though they may be atheists. In the real world, free markets are so rare, they are almost non existent.

Galbraith points out when the Japanese real estate and financial bubble burst throwing that country into a decade long stagnation:

This dimmed the luster of the Japanese model for American observers, even as they largely overlooked the obvious point: there is evidently no development path that an unfettered, liberated, free capital asset market cannot screw up.

On the relationship between full employment (deemed by conservative economists to be inflationary and therefore bad) and wage inequality, Galbraith demonstrates, as do all Keynesians, that full employment, such as is enjoyed in Denmark, actually leads to greater wage equality, not less, and there is no evidence that full employment is inflationary.

Getting into the book’s central theme, he then makes some original observations along the lines of the Black Swan phenomenon. The big dominant corporations such as ATT and IBM lost their technological leadership to small startup entrepreneurs who were funded by new venture capital and equity raising wall street firms. The founders of these firms in Silicon Valley, Seattle, Boston, and other technology hubs overnight became extremely wealthy together with their supporting financial institutions.

Traditional companies became dependent on technology from outside rather than developing it internally and the CEOs of these traditional companies became extremely envious of the great wealth of these new technology usurpers. The CEOs formed closed groups, gained control of boards of directors, and demanded and received compensation and bonuses to close the gap with their entrepreneurial counterparts at levels unsustainable by the companies they ran. In a word, these CEOs became predators, preying on the companies they supposedly were leading (down the drain).

Unmanned Predator RQ-1

This group did not come from within their companies but were outsiders with little technical knowledge of the company. Their primary justification for their compensation was that they had been CEO of other firms where they were paid outrageously. As a new and small elite, they became predators, feeding off and destroying stockholder value and even whole companies as they competed with other CEOs to maximize their own compensation. They measured their own success and worth, not by the success of the companies they were failing to lead, but by their accumulation of personal wealth. Where did this loot go? Not into the productive economy, but into private mansions and conspicuous consumption.

Galbraith attributes the decline of the modern American industrial system studied by his father to:

These four phenomenon — the rise of trade, the reassertion of financial power (wall street and venture capital), the outsourcing of technological development, and the ascendancy of an oligarchy in the executive class — … had dramatic effects on American industrial corporations, on the way they are run, and on their broadly declining position in the world.

On the need for and desirability of regulation:

…Regulation helps the competitive position of relatively advanced businesses, by reducing or even eliminating the competition from backward enterprises that offset higher production posts with less safe factories and products and will lower wage bills.

Unfortunately for America the advanced “better” businesses of today are often offshore like the Japanese automakers.

Galbraith considers the rise of predator executives not to be a part of the normal process of growing wealth disparity, but a separate and more pernicious phenomenon. Not satisfied to raid and bankrupt their firms, this group set out to control and dominate the government and its apparatus as well. They are not normal conservatives, desiring a smaller government; they want a strong government, led by an imperial executive branch, in position turn a blind eye to regulation, to privatize as many government functions as possible with extortionary contracts, but also to be ready to bail them out when their destructive practices bankrupt their companies. By controlling government, they can minimize governments regulatory oversight that may interfere with their predatory practices while assuring that the government is ready with contracts and bailouts when needed. Hence the phenomena of Cheney turning the executive, and Newt Gingrich, Tom Delay, and Jack Abramoff turning the congress into the arms of the new predator state.

Predator State

…it is fair to say that the very concept of a public purpose is alien to, and denied by the leaders and operatives of this coalition.

Modern corporate decision-making structures exist … to permit senior executives to do what they want… This is the culture that Richard Cheney brought back into government… The operational result is a government by cliques operating in secret, indeed with their very membership unknown outside…We have instead (of checks and balances) a government public relations apparatus whose purpose is not to persuade but to deflect, deter, and frustrate inquiry into the operation of the government…It fills the courts with functionaries who are prepared to act as enablers for the executive branch.

But if the government is predatory, then it too will fail in every substantial way (just like the corporations). Government will not cope with global warming, or with Hurricane Katrina, or the occupation of Iraq, or Election Day chaos, or avian influenza, or nuclear weapons…Failure on that scale is not due to incompetence. It is intended. Inside government no one cares. The attention of the people in charge is focused on other goals (acquiring massive personal wealth).

So, can the predator state be turned around under an Obama Presidency to tackle current problems like global warming, broken health care, a financial meltdown taking more and more companies with it? Galbraith hopes so but recognizes how broken government is, how far down the predator path we have gone.

Galbraith ends with discussions of the need for reestablished regulation and the re institution of utilities where free markets do not exist (like California and Texas electric power), the need for massive new levels of government planning and investment to rebuild infrastructure, provide public services like education and health care, and to tackle really tough problems like CO2 emissions and global warming. He pleads for the reestablishment of standards for safety, working conditions, minimum and maximum income and the environment. We also clearly need new standards for financial markets and energy and global trade. Galbraith remains confident that America will be able to pay for all these reforms and recover its global leadership position as an innovative, moral, economic power.

This book is a compact 200 pages. It would have been helpful to provide more detail and facts to debunk the conservative’s economic theories, but maybe Galbraith thought too much detail would discourage readers.

Three Stooges Chase Terror

Monday, December 22nd, 2008

A Most Wanted Man, John Le Carre’, 2008

When it is learned that three 9/11 terrorists including leader Mohammad Atta, were based in Hamburg, that city became the European epicenter for the war on terror. Unfortunately German, British, and American anti terror intelligence resemble the three stooges far more than they resemble the cold war spies that preceded them. But what they lack in understanding they more than make up for in high tech video and audio spy tools.

Hamburg Hauptbahnhof

A young man shows up in Hamburg railway station videos and is quickly identified as a most wanted terrorist who is escaped from prisons in Russia, Turkey, and Sweden. Who he is and what he has supposedly done by way of terror is totally unknown to the intelligence community. He claims to be a Chechen Muslim but speaks only a few words of Chechen, his primary language is Russian, and he knows almost nothing of the Islamic faith.

The young man is taken in by a young Turkish boxer and his mother and their house falls under incredible levels of bugging and surveillance. A young, blond, bicycle riding, genes wearing lawyer who carries her legal papers in a backpack soon shows up at the Turks house and is identified as the independent youngest daughter of a very powerful German family (politics and law) who works for a pro bono amnesty group and has been assigned the young man because she speaks fluent Russian having been raised as a diplomatic brat in Moscow. The young man and everyone who meets the bicycle riding lawyer falls in love with her. Next to show up at the Turks’ house is the Scottish propriety of a private bank operating exclusively in Hamburg. He immediately falls in love with the young lawyer.

Inconspicuous spy-mobile

The spies are totally clueless but quickly and quietly converge on Hamburg in their private Helicopters out of Berlin. They insist on moving around Hamburg in inconspicuous convoys of black Mercedes. The Hamburg spy station kidnaps the young lawyer for interrogation and British intelligence pays a very threatening visit the the Scottish banker. Nothing subtle about these guys. The woman assigned to interrogate the lawyer falls in love with her.

They learn that the boy is the sole heir of a Russian military man who raped the boy’s mother who died shortly after giving birth. During the collapse of the Soviet Union, the Russian father has moved a small fortune to the Scottish private bank for laundering in special accounts overseen by the current banker’s father. The current banker wishes these Russian accounts code named Lipizzaner for the horse breeds ability to turn from black to white as they age would simply disappear. The Russian raised the boy and has now died.

Lipizzaner White Mare and Black Colt

The Hamburg intelligence officer who uniquely speaks Russian and Arabic, has been closely watching an Islamic cleric and teacher who operates a vast charity network. He has concluded that the cleric’s charity is only 5% dirty, i.e. only 5% of the money finds its way into illegal and terror operations, which make the charity practically saintly. He comments that most multi-national corporations operate at about 50% legal.

A scheme is hatched by the three intelligence groups to convince the boy to give his inheritance that he considers dirty to the saintly cleric in return for a promise of German residence and an education. The cleric would be recruited by the Hamburg office to collaborate in return for the large donation which would allow intelligence to infiltrate Islamic terror networks around the world.

Unfortunately for the fate of this complicated scheme, we are dealing with the three stooges, one of which is under the control of W and Darth Vader. Entertaining, informative, and bleak.

Birth of a Nation

Monday, December 15th, 2008

A Golden Age, Tahmima Anam, 2007

A first novel recreates the nine months in 1971 that led to the creation of Bangladesh from the old British created East Pakistan. see Partition of India. The author was born in 1973 in Dhaka and earned a PhD in social anthropology from Harvard.

House in old Dhaka

The main character is a Calcutta born widow with two Dhaka university student children. Both children become involved in the resistance, the son as a saboteur, the daughter as a writer and documenter of Pakistani abuses. 12 years earlier when her husband died suddenly of a heart attack, the young widow was left without any means of support. Her late husband’s brother and his barren wife got a court order giving them custody of the young children who they moved to Lahore in West Pakistan.

The widow mysteriously comes into some money which she uses to build a large house for renting on her plot of land and to bribe a judge to regain custody of her children. The rent from a Hindu couple allows her to support her family and send the children to school.

Bangladesh is Born

When the Pakistani army moves to occupy Dhaka, the Hindu couple return to the supposedly safer remote village of their origins and the widow allows the big empty house to be used by the resistance fighters to hide arms and people. An engrossing tale.

For a good look at life in rural East Pakistan during the 1971 genocide see the movie The Clay Bird about a young boy sent by his fundamentalist Muslim father to the local madrasa. The father remains in denial of the Pakistani genocide until it is too late.

Unintended Consequences

Monday, December 8th, 2008

Death with Interruptions, Jose’ Saramago, 2008

Grim Reaper

“THE FOLLOWING DAY, NO ONE DIED.” thus begins Portuguese Nobel laureate Saramago’s newest novel. In this inventive work, each country in the world has its own angel of death or grim reaper and Portugal’s is female, bored, restless, and wants to experiment. Suddenly no one in Portugal is dying but the early euphoria soon turns to gloom as it is discovered that normal aging continues; the only difference is that those who used to die enter a seemingly permanent vegetative state. When is it discovered that a person so suspended is transported to the border, they die immediately after crossing into the next country. Neither families nor the state want the responsibility for carrying out this solution until the maphia offers to transport family members for a fee.

After a number of months of this, the angel of death decides she has made a mistake and writes a letter to the director of state television announcing the end of the experiment at midnight, but that she will henceforth notify by letter written on violet colored paper that the recipient is due to die in exactly one week. She says this notice should allow the recipient to get their affairs in order before dying. She signs the letter death. At midnight, 65,000 people die and the letters start arriving mysteriously in the mail and the recipients all die one week after receiving their letter.

The novel then turns to focus on death and her trusty sidekick, the scythe. She is described as a skeleton dressed in a white sheet. The unintended consequences of her letters of notification are compounding until one day a single letter gets returned to her. The rest of the novel deals with her efforts to deliver this one letter.

Very inventive and entertaining.

Modern Meditation

Monday, December 1st, 2008

From A to X, A Story in Letters, John Berger, 2008

This novel is a collection of love letters written by A’ida to a prisoner Xavier, serving two lifetime sentences for terrorism. The letters were found in pigeonholes along the prisoner’s cell wall when all prisoners were moved into a new prison facility. The letters were given to the author who doesn’t know if the two are alive or dead. He decides to publish the letters in the order they were found in the pigeonholes and manages by secret means to get a hold of additional letter A’ida never mailed.

The novel is thus a series of meditations without a clear reference to time or place that manages to be extraordinarily engrossing and challenging. References hint the characters are probably somewhere in Latin America and the repressive regime in power seems to have access to the latest American weapons like the Apache helicopter and M1 tank. A’ida is a trained pharmacist who continues to help the resistance, treating the wounded and sick who arrive at her store in the middle of the night.

A’ida continues to ask for permission to marry the prisoner so she can visit but her requests are denied. Her only means of communicating her life and her love are the letters. Some she cannot mail. In between letters are quotations and reflections presumably by the prisoner on a wide range of contemporary questions. A few examples on the subject of capitalism:

Today’s capitalism would be impossible without the very high return of the thick energy of fossil fuels, hence the question of what may happen in four decades when oil supplies are exhausted. Will there be only the thin solar energy?

The day that hunger disappears the world will see a spiritual explosion such as humanity has never known.

Only for the powerful is history an upward line, where their today is always the pinnacle. For those below, history is a question which can only be answered by looking backward and forwards, thus creating new questions.

All usurpers do their utmost to make us forget that they have only just arrived.

The sky a reminder of what may be temporarily forgotten – e.g. the private equity funds available for financial speculation are today worth 20 times more than the sum total of the world’s gross national product!