Category: Wall Street

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I had no idea I was such a Keynesian

I have heard a lot about Hayek and Keynes and how they influence the current financial politics, but not until I read this article in The Nation did I realize how much of a Keynesian I am.

For a long time I have considered myself a social liberal. But I have also seen the consumer economy as a big ponzi scheme, which i guess it is. It is always the people coming in at the end (consumers) that end up paying for all the other people. When the consumers is 99% of the US population, then there isn’t much hope for the country as a whole.

So where did the USA lose its way? I believe it was when they started believing the sirens of Wall Street, who claimed that playing in their casino was actually investing, and that their ideas of what valued a company became the measuring stick. From then on the only measurement that mattered for publicly traded companies was the stock market valuation, and the way of keeping that going up was to very short term inflating the numbers. It ended up being about quarterly results, and companies were rewarded for closing factories and firing staff. This combined with outsourcing based on cheap labor and production has led to a significant trade deficit.

And that is where I learned that I was very much in the school of Keynes. He was very much against big trade deficits, and I guess to some degree to a large trade surplus as well, since somebody else would get a deficit because of that. However, increasing that trade deficit is exactly what all our US corporations have been doing, with moving manufacturing abroad and having the US population buying all the goods. The long term effect is that we have almost no manufacturing base, which means that we are losing research in manufacturing disciplines, since they need factories nearby to test anything new and make improvements.

That is why I’m a Keynesian, and I believe that we need to start making products in the US again, not just services. We don’t want to be like the spaceship that crashed into the second earth in Douglas Adams’ Hitchhikers Guide to the Galaxy series.

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Doing what’s right for the country or doing what sounds right

As I am writing this I have to admit that I feel slightly confused. We are still in an economic downturn, and because of that people are unhappy, which means that they have once again voted in a group of people whose policy choices got us here in the first place. But that is not so surprising. If you only have two choices it’s easy to choose the other just because you are unhappy. There aren’t any other alternatives. Well apathy, maybe, but that does not make anybody happy either.

No, my confusion stems from an even simpler situation. There is a federal office called the Congressional Budget Office (CBO) that is non-partisan and really only crunches numbers and scenarios to see what the effect is of different political decisions. They were instrumental in getting the health care bill balanced last year, although many of the people in congress chose not to listen to all the data. And this is happening again.

The CBO has come out with a report saying that the most effective thing Congress can do right now to stimulate the economy is to make sure that unemployed people get unemployment benefits. The reason is simple. They live on a tight budget, and any money coming in is spent, which in turn turns the wheels of businesses small and large. This in turn has the effect of improving the economy so that these companies need to hire people, lowering unemployment and increasing spending capital. The CBO has also found that the least effective thing that Congress can do is to reduce income tax. Also not entirely hard to understand, since it would leave people who already earn an (un)reasonable amount of money with slightly more money. Money they will be more likely to save, since the economy is bad.

Are you with me so far? Now comes the conundrum. Why is it that everybody in the GOP says that the most important thing is to make sure that the top 10% earners get to keep their tax cuts. Tax cuts that have had their income increase with 10% year during the 2000s, while the rest have not had any net gain at all. Keeping these tax cuts is so important that they would rather have the economy continue to flag and keep the deficit, since they are unwilling to even consider paying for it. Unemployment benefits on the other hand, they need to be paid for, if they are even considering them at all.

Now I ask the follow-up question. Who benefits from this? Well, as we know, it’s the top 10% earners in the country. That means that if all of them vote Republican, they would constitute about 20% of the GOP vote, since overall it’s fairly even between the parties. Even if we assume that they have 100% voting record (Meg Whitman proves that it’s not the case), as opposed to the 50% average that you might get in a general election means that they can be maybe 40% of the republican voters.

Why does the GOP in Congress want to shaft 60% of the people who elected them? And why do that 60% constituency continue to vote for them? If what they did was because it was the best thing to do for the country I could understand it. But it isn’t. And I don’t. I wish somebody could explain.

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Please, say it ain’t so!

The rumors are already flying. Tim Geithner might not be Treasury Secretary much longer. But who are they floating as a replacement? JP Morgan Chase CEO Jamie Dimon. Huffington Post has an article where they discuss whether it would be a good fit or not. My reaction? I pray that they will not be that stupid.

I know that a Treasury Secretary needs to know a lot about finance, economics and what goes on on Wall Street. But really. Replacing one Wall Street insider with another just makes it a revolving door of people mentally connected from most people in the USA, and makes lobbying from Wall Street look like an amateur’s game.

If Timothy Geithner steps down, which might not be such a bad thing, I would hope that they could find somebody that has more knowledge of small businesses, entrepreneurship and general daily grind activities. Somebody who undersands that keeping banks too big to fail will just set us up for another crash just like the one we’re in with bigger job losses and the potential for a real depression. No, we need to make the price to be big so high that it’s not financially responsible to share holders to be so big. And separate money lending banks from investment houses. The latter should not even be allowed to be called banks, just to limit the confusion.

The USA needs a good and steady hand at the helm of the Treasury. I don’t believe the Wall Street CEOs even know what the chart looks like.