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Posts Tagged ‘Henry Paulson’

Worthless money as a rational absurdity

June 5, 2012 3 comments

INTRODUCTION

For a while now, I have been trying to come to grips with the neoclassical theory of money, which states anything can serve as money and that money doesn’t have to be a commodity. The theory is patently theoretically absurd, contradictory and internally inconsistent as John weeks explains in the paper I discuss in my post. Despite these defects, however, neoclassical money theory not only maintains its dominance in economics, its alternative, commodity money theory, is ridiculed and marginalized even among Marxist theorists.

While reading the John Weeks paper, it began to dawn on me why this is true. I had been spending my effort trying to argue for the superiority of commodity money theory, when I should have been trying to understand the circumstances under which neoclassical money theory made sense. Weeks, in his paper, explains two assumptions which are necessary for neoclassical money theory: 1. the economy has to produce only one composite commodity; and 2. the state must be able to control the money supply.

Weeks thinks both of these conditions make neoclassical money theory wrong, but now I believe he is wrong on this. In the capitalist mode of production, the only true commodity is labor power — the single composite commodity required by neoclassical theory. Moreover, contrary to Weeks’ assertion, the state can control the money supply, if we a speaking of classical commodity money. It need only declare commodity money is not money and replace this money in circulation with its own token, i.e., impose an inconvertible currency in place of gold. This was done in the 1930s in the US and Europe. The state can control the money supply, if by “control” that term includes also setting that supply to zero.

The result was a bit of an epiphany for me, since Weeks is describing how Washington directly manages the US economy as a single giant corporation, despite the economy appearing superficially as numerous separate capitals.

The article was rushed and is in need of serious editing, but I welcome criticism and challenges to this idea.

*****

I want to recommend everyone read John Weeks’ paper, “The theoretical and empirical credibility of commodity money“, because he presents a key to the analysis of neoclassical economic theory that unlocks its inner logic. I missed the juicy goodness of his argument in my first read because I have an aversion to mixing math with social criticism. However, in his math Weeks uncover why money is not a commodity-money in neoclassical theory, and why it cannot be a commodity-money.

Weeks tries to make sense of a troubling rejection by neoclassical economic theory to admit to the obvious internal consistency of Marx’s commodity-money theory:

Th[e] theoretical superiority of commodity-based monetary theory has had little practical impact because of a perceived empirical absurdity of the commodity money hypothesis.

I came to my understanding of fascist state issued fiat money based on one closely held idea that neoclassical economics is not irrational, capitalism is. Yes, capitalism is as irrational as it has been declared by Marxists to be, however no one but an idiot would buy into the neoclassical argument unless it made sense in the context of fascist state economic policy. Since capitalism itself is irrational, a rational person looks like an idiot when he buys into its propositions; on the other hand, accepting the irrationality of capitalist relations of production as the basis for formulating fascist state economic policy is rational.

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The Great Turning…

September 25, 2008 Leave a comment

Details are beginning to dribble out on how wrenching the changes will be for you in the next few months. Analysts on CNBC are frankly admitting rising unemployment through 2010 – at least 7 percent next year alone.

Govenor Patterson, of New York, indicates a slowing economy for at least 18 months, and perhaps for two years.

Hope you have your galoshes – shit will be deep, once you wake up to discover you have just transferred almost a trillion dollars to China. From Bloomberg:

“China is very worried about the safety of its assets,” he said. “If you want China to keep calm, you must ensure China that its assets are safe.”

Don’t cry for US, Argentina…

September 25, 2008 2 comments

Figures don’t lie, but liars figure – Mark Twain

The Moron returned to television last night bringing anguished tales of impending doom – news to all, apparently, but any person who has done the slightest bit of investigation into this crisis on the numerous web pages devoted to the subject.

The failure of Congress to hand him a blank check to bailout Wall Street, said the Marionette-in-Chief:

…would cause massive job losses, devastate retirement accounts and further erode housing values, as well as dry up loans for new homes and cars and college tuitions. These are risks that America cannot afford to take.

Of course, a simple back of the envelope calculation would have laid all this bare without the whining squeal of the Decider. The US needs several billion dollars each and every day to fund its pretensions to empire.

Above all, this requires the continuing inflows of currency from all the major holders of American dollars – China, in first place, but also Japan, Russia, and the oil dependencies in the Middle East.

These inflows rest on the assumption among the global holders of the American debt that their assets are safe, relatively liquid, and retain their value in the face of decaying global economic conditions.

The Empire is on life support, and you are being sacrificed. You are being asked to pony up untold billions of to guarantee the assets of the People’s Republic of China, who, through their mouthpiece, economist Yu Yongding, explicitly demanded action:

“If the US government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu said in e-mailed answers to Bloomberg. “If it is not the end of the world, it is the end of the current international financial system.”

As we noted at the time, not one of the leading members of the Party of Washington and the Party of Wall Street uttered a single response to this threat:

Not a word this week from a single member of the elite bosses of the Party of Washington. Not a peep from the economic vandals of the Party of Wall Street.

Not a single response from The Presidency, the office of the Speaker of the House, nor from the office of the Senate Majority Leader.

Not a word of this and its implication for you and those you love from the lips of the nominee of the Party of Washington, who waxed eloquent regarding how life will profoundly change under his enlightened term in office.

He went on for forty-two minutes, we are told, yet found not ten seconds of it where he could have told the nation, “Uh, sorry. The Chinese just sent us an ultimatum: Either we fix our economy, or we are cut off from the spigot.”

We also told you the implications of this threat:

There are only two choices here:

  1. Dismantle America’s Empire – withdraw from Iraq, Afghanistan, all overseas bases, pull back the fleets, recall the submarines, and stand down, or,
  2. Starve.

Last night, the Moron told you which of these choices Washington made.

Don’t cry for us, Argentina.

When it was your turn, back in 1999, we sure didn’t.

KISS principle… (Part I)

September 20, 2008 Leave a comment

In general, when you have a really big problem you have two possible aproaches. You can try to tackle the problem piecemeal – breaking off such small chunks of it so as to manage each piece separately. Or, you can try to find the one or two fundamental issues raised by the problem which, if addressed, will allow the problem to resolve itself on its own.

Such are the choices with the present financial meltdown.

On the surface, the financial crisis seems extremely complicated, but it is actually pretty simple: a number of mortgages were advanced to individuals which, in retrospect – or even at the time – appear to have violated common sense.

The individuals were, either at the time or subsequently, incapable of repaying their mortgage on the terms agreed at the time of the sale. These problem mortgages were bundled together with other mortgages into fancy financial instruments – to reduce or spread out risk, we are told – and sold to investors.

Our bubble economy being what it is – a vast printing press for the near continuous production of new dollars – the new owners of these toxic assets then proceeded to other financial institutions and secured their own loans based on the face value of the fancy instruments with rather steep leveraging to begin the process over again.

Leveraging is an interesting term, which may seem rather complicated on the surface as well, but is also quite simple. Each of us who have ever bought a home likely leveraged the purchase. We put down 20 percent, of the value of the property, and the bank anted up the remaining portion in return for a fixed repayment schedule spread over 15 or 30 years with interest.

Your mortgage is a leveraged buyout of someone else’s property.

But, instead of putting 20 percent down on a new loan, Wall Street was putting as little as one or two pennies on the dollar to leverage their positions. And, according to Nouriel Roubini, these new loans were of very short duration.

They were, in other words, borrowing for a few months, with high levels of leverage, and lending for 30 years to us.

Our four to one leveraged mortgage rested on their 30 to one leveraged credit market debt.

Which, we imagine, if we understand all this correctly, was fine as long as the economy was growing. When it began to slow, and mortgage payments faltered over the last two years, suddenly Wall Street stared into the Abyss and panicked.

Now, assuming we have understood all this correctly – and we make no claim to have done so – the problem which has, this week, driven the international financial system to the brink of collapse, stems mostly from the fact that we – the American shmucks – aren’t repaying our mortgages at the rate predicted by Wall Street financial wizards with their complex and unfathomable equations.

The engine of the American economy hit the wall, and all the trailing freight began piling forward willy nilly.

“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”

We suppose this is one way to look at the problem: “credit lines in America,” are “frozen.”

Such a problem requires the kind of breathless terrorized, haunted mutterings as has been heard on CNBC in the past week. It would also seem to warrant the finest minds in the nation spending all their time, this past week, devising complicated multi-step plans, in coordination with foreign central banks, sovereign wealth funds, investment houses, and pension funds to pump unheard of billions of dollars into the credit markets to, “unfreeze,” the pipelines of debt creation.

According to Mohamed El-Erian, Pimco Co-CEO and Co-Chief Investment Officer,

“To go back to what Secretary Paulson said about the bazooka in the pocket, firing the bazooka, you need to fire four bazookas simultaneously. The first bazooka is to reliquify the system, and that means putting in funds like the central banks are doing, and cutting interest rates. The second bazooka is to deal not with liquidity, but with capital. The system lacks capital, so it’s to inject capital in some key financial institutions. The third bazooka is to stop the deleveraging, which is buying top-quality, highly-rated securities, and the fourth bazooka is on the regulatory side, to go from a pro-cyclical regulatory risk function to an anti-cyclical regulatory risk response.”

(As an aside, we should note Pimco made billions this week when Washington bailed out AIG. So they have reason to be pleased with Paulson’s approach.)

All told, however, despite being an extremely complex and innovative approach to the current economic problems, Washington is still only trying to compensate for the fact some of us are late with our mortgage payments – and the number of us is growing daily.

Yes.

You heard correctly.

Three major investment banks, world’s largest 2 mortgage underwriters, the largest insurance company on the planet, and about a dozen banks disappeared because some guy in Orange County, California couldn’t pay his mortgage.

The cost of bailing out the above will be staggering.

“Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn-$2,000bn.”

Which got us to thinking: 2 trillion dollars is a lot of money.

That is the about what Washington spends sailing aircraft carrier groups around the Persian Gulf, and other major oil routes, for two solid years.

Or, $13,071, for every American in the labor force.

Or, about 122,963,418 mortgage payments.

Mortgage payments?

Wait a minute. Didn’t all this begin with some guy in Orange County who was late with his mortgage payment? And, in the end, this bailout may cost the equivalent of 123 million mortgage payments?

So, instead of our four bazooka scenario, we could just give that guy in Orange County, and all the other guys and gals who pay taxes in all the other counties in the United States, $13,000 – and the problem would go away without the acrid smell of bazooka rocket metaphors?

And, this could be done without bailing out Wall Street firms stupid enough to get themselves to the edge of bankruptcy – after winning the deregulation for which they lobbied for years?

Everything you need to know about the Fannie Mae, and Freddie Mac bailout

July 14, 2008 Leave a comment

The Republicans urinate on us and call it “free enterprise”

The Democrats diligently wipe off the Republican members and place each back in their pants, and call this “regulation.”