Structured by cows

"It could be structured by cows and we would rate it": another fascinating peek into the parallel universe that, unfortunately in the end, did intersect with ours ...

http://tpmmuckraker.talkingpointsmemo.com/2008/11/it_could_be_structured_by_cows.php

Maybe it’s the whole economy that was structured by cows. The focus has been Wall Street, and there’s plenty of craziness there to focus on. People buy and sell hogs that aren’t born yet, fer chrissakes! Crops that haven’t grown yet, all kinds of insanity. They take bets – essentially bets – on which loans will go bad, and so on. It’s nuts, and that’s even with regulation. Without regulation it gets downright bestial.

But it’s obviously much more than Wall Street.

There’s been a lot of talk about debt – private debt, public debt – and how it’s been ballooning for 30 years. It was already considered problematic when Reagan, the balance-the-budget president, jacked the federal deficit to record levels. And as we all know, Bush had to pull out all the stops. Jack Rasmus (Z, Nov. 08) has a very thorough rundown of US debt accumulated during the ‘W’ years, including $8 trillion in new debts to banks (speculative, etc., added to $6 trillion in household mortgages), $1 trillion to credit card companies (largely because people don’t earn enough to pay bills), $3 trillion in government debt (Iraq mostly) and over $3 trillion in “non-financial” business debt: it adds up to around $21 trillion in new debt just since 2000.

Credit card and mortgage companies are now pushing new debt with ads that center around the bailouts!

Yesterday the Senate killed the vote on the auto bailout - playing 'chicken' with maybe 2 million jobs, and possible economic depression - but they keep talking about this the wrong way. It isn't clear at all to the American people why these humongous companies are in debt in the first place. It isn't just because sales have been declining. And it isn't really, except just in the immediate, because of the Wall Street crunch. Why would that bother big manufacturers? Don’t they have money? Or if they don’t, why didn’t they realize it before now?

It’s the way they run their businesses, by trading on their status - in a way that small businesses can never do, so really on their size. (Similar, you have to admit, to the way the big financial institutions were running: these are not bad loans, not irresponsible reckless screwball cowboy ventures, we wouldn’t risk our business that way, we’re big and well respected!)

Turns out, really big businesses don’t run the show on the money they take in, or on their savings or cash reserves, or even on loans that they plan for and include in annual or even monthly budgets. It’s more proof, in case we needed it, that capitalism doesn’t actually work, at least not without passing a giant collection plate around the plebes, sometimes (and always at least indirectly) at the point of a gun – serfs, Native Americans, African slaves, taxpayers, somebody has to prop up this façade at all times.

The dirty secret is, the Captains of Industry keep their show on the road by borrowing money, tens of millions, on a near-daily basis, and pay it back almost daily, too, usually. Your typical manufacturing giant or other towering edifice of capitalist potency will have, secreted away in the bowels of the organism, a small office that swings into action at the end of every business day, or at some point near the end. The function of this office is to check the daily balance – take versus layout – and if there’s a shortfall, borrow, say, $10 million or so, over the phone, just to tide the big boss over until tomorrow. Or, on days when there’s a surplus, pay it out.

There was a recent episode of “This American Life” that told the story, and jaws hit the ground in kitchens and living rooms all over America. They depend on these day-to-day loans so heavily that, in the case of the carmakers (and others), when the loans locked up, the businesses started to bleed out immediately. That’s why the crisis seems to have exploded out of nowhere with every major institution, bar some, whimpering about mountains of debt – mountains of debt that moreover continue to grow at least arithmetically even as they struggle to slow it down. They can’t stop it. They have no other resources. They have been operating miles beyond their actual capacities for decades. Their very capital, the physical existence of the corporation itself is constructed out of this fact. It is literally who they are.

For some like GM the unwinding is happening so fast, they may code by the new year or soon after, taking 2 million or so jobs with them (in addition to the million-plus already down the crapper this year). That’s a lot like a depression, folks.

Talk about a house of cards.

But it’s an inescapable fact, it seems to me, that the kind of free money the carmakers are or were hoping for, sans fundamental restructuring, is just feeding the bad wolf. It wouldn’t even seem to delay the inevitable very long, maybe just long enough for stockholders to pull out but probably not long enough for 10-plus year employees to find another home, especially not nowadays. So the “free” marketeers don’t like it because it enables bad practice. But there’s a good reason for social progressives not to like it either: we could wind up paying them to kick people out of work.

And I know I’ve said it before, but we need to pay them to put people back to work. We need the opposite of an IMF, something like a Social Monetary Fund, and it needs to be one with a vision beyond the WPA or CCC. It needs to encourage investment in what economists might call “externalities”: infrastructure needs; gainful employment, yes, but also alternatives – a kind of social diversification – renewable energy, public transportation, etc.; we need to encourage freight to move by rail, not over public roads; so many things.

Now, GM can’t do that alone, no matter how much we lend them. But that’s where the Fund’s management comes in, a sort of coordinating function – “planning” you might call it. GM, for example, gets a bailout and it required to participate in restructuring, not just internal restructuring but external restructuring, of the whole economic mess.

It doesn’t have to be structured by cows. We are smarter than cows, in theory. The economy can be structured by people. It is anyway, just not by the right people, and not by enough people.

How to Save Capitalism - in case we want to

I’ve just been reading Harper’s Magazine –which I don’t usually do. But this month there are a number of articles on “How to Save Capitalism” – which I don’t normally advocate, either. But it seemed pertinent, and there are quite a few interesting ideas.

Joseph Stiglitz (“The Three Trillion Dollar War”), who I think some of our friends were praying would be Obama’s Treasury Secretary, has an almost impenetrable article on Wall Street and tulip mania in the 1600s – arguing that the long-neglected purpose of financial institutions is to *manage* risk, not just auction it off for fun and profit. That sounds hard to argue with. He has ideas about fixing this, like requiring the troublemakers to invest their own money with ours, but he doesn’t seem to me to get at the larger picture we’re grappling with at the moment.

(From the revised job loss figures for late summer (even more people kicked out of work even before this fall than they told us, which was already a lot), as if we didn’t already know it, that the recession was locked in well before the Fannie & Freddie extravanganza. Well over a million jobs lost this year – job losses may hit 300,000 a month by the end of December. Merry Christmas!)

Similarly Barry Lynn (“The Rise and Coming Fall of Global Capitalism”), who advocates abolishing stock options or at least reforming them so that corporate managers don’t get quite so much encouragement for short-term profits while if not giving away then selling (low) the proverbial store (e.g. GE CEO proposal to sell off their R&D! That must be right up there with a passenger on the Titanic selling his spot on a lifeboat?) Again, I think he makes a good case for the reform he’s advocating – it just doesn’t seem like enough.

And, Elizabeth Warren and Amelia Warren Tyagi (“The Two-Income Trap”) suggest something like a Consumer Product Safety Commission for financial ‘products’ – a “Financial Product Safety Commission” – to detoxify the financial environment. Probably a great idea, but the most interesting part to me was their story that “each year millions of credit-card offers go out with tiny print detailing ‘double-cycle billing’ and ‘trailing interest,’ terms which have enormous financial implications but are meaningless to most people.” Include me. What the hell?

Then they get more radical.

Michael Hudson (“Super Imperialism”) – after a short history of the rise and untimely demise of the progressive income tax – says tax the land. He says tax breaks on property and capital gains, plus tax deductions for mortgage interest amount to “powerful incentives for buyers to go into debt.” He says we should be taxing the privilege of owning land, not socially useful activities like producing and earning money. Especially, he says, tax “’unproductive’ incomes” like hereditary estates and monopolies – e.g. currently privatized natural resources, public airwaves, etc.

At first I thought, wait a minute! No tax deductions for mortgage interest? What will we struggling homeowners do? Then I remembered: those of us who are struggling don’t actually earn enough to itemize deductions anyway. Not sure how this ‘tax the airwaves’ idea would affect small operations like WEFT and WRFU, etc. but I’m sure there’s a way to tweak it. The solution might be as simple as a kind of standard deduction that effectively exempts small operations. Same could work for the land tax, really, when it comes to lower-middle-income folks trying to buy their first house … not their first *ten*, of course. (Can you really live in ten houses?)

James Galbraith (“The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should, Too”) jut comes right out and says we should “plan.” Dude!

No kidding, Galbraith is pointing out once again that the myth of ‘free enterprise’ is just that. It doesn’t exist. The trick is to acknowledge, I think he means officially, that the government always has and of necessity must and should intervene to manage and shape the direction of the economy. It isn’t clear to me exactly how he thinks we should do this, except that he says his idea “is not coercive” but based on budget priorities and such – to encourage the *kinds* of development we want. Clearly, I think, he’s right.

He seems a little short on what exactly those kinds of development are, too, but he mentions one example: a Federal Department of Energy and Climate, which would be “independent” of lobbyists and other evildoers – even Congress – (how?) and (miraculously) free to evaluate new ideas for renewable energy, etc. Our local experience, which may or may not be a useful guide, I think is that the ‘independence’ part is a humongous ‘if.’ To the extent to which city planners around here have been ‘independent’ of elected officials it seems to me they have been ‘independent’ of social considerations, even more than the elected officials: they just listened to developers and trusted their business school training. To the extent to which the planners have been ‘dependent’, well, it has depended on who was in office and what their (election-dependent) priorities were. I just don’t see it working this way.

Galbraith may have some great ideas, and he’s certainly right on about the faith-based nature of “free enterprise”. But it seems to me he’s trying to take a shortcut around the truly back-breaking work of this thing: the organizing, the building of public or cultural or national will, the social will, the social demand for radical changes like these. Maybe it’s because in the process a lot of good ideas will be shitcanned because the huddled masses don’t get them – in favor of gettig paid now. But that is the uphill battle. The biggest public relations industry in human history is against us, not to mention the monopolies on resources and organized violence currently aligned (maybe a little more loosely since last month) with property interests and so on. Tough question, but we can’t just skip it, IMO.

Finally, Eric Janzen (pres., iTulip Inc.) and Bill McKibben (“The End of Nature”) have I think related but different suggestions all to do with what kinds of development we want to foster. Janzen says we have to “reindustrialize”: and he’s talking innovative startups, publicly encouraged. McKibben says “localize”: farmer’s markets and other smaller, more localized economic developments make more sense (as we run out of oil, he says – not so sure that we are any time soon, but) and are much more deserving of public investment – *social* investment again – that ADM and the oil industry & co.

Janzen presents a more destructive version of a similar notion, in my view, advocating that we allow the financial and insurance sector, and the 4-million-job US auto industry to sink or swim on its own. Now. He’s not even just saying don’t bail them out; he’s saying withdraw the subsidies we already give them. No weaning, no methadone. Economic Armageddon.

I think that’s an even steeper ramp down to economic (and medical) depression, myself. You have to remember why we bother to discuss this at all. It’s not a board game. It’s people’s lives. And we don’t want to destroy this village in order to save it.

But in the long run I think Janzen’s got something there: he says in essence that our economy needs to be based on producing things and not just on insuring things that other people make and lending money to buy things that other people make, and then gambling on who will lose the most money when it all comes crashing down. Hm, you think?

He has a zillion ideas for startup businesses – that’s what he *does* – and the model is “public-private partnerships” (i.e. joint ownership). I’m skeptical of this on the scale and with the suddenness he seems to be proposing, at least in the contemporary capitalist context; seems like a tender box. I see armies of scam artists swarming to make living while the tourists wander the burning cities in a daze. But I think we can begin to reorganize our society along lines that are at least informed by these sorts of ideas.

McKibben, for example, addresses the human cost of some of these proposed changes. We don’t want to “beggar the populace,” he says. He’s a little slim on the specifics, but he says there are all sorts of schemes for rebates and discounts and things to ease the burden of yanking the carpet out from under tens of millions of individuals and families. They’d better be damn good ones, is all I can say. I like a lot of these ideas, but we must keep perspective. The biggest problem with the solutions we keep seeing come out of Washington (and downtown Manhattan, and Detroit, etc.) is that they ignore who they are (at least allegedly) *for*.

We must be the nagging reminders.