Happy Bastille Day! liberté, égalité, fraternité

Jamie Dimon, Stephen Schwarzman, Richard Fairbank, Lloyd Blankfein, and Pete Peterson, Step Right Up!

Martin Wolf has a piece in the Financial Times noting the shocking statistic that 58% of all income gains in the United States in the three decades between 1976 and 2007 went to the top 1% of the income distribution (h/t Naked Capitalism).  Standing alone, that fact is pretty damning, but the reason it’s really bad, lies in the supposed “solution” to the problem:

In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.

“The political response to rising inequality … was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”

In other words, the “solution” to wage stagnation among the lower and middle classes was to encourage lifestyle leverage, or borrowing so you could continue to acquire the accoutrements of a middle-class life, whether houses, cars, consumer items, or higher education.  Talk about a cure that’s even worse than the disease!  So it’s no surprise that starting around 1980, levels of household debt in the economy really started to take off, growing to more than 120% by 2007.

Now, I don’t mind inequality per se. Individuals that come up with great ideas, particularly those who follow-up their ideas with great execution deserve big rewards.  Bill Gates, Sergey Brin, Larry Page, and Steve Jobs, for example.  These guys actually create[d] useful products that enhance productivity and make us all better off.  They deserve their money!  But over the past three decades more and more of the profits of the economy have been funneled from  real product entrepreneurs to the paper “entrepreneurs,” especially in the finance sector.

As Robert Reich noted back in April, “The Paper Entrepreneurs Are Winning Over the Product Entrepreneurs (A Thirty Year Retrospective):”

The paper entrepreneurs are winning out over the product entrepreneurs.

Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quottas, price supports, bailouts; going private, going public, going bankrupt.

Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.

****

Yet paper entrepreneurialism is on the rise. It dominates the leadership of our largest corporations. It guides government departments, legislatures, agencies, public utilities. It stimulates platoons of lawyers and financiers.

It preoccupies some of our best minds, attracts some of our most talented graduates, embodies some of our most creative and original thinking, spurs some of our most energetic wheeling and dealing. Paper entrepreneurialism also promises the best financial rewards, the highest social status.

The ratio of paper entrepreneurialism to product entrepreneurialism in our economy — measured by total earnings flowing to each, or by the amoung of news in business journals and newspapers typically devoted to each — is about 2 to 1.

That’s not how it should be.  Finance has a place in the economy, but that place should be nothing more or less, than facilitating movement of capital from savers to product entrepreneurs.  Once finance became the primary means for formerly middle class people to continue living like they were middle class by taking on ever escalating amounts of leverage, aka debt, finance became predatory, extractive, and destructive to the economy.  And, once that happened, the returns to finance dwarfed returns to the real economy. Take a look at when financial sector profits began to diverge from profits in the real economy – just about the time the economy recovered from the 1982 recession.

Our current “Great Recession” was our best chance to rein these fuckers in.  Perhaps through nationalizing the banks, or simply letting them fail en masse and taking a true shared depression.  But that didn’t happen.  Again, back to Reich:

Americans are keeping their jobs or finding new ones only by accepting lower wages.

Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks.

We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.

It’s not inequality.  It’s that the financiers are creaming off too much…from everyone.  They have households over a barrel with debt, and they’re destroying the “product entrepreneurs.”  As Michael Hudson puts it, “From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy.”  They’re winning, perhaps they’ve already won.

Unless you want to head out and start pushing a guillotine down Wall Street (not a bad idea, BTW), the best tool you have at your disposal is to simply not play their game. They levered you up, and levered themselves on the assumption that you would make every effort to pay back those jackals.

To paraphrase William F. Buckley, the time has come to stand athwart the bankster takeover of the economy and yell “Stop!“

AFEP Turns 100!

When the AFEP started this august blog the goal was little more than to plant a seed.  Well, 4 months, 100 posts, and thousands of hits later, I’m still here.  I think I struck a nerve.

Now, I’m not so arrogant as to believe that a few posts would really get people to run away from their debt, default on their loans, and move overseas (Kudos to any that did!), but I wanted to make sure that people were aware of their options.  With serial killer Alan Greenspan still running wild across the land (he actually tried to assassinate a 3-year old kid a few nights ago, the sick fuck!!! ), and talk of suicide rampant among those who are overindebted and underpaid, it was critical that people know there was a way out.

I started this blog at the conclusion of a very dark time in my own life.  I knew I didn’t want to kill myself, but I was equally sure that living in the U.S. and fending off creditors for the next two decades wasn’t an acceptable alternative, so I resolved to leave the country. In truth, I thought I would be on a plane by now.  But Wells Fargo, Capital One, Chase, BofA, and the rest must be so jammed up with defaulters that after 10 months the worst I’ve received are a few threat letters.  Whatever.

Over the last few months I’ve written about the deflation taking hold of the American economy, the grad school scam layering hundreds of thousands of dollars of nondischargeable debt onto our best and brightest 20 and 30 somethings, and how, unfortunately, it’s not likely to change – but perp walking Jamie Dimon, Lloyd Blankfein, Steven Schwarzman, Pete Peterson, and Richard Fairbank would be a good start.  If and when the U.S. gets its act together (or more likely doesn’t), I’ll be watching it on CNN in Costa Rica – feel free to stop by on your way to your final destination.

With that being said, I’d like to take a break from the doom and gloom that is the everyday reality of my life, your life, and American life in general, and take a look at some of the more amusing Google webmaster info we’ve gathered over the past few months (Don’t worry, we have a very rigorous privacy policy around here!).  But first, let me take this opportunity to give a big shout out to the AFEP’s wonderful readers and commentators.  You guys rock!  We have comments from across the political and economic spectrum, but just about every comment is insightful, interesting, or just plain fun, e.g., from Karla:

i L-O-V-E this site!

Many thanks!  Or my all time favorite from “kick in the door” explaining that you can borrow money to acquire useful skills in the U.S. before heading overseas.  The comment to this post concluded with:

But be sure to pay your debts that you ran up before leaving first, because it’d be wrong not to do so. Wrong.

Love it!!!  Absolutely hilarious!  I think the commentators here at AFEP are as good as anywhere on the web.

Let’s start with a look at “Keywords” which are supposed to “reflect the subject matter of your site.”  The words at the top of the list are not a surprise and do reflect the subject matter of the site:

• debt
• financial
• expat
• inflation

Not bad Google. But I was concerned about a few words that showed up way too low on the list:

• 9. banksters
• 15. assholes
• 19. dimon
• 26. deflation
• 76. schwarzman

And worst of all

• 79. fuck

It’s pretty clear that I’ve gotten soft as I’ve continued blogging.  So just to clarify, Fuck Jamie Dimon!, Fuck Steven Schwarzman!, Fuck Pete Peterson!, and Fuck the rest of the asshole banksters!  Google provided me with a wake up call, and I’ll be sure to get back to some of the founding principles of this blog, e.g. swearing at the banksters.

But Google also tracks some of the search engine strings that lead people here. From the unsurprising:

lloyd blankfein douche

thomas mengler sucks

Why yes, yes those are true.  To the tragic:

i co-signed for sallie mae student loans

Sorry.

But they also show that not everybody who comes into AFEP is getting what they, perhaps, expected:

naked tinkerbell – clap louder!

angry fap - I get “angry fuck” – but “angry fap” is a mystery to me

massive dick - sorry, I don’t post naked pics

how to increase fucking time - simple question, simple answer: spend less time reading blogs

i like children and i like tea – I’m ok with kids and I like a cup of tea, but I can’t imagine typing it into a search engine

angry inflated cock - that’s not the kind of inflation we promote at AFEP

ass inflation - see above ^^^

girl inflation – see above ^^^

Some of those are amusing, but there was one search string that was so bizarre, so perverted, so disconnected from any possible reality that when I read it, I simply could not understand what sort of demented mind could come up with such a thing:

i love sallie mae

I’m speechless.  We’ll see if anything quite so disgusting shows up over the next four months.

Thanks to all!!!

Couldn’t Have Said It Better, So I Won’t Try

From Digby:

“Savvy businessman” Jamie Dimon gave words of wisdom to college graduates this week-end:

“Throughout my life, throughout this crisis, I’ve seen many people bury themselves by failing to stand up, being mealy mouthed and simply going along with the pack,” said Dimon at the university’s Carrier Dome, where more than 5,000 students received diplomas.

He told students to “do the right thing, not the easy thing” and not to become someone else’s “lap dog.”

Dimon, 54, who was the subject of student protests before the ceremony, was met at the end of his speech with loud applause by the audience of more than 17,000.

“Have the courage to speak the truth, even if it’s unpopular,” said Dimon. “Have the courage to put yourself on the line, strive for something meaningful, even to risk the embarrassment of failure.”

****

When there is 10% unemployment, the whole workforce is under stress. And the longer it goes on, the more frustrated, angry and depressed the average working stiff feels. Masters of the Universe can drone on about being brave and finding meaning and telling the truth even if it’s unpopular, but he might as well be speaking in tongues for how relevant it is to workers right now.

Those kids may not know it, but they soon will. And I hope they find it in themselves to look back on this day and wish they’d turned their backs on that bastard when they had the chance. It was probably their last opportunity for a good long while to follow his advice.

And to sum up from Subprime JD:

Fuck you Mr. Obama and fuck you Larry Summers and FUCK YOU Timothy Geithner and FUCK YOU BENRON BERNANKE. You can keep on sprouting your lies about “green shoots” and “recovery” the fact of the matter is that millions in this country are languishing in poverty and distress while you motherfucking fucks raid the treasury on a daily basis. Know this, that all of you and your buddies on the board of Goldman, JP Morgan, Bank of America, and Citi, et al, will burn in hell for all of eternity.

WORD!

Update: Robert Kuttner writing over at Huffpo on financial reform:

This bill should be understood as just a first step. It will only partly transform the business model of the post-1980 financial industry, in which creation and trading of abstract securities rather than traditional banking are the main source of profits; and middlemen add too much risk to the economy and take too much of a cut for themselves.

The entire financial industry needs more drastic simplification and shrinkage. Exotic instruments that add no value to the economy need to either be banned entirely or rendered unprofitable with taxes or reserve requirements. The pervasive conflicts of interest need to be expunged from the system. Banking needs to revert to the quasi public utility role that it played during the 30-year boom after World War II. High rollers need to play only with their own money.

The dynamics of deeper reform are very reminiscent of the 1930s. In that decade, it took progressive senators and grass-roots movements to push Roosevelt and his financial advisers beyond their comfort zone. The Roosevelt White House did not always lead — the FDIC was imposed on Roosevelt by Congress — though FDR led rather more than the Obama Administration is current leading. Ultimately, it took six landmark reform bills stretching over seven years, beginning with the 1933 Glass-Steagall Act and ending with the Investment Company Act of 1940 before the edifice of New Deal financial reform was complete. By that calendar, it is only May 1934 right now, and we have a long way to go.

Thanks to that epic cycle of reform, the financial economy efficiently served the real economy for nearly half a century, until a new round of “innovation,” regulatory end-runs, and speculative excess caused the cycle of collapse and reform to repeat. We are witnessing only the opening chapter in a long battle to restore the financial economy to its proper role as servant of the real economy.

Of Bread, Circuses, Secretaries, And Other Distractions

One of the enduring mysteries of the economic meltdown – at least to me – is not only how sanguine our political and financial elites are, but also how subdued the people suffering from long-term unemployment are. It wasn’t always thus.  Over at The Big Picture, Barry Ritholtz posted some articles discussing a riot in Iowa back in the 1930s.  My favorite snippet:

The abduction followed Judge Bradley’s refusal to swear he would sign no more mortgage foreclosures.  The farmers had entered his court room to discuss with him hearings which are to determine the constitutionality of two new laws relating to mortgage foreclosures.

The judge requested them to take off their hats, and to stop smoking cigarettes.

So the farmers grabbed, him, beat him up, and put a rope around his neck.  Awesome.  But that’s just the tip of the iceberg, from the arrival of the “Bonus Army” to various other hunger marches and riots, people just didn’t take the Great Depression lying down.

There are a number of reasons we haven’t responded by taking to the streets this time: 1) the fact that the war on drugs has already incarcerated huge numbers of our rowdiest citizens, 2) unemployment insurance, which is just enough to keep people in their apartments, watching cable, surfing porn, and playing Wii; and 3)the unemployment rate among the well-educated is still low (through underemployment is high).

Perversely, the cushions that have been put in place, are causing our downward mobility to feel less sudden, and more grinding – well, not mine, which was sudden – but long-term downward mobility warps perspectives and misdirects anger.  People should be pissed off at Wall Street – and they still are – but as far as I can tell, brick 1 has not been thrown through a plate-glass window of any of the Wall Street banks.

Much more common is the attitude of Cynthia Norton, a former secretary from Jacksonville profiled in the New York Times:

Ms. Norton has sent out hundreds of résumés without luck. Twice, the openings she interviewed for were eliminated by employers who decided, upon further reflection, that redistributing administrative tasks among existing employees made more sense than replacing the outgoing secretary.

One employer decided this shortly after Ms. Norton had already started showing up for work.

Ms. Norton is reluctant to believe that her three decades of experience and her typing talents, up to 120 words a minute, are now obsolete. So she looks for other explanations.

Employers, she thinks, fear she will be disloyal and jump ship for a higher-paying job as soon as one comes along.

Sometimes she blames the bad economy in Jacksonville. Sometimes she sees age discrimination. Sometimes she thinks the problem is that she has not been able to afford a haircut in a while. Or perhaps the paper her résumé is printed on is not nice enough.

Misdirected blame toward herself, and more ominously:

Ms. Norton says she cannot find any government programs to help her strengthen the “thin bootstraps” she intends to pull herself up by. Because of the Wal-Mart job, she has been ineligible for unemployment benefits, and she says she made too much money to qualify for food stamps or Medicaid last year.

“If you’re not a minority, or not handicapped, or not a young parent, or not a veteran, or not in some other certain category, your hope of finding help and any hope of finding work out there is basically nil,” Ms. Norton says. “I know. I’ve looked.”

The article really isn’t that good, and comes across as a preachy screed from the elites to the poor, but Ms. Norton’s an example of how grinding downward mobility warps your perspective, and impairs your judgment.  Believe it or not, Ms. Norton’s story actually gets worse:

Ms. Norton, for her part, may be reluctant to acknowledge that many of her traditional administrative assistant skills are obsolete, but she has tried to retrain — or as she puts it, adapt her existing skills — to a new career in the expanding health care industry.

Even that has proved difficult.

She attended an eight-month course last year, on a $17,000 student loan, to obtain certification as a medical assistant. She was trained to do front-office work, like billing, as well as back-office work, like giving injections and drawing blood.

The school that trained her, though, neglected to inform her that local employers require at least a year’s worth of experience — generally done through volunteering at a clinic — before hiring someone for a paid job in the field.

Uh, yeah, the school “neglected” to inform her.  I suspect the school actively misled her about her job prospects, but when you’re desperate anything that could provide a leg up sounds desirable, and it’s difficult to ask the tough, probing questions in such circumstances.

Look, this lady should be furious, but not at the minorities, young parents, handicapped, and veterans that she perceives (mostly incorrectly) have at least some government support.   Her anger has been misdirected away from the elites who caused her problem in the first instance – she should be bitching about Jamie Dimon, Lloyd Blankfein, and Larry Summers – yet they earn nary a mention.

Instead, the grind of downward mobility had warped her perspective, severely impacted her judgment (17k for medical assisting, really?), and has misdirected awareness away from the true causes of her hardship: Wall Street, the incestuous relationship between the banks and government, the lack of an adequate social safety net, the (no doubt) for-profit school that hung 17k in non-discharageable debt around her neck for a worthless “certificate.”

Ironically, the best thing about the Great Depression in the U.S. was that is was quick, severe, and widespread enough that it gave rise in short order to the New Deal.  What we’re going through now is much more like death by slow puncture, and with every passing month the elites are counting on us forgetting what happened, and who’s to blame – and it may be working.

Inspiring, Up-and-Coming Politician Cheats On Wife. In Other News, Dog Bites Man.

Drudge is pimping some idiotic story about how Obama had an affair with one of his staffers back in 2004.  True?  Probably.  Do I give a shit?  I would have a hard time caring less.  I have my own reasons for disliking Obama: the health care “reform” bill; letting Timmeh and Larry Summers near the levers of power; the joke of a financial “reform” package that he’s pushing; opening up offshore drilling (nice timing BTW!); etc. etc. etc.  In all honesty, if this cheating story turns out to be true, I might have a little more respect for him – at least I’ll know that he’s not a complete zero.

People are flawed, in fact pretty much everybody is completely fucked up in one way or another.  It’s human nature, it’s always been that way, and it will always be that way – not a goddamn thing we can do to change it.  But there are things that, as a society we can do to make lives better.  For example, I’m all for a broad social safety net, and I think that Social Security and Medicare are, for the most part good programs.

But there is one function of government that it even more important: standing against the forces of oligarchy and their attempts to skim, steal, or otherwise plunder the national wealth.  Teddy Roosevelt knew that, so did Franklin Roosevelt.  But for decades, the United States has not had anybody pulling the levers of political power on behalf of the real lower and middle classes – which I define as about the bottom 95% of the income distribution.  Instead, the goal of the political elites has been to increase the “financialization” of the economy – which is just a cute term for blowing debt-financed asset bubbles and increasing household leverage (aka debt).

Have no illusions, that is real and vicious class warfare against the poor and the middle class.  While what’s been going on is obvious to those paying attention, Wall Street’s utter contempt for real people now has been put to paper (or pixel) in an angry little screed that’s making the rounds on Wall Street:

We are Wall Street. It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable. I didn’t hear America complaining when the market was roaring to 14,000 and everyone’s 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I’ve never heard of anyone going to Gamblers Anonymous because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joes are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We’re going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I’ll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.

So now that we’re going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we’re going to stop buying the new 80k car, we aren’t going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We’re going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.

We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Mainstreet our food supply…will he? and will they?

This isn’t some trader “going rogue,” these guys actually believe this shit.  Read, and then re-read this email, it’s all here, the “we work so much harder than you mentality,” “we make your summers off and landscape businesses possible,” “we push up the value of your 401k,” the fundamental misunderstanding of what real people make, I mean seriously, does anyone get double time and a half?  In the real world 85k is a hell of a lot of money, or at least it would be if serial killer Alan Greenspan hadn’t caused household debt levels to spike to unheard of levels.  That’s what made Wall Street’s go-go years possible.  Robert Reich get’s to the heart of the problem:

The paper entrepreneurs are winning out over the product entrepreneurs.

Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quottas, price supports, bailouts; going private, going public, going bankrupt.

Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.

Our economic system needs both. Paper entrepreneurs ensure that capital is allocated efficienctly among product enrepreneurs. But paper entrepreneurs do not directly enlarge the economic pie. They only arrange and divide the slices. They provide nothing of tangible use. For an economy to maintain its health, entrepreneurial rewards should flow primarily to product, not paper.

And our public policy, for decades, has been committed to ensuring that the pushers of paper, not the developers of products, are not only able, but actually entitled to skim an increasing percentage of the income and wealth of the nation. Not only is the government failing in its most fundamental role of stopping this, it has been enabling and actively encouraging it for decades.  Take a look at this chart which shows that the profits of the financial sector versus the non-financial sector began diverging in the mid-80s, accelerated radically around 2000, crashed back to Earth during 2008, and under Obama’s guidance, spiked back up during 2009.

It is fundamentally backward.  Finance serves one, and only one, purpose and that is to allocate capital in the real economy.  But protecting the finance industry, and encouraging people to leverage themselves and increase household debt levels has become an end in itself, as if there is no real economy, just pushing debt around.  Hey, here’s an $8,000 tax credit so you can overpay for some piece of shit exurban tract house! Praise be consumer credit is finally ticking upward!

So to help the banks, the government encourages as much household debt as possible, but then turns around and doubly fucks us when things go bad.  We have to make it a huge and expensive pain in the ass for consumers to discharge their debt is bankruptcy because otherwise it would be bad for the finance companies!  Much better to allow them to garnish 25% of the wages to pay off the collection companies, even if the supposed “debt” was (miraculously) discharged in bankruptcy, or, hell, never existed in the first place!

Despite owning Congress, getting absolutely every legislative and regulatory blow job possible for 3 decades, these guys pitch a hissy fit at even the most trivial and ultimately useless attempt to reign in some of the worst abuses. I mean, Jesus fucking Christ, if there was any justice in this country 90%+ of the executives on Wall Street would be sitting in prison sleeping with one eye open, but instead we get weak tea “reform” proposals, and another wholesale screw job for the bottom 95% of the income distribution.

With Obama as President (or Bush I and II, Clinton, and Reagan for that matter) you don’t need to imagine what it’s like to live in a banana republic ruled by a handful of oligarchs.  You’re living it.

Slightly Updated

Haven’t Fled The Country, But Did Make Some Beer Money – Win!

I know that up to ten of you have been sitting on pins and needles wondering if my absence from blogging meant that I had pulled the trigger and fled the country.  But no, not yet.  Although, do check in every once in a while because I promise that my first post as an expat will include numerous beach pics as well as photos of every attractive Costa Rican that I see on the street. In truth, I landed a short-term consulting gig (now concluded) which has enabled me to draft this brilliant and insightful post from a table out at a bar with Dire Straights’ Walk of Life as background music. The gig was, of course appreciated, but the timing was a bit unfortunate because this last week or so has been an embarrassment of riches for those of us who blog (a nonprofit activity!) about debt, debt, debt, the economy, and occasionally other things.

The AFEP did, however, make time to watch a few hours of the Goldman Sachs hearings.  While it’s always fun to watch a bunch of preening, narcissistic sociopaths get questioned by a bunch of preening, narcissistic sociopaths, I find Congressional hearings a little  frustrating. The problem is that those who are making an appearance are usually smarter and better prepared than the representatives themselves.  This means that you almost never get a truly dramatic moment because everything is hedged and bullshit – although I did appreciate the fabulous Fab’s unequivocal assertion of innocence and claim that he told ACA about Paulson’s short – seems like a risky thing to do under oath while a lawsuit is pending, but, hey, if Fab ends up in prison on perjury charges, I’ll not shed a tear.

While the biggest news items of the last week were the downgrades among Club Med and the impending implosion of the Eurozone, I found a couple other tidbits to be a little more important – I mean, hey, if the Euro collapses and the dollar strengthens, it’s good for dollar-denominated expats!

First up was a note over at VoxEU that parsed some microeconomic data to look at the relationship between Household debt and macroeconomic fluctuations.  I’m just glad to see that economists are taking it seriously:

There once was a decade in US history in which financial innovation led to a sharp rise in the flow of credit to households. Durable goods consumption increased dramatically as household debt climbed to over 100% of GDP. The subsequent economic downturn was tragic, and the severity of the malaise was closely related to the preceding rise in household leverage (see Eichengreen and Michener (2003), Mishkin (1978), and the chart from David Beim at npr.org).

Research has argued that the “drop in consumption resulted from the unique combination of historically high consumer indebtedness and punitive default consequences” (Olney 1999).

While the storyline sounds eerily familiar to our recent past, it in fact describes the decade preceding the onset of the Great Depression. The form of innovation was not subprime mortgages – it was instead instalment loans related to automobile purchases and other consumer durables – but the parallels are striking. Household debt for Americans went over 100% of GDP only twice in the last century, in 1929 and in 2006.

From NPR Planet Money

You want the answer to pessimism about the medium-term economic prospects for the U.S., there it is.  Economies simply can’t function at or near “trend,” with debt-service payments soaking up such a huge amount of income.  Credit cards, mortgages, student loans, it’s all the same phenomenon.  The essence of leverage is fragility, and a highly levered economy, household, individual, business, and/or investment bank is not robust enough to reverse (or in many cases survive) a deflationary debt spiral.

The close link between household debt and the severity of the recession provides support to a key policy lesson. Regulators must appreciate the role of leverage in understanding asset price movements and macroeconomic fluctuations. Both researchers (Geanokoplos 2009) and regulators (Dudley 2010) have called for a closer monitoring of leverage ratios associated with all asset classes through the economic cycle.

Or as I might say, duh. But at least the economists are saying it now.  On that note, this headline from Naked Capitalism made me smile: Morgan Stanley: Strategic Defaults Hit 12%.  Given my desire that everyone default, immediately, and en masse, this should make me happy, but Yves points out what is likely going on:

Second, it also suggests that some of these strategic defaulters are simply “pre defaulting”, as in recognizing their ability to service the mortgage is tenuous (as in they may be straining to stay current, and recognize that one shock will put them in arrears) and they’ve decided, with the home under water, that it’s better to face the inevitable early.

I tend to agree.  What’s probably happening is that these consumers are cutting back on their biggest debts first, house, and then as the financial crunch continues, they’ll default on others.  So I don’t take the increase as the good news that people really are wising up and walking away, but rather as evidence of across-the-board financial stress, but, hey, I’ll take my defaults wherever I can get them.

A couple other notes, Barry Ritholtz agrees that we are in a deflationary environment:

As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power.  The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.

The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of ZIRP with no inflation.  So long as labor under-utilization is near record levels, they can take their time in tightening.

Or as I might say, no shit, and might I suggest that Ben fire up his helicopter (aka a money-financed tax credit) – it’s ok Ben, it’s the right thing to do.  And finally, what the fuck is wrong with this Stephanie Grace chick?

Glad to be back.

Lloyd, You’re Confusing “America” And “Goldman Sachs” Again

Charles Wilson, the President of General Motors once famously said during congressional hearings that, as Secretary of Defense, he would be able to make a decision adverse to the interests of GM but that such a situation was virtually inconceivable “because for years I thought what was good for the country was good for General Motors and vice versa”.  For decades, Charles Wilson has stood alone as the Platonic ideal of corporate whores and douchebags who have no compunction about plundering the public and the Treasury to serve their corporate ends, because, well, hey if it’s good for us, it’s good for the America.

I doubt I could ever be mistaken for a “fan” of Lloyd Blankfein – If anyone ever put him out of our misery, I’d probably go piss on his grave – but it is hard to deny that this guy has a level of narcissism and grandiosity that is virtually unparalleled, even by Charles Wilson.  Take this comment:

Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work”

Sarcasm? Hardly, this was an unintended – or perhaps fully intended – bit of honesty.  In other words, fuck you all, I’m touched by god, and will do whatever the fuck I want – sort of a “family” of the financial world.  Because of that, there is nothing surprising about this series of douchetastic calls that Blankfein made to various Goldman clients:

Lloyd Blankfein on Wednesday attacked the Securities & Exchange Commission’s fraud charges in telephone calls to ­clients as Goldman escalated its campaign to stem the damage to the bank’s reputation.

One person who received a call from the Goldman chief said he was told the regulator’s case against the bank was politically motivated and would ultimately “hurt America”

Goldman doesn’t need to consider whether it’s lost its way, or maybe went too far on this trade, it’s unpossible!  It was a Goldman-organized trade and that’s all you need to know, and any attack on the trade is ipso facto an unfair attack on Goldman and therefore an attack on America itself.  I’m surprised he didn’t call the SEC “traitors.”  These guys are so demented, so evil, so disconnected from the reality that they are bad for America – and the World – that there is simply no way to deal with them other than by taking away all their money, and throwing them in a pen.

And, that, would be good for America,

The Magnetar Trade – CDOs, Pricing Arbitrage, Vampire Squid, And Hand Jobs

By now, I’m sure everyone knows that the great vampire squid has been civilly sued by the SEC relating to the Abacus trade.  Seems like the sort of thing that, complex though it is, I should make a few comments about.  The essence of structured finance is that it’s possible to allocate and slice up credit risk.  If you combine 10 mortgage payments into a single structured financial product, you can allocate the risk of default to various purchasers based on their tolerance for losing their payment stream.  You can have one investor that is willing to lose their investment if one of the ten mortgages defaults, another that loses if 2 default, and so on and so on, until there is someone that makes out unless everyone defaults.

These are called the tranches of a structured finance product.  They rely on the law of large numbers in order to allocate the risk among the tranches – it is unlikely that everyone in any given group will default, but it’s also likely that someone will.  As such in these structured finance products, it’s cheap to buy the low value “tranche” (usually called equity, then mezzanine) and relatively expensive to purchase the senior tranche, which back in the bubble days were often rated AAA because such a large number of people needed to default before the cash flows were affected.

Many types of debt were structured in this way – mortgage, student loans, car loans, credit cards, etc.  Here’s a chart that lays some of it out.  The AAA tranches were generally sold to investors that could only invest in AAA securities, e.g. insurance companies and pension funds.  While the mezzanine and equity tranches were generally purchased by more risk-loving groups, including hedge funds, wealthy individuals, or were held by the issuing banks.

With that as background, let’s discuss Magnetar.  Magnetar was a hedge fund (they seem to be based in Evanston Illinois) that noticed an interesting fact about CDOs backed by certain residential real estate loans (.pdf):

Magnetar’s strategy was in essence a capital structure arbitrage. This type of strategy is broadly employed in corporate credit markets, and is based on the relative value between differing components of a company’s capital structure (in our case the different tranches or classes of a CDO), and on the supply‐demand imbalances which can be exhibited in the pricing of rated and non‐rated tranches. From early 2006 to late 2007, there was a systematic relative value mispricing between the equity tranches of Mortgage CDO structures, which offered approximately 20% target yields, and mezzanine debt tranches of Mortgage CDO structures, on which credit protection could be bought for between 1% and 4% (depending upon which tranche and CDO).

In essence, Magnetar claims that they realized they could buy the equity tranche, cheap natch!, and hedge the bet by purchasing cheap insurance against the mezzanize tranche.  Thus, if the homedebtors paid, Magnetar made money, and if they defaulted, Magnetar made money – They just didn’t give a shit which outcome came to pass – 6 of one, half dozen of the other.

If true, and I have to assume that the SEC, despite being a bunch of ass clowns, is looking into it, Magnetar almost certainly didn’t do anything illegal.  They noticed a pricing asymmetry, and took advantage of it – good for them.  Unfortunately, that pricing asymmetry that they found goosed the demand for equity tranche mortgage CDOs and threw gasoline on the housing bubble fire.

You may be asking yourself “AFEP, why would the SEC go after the Squid, but not Magnetar, isn’t it the same thing?”, and the answer is only sort of.  What the great Vampire Squid concocted didn’t involve taking the equity tranche.  In essence, Paulson – in the great squid deal of 2007 only made money if the homedebtors defaulted, there was no equity tranche upside for Goldman or its client if they kept paying.  That, as they say, is the difference between being socially malignant pieces of shit, like Magnetar, and being socially malignant pieces of shit and criminals, like Goldman Sachs and John Paulson.  If you look at the SEC complaint, Goldman was scrupulous about leading ACA and, by extension the investors in Abacus synthetic CDO, that Paulson was, in fact, the equity tranche investor – in other words that Paulson was likely playing the Magnetar trade rather than building a CDO that was specifically designed to fail top to bottom.

What does this have to do with hand jobs?  This:

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can’t even get used to the tragedy of having to fly coach. “These people need their trips to Baja, their spa treatments, their hand jobs,” says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. “They don’t function well without them.”

Maybe not, but could we at least make sure that the worst offenders get their hand jobs from their cellmates?  Maybe, please?

Updated slightly.

World’s Biggest Assholes Watch – The Return of Stephen Schwarzman

Welcome back for another edition of the World’s Biggest Assholes Watch, where we keep tabs on the comings and goings of the World’s Biggest Assholes™.  In this week’s edition, we  answer the questions that you need to know.  Has hack Charlie Gasparino redeemed himself, or is he an even bigger hack?  Does Goldman Sachs putting a picture of a manufacturing facility on their annual report make their role in shipping the manufacturing base of the United States to China a “no harm no foul?”  What is the sound of one of Larry Summers’ hands clapping?  Does Jamie Dimon know what qualifies as appropriate attire for a tennis tournament?

Stephen Schwarzman is back!  Personally, I was hoping that he would stay in India, but he came back and threw a shindig at the Waldorf.  Charlie Gasparino was not impressed by the spread.  I stayed at the Waldorf once when I was in New York for a job interview back in the late 90s, and I agree that the food sucks – I also agree that Ketel One is the best vodka.  So, hack Charlie Gasparino has, in my book, moved from true hack to just kind of hacky hack.

Of  course, Steve-o doesn’t just throw parties, he also spoke to the Japan Society and noted that “Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half,” and that “This is absolutely unprecedented in our lifetime.”  Of course, if the government is guaranteeing the debt “assets,” the only people that are getting screwed are the taxpayers – once because they need to pay off Blackstone, and once because they have to pay off the collection agents, as only the creditors get bailed out.  For his role in engineering a mighty double fisting of the middle-class, we declare SS an asshole – but you already knew that. Or make that a triple fisting, as Hilton (one of Schwarzman’s babies) is trying to severely cut back on health benefits for Hilton workers making between 30,000 and 35,000 a year.

Asshole Lloyd Blankfein has taken a break from his efforts to perfect the Aristocrats routine, to send a letter to shareholders who want a greater say in the structure of the company and executive pay.  In true asshole form, Blankfein’s response is “Fuck you shareholders!”  The Goldman Boys are also declaring “clean hands” relating to AIG and betting against their own clients.  Methinks the lady doth protest too much.  But Goldman Sachs loves the manufacturing economy as you can tell from the front image on their recent annual report:This raises the real question, do the poor slobs in this picture realize that their jobs are about to be shipped to China, I mean, why else would someone associated with Goldman Sachs be taking pictures in a manufacturing plant?  Anyone, anyone?  But the best Goldman news of the week came from Businessweek in the article “Not Guilty. Not One Little Bit,” where the hack writer notes that in interviews with several top officials “the overall message was emphatic and unified.”  Really?  You interviewed four top executives about AIG and the mortgage market and got a unified response?  Why, it must have taken almost two hours to prepare those execs for that interview, especially considering “The defense mounted by Goldman lacks critical details, a consequence, the firm argues, of its overriding need to protect the confidentiality of its clients.”  Trust me, it ain’t hard to come up with a unified story, if you can withhold the documentary evidence that you’re lying.  I declare GS, assholes and guilty as hell.

Could it be true?  Is Larry Summers on his way out?  It would be a pity if we didn’t have Larry to kick around any more, but having that disastrous retard as far away from the levers of power as possible would be an unequivocal good.  Speaking of which, Larry thinks that the U.S. economy has reached escape velocity and “The process of recovery seems to have started earlier and more vigorously than was common in such crises.”  Not all agree, of course.  But if true, I say, “Awesome!” and can I have your job when you get the boot?

Jamie Dimon is no shrinking violet, with snaps of him at the U.S. Open Tennis Tournament hitting the wire this week.  More interesting is that Jamie is slated to be the commencement speaker at Syracuse this May, but the communists, really communists, are circulating a petition in protest.  The irony of the protest is that Jamie Dimon is the biggest socialist of them all.  Bailouts 4eva!  On a highly related note, Jamie’s firm led all Wall Street banks on lobbying last year – clocking in at 6.2 million.

Geithner seemed to be a somewhat low profile asshole this week, striking a deal with China to allow a full 3-5% appreciation in the Yuan!  Wow!  That’s certain to bring manufacturing jobs flooding back.  Geithner, much more effectively, went to bat for U.S. based hedge funds and private equity groups, urging the Europeans not to “discriminate.”  Because really, manufacturing doesn’t add value – it’s hedge funds and private equity that matter most.

Richard Fairbank and Capital One suck, and debt repudiation gains another supporter (I think).

Until next week.

Vanquish the Rich, Drive Them Before Us, Take Their Wealth, and See Those Dear to Them Bathed in Tears

In truth, one of the best people I know is a multi-millionaire who started a business, built it up over many years, survived the 1982 recession (barely!), and is now retired in Florida. Perhaps because I am was one, entrepreneurs who build a company have always held a special place in my heart – as I like to say they’ve earned and deserve to keep every penny they’ve made.  Of course, the great fortunes are not only made in the manner of Bill Gates, Sergey Brin, and Steve Jobs.  Plenty of the today’s rich fall into the category of of pimples on the ass of the body economic, Lloyd Blankfein, Jamie Dimon, Robert Rubin – obsequious jackasses and parasites that feed off the real economy built by entrepreneurs.

With that introduction, Yves Smith has one of the best blog posts of the year about how savings rates are inversely correlated with income inequality.  Go read it now, really right now, I’m not kidding.

If you’ve decided to come back, let me tell a story from my college days.  I majored in economics at one of the “preeminent” undergraduate institutions, and during my junior year was discussing the marginal propensity to save with one of my professors.  I suggested that an indifference curve between current and future consumption whose slope changed based on current income would be irrational (can’t remember exactly what I was arguing, but that’s pretty close).  Her reply was, “And yet, empirically, that’s exactly what happens.”

Now, since I’ve actually lived in the real world and been through the highs and lows of life, I understand that the college version of me was a moron.  It isn’t until you’ve managed to satisfy your baseline needs that one even begins to think about putting away money for the future, and even then, there may be positional goods that are necessary (or perceived necessary) for business reasons – anyone ever met a real estate agent that drove a car more than 2 years old?

The kicker is that an entrepreneurial society demands savings – at an aggregate level certainly, but also in a widely distributed way.  Entrepreneurs need start-up capital, usually from their own bank accounts, or family, or friends.  But as Yves points out, a society in which the distribution of income is unequal will have a lower aggregate savings rate, and a society in which the savings are not widely distributed will lock out any entrepreneur that lacks access to business loans (a terrible way to finance a start-up BTW).  Yves speculates – probably correctly – that it’s because the rich (living on interest and dividends crew) don’t feel any particular need to save, and the poor simply can’t – or more likely in my view, if they get uppity and put away a few dollars, the bill collectors will sweep in and take it.

Highly stratified income distribution, low labor market turnover and credit score freeze out from employment, and low intergenerational social mobility are all signs of a stagnant economy where entrepreneurs go to die, rather than thrive.  Eliminating the debt overhang would be a good start to rebuilding an entrepreneurial society, followed by radically shrinking the finance sector.

But I’m not getting my hopes up.