DanRegrettably,
your editor was back at the doctor's office early this morning being
diagnosed with tonsillitis after a lousy night. We were especially
disappointed because scheduled for today was a noon lunch with Dr.
Michael Hudson. His tour of the country is being sponsored by Prosper
Australia and tonight at the Melbourne Town Hall at 6:30 Dr. Hudson and
Dr. Steve Keen will be "lifting the lid on the GFC."
We're not sure if there are still places available. It's free, but you'll have to RSVP. You can do so here.
It's a great chance to hear two independent thinkers offer an
alternative explanation for what's going on, an alternative to the rosy
everything's fine clap trap in the mainstream.
If you're not in
Melbourne or can't make it, don't worry. We're going to take up some of
Dr. Hudson's main contentions over the next month and "unpack them" as
the saying goes. Among other things, he's arguing that we are moving to
a "Neo-Feudal" world where the landlords and the bankers are again in
charge of the economy (and the world).
Their strategy is to get
the rest of the country into as much debt as possible. Whether this is
so they can increase their claims on financial wealth (rents, interest
payments, and capital gains on asset prices) or whether it's a
political program to subjugate the population...that's one of the
questions we were going to ask.
We were also going to ask if the
"de-industrialisation" of advanced Western economies that Dr. Hudson
talks about is a reversible process. Can Europe and America ever
compete with China and Asia in manufactured goods? And if they can only
do so in high-end goods (capital goods, technology, aerospace, IT etc.)
what does that mean for the structure of employment in Western
economies and corporate earnings.
Dr. Hudson, it seems to us, is
right to point out that there is a kind of "Financial Oligarchy" that
seems to be benefiting the most from the financialization of the
economy. But everyone else - those betting on higher share and house
prices to pay for retirement (and pay off huge debts) - may not fare so
well. What should you do? What can you do? More on this in future
reckonings.
Michael Hudson was also on Max Keiser on Friday
discussing his views on how Latvia is getting screwed by the IMF, the
EU, Swedish and German banks (watch YouTube video below or click on
link above):
Michael Hudson's views have been critically reviewed, most recently by Vjaceslavs Dombrovskis who wrote this on "Stockholm Syndrome":
Meet Michael Hudson, a "well known economist and Professor at University of Missouri" (yesterday's Delfi).
The "well-known" part is not, strictly speaking, true - not among the
economics profession, at least. Further, although Mr. Hudson has a PhD
in economics (NYU), during his (long) professional life he hardly
published anything in the economics mainstream. However, I think Mr.
Hudson is to be watched. He is an interesting person. Also a rather
dangerous one.
What makes him interesting is his other affiliation - being a leading Member of Reform Task Force Latvia (RTFL), "initiated by the Harmony Center (Saskanas Centrs)
political alliance" [emphasis mine]. Need I remind you that Harmony
Center has a very strong lead in every polls and national election is
merely a year away? This task force "brings together people whose ideas
… are ahead of our time". There is no shortage of ambition. "We wish a new order" - so says the mission statement [emphasis their].
What
makes Mr. Hudson dangerous is a mix of some very sensible ideas with
populism and extremism. His "Latvia's Stockholm Syndrome", which likens
IMF and EU program to "a declaration of economic war against Latvian
labor and industry" is exactly the kind of stuff that
media love. The 'Syndrome' paper is a set of poorly structured,
rambling attacks on the IMF, EU, neo-liberal economists, banking
special interests, etc. It's sheer venom, near absence of coherent
argument, and overabundance of flashy metaphors would be appalling to
any serious economist. But I suspect it's all exciting stuff to people
on the streets.
Lets start with his sensible
points. There are two. First, he correctly questions the banks' role in
Latvia's economic ordeal. It’s probably true that 'too much has been
lent', so that the sum of banks' outstanding claims is (significantly)
smaller then the market value of all real estate collateral plus
whatever residual claims can be recovered from individual (and
corporate) borrowers. Somebody has to incur those losses.
There
are some very legitimate questions as to whether the present
"keep-the-peg" program is not a way to spread the banking sector's
losses over Latvia's population at large. If you add State Control
(Valsts Kontrole's) report basically
saying that Latvian taxpayers fully bailed out Mr Kargins and Mr
Krasovickis (of Parex), there are good chances that an increasing
number of people would sympathize with this kind of thinking. Mr.
Hudson's second sensible point concerns his frequently recurring
argument that Latvian tax system is severely biased towards taxing
labor and extremely benign in taxing land. Well, I have been talking
about this (not the land tax though) for better part of the last five
years.
What does Mr. Hudson want? There are lots
of slogans that Latvia should "stay away from IMF central planners like
the plague", and become "economically independent". I see two practical
proposals in the 'Syndrome' piece. The first one is, actually, quite a
good one - to introduce a land value tax so as to reduce the tax burden
on labor (e.g. personal income tax).
Land tax
minimizes something that is called "excess burden" of taxes (i.e.
distortions) because land supply is perfectly inelastic. William
Vickrey (a 1996 Nobel prize winner in economics), for example,
advocated replacing nearly all taxes with land value tax to improve
economic efficiency. The second suggestion is more 'fun': "Latvia needs
to act as a sovereign nation and denominate its debt in its own
currency." I presume Michael Hudson means private sector debt, but I
wonder whether it also applies to the IMF/EU loan. This is equivalent
to a default, of course. My interpretation of Mr. Hudson's
justification for this is that unknowing victims of global conspiracy
by financial interests need not honor their obligations.
This
brings me to what my problem with this is. I, personally, have no
illusions that Mr. Hudson is, to put it bluntly, more than a little
Marxist. A central theme of his "Syndrome" piece (and other work) is
workers being ruthlessly exploited by capitalists with the aid of IMF,
World Bank, and their loyal servants - neo-liberal economists. RTFL is
trying to position itself as a liberal (U.S. sense) 'New Deal' force
(read the "mission"), but have no illusions about it -
it is Marxist through and through, rooted in the class-struggle view of
the world. The 'Syndrome' is riddled with things like " "free-market
Bolshevism", "neo-liberal junk economics", "destructive neo-liberal
Lisbon program", and generally equating "business friendly" with "anti-labor".
All in all, however, I think it's good that Michael Hudson is busy developing, as it seems to me, economic ideology of the Saskanas Centrs. Finally, a more serious fight for people's "hearts and minds" is about to begin. The
message developed by Mr. Hudson is simple and attractive to the masses
- as Bolsheviks' ideas, no doubt, were in 1917. I am afraid there would
always be a thriving market for ideas like "it's not your fault you're
poor, it's because of a global conspiracy of the rich and powerful".
Finally, no matter how fundamentally flawed his ideas are, I am sure
Mr. Hudson will be more than a match for Latvia's lethargic
intellectual 'mainstream'.
Now, let me stop right here to tell you that Michael Hudson is part of
an email distribution list I receive called UglyNewWorld. Mr.
Dombrovskis' comments are erroneous and totally biased. He is neither
"dangerous" nor is he a "Marxist" but a vehement critic of the bailout to
U.S. banks, which last year he correctly pegged as multi-trillion
dollar bailout, not an $850 billion bailout. Listen to the interview below done last year and read Michael's article posted on his website, Financial Bailout: America's own Kleptocracy.
Finally, speaking about revolutions, Jonathan Spicer of Reuters reports that a critic of high frequency trading rattles conference:
Seth
Merrin, the outspoken head of block-trading platform Liquidnet, shook
up a trading industry conference -- and conjured up the U.S.
Revolutionary War -- on Friday when he said high-frequency traders harm
traditional market players.
Merrin,
whose private market caters mostly to buyside institutions, told an
audience here that the world's fastest traders fail to provide
liquidity in a broad array of stocks, and when they do, the resulting
smaller bid-ask spreads end up costing institutions that trade larger
blocks of stock.
"The institutions are the British Army in the Revolutionary War walking
down the field in lock-step, proud and in red -- you couldn't get a
brighter color. The high-frequency shops are the Americans hiding in
the woods in their camouflage, picking them off one byone," Merrin
said.
"We all know who won the war ... we kicked their asses," he told a Security Traders Association conference, to laughter.
High-frequency trading -- where banks, hedge funds and independent
proprietary shops use lightning-quick algorithms to make markets and
earn thin profits from inefficiencies in the myriad marketplaces -- has
come under fire this year after politicians and others raised concerns
about unfair markets.
The
U.S. Securities and Exchange Commission is looking into the practice,
which is estimated to account for more than half of overall U.S. equity
volume, and is spreading quickly into other regions and asset classes.
Speaker after speaker over two days at the STA conference had defended
high-frequency trading, arguing it reduces costs, curbs market
volatility, and adds liquidity so that traders can move stocks even in
a crisis such as last year's sell-off. The ultra-fast practice is
generally seen by the industry as the natural evolution of increasingly
electronic markets.
Merrin,
whose market has relatively little high-frequency flow, said the
practice has a "virtually unlimited capacity" to grow because every
institutional buy or sell order creates a supply-demand imbalance from
which the traders can profit.
"For every buyside algorithm that is created out there today -- whose
sole purpose is take this large order, slice it into tiny pieces to
mask it going into the market -- there are now thousands of computers
on the other side that are sniffing that out," he said.
"And those
computers are ... more sophisticated than whatever algorithm you guys
are applying."
This type
of trading does not represent true market making, Merrin said, because
it focuses primarily on the most liquid, large-cap stocks, such as
Citigroup Inc (C.N), American International Group (AIG.N), and Bank of America (BAC.N) -- and far less on others.
"Yes,
they're reducing the spreads, but it costs the institutions" because
they're beating the institutions to the profits to be made on market
imbalances, he said, adding he does not want to see this type of
trading banned.
Rebuttal was quick.
Jamil Nazarali, managing director of electronic trading at a unit of Knight Capital (NITE.O), later told the conference the facts aren't there to back Merrin's claims.
Joseph Rizzello, CEO of the small National Stock Exchange, said
high-frequency traders played a key role in smoothing out the crisis a
year ago, adding that banning the practice would halve trading volumes.
On Thursday, Dave Franasiak, principal at law firm Williams &
Jensen PLLC, who represents the STA in Washington, said Senators
Charles Schumer and Ted Kaufman and other lawmakers raising concerns
over high-frequency trading have encouraged "a sense of perceived
inequality, where somehow the little guys are getting hurt."
Kaufman
wrote in the Financial Times newspaper on Friday that, left unchecked,
"high frequency trading could develop into a systemic risk, becoming
simply too big and too fast to regulate." The SEC, playing a big part
in the Obama administration's financial reform plan, aims to issue a
concept release on high-frequency trading by year end.
Merrin, who admitted there was yet little data to back his claims,
stressed that institutions need to become more familiar with the fast
traders interacting with their orders.
"If the British didn't change their fighting stance, their tactic, and
they didn't choose a different battlefield, they would have lost every
war since then," he said.
The sad part in all of this is
that pension contributions are funding this Casino Capitalism. Money is
going to develop new ways to screw buyside clients that invest
trillions in the markets. Pensioners don't stand a chance in a
neo-Feudal world. I think it's time for a revolution, hopefully one
without bloodshed, that will democratize the financial system by
loosening the grip of the financial oligarchs.
Great read Leo. I find Mr Dombrovskis's retort comical. He mainly just summarized Mr Hudson's points while laughing at them without any further comment on why they were wrong. And by the way, default may be the only solution to this whole mess, as much as some economists may hate it. If most of the debt out there is fraudulent to begin with, as in the money lent out was never really owned by the creditor, then default is the only feasibly prescription IMHO. Of course it is hard to discern what debt is legitimate and what is not, but if in the end if all of the risk of the debt is on the back of a third party, the taxpayer, then it could be argued that none of it is legitimate.
Word.
damn good soap there Leo. more info on latvia:
http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e091011#e091011
looks like this friday is D-day of the catch-22.
The solution is simple but problematic. Governments and individuals must live within their means (cash-flow). I don't know anyone that invests - everyone speculates and gambles. The pension fund managers are no different. How can anyone seek a bonus when they've tanked the capital. We need "Balanced Budget Legislation" (firm - unbreakable) because politicians (everywhere) are only good at cutting taxes and increasing spending - they simply don't know to cut spending and increase taxes. Debt was brought about by a spending problem. Now we face ever larger problems wit the aging population. Costs will skyrocket as government revenues decline. This needs sound common sense managers - not schemers or politicians.
It really goes to the heart of the paradigm. When we value every aspect of our lives in monetary terms, those who control the money, control everything denominated in it. If people understand money for the public utility it is AND the taxpayer is responsible for maintaining its value, they we wouldn't insist on turning all value into money AND we would insist on a public banking system that would use its profits as public income.
Monarchies lost the patent on leadership, due to poor management and now the banks have succumbed to the same hubris. Their patent on inventing money has expired.
Slavery, coming to a country near you.
http://www.youtube.com/watch?v=fO__qoy230I&feature=sub
HUD, Freddie and Fannie, USFed, US Treasury and the banks have done their part, they "own" most of the residential RE in this country. Since they won't be able to get out of the loans, they will be "forced" to become the largest landlord in the world by converting unpaid mortgages into rental properties. The pleasants will be grateful for shelter and serve the king well. The great experiment of personal freedom that has been the USA is winding down. Humans will give up freedom for implied saftey, that can't be changed.
Long live the King.
I think you're a bit over-pessimistic.
Both Taleb and Buiter have recently written to the effect that if debt is not repayable then the answer is to look at equity instead. As Hudson, whom I know well, says, if it can't be repaid, then it won't be repaid.
I think we're overdue a new look at equity, but not using conventional company structures. In Canada, and Australia before that, Income Trusts and Royalty Trusts were extremely successful - until the tax-man cracked down - because pension funds liked the idea of getting their hands on corporate revenues before the management does.
I've been working on using partnership law frameworks (rather than company or trust law) to create what are essentially units of equity redeemable in payment for underlying use value or production of productive assets.
eg REITs redeemable in property occupation/use, or Units in an energy ETC redeemable in payment for energy supplied.
I think that these have huge potential as new asset classes.
http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-cre...
http://seekingalpha.com/article/130066-the-reit-way-to-solve-the-credit-...
and I've been getting a lot of interest.
Essentially it's direct "Peer to Peeer" investment in productive assets.
hey Chris, 1st read your paper back last fall i think through a link over at herr Setser's old blog. it really stuck in my mind.
question: have you ever thought if & how such a framework could work for a new business where labor could be partially paid in 'shares', similar to the brazilian company Semco? thinking more along the lines of building a new economy vs. fixing the intractable problems of the old.
cheers.
Michael Hudson's interview was excellent. It's is long past time for a revolution, long past!