The Gilded Age of Finance

The New York Times has a few articles online today that are really worth the read.
First, since it’s Monday, there is Paul Krugman’s piece. In which he points out the fallacies of this gilded age, as Sanford Weill former Citigroup CEO called it, shortly before the financial system came down. It may have had a gilded outside, but it was a Potemkin villiage nevertheless. Well, in reality is was and still is a gilded age for some. Just think about the bonuses and perks of managers and the dividends some investors pocketed.
Timothy Geithner, and before him Hank Paulson intend to keep it that way by doling out trillions of dollars to their Wall St buddies. In another piece the NYT points out the close relation Geithner has with the Wall St. executives. Not only him! The whole administration is full of such people. All with very close ties to Wall St., all having a financial stake in the success of the policies that they push and with a remarkable number of ex-Goldman Sachs and Harvard people.
Coincidence? Hardly. Got to keep the Ponzi scheme running and create bubbles with phony financial ‘instruments’ that only serve to make things opaque and difficult so that no one notices that this is just a device to siphon-off the money from investors (mainly your pension fund) to a few hand-picked members of the financial guild.

Idea for a New Economy

Our economic system is called Capitalism (for a good overview of the term Capitalism see wikipedia). It is equally clear that in the financial sector with all its deregulation and non-interference by regulators, we have seen Capitalism at its worst. If anyone needed proof that laissez-faire à la Milton Friedman is baloney then you are seeing the results of this before you.
With all the wealth that has been destroyed and which still we destroyed, it should have become clear that the current economic system does not work and that a new approach to doing things is needed.

To come up with a new solution, it seems in order to do a analysis of the problems caused by our current economic system.

Financial Issues

To live (and I mean that literally) you need money. To get that money most people have to find a job that pages wages they can live on. This is becoming more and more difficult and with the current economic downturn, I would say, it is an illusion form many people to find a job, or a job that they can live on.

Health Issues

Our way of living leads to people becoming sick. The lifestyle is based on consumption of goods. Consumption is a stress reliever. The stress is being artificially induced in the working place, where people work as wage slaves just to pay their mortgages, leasings, student credits and consumer credits.
Many health-issues today are caused by this setup. Many of them may just disappear once the stress is eliminated.

Resource issues

Natural resources are for the most part non-renewable. This is true for many metals needed in high-tech stuff like your PC, plasma screen, iPhone etc. It is also true for oil from which many plastics, drugs, etc are made. Without those things, there is no modern society, you will have to go back living as in the 18th century.

Environmental Issues

Our way of living produces too much waste and too much pollution and too much. Those in turn hurt our ecosystem. This affects not only the habitat of wild animals, but also the habitat of humanity. Today, the ecological footprint of many humans, especially in the countries that have embraced the capitalistic system, is way too great. This must be changed.
Environmental issues are also created by the way this work is organized. The commuting to and from the workplace not only takes hours, it also puts a stress on people and on the environment.

With the above, it is easy to see that we are in a vicious cycle with factors that do reinforce themselves and make it increasingly difficult to keep it working. In fact, we may have reached the breaking-point of the system. Once past that, there is no way it can be « fixed », more and more resources would be needed to keep it working. The only solution is to stop that madness, step outside this destructive logic and come up with something new. Here is a first idea of what could be done.

Possible Solution

(1) Reform social security. Scrap different programs for people in need and Medicaid and pay every US Citizen a monthly “basic income” of USD 2800, which will cover basic needs for housing, food, clothing. This way people will no longer have to work to make a living. The basic income will not be taxed;
(2) people may earn an “additional income” by working on their terms and as much as they want, depending on their needs. This “additional income” will be taxed, but only lightly until it reaches USD 250,000 , see (6);
(3) Freeze all mortgages for primary homes in trouble and restructure them, so people can afford them, there will be no need for foreclosure;
(4) Set the maximum interest rate for debt that can be charged to 15% p.a., define maximum allowable charges;
(5) Tax consummation through VAT,tax Carbon (di)oxide emissions, tax transactions (wiretransfers, stock-exchanges, etc);
(6) Tax additional incomes (see 2) from 33,600 to 250,000 will be taxed lightly, starting at 4% ending at 12%. Incomes above 250,000 will be taxed progressively starting at 12% reaching 79.9% at 5mln. Higher incomes will be taxed at 99.9%;
(7) Tax large fortunes – above 100mln – progressively the higher the income, the higher the tax, starting at 35% and reaching 79.9% at 2bln;
(8) Tax large heritages progressively starting at 35% reaching 79.9% at 2bln. Limit amount that can be inherited to 200mln;
(9) Ban lobbying by corporations in any legal shape or form. Corporations were not meant to benefit from any right guaranteed in the bill of rights. They are neither “natural persons”, nor do they belong to “the People”. Therefore they cannot “petition the Government”.

Now get us out of that!

Where is the economic growth going to come from? Even if the financial crisis were solved today and credit flow restored would economic growth follow and if yes, would it be sufficient to pay off all the debt that has been accumulated?
I suspect that the growth rate would need to be very high if we were to return to the economy we had. In addition, it would have to be growth around the world. That would put a strain on the environment and certainly aggravate climate change. In the process of achieving this growth, natural resources would be used up pretty quickly, as an diagram on the newscientist.com (information via ritholz.com) makes clear.

As an example, Indium is used for LCD Screens. Resources of Indium will be depleted in 13 years, if the world consumes at the current rate. It will be depleted in 4 years, if the world consumes at half the current U.S. rate.

If those figures are correct, it would mean that economic recovery is not possible unless

  1. you can either grow Indium on demand out of thin air; or
  2. we find a way to get Indium from other planets;

Let’s just hope none of these require more Indium than we have.

A Name Keeps Popping Up

It is interesting that the name Goldman Sachs keeps popping up in all important places where the financial crisis is concerned. Ever since I learned that Loyd Blankfein was the only chief executive in the room in the meeting at the New York Fed on September 15, 2008 when AIG was discussed.
Subsequently, I noticed other former Goldman Sachs people in important positions. Of course, Hank Paulson, John Thain are, or rather were, the most visible ones.
Currently, there is a list of former Goldman Sachs people and where they went in the works. See goldmansachs666.com.

Still Cooking the Books, are we

An article on Zero Hedge points out that the Fed is taking losses on the commercial and residential mortgage loans it took into its Maiden Lane vehicle. Read the Fed statement here (pdf).
As the article points out, this begs the question that if the Fed is taking losses, why are commercial banks booking profits?
Considering that housing prices will probably not bottom out any time soon (see Barry Ritholz’s post), one might conclude that the losses that will be coming to the banks will just wipe them out entirely.
So, why not find a better use for taxpayer money than shoving it down the bottomless pit of bank-“bailouts” where the payments are just are re-purposed and doled out as bonuses. Considering that Fed people and Treasury people are not stupid one might argue that “this is just the point”. Who cares if the banks go down as long as a legitimate reason can be found to funnel big bucks to rich investors.

Evidence of Fraud in Lehman and Bear Stearns Collaps?

Bloomberg seems to think so. The article claims that a considerabel increase in failed trades, i.e. shares that were sold but not delivered withing three days, where traceable to naked shorts and that complaints to the SEC were not followed up by the regulator.
The obvious question, though, is not addressed in the article. Who did those naked shorts?

It's Credit Default Swaps again

The market for Credit Default Swaps does seem to predict a hard time for sellers of these derivatives as the market think that defaults will be likely, but payouts low as Bloomberg reports.
It may be that there is another round of write-downs of CDOs coming. There are mounting losses with credit-card companies such as American Express whose customers default on their debts in ever greater numbers. If those CDOs are insured by CDSes, e.g. by AIG the write-downs will be off-set only partly by the CDS payouts if the CDS sellers cannot pay them. I wonder how much AIG FP, ehm the U.S. Taxpayer, will have to cough up in this case.