Dr. Keynes Was Right

It's the Distribution, Stupid
MAY 7, 2012 10:19AM

Dunce Caps

Rate: 3 Flag

Mr. Market is popping xanax and quaaludes like Jelly Bellies (from bygone years; he's kept an ample supply) with the results from France and more agita in Greece.  Seems an opportune time to discuss what the mainstream pundits avoid.  How did we get here?

The mainstream pundits, by and large, and civilians nearly to a man, when asked would say "the banks crashed because of the subprime mess".  And, as the proximate cause, that's not too wrong.  But doesn't follow the breadcrumbs back far enough.

The first step back up the trail, is to ask why subprime?  It's been documented that mortgage companies and banks set off to loosen requirements (ultimately, to "declared income" subprime ARM instruments) in order to satisfy the demand for CDOs derived from home mortgages.  Why?  Because the so-called "sophisticated investors" (that's how they're described whenever some entity goes to place shares or notes to a select few), are just as gullible as retail plungers.

Those with accumulated wealth, especially when the accumulation is multi-generational, adopt an entitlement attitude toward their positions; economic, societal, and political.  Mitt isn't an outlier, he just lives, as they all do, in his own bubble.  The demand for housing CDOs (and credit default swaps) derives from conflicting (although not acknowledged in the minds of the bubblists) demands:  maximum return with minimum risk.  They wish to live off the fat of the land, forever.  As stated in this endeavor many times, return on invested capital is only real (as in "reality based decision making", anathema to Dubya and Dick) if the capital (aka, moolah) is used to build or acquire physical goods (equipment is a good description) which increase productivity.  (Aside:  it's well documented that service sector is the least productive.  Betcha didn't know that!)  Make more stuff cheaper or make the same stuff even more cheaper.  Either way, capital earns its reward.  The cost-cutting approach is anti-growth, of course, and kills the golden goose (aka, the middle class) in due time.

It was demand for mortgage CDOs that drove the economy off the cliff.  But why?  Why did capitalists dive into them to such a degree?  The answer has to be:  capitalists couldn't find productive uses for capital in productive investments.  I'll say that once again:  those with accumulated wealth (people and corporations-is-people) couldn't figure out how to be productive investing their wealth.  Adam Smith should be rolling in his grave.  So far as he was concerned, the only justification for capitalists was their superior ability to make better use of wealth.  Pure and simple.  But, our simpleton capitalists of today can't do that.

As a result, they turned to specifically unproductive uses of their moolah.  Remember, the only way a household can pay a mortgage is to forgo other expenditures.  The larger the mortgage payment, the less it spends on movies and cars and even food.  Mortgages, from a macro-economic point of view, are a zero-sum game.  Yes, there are those ads on the TeeVee which claim that each house "creates" one job.  I suspect that's a very fuzzy number, derived from questionable sources.  What matters, in such assertions, is whether other uses of the funds would have a greater or lesser multiplier effect.  Physical productive investment is greater.  Take my word for it.

Let's walk another step back the breadcrumb trail.  Rather than let Dubya have a recession, Greenspan crater interest rates in 2001.  That should have led to a boom in real investment, one would think.  But, on further reflection, all that did was increase the spread between "safe" housing investment and Treasuries.  For all those wimpy capitalists, Treasuries were no longer the mattress-place to hide cash.  Housing now became the place.  In order to do that, more CDOs had to be manufactured by mortgage companies and banks.  And so they were.

Would all those CDOs been marketable without the complicity of the credit raters?  Of course not.  But they relied on the mortgage companies and banks to play by the rules, long established.  They weren't, and the credit agencies didn't really want to know.  

The living off the rising equity in the house syndrome took hold, big time.  During Dubya's reign, median income continued to stagnate, even falling some years.  The middle class was being butchered, and it didn't even whimper.  How many of you, dear reader, took out home equity loans to pay for fishing boats, cruises, and new cars?  What you should have been doing is voting Blue State, but you didn't.  You didn't look beyond the end of your dick, nicely risen on home made Cialis.

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If you check the cash flows, you'll see that capital moved to CDOs in response to Greenspan's interest move.

The "artificiality" of interest rates remains one of the most contentious in economics. While the quants look at standard deviation as "risk" (and the prime reason they got it so wrong), "risk" is the product of real world events. For housing, it was that the mortgage companies gamed the system, whether they did so in plain sight or otherwise.

The demand for CDOs is documented to have increased their production. The demand resulted from capital's flight from physical investment in plant and equipment. That's just a fact. Capitalists are pussies.

So long as China, India, etc. continue to generate free funds, the price of debt will continue to fall. Never forget that auctions of Treasuries are just that. The Chinese can stuff the money in mattresses, but they won't. The imbalance between capital and productive investments continues.

The fact is, with the accelerating developments in tech, the longevity of assets continues to shorten. And with that shortening, the lower the value of those assets. Long term continues to march back toward short term. Capitalism is on shaky legs. With automation "displacing" yet more labor, demand for consumer goods (the only ones that matter) shrinks. And it doesn't matter that China/India have an "emerging middle class". They can only get away with currency manipulation for so long. A country's currency is only as valuable as the products produced by that country.
Good critical analysis "on the level of market objectifications," as the poststructuralists used to say. But you can keep going back and back and never get to the deeper crisis trends in capital. For that you need to look beyond even the "Blue State" perspective, I'm afraid.

Exactly my take on the "take" from this robbery. The Bush tax cuts exacerbated the problem by putting even more capital in the hands of the coupon-clippers -- and god only knows where we'd be if he'd gotten his way with privatizing Social Security.

Under traditional investing rules, an argument can be made that might actually have helped stimulate growth. But that's no longer the case; not since "investors" became speculators bent on exorbitant rates of return. Anything less than double digits is unacceptable, and 100% rates of return on short term "investments" is expected.

When capital is gamboled and gambled away, when it is "invested" in garish $1000 tees and $120 million dollar artwork, there are and will be dire consequences. But alas, Freemarketeers are either too ignorant or too willfully blind to see this, and thus they are ready to double down on their horrible bets. They are like children gorging themselves on cake and ice cream at a birthday party, and then complaining about their aching bellies.

A first and obvious step toward salvaging the American economy would be to let the Bush tax cuts die an unnatural death. An even better step would be to re-institute Eisenhower tax rates on the wealthy until the deficit is under control. I wouldn't bet the farm on either of those things happening -- certainly not with this Congress.
It will depend largely on whether Obambi gets his nuts back. Certainly, any sentient being sees the object lesson in Europe for the efficacy of "prosperity through austerity"!!! Even polls of businesses say their biggest issue is lack of demand. D'oh!!!

But, then, if you've got billions stashed away, deflation is the painless way to prosperity.
Frankly, I love it when the wingnuts talk about the horrible overburden of government debt. No less an authority than PIMCO says that the total amount of ALL government debt outstanding is only 14% of the total. This is equal to ALL of the credit card debt. So, outside of this 28% total government and individual debt, we have 72% corporate/financial debt -- much of which is in repos and other exotic instruments. And that's why the total par valuation of these exotics is worth well over 20 times the world domestic product.

To this day, the "too big to fails" are leveraged far beyond their net worth, perhaps not 30x+, as Lehman Brothers was, but big time nonetheless.

The most accurate description of the housing mess in a simple form can be found by watching INSIDE JOB, the movie.

And yes, I forgot to mention those crushing interest rates on T-Bills -- 0.1%. And if auerole wants to short treasuries, I know some sure fire exotic ETFs for him.
Now, now Lefty. We have standards of comportment here.