Tag Archives: money power

Noah is a Rousing call for Christian Environmentalism

It has been a grim week for the planet, but the movie Noah offers a glimmer of hope by delivering a spectacular wake-up call to Christians – reminding them that it is God’s creatures who are going extinct and God’s jewel of a planet that is being destroyed.

NoahWith the environmental movement desperately trying to protect the earth, energetic Christian environmentalists would be a welcome addition.

We all know the biblical story of Noah: humans have wandered far from the Garden of Eden, with immoral cities, plundering and killing. The movie Noah adds an interesting twist that makes the story jump into the 21st century – the most visible evil is how humans are befouling the earth. As the movie begins, we find Noah and his family living in an odd wilderness. Later, when they begin their journey to discover God’s vision for Noah, we suddenly realize that the wilderness is a forested area that has been completely, ruthlessly, denuded of trees and top soil by heedless human farmers.

The cruel and disheveled people they meet on their journey are literally starving to death as the earth becomes barren under the weight of human development. Only Noah seems able to recognize the beauty and worth of the animals, plants, and birds that struggle to share the planet with these ravenous humans.

The movie has a series of unexpected plot twists that put everyone in the family under intense moral strain but throughout, the sense of wonder and reverence for the creatures and the fullness of life on the plant remains a constant – right down to Noah’s final words after the flood, asking his family to replenish, not subdue, the earth.

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The Federal Reserve vs. the Tea Party

The Federal Reserve turned down its invitation to a Tea Party.  The Fed looked at the havoc Tea Party Republicans want to create with the U.S. budget and decided to put more sand bags in the economic dike.

Ben Bernanke and his fellow bankers decided on September 18 to keep buying $85 billion in mortgage bonds and treasury bonds, hoping they can keep the feeble economic recovery from collapsing into recession when the Tea Party Republicans refuse to raise the debt ceiling.

The good news is that Fed Chairman Ben Bernanke is trying to keep the economy on track as we head into a serious collision between the Democrats and the Republicans over the federal budget and the debt ceiling resolution – both of which have to be resolved in October.  The bad news is the economic expansion is so weak, a few weeks of political confusion might plunge us back into recession.

Buried in the back part of stories about the Federal Reserve’s decision was the grim news that the Fed’s economists have lowered their predictions for economic growth.  The new prediction is for tepid growth of 2.0 to 2.3 percent this fall – a rate that will not put many people back to work.  The Fed and the mass media have finally noticed what I pointed out last spring in this blog – much of the fall in the unemployment rate is coming from people dropping out of the labor force.

Look at this, the number of people in the labor force, that is, working full or part time or looking for work, fell by 312,000 in August.  As a result the labor force participation rate fell to just 63.2 percent – the lowest it has been since 1978, back when it was pretty common for only one adult in a household to be working.  The impact is staggering – the unemployment rate has fallen 2.7 percentage points from a peak of 10 percent in 2009 to 7.3 percent in August.  The majority of that decline, 1.8 percentage points is from the drop in the participation rate!

Enter the Tea Party/Republican Party.  In utter disregard for the spreading poverty around them, the House of Representatives voted 217 to 210 to slash $40 billion from the Food Stamp program.  This is the latest round in the right’s relentless push to re-distribute income through tax cuts for the rich and benefit cuts for the poor.  As usual, this subversive program is obscured by a fog of words proclaiming a moral crusade against deficit spending and the undeserving poor.  For example, Representative Marlin Stutzman of Indiana, who led the Republican push for the cuts, said “This bill eliminates loop-holes, ensures work requirements, and puts us on a fiscally responsible path.”

What nonsense.  The 44 million Americans, one in every seven of us, who have their income supplemented by food stamps and the 48 million Americans without health insurance are not causing our economy to stumble along.  The Republicans have been using this “blame-the-victims economics” for over a generation.

It only works if the rest of us are unable to see that the root causes of our problems lie in the selfish decisions being made by bankers, hedge fund managers, right-wing CEOs, and the political leaders they support with millions in political donations.  Don’t take my word for it, ask Ben Bernanke.  If the Federal Reserve Board is afraid of the political plans of the Republican Party, then we should be too.

The Stock Market and the End of the Bernanke Put – Part I

Since the 1980s, speculation in U.S. financial markets has been supported by first the Greenspan “Put” and then the Bernanke “Put.”  These puts – informal promises by the Federal Reserve Bank to protect the value of stocks and bonds and prevent destructive crashes, will come to an end if the Fed stops buying housing bonds and allows interest rates to rise this fall.

The wealthiest 1% of Americans, who own about 33% of the total value of stocks and bonds on Wall Street, are upset about the amount of risk they face without the Fed pouring money into the economy.

PART I  To understand why the stock market jumps up and down depending on what Ben Bernanke says, you have to understand the Greenspan “Put.”  In the 1970s, the post-WWII golden age of American prosperity came to an end.  The combination of staggering oil price increases, fierce competition from foreign imports, and resistance to wage cutbacks by unionized workers led to “Stagflation” – an unhappy world of slow growth and high inflation.

Profits for non-financial corporations were squeezed by these trends; in the late 1970s the rate alternated between 2% and 4%, less than half the profit rate of the 1950s and one third of the profit rate of the mid-1960s. 

In response to intense competition from modern factories in Germany, France, and Japan, U.S. industrial firms began what Barry Bluestone and Bennett Harrison wrote about in their ground-breaking book The De-Industrialization of America.  In a process that now seems commonplace to us, many companies closed old, unionized factories in the northeast and mid-west, moving them first to the south and then overseas.

Other manufacturing firms were purchased, their assets sold for cash, and the shell of the company then allowed to go bankrupt.  The blockbuster movie Wall Street captures the ruthless scramble to turn factories into cash in the 1980s.

With investment in tangible production assets becoming more risky and less profitable, American banks and investors began turning to financial speculation as a way to maximize their returns.  The newly elected Reagan administration was eager to help, persuading Congress to loosen regulatory restrictions on the savings and loan industry and stocking the government with regulators who looked the other way when new financial instruments like “junk bonds” appeared on Wall Street.

The explosive growth in these new financial products was fueled by a rapid and costly defense build-up which led to federal deficits of 6.1% of GDP in 1983, 5.2% in 1985 and 5.1% in 1986 – the largest peace-time deficits in U.S. history.  These deficits led to wild speculative excesses on Wall Street, vividly captured in Tom Wolfe’s novel Bonfire of the Vanities.

Alan Greenspan, formerly Chairman of Gerald Ford’s Council of Economic Advisors, was appointed chairman of the Federal Reserve in August of 1987, at a time when the roaring stock market had soared 44% in just one year.  Then, on October 19, 1987, a day after the Hong Kong the stock market collapsed, Wall Street stumbled into full financial panic, losing 22.5% of its value in a single day.  Greenspan immediately stepped in, providing large loans to banks and lowering interest rates.  He announced that the Fed “affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

Greenspan, over the course of five terms as Fed chairman, would demonstrate again and again that the Federal Reserve was ready to pump money into the economy any time the financial markets got into trouble.  This guarantee of support became known as the Greenspan “Put.”  In the world of finance, a “put” is a contract that gives its owner the right to sell a stock or bond at a certain price regardless of whether the market is falling – essentially a guarantee against severe losses.

With the Greenspan “Put,” banks and investment companies could take more risks.  In response, they began inventing the world of derivatives, hedge funds, sub-prime mortgages, and securitization of loans that proved so unstable in 2000 and 2008. 

Next week in Part II, I will look at two examples of the Greenspan “Put” and then show how Bernanke has done even more than Greenspan.

Postscript: Front page headline in the Wall Street Journal on Friday the 11th, the day after I put up this post: “Stocks Surge to Fresh Highs: Skittish Investors Gain Courage From Fed Chief’s Reassurance on Easy-Money Policy.”

Don’t Buy at the Top of the Stock Market

The Stock Market is reaching the end of a long rise in values, so heed the yellow caution signs. There are many indications that when the downturn comes, investors who brought their money late to the party will end up taking a financial bath.

It is not time to run, but it is time to put your cash in a safe place.

Our modern Stock Market is not deeply tied to the fate of the real economy; with hedge funds, e-trading, derivatives, and “shorting,” the markets have plenty of things to do with their cash without worrying about messy things like investing, manufacturing, and selling. However, there is one thing that gets everyone’s attention – the candy machine known as QE 3, the U.S. Federal Reserve program that injects $85 billion into the financial markets every month, providing cheap money for banks to use as they please.

The key is to remember that the third round of Quantitative Easing since 2010 (thus QE 3) does not consist of the Fed buying government bonds, which would facilitate deficit spending and stimulate the entire economy. Instead, QE 3 consists of the Fed buying housing bonds from banks and other bundlers of mortgage bonds, thus giving money to these financial firms to spend on stock market purchases, commodity speculation, and maybe a few bank loans. It is the trickle-down theory in a financial management disguise. Give money to the rich and let them do things that will get the economy moving.

In practice QE 3 has two results: (a) mortgage rates are very low, so if you have a good, steady job you can get a cheap mortgage and, (b) financial firms have a lot of money to invest in stocks. Thus, the stock market has steadily risen during QE 3.

So, when Fed Chairman Ben Bernanke told a Congressional Committee on May 22 that the Fed might decide to reduce the number of housing bonds it purchases at one of the “next few meetings” the stock market trembled. Then, the minutes of the April Fed meeting were released later that afternoon and people discovered that “a number” of officials wanted to begin reducing the program in June. Investors panicked. The Dow lost more than 80 points in two hours and other indexes fell, too. With wild rumors about the Fed’s intentions still flying about, the Dow lost 138 points on Wednesday the 29th and 240 points on Friday, May 31st.

These events essentially confirm what many people suspected; the vigorous rise in the stock market since last fall is primarily a function of the Federal Reserves’ stimulation policy. It must be, because the real world economy is in decline:

The Eurozone, the world’s largest economic unit, is trapped in its 7th consecutive quarter of declining growth;
China’s growth is slowing to less than 7% a year (the smallest rate since 1990);
Cuts in federal spending will reduce U.S. economic growth in the second part of the year; and
The gradually falling U.S. unemployment rate is largely a product of 6.5 million people leaving the workforce.

In this environment, stocks will continue to rise only as long as the Federal Reserve keeps pumping $85 billion dollars into the financial markets each month. A major cut-back in that subsidy is likely to lead to a drop of 10% to 20% in stock prices. That means that if you put money in the market when the Dow is at 15,200 and it rises to 15,500 and falls 20%, then it goes back to 13,000 or less and you lose a good chunk of your investment. Wait and buy at the next market bottom, when you see Washington and the Fed stimulating the real economy.

Politics and Unintended Consequences

Who knew that the German military theorist Carl von Clausewitz came up with a brilliant theory about politics that explains why it is shot through with unintended consequences and unusual twists and turns.

His “fascinating Trinity” offers a unique way to think about political life.

One of my good friends is always cautioning me about my bold statements about politics and what will happen next.  He is a devotee of the notion that life is extremely complex and all actions lead to unintended consequences.  It turns out that Clausewitz, who fought in the Prussian and Russian armies against Napoleon, felt the same way.

After Waterloo, he became the Director of the Prussian equivalent of West Point and wrote On War, one of those complex 19th century books that everyone talks about and nobody reads.  However, he still generates plenty of controversy amongst military theorists – the internet is crowded with debates about his ideas.

Clausewitz describes war as a “fascinating Trinity.”  In all wars, he says, both full tilt combat between major powers and guerrilla wars, there are three dimensions. First is the realm of passion and emotion, anger, loyalty, and violence because war is like a heavyweight wrestling match – direct and brutal.  Another realm is the element of chance, intuition, military genius, willpower, and “friction,” his term which is the genesis of the idea we know as the fog of war.  Finally, there is the realm of rational planning, policy making, and strategic decision making.

The course of every war veers around in a non-linear, chaotic fashion between these three elements. Clausewitz says it is like a metal object hanging on a string that is being attracted simultaneously by three magnets set up in a triangle arrangement.  I saw a demonstration of this situation on a video.  What happens is the metal object careens around wildly, being pulled almost randomly this way and that way between the three magnets.  It is a fascinating multi-dimensional demonstration that smashes the cramped linearity of lines and arrows and circles on a piece of paper.

Thus, war is unpredictable and all planned activities generate unforeseen, unintended consequences. Once a war starts, no one can predict its course.  Therefore, a nation must plan carefully for a war, trying to examine a wide array of possible outcomes to events. It must then be flexible and ready to re-evaluate frequently as the war continues.  He also says that politics is like war, except that there is no (or at least little) violence in the passion-emotion element.  That is why he pens the famous statement: “war is an extension of politics by other means.”

I hope to use this multi-dimensional trinity imagery to think more deeply about politics in the future.  For now, I will use Mr. Clausewitz in some future posts about Iraq and Afghanistan. I believe he can help us understand the disasters that occurred in those countries.

Retreat on Filibuster Reform Helps Fundraising

Majority Leader Harry Reid and conservative Democratic Senators decided not to change the Senate’s filibuster rules when the new Senate met in January – the result is a disaster.

Tired of deadlock in the Senate? Blame the Democrats.

Sure, it is the Neanderthals running the Republican Party in the Senate who filibuster every possible improvement in American life, but the Democrats designed the rules that let them do it. Harry Reid may bluster and complain when a Republican filibuster blocks a nomination or stymies a bill, but every other January since 2007 he and a handful of Democratic conservatives prevent Senate liberals from changing the rules to break the power of the filibuster.

Unlike Roberts Rules of Order, which are based upon the principal of majority rule, the procedures adopted by the Senate in the 18th Century allow Senators to frustrate majority rule by talking without interruption – thus blocking any vote. Senate rules say that only a super majority – it was 66 Senators until the 1970s, now it is 60 Senators – can cut off debate and force a vote.

The filibuster is obnoxious in and of itself because, until the 1990s, the filibuster or the threat of a filibuster was used primarily by southern Senators to block civil rights legislation. As a result, none of the many civil rights bills approved by the House of Representatives between 1869 and 1957 – including voting rights acts, anti-lynching laws, and fair employment laws – passed the U.S. Senate. Only under the pressure of the Civil Rights movement in the 1960s were laws finally passed to outlaw discrimination and restrictions on voting rights.

Now the Republican Party has used the filibuster 380 times since Democrats re-took control of the Senate after the 2006 Congressional elections. Here are examples of legislation passed by the House during the 111th Congress (2009 and 2010) that received more than 50 votes in the Senate, but were blocked by a Republican filibuster – The DREAM Act, which would have provided a path to citizenship for children of undocumented immigrants; the Employee Free Choice Act, which would allow employees to create a legal union by collecting signatures rather than participating in a company-dominated election; a Public Option provision in the ObamaCare Act; and the Buffet Rule, which would have created a 30% minimum tax for individuals with incomes over $1 million.

There was a strong movement among newer Democratic Senators to change the filibuster rule when the 113th Congress started, but in the end Harry Reid, Diane Feinstein, Carl Levin and other conservative Democrats, apparently without any complaint from the White House, settled for a few minor reforms. The impact has been painful. Under the threat of a filibuster, the Democratic leadership has dropped provisions banning assault weapons and large magazine clips from the Senate gun control bill. In March, the President had to withdraw his nomination of Caitlin Halligan, a liberal lawyer who pursued law suits against gun manufacturers, to the U.S. Court of Appeals for the District of Columbia Circuit – a training ground for future Supreme Court justices because of the prominence of the cases brought in Washington.

This frustrating state of affairs allows the Democratic Party leadership to have it both ways – trumpeting its progressive positions during elections – but collecting campaign cash from rich donors who understand that results are what count.  You have to think about how their main constituents are the people that donate millions of dollars for their campaigns – people who are not excited about economic change.

Tax Cheats are Forcing Painful Federal Cuts

Corporate profits have surged since the Financial Crisis, but these companies are using dozens of tax loopholes to starve the U.S. government of revenue – pushing up the deficit and forcing Congress into making painful budget cuts.

One sign of a dysfunctional political system is when major corporations refuse to pay taxes.

As we have every year since right-wing Republicans found that cutting taxes and creating deficits was good politics, there will be an enormous outcry about taxes this April. I propose we turn the spotlight on this county’s biggest tax cheaters – large corporations that think they are doing us a favor by operating in the U.S. instead of Switzerland or Dubai.

They claim to be job creators, but they certainly aren’t tax generators. The federal Joint Committee on Taxation estimates that in 2013 about $154 billion in special corporate tax breaks will be granted through 135 individual sections of the U.S. tax code. This staggering sum is nearly twice as much as the more than $80 billion in spending cuts taking place through “sequestration.”

One example is the Active Financing exemption for multinational banks and corporations, which was renewed as a little noticed part of the tax legislation passed to avoid the fiscal cliff. This exemption allows multinational firms to set up foreign subsidiaries that receive interest and insurance payments, and carry out financing activities for American exports. Citizens for Tax Justice says:

[The exception is one of the primary reasons General Electric has paid, on average, only a 1.8% effective U.S. federal income tax rate over the past ten years. G.E.’s federal tax bill is lowered dramatically with the use of the active financing exception provision by its subsidiary, G.E. Capital, which Forbes noted has an “uncanny ability to lose lots of money in the U.S. and make lots of money overseas.”]

The exemption, which was eliminated in the 1986 Tax Reform legislation signed by President Reagan, was re-enacted over President Clinton’s veto in 1997. It is renewed each year through the efforts of The Active Financing Working Group, a coalition of multinational companies that includes G.E., J.P. Morgan Chase, and Caterpillar. The Working Group paid $540,000 in lobbying fees to Elmendorf Strategies in 2012 according to Senate disclosure forms.

These tax subsidies continue to flow to corporations even as their profits have soared since 2009. General Electric has raked in $81 billion in profits over the last five years and received a $3 billion refund as a compliment to its tax lawyers.

This is not merely an issue of fairness – corporate tax avoidance, which goes on at the state and local level as well, is bleeding our nation’s ability to educate our youth, send kids to college, care for the sick, and support the elderly and the disabled. In an era of economic decline it is a crime.