Quips of the day - boom and hype

Paul Krugman used "prophets of boom" and "hype springs eternal" in his New York Times column of 2002-04-30, "Herd on the Street", also published in "The Great Unraveling", p. 75.

I think Krugman is a master of the English language as well as of economics.  Of the latter, his own Cassandra-like predictions have come true more often than not.  The people in power didn't listen to his warnings, he was right, and they still don't listen.

U.S. oligarchy, history repeats itself

"The Penguin democracy was not ruled by itself: it obeyed a financial oligarchy that put its opinions in the newspapers, and held in its hand the deputies, ministers and the president.  It was the final power in the finances of the republic and directed the foreign policy of the country."

Anatole France, L'Ile des Pingouines (The Isle of Penguins), 1908
My translation based on Google Translate

"La démocratie pingouine ne se gouvernait point par elle-même; elle obéissait à une oligarchie financière qui faisait l'opinion par les journaux, et tenait dans sa main les députés, les ministres et le président. Elle ordonnait souverainement des finances de la république et dirigeait la politique extérieure du pays."

Or as Jean-Baptiste Alphonse Karr wrote in 1849:
"Plus ça change, plus c'est la même chose."
http://en.wiktionary.org/wiki/plus_%C3%A7a_change,_plus_c%27est_la_m%C3%AAme_chose

Default Social Security but not China?

A company was founded that used bonds for its financing rather than stocks.  It issued bonds for various lengths of time: short term to smooth cash flow, medium term for starting new projects, and long term for capital improvements such as office buildings and factories.

When it began hiring a large number of people, it started a retirement and disability insurance fund for its employees.  It paid half of the premiums and collected the other half from the employees.  All the premiums purchased short-term bonds of the company.  Essentially, the company used the premiums to smooth its cash flow.

This went on for several decades.  Some employees never collected because they died before retirement.  Others collected for a few decades after retirement.  Few complained about the arrangement.

Then the company hired a new CEO.  He looked at the retirement fund and decided that instead of paying interest on the bonds of the fund, he could use that money to increase his own salary.  He also found a loophole in the decades-old contracts that allowed him to not pay the principle on the bonds.  He could apply it to his own salary.

There was a big hue and cry from current retirees about having their retirement checks reduced, but the votes of the bonds were controlled by the company, not the retirees.

Meanwhile,the holders of the higher interest bonds, the big banks and the foreign governments, including China, were assured that the company would meet its regular interest payments and pay the bonds in full on maturity.

Capitalism and socialism - let's get our definitions straight

A survey polled people on how they felt about capitalism and socialism - positive or negative.  But did the pollsters give a definition of these two terms or ask respondents to give their own definitions?  I think not.

See "Is Rush Limbaugh's Country Gone?", Thomas B. Edsall, New York Times, 2012-11-19.

Capitalism is gathering  resources to do something, whether it's to start a neighborhood grocery or to start an airline.  Capitalism is not the buying and selling of stocks and schemes based on the stock; that is finance.  Finance can raise capital, but the secondary markets of that capital are not capitalism.

Socialism is the government providing all the resources to do something and controlling how those resources are used.  I don't think there is a country in the world where that happens for all projects.  Even China has private capital ventures.  Social welfare is the government providing various safety nets or investments that help people with needs that "capitalism" doesn't provide to everyone.  Most developed countries have capitalist economies supported by social welfare programs.

Think of LM Ericsson in Sweden, Nokia in Finland, Siemens in Germany, and FIAT in Italy.  These large capitalist companies aren't going away.  Well, maybe Nokia will go away but that's because of technology, not government interference.

And many of these social welfare programs depend on a large number of private organizations, large and small.  Germany has hundreds of insurance companies underpinning its health care.  England has thousands of physicians in private practice who provide government listed services.

What I find ironic is that proponents of "capitalism" don't understand how "socialism" makes "capitalism" work better.  If there weren't government-provided roads, sewers, schools, and yes, regulation there would be chaos.  Chaos is something capitalists do not need or want.  If there wasn't government-sponsored research, many new ideas would never even reached the capitalists who would implement them into products.  If there is a good public health care system, then corporations don't have to fund them directly at great inefficiency.  Wasn't it G. Richard Wagoner of General Motors who said that he wasn't an auto executive but a health care executive?  See "U.S. Firms Losing Health Care Battle, GM Chairman Says", Ceci Connolly, Washington Post, 2005-02-11.

Be careful how you define things.  If you define things incorrectly or too narrowly, you may miss out on many opportunities for a better society.

Freedom of anonymous speech?

I was inspired to write the following by "How I Became Stephen Colbert's Lawyer -- And Joined the Fight to Rescue Our Democracy from Citizens United", Trevor Potter, 2012-05-23, speech at the Annual Meeting of th American Law Institute.

I wonder what the writers of Bill of Rights would think of the Supreme Court interpreting the first amendment as "freedom of anonymous speech".  Speech is meant to be heard.  If it is heard, those hearing it know who said it.

Second, if someone started a whisper campaign that disparaged you or your business and you found out who and were able to afford the right lawyer, wouldn't you probably win a defamation case?

If you started a campaign making false (or even damagingly true) accusations against a large corporation, wouldn't its lawyers be doing their best to get you into court?

So, why do large corporations or wealthy donors get to make scurrilous, misleading statements without identifying themselves or being held accountable for libel?

Oh, I forgot.  Although corporations are people, they are super-people who are above the law.

Beginning of the end of finance as we've come to hate it?

Today, Greg Smith is resigning as Executive Director of Goldman Sachs.  He wrote "Why I Am Leaving Goldman Sachs" for the New York Times.

The Coffee Party Facebook page provided a link to this.  I'm sorry that I can't give you a URL for it.   What struck me about many of the comments was that many seemed to equate finance and capitalism; they are not the same.  Finance is a tool of capitalism, but to mix metaphors, it has become the tail wagging the dog.  See my blog entry "Finance is not capitalism", 2012-12-07.

The repeal of Glass-Steagall put a lot of muscle into the tail, and at the time only a few saw this coming.  Sen. Byron Dorgan (D-ND) warned about this in a Senate speech in 1999.  See "Byron Dorgan's Prophetic Words", Moyers & Company, Lauren Feeney, 2012-01-27.  I recommend watching the full show: "How Big Banks are Rewriting the Rules of our Economy".

For more of the gory details of the collapse of finance, see "All the Devils are Here", by Bethany McLean and Joe Nocera.  See also my quote from the book about the plea from Wall St. for more regulation!

Finance is not capitalism

I've long thought that Wall St. and capitalism were two different entities. Wall St. is almost exclusively about moving money around, not about raising money to put into businesses that provide goods or services. The latter is secondary to Wall St.

Today I read/saw a good distinction in "An Unexpected Fate for Occupy Wall Street". Lee Munson, author of "Rigged Money: Beating Wall Street at Its Own Game", was interviewed on Yahoo Finance's Breakout.


Munson said that "finance is supposed to be grease for the wheels of capitalism." Now capitalism is a tool of finance.

One of the comments was on buying IBM shares long term is not investment. My response was

"It's a personal investment in that you hope someday somebody will pay you more for your IBM shares than you did. IBM gets no new money. Your buying IBM shares gives liquidity to a previous buyer. Liquidity of shares does make it easier for IBM to borrow money or to issue new shares."

Another interesting comment was "New name for Wall Street: FRAUDWAY".

Oh, about Occupy Wall Street, Munson thinks it will evolve to be a watchdog group by 2013.

See also "Beginning of the end of finance as we've come to hate it?"

We're sorry, Wall Street???

For a marvelous piece of sarcasm, read, "Dear Wall Street, We're sorry" by David Weidner, MarketWatch, 2010-01-26, subtitled "How the Little Guy Ruined Wall Street".