[P2P-F] Fw: [gang8] 11th Post-Keynesian Conference at UMKC last week

Thu Oct 4 11:57:00 CEST 2012

----- Forwarded Message -----
From: Geoffrey Gardiner <geoffrey.gardiner at btinternet.com>
To: gang8 at yahoogroups.com 
Sent: Thursday, 4 October 2012, 9:55
Subject: Re: [gang8] 11th Post-Keynesian Conference at UMKC last week

Michael, 

Many thanks for taking so much care to give us a detailed report of a fine 
speech. 

Randy’s analysis fulfils our expectations, but now he needs to move on to 
flesh out the solutions, which is going to be hard work. Saying one must tax 
property and capital gains is nowhere hear enough. We need details. We need a 
viable system of taxation. 

Moreover is he not forgetting that if one stops the sort of lending he has 
rightly criticised, the capital gains will mostly vanish as they are the product 
of the lending, and the same is true of property prices? Indeed as regards 
property our plans must now include how to soften the blow for those working 
class people (I include all forms of real work in that category)  who will 
see their house values sinking to below construction cost, as they were before 
credit became easily available. Here inflation is hiding the drop in real 
values. In my street a drop of about ten to fifteen per cent in money values 
over 8 years cannot reflect the 20 per cent fall in the value of money. The new 
values reflect a movement back to sensible prices. Tax the houses more and the 
values will drop further. Moreover a ‘mansion tax’ is a menace if its effect is 
to increase the price of the houses in the lower categories, and that is indeed 
what it is bound to do as the profile of the supply of houses takes 100 years to 
adapt to a change in the profile of demand. The new profile of demand, by the 
way, will cause a lowering of the average standard of housing, quite 
unnecessarily.  

I hope Randy fully realises that no power on Earth can turn a house into 
food and lighting for state pensioners. To raise capital taxes in money, assets 
have to be sold, and they have to be sold to savers if prices are not to 
collapse. Experience has shown, I think, that the scope for capital levies is 
limited to one or two per cent. To illustrate the problem, imagine what would 
happen to the price of Microsoft if one tried to mulct Bill Gates of $20bn. It 
was in 1974 that two Oxford academics published a paper called, ‘Why We Need a 
Wealth Tax’ and included detailed suggestions which would have raised more money 
that the total savings of the personal sector of the economy, which made their 
proposals impossible to carry out. Of course this ineptitude did not stop one of 
them from becoming the chief economic advisor to the Bank of England. 

If you tax savings will people still save? Maybe, as so much saving is 
contractual. 

For the same reasons as above tax, the need for liquidity  on capital 
gains has to be on realised gains, not paper profits.  

If one’s purpose is to reduce wealth disparity there are two ways of 
achieving it. 1. The way done in Britain prior to Nigel Lawson’s tax changes. 
High death duties, the assets sold being bought up by pension funds. It is a 
slow process. 2. Expropriate and use the income of assets to reduce the 
deficits. One might be able to slowly convert the assets into money. 

If one wants immediate results to prevent increased deficits, one has got 
to increase income taxes. Income is what the state spends. And the income taxes 
will have to apply to the middle classes, as they in the aggregate have the big 
bucks. The very rich are few and far between. Even a net family income of 
£70,000 puts a couple in the top 3 per cent of incomes in Britain. You can try 
this out for yourself by feeding sample figures into the calculation scheme on 
the Institute of Fiscal Studies web site. People with this income would however 
consider themselves to be middle class, not plutocrats 

Of course both Romney and Obama funked this one in their debate. Both 
promised to protect the middle classes. MMT economists should not be exhibiting 
the same cowardice. 

Should not there be some attempt to discriminate the good from the bad in 
the business system? A capital gain resulting from manipulation of money is 
surely of a different quality to the community from a capital gain from saving 
and real investment in equity. There was a perfect example of this in the news 
this week. Britain's best performing share in recent years is James Halstead 
plc, a company which has raised its dividend every year for 35 years. It 
increased its final dividend 12.2 per cent. Its success has been entirely due to 
organic growth. I have known the company since 1981 and so far as I can recall 
it has never bought a business. It has sold businesses, and indeed its current 
activity bears little resemblance to what it made 30 years ago. Oh yes, I forgot 
to mention it manufactures. Nor does it borrow much. Indeed it ended the year 
with £38mn in cash, much the same as it had at the beginning of the year, 
despite spending about £5mn redeeming shares. The current dividend is 33 per 
cent of the share price in 2001. Of course there are companies which which would 
love to mount a take-over of James Halstead. Luckily it is family controlled. We 
do not want a tax system, such as we used to have, which would change 
that. 

So come on all. Let us have some constructive, well thought out, viable 
plans for rebalancing society without wrecking the economy in the process. Let 
us get on with the hard work. 

Geoffrey 

rom: Michael Hudson  
Sent: Wednesday, October 03, 2012 11:34 PM 
To: GANG8  
Subject: [gang8] 11th Post-Keynesian Conference at UMKC last 
week 

On 
Saturday, Randy Wray and others gave a set of really good speeches to the 11th 
Post-Keynesian Conference at UMKC. Here are my notes (I’ve added my own comments 
and extended them, I think).

Randy’s 
speech:

The Minsky moment occurs when enough people recognize that the financial sector 
has turned the economy into a Ponzi Scheme. Debts have lost their no counterpart 
in the ability to pay. So they become part of the fictitious capital base.

Sept. 14, 2007: the Northern Rock Crisis. It became clear just HOW AND WHY the 
Ponzi game was 
over.

Failure to deal with this problem turns the “moment” into a permanent 
depression. It is made permanent because there is no endogenous dynamic leading 
to escape. The “solution” must come from outside the existing financial 
environment. (Economists call this exogenous.”) And it must involve a writedown 
of debt to the existing ability to 
pay.

President Herbert Hoover’s Treasury Secretary Andrew Mellon urged that this be 
done by “liquidation” across the board – at sharp writedowns of asset prices to 
correspond to the bankrupt economy’s inability to pay. The Roosevelt 
administration had a more progressive answer, avoiding the disruptions of mass 
unemployment.

The present crisis was 50 years in the making. It began in the 1940s, and 
entered a serious phase in the 1980s. It now consists of Wall Street’s attempt 
to financialize almost everything, layering debt on debt on 
debt.

As property and companies are securitized and pledged to banks for loans to buy 
real estate, raid companies and simply gamble, a rising share of profits and 
value added is diverted to the financial sector. In the United States the 
process was marked by fraud from the outset, starting in the 1980s with the junk 
bond financing pioneered by Drexel Burnham. This was closed down on felony 
charges, as raiders bought forward options to buy – without announcing their 
intention. Arthur Andersen also was closed down for fraud in its Enron 
accounting. All the accounting firms were engaging in approval-for-fees 
business.

Then, the S&L crisis occurred. Every bank that failed had fraud involved. 

            After 
2000, the Alan Greenspan “goldilocks” economy set the stage for fraud. The 
financial sector was thoroughly permeated by fraud. The real estate appraisals 
were fraud. The lawyers were fraud. The liars’ loans were fraudulent (the “lie” 
was put in by the mortgage bankers, not by the borrowers.) And exploding 
interest rates guaranteed a leap beyond the ability to 
pay.

The problem is that the market of honest housing loans is limited – by the 
homebuyer’s ability to pay, and even to make a down payment. Honest growth in 
this market is limited to the population of family-forming age cohorts, 
multiplied by the rise in overall prosperity (enabling larger and better homes 
to be 
built.)

But there is no limit on fraudulent loans. All you need is to sell them – and 
the solution is to find suckers. These were the domestic pension funds and 
foreign banks, who looked up to the U.S. economy and trusted it. 

Most people associate the Mafia with the construction industry.  But a new 
financial mafia emerged at the lending source: the banks. Having found German 
Landesbanken and other gullible buyers of packaged mortgages, fraud absorbed the 
financial sector and its symbiotically joined real estate sector. 

            Fraud 
usually is the most profitable behavior that is going on. So it drives honest 
players out of the market. And the fraudsters use part of their earnings as 
payoffs to the “police”: the regulatory agencies and law courts, culminating in 
control of the political system 
itself.

Minsky’s term for this is Money Manager 
capitalism.

So we are now in the endgame of finance capitalism in its casino capitalist 
stage of “money manager 
capitalism.”

Goldilocks was a fairy tale. “Everything is all right. We have achieved 
post-cycle stability,” when things are not all right at all, and fragility is 
building up to a crash. Trends were supported as things-in-themselves, rather 
than viewing the economy as a holistic overall dynamic. Trends are the RESULT of 
different forces, not a self-directing force in 
themselves.

The public knew about the $800 billion TARP giveaway, which they found unpopular 
when it was approved by Congress. They DIDN’T know about the $29 trillion 
Treasury/Fed bailout of 
loans.

The crisis that has ensued is part of a long-term transformation, characterized 
by Ponzi debt-driven speculation permeated with fraudulent activity, now that 
Erik Holder is not prosecuting financial fraud at the Justice Department, and 
President Obama is doing whatever Wall Street tells Tim Geithner to tell him to 
do.

            So 
what we have is much more serious than merely a “liquidity crisis.” The problem 
is insolvent borrowers. This goes deeper than just a few bad apples like 
Citibank, Countrywide and Bank of America. The debts are unpayable on an 
economy-wide scale – so the U.S. economy is facing a massive insolvency crisis. 

            Under 
these conditions, rescue of banks – which true reporting would show to be in 
negative equity – rewards the reckless risk and fraud in which they have 
engaged. The Fed’s Special Purpose Vehicles have subverted 13(3) constraints by 
buying toxic 
waste.

True, the Fed CAN spend money on whatever it wants, without Congressional 
oversight. The Supreme Court ruled that if Congress does not PROTEST, then the 
Fed’s actions are deemed to have its approval! This is a politicization and 
decriminalization of 
fraud.

In QE1 the Fed bought Treasuries. In QE2 and 3, it is buying toxic waste. It 
seems bout to start selling these at great discount to vulture buyers, or 
shifting them onto Fannie Mae and Freddie Mac. This will require another rescue 
down the 
road.

The problem with these Fed loans is not that they are inflationary, but that 
they subsidize the 1% with a giant free 
lunch.

The peak outstanding was $1.7 trillion in December 2008. But cumulatively, the 
sum was over $29 trillion.  Of this, 40% were “questionable” under 13(3): 
$11 
trillion.

The operative clause is “Unusual and Exigent Circumstances” under which the Fed 
can discount notes, etc., if the borrower cannot secure adequate credit from the 
banking 
system.

The Fed has become the lowest-cost finance to the banking system, with no 
questions asked – and no concern for the viability of loans it is discounting 
and being willing to be stuck 
with.

Fed commitments are as official as those of the Treasury, but is “free” of 
political oversight. This brings into question whether the Fed SHOULD be 
“independent” of 
government.

The problem is that the government itself has become privatized and 
financialized. And in today’s environment, this means criminalized. 

We would have had a crisis even without fraud. But we can’t ignore fraud, and in 
fact it magnified the crisis – using the Fed’s and AG’s attempt to keep 
inflating the economy as an opportunity to take advantage of the government’s 
reckless 
deregulation.

The problem is that the mortgage debt never could have been paid anyway, given 
the exponential growth in debt that diverted more and more income away from 
spending in the “real” economy to pay 
debts.

After the dot.com bubble crashed, the Fed had a problem: how to sustain economic 
growth and prosperity. The fraudulent mortgage sector was a SOLUTION to this 
problem. But the old axiom remains true: The solution to any problem creates 
new, often unforeseen problems. Pumping credit into an already over-indebted 
economy (hoping that it will “borrow its way out of debt” by finding some new 
sector in which to make a killing) provides an infusion of spending power 
somewhat akin to the government running a budget deficit. EXCEPT for the fact 
that when governments run deficits, this NORMALLY involves buying goods and 
services and hiring labor. And it often creates infrastructure and other social 
capital investment. But pumping money into the banking system lets IT lend new 
credit, on which it creates interest, whose payment withdraws yet further 
borrowing power from the 
economy.

The taboo against discussing financial fraud and proposing a “monetary” solution 
to the debt problem (giving banks more money, and then buying their bad loans) 
blocks society from solving the problem. It mutes popular opposition to huge 
giveaways to the banks, that the government could do at much less cost simply by 
writing down the 
debts.

TARP and TALF were unnecessary, if Congress or the Fed would simply have written 
down debts.

Policy solutions

. Debt write-down or 
outright write-off

. Raise the minimum wage. 

Any decrease in employment will be more than offset by the injection of new 
purchasing power at the lower end of the income spectrum where it is most 
needed.

Opponents say, “This will discourage employers from hiring teenagers.” But what 
about minimum wage-earners with families?

. Lower the retirement age. 
This will open the job market for younger people. (The rentiers and deficit 
hawks urge RAISIG the retirement age.)

. Jail the fraudulent bankers, 
above all those of the largest 5 or 9 banks. This will deter fraud. Close down 
the banks, wipe out the stockholders and bondholders.

. Raise income 
taxes on the higher brackets, and shift the tax burden back onto property and 
“capital” gains. This will solve the problem of how to recapture the enormous 
doubling of wealth held by the top 1%. 

. Establish a targeted loan 
program akin go Japan’s MITI.

. Recalculate government deficits so that 
capital expenditures on infrastructure are an asset that reduces the GROSS 
deficit, into a smaller NET 
basis.

However, if you do this, you must include depreciation calculations to measure 
how much the infrastructure is being worn out or obsolescent. And as an 
extension, you may need to include environmental cleanup 
costs.

Discussing the South economies, Manuel Montes 
pointed out that neither Latin America nor India are providing credit for 
industrialization. They continue to de-industrialize. And their agricultural 
sectors remain backward, as do their tax systems remain regressive. Political 
corruption still concentrates power among the leading rentier families.

The recovery of many Asian economies are linked to that of China, especially as 
a result of booming commodity prices. But this merely increases the value of 
mining, agriculture and low value-added manufacturing rather than real industry. 
So the South’s position has not really increased its economic independency, food 
self-sufficiency or autonomy from the North’s/China’s economic 
dominance.

So growth rates for “developing countries” are 
declining.

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