The brave new world of finance-4: From social being to consumer

(For previous posts in this series, see here.)

In the last post, I suggested that sending out checks for $600 to each taxpayer, especially those who don’t need it, and then encouraging them to waste it, hardly seemed like a coherent economic plan. Such a policy can only be understood as a subsidy to the business sector disguised as a benefit to individual taxpayers. We are merely conduits through which money is given by the government to Wall Street.

It was not always the case that governments responded this way. The US has met greater social and financial challenges before and responded quite differently, most notably the WPA (Works Progress Administration) program, begun in 1935 to get the country out of the Great Depression of 1929. “[T]he WPA provided jobs and income to the unemployed during the Great Depression in the United States. The program built many public buildings, projects and roads, and operated large arts, drama, media and literacy projects. It fed children, redistributed food, clothing and housing…About 75 percent of WPA employment and expenditures went to public facilities and infrastructure, such as highways, streets, public buildings, airports, utilities, small dams, sewers, parks, city halls, public libraries, and recreational fields. The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 buildings, and 700 miles of airport runways. Seven percent of the budget was allocated to arts projects, presenting 225,000 concerts to audiences totaling 150 million, and producing almost 475,000 pieces of art.”

But those were days in which the collective good was more valued. Can you imagine that they even thought that spending money to provide cultural enrichment to the general public was a good thing? How quaint! Nowadays, we sneer at such an approach. What is considered good is not to have people be able to go to a library or a park or to enjoy a concert or play, but to get them to go to shopping malls. Nowadays, people are urged to not see themselves as part of a community, a social fabric, a collective. We are taught to see ourselves as ‘consumers’ whose only purpose is to accumulate private goods. When did that strange word ‘consumer’ come into vogue as a means of describing people? Its popularity is a symptom of how we are expected to see ourselves as merely voracious organisms, a species of bacteria, whose purpose is to eat up products to make the business sector happy. These days the purpose of a ‘stimulus package’ (as it is euphemistically called instead of the more accurate ‘let’s all waste money together’ plan) is to serve as a subsidy to business. The government wants people to use the money to buy junk they don’t need.

The notion that I, as an individual, have an obligation to spend money to ‘stimulate the economy’ strikes me as insane. I do not have to do anything of the sort. I have no obligation to goose up the economy by spending myself into the poorhouse, just because it is good for the stock market. As I see it, my obligations are to work productively, be a good citizen, serve my community, live within my means, and save for my family and the future – the kinds of things that Benjamin Franklin would have approved of. It seems blindingly obvious to me that the less I spend on unneeded goods and services, the better it is, both for my own financial health, the health of the community, and the long-term health of the planet. And yet, every muscle of government and business propaganda seems to be aimed at convincing people of the opposite. In a way one can understand that. When one is trying to convince people to so something that goes against common sense, one has to pull out all the propaganda stops. Thus the news media report with approval, and even glee, if people go on shopping sprees at Christmas. They are thrilled to tell us about people maxing out their credit cards buying gifts for all and sundry. They are downcast if people decide not to spend money they can’t afford.

The government is even being urged to call the $600 check a ‘bonus’ rather than a ‘tax rebate’ since studies indicate that people think of a bonus as ‘free money’ and are thus more likely to spend it, whereas a rebate is seen as your own earned money being returned to you, and is thus more likely to be saved.

The sad thing is that some people have actually bought into this notion that their proper role is to serve as engines to drive the consumer economy. In interviews, I hear people actually blather on about how they feel they should immediately spend their $600 refund check so that the economy benefits. They have swallowed the whole bogus story, hook, line, and sinker.

It seems clear to me that we have ceded control of the economy to the worst elements of the financial world, by taking it away from those who see it as serving the long-term well-being of people by encouraging sound business practices, and handing it over to people whose main goal is use money to make money, a financial pyramid scheme that depends upon the collusion of the government, a few big industries, and the financiers and other money people of Wall Street. We see now the government essentially using the money of ordinary people to bail out (and thus essentially reward) the scandalously risky behavior of the financial sector that has been driven by greed.

British comedians John Bird and John Fortune show in this satirical interview how the banking and finance sectors recklessly siphon away people’s money for their private benefit, confident that if things go badly wrong (as they have) the government will bail them out using public funds. The Northern Rock they refer to is the big British Bank that got into trouble due to the current subprime mortgage crisis and had to be bailed out by the British government.

Another example of how the government’s priorities are to maintain the profits of a few at the expense of the financial health of the many can be seen in its attitude to single-payer health insurance plans. There is absolutely no question that this would be not only provide overall better health services to the public at lower costs, but would also be hugely liberating for business. (See here for earlier posts dealing with this issue.) The employer-based health care system has to be the biggest albatross dragging down American business competitiveness. And yet, the stranglehold that the health insurance, pharmaceutical, and medical industries have on our government, and the huge profits made by them at everyone else’s expense, means that the current system continues without even a serious challenge to its existence, even as the economy gets dragged under. The ruthlessly exploitative health care industry has been helped in their efforts to preserve their lucrative cash cow by the Villager propaganda, endlessly repeated, that America provides the Best Health Care in the World and that Americans would never support a single-payer system. These are all completely unjustified assertions, but they are repeated unquestioningly.

Next: The rise of the ‘bubble economy’.

POST SCRIPT: Flight of the Conchords

Those two wacky musical comedians give a quick summary of the Lord of the Rings.

The brave new world of finance-3: The ‘free money’ stimulus package

(For previous posts in this series, see here.)

Clearly I am not the only one that thinks that current fiscal and monetary policies are not only unsustainable but also immoral and that their priorities are completely out of whack. French President Sarkozy, following the discovery of the speculative trading and fraud that resulted in losses of $7 billion at one of France’s largest banks Societe Generale, also called for an end to this mad, reckless way of thinking, where short term profits trump everything else.

“The point of a financial system is to lend money for economic activities, which, in turn, generate profits,” Sarkozy told a gathering of French nationals at the French embassy [in India].

“It is not to go and speculate on different activities which create enormous flows and profits in a few hours,” he added.

“If one can make profits in a few hours, one can also make gigantic losses in a few hours as well. And it is time to realise that (we need) to insert a bit of wisdom into all these systems,” the president said.

Because of fears that the US is headed for a major recession, we currently have the Bush administration and the Congress planning to pass a ‘stimulus package’ to stave that off. A major recession would undoubtedly be a bad thing for ordinary people since it is likely to result in many people losing their jobs, creating widespread hardship. But the current plan seems to be to for the government to spend $150 billion by mailing checks for $600 to each taxpayer, plus an additional $300 per dependent child.

Sending checks to people does not seem to me like a very coherent plan. What is even more bizarre is that the government (and stock market investors) are really worried that people will use this money in a responsible way, by paying their bills, repaying loans, reducing their credit card debt, or putting the money into savings for their retirement or their children’s education. What they want people to do is to behave irresponsibly, by immediately rushing out and spending the windfall money on items they don’t need, like plasma TVs or other high-priced consumer goodies.

Giving poor people a check for $600 will undoubtedly help many of them stave off some immediate disaster and even hunger. Many people are just one paycheck away from going cold or becoming homeless. But instead of urging people to use this small windfall to avert an immediate crisis and regain their financial footing, the government is actually encouraging people to spend the money on more junk, to indulge in just the kinds of reckless consumer behavior that caused many of them to fall into deep debt in the first place. After scolding people for living beyond their means, we are now encouraging them to do just that. As Bob Park writes sardonically, but accurately:

In case you didn’t notice, your 401k is shrinking. Don’t worry! President Bush has a plan: send a check to every family in America. People are supposed to spend it on the shoddy merchandise they didn’t buy at Christmas. Where is the money coming from? From taxes we paid to end Iraq’s WMD program. It worked perfectly; there is not a WMD to be found in Iraq. No one could think of anything except war to spend the stimulus money on (like maybe health insurance for children, or fusion energy, or the International Linear Collider) so Congress agreed to the President’s plan to write everyone a check. After decades of public-service announcements telling people to save, we can now expect to be told the opposite. So much for the laws of economics. The program would be more environmentally friendly if they cut out the middleman. Instead of every family, send checks to every business. Operating on a government subsidy would free business from the need to produce more useless crap to sell.

Do such policies make any sense? We have a country in which the infrastructure is crumbling and many people are hopelessly in debt, unable to even pay their mortgages or credit card bills. Why are we encouraging them to get into even more debt by buying things they don’t need or can afford? Is this any way to run the world’s largest economy?

Furthermore, while I can understand giving really poor people some money, what is the point in giving middle-class and rich people a one-time payment of $600? I personally don’t want or need $600. If given it, I will save it to meet some future need. Giving people money and urging them to spend it frivolously seems to me to be equivalent to dropping currency notes out of helicopters and hoping something good comes out of it. Surely there are a lot of other things that could be done that would produce benefits while putting the money into circulation?

I can think of lots of worthwhile ways of spending $150 billion that could have long-lasting and beneficial effects. I would much rather see that money being used for the collective good. How about refreshing decaying urban areas by creating parks and public recreation areas for people? How about improving water and electricity services to deprived rural areas? How about creating a system of low-cost satellite health clinics staffed by paraprofessionals to provide better early care to people, the way that many countries do? How about hiring people to do the many things that need to be done to improve our communities?

Is indiscriminately giving large numbers of people relatively small sums of money the best plan that our great financial brains can come up with?

Next: Past experiences with combating recession

POST SCRIPT: The moral hazard myth

One of the reasons that the US has an insane crazy-quilt health care system, and the source of weird arguments used against universal single-payer health care schemes, is the strong belief among health care economists that providing easy access to health care creates a ‘moral hazard’, where people will abuse this benefit.

In this New Yorker article, Malcolm Gladwell demolishes this myth.

The brave new world of finance-2: Further indicators of insanity

(For previous posts in this series, see here.)

The current weird situation in which the stock market rises on what you or I might think is bad news can also be seen with labor figures. When reports are released that unemployment is low (which ordinary people would think is a good thing), the stock market tanks. When unemployment figures rise, the stock market also rises. Why? We are told that if unemployment is low, that means that workers are in demand and thus have more clout in negotiations and their wages are likely to rise. Again, you and I might think it is a good thing for working people to be earning more. But for investors, this is bad because rising wages means lower profits for companies and an increased possibility of rising prices, which means the possibility of inflation, which means that the Federal Reserve might raise interest rates to reduce the money supply and thus lower the risk of inflation. And we know the love affair that investors have with low interest rates. Hence the stock market goes down.

All this may be perfectly rational behavior within the weird world of finance. But to me there is something profoundly disturbing, immoral even, about an economic value system that is so committed to low interest rates that it even cheers on news that by any measure is not good for ordinary people. As Barbara Ehrenreich writes yesterday: “So thoroughly is the economy decoupled from ordinary experience that according to a CNN poll, 57 percent of Americans thought we were already in a recession a month ago. Economists may complain that this is only because the public is ignorant of the technical definition of a recession, which specifies at least two consecutive quarters of negative growth. But most of the public employs the more colloquial definition of a recession, which is hard times. And — far removed from whatever happens on Wall Street, the Nikkei, Dax, or the curiously named FTSE — most Americans have been living in their own personal recession for years.”

You or I might think that it would be desirable to have an economy in which almost everyone was working and putting money away in savings for their future and the future of their children. But such a scenario seems to give the financial sectors and investors in Wall Street nightmares. And unfortunately, they are the ones who seem to control monetary and fiscal policies.

We seem to be living with a financial system has lost touch with human needs.

Why is it that our sense of what is a healthy economy has been overturned? One reason is that the US economy has switched from one that was dominated by the manufacturing sector (i.e., where companies actually made and sold stuff like steel and cars) to one that is dominated by the co-called FIRE sector (finance, insurance, and real estate).

The US is rapidly ceasing to be the country that makes things that people in other countries want to buy. The US has been running up huge trade deficits since 1970, with the rapidly increasing deficit in goods exported to other countries failing to compensate for the (small) surpluses in the services sector.

The FIRE sector, rather than actually manufacturing goods, essentially uses money to make more money and this change in activity has profound consequences. One negative consequence of the dominance of the interests of the financial sector over the general economy is that economic policy seems to be now driven to serve the needs of investors, not actual manufacturers. As a result of the desire to placate the Wall Street investors, we now have a situation where the goal of the Federal Reserve seems to be not to maintain the long-term health of the nation through careful management of long-term fiscal policy, but to shore up the value of the stock market in the short term.

We saw this desire to placate Wall Street brutally on display just recently. The week ending on Friday, January 18 had seen stocks plunge worldwide on reports of further massive losses incurred by American financial institutions due to the sub-prime mortgage debacle (more on that fiasco later). Monday, January 21 was the Martin Luther King holiday in the US where the exchanges were closed but stocks dropped sharply that day worldwide, and dropped again on Tuesday, January 22 in the far east before the US markets opened on Tuesday morning. Everyone was braced for a massive plunge in the stock market when the US markets opened on Tuesday. But in an effort to prevent this, the Federal Reserve did something it very rarely does, and that was to have an emergency conference call among its governors and decide to slash interest rates by a huge amount (0.75%) before the US markets even opened, as an emergency move on a day when it does not usually make changes in interest rates. This news struck me as a bad sign, that the Fed thought the situation was serious. But the stock market responded with cheers, because low interest rates make money cheaper to borrow and this enables financial speculators to make even more money. The only thing Wall Street loves more than low interest rates is a surprise lowering of interest rates. Then on Wednesday, January 30, at its regular meeting the Fed lowered the interest rates again by another 0.5%. The Dow Jones stock index, which had been in negative territory, suddenly shot up nearly 300 points within an hour of the announcement, before sinking back into negative territory.

To me, the Fed taking such remarkable and dramatic steps meant that they thought the economy was in serious trouble and heading for recession. Recessions are awful things, shutting down companies and throwing lots of people out of work. But for Wall Street investors, all that seems to matter is lower interest rates, whatever the cause. They are already putting renewed pressure on the Fed for further and deeper cuts in interest rates since the last one did not really work as far as they were concerned and merely kept the status quo. They are circling like wolves, essentially demanding that the Fed lower the rates even more, perhaps by even larger amounts. If the Fed does not keep lowering rates, the stock market is likely to decline. We seem to have reached the stage where it is taken for granted that the main role of the Fed is to please Wall Street investors by keeping stock prices high by manipulating interest rates. As long as they do that, the long-term health of the economy seems to be ignored.

Next: The crazy ‘stimulus package’ – Get your free money here!

POST SCRIPT: The lobbyists’ preferences

See which candidates have garnered the support of lobbyists.

The brave new world of finance-1

One topic that I have tended to avoid in my blog posts is the subject of economics. This is because the ‘dismal science’ is one of those subjects where I feel a little out of my depth. Whereas I can make sense of events in many other areas of everyday life, even to the extent of making modestly successful predictions about what should occur, behavior in the world of business and finance tends to defy my expectations. For a long time, I thought this was due to my weak understanding of the basics of economics. But now I am wondering if it is because the economic world is, frankly, crazy.

I am beginning to worry that the modern US and global economy has become untethered from reality or even basic common sense. French President Nicolas Sarkozy seems to share my alarm when he recently said that we now seem to have a global “financial system which is out of its mind and which has lost sight of its purpose.”

Let me start out by admitting that I am old-fashioned when it comes to basic economics and finance. My understanding of those topics is similar to Benjamin Franklin’s Poor Richard’s Almanac proverbs, which extol the virtues of hard work, thrift, and prudence. The basic ideas that Franklin advocates – live within your means, don’t waste time on too much frivolity, avoid spending money on things you don’t need, save for the future – are things that I understand and basically try to follow. They still make sense to me as a means of ordering my personal finances.

Although I am not, and never have been, a businessman, the basic idea of business – investing money in producing some product or offering a service, and charging for those things at a price high enough to make a profit that is at least slightly above what one might earn from simply putting the money in a bank and earning interest on it – is again something I understand.

But those kinds of attitudes seem to be hopelessly out-of-place in the brave new world of modern high finance. My awareness that I don’t understand modern finance is on display with the way that the stock market actually performs compared to the way that I expect it to perform. Again, I think I understand the basic idea of stocks. If a company needs to raise money to improve or expand its business, one option is to borrow it, another is to sell stock to the public. The public that risks its money this way gets rewarded if the company invests that money well and continues to make profits which gets returned to the stockholders as dividends. Also a company that is efficiently and well-run and produces goods and services that people desire is a company that becomes more valuable over time and that more people will want to own stock in, thus driving up the stock price and benefiting the stockholders even more.

Thus its stock price should be a gauge of the health of a company and the stock market should be a gauge of the overall health of the underlying economy and the companies that make it up. If a country has many companies that are producing goods and services of value that are sought, then the stock market indices should go up, and vice versa.

That is my admittedly naïve understanding of the world of business and personal finance. It is something I understand.

But as far as I can see, the world of business and finance is now topsy-turvy, with causes and effects becoming blurred or even interchangeable. The stock market seems to be acting independently of the underlying economy. Rather than its stock market being an effect, reflecting the basic health of a company, high stock prices are seen as good in themselves, even if that is obtained at the cost of driving a company into the ground. The actions of company management now seem to be increasingly driven by the desire to drive up the stock price, even if this might mean harming the long-term health of the company. And even government policies seem to be aimed at keeping stock market prices high rather than in ensuring that the underlying economy is sound.

Take for example the news released on Monday, January 28th that new housing starts had slumped dramatically. This was widely seen as yet another sign that the economy was slowing down and that activity was declining, perhaps the precursor to a recession. In other words, it was a sign of a seriously ailing economy. And yet the stock market shot up that day, as if this was the best news. Why? The ubiquitous financial analysts who can explain anything after the fact said that this was because investors felt that such bad economic news would cause the Federal Reserve to slash interest rates once again very soon, and stock market investors passionately love low interest rates above all else. This is because low interests supposedly make other forms of investments such as bonds and money market and certificate of deposits less competitive, and thus more people will divert their money from those areas into the stock market, driving up demand. Thus lower interests rates means that we can expect stock prices to rise in the future, making them a good buy now. This thinking is what raised the stock prices on such a bad news day. Furthermore, low interest rates make it cheaper for businesses to borrow money, enabling them to have more money to expand their operations, thus resulting in growth in the future. Since the stock market is supposed to reflect the future, not the present, bad economic news like the drop in housing starts was seen as a good thing.

Next: More signs that modern financial world is out of synch with the real world.

POST SCRIPT: Fame

The highly versatile Stephen Fry (actor, director, author) has his own blog with a nice essay on what fame is like for the famous.