----- Forwarded Message ----- From: Geoffrey Gardiner <[email protected]> To: [email protected] 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. __._,_.___ Reply to sender | Reply to group | Reply via web post | Start a New Topic Messages in this topic (2) Recent Activity: Visit Your Group The gang8 list is devoted to Creditary Economics. To unsubscribe, email: [email protected] Switch to: Text-Only, Daily Digest • Unsubscribe • Terms of Use . __,_._,___
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