Derivatives

English: Wall Street sign on Wall Street

English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

The abuse of unregulated derivatives by Wall Street caused the Great Recession. That is the conclusion reached in Republic, Lost, How Money Corrupts Congress–and a Plan to Stop It by Lawrence Lessig. The following quotation is the simple analogy he uses to explain what happened. The regulation of derivatives is compared to laws regulating automobile highway speeds.

“A speed limit that applies to black cars only will not only incentivize the sale of colorful vehicles, it will also be a boon to the paint departments of auto body shops everywhere. That’s the story of Wall Street in the 2000s. While some portion of the market for derivatives was no doubt driven by a genuine meed for the particular flexibility of a derivative, a huge proportion was simply black cars being painted red. The winners in this new market were the drivers of those freshly painted cars, and the firms that had done the paint jobs (aka Wall Street). The losers were–surprise, surprise–the rest of us.”

The derivatives in question were backed by US mortgages and rated AAA by Standard and Poor and others. Derivatives were exempt from regulation by act of Congress as urged by Alan Greenspan and others. Financial instruments still regulated by law were recast as derivatives to escape regulation. And without the discipline of regulation, Wall Street took on excessive risk. And it came tumbling down in 2007-8 birthing the Great Recession.

Greed

The Price of Greed

The Price of Greed (Photo credit: Wikipedia)

In his book A Failure of Capitalism, Richard Posner denies that greed played a part in causing the Great Recession. I disagree. First let’s define greed as milking the system for excessive and undeserved income, as Mitt did with his 401K north of $100 million. In my opinion, no one is worth or deserves $100s millions or billions in income or net worth. It is true that $1 million doesn’t go as far as it used to, but $1 billion certainly does. Nations that don’t mimic our income inequality do not have the social problems that we do. We won’t solve all our problems with greater income equality, but we will lessen their severity as nations in Scandinavia prove.

The greatest danger of vast differences in income equality lies in the threat to our democratic institutions. Some people with vast wealth will use that wealth to buy favors from government that will increase their wealth at the expense of the rest of us. Louis Brandeis was better able to explain the pernicious effect of income inequality better than I can. He said that we could have democracy or vast concentrations of wealth, but not both at the same time. Please see Freedom and Supreme Court

A Failure of Capitalism

Richard Posner, one of the Chicago School, run...

Richard Posner, one of the Chicago School, runs a blog with Nobel laureate Gary Becker. “The Becker-Posner Blog” . . Retrieved 2010-05-20 . (Photo credit: Wikipedia)

A Failure of Capitalism, The Crisis of ’08 and the Descent into Depression by Richard A. Posner. He believes that the Great Recession is actually a depression, but not as severe, so far, as the Great Depression.

“Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government’s myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression. We are learning from it that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience–the self-healing powers–of laissez-faire capitalism.”

Amen!

Natural and unnatural disasters

Australia

Australia (Photo credit: Kenny Teo (zoompict))

What is an unnatural disaster? It is a natural disaster made much worse by the actions or lack thereof of conservatives in government.

Case in point, the fires near Sydney, Australia, in New South Wales state. It is spring Down Under during a prolonged drought and not yet the summer and fall high season for wildfires. The thinking person’s response would be to increase fire preparedness. Is that what the conservative government of NSW did? No, they cut the fire prevention budget for no good reason. The Great Recession in Australia is over, defeated several years ago by the traditional Keynesian remedy of adequate stimulus by the national government. Something that hasn’t happened here because the GOP are punishing us for electing Barack Obama in 2008 and re-electing him in 2012.

Another case in point, the destruction of New Orleans in 2005 by Katrina. We are now 8 years after that event and New Orleans still has not recovered. George W. Bush knew that the levees needed to be strengthened and he did nothing for 4.5 years, spending money on dredging a seldom used canal rather than budgeting for levee maintenance in New Orleans. Conservatives tend to be penny-wise and pound-foolish when it comes to government spending for the common good. Today, they decry the national debt when they should be stimulating the economy to increase economic activity and increase tax receipts. But that would redound to President Obama’s credit and they cannot abide that.

Plan C

English: Barack Obama taking the oath of offic...

English: Barack Obama taking the oath of office on January 20, 2009 at the U.S. Capitol. (Photo credit: Wikipedia)

The best laid plans of mice and men often go astray. Loosely translated from the original by Robert Burns.

On inauguration night, January 20, 2009, the GOP hatched plan A to oppose everything that President Obama supported and to prolong the Great Recession as long as possible. That plan didn’t work.

After the November, 2012 election, the GOP came up with plan B, shut down the government and skirt default. That plan too has just failed.

Now it is time for a plan C. We don’t know the details yet, but we do know that there will be a plan C: find some pretext to impeach President Obama. Whatever the GOP may claim, the real reason for the impeachment effort will be that President Obama, his family and his dogs are black.