Tag Archives: Capital

Why The Only Answer Is To Break Up The Biggest Wall Street Banks

By Robert Reich – Glass-Steagall’s key principle was to keep risky assets away from insured deposits. It worked well for more than half century. Then Wall Street saw opportunities to make lots of money by betting on stocks, bonds, and derivatives (bets on bets) – and in 1999 persuaded Bill Clinton and a Republican congress to repeal it.

Nine years later, Wall Street had to be bailed out, and millions of Americans lost their savings, their jobs, and their homes.

Why didn’t America simply reinstate Glass-Steagall after the last financial crisis? Because too much money was at stake. Wall Street was intent on keeping the door open to making bets with commercial deposits. So instead of Glass-Steagall, we got the Volcker Rule – almost 300 pages of regulatory mumbo-jumbo, riddled with exemptions and loopholes.

Now those loopholes and exemptions are about to get even bigger, until they swallow up the Volcker Rule altogether. If the latest proposal goes through, we’ll be nearly back to where we were before the crash of 2008. more>

Updates from Chicago Booth

Globalization is close to its ‘holy cow’ moment. Why we must rethink our outdated ideas about international trade.
By Richard Baldwin – Globalization has changed.

The globalization we knew and understood for most of the 20th century resembled more the globalization that emerged from the Industrial Revolution than it did the globalization we experience today.

That globalization was based on the movement of goods across borders—measurable, limited by physical infrastructure, and parried by policies such as tariffs. But globalization today is about more than trading goods; it’s about trading ideas and, increasingly, services.

Our 20th-century paradigms of globalization are ill-equipped to understand what cross-border trade means for the present and near future. Globalization has changed, but the way we think about it hasn’t.

The one thing that hasn’t changed about globalization is that it is a phenomenon with the power to change the world. If you trace the share of world income going to two groups of countries—India and China in one group and the G7 countries in the other group—back to the year 1000, you’ll see that back then, India and China had about half the world’s GDP, and the G7 had less than 10 percent of it.

Starting around the 1820s—the decade economists Kevin H. O’Rourke of Oxford and Jeffrey G. Williamson of Harvard have pegged as the start of modern globalization—the G7 share starts to swell. Over the course of about 170 years, it goes from about one-fifth up to about two-thirds of world income. That’s how powerful globalization—the movement of goods across borders—was.

Globalization is arbitrage. What is arbitrage? It’s taking advantage of a variation in price between two markets. When the relative prices of some goods are cheap in Mexico, that’s what they sell to us, and when other goods are relatively cheap in the US, that’s what we sell to them. A two-way, buy-low/sell-high deal—that’s arbitrage, and trade theory is all about what the direction of arbitrage, and especially arbitrage in goods, is. more>

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Crisis Of Globalization: Restoring Social Investment Is Key

By Robert Kuttner – Why is democracy under siege throughout the West? How much of the story is cultural or racial, and how much is economic? And can the slide into authoritarianism be reversed? I think it can.

In the remarkable three decades after World War II, the economy delivered for ordinary people and there was broad support for democracy. That era was unique in two key respects.

First, the economy not only grew at record rates for peacetime, but it also became more equal. Second—and not coincidentally—this was a period when raw capitalism was tightly regulated, on both sides of the Atlantic, economically and politically.

Banking was very limited in what products it could offer, and at what prices. It was almost like a public utility. There were no exotic securities like credit derivatives to deliver exorbitant profits and put the whole economy at risk. Globally, there were fixed exchange rates and capital controls, so bankers could not make bets against currencies and entire economies.

Organized labor was empowered. Unions were accepted as legitimate social partners and had substantial influence. This was true in both Europe and America.

In the years since then, political and financial elites have redefined trade agreements to mean not just reciprocal cuts in tariffs but broader changes in global rules to make it easier for banks and corporations to evade national regulation.

Laissez-faire, discredited and marginalized after 1929, got another turn at bat(ting). Hyper-globalization was a key instrument. And that reversion had economic and ultimately political consequences. more>

We Don’t Have Elections

BOOK REVIEW

Terms of Service: Social Media and the Price of Constant Connection, Autor: Jacob Silverman.

How tech companies merge with the nation-state
By Jacob Silverman – It should shock no one if Facebook emerges from its latest privacy imbroglio with a meager fine and a promise to do better—even as our elected leaders, whose lack of knowledge of Facebook’s workings reflected their advanced age, tut-tutted that this time Facebook has to do better.

The canon of American regulatory practices tends toward the ceremonial, with extreme deference shown toward corporations that may one day hire former regulators. Senator Lindsey Graham even invited Zuckerberg to submit possible regulations—an example of regulatory capture so blatant that “corruption” doesn’t even seem like the proper word.

Playing along, Zuckerberg expressed an openness to regulation, though he asked for a light touch, which, barring another data spillage, he should expect.

Beyond a few mild critiques, Congress’s overriding opinion of Zuck seems to be that he was a classic American success story, and perhaps—in his cunning acquisition of ungodly riches on the backs of others’ labor—he is.

To better understand Silicon Valley’s politics, we might return to the nation-state metaphor and consider technology companies as recently ascendant great powers. Endowed with impressive resources, making themselves known in assorted global capitals, their CEOs are greeted in the manner of heads of state. Their vast offshore cash reserves resemble sovereign wealth funds, whose investments have the power to shape politics. more>

Fiscal Policy Remains In The Stone Age

By Simon Wren-Lewis – Or maybe the middle ages, but certainly not anything more recent than the 1920s. Keynes advocated using fiscal expansion in what he called a liquidity trap in the 1930s. Nowadays we use a different terminology, and talk about the need for fiscal expansion when nominal interest rates are stuck at the Zero Lower Bound or Effective Lower Bound.

When monetary policy loses its reliable and effective instrument to manage the economy, you need to bring in the next best reliable and effective instrument: fiscal policy.

The Eurozone as a whole is currently at the effective lower bound. Rates are just below zero and the ECB is creating money for large scale purchases of assets: a monetary policy instrument whose impact is much more uncertain than interest rate changes or fiscal policy changes (but certainly better than nothing). The reason monetary policy is at maximum stimulus setting is that Eurozone core inflation seems stuck at 1% or below. Time, clearly, for fiscal policy to start lending a hand with some fiscal stimulus.

You would think that causing a second recession after the one following the GFC would have been a wake up call for European finance ministers to learn some macroeconomics. Yet what little learning there has been is not to make huge mistakes but only large ones: we should balance the budget when there is no crisis. more>

So Much More than a Tiger

By Bolaji Ojo – The foundation for what Taiwan is today and what will be years from now were laid decades ago by successive leaders in government and private sectors who elevated the island above natural and geopolitical obstacles to ensure its survival.

Taiwan – also known as the Republic of China – is not at risk of extinction. Rapid economic growth catapulted Taiwan into the group of countries economists like to describe as Asian Tigers, but the island plays an even more central role in the high-tech ecosystem.

It is today headquarters to some of the better-known players in the electronics industry, amongst them Taiwan Semiconductor Manufacturing Co. Ltd., the world’s biggest chip foundry. Foxconn, the No. 1 global contract manufacturer and a Top 5 high-tech company by sales, calls Taiwan home, as does WPG Holdings, a leading distributor of electronic components. Taiwan is a major supplier of PCBs to OEMs and EMS providers and is host to AU Optronics Corp., one of the biggest suppliers of displays for smartphones, PCs and laptops.

Taiwan’s challenge this time is finding a way to respond to China’s ascendance and staving off rivals elsewhere. Taiwan was one of the forces behind the emergence of China as a heavyweight in the electronics supply chain. The huge investments of money and expertise poured into China by Taiwan, Japan and other Western countries helped to turn the Communist country into a manufacturing hub for the electronics industry. For Taiwan, though, China presents a conundrum; It has become both a beneficiary of and a victim of China’s explosive growth. more>

Capitalism Redefined

BOOK REVIEW

Theory of Value, Author: Gerard Debreu.
The Origin of Wealth, Author: Eric Beinhocker.

By Nick Hanauer and Eric Beinhocker – For everyone but the top 1 percent of earners, the American economy is broken.

Since the 1980s, there has been a widening disconnect between the lives lived by ordinary Americans and the statistics that say our prosperity is growing. Despite the setback of the Great Recession, the U.S. economy more than doubled in size during the last three decades while middle-class incomes and buying power have stagnated. Great fortunes were made while many baby boomers lost their retirement savings. Corporate profits reached record highs while social mobility reached record lows, lagging behind other developed countries.

These facts don’t just highlight the issues of inequality and the growing power of a plutocracy. They should also force us to ask a deeper set of questions about how our economy works—and, crucially, about how we assess and measure the very idea of economic progress.

How can it be that great wealth is created on Wall Street with products like credit-default swaps that destroyed the wealth of ordinary Americans—and yet we count this activity as growth?

Likewise, fortunes are made manufacturing food products that make Americans fatter, sicker, and shorter-lived. And yet we count this as growth too—including the massive extra costs of health care.

Global warming creates more frequent hurricanes, which destroy cities and lives. Yet the economic activity to repair the damage ends up getting counted as growth as well.

Great debates rage about whether to raise or lower interest rates, or increase or decrease regulation, and our political system has been paralyzed by a bitter ideological struggle over the budget. But there is too little debate about what it is all for.

Hardly anyone ever asks: What kind of growth do we want? What does “wealth” mean? And what will it do for our lives? more>

How To Stop Trump

By Robert Reich – Why did working class voters choose a selfish, thin-skinned, petulant, lying, narcissistic, boastful, megalomaniac for president?

One explanation focuses on economic hardship. The working class fell for Trump’s economic populism. A competing explanation – which got a boost this week from a study published by the National Academy of Sciences – dismisses economic hardship, and blames it on whites’ fear of losing status to blacks and immigrants. They were attracted to Trump’s form of identity politics – bigotry.

If Democrats accept the bigotry explanation, they may be more inclined to foster their own identity politics of women, blacks, and Latinos. And they’ll be less inclined to come up with credible solutions to widening inequality and growing economic insecurity.

Yet the truth isn’t found in one explanation or the other. It’s in the interplay between the two. more>

America is Regressing into a Developing Nation for Most People

BOOK REVIEW

The Vanishing Middle Class: Prejudice and Power in a Dual Economy, Author: Peter Temin.

By Lynn Parramore – America is not one country anymore. It is becoming two, each with vastly different resources, expectations, and fates.

In one of these countries live members of what Temin calls the “FTE sector” (named for finance, technology, and electronics, the industries which largely support its growth). These are the 20 percent of Americans who enjoy college educations, have good jobs, and sleep soundly knowing that they have not only enough money to meet life’s challenges, but also social networks to bolster their success.

They grow up with parents who read books to them, tutors to help with homework, and plenty of stimulating things to do and places to go. They travel in planes and drive new cars. The citizens of this country see economic growth all around them and exciting possibilities for the future. They make plans, influence policies, and count themselves as lucky to be Americans.

The FTE citizens rarely visit the country where the other 80 percent of Americans live: the low-wage sector.

Here, the world of possibility is shrinking, often dramatically. People are burdened with debt and anxious about their insecure jobs if they have a job at all.

Many of them are getting sicker and dying younger than they used to. They get around by crumbling public transport and cars they have trouble paying for. Family life is uncertain here; people often don’t partner for the long-term even when they have children. If they go to college, they finance it by going heavily into debt. They are not thinking about the future; they are focused on surviving the present. The world in which they reside is very different from the one they were taught to believe in.

While members of the first country act, these people are acted upon.

Temin uses a famous economic model created to understand developing nations to describe how far inequality has progressed in the United States. For the first time, this model is applied with systematic precision to the U.S.

The result is profoundly disturbing. more>

Robots at the gate: Humans and technology at work


Barclays – Humans have often had a cautious relationship with new technology, particularly when it causes widespread disruption in the workforce. Yet historically, technological advances have not resulted in fewer jobs available to humans, but rather have led to the creation of new opportunities. Farriers and saddlemakers were hit hard when cars replaced horse carriages, but the petrol stations, mechanics, motels and related industries that sprung up created new, yet different, types of jobs.

More recently, the smartphone is a great example of technological advances creating new forms of work. Twenty years ago, mobile app developer was not a job; today, millions of such developers are at work around the world.

One of the most influential economists of all time, David Ricardo, flip-flopped on the issue. In 1821, he stated that while was a general good, he was now more worried about the substitution effect on labor. And the discussion was not always academic – the Luddite movement was an early example of workers resorting to violence to protest the use of technology in textile factories.

As the decades passed, the Industrial Revolution led to a visible, massive improvement in living standards. But the debate – on how technology affects work and whether it is an unequivocal positive – continued to wax and wane.

Machine learning represents a fundamental change. It is a subset of the much-abused term ‘Artificial Intelligence’ and is grounded in statistics and mathematical optimization. The computer is fed vast data sets and a few general parameters to point it in the right direction. Then, the machine executes simulations of how biological neurons behave, uses that to recognize recurring sequences in the data, and writes its own rules.

Suddenly, it is no longer limited to applying algorithms that
a human wrote; the machine is designing its own. more (pdf)>