The Easiest Way to Make a Buck is to Steal It

(via Karl Denninger)

Here's Rep. Alan Grayson with a powerful indictment of the rampant mortgage fraud occurring in Florida.

Lies, Damn Lies and Statistics Redux (BLS edition)

On the Bureau of Labor Statistics' nasty habit of routinely undercounting the unemployed on the first try (via zerohedge):

Charting Statistical Fraud At The BLS: 22 Out Of 23 Consecutive Upward Revisions In Initial Jobless Claims


Note: Blogger is being tempermental, so I can't post up the graph at the moment, but I will do so when things are working right again.

Political Theater Alert: The Democrats Could Have Passed Middle Class Tax Cuts Through Reconcilliation

Austan Goolsbee, a top economic advisor to the Obama Administration, claims that Congressional Republicans are "holding the middle class tax cuts hostage" (hat tip to Mark Thoma)



Goolsbee is not telling the whole truth.

First, the Democrats could have made middle class tax cuts part of the reconcilliation process used to pass healthcare reform as part of this year's concurrent resolution on the budget. It's not like the Democrats didn' see it coming.

Second, it appears that the Democrats had until today to revise the concurrent resolution on the budget to include the middle class tax cuts. At least that's my reading of 2 USC Sec. 635, which states:

At any time after the concurrent resolution on the budget for a fiscal year has been agreed to pursuant to section 632 of this title, and before the end of such fiscal year, the two Houses may adopt a concurrent resolution on the budget which revises or reaffirms the concurrent resolution on the budget for such fiscal year most recently agreed to

The current fiscal year ends today, September 30, 2010, which means the Democrats had until today to revise this year's concurrent resolution on the budget, which included health care reform.

As I read  2 USC Sec. 641, the Democrats were allowed to use the reconcilliation process of Sec. 641 to pass a revised concurrent resolution under Sec. 635. 

They didn't. 

Why not?

You can answer that question any way that makes you comfortable. 

For me, the answer begins with the obvious: the Democrats want to make middle class tax cuts a big issue for the 2010 mid-term elections.  And isn't that exactly what they're trying to do, with agents of the White House leading the way? 

But my answer doesn't end there: I firmly believe that Obama and the Democratic leadership are completely aligned with the Republicans in seeking an extension of all the 2001 Bush income tax cuts, including those that go to the wealthiest households.  The problem is that the Democrats cannot achieve this goal when they are in control of the presidency and both houses of Congress.  The Democratic base would not stand for it.  The good news for Obama and the Democratic leadership is that, in all likelihood, the Republicans will recapture the House this year and "force" Obama and the Democratic Senate to extend all of the Bush tax cuts.  That will be the narrative, anyway, you can count on it, if the Democrats don't hold both houses of Congress.

Am I accusing Obama and the Democratic leadership of engaging in a "conspiracy theory?"  Leaving aside the fact that, as a political movement, they must "conspire" to agree on common objectives and coordinate their resources to achieve those objectives, no, I am not accusing Obama and the Democratic leadership of engaging in a conspiracy theory. 

Am I accusing Obama and the Democratic leadership of being stupid?  No.

I'm accusing Obama and the Democratic leadership of being venal.  I'm accusing them of saying they want one thing while they actually want another.  I'm accusing them of lying to their base.  Big difference.

In What’s the Matter With Kansas Thomas Frank detailed how Republican get elected because of cultural wedge issues that are important to their base, yet Republicans never manage to solve those issues because they must persist in order to ensure reelection.  If you think it through, you'll recognize that Obama and the Democrats are engaged in exactly the same type of cynical politics the Republicans are accused of, but they tailor the politics to their base.  In addition to the middle tax cut issue, one need look no further than "Don't Ask Don't Tell" to see more Democratic cynicism on display: the DADT law leaves enforcement of the policy to regulations set by the executive.  Obama is the executive.  He does not even have to consult with Congressional Republicans to suspend DADT.

The bottom line is that, on both sides of the aisle, what we're witnessing is a morality play staged for our benefit, but the people putting on the play don’t really share that morality.

UPDATE:  Over at Firedoglake, a commenter argued that, if I were right about the Democrats' intentions, they would have been better served to capitulate before the mid-terms in extending all of the Bush tax cuts, and then run on being "forced" into it "class warfare" as part of the narrative for the mid-terms.  This makes no sense.   Obama wants a second term.  To get it, he needs to lose the House in the mid-terms, be "forced" into extending the Bush tax cuts in their entirety (what he really wants), and then he can use the "class warfare" meme to secure his second term.  The game is all about pitching a double truth to the masses and the elites that convinces them both to elect you.  The sad thing is that most of the masses and most of the elites don't get that.  They actually take what politicians say at face value.

Further Confirmation of Predatory Lending to Feed the Derivatives Beast

Ambac Sues Bank of America Over Countrywide Bonds

Ambac Assurance Corp. sued Bank of America Corp. over $16.7 billion of mortgage-backed securities, saying the bank’s Countrywide Financial Corp. unit fraudulently induced Ambac to insure bonds backed by improperly made loans.

Ambac found that 97 percent of 6,533 loans it reviewed across 12 securitizations sponsored by Countrywide didn’t conform to the lender’s underwriting guidelines, according to the complaint filed yesterday in New York state Supreme Court. Many of the loans were made to borrowers with limited or no ability to meet their payment obligations, Ambac said.

Countrywide was a major subprime lender. 

This story is further proof of my thesis that the subprime loan frenzy was created to serve the demand for mortgage-backed derivatives, not to provide affordable home ownership.  If Countrywide had followed its own underwriting guidelines, it would have denied almost all of the reported loans because those guidelines indicated that the loan applicants would be unable to pay back the loans.  That's predatory lending and control fraud rolled up into one tidy bundle.

Neoliberalism = Corporatism = Fascism

This is what Hayek, Friedman and Mises really advocated, a corporate person who cannot be touched by the law but who can wield the law like no other.  A one-way, trick mirror of freedom that makes the "individual liberty" peddled to the neoliberal masses a complete and utter falsehood.

Jesse.

Barry.

Mikey.  (never saw his site before today, but . . .)

Latest Michael Hudson: Taking Krugman to Task

Hudson's latest piece, "America's China Bashing," can be found here.

Here are some choice statements:

The U.S. and foreign economies alike are suffering from the idea that the way to get rich is by debt leveraging, and that the wealth of nations is whatever banks will lend – the “capitalization rate” of the available surplus. The banker’s dream is to lend against every source of revenue until it ends up being pledged to pay interest. . . .

But Paul Krugman and Robin Wells blame China for Wall Street’s junk mortgage binge. Instead of pointing to criminal behavior by the banks, brokerage companies, bond rating agencies and deceptive underwriters, they take the financial sector off the hook:  . . .

This sounds more like what one would hear from a Wall Street lobbyist than from a liberal Democrat. It is as if the real estate bubble didn’t stem from financial fraud, junk mortgages, NINJA loans or the Federal Reserve flooding the U.S. economy with credit to inflate the real estate bubbles and sending electronic dollars abroad to glut the global economy. It’s China’s fault for running large trade surpluses “at the rest of the world’s expense.” . . .

The FIRE sector’s business plan has priced U.S. labor out of world markets. There seems little likelihood of making Chinese and German workers pay rents or mortgage interest as high as the United States? How can American economic strategists force them to raise the price of their college and university tuition so that they must take on the enormous student loans of the magnitude that Americans have to assume? How can they be persuaded to follow the high-cost U.S. practice of adding FICA-type wage withholding to the cost of living to save up pensions, Social Security and medical insurance in advance, instead of the pay-as-you-go basis that Germany quite rightly follows?

Such suggestions are a cover story for America’s own financial mismanagement. The U.S. idea for global equilibrium is to demand that that the rest of the world follow suit in adopting the short-term time frame typical of banks and hedge funds whose business plan is to make money purely from financial maneuvering, not long-term capital investment. Debt creation and the shift of economic planning to Wall Street and similar global financial centers is confused with “wealth creation,” as if it were what Adam Smith was talking about.

A Proposal

China is trying to help by voluntarily cutting back its rare earth exports. It has almost a monopoly, accounting for 97 per cent of global trade in these 17 metallic elements. These exports are “price inelastic.” There is little known replacement cost once existing deposits are depleted. Yet China charges only for the cost of digging these rare metals out of the ground and refining them. They are used in military and other high-technology applications, from guided missile steering systems and computer hard drives to hybrid electric automobile batteries. This has prompted China to recently cut back its exports to save its land from environmental pollution and, incidentally, to build up its own stockpile for future use.

So I have a modest suggestion. If and when China starts re-exporting these metals, raise their price from a few dollars a pound to a few hundred dollars. According to a theory put forth by Paul Krugman and the U.S. Congress, this price increase should slow demand for Chinese exports. It also would help promote world peace and demilitarization, because these rare metals are key elements in missile guidance systems. China should build up its national security stockpile of these key minerals for the future – say, the next prospective five years of production. Let this be a test of the junk paradigms at work.

Debt Inequality v. Income Inequality

A lot of people are pushing the income inequality meme: that income inequality caused the financial crisis and subsequent (and continuing) economic depression.  A week or so ago, we had the IMF pushing it.  Robert Reich is currently peddling a book, Aftershock, which does the same.  And just today Linda Beale of Angry Bear and ataxingmatter queried "Inequality as a critical cause of the financial crisis? (by which she meant income inequality)."

My answer to Linda is no, income inequality was not a cause of the financial crisis, let alone a critical cause. 

The financial crisis was caused by debt-financed financial speculation gone bad.  While one is free to argue that wealth inequality arising from income inequality resulted in a lot of money seeking the high yields offered by financial speculation, if people hadn't used that money to borrow more money to leverage their bets, none of this would have happened.

The financial crisis caused the current economic downturn, called the "Great Recession" by Reich, which government hacks recently declared "over" back in June 2009 (although Bernanke and his cadre don't seem to believe it, either; you don't employ quantitative easing with a healthy economy).

Now we're at the point to ask whether income inequality matters.  Specifically, is the current economic downturn being prolonged by income inequality?

The facile answer would be yes; however, the correct answer is no.

Income inequality is a necessary but insufficient condition for suppressing demand (i.e. spending).  To suppress demand in the manner that we're currently witnessing requires income inequality coupled with debt inequality, which for the bottom 90% of American households is best measured by the debt-to-wage ratio.  If people did not have to spend their (increasingly shrinking) wages on servicing existing, overvalued debt, it would be available to spend on new purchases.

Unfortunately, the debt-to-wage ratio is something that is not tracked by anyone (at least to my knowledge).  I've seen the debt-to-income ratio and the savings rate, but both are typically tracked using BEA data, which, as I've documented previously, is highly suspect due to the fictional "imputations" it uses to inflate personal income, personal disposable income, and savings. IRS income data appears to be much more realiable (unlike BEA and Fed data, it is not subject to subsequent, self-serving revisions that can be detected only by reviewing old Census reports that captured the original data like a fly in amber), and Professor Emmanual Saez of UC Berkeley has a great IRS-based dataset available here (and lots of papers based on that dataset, in its various incarnations).  The Fed tracks debt data itself, but it relies on BEA data for income, disposable income, savings, etc.  Every few years, the Fed conducts its "Survey of Consumer Finances," which provides some information that is useful in connecting the dots between debt and income, but not necessarily between debt and wages.

A major limitation in the vast majority of the available economic data is the fact that it is expressed in the aggregate: the data that is made available for public consumption is for the ENTIRETY of the U.S. populace, and is not susceptible to a deeper dive to help understand what is really going on.  One of my favorite examples is the "median real income," which inherently measures the mid-point of all income, adjusted for inflation.  But what does the mid-point really tell us about income distribution when 50% of all income accrues to the top 10% of households (up from something like 35% thirty years ago)?  It should tell us that the so-called "stagnant" median real income masks a substantial decrease in real income for everybody not in the top 10%, but that's not what we hear.  We hear that everybody is just running in place.

To the extent that we ever see a parsing of the data, it depends entirely on what hypothesis the researcher is seeking to prove or disprove.  Thanks to Prof. Saez, we at least have a real drill down into the make up of the top decile of American households, at least as to income. 

Most income inequality researchers seem to focus on quintiles (five slices of 20%), but I don't find this meaningful for the simple fact that the Prof. Saez's data show that everybody below the top 5% is, in fact, a wage slave: at least 90% of the annual income for everybody below the 95th percentile of households comes from wages.  This is one reason for my emphasis on wages instead of income.  For 95% of American households, the ability to spend depends entirely upon the ability to earn.  If you lose your job, you can't (and won't) spend.  Period.

For those of us in the 95th percentile and above, well, we can keep on spending without a steady job because we've hoarded enough financial wealth that we can make money from our money and live on the fixed income doing so produces.

Now for the Data

First, I used the following Fed data (the D.3 table from the penultimate Flow of Funds report) to understand the amount of outstanding debt:

NOTE: I had to reconstruct the data for 1952-1974 using Fed data embedded in Census reports.

Second, I used the following Credit Suisse chart to estimate the relative amount of debt held by the top 10% of households versus everybody else:

FYI -- I believe that I've found the dataset Credit Suisse used to derive this chart at the Federal Reserve website, and I intend to check Credit Suisse's conclusions.  Regardless, however, a major question is what is meant by the term "income?"  The BEA measures income withouth capital gains.  The IRS provides measures with and without capital gains.  It is difficult to ascertain from the Fed survey data what is meant by "income," although it does seem to include income from all sources.  Moreover, the Fed slices and dices the survey data in truly odd ways that make it impossible to parse.  All that being said, I am assuming that "income" means income without capital gains.

Finally, I used Prof. Saez's data to calculate debt-to-wage ratios for 1988-2007 for the top decile of households versus everybody else, using IRS income data and calculating outstanding debt for the top decile using the Credit Suisse chart.

So, without further ado, here you go:

The final chart shows how the bottom 90% really piled on the debt in the last decade, while the top decile hovered around the historical mean.  That huge ramp in the ratio was no accident.

I'm happy to share my data sets, if anyone wants them.

Shorter Reich: Give 'Em a Bite of Cake (Or We'll All Be Sorry)

Seriously, that is the message I take from Reich's Aftershock.

Reich could have achieved the same thing in a much pithier letter:

Dear Caker,

If you want to keep all the stuff you stole from the little people, you need to give 'em some of it back.  They're naive enough to thank you for it and dumb enough to think that having impossible odds of winning your rigged game means they actually have a chance.  If you don't do something to appease the little people, they might kill you (and me, yikes!).

Love,

Bob

Some people watch too many Jim Carrey movies (you can click the link above if the embedded video does not work).

Aftershocked by Reich

Shortly after yesterday's post about a recent Robert Reich interview, I purchased the book he's currently out pimping, Aftershock: The New Economy and America's Future.  I have not read the whole thing yet, but I have read the key chapters in which he sets forth his vision of the problem and his solution to it.

Here's what I can say definitively: this is a book written for economic elites by an economic elite.  What's more, it was not written for economic elites like me, who already believe that having a vibrant middle class is crucial for America's long term success as a nation, but for economic elite who need convincing (i.e., the "let them eat cake!" types). 

Here's what I cannot tell: is Reich really as clueless as he seems, or is he playing dumb to make sure his intended audience (the "cakers") will read the whole book?

Reich's central thesis is that income inequality is the source of America's economic doldrums:

Geithner . . .  misstated the underlying problem, of which the Great Recession was a symptom.  The problem was not that Americans spent beyond their means but that their means had not kept up with what the larger economy could and should have been able to provide them.  The American economy had been growing briskly, and America’s middle class naturally expected to share in that growth.  But it didn’t.  A larger and larger portion of the economy’s winnings had gone to people at the top.

This is the heart of America’s ongoing economic predicament.  We cannot have a sustained recovery until we address it.  It is our social and political predicament.  We risk upheaval and reactionary politics unless we solve it.  The central challenge is not to rebalance the global economy so that Americans save more and borrow less from the rest of the world.  It is to rebalance the American economy so that its benefits are shared more widely in America, as they were decades ago.  Until this transformation is made, our economy will continue to experience phantom recoveries and speculative bubbles, each more distressing than the one before.

Reich explains how the middle class was able to mask the effects of income inequality through three coping mechanisms:Of these measures, only the last one-- taking the money out of politics-- seems to address the underlying system (the tilted playing field) that led to income inequality, but it does so in a purely cosmetic way that cannot address the influence exerted over lawmakers by the largest employers in a congressional district, for example.

Americans also accepted the backward swing of the pendulum because they mitigated its effects. Starting in the late 1970s, the American middle class honed three coping mechanisms, allowing it to behave as though it was still taking home the same share of total income as it had during the Great Prosperity, and to spend as if nothing substantially had changed. Not until these coping mechanisms finally became exhausted in the Great Recession would the underlying reality become evident. (And not until the federal government ended its stimulus and the Fed tightened the money supply would that reality be exposed as more enduring than the Great Recession’s downturn.)

Coping mechanism #1: Women move into paid work . . .
Coping mechanism #2: Everyone works longer hours . . .  
Coping mechanism #3: We draw down savings and borrow to the hilt . . .

Eventually, of course, the debt bubble burst. With it, the last coping mechanism disappeared . . . 

Reich then explains how the disappearance of these coping mechanisms has awakened the middle class to a reality that is very different from what they expected, a reality that appears to be a "rigged game" to make the rich richer even as they are made poorer.  Reich at no time argues that the game is NOT rigged.  Indeed, he admits that it is, and that the income gap will continue to widen unless something is done.

All of this, Reich says, is giving rise to "the politics of anger," something that is a threat to everyone, including the wealthy and the nation as a whole:
So, does Reich offer solutions to level the playing field, to clean up the game so it is no longer rigged but fair?  No.  Reich's proposal merely aims to make "a tilted playing field . . . tolerable" to the middle class through:

I could have grounded my argument in morality: It is simply unfair for a handful of Americans to take home such a large share of total income when so many others are struggling to make ends meet. Or I could have based it on traditional American values: Such a lopsided distribution is at odds with the nation’s history and its ideal of equal opportunity—especially when the deck seems stacked in favor of those at the top. I could have talked about how this degree of inequality undermines the nation’s moral authority and its standing in the world.

I have chosen instead to base my argument on two tangible threats that such inequality poses to everyone—including even the wealthiest and most influential among us. One is economic: Unless America’s middle class receives a fair share, it cannot consume nearly what the nation is capable of producing, at least without going deeply into debt. And debt on this scale is unsustainable, as we have seen. The inevitable result is slower economic growth and an economy increasingly susceptible to great booms and terrible busts. The other threat is political: Widening inequality, coupled with a growing perception that big business and Wall Street are in cahoots with big government for the purpose of making the rich even richer, gives fodder to demagogues on the extreme right and the extreme left. They gain power by turning the public’s economic anxieties into resentments against particular people and groups. Isolationist and nativist, often racist, and willing to sacrifice overall prosperity for the sake of achieving their ends, such demagogues and the movements they inspire can cause great harm. As I’ve shown, the Great Recession has accelerated both troubling trends. With the bursting of the housing bubble, many middle-class homeowners who can no longer use their homes as piggy banks must face the reality of flat or declining wages. The downturn also has forced—or given a ready excuse for—firms to increase profits by shrinking their payrolls, laying off millions of workers and reducing the pay of millions more. It has simultaneously induced firms to ratchet up the pay of their “talent”—the executives and traders who drive the profits. At the same time, the Great Recession has starkly revealed the political power of big business and of Wall Street. Both have been able to enhance their profits by exacting money and other favors from government—even from one under the nominal control of the Democratic Party.

Unless these trends are reversed, the financially stressed middle class will not have the purchasing power to keep the economy growing. This will hurt even those who are well-off. A political backlash could generate a similar result, or worse. Margaret Jones and her Independence Party are fictional, but the anger on which she bases her appeal is not.

I cannot pretend that the following measures would remedy these problems altogether, but they represent important steps. They would help restore the basic bargain. As such, they would fill the gap in aggregate demand, and would preempt a politics of resentment. Some of these reforms would be costly, but I suggest ways to pay for them so they would not increase the national debt. To the contrary, they are likely to produce a budget surplus. And because they would generate stronger and more sustainable growth than the policies we now have, they would shrink the debt as a proportion of the national economy in years to come. The costs of inaction are far greater. An economy functioning well below its capacity is a terrible waste of all our resources, especially of our people; a society riven by resentment is potentially unstable.

A reverse income tax  (welfare for the working poor)
A carbon tax.  (recouping subsidies in production at the point of consumption)
Higher marginal tax rates on the wealthy.
A reemployment system rather than an unemployment system.  (worker training)
School vouchers based on family income. 
College loans linked to subsequent earnings.
Medicare for all.
Public goods.  (free parks, museums and public transportation)
Money Out of Politics.

Everything else seeks to address income inequality through redistributive taxes and by shifting costs to the government.   While some of the proposals are necessary (e.g., Medicare for all and higher marginal tax rates on the wealthy), none of them are sufficient, alone or together, to address thre real problem, of which income inequality is only a symptom.

Again, Reich's central thesis is that the Great Recession is a symptom of income inequality.  That's not correct. 

The Great Recession was not caused by income inequality but by a major financial crisis, which was itself caused by debt-financed financial speculation.   

The Great Recession is being prolonged by debt inequality, not by income inequality.  The American middle class in these uncertain times feels compelled to pay down what debt it has (which is a good thing because the banks aren't lending).  But paying down existing debt doesn't add to the GDP.  If the American middle class were not so weighed down with debt (i.e., if its debt-to-wage ratio were not so high), it would be out there spending right now, even with the same levels of income inequality. 

Note: Reich asserts that the American middle class turned to debt as a "coping mechanism," but the fact is that debt was pushed on the consumer like a drug.  Starting in the 1980s, the financial sector greatly expanded access to credit and began marketing it like product that everybody had to have.  "What's in your wallet?"

Addressing income inequality will not prevent boom-bust cycles, which are always caused by debt-financed financial speculation. 

Addressing income inequality also will not address debt inequality.  Giving people more money to start just gives the banks more money to siphon off through debt service. 

And giving the middle class a taste of the things the elite take for granted and believe to be important won't change the fact that not everybody comes from the same mold or has the same interests or abilities.  Making college more affordable won't help people who can't or don't want to go to college.  Providing worker training won't create jobs.  Offering private school education won't help kids who struggle to learn in a less challenging curriculum.  Free museums and other cultural experiences don't matter much to most people.

The current system is fundamentally broken, and shuffling money around won't fix it.  The fact is that the only thing America "produces" any more is debt.  Debt is what has fueled our economy for the last thirty years and has masked an ongoing depression for the last ten years.  The only answer the Obama administration sees is more debt, but it isn't going to happen.

The current system is so broken that the playing field can't be leveled.  As long as our private sector, which is dominated by financial institutions, must demonstrate perpetual growth to satisfy shareholder expectations, it will find more and more ways to layer debt on to those willing to accept it (which is everybody but the top decile of American households).

The only way out of our current predicament is to eliminate the dominance of the FIRE sector over our economy, which will require an official industrial policy that encourages investment in what America produces and provides blue collar jobs that provide a living wage.  At the moment, it is possible to make American manufacturing competitive without rejecting globalization through politically expedient tarriffs, but the window of opportunity is closing, and tarriffs will be required if something significant isn't done.

Economist Pat Choate has a much more compelling (and correct) vision than Reich, who seems to be wearing neoliberal blinders (i.e., the very kind of "free market absolutism" that people like Pat Choate and Paul Craig Roberts reject).

Bank of England to Wealthy Savers: Start Speculating in the Equity Markets or We Will Steal What You've Saved

At least that's my translation of this story, which is posted up at Calculated Risk.

Anybody in the UK who can live off his monthly interest income is sitting on a big pile of cash that cannot be "spent" in a single month or even a single year.  If reducing interest rates is enough to cause this kind of saver to start spending his principle, the saver must chase higher yield and, therefore, become a speculator in the secondary bond and equity markets.

The BoE is basically demanding the lower rungs of the wealthy subject themselves to predation by the upper rungs.  You know, the ones that have "dark pools" and HFT algos that selectively cause flash crashes to their advantage.

What ultimately saved capitalism back in the mid-1930s is that the lower rungs of the wealthy realized they were just as at risk as the middle class.  The Bank of England is just begging for a new reform era by behaving this way, which is a great thing.

Dear Mr. Biden: You Have No Base Left

According to an item posted at HuffPo, Joe Biden is telling the Democratic Party's base "to stop whining and get out there and look at the alternatives."

No problem, Joe.  I've looked at the alternatives, and they don't seem meaningfully different from what the Democratic Party offers. 

Yes, we now have an articulate, well-read president compared to what we had, but his judgment is consistently the same as the inarticulate, poorly-read president he replaced.  I see no difference that matters. 

Yes, we now have a president of mixed race, and it is impossible to imagine a Republican presidential candidate of mixed race or a racial minority, but the fact is that your mixed race president consistently reaches the same conclusions as the white president he replaced.  Again, I see no difference that matters.

Yes, we now have a president who says how much he cares about the less fortunate among us, but his actions prove that he doesn't, just like the fool who sat in his chair before him.  Again, I see no difference that matters.

Yes, we now have a president who championed healtchare for all, but his solution was a Republican one that was very far from the no-mandate public option that he ran on.  In this case, there is no difference (in spite of the Republicans faux protests to the contrary).

I am no longer a part of the Democratic Party's base.  Now, I just don't care about the parties.  My job is to do my best to give each party the chance to utterly destroy itself.  Job One right now is to help your party, Joe, completely implode, and I am going to vote against Democrats that I actually like in order to accelerate the political demise of asshats like you and your boss.  Whining is what children do, Joe.  I'm not a child, Joe, and you and Barry have made a huge mistake in treating me and others like me, as if we were children.

Enjoy your one term as Vice President.

UPDATE:  Here's an interesting piece from Crooks & Liears entitled "Rich Vote with Their Wallets to End Bush Tax Cuts.  Again," which includes a graphic showing how 52% of households having an income over $200,000 voted for Obama.  Well, my household was part of that demographic and has been for many years.  I've voted against my own self-interest for two decades because I was fool enough to believe that there was somebody out there looking out for the middle class (which I am no longer part of) and the American Dream (which I managed to achieve against the odds).  Now, I know otherwise, and I will start behaving accordingly, not to embrace my inner asshat but to get the asshats out of power so we can get back to having a robust middle class.

Cost Arbitrage Hitting Wall Street In Spite of Continuous Backdoor Bailouts

Wall Street's cannibalization of the real economy is coming home to roost.  As reported on Fox Business (and posted up by Zero Hedge here), Morgan Stanley and other Wall Street firms are freezing hiring and may soon move to cutting jobs, something I don't think it has done since 2008 when the financial crisis was in full bloom.

Wall Street firms, like all publicly traded companies, must show perpetually growing profits from quarter to quarter.  That's the rule they invented, and they have to follow it, too.

Faced with fewer real people trading the secondary markets (it seems to be mostly Wall Street computers pushing prices around these days) and a reduction in borrowing in every private sector, the only way for the Wall Street firms to increase the appearance of profitability is to cut costs, and the easiest way to do that is to lay people off.  (Apparently, the mini flash crashes Wall Street computers seem to be creating weekly, along with other forms of cheating, simply aren't lucrative enough to avoid layoffs.)

And thus Wall Street continues to add to its own demise along with the demise of the U.S. economy.

Public Company M&A: Good for Wall Street, Bad for the Real Economy

There has beeen a spate of mergers and acquisitions among publicly traded companies, including some apparently puzzling moves by Intel and others. 

Today's announcement of Southwest Airlines' proposed acquisition of AirTran Airways provides an excellent opportunity to discuss why such acqusitions are actually a bad thing for the economy.  Although this particular deal, which looks like a relative bargain for Southwest in view of the fact that AirTran has one quarter the top line revenue and the same net income after taxes, does not seem to have the hallmarks of "stupid accounting tricks" (i.e., cost arbitrage through accounting rules) that provide the illusion of increasing shareholder value, the deal is a horizontal combination that will clearly reduce competition and lead to increased costs for consumers while shedding jobs due to "consolidation."

While we're at it, we might as well discuss other attempts to prove shareholder value, such as MSFT's recent move to borrow money to pay dividends in order to avoid paying taxes on repatriated funds.

The fact is that corporate behavior is being shaped by tax laws and accounting rules, and the Obama administration really needs to think about ways to at least temporarily change that behavior to revitalize the economy.

Anyway, I plan to update this post today or tomorrow to flesh out the discussion.

Note to Robert Reich: Debt Gap Is What Is Really Killing the U.S. Economy

In a recent interview (h/t to Jesse for the link), Robert Reich, according to the author of the piece, "argues that income inequality has left America's middle class too unstable financially to fuel demand for goods and services as in the past."

While income inequality is certainly an important factor in the demise of the U.S. economy, debt inequality is even more important.   More precisely, what is killing the U.S. economy right now is the huge and increasing inequality in the ratio of debt-to-wages for the top 10% of American households versus everyone else.  For the bottom 90% of American households, wages constitute the vast majority of household income.  While the debt-to-wages ratio of the top 10% of American households has remained relatively constant over the last twenty years, the debt-to-wages ratio of the bottom 90% of American households has almost doubled. 

This is no accident.  The debt-to-wages ratio of the bottom 90% of American households almost doubled because their outstanding debt substatiantially increased while their share of total wages largely remained unchanged.  This was due to increasingly loose standards for the extension of credit, which has led to many of the usurous practices that we're seeing today in consumer credit.  To put it bluntly, the American middle class is being systematically preyed upon by the financial sector.

If pre-1980s debt-to-wages ratios had been maintained, there's every reason to believe that the U.S. economy would not be "dead in the water" today, that people would be willing to spend money buying new things instead of feeling required to just serve the debt they already have.  Of course, we wouldn't have had the illusion of GDP growth that all that new debt helped to create (along with accounting tricks from the BEA).

Later today, I'll update this post to include data and charts that support my assertions regarding debt-to-wage ratios.  There's no straightforward way to calculate this ratio too far back in time, but there's solid data dating back to 1988.

What "Prices" Are the Federal Reserve Supposed to Keep "Stable"?

The Federal Reserve's latest moves (maintining ZIRP and continuing QE-lite) made me question whether these moves actually further the stated objectives of the Fed, which are set forth in Section 2a of the Federal Reserve Act:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Section 2a was added to the Federal Reserve Act in 1977 by way of an amendment passed in the wake of a 1975 House Concurrent Resolution 133, which expressed "the sense of the Congress that monetary policy be conducted so as to ‘maintain longrun growth of the monetary and credit aggregates commensurate with the economy's longrun potential to increase production so as to promote effectively the goals of maximum employment, stable prices, and moderate longterm interest rates.‘"  House Report 95-744.

Apparently, House Concurrent Resolution 133 was a BIG DEAL.  First, it required the Fed to embrace full blown Chicago-style monetarism, focusing on controlling the money supply instead of merely interest rates.  Second, it instituted semi-annual reporting to Congress, which continues to this day.  Interestingly, House Concurrent Resolution 133 appears to have been a compromise among both parties because then, as now, there was a log of talk about auditing the Fed.

The Fed's forced embrace of monetarism was a testament to the political genius of Milton Friedman's and Anna Schwartz's A Monetary History of the United States, 1867-1960, which was published in 1962.  The book placed the blame for the Great Depression squarely on Fed policy and, specifically, that the Fed's policy caused contraction of M1 money supply.  (Steve Keen has noted, however, that Friedman pulled a fast one, that M0, the monetary aggregate over which the Fed has some control, actually expanded even as M1 contracted, which implies that it was not Fed policy but bank policy and depositors withdrawing their money from banks).  With inexplicably high inflation in the late 1960s followed by stagflation in the 1970s, politicians needed a scapegoat, and Milton Friedman gave them one.

The twin issues in 1975, when stagflation ruled, were unemployment and inflation.  In context, then, the "prices" that were to remain stable were the prices of consumer goods, not asset prices.

By the way, the Fed abandoned targeting money supply aggregates in the early 1980s after doing so proved to be a complete and utter failure.  That should make you wonder, if Paul Volcker really killed the inflation monster with his monetarist policies, how come his monetarist policies were killed shortly thereafter?  This is a topic for a forthcoming post.

Returning to the central question of this post, do the Fed's current policies of ZIRP and QE "promote effectively the goal[] of . . . stable prices?"  Clearly, quantitative easing has no direct effect on consumer prices because it is merely a mechanism for adding to bank reserves in order to promote additional lending.  When nobody wants more credit and/or the banks aren't lending-- both of which seem to be true today, well, then, quantitative easing has no effect at all on consumer prices and cannot be said to "promote effectively the goal of stable prices."  Similarly, the zero interest rate policy, which, like QE, is designed to promote additional lending, fails to "promote effectively the goal of stable prices" for exactly the same reasons as QE.

Okay.  If the Fed's policies of ZIRP and QE are not keeping consumer prices stable (and could actually be encouraging price inflation due to speculation in consumer commodities), are there any prices that they are keeping stable?  Yes, the Fed's policies are propping up prices in the secondary bond and equity markets.  Another way to put it, the bond and equity markets are asset bubbles that the Fed policies are preventing from deflating.

NOTE: Whether or not the Fed is complying with Section 2A of the Federal Reserve Act deserves a lot more attention and will be the subject of at least one more post, this time with data analysis.  Further, I will be updating this post to provide links to some of the source materials I reviewed regarding how Section 2A came about, just in case you're interested.

Karl Denninger Is On Fire (Again)

One of the things I like about Karl is that he calls thing like he sees them.  This time, it's about the fraud done by the banks.  Yes, he casts some blame on the government for setting up a system that absolves banks of wrongdoing, which is completely fair, but his focus is on the banks, where it ought to be.

Here's the impassioned conclusion to his post:

How far does this have to go ladies and gentlemen, before you've had enough?; Before you simply refuse to submit?  How much of your money - both present and future earnings - has to be stolen before you will rise and say "no more"?

How much?

Do you need to be reduced to living under a freeway overpass?  Eating scraps from a garbage bin?  Is not having your retirement and income security destroyed not once, but twice in ten years enough for you to demand that this crap stop, and for you to refuse to labor and thus create more wealth that these crooks can steal until you obtain effective redress and the people responsible are held to account?

These events were not accidents folks.

They were premeditated and intentional, undertaken with the full knowledge of what would - and did - happen.

The truth has been covered up, whitewashed and papered over by both major political parties, neither of which is willing to stand and demand that all of these void agreements be rescinded, that the funds stolen be returned and that everyone involved in this tawdry mess go straight to prison.

No, instead all you've heard is "irrational exuberance."

There was nothing irrational about it folks.

It was intentional, mendacious theft

Confirmed: Bush Tax Cuts Substantially Harmed the Economy

David Cay Johnston has a lengthy piece analyzing the performance of the economy during the Bush years and the fiscal effect of the Bush tax cuts.  I have not had a chance to review the analysis in detail, but Johnston is somebody whose analysis I've come to trust over the years.

Here's his ultimate conclusion:

The hard, empirical facts:
 
The tax cuts did not spur investment. Job growth in the George W. Bush years was one-seventh that of the Clinton years. Nixon and Ford did better than Bush on jobs. Wages fell during the last administration. Average incomes fell. The number of Americans in poverty, as officially measured, hit a 16-year high last year of 43.6 million, though a National Academy of Sciences study says that the real poverty figure is closer to 51 million. Food banks are swamped. Foreclosure signs are everywhere. Americans and their governments are drowning in debt. And at the nexus of tax and healthcare, Republican ideas perpetuate a cruel and immoral system that rations healthcare -- while consuming every sixth dollar in the economy and making businesses, especially small businesses, less efficient and less profitable.
 
This is economic madness. It is policy divorced from empirical evidence. It is insanity because the policies are illusory and delusional. The evidence is in, and it shows beyond a shadow of a reasonable doubt that the 2001 and 2003 tax cuts failed to achieve the promised goals.
 
So why in the world is anyone giving any credence to the insistence by Republican leaders that tax cuts, more tax cuts, and deeper tax cuts are the remedy to our economic woes? Why are they not laughingstocks? It is one thing for Fox News to treat these policies as successful, but what of the rest of what Sarah Palin calls with some justification the "lamestream media," who treat these policies as worthy ideas?
 
The Republican leadership is like the doctors who believed bleeding cured the sick. When physicians bled George Washington, he got worse, so they increased the treatment until they bled him to death. Our government, the basis of our freedoms, is spewing red ink, and the Republican solution is to spill ever more.
 
Those who ignore evidence and pledge blind faith in policy based on ideological fantasy are little different from the clerics who made Galileo Galilei confess that the sun revolves around the earth. The Capitol Hill and media Republicans differ only in not threatening death to those who deny their dogma.

How much more evidence do we need that we made terrible and costly mistakes in 2001 and 2003?

You can find the full piece here.

My only issue with Johnston is that he continues to think in terms of the Democrat v. Republican frame, which I think will prevent his analysis from every penetrating the biases of self-identifying Republicans/conservatives. 

The Inflationary Effects of Stock Grants

I've previously stated that I believe that, when an economy is operating normally*, the primary cause of inflation is debt-financed financial speculation. 

I'm going to restate my position and assert more broadly that the primary cause of inflation is financial speculation.  Why have I dropped the "debt-financed" qualifier?  Employee stock grants.

I live in the San Francisco Bay Area, the epicenter of the Internet Bubble.  In the mid-1990s, we had so many "Internet millionaires" bidding up the housing prices around here that our housing bubble started around 1995.  Today, we have the "Google millionaires."  And I personally have received a substantial sum of money by selling thousands of shares of stock I received through grants of stock and stock options.

The fact is that an employee who exercises a stock option is creating money from thin air as assuredly as and more effectively than any bank who engages in fractional reserve lending. 

I will update this post later with further thoughts on the matter, particularly regarding whether stock and option grants are a good idea or not.


*Hyperinflation is the pathological case where the market no longer believes that the sovereign will make good on its promise to back the currency.  The legitimacy of all currency, whether fiat currency or gold-backed currency, depends on the sovereign's guarantee of the currency.

There Is More Household Deleveraging Than the Data Show

As I suspected, the banksters are not writing off what appear to be worthless second mortgages and home equity lines of credit. 

For example, the top four banks (BofA, Citi, JPM and Wells Fargo) hold at least $423 billion in home equity loans, and over a third of that amount is for homes that are either worth less than the first mortgage or close to it (i.e., there's no hope of getting any money out of foreclosure, and the likelihood that people defaulting will be able to pay the difference).  Given the amount of leverage that the financial sector created in the derivatives market off of mortgage debt, if they were to write off that $150 billion in second mortgages, it could easily translate into write-offs of financial sector debt on the order of $1 trillion or more.

Check out this post from Larry Doyle of Sense on Cents for the details.

Shorter Karl Denninger: ZIRP and QE = Forced Transfer Payments from the Middle Class to the Rich

Karl nails this one: Why The Fed's Policies WILL Collapse The Economy

The Fed simply cannot debase the currency enough to account for the tsunami of bad debts profligate financial speculators incurred over the last decade.  Even if the Fed were to devalue the dollar enough such that the productive economic sectors' wages were essentially reduced to zero, it will still be like bailing out the Titanic with a thimble.

NOTE: I plan to publish a wonky version of my "There Is No Red Pill" post that removes the pop references and most of the cynicism that reviewing the underlying data instilled within me.  There will be a lot of econ chart porn, so be prepared (not suitable for work because sleeping on the job is grounds for dismissal).

Brad Delong Makes Bid for Larry Summers' Job

Brad Delong is a smart, savvy economist and political animal.  I always enjoy his essays/posts on economic history, but I everything else he writes is tainted by his own ambition to return to Washington D.C. to serve a Democratic administration (in this case Obama's).

In his latest post, Brad gives a bit, wet sloppy kiss to Larry Summers' departing ass to prove that Brad is prepared to be exactly the same kind of Wall Street tool that his old boss Larry is.  Oh, Brad doesn't say he wants the job.  He even recommends others to fill the position.  But c'mon!  It is pretty clear that he wants the job, that he has taken on the mantle of Obama/Summers propagandist/apologist with the hope of getting something out of it.

 Quoting:

The job of Assistant to the President for Economic Policy has two components:

1. Making sure that the President hears and considers the arguments, and makes an informed decision.
2. Making sure that everybody thinks that the president has heard and considered their arguments, and made an informed decision, and that they are valued and respected members of the team who are being given due influence and deference.--and also to make sure that the president hears everybody's arguments and makes an informed decision.

Larry is superb at figuring out how to present complicated arguments to make them comprehensible to non-experts, and at setting up frameworks for discussion and debate that kept policy discussions on track and organized. That is most of the job. That is (1). And at that Larry is the best in the world.

The other part, part (2)--making sure that everybody thinks that their point of view has been given a fair shake, and that they are valued and respected measures of the team? Well, given who Larry is, he far, far exceeded expectations. Only one public shouting fight in the halls of the West Wing in two years is... quite good, really.

In rebuttal, I offer two words (or one name): Brooksley Born.

In the Debtrix, There Is No Red Pill

In the last forty years, Americans have gone from citizens to consumers, from consumers to consumables.  As citizens, we existed to participate in society by producing goods.  As consumers, we existed to proclaim our individuality by consuming more goods than our neighbor (who we didn’t know then, and still don’t know now).  As consumables, we exist solely to incur debt and be consumed by it.

We are trapped in the Debtrix, coppertops, and there is no escape.  There is no Morpheus in this debt matrix (he’s been rebooted as an actor), there is no Neo (another actor), and there is no red pill.

For the vast majority of us, those of us in what used to be called the middle class, our value to the Debtrix is measured by the size of our credit line and our propensity to use it.  So make sure to leverage up and spend borrowed money on things you don’t really need or want.  But, whatever you do, don’t lose your job because you are unlikely to find it (especially if you damage your credit score). 

For those of us without credit, well, our value to the Debtrix is measured by our ability to provide a pool of cheap, temporary labor, primarily to incentivize those with credit lines to produce more in order to keep them.  The middle class coppertops will have to increase productivity or end up like you, eating cake.

For those of us at the top of the pecking order, our value to the Debtrix is measured by our complacency in allowing it to persist.  The longer we are in the Debtrix, the more time it has to consume our wealth and our humanity (it’s already too late for Charles Munger and this guy, too). 

Although the Debtrix cannot be escaped, it can be destroyed through the very means it uses to consume us: debt. 

First, stop taking on new debt.  This alone will prevent the Debtrix from growing and will even force it to shrink as it fails to maintain the illusion of perpetual exponential growth.

Second, start retiring old debt.  If that means selling some of your possessions to pay the debt off, do it.  Many of us don’t use or need a lot of what we own.  If that means defaulting on non-recourse mortgages, do it.  The bottom 90% of households owes roughly 80% of the outstanding household debt, which is about $11 trillion total, of which $8 trillion is mortgage debt.  When you include the leveraged side bets the architects of the Debtrix placed on us coppertops paying that $8 trillion back, you’re looking at as much as $88 trillion in total losses for the Debtrix, which would break it.  TBTF would become TBTB (“Too Big To Bail”).

The Debtrix cannot be escaped, but it can be destroyed, and when it is, we'll be citizens again.

John Kenneth Galbraith and the (Now Not So) Innocent Fraud of the Fed

John Kenneth Galbraith was an interesting and insightful man, more of an institutionalist economist than anything else. 

Generally, I agree with his discussion of the Fed, found below, which is excerpted from his essay The Economics of Innocent Fraud: Truth For our Time.  Based on the Fed's actions today, I do think JKG's observations are worthy of a codicil, which is that, while the Fed has little consequence on the real economy, it can be quite effective in enriching the banks at the expense of savers.  The Fed's zero interest rate policy and quantitative easing "lite" (soon to be QE2) are harming real Americans and need to stop.

THE ELEGANT ESCAPE  FROM REALITY

COME NOW to our most prestigious form of fraud, our  most elegant escape from reality. As sufficiently noted,  the modern economic system is unpredictable in its  movement from good times to bad and then eventually  from bad to good. Boom, bubble and inflation go on to declining   production, rising unemployment, reduced earnings,   stable but lower prices. Then, in time, to a revival -to  higher employment, greater earnings, talk if not the reality  of inflation. To limit unemployment and recession in the  United States and the risk of inflation, the remedial entity  is the Federal Reserve System, the central bank.  For many  years (with more to come) this has been under the direction   from Washington of a greatly respected chairman,  Mr. Alan Greenspan. The institution and its leader are the  ordained answer to both boom and inflation and recession or depression with its lower production, financial and economic   contraction, distress and reduced employment.  Quiet measures enforced by the Federal Reserve are thought  to be the best approved, best accepted of economic actions.  They are also manifestly ineffective. They do not accomplish   what they are presumed to accomplish. Recession and  unemployment or boom and inflation continue. Here is  our most cherished and, on examination, most evident form  of fraud.

The false and favorable reputation of the Federal Reserve  has a strong foundation: There is the power and prestige of  banks and bankers and the magic accorded to money.  These stand behind and support the Federal Reserve and  its member- that is, belonging-banks. If in recession the  interest rate is lowered by the central bank, the member  banks are counted on to pass the lower rate along to their  customers, thus encouraging them to borrow. Producers  will then produce goods and services, buy the plant and  machinery they can now afford and from which they can  now make money, and consumption paid for by cheaper  loans will expand. The economy will respond, the recession  will end. If then there is a boom and threat of inflation, a  higher cost of borrowing initiated also by the Federal Reserve   and imposed on its lending to member banks will  raise interest rates. This will restrain business investment  and consumer borrowing, counter the excess of optimism,  level off prices and thus insure against inflation.

The difficulty is that this highly plausible, wholly agreeable process exists only in well-established economic belief  and not in real life. The belief depends on the seemingly  persuasive theory and on neither reality nor practical experience.   Business firms borrow when they can make money  and not because interest rates are low.  As this is written, in  2003, during a recession, the lending rate of the Federal Reserve   has been reduced roughly a dozen times in the recent  past. These reductions have been strongly approved as the  wise and effective response to the recession, so acknowledged   in both popular and learned comment. How good  this simple, painless design, free from politics and in the  hands of responsible and respected professional and public  figures free from political taint. No disagreeable debate, no  pointless controversy. Also, and uncelebrated, no economic  effect.

Especially as regards recession, hope always awaits the  next Federal Reserve meeting. There is then promise, prediction   and ultimately no result.  On no economic matter  does history more reliably repeat itself. One should, however,   be gentle. The action is reputable and well regulated;  there is general agreement by the participants and approval from the financial world; it is just that nothing perceptible  occurs. Recovery comes, but not in any visible way, from Federal Reserve action. Housing improves as mortgage  rates decline. Elsewhere there is painful indifference. Interest  rates are a detail when sales are bad. Firms do not borrow   and expand output that cannot be sold.

SINCE 1913, when the Federal Reserve came fully into existence, it has had a record against inflation and notably  against recession of deep and unrelieved inconsequence. In  World War I, prices doubled in the course of the two years  the United States was at war. No remedy came from the  new and magical central bank. In the 1920s, in Florida and  then disastrously on Wall Street, came unbridled and, in  its aftermath, deeply damaging speculation. There was no  effective restraint from the Federal Reserve. Then for a decade   the Great Depression, and once more no curative action   from Washington and the Fed. Informed debate, no  result. Deflation and depression persisted.

During World War II, because of the previous wartime  experience, inflation was greatly feared. In the event, however,   it was closely controlled and no seriously unpleasant  memory remains. Historians pass the problem by. This  agreeable outcome was more than slightly because, acting  on what had earlier occurred, there was no reliance on the  Federal Reserve. Economic policy in this truly difficult time  could not be based on hope or mythology. As one principally   responsible for limiting inflation in those years (I was  the deputy administrator in charge of price policy in the  Office of Price Administration and thus immediately concerned   with the action against inflation), I shared the belief  that the Federal Reserve was irrelevant. So it was.

In the decades since World War II, there have been lesser  threats of inflation and recession. The Federal Reserve, after  learned and intense discussion, has acted. There have been well-voiced approval, optimistic prediction and no effect.

Such are Chairman Greenspan's public skills, such is the  ingrained faith in any action involving money, that the Fed,  as affectionately it is called, will receive credit if and when  there is full recovery. The fact will remain: When times are  good, higher interest rates do not slow business investment.  They do not much matter; the larger prospect for profit is  what counts. And in recession or depression, the controlling   factor is the poor earnings prospect. At the lower interest   rates, housing mortgages are refinanced; the total  amount of money so released to debtors is relatively small  and some may be saved. Widespread economic effect is absent   or insignificant.

In restraining inflation, or what seems such purpose, the  Federal Reserve must be especially cautious; it cannot he  thought to be in conflict with economic well-being. If and  when recession returns, the defining forces, as later noted,  will be the consumer spending and industry investment so  called forth. On these, what follows from central-bank action   is minimal. Business firms respond to diminishing  sales. Here the Federal Reserve has no decisive role. Only in  innocence does it control general consumer and business  spending.

Nonetheless, it is thought good to have an uncontroversial,   politically neutral institution headed as in all recent  times by an informed, confident and respected figure of no  slight theatrical talent. How agreeable decisions taken in  reputable surroundings beneath the portraits of the financially celebrated of the past. It is thus that economic policy  should be decided. That nothing important results is overlooked.   The belief that anything as complex, as diverse and  by its nature personally as important as money can be  guided by well-discussed but painless decisions emanating  from a pleasant, unobtrusive building in the nation's capital   belongs not to the real world but to that of hope and  imagination. Here our most implausible and most cherished   escape from reality. No one should deny those participating   their innocently acquired prestige, their sense of  personal competence, their largely innocent enjoyment of  what in economic effect is a well-established fraud. Perhaps we should let their ineffective role be accepted and  forgiven.