America needs jobs

Posted on by j.giglio

America is stuck in the worst economic, political and social crisis since the Great Depression. Despite the unemployment rate dropping 2.5 percentage points from its peak in October 2009, the labor market remains bleak and it is becoming ever clearer that the federal government needs to act aggressively to fix the problem.

The drop in the official unemployment rate is partly due to people who have stopped searching for a job. If a person has not worked or looked for work in the past 12 months, he or she is no longer included in the official government statistics.

The recession officially ended in June 2009, but job growth has remained painfully slow. It took 15 months after the 1990-1991 recession and 39 months after the 2001 recession for employment to recover to precession levels. At the recent pace of job creation, it will take years for employment to recover from the Great Recession that started in 2007.

The President’s Council on Jobs and Competitiveness has estimated that we will need more than 20 million jobs by 2020. The American economy has never created jobs at that rate in peacetime.

The Commerce Department says the American economy grew at an annualized rate of only 1.8 percent in the first quarter of 2013. Gross Domestic Product needs to grow by 3 to 4 percent annually to reach its productive potential. The economy is failing to generate enough jobs to support sustainable growth.

About 150,000 new jobs have to be created each month just to absorb new entrants to the labor force. Left to current market forces, America faces a serious job deficit that will last for at least the rest of this decade.

Frustrated with the slow American recovery from the recession, the Federal Reserve has kept interest rates near zero since late 2008 and is currently buying $85 billion in Treasury and mortgage bonds each month. The efforts are meant to increase spending, investment, hiring and overall growth.

But the Fed has done almost all it can with monetary policy. The American economy needs fiscal stimulus to restore a satisfactory level of employment and income.

The first order of business is to pick the low-hanging fruit to jump-start job growth and compensate for the pressures to outsource American jobs that leave society to pick up the cost of unemployment.

For starters, offer private firms tax benefits for hiring new workers. Right now, those firms receive tax benefits for buying new plant and equipment – even if it replaces existing workers – but no tax benefits for hiring. So fiddle with the tax code to change these tax regulations 180 degrees.

Experts from all quarters agree on the importance of investing in America’s physical and communications infrastructure. This is about as controversial in economics as antibiotics are to doctors. Such investments in income-producing capital assets, not consumption spending projects, would yield positive economic returns and create jobs for years to come. Financing these investments by borrowing is no different than a business building a new plant or a family building a new house. If nothing else, such investments will remove constraints on infrastructure capacity that currently depress economic growth by making it more expensive to move goods and services.

Finally, the military can help solve the shortage of workers with technical skills that businesses often cite. The armed forces have infused technology into nearly every aspect of their operations, and they should train people- who would be paid as federal employees during training- for private sector jobs. The military has a distinguished record of preparing and certifying individuals across a full spectrum of occupational specialties that are in demand by the private sector. It should also be empowered to contract with community colleges for the additional space and instructor capability needed to accommodate the increase in trainees.

How do you detect a society in real trouble? One sure-fire sign is persistently high unemployment. America needs an aggressive, comprehensive strategy to bring employment back to pre-recession levels and prepare workers for 21st-century jobs.

originally published: July 16, 2013

The salacious relationship between a man and his gun

Posted on by j.giglio

In April, a series of gun control bills, including bipartisan legislation designed to expand background checks, were euthanized in the U.S. Senate after each failed to receive the 60-vote supermajority needed to pass. The votes by the world’s greatest deliberative body were a body blow to the campaign to pass legislation to curb gun violence.

Maybe it’s time to admit what the gun debate is really all about, even though it’s a topic not discussed in polite society.

The gun control bills would have banned the sale of certain military-style assault weapons, outlawed high-capacity magazines and expanded criminal background checks on gun buyers. This latter provision is supported by 91 percent of Americans, according to a Gallup poll.

Guns are pervasive in America. The FBI estimates that about 60 million Americans own over 300 million guns and the number is climbing. More than ever, guns are in. There is practically a gun for every man, woman, and child in the country.

Nearly all of the mass shootings in recent years- Aurora, Tucson, Columbine and most recently Newtown, Conn., where a one-man army tragically abbreviated the lives of 20 children, were committed by deranged white males. These bloodbaths, which could happen again any day, were not sufficient to make firearm possession more difficult or even enforce existing laws more faithfully. In the end, they have changed nothing.

The subjects of guns and violence always elicit emotional responses from gun haters and gun lovers and generate heated debates among well-meaning people for whom democracy is a burning faith rather than a belief based on reason. The main arguments are stale by now.

Let’s get beyond what philosophers call the “habit of abbreviated thinking.” What is the fight over guns really about? Maybe it is time to consider the association between firearms and phallic (Freudian) symbolism.

Back in the late 1960s, Mad magazine did a hilarious article based on the idea of combining a gun magazine with a hot romance magazine. The result was called “Passionate Gun Love.” One of the articles was titled “Field-Stripping the M-1 Rifle.” The content and writing style is left to your imagination.

The point, of course, was to emphasize the enormous amount of aggressive sexual sublimation there is in the emotional involvement with firearms of the average American gun enthusiast, which only seems to have become more intense over the years and rules the psyche in an effort to overcome a sense of lost virility or “shooting blanks.” Yes, sublimation between guns and sex, more phallic symbolism.

Some gun owners do seem to get a little too much fun out of fondling and firing guns. Obviously inanimate objects such as the business end of a long-barreled assault weapon have agency that may compensate for just average manhood. And when you have something that large, you are right to be concerned that the government may want to nationalize it.

Does this suggest that the only feasible way to pass serious gun control legislation is to first pass legislation fully legalizing every variety of sexual activity involving consenting adults and rebrand guns as sex toys as well as intellectual companions? Call this Freudian psychobabble if you want. But American men – and the legislators who represent them – are proving that Freud was right.

originally published: June 29. 2013

The resurgence of Gatsby on Wall Street

Posted on by j.giglio

Gatsby mania is back with a new film adaptation of the novel, a music hall version of the book in London, last year’s off-Broadway play and several new books on the protagonist and the author. Perhaps the reason for the buzz around “The Great Gatsby” is that the book is such an accurate reflection of modem America.

Bad guys are often the most interesting fiction characters. Psychologists who claim to know about these things tell us that male readers can’t help admiring fictional bad guys because they have the minerals to go after what they want without being hung up by laws, social rules or moral constraints.

They see. They want. They take. Simple as that.

Female readers can’t help admiring bad guys either, but for different reasons. Deep down, psychologists insist, every woman is attracted to men who seem able to give them superior children. In our rarified social world, “superior” means children who can make themselves rich and celebrated.

F. Scott Fitzgerald’s Jay Gatsby is one of the classic bad guys of American fiction. He runs a successful bootlegging operation- so successful that he’s able to buy a bay-front mansion on the upscale north shore of Long Island, just east of New York City, staff it with servants and a yellow Rolls Royce, and throw enormous parties every weekend – all while circulating artfully mysterious stories about being the lone survivor of an aristocratic West Coast family.

Gatsby is different from most bootleggers. For one thing, he isn’t a standard urban-slum ethnic type like AI Capone. Instead, he grew up in a small Midwestern town and experienced the kind of semi-rural near-poverty that was the lot of so many WASPS in those days.

He burned with a desire to “improve himself’ borne of the popular copy book maxims of the day that promised upward mobility and the American Eden. He took a critical step toward achieving his goal when he became an Army officer during the First World War.

As a handsome young military officer whose down-market penury was hidden by a well-tailored uniform and Army paychecks, Gatsby found it easy to gain entry into the aristocracy’s social world in the small southern city where he was assigned for training. That’s how he met Daisy, the beautiful, callow, capricious daughter of an upscale local family who became the love of his life and personification of all his ambitions.

After Gatsby was posted to France just in time for the Armistice and found his return to the United States delayed by red tape, restless Daisy let herself be married off to the smirking son of an aristocratic Chicago family. It left Gatsby emotionally shattered and driven to make himself as rich as possible by any feasible means so he could “buy back” Daisy from what he convinced himself was a mere “marriage of convenience.”

Hence the lucrative bootlegging business, the mansion right across the bay from the one where Daisy  and her husband live and Gatsby’s made-up stories about his aristocratic background. But all to no avail. His pursuit of the American Dream fails and he is ultimately killed.

If the media is to be believed, Wall Street sharks like Ponzi schemer Bernie Madoff- one of the few who’s actually been sent to prison- are currently America’s leading bad guys. They manipulate other people’s money to serve their own ambitions, oblivious to how the resulting economic disaster has affected ordinary Americans.

Wall Street trickery helped drive America into an economic abyss from which we can’t seem to emerge, despite a Gatsby-like stock market rally. The result is disillusionment with the American dream and its promise of social and economic mobility.

“The Great Gatsby” is a reflection of our own time. The richest one percent received the preponderance of income during the Jazz Age, and the same income inequalities exist in America today. The party of the Clinton-Bush (rhymes with tush) boom years ended long ago, replaced by the Great Recession- just as the Jazz Age obsession with conspicuous consumption ended with the stock market crash in 1929.

The novel stands as an endorsement of Balzac’s comment that “behind every great fortune is a great crime.”

originally published: June 15, 2013

Student-loan problem has nothing to do with interest rates

Posted on by j.giglio

A recent New York Federal Reserve report suggests the mounting burden of student-loan debt is undermining economic growth. That’s probably true, but policy makers should focus on the underlying problem.

Those in their 20s and 30s account for nearly 70 percent of student-loan debt. Buried under loans, they are unable to participate fully in the economy, putting off major purchases such as homes and new cars.

At least 37 million Americans owe nearly $1 trillion for outstanding student loans. One-third of those borrowers are delinquent on repaying, and more than 10 percent of them by more than 90 days. The highest delinquency rates are among 30- to 39-year-olds. Their average personal debt is about $33,000, compared to the overall average of $25,000. Student-loan debt now exceeds aggregate auto loan, credit card, and home equity debt balances, placing it second only to mortgages.

Student loans are not dischargeable in bankruptcy, much like tax debts, child support and alimony, and unpaid debts continue to accrue penalties. It is a classic Catch-22. Defaulting on a student loan damages a person’s credit and job prospects, and it can keep a person out of the mortgage market for years. The federal government has the power to collect on defaulted student loans by garnishing wages and withholding tax refunds and Social Security payments.

Student-loan debt that young people struggle to repay and continues grow even in bankruptcy is not exactly a ticket to a better life and upward mobility. These debtors are, in effect, semi-indentured servants. It is an arrangement that would put a smile on Ebenezer Scrooge’s face.

It is reasonable to assume that this level of student debt burden will adversely impact household formation and decrease the number of first-time home buyers. First-time home buyers with a median age of 30 usually make up more than 40 percent of the home-buying population; now their share is about 30 percent. student-loan debt has many either renting or back living with their parents, trying to make a go of it, their hopes abridged.

Congress is once again trying to agree on an extension of the current student-loan interest rate. In 2007, Congress cut the statutory interest rate of 6.8 percent on federal student loans in half to 3.4 percent for five years. Last year, Congress averted a July 1 doubling of interest rates by agreeing to a one-year extension. student-loan interest rates are again slated to double for more than seven million people by the end of the month if Congress doesn’t act. Democrats and Republicans say they want to head off an increase to 6.8 percent, but they disagree about how to best manage the interest-rate trajectory.

The Republican-led House passed a measure in mid-May that would link the federal student-loan interest rate to that of 10-year Treasury notes, plus 2.5 percentage points. The measure would cap interest rates at 8.5 percent and allow them to vary annually.

This was greeted with Bronx cheers by the Democratic-controlled Senate, which proposes to extend the government -subsidized rate of 3.4 percent for the 7.4 million students with subsidized loans for another two years at an annual cost of $6 billion. The President proposes to set interest rates for subsidized federal student loans each year based on the Treasury note, but to then keep the rate fixed for the life of the loan.

But the dirty little secret about student-loan debt has nothing to do with the interest rate. It is about college costs, which have been rising faster than inflation for the past 15 years. Since the 1980s, the cost of college has increased by more than 400 percent while the median income has only risen 150 percent.

Getting to the bottom of the student-loan problem and its negative impact on the overall economy will require figuring out just where all that tuition money is going and how we can bring college costs under control. 

originally published: June 8, 2013

Another housing market of cards

Posted on by j.giglio

Rising home prices have some concerned that we could be building another house of cards. Housing prices are up 8.1 percent over last year, according to the S&P/Case-Shiller price index.

Sales have been improving too. The National Association of Realtors estimates that 4.65 million previously owned homes were sold in 2012, up 9.2 percent from 2011. Some of the numbers are truly eye-popping. Phoenix home prices were up 37 percent, followed by Las Vegas, where prices rose by 30 percent.

The question is whether the housing recovery is caused by rising demand from people who are doing better economically, or big investment companies, private equity firms, hedge funds and foreign buyers betting on the housing market’s recovery by buying homes, renting them for short-term profit and holding them for long-term price appreciation.

They are buying in places like Florida, Georgia, Arizona, Nevada and Califomia,places where home prices fell the most during the Great Recession.

In the process, they are helping fuel the home price surge, bankrolled by cheap credit made available by the Fed’s zero interest rate policy. They are also shrinking inventory, crowding out local buyers, and making homes beyond the economic reach of first-time home buyers.

It’s like the story about a soapbox orator speaking to a Wall Street crowd about the evils of drugs. When he asked if there were any questions, an investment banker asked, “Who makes the needles?” Never  miss an opportunity.

In the early 2000s, America saw the creation of a housing bubble, encouraged by low interest rate policies implemented in the wake of the 2000 stock market crash and recession that was caused when the dot-com bubble burst. Low interest rates reduced mortgage costs. This stimulated demand for houses and drove up prices.

Rising prices led to the perception that houses were more than just a place to live, they were an investment whose value seemed likely to keep rising, building wealth and funding the homeowner’s retirement. That perception further increased demand for houses, driving prices still higher.

In 2005, Federal Reserve Chair Ben Bernanke said, “House prices have risen by nearly 25 percent over the past two years … at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”

Since the consumer price index we use to measure inflation excludes assets like homes and securities, the index’s nearly flat trend during the middle of the last decade made it easy for the Fed to convince us to be more worried about deflation than inflation and helped justify its decision to keep interest rates low.

China and other low-wage countries were happy to help the Fed keep rates low. By exploiting their non­-union labor forces, they continually reduced the prices of their exports, which Americans bought in ever-increasing numbers. Then they took the proceeds and bought up the U.S. Treasury debt being issued to fund two wars in the wake of large Bush administration tax cuts.

Ours was a nation awash with capital, much of it debt-based, seeking investments that offered generous yields. Home prices peaked in May 2006, stalled and then fell. The American economy officially slipped into recession at the end of 2007.

The housing bubble burst in the fall of 2008, experiencing its Wile E. Coyote moment. Many financial institutions had to write off billions in toxic or worthless mortgage assets. All the large American financial institutions- including Bank of America, Citigroup, Wells Fargo and insurance giant AIG­ ended up getting bailed out by taxpayers. When the housing bubble burst, the 2008-09 recession affected nearly every business in the U.S. and then worldwide.

Let’s hope Wall Street’s speculative housing bet facilitated by the Federal Reserve’s zero interest rate policy doesn’t lead to another crash in which the rise in home prices is not supported by economic fundamentals and ordinary people ultimately bear the cost.

originally published: May 18, 2013

Congress and the president can compromise -to protect themselves

Posted on by j.giglio

On Monday, April 5, Patriots Day, two improvised explosive devices detonated 10 seconds apart near the finish line of the Boston Marathon, killing three people and wounding more than 260. That same day, despite whining, complaining, and hand-wringing about the lack of bipartisanship in Congress and claims that our federal government is broken, the President quietly signed Senate Bill 716.

It is reassuring to learn that Congress can bridge the gaps between the two competing visions of the role government should play in a free society. What a relief to know they could set aside their ideological divide and come together to reach a solution that incorporated the best thinking on both sides. And you thought you could count on one hand the number of times Congress and the President would agree on anything.

The bill they agreed on rolled back key transparency provisions of the Stop Trading on Congressional Knowledge Act, known as the STOCK Act, which was signed into law in April 2012, an election year, in a highly visible signing ceremony where it was said that the legislation would address the “deficit of trust” that divides Washington and the rest of America.

The Senate gutted the disclosure requirements on Thursday evening, the House followed suit the next day and the President signed the bill Monday afternoon.

The STOCK Act, which was written in the wake of a “60 Minutes” segment on insider trading practices in Congress that aired in November 2011, prohibited members of Congress and senior executive and legislative branch officials from trading based on knowledge they obtained as a result of their jobs. It increased transparency by beefing up financial disclosure requirements on stock trades and posting the annual financial disclosure forms filed by federal officials on a publicly available online database.

Senate Bill 716 gutted the provisions of the STOCK Act that were designed to curb trading by 28,000 senior government officials that was based on market-moving non-public information. Sure, insider trading by members of Congress and federal employees is still prohibited, but the ability to verify that such trades took place has been compromised.

But hey, the legislation  is a blessing in disguise. And it is very well disguised.

By unanimous consent, Congress removed the online disclosure requirement for congressional and executive branch staff. Why waste time by asking members to go on record and cast a roll call vote when everyone agrees?

The move clearly violates President Obama’s 2008 campaign promise to allow time for public input by posting every bill Congress passes online for five days before he acts on the legislation. No big deal; it’s not like anyone in government is trying to hide anything.

The new law is a hopeful sign in the wake of all the wretched partisan excess we’ve seen of late. Can progress on gun control, immigration, and the nation’s fiscal woes be far behind?

originally published: May 14, 2013

Unemployment rate ignores the millions who have stopped looking

Posted on by j.giglio

The employment rate is the key measure of Main Street’s economic health and the Labor Department’s April 5 report was weak and discouraging at best. After adding more than 200,000 jobs per month since last November, American employers added only a paltry 88,000 jobs in March, less than one-third the number created during February.

The country needs about 250,000 new jobs each month for five years just to get back to the headline unemployment rate we had in 2007. What’s more, this recent report found stagnant wage growth. We are not exactly witnessing a revival of breadwinners’ jobs.

Job creation was at its slowest pace since last June, totaling less than half the number economists had expected. The headline unemployment rate stands at 7.6 percent, shockingly high for a recovery that is nearly fours years old. This is not even remotely close to the pre-recession 4.7 percent rate in 2007.

Unemployment would be even higher if not for the large numbers of working-age people who have simply dropped out of the job market. Nearly 500,000 people just plain gave up looking for work and are no longer counted in the official employment numbers. Where they have disappeared to is anyone’s guess.

As a result, the labor participation rate fell to 63.3 percent, the lowest since 1979, which was before women entered the labor force in large numbers. If you count this exodus of Americans from the labor force as well as those still counted as unemployed and the involuntary part-timers, the true, actual joblessness rate is closer to 13.8 percent. Our friends in Washington, D.C., are stuck in the tar sands of an old paradigm continuing to focus on the “official” unemployment rate, but this masks the true crisis in the labor market.

Last December 12, Ben Bemanke, the fourteenth chairman of the Board of Governors of the Federal Reserve system, said the Fed would keep running the printing presses and thereby keep interest rates ultra-low for as long as the unemployment rate remained above 6.5 percent as long as its official forecast for inflation does not surpass 2.5 percent.

A jobless rate that low is not valid if it is predicated on a shrinking labor force. By only counting people who actually tried to find work within the previous four weeks, the unemployment rate ignores the millions of Americans who have stopped looking. The result? A falling official unemployment rate is not always a good economic omen.

We want the unemployment rate to go down because more people are getting jobs, not because they are giving up. During an economic recovery, an expanding economy usually brings people back into the labor market. This time, many are staying on the sidelines and more are joining them.

What happens if the real world economy regains its footing and starts to show signs of life? Many of these discouraged workers will probably resume their job searches.

But this will actually increase the size of the active labor force and cause the official unemployment rate to increase as well. This is good news hidden behind seemingly worst statistics. But it is really an admission of how bad things have been all along.

Alternatively, if the  conomy is facing a long twilight of no growth, maybe the Federal Reserve believes these people who have stopped looking for work will never return to the hunt; in this case, the headline unemployment rate will continue to decline as American workers remain on the sidelines.

Of course, this will result in the continuing growth of transfer payments such as unemployment benefits and food stamps, with the average worker leaning on government for relief, and flirting with poverty. They wouldn’t have far to go.

originally posted: April 27, 2013

It’s a wonderful life

Posted on by j.giglio

Those of you who’ve seen Frank Capra’s classic 1946 movie “It’s a Wonderful Life” (at least once, since it’s been a Christmas Holiday perennial on television for decades) will remember one of its most famous sequences.

George Bailey (played by James Stewart) runs a one-horse Savings and Loan bank in the All-American town of Bedford Falls. And one day he’s confronted by a group of his depositors who’ve come to withdraw their savings money because they’ve become nervous about its safety, the classic run on the bank.

He tries to clue them in on the realities of the banking business, explaining that he doesn’t keep their savings in a safe in his back office. Instead, he’s used most of the money to grant each of them affordable mortgages on their homes.

Sam’s money is in Chuck’s house. And Chuck’s money is in Dick’s house. And Dick’s money is in Sam’s house … So it goes.

With each of them able to own the homes they live in instead of having to pay rent to Old Man Potter, the hard-hearted villain who owns the leading commercial bank and most everything else worth owning in town.

What George was trying to describe to his nervous depositors is how the home mortgage and banking business worked in the “Good Old Days.”

If “It’s a Wonderful Life” were made today, its description of banking would have to be updated to reflect last month’s goings on in Cyprus. To secure a 10 billion euro bailout, Cyprus slapped a tax on deposits that ranged from 9.9 percent on amounts above E100k to 6.75 percent on deposits under E100k which translates into $130,000 (the limit for deposit insurance). It then revised the terms of the proposed haircuts to reduce the levy on smaller depositors and raise them on larger ones. In other words, they would tax the bank accounts of citizens and businesses to recapitalize the banks. Afraid that the government was coming for their cash, Cypriots ran to the bank. Much was made of the government’s attempt to get its pound of flesh from bank accounts; people had to wonder if their own money was safe. We were told Cyprus was an isolated case and it could not happen here.

But how does Cyprus compare to what’s happening to American depositors and savers? The Federal Reserve’s zero interest rate policy (ZIRP) is not a tax, but it reaches into the average American’s pockets.

And it is done for the same reason as the bank bailout in Cyprus: to save the financial system. Average Americans are earning next to nothing on their bank deposits, which are actually losing ground to inflation. Yet they can’t borrow from the bank at these ridiculously low interest rates. Maybe Cyprus doesn’t look so bad after all.

ZIRP sets a dangerous precedent. It suggests that governments are not above taking money from depositors to pay for bailout packages. If deposits are not safe from politicians, why should you trust any bank?

ZIRP has been confiscating the savings of Americans for the past five years.

The average interest on a savings account is less than 0.25 percent, a 10-year government bond yields less than 2 percent and inflation adjusted returns on six-month bank CDs are 0 percent. Average Americans have no safe place to park their money and collect a decent return. Is the difference between these returns and normal interest rates equivalent to a tax? In Cyprus, it was a one- time hit to depositor, in America it happens more slowly.

This blow to traditional savers harms the working class, discourages savings and induces some to speculate in the stock market and reach for higher yields on riskier investments. In America, savers aren’t an endangered species; they’re all but extinct.

originally posted: April 20, 2013

Cyprus crisis can’t happen in the U.S.- right?

Posted on by j.giglio

“Neither a borrower nor a lender be,” prattled Polonius to Laertes in Shakespeare’s “Hamlet.” Well, maybe. Last month, the European Central Bank, the European Commission and the International Monetary Fund decided that Cyprus needed a fast 17 billion euro bailout. They proposed to offer the tiny island 10 billion euros and demanded that depositors in Cypriot banks fork over the remaining 7 billion.

Specifically, they proposed taxing bank deposits. Depositors with more than 100,000 euros in their account would be faced with a 9.9 percent tax while those with less would see a 6.75 percent levy.

As you can imagine, depositors rushed to withdraw funds from Cypriot banks before the measure went into effect. So the authorities shut down the banks for several weeks and instituted capital controls. This had to be unsettling for retirees and the working class, as well as small businesses that need to make payroll using their bank accounts.

Setting aside for now how the crisis was averted and whether something similar could happen here, in the real world few businesses of any size can operate without access to short-term credit to smooth out mismatches in their normal cash flows.

Suppose your family’s widget factory pays its employees every Friday. That means a weekly cash outflow. But most of your prime customers are wholesale distributors who pay for purchases from firms like yours on the last day of the month following widget deliveries. So you have four payroll outflows for each injection of cash from sales.

Like the overwhelming majority of businesses, you cover these cash flow mismatches by drawing down a credit line from your local bank each week to make payroll and repay the drawdowns as soon as payment is received.

But one Friday morning when you get on your PC to access your firm’s bank accounts and transfer enough cash from your credit line to cover payroll checks, you see a chilling message on your screen: “All credit lines are frozen until further notice.”

You scrounge around among your firm’s bank accounts and come up with enough cash to cover this week’s payroll, leaving you pretty well tapped out until a big group of customer payments is due to arrive in three weeks. But what about your next three payrolls?

One option is to simply close the factory and lay off your employees until the payments arrive. But a closed factory doesn’t produce widgets, so you can’t deliver to your customers, who may tum to other suppliers. In any case, your future cash inflows will be lower, which means smaller profits.

Another option is to close the factory and lay off your employees for just a week, when you try to find enough emergency cash somewhere to cover the next two weeks of payroll. Losing only one week of production will reduce your loss, but what if you can’t find the money?

The widget company’s experience isn’t just limited to Cyprus. It was repeated a few million times in the United States during the fall of 2008. The results were massive layoffs, lost wages (which meant less consumer spending) and lost company profits. All of which made a disastrous recession even worse.

Why did this happen in the U.S.?

Because too many banks woke up one morning to find that some of the dicey unregulated derivative securities they held in their portfolios had lost most of their value. In a panic, they tried to conserve as much available cash as they could by freezing lending to businesses and individuals alike.

Back in Cyprus, the banks became a tax haven for overseas depositors. They then invested the money in Greek bonds to generate big returns. When the bonds tanked, the banks were on the verge of bankruptcy and needed a bailout.

But there’s no need to be alarmed. It can’t happen here. The American economy has been strong for months now, the stock market is rising, and your 401(k) is going through the roof. Right?

originally posted: April 6, 2013

The tigers of Wall Street

Posted on by j.giglio

The Senate recently held a hearing to look into a series of trades that cost JPMorgan Chase over $6 billion last year, some of which was funded by federally insured deposits. They have come to be known as the “whale trades,” but beyond indicating the scale ofthe loss, the description is a misnomer. You see, likening whales to rogue traders is unfair to whales. A more accurate metaphor is the Siberian tiger, one of the most awesome creatures on earth.

The Siberian tiger was brilliantly engineered to be the world’s ultimate killer, far surpassing the shark, the barracuda and the piranha. Tigers kill with their fearsome combination of size, speed, strength and cleverness, not to mention razor-sharp claws and teeth.

But tigers don’t kill just to meet the Darwinian imperative of satisfying their ravenous hunger. They also kill for the sheer joy of it, preferably while inflicting the maximum amount of torture on their terrified victims. It’s just their nature.

An example of this occurred on Christmas Day 2007 at the San Francisco Zoo, when three teenage boys who had consumed too much beer thought it would be great fun to yell taunts and obscenities at Tatiana, the zoo’s 400-pound Siberian tiger, from outside her enclosure.

After the boys had tired of the game and started on their way, Tatiana sought vengeance. She leaped to the top of the 12-foot wall surrounding her enclosure, hid behind some bushes along the pathway she figured the boys would take, and leaped at them with a mighty roar as they passed.

Tatiana killed the first boy instantly with a bite to the neck . She whacked the other two into semi­ consciousness with blows from her powerful front paws. But as she set upon them, a team of zookeepers reached the scene and killed Tatiana with a shot to the head from a high-powered rifle, saving the lives of the remaining two boys.

For all their strength, intelligence and murderous instincts, Siberian tigers are in danger of becoming extinct in their natural habitats, because each adult requires roughly 400 square miles of unspoiled wilderness stocked with tasty animals to survive on its own. A burgeoning human population and development pressures are making such outsized land hunger increasingly impractical.

So the best future for Siberian tigers is in regulated environments like the Bronx Zoo’s Tiger Mountain. There they can roam large wilderness compounds that replicate their natural habitats as they are fed fresh meat daily so they no longer have to kill other animals. They are tended by skilled keepers who entice them into playing games that delight human spectators and maintain their physical fitness and fighting instincts without requiring them to indulge in the worst aspects of their serial-killer nature.

In many respects, markets are also serial killers. From a social perspective, the best future is for them to also exist in regulated environments where their survival is pretty much assured, their many benefits can be harnessed to serve the public good, and the downsides of their nature are properly restrained.

As the financial meltdown of 2008 reminded us, under-regulated markets have a long history of going on periodic murderous rampages, just like hungry tigers. They rip jobs and homes away from millions of people who depend on them, gulp down trillions of dollars in hard-earned savings, and ravage the flesh of thousands of small businesses whose bones are flung on the ash heaps of bankruptcy.

There are two possible solutions:

One is to learn how to regulate markets and their participants sensibly, to rein in their potentially murderous behavior before it gets out of hand by building a system in which the ups and downs of capitalism are sufficiently tempered to avoid destructive booms and busts.

You don’t want to know what the second solution is. But if you happen to be an immigrant from the former Soviet Union, you already know what it’s like to be subjected to absolute state authority. 

originally published: March 23, 2013