The Fourteenth Banker Blog

October 22, 2010

Seeking Radical Solutions

Filed under: Running Commentary — thefourteenthbanker @ 12:22 PM

In this country we have real problems that need real solutions. They are too many to enumerate here but I will make a few generalities.

  • The middle class is under immense pressure. There has been no real wage growth for a decade or more. The second earner in most families in the workforce, is yet the real standard of living has not moved appreciably except that perhaps we have bigger houses, which is not necessarily a good thing in the long run.
  • We continue in the shadow of a boom bust cycle with unemployment and underemployment running somewhere in the 16-20% range.
  • Interest rates are at all time lows and yet the Fed can only think to stimulate the economy by further purchases of financial assets.
  • Markets are no longer trustworthy. In the stock market, program trading dominates volume. I heard recently that 70% of trade positions are held for an average of 11 seconds. These trading algorithms are in a cut throat competition to trade on information a fraction of a second before other computers. The retail investor is at the mercy of these traders and has lost confidence that the markets are fair. The bond markets are not fair either. The junk that makes up Commercial and Mortgage Backed Securities is subject to all kinds of risks. Rates are suppressed by the Fed and a rebound would burn bond investors. The rating agencies can’t be trusted. There is little retirement security. Low rates on bank deposits are suppressing income for savers.
  • The United States, state, and local governments are in a pickle and are looking to reduce spending, which will further suppress aggregate demand at a time when the economy is weak.
  • We are stuck in expensive foreign wars that appear to be endless.
  • The global economy favors developing nations and emerging markets. Labor cost differentials are suppressing middle class employment in the United States.
  • The nation is divided politically. Neither major party has much leeway to even implement their preferred policies.
  • Small business is struggling while economic power becomes more concentrated in the hands of mega corporations and the super wealthy.
  • The Fed’s efforts to stimulate policy by creating inflation appear to be creating inflation in the cost of living for families but not in the value of their assets. Food and energy costs are on the rise, yet the government excludes these from their core inflation measures. Health care costs continue to be out of control and the population is aging.

So does anyone have any ideas? Here is one. Let’s create a wave of entrepreneurship that begins to rectify some of these imbalances. How can we do that? There is tremendous talent and knowledge locked up in our biggest corporations, those that are prospering while giving paltry wage increases, passing more health care costs back to their employees, moving many jobs to other nations, paying massive bonuses to executives. Why should the people support this?

A little over a century ago, the foundations of corporate power were laid with a series of legal decisions that weakened the position of the skilled employee vis a vis the corporation. This paper by Duke University professor Catherine Fisk examines these legal decisions. Here is the Abstract:

A legal ideology emerged in the 1870s that celebrated contract as the body of law with the particular purpose of facilitating the formation of productive exchanges that would enrich the parties to the contract and, therefore, society as a whole. Across the spectrum of intellectual property, courts used the legal fiction of implied contract, and a version of it particularly emphasizing liberty of contract, to shift control of workplace knowledge from skilled employees to firms while suggesting that the emergence of hierarchical control and loss of entrepreneurial opportunity for creative workers was consistent with the free labor ideology that dominated American thinking on the subject of work.

Today, corporations own virtually all intellectual property. They choose to develop and market some products and ideas, and others lie fallow for lack of attention and frankly motivation among increasingly disenfranchised corporate workers. The lack of any wave of major new innovation that can carry employment and personal income levels higher is exacerbating all the problems listed above. The government’s efforts to solve economic problems only serve to entrench existing corporate interests. They pass stimulus efforts through the financial markets, supporting “systemically important” institutions by shielding them from the consequences of their actions and pumping up the value of assets that are primarily institutionally and corporately held. All this is supposed to trickle down to the benefit of the employees. I can tell you, it is a trickle.

This suggestion is radical. The whole legal basis of company/labor relations would be challenged. But is not a shaking up of the status quo what is needed in order to get change of any magnitude? Well intentioned as they may be, are efforts to make change without actually hurting entrenched interests having any material effect? Take the health care bill. By building a coalition of the existing entrenched interests, the bill does little to affect cost. Cost is the problem my friends. If you want stimulus, cut health care costs back to 10% of GNP! That means some companies go under. So what? The prosperity that would result would dwarf these effects. But, then no campaign contributions, no?

Here is an issue for the Tea Party. Free the worker! Free market for intellectual capital! Decentralization of power! Pro Small Business!

Perhaps some of this intellectual capital would be used to revolutionize our health care. Perhaps some would be used for experimentation with new agricultural techniques. Perhaps some would be used in the energy business. The only problem is that the tables would be turned on the poor corporations, with their rising stock prices and billion-dollar war chests.

Anyone have any other ideas?

Of course, to get these businesses going we would need banks with decentralized judgment based decision-making. Good luck with that.

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17 Comments »

  1. To figure out what the solution might look like, one must first understand the problem. That means coming to grip with the full range of consequences of outsourcing, but similarly with the reasons why outsourcing is happening, and why the western world is investing in the ‘developing’ world. As one does not voluntarily choose to invest in the company of a direct competitor, there must be reasons why western investors can no longer find sufficient investment opportunities in the West.
    One of the best books I have read about the causes for this economic crisis is David Harvey’s The Enigma of Capital. You can find a – almost glowing – review of the book at the IMF website here: http://www.imf.org/external/pubs/ft/fandd/2010/09/books.htm#2 or at the independent (UK newspaper) here: http://www.independent.co.uk/arts-entertainment/books/reviews/the-enigma-of-capital-and-the-crises-of-capitalism-by-david-harvey-1958010.html .
    Harvey offers a framework that, while it obviously has some lacunae that need to be filled and fleshed out by doing empirical research, goes a long way to explain why and when people choose to invest in ‘risky’ assets and places. Please read it. :)
    Anyway, to give a more direct answer to your question (I mention the above because I’m not much use giving business advice, and only slightly better at policy advice, so that you’re better off getting it from the source): The problem with the US economy today is that (roughly) the surpluses are all on the side of production, and this causes lots of problems due to the negative feedback loop between decreasing wages and thus increasing investor profits and decreasing spending and thus decreasing the possibility for investing those investor profits in expanding the means of production.
    Therefore, for a start, something will have to be done to discourage trade imbalances (and misaligned currencies), so that producing goods in the US/UK and southern Europe (to name the most obvious places where there are problems) becomes comparatively less impossible again.
    Besides that, innovation is almost always stifled by IP legislation, as it tends to create monopolies (and thus encourage less innovation) and serve as an enormous barrier to entry. If you want a vibrant market, you need lots of players, not just a few big ones. All that gets you is increased corporate power and thus legislative capture. No company I know of in the world has ever gone bust because of increased competition due to ‘piracy'; piracy is a fringe phenomenon at best, and the more innovation there is, the bigger the chance is that pirated materials will be at least 1 iteration behind. See Boldrin & Levine’s book Against Intellectual Monopoly for more examples.

    Comment by Foppe — October 22, 2010 @ 1:11 PM | Reply

    • Thanks. I will add it to my reading list. Good comments.

      Comment by thefourteenthbanker — October 22, 2010 @ 6:36 PM | Reply

      • One of the biggest problems the US has is awareness, and this is not helped by the fact that the narrative concerning the recession is so fragmented.
        An enormous part of the problem is that the aggregate (and median) wages have been dropping since forever, thus lowering demand for goods (because the rich save more than the poorer, this means that less money is returned to the economic cycle). This demand drop was papered over for some time by the rising housing prices, which allowed people to think that they were becoming richer, but, as we can see now, all it’s resulted in is a deeper-than-necessary drop in consumption, because everyone now first has to deleverage before they can resume buying at a sustainable (based on their wage) rate. (Thank Alan G. and his friends for that.) Lower spending means that fewer people can work in retail/services (and ultimately production again), so that raising employment levels is the premier problem facing the US (as you note).
        I’m not sure if it was by accident or by design, but in your list you list the ‘wage repression caused by foreign growth’ and ‘problems facing the middle class’ (and a third point, the entry of women into the labor force) separately from each other. However, since the 1950s, the first and last of these have both contributed to wage repression. There are two problems with women entering the work force: first, because their income was mostly spent on the exploding housing (and healthcare and edu) costs, which meant that there was no real extra money that was available in households; and second, because it wasn’t really extra money that could be spent, this meant that there was no increased consumption that could create demand for these new workers, which meant that wages rose less or dropped because more workers were chasing the same jobs.
        The same goes for South-East Asia, although on a much larger scale, and with the added twist that the factory owners made even more profits. However, more profits mean more money that has to be reinvested, yet the fewer consumption is going on, the harder it becomes to invest safely in ways that yield returns, forcing investors to turn to far riskier places to invest their money in (such as housing and dot-com bubbles). This means that the more profits are extracted by the investors/factory owners, and the less money is paid in wages, the more desperate the rich become to find investment opportunities, and the more likely crises become. (I bet they don’t teach this in econ 101.)
        Anyway, once people start getting how this process works, you might see a decrease in the stories that talk heroically about how the rich ‘deserve’ their money, as it is precisely giving in to this greed that causes economic crises to become more prevalent, but until then.. The media are far too good at reinforcing the status quo, and even when they aren’t they’re still unable to present a coherent story about the crisis and its causes, causing popular anger to remain fragmented.

        Comment by Foppe — October 22, 2010 @ 7:15 PM

  2. [...] Fourteenth Banker writes today: In the stock market, program trading dominates volume. I heard recently that 70% of trade [...]

    Pingback by Guest Post: 70% Of All Stock Market Trades Are Held for An Average of 11 SECONDS « naked capitalism — October 22, 2010 @ 3:20 PM | Reply

  3. I loved David Harvey’s book too.

    Radical economic ideas in the United States must mesh with the now inbred ideologies of the US masses between the coasts. The heartland is the core society and obviously, the vast majority of states and square mileage of the US lie in the Heartland. These people are virulently anti statist and their personal mythology is individualistic. What ever radical ideas that emerge must be within the fantasy beliefs of the US core.

    The Tea Party Movement may be considered a fantasy political grouping but they represent the heartland core understandings about life. The real question though is ,that having a taste of power if the mid term elections rout the establishment, will be to solve the political mantra that dominates. Jobs, Jobs and more jobs. They will have a lot more problems solving the core financial system problems outside of putting 10,000 elites or so in prison.

    The radical question answers must wait to see how effectively the core voters can frighten the politicians into doing their bidding in the next two years. Obviously, the financial critical point is the immediate future. Are we about to witness a radical disenfranchisement of big finance and current power elites? The Nazi’s had next to no power representation and suddenly were within the target distance of ruling.

    Are the solutions about to be forced into less than hyper rational realms. There was a very nasty cartoon billboard in Grand Junction, Colorado depicting Obama as a Muslim wrapped in explosive garb, Obama as a Gangsta, Obama as a Mexican Bandit and Finally Obama in drag. The caption was Vote Democ RAT. Join the game.

    Are vast numbers of Middle Americans , in the geographical middle about to join the perceived long standing game suggested? I suspect the answer is going to be yes. Is it possible for a Congress that will battle Obama to the death to solve jobs, jobs and more jobs? What if the Congress is able to override any Obama Veto. Will they solve the political demand for jobs?

    So, solutions must run the political gauntlet of flails to be even possible if there is a vast political upheaveal in eleven days. The next Congress decides what is possible before even considering the question of successful solutions to the present status quo? Is this 1858 in terms of internal US political turmoil?

    Comment by Jerry J — October 22, 2010 @ 3:32 PM | Reply

  4. It seems to me that you should start by looking at where to shift the regulatory advantage from large corporations to the primary job growth engine, small and medium sized businesses.

    Taxation & compliance issues are the logical starting point.

    Comment by Dave Narby — October 23, 2010 @ 12:13 AM | Reply

  5. “Seeking Radical Solutions”

    “Filed under: Running Commentary — thefourteenthbanker @ 12:22 PM”

    “In this country we have real problems that need real solutions.”

    we? who is we?

    real problems? laws not being enforced. excessive consumption. no savings.

    no personal responsibility. not understanding basic economics.

    real solutions? personal responsibility. obey the laws or change them. save. responible comsumption.

    people have made their choices. live with them or change them.

    “They are too many to enumerate here but I will make a few generalities.”

    “* The middle class is under immense pressure.”

    “The middle class is under immense pressure” from personal choices.

    “I beg your pardon;” america “never promised you a rose garden”

    “There has been no real wage growth for a decade or more. ”

    where is wage growth a right?

    “There has been no real” SAVINGS “growth for a decade or more. ”

    people’s “standard of living” is by freedom of choice. PERSONAL CHOICE.

    corporate marketing hype. marketing brain washing. marketing propaganda.

    ” * We continue in the shadow of a boom bust cycle with unemployment and underemployment running somewhere in the 16-20% range.”

    boom bust cycles are part of reality. understand them and deal with them accordingly or suffer the consequences.

    ” * Interest rates are at all time lows and yet the Fed can only think to stimulate the economy by further purchases of financial assets.”

    the fed. who cares about the fed? some people who have made bad choices.

    this is america. Land of the Free. Home of the Brave.

    americans have freedom of choice, except for the new healthcare.

    “* Markets are no longer trustworthy.”

    the markets were NEVER trustworthy.

    “In the stock market, program trading dominates volume.”

    “I heard recently that 70% of trade positions are held for an average of 11 seconds. ”

    delayed trade execution. so what. one can still make money.

    “These trading algorithms are in a cut throat competition to trade on information a fraction of a second before other computers.”

    trading algorithms. high frequency trading. delayed trade execution. rigged markets. market are not fair. ….

    my trading buddy. hi.five.oh.

    a retail trader trading from a bedroom trading room started in 1993 with $50,000 went up to $6,000,000, down to $600,000, up to $10,000,000, now at $5,000,000.

    the excuses are there are NO EXCUSES.

    a trader trading a complete trading plan will continuously make more money than one loses.

    “The retail investor is at the mercy of these traders and has lost confidence that the markets are fair.”

    “The retail investor is at the mercy of” their own ignorance.

    “The bond markets are not fair either.”

    hope for the best. expect the worst.

    hope for the best. an investor.

    expect the worst. a trader.

    hope and change. america got a dope and change.

    “The junk that makes up Commercial and Mortgage Backed Securities is subject to all kinds of risks.”

    “Commercial and Mortgage Backed Securities is subject to all kinds of risks” that is why they are NOT called a sure thing.

    what part of BUYER BEWARE or DUE DILIGENCE does ONE not understand.

    “Rates are suppressed by the Fed and a rebound would burn bond investors.”

    “bond investors” have the right to NOT be “bond investors.”

    “The rating agencies can’t be trusted.” that has always been a fact. a given.

    “There is little retirement security,” if one has not been responsible for one’s own security.

    “Low rates on bank deposits are suppressing income for savers.”

    savers can bury their money in their backyard.

    the markets were NEVER trustworthy.

    WELCOME to the real world.

    naive: deficient in worldly wisdom or informed judgment.

    “I’ve been cheated, been mistreated. When will I be loved?” Linda Ronstadt

    “* The United States, state, and local governments are in a pickle and are looking to reduce spending, which will further suppress aggregate demand at a time when the economy is weak.”

    finally. reduced spending. “suppress aggregate demand” of needless consumables.

    “* We are stuck in expensive foreign wars that appear to be endless.”

    “We are stuck in expensive foreign wars” because america does not wars to come to the america. better there than here.

    we would not want our standard of excessive consumption to be interrupted.

    “* The global economy favors developing nations and emerging markets.”

    “Labor cost differentials are suppressing middle class employment in the United States.”

    americans buying cheaper foreign product suppress “middle class employment in the United States.”

    again. personal choice. freedom of choice.

    ” * The nation is divided politically. Neither major party has much leeway to even implement their preferred policies.”

    The nation is getting what is deserves.

    ” * Small business is struggling while economic power becomes more concentrated in the hands of mega corporations and the super wealthy.”
    guarantees

    Small business is struggling because business is business.

    there are no guarantees in business. that is why it is called business and not called a sure thing.

    ” * The Fed’s efforts to stimulate policy by creating inflation appear to be creating inflation in the cost of living for families but not in the value of their assets.”

    the fed exists because people let it exist.

    “Food and energy costs are on the rise, yet the government excludes these from their core inflation measures.”

    would you expect anything less from government.

    “Health care costs continue to be out of control and the population is aging.”

    politicians are “out of control” no accountability.

    jail time. a solution.

    “the population is aging.” no one has found the fountain of youth yet.

    “So does anyone have any ideas?”

    YES.

    Let failed business fail.

    Let people who cannot pay their mortgages lose their homes.

    Let people buy their own health insurance or not.

    Or everyone gets the SAME healthcare. NO EXCEPTIONS. senators, congressmen, government employees, …

    “tremendous talent and knowledge” will be unleashed, if successful is allowed to succeed and failure is allowed to fail.

    there is a lack of “tremendous” of wisdom and reality.

    corporations. “giving paltry wage increases, passing more health care costs back to their employees”

    employees can work for whomever they want/chose. they is no slavery or forced labor in america.

    an employee can go and start one’s own business or not, if one thinks they are so talented/smart.

    how do you live?

    what are you willing to give up?

    are you a freeloader?

    do you let people take advantage of you? why?

    do you let other people do your thinking for you?

    you are where you are because of YOU.

    “A little over a century ago, the foundations of corporate power were laid with a series of legal decisions that weakened the position of the skilled employee vis a vis the corporation. ”

    “skilled employees” can work for whomever they chose.

    solution. personal responsibility.

    twittering as stocktradr

    Comment by twittering as stocktradr — October 23, 2010 @ 1:14 AM | Reply

    • You did get a few things right but there is no real coherence to the argument you laid out except you support every man for himself, but would do nothing for justice or to give every man a fighting chance. You support enforcing the laws but do not seem to think there should be any.

      Comment by thefourteenthbanker — October 23, 2010 @ 11:21 AM | Reply

    • From your rant I’ve drawn some conclusions:

      1) You are twenty some thing.
      2) You have no interest in history.
      3) You don’t understand that not all human beings are created equal BUT all human beings and for that matter all life is highly interconnected and interdependant.
      4) You have not gone through the stage of experiencing the results of your self centered actions.

      You do have one good thing going, you understand personal responsibility. But you’re extremely arrogant about it. One day you will understand that there is a huge difference between PLEASURE and HAPPINESS. Pleasure is self centered, happiness is other centered. What 14th is talking about requires wisdom. You’re not there yet. Just make sure you pay attention to the results in every area of your life, not just financial. You’ll start to see the manifestation of your selfishness show up in strange places.

      Comment by Vocalbanker — October 23, 2010 @ 11:31 AM | Reply

    • Objectiveist sloganeering isn’t really a plan is it? I think the underlying assumptions of market efficiency, rationalism, symmetric information and opportunity are pretty well discredited in our current regime. Sure I’d like to be fully responsible and accountable for my actions, but given the many constraints on my actions both legal and social, holding me accountable has some limit doesn’t it? This dog-eat-dog Randian-rant is overly simplistic if we’re talking about a civil society governed by laws – no?

      Comment by Bond_James_Bond — October 27, 2010 @ 4:34 PM | Reply

  6. Today, Treasuries literally went negative. It should be obvious that the Obama crowd and the Federal bureaucracy are terrified that the mortgage fraud having gone mainstream might ignite a panic. Has one already been started? The money is exiting something and is staying put in Treasuries. Even covered new Treasuries to finance the fiscal 2010 deficit. And it still has next to nothing , now negative yields.

    Comment by Jerry J — October 25, 2010 @ 1:30 PM | Reply

    • Yes. For TIPS went negative. That means investors paid the UST 55 bps for the inflation protection built into TIPS. Very interesting. Buyer beware though on this. TIPS are not as straightforward as they first seem. If truly holding long term, they probably provide some hedge if you trust the index. Short term they can fluctuate in value more than you would suspect.

      Comment by thefourteenthbanker — October 26, 2010 @ 2:03 AM | Reply

  7. I take it this is Stocktradr’s version of the American culture hero:

    “my trading buddy. hi.five.oh … a retail trader trading from a bedroom trading room started in 1993 with $50,000 went up to $6,000,000, down to $600,000, up to $10,000,000, now at $5,000,000 … there are NO EXCUSES”.

    But I like 14th advocacy for the middle class better. Bravo to 14th for his call for radical solutions. James Kwak at Baseline Scenario once posted that it was the middle class that lead the French Revolution.

    14th writes:

    So does anyone have any ideas? Here is one. Let’s create a wave of entrepreneurship that begins to rectify some of these imbalances. How can we do that? There is tremendous talent and knowledge locked up in our biggest corporations, those that are prospering while giving paltry wage increases, passing more health care costs back to their employees, moving many jobs to other nations, paying massive bonuses to executives. Why should the people support this?

    Comment by tippygolden press — October 27, 2010 @ 6:49 PM | Reply

  8. I have been thinking about 14th’s call for radical solutions. How about this one:

    The wireless and conventional phone companies are scared to death of Skpye an leading technology that is the future of the telephone industry. With Skype one can make a phone call to nearly any country in the world either free or for pennies. The monopolistic telecom giants are digging in their heels. They do not want to lose their cash cow. (High fees and onerous contracts for telephone service that was once considered a public utility.)

    IMHO, there may be an entrepreneurial opportunity here. It would be great to have a — wireless phone carrier — that fully integrates the skype technology as a selling feature. I would sign up right away.

    Here is the Skype link: http://www.skype.com/intl/en-us/home

    (Apparently Google and Fring have their own versions of this technology.)

    Comment by tippygolden press — October 27, 2010 @ 7:23 PM | Reply


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