On Economics and the Crisis with James K. Galbraith

James K. Galbraith teaches economics at the University of Texas at Austin.

"There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless."

That could prove to be a real ice-breaker in the faculty lounge.

"Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance."

None dare call it tenure.

NY Times
Questions for James K. Galbraith
The Populist
Interview by DEBORAH SOLOMON
October 31, 2008

Do you find it odd that so few economists foresaw the current credit disaster?
Some did. The person with the most serious claim for seeing it coming is Dean Baker, the Washington economist. I saw it coming in general terms.

But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?
Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?
It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

You’re referring to the Washington-based conservative philosophy that rejects government regulation in favor of free-market worship?
Reagan’s economists worshiped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.

So you claim in your recent book, “The Predator State,” but will President Bush actually be leaving Washington a richer man?
Presidents don’t make money in office; they do so afterward. In his case, I hope he won’t. Maybe his friends will abandon him.

What do you think the future holds for Vice President Cheney?
I suspect that Cheney will spend much of his life fending off legal challenges, but that is a different area. I’m quite sure that the human rights issues will follow him for the rest of his life.

Any thoughts on Treasury Secretary Henry Paulson, who engineered the bailout?
He is clearly not a superman. This is the guy who had the financial crisis on his plate for a year, and when it finally became so pervasive that he couldn’t handle it on a case-by-case basis, the best he could do was send Congress a bill that was three pages long.

What’s wrong with that? Maybe he’s pithy.
It shows he wasn’t adequately prepared. The bill did not contain protections for the public that Congress had to put in.

Regulation is the new mantra, and even Alan Greenspan in his mea culpa before Congress seemed to regret he hadn’t used more of it.
I would say a day late and a dollar short. Greenspan blotted his copybook disastrously with his support of deregulated finance. This is a follower of Ayn Rand, an old Objectivist. His belief was you can’t really regulate and discipline the market and you shouldn’t try. I think Greenspan bears a high, high degree of responsibility for what has happened....

China and Russia Moving Away from the US Dollar?

The headline of this news piece greatly overstates the extent of any deal between Russia and China to stop using dollars. It seems to be a bilateral trading agreement. But it is credible since Russia and China have mutual trading interests that do not involve dollars; Russia is rich in resources and China is strong in manufacturing. Choosing to trade in the rouble makes sense, especially as China remains under currency controls.

It would be even more interesting if they chose some neutral currency such as the euro or even gold and silver since that would invite other countries to join in more readily, especially in the mideast and AsiaPac. We recall that both Russia and China have significant supplies of each of the metals. They might even fix a ratio of value between them, perhaps 16:1? There seems to be an historical precedent.

The problem becomes what should the value of any external standard be to the dollar? In the case of gold and silver, their prices are obviously far too low if they were to assume their roles as international trading currencies again. And the adjustment might prove painful for the three or four western banks that have been dominated the prices of several commodities, including the precious metals, at least on paper. It would be almost as if they had tied a noose around their necks and sold it to their rivals. But they would likely be made whole in cash dollar settlements.

Russia and China are not renouncing dollars overall. But watch for this to become a trend as the US continues to prove that it is no longer capable of managing the world's reserve currency on its own.

The month of November following an October dislocation in the financial markets such as we have just experienced has often proven to be filled with interesting developments.

Global Research
China, Russia, Belarus Renounce the US Dollar?
by Anatoly Gorev
RIA Novosti - 2008-10-30

The recent meeting between Russian Prime Minister Vladimir Putin and his Chinese counterpart, Wen Jiabao, created a financial sensation. Wen said that the two nations could withstand the global financial crisis if they joined forces; Putin urged him to go farther and stop using U.S. dollars in Russian-Chinese settlements.

This idea is nothing new. Russia and China reached a "framework" agreement in November 2007, which was followed by China's similar agreement with Belarus.

Earlier this year, Iranian President Mahmoud Ahmadinejad and Venezuelan leader Hugo Chavez turned against the dollar as well when they asked their OPEC partners to stop using the dollar for oil settlements. They argued that the "green" currency was no longer reliable and it was high time they look for a more stable and predictable alternative. (No one has followed them yet it should be noted, and the dollar has strengthened remarkably - Jesse)

Curiously, unlike the Ahmadinejad and Chavez appeal, Putin's proposal came as the dollar was on the rebound and even began pushing the euro. Economists even started talking in terms of a reversal of the global currency trends, rather than the temporary appreciation of the dollar.

Analysts predict that the dollar will regain its value in the next few months. They do not see anything which could hinder its steady growth.

Yet, Putin proposed that Russia and China stop using it as a settlement instrument. What is it - lack of confidence in the dollar's prospects or a political move? (The dollar has proven to be unstable, and the US preoccupied with its own internal troubles. The dollar is not a substitute for an external standard - Jesse)

Experts differ on this count. Igor Nikolayev, chief strategic analyst at FBK private auditing firm, sounded skeptical: "I think it was a political statement rather than an economic decision. There is a dominant public sentiment that the United States is the source of all evil, so let's stop using the dollar," he explained. (It was political, but it is also a warning and a preface to the November 15 meeting in Washington - Jesse)

One has to bear in mind, though, that some other currency will need to be found to replace the dollar for international settlements. China is unlikely to use the ruble, and Russia would be equally reluctant to accept the yuan. (The rouble would be more viable if it was backed by gold - Jesse)

"They could opt for the euro, but its future is uncertain, especially considering current developments on global financial markets. It is also unclear whether China would be happy to start using the euro while most of its international reserves are held in dollars," he added. (The euro has the same drawbacks as the dollar; it is too vulnerable to domestic policy priorities - Jesse)

There are more questions than answers here, Nikolayev concluded.

To be objective, one has to admit that other analysts are not as skeptical about the possibility of using other currency units between Russian and Chinese companies. (The use of gold and silver between these two countries seems logical if the trade can be 'balanced.' - Jesse)

Andrei Marinchenko, director general of the Kalita-Finance company, said the idea was quite realistic. Moreover, he thinks that the ruble stands a good chance of being selected as a reserve currency, primarily because the Chinese are disappointed in the dollar but aren't yet accustomed to the euro. (Yes but the rouble has a limited reach among other countries that do not wish to trade one empire for another - Jesse)

Only time will show who is right. But to stop using the dollar in Russian-Chinese settlements is too important a decision to make for purely political reasons - that much is obvious. (We're shocked it lasted as long as it did. It makes absolutely no sense to cede that much power to someone whose interests are not aligned with your own - Jesse)

Suppose we do it; what will be the implications for Russian businesses, how will the new financial and political reality affect their incomes and savings?

Marinchenko is convinced of a beneficial impact. According to Marinchenko, once the ruble is recognized as a settlement unit, it will enjoy growing demand with Chinese companies and individuals. The Russian currency will consequently grow stronger and more influential globally. (Its nice to dream, but there is an obvious flaw that needs to be resolved as we noted. Russia is no more stable nor trustworthy than the US for certain Physical gold and silver are beyond the control of a single country. - Jesse)

Russia will also become immune to many shocks from stock market meltdowns and won't have to fear future devaluation or revaluation of the ruble. It will happen because the role of the U.S. dollar, which has earned a reputation as an unstable and unreliable currency lately, will be much less important. (They are not able to do that now for certain. This highlights the risks of a single currency as the world's reserve currency. It is amazing that it has held together for as long as it has. - Jesse)

ISM Manufacturing Index for October at Lowest Since 2001

The ISM Manufacturing Index came in at 38.9 versus an expect 43.0, declining from a prior reading in September of 43.5. This reading is lower than the lowest readings seen in the prior two recessions.

Manufacturing is falling at its fastest rate since the recession of 1982.

There should be no doubt, even for the most diehard panglossians, that the US is in a significant recession already, despite heavily managed government numbers such as GDP.

This is an economic and event heavy week, with the national elections tomorrow and the Jobs Report for October coming out on Friday October 7.

As corporate America runs out of accounting tricks look for their reports to start reflecting a grimmer reality which is now only selectively disclosed from the financial sector and a few companies.

This is made worse by the masking of the seriousness of the situation by statistical reporting that leaves so many unsuspecting and unprepared, and in the grip of a rapacious financial system.

The culture of deception and greed must be restrained, and balance with transparency restored to our economy and our governance.

Goldman Set to Payout All of Its US Bailout in Bonuses

bra·zen adj.
1. Marked by flagrant and insolent audacity.
2. Impudent, immodest, or shameless.
3. Unrestrained by convention or propriety.

Daily Mail Online
Goldman Sachs ready to hand out £7bn salary and bonus package... after its £6bn bail-out
By Simon Duke
8:55 AM on 30th October 2008

Goldman Sachs is on course to pay its top City bankers multimillion-pound bonuses - despite asking the U.S. government for an emergency bail-out.

The struggling Wall Street bank has set aside £7 billion for salaries and 2008 year-end bonuses, it emerged yesterday.

Each of the firm's 443 partners is on course to pocket an average Christmas bonus of more than £3 million.

The size of the pay pool comfortably dwarfs the £6.1 billion lifeline which the U.S. government is throwing to Goldman as part of its £430 billion bail-out.

As Washington pours money into the bank, the cash will immediately be channelled to Goldman's already well-heeled employees.

News of the firm's largesse will revive the anger over the 'rewards for failure' culture endemic in the world of high finance.

The same bankers who have brought the global economy to its knees seem to pocketing the same kind of rewards they got during the boom years.

Gordon Brown has vowed to crack down on the culture of greed in the City as part of his £500billion bail-out of the UK banking industry.

But that won't affect the estimated 100 London partners working at Goldman Sachs's London headquarters.

The firm - known as Golden Sacks for the bumper bonuses it pay its top bankers - is expected to cut the payouts by a third this year. However, profits are falling much faster. Earnings have plunged 47 per cent so far this year amid the worst financial crisis since the Great Depression.

This has wiped more than 50 per cent off the company's market value.

The news comes after it was revealed that even bankers working for collapsed Wall Street giant, Lehman Brothers, could receive huge payouts.

Its 10,000 U.S. staff are expected to share a £1.5billion bonus pool. The payouts were agreed as part of the rescue takeover of Lehman's American arm by Barclays last month.

The blockbuster handouts caused consternation among London employees of the firm, many of whom have now lost their jobs.

Even workers at the nationalised Northern Rock will scoop bonuses worth up to £50million over the next three years.

The extraordinary handouts include more than £400,000 for Rock's boss, Gary Hoffman, who is likely to become Britain's best-paid public sector worker.

The majority of Northern Rock's 4,000 workers will receive four separate bonus payments - the first of which will be made next March. Staff will get an extra 10 per cent on top of their basic salary.

Lloyds TSB also intends to pay its employees bonuses despite taking a £5.5 billion emergency cash injection from the taxpayer.

News of Goldman's bonus plan came as the firm promoted 92 of its bankers to partner level. A quarter are based in Fleet Street, London.

Partnership is the holy grail of the investment banking world as the exclusive club shares around a fifth of the firm's total bonus pool.

New York Attorney General Andrew Cuomo last night warned that Wall Street firms taking government-money risk breaking the law if they hand the cash straight back to employees.

Cash-strapped workers are being penalised by pay rises which are far below the soaring cost of living, research reveals today.

Despite inflation soaring to a 16-year-high of 5.2 per cent, the average worker got a pay rise of just 3.8 per cent in September.

The research, from the pay specialists Incomes Data Services, highlights the financial problems facing millions of workers.

Most of their household bills, particularly food and fuel, are rocketing by up to 35 per cent. However, their meagre pay rise does not begin to cover the extra cost.

The majority of the 50 pay settlements investigated by IDS were in the private sector covering around 1.1million employees.

They range from just 2 per cent for workers at the BBC to 5.3 per cent for workers at a firm of dockyard workers.

Incomes Data Services warned pay rises are likely to fall even further over the coming year as inflation is expected to drop sharply.

Economists predict inflation will fall below the Government's 2 per cent target next year.