Via Democracy in America, a recap:

I think popular deficit anxiety is related to a mistrust that what worked to end the Great Depression will still work today. The political will to achieve sufficient stimulus spending to kick-start the American economy out of its shortage of aggregate demand in the 1930s arrived in the form of an existential military threat: for four years, the government blew out all the stops on spending and printed money like there was no tomorrow. (Wars make it easy to get people to think that way.) At the end of the war, the national debt was over 100% of GDP, and the de-militarising economy faced a realignment that dwarfs anything today’s creative-destruction fans could imagine. But that late-1940s economy could count on two things: lots of young families who’d been starved of consumer goods for years and had built up a tremendous appetite, and a technological moment in which all sorts of fabulous new consumer goods were just being invented and advertised and pouring onto the shelves. In an industrial economy that was inventing amazing stuff people had never seen before—Whirlpools, Buicks, split-level ranch houses—demand was not hard to create. Today’s post-industrial economy is still creating a lot of amazing stuff people have never seen before, but a tremendous amount of it is downloadable and free. Much of the rest is fabulously expensive, and only useful if you have a rare genetic disease.

Paul Krugman has a famous essay in which he explains that our inability to imagine what people will spend money on as the economy changes is a failure of our imagination, not of the economy. But still, I’m having a hard time imagining what people will spend money on as the economy changes. We could certainly use a bunch of high-speed trains, a smart electric grid, highway and water-main upgrades and so forth, but only government can pay for those things, and to do that, you have to either tax or borrow. And those are the two things the public remains unwilling to do, because they don’t believe the spending will do the trick.

It seems to me that there is some room for splitting the difference here. I think a reasonable coalition could be assembled to cut spending by:

• raising the retirement age to 68 or or even 70, as the EU is preparing to do
• increase the social security contribution limit above $102,000 to say… oh, half a million sounds good

cutting several tens of billions from the Pentagon budget by killing programs aimed and fighting a Major Land/Air/Sea War (I’m looking at you DDG-1000, F-35and, and Expeditionary Fighting Vehicle) and refocusing on asymmetric war fighting (people).

One could then take about half of that and put it straight to bottom line deficit reduction — the retirement, SS moves alone would have long-term beneficial help for the deficit beyond the simple year-on-year revenue savings — and put the other half into big budget, big vision jobs projects like high speed rail and smart grid technology.

This is something that could probably get done in the House. In the Senate on the other hand, good luck getting it through without some Senator blocking the process because his/her sacred cow of a DoD project is on the chopping block.

The problem for Tourre—and for Wall Street more broadly—is that they’re so intent on proving that what they did was legal that they can’t see that what they did was wrong. These are men (and they usually are men) of the market, and they played by the market’s rules. And the market’s rules are these: you make as much money as you can without actually going to jail. This is a world in which people are applauded for “blowing up the customer”—that is to say, offloading a crap product on a dim investor.

Once upon a time, the financial services industry existed to perform an essential social good: they provided capitol that businesses large and small required to run their operations, expand and to build stuff. They charged interest on that capitol to hedge against non-payment and to provide income to the banks. And to the extent that those businesses paid back that capitol (almost always), the owners and investors of the financial services businesses thrived. Long before the invention of deriviatives and hedge funds, working for a large investment bank was a ticket to if not filthy lucre, at least to a very well-off life.

At some point this all changed. And the point of the exercise became to make money for the sake of making money. How much money wasn’t even the point. As many wealthy individuals have said over the years, after the first few million the money doesn’t matter any more, its just a way of keeping score.

If anything has been rather well proved by the last few years it is the lie that the financial services industry should not be excessively regulated because it is the essential engine of economic growth.

The financial services industry worked just fine at “being the engine of economic growth,” for the nation in the sixty-six years between the enactment of the Glass-Stegall Act in 1933 and its repeal in 1999. Any argument that returning to such a strict regulatory regime would somehow strangle the American ecnomy is, quire frankly, bullshit.

And to cheapen this first post back from over a month away even more… I’m just going to link to another blog.

Via Economist blog Democracy In America

PAUL KRUGMAN says the really glaring malefactor wasn’t Goldman Sachs; it was the rating agencies. The problem, he says, is rooted in the notorious system in which the rating agencies are paid by the issuer of the security being rated, and he suggests a proposal by Matthew Richardson and Lawrence White of New York University to have the SEC pick the agency to rate each security. Dean Baker likes this solution too. Kevin Drum demurs:

I guess this is my question: if you do this, the ratings agencies no longer have any incentives to do much of anything. There are three of them, and presumably each one would get a third of the business at a price set by the SEC. So their incentive would be to hire the cheapest possible analysts and cut costs to the bone. The result would be ratings agencies even less able to cope with complex modern securities than the current ones.

This is what stonkers me about the ratings dilemma: there just doesn’t seem to be any good answer. Turning the ratings agencies into regulated utilities might be better than the current situation, but not by much. And if you’re going to do that, why bother with ratings agencies at all? Why not just have the SEC provide ratings?

Ezra Klein replies: “Actually, why not?” Indeed, it seems like a good question. My instinct is that it’s better to keep the ratings agencies as heavily-regulated public utilities than have the government actually assume their function. There are lots of reasons why certain things work better as regulated utilities than as government agencies. Electricity transmission, for example, is pretty much a natural monopoly, but we don’t have the Department of Energy just take over the whole business.

Indeed. The idea that a private business whose core business is to basically provide a public service — for example, financial ratings agencies, utilities, product safety ratings businesses — should have the same opportunities for unlimited growth and profit potential than say, a company that actually makes stuff, seems to me to be a bit silly. Sure they can make money and people who are interested in this kind of thing either from a sense of wanting to do well by doing good, or as a way of having a nice, “safe” job are going to want to do it. But that doesn’t mean that you are going to get filthy rich.

Just as there are different career options for people of differing skills and ambitions in life, it seems to me that a free market system can have room for different business models.

From his latest letter to Berkshire-Hathaway shareholders, Buffet lays down the smack on Wall Street, financial regulators and Congress:

It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.

In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial
institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.

The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter.

Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every two weeks. If that.

Water cutbacks mean most parks will be dead, brown turf by July; the flower and fertilizer budget is zero.

City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won’t pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.

Since the global financial system unraveled in 2008, U.S. policymakers have struggled heroically to improve the performance and oversight of global banks and investment firms. But these actions have been largely unresponsive to the growing number of Americans who would like to remove their hard-earned retirement savings from these high financial fliers altogether and invest their nest eggs in their community. Might it be time for policymakers to consider the potential stimulus payoffs from nurturing micro-equity investments?

Growing evidence suggests that every dollar spent at a locally owned business generates two to four times more economic benefit—measured in income, wealth, jobs, and tax revenue—than a dollar spent at a globally owned business. That is because locally owned businesses spend much more of their money locally and thereby pump up the so-called economic multiplier. Other studies suggest that local businesses are critical to tourism, walkable communities, entrepreneurship, social equality, civil society, charitable giving, revitalized downtowns, and even political participation.

We have two fundamentally contradictory legal regimes operating today. One, called gambling, allows every adult, irrespective of income, to risk everything for a probable loss. Another, called small-stock investing, prohibits 98 percent of us from investing in the local businesses that are essential for the well-being of community, unless businesses pay prohibitively expensive lawyers’ fees to prepare the unreadable disclosure statements.

Something is deeply wrong here. Outdated federal securities laws have left Main Street dangerously dependent on Wall Street, and overhauling them may well be a key to economic revitalization.

Click on graphic for larger view.

The Lost Decade In America. Source: Washington Post

Welcome to 2010. What’s your plan for the next ten years?

It goes like this:

• What three independently owned businesses would you miss if they disappeared? Stop in, say hello. Purchase something that brings a smile. Purchases keep those businesses around.
• If half the employed population spent $50 a month at locally-owned independent businesses it would generate more than $42.6 billion in revenue.

For every $100 spent in a local business, $68 stays in the community in the form of wages, taxes and other expenditures. If you spend that $100 at a national chain only $43 stays in the community.

Do it for yourself. Do it for your community.

India’s Reliance Industries has tendered a non-binding offer for LyondellBasell. Details were not disclosed but sources cited by CBS News Marketwatch say it is in the neighborhood of $12 billion. Rumors has been circulating that US-based private equity firm TPG and Chinese chemical giant Sinopec had been mulling a joint offer but they were denied by officials from both companies last week.

There is a good profile of the for-profit education market in Fast Company this week.

LyondellBasell is expected to leave Chapter 11 bankruptcy protection in the new year. The holding company is half-owned by Access Industries, the investment vehicle of Russian tycoon, Len Blavatnik, and ProChemie, a group controlled by Andreas Heeschen, a German tycoon best known for his investment in Heckler & Koch, the arms maker.

Bridgepoint Education, the San Diego-based owner of Ashford University, showed continued growth in revenues and student enrollments in its 3rd quarter report last week Bridgepoint Education has 54,894 students enrolled through Ashford and its University of the Rockies in Colorado. Of those students, 99 percent take their classes exclusively online.

Net income also is up significantly to $22.4 million, an increase of 155 percent over last year at the same time. The school also announced this fall that it would offer scholarships to top-performing students who study on the Clinton campus, including full-tuition scholarships to those who have a 3.5 GPA or above. The campus now has more than 600 students, the most in its history. Bridgepoint bought the campus in 2005 for $9 million from the Sisters of St. Francis.

Paper products company Rock-Tenn reported its quarterly financials last week. Although revenues are down from a year ago, they have been climbing back up this year on a quarter-by-quarter basis. In addition, RockTenn reported that they have increased their operating margins from the mid teens earlier in the year to 30% this quarter.

Archer Daniels Midland reported a steep drop in revenues this quarter over the quarter a year ago as profits fell 53%. At ADM’s corn-processing operations, which includes the company’s ethanol business, operating profit increased 59% as corn and manufacturing costs fell. Earnings rose in the unit’s sweeteners and starches business, but the bioproducts business turned in a loss as ethanol and lysine prices fell.