Econ-Fin News - Dec 5, 2008 – Basic Assumptions and Nationalization

Back in the middle of September, when the Wall Street model of investment banking collapsed into the dustbin of history Stirling Newberry wrote a series of articles laying out the underlying realities of the financial crises, and re-framing the issue as a Constitutional crisis because of the existence of a reactionary faction in American politics that is as yet unwilling to move from the existing means of storing wealth – the development of land, i.e., suburban sprawl – to a new store of wealth that would allow us to begin building a workable future. The Constitutional crisis arises because the present monetary configuration of the United States rests on the valuation of mortgages, the values of which are supposed to keep increasing as more land is developed:

 

 

It is not ironic that the crisis of an order often centers around the control of future value in the old monetary order. Often reactionary forces control (or attempt to control) the means of creation of future value, and use this to prop up old value. This is because there is no wealth that exists by itself; wealth must be maintained, and the cost of maintaining it grows over time. It is at the point where all of the profits of the future are burned supporting wealth stored by the past, where the living work for the dead, that the constitutional order falls, because its money falls. It cannot keep all of its promises yet provide an incentive to work in the future. The rip becomes a pair of coalitions which are often very strange bedfellows. Those who have been most aggressive in pursuing the kinds of value that make up the future are often the most reactionary, because they hope to leverage that control into a permanent command of the economy. Those who hope to disrupt the present order often have a lagging control of the nascent assets, but have more of the potential growth if only previous claims in silver, gold, and revenue streams from mortgages are removed.

 

The financing of land development, Newberry pointed out, is based on the U.S. trading oil for financial paper. The unwillingness thus far to abandon these economic / financial / monetary arrangements has now lead us to committing $3.125 trillion to a vain attempt to rescuing the banking system, with additional future commitments bringing the total to $8.490 trillion. (See Barry Ritholtz’s Calculating the Total Bailout Costs.)


 

Despite this massive amount of funding, the financial system remains in crisis, and lending remains frozen. And the effects on the real economy, are becoming truly frightening, with 1,250,000 jobs lost in just the past three months.

 

This inability of such a stupendously costly bailout to stop the collapse has prompted Elliot Spitzer to urge a reconsideration of basic assumptions. In his first article in his new gig as a columnist for on-line magazine Slate, Spitzer points to the recent purchase by GE Capital of five Chinese-made airliners (I would have thought that news would be causing  an uproar here – we’re going to start importing effing airliners now?!) and warns that


The CACC story highlights the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector . . . .

 

This long-term change frames the question we should be asking ourselves: What are we getting for the trillions of dollars in rescue funds? If we are merely extending a fatally flawed status quo, we should invest those dollars elsewhere. Nobody disputes that radical action was needed to forestall total collapse. But we are creating the significant systemic risk not just of rewarding imprudent behavior by private actors but of preventing, through bailouts and subsidies, the process of creative destruction that capitalism depends on.

A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.

 

Long before these crises erupted into clear view, people like Newberry have been prodding us to ask these questions. Maybe had we done so, the crises could have been averted, maybe not. No matter, it’s too late now. In his article, Newberry observed

The complete lack of understanding of this historical process by current political parties, is the sign that while we could rearchitect the financial system, we cannot rearchitect the constitutional order. This means, with certainty, that there will be another crisis. The Federal Government has taken over the mortgage system, not to tell creditors that they will have to accept a different kind of money and then architecting a new economy which will generate that new kind of money, but in hopes of collecting the control of the old money. Since there is not enough future economic activity in the current form - that is, there is not enough money on the planet - to pay back all of the debts held (the speculative money having all been used to pyramid claims) this will fail, because it must fail. . . .

The great write down will come, because very shortly someone must pay. The reactionary forces want the write down to come in the form of ending Social Security, and indeed all of the social safety net, and turn the US government in fact and name into an insurance company for their investments. . . .

 

[The solution] is what is already happening: nationalization. The reality is that the United States is in a situation were it must, as a national unit, optimize its exports and imports. While the market mechanism will be part of this process, the incentives of the market mechanism will have to be determined by politics. The market has been proved over and over again to be unable to price its own meta. This is in fact part of the theory of market economics. . . .

The natural solution is not to stop with nationalizing AIG, but to continue to nationalize not merely the financial sector but the media sector as well. Since the financial crisis has not reached that point, it will not happen yet. But it will one day, and on that day the media sector will be ripe for nationalization as well. This is a dangerous process, but it is also a necessary one. It can be effected by regulation, and in many cases by simply applying regulations which have been long ignored.

 

Nationalize the entire banking system? And the media? Wow, far out stuff. But that's a first reaction. Talk a walk, go for a run or bike ride, and think about it, and the audacious correctness of it becomes apparent. And what do we find today? Todd Gitlin on TPMCafe pointing to Steve Fraser writing on Tomdispatch:

A real democratic nationalization of the banks -- good value for our money rather than good money to add to their value -- should be part of the policy agenda up for discussion in the Obama era. As things now stand, the public supplies the loans and the investment capital, but the key decisions about how they are to be deployed remain in private hands. A democratic version of nationalizing the financial system would transfer these critical decisions to new institutions created by the Congress and designed to pursue public, not private, objectives. How to subject the flow of credit and investment capital to public control ought to be on the drawing boards if we are to look beyond the old New Deal to a new one.

Or, for instance, if we are to bail out the auto industry, which we should -- millions of jobs, businesses, communities, and what's left of once powerful and proud unions are at stake -- then why not talk about its nationalization, too? Why not create a representative body of workers, consumers, environmentalists, suppliers, and other interested parties to supervise the industry's reorganization and retooling to produce, just as the president-elect says he wants, new green means of transportation -- and not just cars?

So far, the boldest calls for action, from people like Robert Reich and Paul Krugman, have been for a "massive" stimulus program of $700 billion or so a year for two years. But is $1.5 trillion enough to turn around a $15 trillion economy and steer it into the future? I believe just infrastructure needs along amount to over $5 trillion. How much will a national health system cost? Such numbers used to be politically improbable. That was before Wall Street stuck a gun to our heads and demanded $8.490 trillion.

 

Thanks to Naomi Klein, we now understand how the elites use the shock doctrine to impose unwanted changes on entire populations; clearly, we are living in such a time.  But we do not have to let the elites choose our future for us. We have a clear list of needs requiring funding. Thus far, the financial and banking system has refused to meet those funding needs. But a new path is opening before us. The politically improbable is inexorably becoming the politically possible.

 

So, how best do we seize the moment?

 

Meta: 

Comments

CACC

That's a very good point, although I am kind of amused that Mr. unlimited migration (which represses wages and decimates employment law) would point out that one of the last manufacturing industries, aircraft is not a target to be captured by China.

What I get out of this article is it has become very obvious that the US needs a national strategy based on domestic national economic interests.

Sen. Bernie Sanders has done a few speeches on the too big to fail argument and Spitzer is echoing those truths.

I certainly agree it's absurd to pour more money into a financial sector which has literally demanded trade policy, deregulation that has gotten us into this mess in the first place for it's obvious that are just going along as business as usual, but with taxpayer money.

I wrote Bad Ideas, Bad Management are Rewarded with Taxpayer Money and in this post I mention some fundamental policy recommendations to make U.S. corporations more loyal, more attached to the U.S. national economic interest.

I'm kind of glad to see Spitzer writing a column. He was an idiot in my view on labor economics and also obviously had a small little character flaw but he's smart as well and knows corporate crime, corruption inside and out (now just a little more inside than we thought!). ;)

It's a good piece.

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5 trillion dollars an interesting number

I was just looking into the spending during WWII. At it's height, according to table 1 in "The American Economy during WWII", the US government was spending from 32% to 37% of the entire GDP of the country on defense -- the Federal government as a whole got up to 47% in 1943.

If you take that "one third of GDP" figure and apply it to today's $15 trillion, voila, you get $5 trillion as the equivalent. That would be one serious infrastructure rebuilding program.

Another interesting thing to notice about the table is that much, if not all, of the increase in GDP came from the increase in the Federal Budget. Perhaps they were just printing money, which sounds OK to me, if the new money tracks the new production. Or am I missing something?

Anyway, at the rate things are going, it seems to me that the financial system will be nationalized eventually anyway. The French example is rather complicated, i think, but they seem to be doing just fine with a government-owned financial system.

JR on Grist

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60%

I believe the Fed has already pledged 60% of GDP to these damn financial institutions.

Then, on WWII, the US had a strong Domestic economy at that point, plus so much of the debt was war debt, which had an "end in sight", so I'm not convinced since the US is weakening economically, China and India are expected to supersede the U.S. very soon as the dominant economy, our dollar might no longer be a reserve currency and under those circumstances, I don't believe the US can sustain such large deficit spending.

In my view, while they talk about restructuring GM and so on (anyone except the financial sector!) I think the U.S. needs to restructure.

We pay 8 times in health care costs than any other nation and the DoD budget is out of control.

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The $5 trillion number is off the cuff

Not quite out of my butt, but close. I want to work up a spread sheet from the ASCE's 2005 Report Card for America's Infrastructure, add in the two numbers I have worked up that are solid - $3.4 trillion for urban rail transit , and $1.0 trillion for the DoE unambitious goal of 20$ wind energy by 2030 - then present it here and ask people to start adding more projects, such as solar energy, high-speed long distance rail, water and sewage systems for Africa, widening the Panama Canal, and so on.

 

I wouldn't be surprised if we find that we need a small mutiple of $5 trillion.

 

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3.4 trillion for mass transit?!

It's not the number I'm wondering most about (I am wondering), did you get that from a study? As a fan of the ASCE report card, I don't recall that big a number being in there -- they have "only" $1.6 trillion for their plan.

At the risk of boring comment readers, on another comment I threw around the number "2 trillion" for the dollars needed for a high-speed rail system in this country. My reasoning was that you take 40,000 of the 46,000 miles of the Interstate, multiply each mile by the approximately $50 million per mile that it looks like the recently approved California system would cost.

If you're interested in a recent estimate of "greening" the economy, I thought Gar Lipow did a nice job at Grist in a post called "How much should we spend to green the U.S.?". I also once did a very rough write-up on shutting down all coal plants by installing ground source heat pumps and solar panels to provide all heating and cooling needs, "Let buildings heat and cool themselves". I came up with 6 trillion for that, over 20 or 30 years, for all residential and commercial buildings in the US.

Robert, the U.S. had something like 40% of the world's manufacturing capacity as the world entered the Great Depression, if my memory serves. So yes, we had quite the spare capacity, and any massive rebuilding program would involve building lots of factories, which I don't think were required then. Although they produced a gazillion machine tools in WWII. The Soviets bootstrapped their industrial system in the 1930s, although I would hope a US bootstrapping would be much gentler and kindlier.

JR on Grist

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manufacturing capacity/retooling

That's an interesting issue because the capital investment costs to build from the ground up might break the bank.

That's another issue with this push to offshore outsource...
they ignore the initial capital expenditures, plus building up advanced manufacturing expertise in their short term thinking insanity.

I'm thinking about Steel. If Steel dies in the US and that's a national security issue, if the US later needed to have it's own domestic steel supply, just how bad would it be to have to rebuild that entire industry at that point?

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We'd already have to rebuild steel-making machinery makers

I know from a friend -- well, this is of a few years ago -- the only countries in the world that can make steel-making machinery -- blast furnaces, continuous casters, the big stuff -- are companies in Germany, Austria, Italy, and Japan. Curious how the WWII Allies can't do it.

I notice when I pass the Gary Steel Works on the train that Arcelor Mittal has some of the big buildings. But my impression is that the recyclers like Nucor are doing OK, and the bloodbath of the integrated companies like US Steel and Bethlehem has resulted in a fairly stable industry, although countries like Brazil and Russia keep trying to dump cheap steel.

JR on Grist

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dumping

That's pretty much my understanding of the current state of affairs, but the Steel industry is under constant threat.

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I'm just pasting in material I wrote but have not polished

To build adequate urban rail transit systems in the 39 largest U.S. cities, where nearly half of all Americans live, is going to require $4.433 trillion. That is just the construction costs – it does not even include the cost of new rolling stock and maintenance rail vehicles.

It is a project that will create over 100 million new jobs.

I began by assuming a desideratum of having a rail transit line no more than 2.5 miles from any point in an urban area. That is, if you took a square of urban area five miles on each side, we want to have a rail transit line running directly across the middle of that square. Slice that 25 square mile area into one mile strips, and you get one mile of rail transit line for every five square miles of urban area, or a density of 0.2 mile of rail transit line for every square mile.

Converting square miles to square kilometers, and miles to kilometers, what we are looking for is a density of 0.124 mi of rail transit line for every square kilometer of urban area. I needed to convert to metric because I wanted to be able to compare U.S. cities with cities in Europe and elsewhere, and for the more basic reason that the statistics available for urban rail transit systems, at both Wikipedia’s List of Urban Rail Systems by Length and at the http://en.wikipedia.org/wiki/List_of_urban_rail_systems_by_length amazing www.urbanrail.net provides statistics in kilometers. www.urbanrail.net

The statistics for land area for major cities in the U.S. is found at http://factfinder.census.gov Also, the primary Wikipedia entry for each city provides the population and land area, including for cities around the world.

My theory was that in order to achieve the same proportional levels of transit rail ridership you find in the great European cities, you need to provide similar densities of transit service and infrastructure. I was surprised to find that my desired density is met by New York City, which has 368 kilometers of rail transit line for a land area of 1,141.64 square kilometers, or a density of exactly 0.1245 kilometers of rail transit line per square kilometer. Perhaps I have stumbled upon a statistical artifact of some competent city planning authority for New York from a by-gone era? Someone with some knowledge of the history of New York urban rail transit might be able to provide an answer.

Finding that New York City meets the desired rail transit density is also a confirmation of the validity of the desideratum because New York City is unique among American cities in the high percentage of its population that uses its urban rail transit system. Over 80 of the passenger route miles in New York City are carried by the rail transit system. These numbers do not include bus ridership.

The case of New York City also presents what is probably the most significant problem with my study: the lack of a clear definition of what is included within an urban area. At first I began by using the population and area statistics provided in the Wikipedia profiles of each city, which usually include population and area for both the core city, and the urban area. The amount of rail kilometers of new line required for each city is based on land area, not total area, which includes water. For some cities, such as New York City or Norfolk-Virginia Beach-Newport News, Virginia, the amount of total city area under water is very significant. For many of these, it appears to be because the municipal boundaries are extended into neighboring bodies of water. For example, the Milwaukee-Waukesha, Wisc., PMSA is listed as having a total area of 3,322.27, of which 1,862.38 square miles are water, or 56.1 percent, the highest percentage of the 29 cities. The Cleveland-Lorain-Elyria, Ohio PMSA has a total area of 5,347.31 square miles, of which 2,640.47 square miles are water, or 49.4 percent, the second highest percentage. The city with the third largest percentage of water area is Norfolk--Virginia Beach--Newport News, VA--NC MSA, which has a total area of 3,586.20 square miles, of which 1,237.71 are water, or 34.5%. The next largest water areas by percent are Chicago, IL PMSA at 24.6 percent; Tampa--St. Petersburg--Clearwater, FL MSA at 23.3 percent; New York City at 19.3 percent; Baltimore, Md. and the San Francisco-Oakland-San Jose, CA CMSA both at 16.0 percent; and Providence-Fall River-Warwick, RI-MA MSA at 15.9 percent. Boston, MA-NH PMSA is 14.7% water; Los Angeles--Long Beach, CA PMSA is 14.5 percent; Orlando, FL MSA is 13.0 percent; and Seattle--Bellevue--Everett, WA PMSA is 11.9 percent. All the rest are ten percent or less of water area. The city with the smallest percentage of water area is Phoenix-Mesa, Arizona, which has 14,598.36 square miles of which only 25.63 are water, or 0.2 percent. The next two lowest are Riverside-San Bernardino, Calif. PMSA and Denver, Col., which both have 0.5 percent of their total area listed as water.

This table http://www.apta.com/research/stats/ridership/uzapmiles.cfm Annual Unlinked Passenger Trips and Passenger Miles for Urbanized Areas Over 1,000,000 Population, Fiscal Year 2004, shows that the more dense a rail transit system is, the more it will be used. For example, passenger miles in Chicago are some 30 percent higher than Los Angeles, despite the larger population in L.A. Particularly telling is a comparison of Boston, Philadelphia, and Washington DC – each with relatively much more developed rail transit systems – with Miami, Dallas, and Houston.

Here is another source for costs, but for light rail only: http://www.publicpurpose.com/ut-lrt2001.htm Light Rail Costs Approach $70 Million per Mile in 2000

What I found is we need to build 70,926.7 km of lines at a total cost of $4.433 trillion. This is based on $62.5 million for the 2004 Metro Gold line 9.6 km extension in Los Angeles, which used 2,604 tons of steel per km. That means my program requires 184,704,995 tons of steel, or about two years of U.S. steel shipments, probably about THREE years of U.S. steel production.

If anyone would like to do similar studies for other infrastructure needs, or know of such studies, please let me know.

 

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ASCE Infrastructure

ASCE Infrastructure Funding Needs
Airports $120
Bridges and Roads 1,555
Dams 8
Drinking Water 500
Hazardous Waste and "Brownfields" no amount given
Inland Waterways 13
National Park Service maintenance backlog 6
Rail - Freight 100
Schools (repair only) 268
Transit (repair only) 206
Infrastructure Security no amount given
Wastewater 195
Solid Wastes no amount given
Total $2,971

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A good source on the steel industry

is Locker Associates, with a nice data table, although their newsletter is big bucks. Looks like, as of September, prices had skyrocketed...don't know about now, though

JR on Grist

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