The real cost of the 2008 financial crisis

John Cassidy writes:

September 15th marks the tenth anniversary of the demise of the investment bank Lehman Brothers, which presaged the biggest financial crisis and deepest economic recession since the nineteen-thirties. After Lehman filed for bankruptcy, and great swaths of the markets froze, it looked as if many other major financial institutions would also collapse. On September 18, 2008, Hank Paulson, the Secretary of the Treasury, and Ben Bernanke, the chairman of the Federal Reserve, went to Capitol Hill and told congressional leaders that if they didn’t authorize a seven-hundred-billion-dollar bank bailout the financial system would implode. Some Republicans reluctantly set aside their reservations. The bailout bill passed. The panic on Wall Street abated. And then what?

The standard narrative is that the rescue operation succeeded in stabilizing the financial system. The U.S. economy rebounded, spurred by a fiscal stimulus that the Obama Administration pushed through Congress in February, 2009. When the stimulus started to run down, the Fed gave the economy another boost by buying vast quantities of bonds, a policy known as quantitative easing. Eventually, the big banks, prodded by the regulators and by Congress, reformed themselves to prevent a recurrence of what happened in 2008, notably by increasing the amount of capital they hold in reserve to deal with unexpected contingencies. This is the basic story that Paulson, Bernanke, and Tim Geithner, who was the Treasury Secretary during the Obama Administration, told in their respective memoirs. It was given an academic imprimatur by books like Daniel Drezner’s “The System Worked: How the World Stopped Another Great Depression,” which came out in 2014.

This history is, on its own terms, perfectly accurate. In the early nineteen-thirties, when the authorities allowed thousands of banks to collapse, the unemployment rate soared to almost twenty-five per cent, and soup kitchens and shantytowns sprang up across the country. The aftermath of the 2008 crisis saw plenty of hardship—millions of Americans lost their homes to mortgage foreclosures, and by the summer of 2010 the jobless rate had risen to almost ten per cent—but nothing of comparable scale. Today, the unemployment rate has fallen all the way to 3.9 per cent.

There is much more to the story, though, than this uplifting Washington-based narrative. In “Crashed: How a Decade of Financial Crises Changed the World,” the Columbia economic historian Adam Tooze points out that we are still living with the consequences of 2008, including the political ones. Using taxpayers’ money to bail out greedy and incompetent bankers was intrinsically political. So was quantitative easing, a tactic that other central banks also adopted, following the Fed’s lead. It worked primarily by boosting the price of financial assets that were mostly owned by rich people.

As wages and incomes continued to languish, the rescue effort generated a populist backlash on both sides of the Atlantic. Austerity policies, especially in Europe, added another dark twist to the process of political polarization. As a result, Tooze writes, the “financial and economic crisis of 2007-2012 morphed between 2013 and 2017 into a comprehensive political and geopolitical crisis of the post–cold war order”—one that helped put Donald Trump in the White House and brought right-wing nationalist parties to positions of power in many parts of Europe. “Things could be worse, of course,” Tooze notes. “A ten-year anniversary of 1929 would have been published in 1939. We are not there, at least not yet. But this is undoubtedly a moment more uncomfortable and disconcerting than could have been imagined before the crisis began.” [Continue reading…]

Conflict reigns over the history and origins of money

Bruce Bower writes:

Wherever you go, money talks. And it has for a long time.

Sadly, though, money has been mum about its origins. For such a central element of our lives, money’s ancient roots and the reasons for its invention are unclear.

As cryptocurrencies such as Bitcoin multiply into a flock of digital apparitions, researchers are still battling over how and where money came to be. And some draw fascinating parallels between the latest, buzzworthy cryptocurrencies, which require only a virtual wallet, and a type of money developed by one Micronesian island community that wouldn’t fit in anyone’s wallet, pocket or purse.

When it comes to money’s origins, though, conflict reigns. Economists have held one view of money’s origins for hundreds of years. But a growing number of anthropologists and archaeologists, holding a revisionist view, say that economists’
standard story is bankrupt.

Economists and revisionists alike agree that an object defined as money works in four ways: First, it serves as a means for exchanging goods and services. Currency enables payment of debts. It represents a general measure of value, making it possible to calculate prices of all sorts of items. And, finally, money can be stored as a wealth reserve.

From there, the two groups split. Mainstream economists assume that bartering of goods and services inspired money’s invention. Anthropologists and archaeologists contend that early states invented currency as a means of debt payment.

“Much academic work assumes that [monetary systems] arose in nation-states within the last 200 to 400 years,” says sociocultural anthropologist Daniel Souleles of Copenhagen Business School in Frederiksberg. But financialized transactions and debt show up in lots of places much further back in time.

Recent research from the Americas adds new questions to the debate. These investigations suggest that money independently appeared for different reasons and assumed different tangible forms in many parts of the world, starting thousands of years ago. [Continue reading…]

Geoffrey West: What is complexity in the cosmos?

 

Portugal dared to cast aside austerity. It’s having a major revival

The New York Times reports:

Ramón Rivera had barely gotten his olive oil business started in the sun-swept Alentejo region of Portugal when Europe’s debt crisis struck. The economy crumbled, wages were cut, and unemployment doubled. The government in Lisbon had to accept a humiliating international bailout.

But as the misery deepened, Portugal took a daring stand: In 2015, it cast aside the harshest austerity measures its European creditors had imposed, igniting a virtuous cycle that put its economy back on a path to growth. The country reversed cuts to wages, pensions and social security, and offered incentives to businesses.

The government’s U-turn, and willingness to spend, had a powerful effect. Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off — including at Mr. Rivera’s olive groves.

“We had faith that Portugal would come out of the crisis,” said Mr. Rivera, the general manager of Elaia. The company focused on state-of-the-art harvesting technology, and it is now one of Portugal’s biggest olive oil producers. “We saw that this was the best place in the world to invest.”

At a time of mounting uncertainty in Europe, Portugal has defied critics who have insisted on austerity as the answer to the Continent’s economic and financial crisis. While countries from Greece to Ireland — and for a stretch, Portugal itself — toed the line, Lisbon resisted, helping to stoke a revival that drove economic growth last year to its highest level in a decade. [Continue reading…]

Republicans increasingly express fear that Trump’s trade war with China will harm the U.S. economy

The New York Times reports:

The trade war between the United States and China showed no signs of yielding on Thursday, as Steven Mnuchin, the Treasury secretary, told lawmakers there was no clear path to resolution and Beijing blasted the administration over its approach.

Mr. Mnuchin, who has tried to avoid calling the trade tensions with China a “war,” said talks with Beijing had “broken down” and suggested it was now up to China to come to the table with concessions. President Trump, speaking in Brussels on Thursday, described the trade talks with China as a “nasty” battle.

The Chinese, meanwhile, accused the United States of “acting erratically” and said the administration had “blatantly abandoned the consensuses that two sides have reached and insisted on fighting a trade war with China.”

Republicans and Democrats on the House Financial Services Committee showed little patience for Mr. Mnuchin’s answers about the lack of progress, repeatedly pressing him about whether there was a strategy to resolve the trade war and expressing concern that it was starting to hurt parts of the economy. [Continue reading…]

How Silicon Valley fuels an informal caste system

Antonio García Martínez writes:

California is the future of the United States, goes the oft-cited cliché. What the US is doing now, Europe will be doing in five years, goes another. Given those truthy maxims, let’s examine the socioeconomics of the “City by the Bay” as a harbinger of what’s to come.

Data shows that technology and services make up a large fraction of citywide employment. It also shows that unemployment and housing prices follow the tech industry’s boom-and-bust cycle. Amid the current boom, a family of four earning $117,400 now qualifies as low-income in San Francisco. Some readers laughed when I wrote in a memoir about working at Facebook that my six-figure compensation made me “barely middle class.” As it turns out, I wasn’t far off. With that credential, consider this rumination on bougie life inside the San Francisco bubble, which seems consistent with the data and the experience of other local techies.

San Francisco residents seem to be divided into four broad classes, or perhaps even castes:

The Inner Party of venture capitalists and successful entrepreneurs who run the tech machine that is the engine of the city’s economy.

The Outer Party of skilled technicians, operations people, and marketers that keep the trains belonging to the Inner Party running on time. They are paid well, but they’re still essentially living middle-class lives—or what lives the middle class used to have.

The Service Class in the “gig economy.” In the past, computers filled hard-for-humans gaps in a human value chain. Now humans fill hard-for-software gaps in a software value chain. These are the jobs that AI hasn’t managed to eliminate yet, where humans are expendable cogs in an automated machine: Uber drivers, Instacart shoppers, TaskRabbit manual labor, etc.

Lastly, there’s the Untouchable class of the homeless, drug addicted, and/or criminal. These people live at the ever-growing margins: the tent cities and areas of hopeless urban blight. The Inner Party doesn’t even see them, the Outer Party ignores them, and the Service Class eyes them warily; after all, they could end up there. [Continue reading…]

How the pharmaceutical drug economy became a racket controlled by Wall Street

Alexander Ziachik writes:

Donald Trump’s plan to lower prescription drug prices, announced May 11 in the Rose Garden, is a wonky departure for the president. In his approach to other signature campaign pledges, Trump has selected blunt-force tools: concrete walls, trade wars, ICE raids. His turn to pharmaceuticals finds him wading into the outer weeds of the 340B Discount program. These reforms crack the door on an overdue debate, but they are so incremental that nobody could confuse them with the populist assault on the industry promised by Trump the candidate, who once said big pharma was “getting away with murder.”

With his May 11 plan, Trump is, in effect, leaving the current pharmaceutical system in place. Increasingly, its most powerful shareholders are the activist managers of the hedge funds and private equity groups that own major stakes in America’s drug companies. They hire doctors to scour the federal research landscape for promising inventions, invest in the companies that own the monopoly licenses to those inventions, squeeze every drop of profit out of them, and repeat. If they get a little carried away and a “price gouging” scandal erupts amid howls of public pain and outrage, they put a CEO on Capitol Hill to endure a day of public villainy and explain that high drug prices are the sometimes-unfortunate cost of innovation. As Martin Shkreli told critics in 2015 of his decision to raise the price of a lifesaving drug by 5,000 percent, “this is a capitalist society, a capitalist system and capitalist rules.” That narrative, that America’s drug economy represents a complicated but beneficent market system at work, is so ingrained it is usually stated as fact, even in the media. As a Vox reporter noted in a piece covering the May announcement of Trump’s plan, “Medicine is a business. That’s capitalism. And we have seen remarkable advances in science under the system we have.”

This is a convenient story for the pharmaceutical giants, who can claim that any assault on their profit margins is an assault on the free market system itself, the source, in their minds, of all innovation. But this story is largely false. It owes much to the rise of neoliberal ideas in the 1970s and to decades of concerted industry propaganda in the years since.

In truth, the pharmaceutical industry in the United States is largely socialized, especially upstream in the drug development process, when basic research cuts the first pathways to medical breakthroughs. Of the 210 medicines approved for market by the FDA between 2010 and 2016, every one originated in research conducted in government laboratories or in university labs funded in large part by the National Institutes of Health. Since 1938, the government has spent more than $1 trillion on biomedical research, and at least since the 1980s, a growing proportion of the primary beneficiaries have been industry executives and major shareholders. Between 2006 and 2015, these two groups received 99 percent of the profits, totaling more than $500 billion, generated by 18 of the largest drug companies. This is not a “business” functioning in some imaginary free market. It’s a system built by and for Wall Street, resting on a foundation of $33 billion in annual taxpayer-funded research. [Continue reading…]

Chinese investment in the U.S. has plummeted 92% this year

CNN reports:

Chinese investment in the United States nosedived in the first five months of 2018 amid mounting tensions between the world’s two largest economies.
For years, Chinese companies pumped growing amounts of money into the United States, deepening ties between the countries.

But Chinese investment totaled only $1.8 billion between January and May. That’s a 92% drop compared to the same period in 2017, and the lowest level in seven years, according to a report released Wednesday by Rhodium Group, a research firm that tracks Chinese foreign investment.

The dramatic decline comes as the fight between Washington and Beijing over trade escalates, and US regulators increase their scrutiny of Chinese acquisitions. [Continue reading…]

Climate change can be stopped by turning carbon dioxide pollution into gasoline

The Atlantic reports:

A team of scientists from Harvard University and the company Carbon Engineering announced on Thursday that they have found a method to cheaply and directly pull carbon-dioxide pollution out of the atmosphere.

If their technique is successfully implemented at scale, it could transform how humanity thinks about the problem of climate change. It could give people a decisive new tool in the race against a warming planet, but could also unsettle the issue’s delicate politics, making it all the harder for society to adapt.

Their research seems almost to smuggle technologies out of the realm of science fiction and into the real. It suggests that people will soon be able to produce gasoline and jet fuel from little more than limestone, hydrogen, and air. It hints at the eventual construction of a vast, industrial-scale network of carbon scrubbers, capable of removing greenhouse gases directly from the atmosphere.

Above all, the new technique is noteworthy because it promises to remove carbon dioxide cheaply. As recently as 2011, a panel of experts estimated that it would cost at least $600 to remove a metric ton of carbon dioxide from the atmosphere.

The new paper says it can remove the same ton for as little as $94, and for no more than $232. At those rates, it would cost between $1 and $2.50 to remove the carbon dioxide released by burning a gallon of gasoline in a modern car.

“If these costs are real, it is an important result,” said Ken Caldeira, a senior scientist at the Carnegie Institution for Science. “This opens up the possibility that we could stabilize the climate for affordable amounts of money without changing the entire energy system or changing everyone’s behavior.” [Continue reading…]

Under Trump, ‘America First’ really is turning out to be America alone

Susan B. Glasser writes:

The Canadian Prime Minister, Justin Trudeau, was less than forty-eight hours away from hosting the biggest diplomatic gathering of his career when I spoke with one of his top advisers on Wednesday afternoon. Trudeau’s team was searching for strategies to salvage the annual G-7 summit with the American President, Donald Trump, and leaders of five of the world’s other large democratic economies—all of them close allies of the United States, and all of them furious with Trump. “Look, he personally decided he wanted to be fighting with everybody,” the Trudeau aide told me, referring to Trump. “Maybe he thinks it’s in his best interests to be combative and fighting.”

For close to a year and a half, Trudeau and his counterparts have employed various strategies to try to head off conflict with the volatile American President, from flattery to stonewalling to hours of schmoozing on the golf course. But in recent weeks Trump has confounded their efforts, unleashing a tit-for-tat trade war with allies, blowing up the Iran nuclear deal over European objections, and walking away from a deal with Canada and Mexico to overhaul NAFTA, all while lavishing praise on the North Korean dictator with whom he hopes to reach an accord next week. Adding insult to injury, Trump even cited an obscure national-security provision to justify the tariffs, as if America’s closest friends had suddenly become its biggest enemies. As a result, the G-7 meeting that Trudeau will host on Friday and Saturday was shaping up to be the most contentious, and possibly the most consequential, since the summits began, in 1975.

Trump’s chief economic adviser, Larry Kudlow, told the White House press corps on Wednesday that this was all just a “family quarrel,” but, if so, it’s one ugly fight. As Kudlow acknowledged the rift, Trudeau and France’s President, Emmanuel Macron, were meeting to plot strategy, and everyone was wondering why Trump, who is often described as averse to face-to-face conflict, had chosen the weeks preceding the annual G-7 summit to punch his allies in the face. In the days leading up to the meeting, Trump had tense phone calls with Trudeau, Britain’s Prime Minister, Theresa May, and Macron, who has been especially humiliated by the series of adverse decisions after flying to Washington to lobby Trump personally. All of them appear to fix blame on Trump himself. “We’ve gotten used to unorthodox behavior from your President,” the Trudeau adviser said.

For his part, Trump seems to relish the confrontation he has unleashed and is spoiling for more. [Continue reading…]