Reviewing last year's events toward the precipitous liquidity crisis there is a tendency to identify the sub-prime lending market as the primary cause.
Sub-prime debt was securitized so that it all looked triple A in the aggregate, but that did not cause the crisis. The crisis was caused at the fundament: a lack of income to support the value of the debt instruments, thus called "sub prime."
Buying and selling the sub-prime debt was predicated on a theory of economic investment and growth that fails, or nulls, its hypothesis in every case.
Trickle-down economics always nulls its hypothesis. It accumulates and consolidates the value, the income, needed to cause the growth and distribution of income to pay the debt. Pretty simple!
Rejection of making permanent a public policy plagued with a continuously nulled hypothesis was definitely worth voting for in the last election cycle.
In retrospect it is time to confirm what the truth is by very simply rejecting what it clearly is not. This is a function of critique: testing the hypotheses of theoretical models, and this particular model of trickle-down economics has been thoroughly tested negative for the results it promises. It caused the sub-prime liquidity crisis because it does not work.
The solution is very easily, very simply, induced from the evidence: if you want to prevent liquidity crises, do not use trickle-down economics.
Making sub-prime loans did not cause the crisis. The accumulation of wealth to trickle down to pay the debt caused the crisis because "accumulation" and "trickle down" (distribution) are antithetical. Remove the contradiction--what conservatives say requires a secret knowledge to understand why it really works--and the problem is actually solved rather than continuously reinvented in the guise of empirical improvement.
It is no secret that the trickle-down hypothesis is continuously nulled.
Slow growth plagued the Bush administration despite record budget deficits that will continue well beyond its eight years. During that time, growth was most robust when tax policy favored the middle class. When those middle-class tax cuts expired, so did the more robust growth.
Growth--expanding the pie--supports the dollar and a "fundamentally" low interest rate. Instead, the rate was "technically" low to support the trickle-down theory with positive confirmation.
Of course, truth kicked out the front door just comes in the back.
The funds provided by the "technical" rate, instead of adding liquidity to be trickled down, were retained at the top. The funds remain there, in a steady state of accumulation, which is why the economy is on a slow slope to recovery.
The funds to support the trickle-down hypothesis (an extra-large buget deficit AND a low interest rate) were technically provided but used to finance the over-leveraging, and consolidation of the wealth, to a larger-than-usual crisis proportion.
(Hedge fund managers called the over-leveraging "the magnifier effect" which technically indicated the deviation from the normal distribution would not be a random event.)
All the indicators were technically there to prevent the magnitude and precipitousness of the crisis, but that does not allow for the gratitude the little people should have for the technical elits that saved us from the folly of their own devices.
The wealth, even with a record budget deficit, did not trickle down to cause growth. Instead, it accumulated and caused the most severe deflationary trend since The Great Depression.
More disturbing is that the crisis was so easily predictable, indicating how entrenched a lack of empirical methodology is for the development of public policy. It is like living in the Middle Ages when the earth was flat and at the center of the universe.
Even after the crisis and an election cycle with a clear mandate to make application of the truth permanent instead of the Bush tax cuts, we persist with a failed model of political economy that is methodologically no less akin to what Galileo faced with his observations.
Secular economic reality is the remaining legacy of the empirical heresy.
Showing posts with label predictive utility. Show all posts
Showing posts with label predictive utility. Show all posts
Wednesday, September 30, 2009
Tuesday, October 28, 2008
Pricing the Risk
It looks like the bailout funds will be mostly used to consolidate rather than pluralize the financial sector. Easily predictabe.
The economic model of efficiency being used is "bigger is better" which translated means "bigger is too big to fail" and receives public funding to consolidate and cause more crisis for more funding.
The current price on this risk is greater than $700 billion with a perfect probability of failure at 100 percent. I guesse we can't accuse our elits of not striving for perfection.
The bigger the firm, the more likely, if not certain, it will leverage risk for a magnified return, which caused the crisis we are now in. Banks will not be in the business of risking capital to grow the economy--lending to The People and their businesses--but to leverage a pure profit by bidding up futures contracts, straddling rate spreads and securitizing the risk into inscrutible value with bogus marks to the market.
The bureaucratic managers to discharge the TARP are sector executives that are likely to price the risk based on returns for the private sector and the consolidation of market share, recycling crisis with the legitimacy of public authority.
Instead of better products, services and prices, the consumer is financing an organization inimical to its interests.
Instead of financing a competitive multiplicity of the marketplace in which risk is priced in terms of the best value for the customer (The People), the risk is priced to shift it all it to The People with the least possible benefit and the greatest gain for the private corporate entity, thereby securing exploitation of The People, the perfect probability for crisis, and the public funding that it causes, all with the legitimacy of public authority which is defined by the consent of the governed.
The risk is priced out of the market and into the public domain so that the accountability is all with a bogus consent of the governed. The risk is priced by dumpimg all the cost into the public domain. The result will be crisis and the need to service the inefficieny of "bigger is better" with public finance, always being supported as the confirmed model of efficiency with the empirical verification of the huge amount of public money spent to bail it out, and preserve it, by popular consent.
The People's capital needs to invest a deconsolidation of industry and markets, not pay for the organized means for The People's deprivation.
Obama/Biden 2008!
The economic model of efficiency being used is "bigger is better" which translated means "bigger is too big to fail" and receives public funding to consolidate and cause more crisis for more funding.
The current price on this risk is greater than $700 billion with a perfect probability of failure at 100 percent. I guesse we can't accuse our elits of not striving for perfection.
The bigger the firm, the more likely, if not certain, it will leverage risk for a magnified return, which caused the crisis we are now in. Banks will not be in the business of risking capital to grow the economy--lending to The People and their businesses--but to leverage a pure profit by bidding up futures contracts, straddling rate spreads and securitizing the risk into inscrutible value with bogus marks to the market.
The bureaucratic managers to discharge the TARP are sector executives that are likely to price the risk based on returns for the private sector and the consolidation of market share, recycling crisis with the legitimacy of public authority.
Instead of better products, services and prices, the consumer is financing an organization inimical to its interests.
Instead of financing a competitive multiplicity of the marketplace in which risk is priced in terms of the best value for the customer (The People), the risk is priced to shift it all it to The People with the least possible benefit and the greatest gain for the private corporate entity, thereby securing exploitation of The People, the perfect probability for crisis, and the public funding that it causes, all with the legitimacy of public authority which is defined by the consent of the governed.
The risk is priced out of the market and into the public domain so that the accountability is all with a bogus consent of the governed. The risk is priced by dumpimg all the cost into the public domain. The result will be crisis and the need to service the inefficieny of "bigger is better" with public finance, always being supported as the confirmed model of efficiency with the empirical verification of the huge amount of public money spent to bail it out, and preserve it, by popular consent.
The People's capital needs to invest a deconsolidation of industry and markets, not pay for the organized means for The People's deprivation.
Obama/Biden 2008!
Tuesday, October 21, 2008
Economy of Innovation
President Bush says that regulatory reform of the financial sector should allow for innovation. The general suggestion is that regulation of industry and markets stifles innovation, including financials.
That is incorrect.
First, innovation is likely to occur where the capital is, and if the capital is allowed to concentrate as much as it is (not spreading the wealth around), then innovative ways to produce profit without growth are assured, has occured, and has resulted in general crisis.
Innovative ways to prevent crisis (optimal investment), instead of causing crisis, requires spreading the wealth around, or deconsolidating the capital.
Regulation can also produce innovation to control externalities, like pollution. Unfortunately, the capital is so consolidated, the innovation is resisted, considered a cost, not a benefit, so it suffers deficient investment (economic growth) and tends to be exported along with the jobs associated with it.
Neo-conservatives opt to keep the regulatory authority proactively cooperative, acquiescent, and a sycophantic satrapy organized to give the abuses of consolidated power the legitimacy of public authority, and to reactively manage the risk, the cost, to a minimum.
For the financial sector, the lack of regulatory authority produced negative innovations that are now being dealt with as negative externalities to be crisis-managed by the regulatory authority.
The negative externalities are the product of extreme misfeasance if not malfeasance of a public/private power structure called "The Iron Triangle." It is the bureaucratic model of power and political economy and it yielded a competence for corruption because its power is so huge and concentrated (non-pluralistic). The result is a systematic, structural, failure not seen since the Great Depression.
There is no reason to believe switching this bureaucratic form of power to a socialist legitimacy will be any less corrupt, and here is where the conservative rhetoric is focused to instill fear, loathing, and logical fallacy.
What needs to be innovative about the financial sector?
Innovative ways to lure consolidated capital out of its horded haunts yields crisis. We have incontrovertible empirical proof of that by living it now, but McCain still wants us to "believe" that innovation of leverage finance, encouraging it with a highly regressive tax code, will "create wealth." No, it creates crisis!
According to McCain, and what has proven to be a greedy, malfeasant, neo-conservative cohort, ensuring a very clear means of verifying class distinction drives productivity, innovation, and wealth. The argument is that if we do not subsidize the rich to stay rich, by not spreading the wealth around, we will suffer the effects of socialism--low productivity.
Policies and programs that encourage innovation of financial instruments yields low productivity and economic growth with the empirical proof of the current crisis. The employment we have had has been mostly to confirm ensuring class society of rich and poor so that we will be productive by exporting our good paying non-service jobs. A service economy, that is, an economy of servitude was created. Being assured A 2.50 an hour job serving food is not the model of innovative financing that assures creating the wealth. What it does assure is consolidation of the wealth and a workforce structurally enslaved to serve it up.
Mr. McCain and Mrs. Palin... NO THANKS!
We need our financial sector to very simply finance innovation of productivity in the marketplace. If the talent we have now--greedy, self-involved, incapable of seeing past their self-interest and the consciousness of their class--cannot identify the entrepreneurial talent that will pluralize the marketplace and cause productive capacity, full employment and low inflation, then let's get those that will, and we know all too well that will not be the party of McCain and neo-conservatives.
That is incorrect.
First, innovation is likely to occur where the capital is, and if the capital is allowed to concentrate as much as it is (not spreading the wealth around), then innovative ways to produce profit without growth are assured, has occured, and has resulted in general crisis.
Innovative ways to prevent crisis (optimal investment), instead of causing crisis, requires spreading the wealth around, or deconsolidating the capital.
Regulation can also produce innovation to control externalities, like pollution. Unfortunately, the capital is so consolidated, the innovation is resisted, considered a cost, not a benefit, so it suffers deficient investment (economic growth) and tends to be exported along with the jobs associated with it.
Neo-conservatives opt to keep the regulatory authority proactively cooperative, acquiescent, and a sycophantic satrapy organized to give the abuses of consolidated power the legitimacy of public authority, and to reactively manage the risk, the cost, to a minimum.
For the financial sector, the lack of regulatory authority produced negative innovations that are now being dealt with as negative externalities to be crisis-managed by the regulatory authority.
The negative externalities are the product of extreme misfeasance if not malfeasance of a public/private power structure called "The Iron Triangle." It is the bureaucratic model of power and political economy and it yielded a competence for corruption because its power is so huge and concentrated (non-pluralistic). The result is a systematic, structural, failure not seen since the Great Depression.
There is no reason to believe switching this bureaucratic form of power to a socialist legitimacy will be any less corrupt, and here is where the conservative rhetoric is focused to instill fear, loathing, and logical fallacy.
What needs to be innovative about the financial sector?
Innovative ways to lure consolidated capital out of its horded haunts yields crisis. We have incontrovertible empirical proof of that by living it now, but McCain still wants us to "believe" that innovation of leverage finance, encouraging it with a highly regressive tax code, will "create wealth." No, it creates crisis!
According to McCain, and what has proven to be a greedy, malfeasant, neo-conservative cohort, ensuring a very clear means of verifying class distinction drives productivity, innovation, and wealth. The argument is that if we do not subsidize the rich to stay rich, by not spreading the wealth around, we will suffer the effects of socialism--low productivity.
Policies and programs that encourage innovation of financial instruments yields low productivity and economic growth with the empirical proof of the current crisis. The employment we have had has been mostly to confirm ensuring class society of rich and poor so that we will be productive by exporting our good paying non-service jobs. A service economy, that is, an economy of servitude was created. Being assured A 2.50 an hour job serving food is not the model of innovative financing that assures creating the wealth. What it does assure is consolidation of the wealth and a workforce structurally enslaved to serve it up.
Mr. McCain and Mrs. Palin... NO THANKS!
We need our financial sector to very simply finance innovation of productivity in the marketplace. If the talent we have now--greedy, self-involved, incapable of seeing past their self-interest and the consciousness of their class--cannot identify the entrepreneurial talent that will pluralize the marketplace and cause productive capacity, full employment and low inflation, then let's get those that will, and we know all too well that will not be the party of McCain and neo-conservatives.
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