Too Big To Fail

Our financial system is dominated by banks considered too big to fail.  And that is a problem for the rest of us.  As Time Magazine explains:

“Too big to fail is opposed by the right and the left, though not apparently by the people drafting legislation,” says Simon Johnson, an MIT professor and the author of a recently published book on the subject, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. “The current financial-reform bills are effectively a wash on the issue.”

The question is how large banks ought to be allowed to become. When large banks run into trouble, regulators are often unwilling to let them fail, as bank failures can wipe out individual depositors. What’s more, banks often fund their operations by borrowing from other banks. The bigger the bank, the more likely it is to put other banks at risk if it fails. Mass bank failures, especially of big banks, means people can’t get loans. And no loans, no economy.

That’s why the government decided to bail out most of the nation’s largest banks at the height of the financial crisis. And here’s where the problem potentially gets worse. Once bankers understand that the government will bail out their firms when their loans or other financial bets go bad, they are likely to take riskier and riskier bets. That, of course, leads to more potential bank failures — and more taxpayer-funded bailouts.

Not only have attempts at reform largely failed, government regulators have often tried to paper over financial problems by encouraging our dominant banks to swallow smaller, less stable ones, thereby worsening the problem.     

So, who are our “too big to fail” banks and how did they get so big?  Here is a time line that charts the process and highlights the winners.

 

Of course there are answers to this “too big to fail” problem.  One is turning our banks into public utilities.  Here is Yves Smith talking about this solution.

Wealth Inequality

The OccupyWallStreet movement has succeed in forcing the media to acknowledge the extent and seriousness of income inequality.  In many ways wealth inequality is a bigger problem since it is wealth that largely underpins income and power differences.  According to an Economic Policy Institute posting,

the richest 5 percent of households obtained roughly 82 percent of all the nation’s gains in wealth between 1983 and 2009. The bottom 60 percent of households actually had less wealth in 2009 than in 1983, meaning they did not participate at all in the growth of wealth over this period.

It is worth dividing the top 5% into what has now become two familiar groups, the top 1% and the next 4%.  As the chart below shows, the top 1% of households captured 40% of all the growth in wealth over the period 1983 to 2009.  The next 4% gained 41.5%.

Putting these trends into dollars, households in the top 1% gained an average of $4.5 million in wealth and households in the next 4% gained an average of $1.2 million over the period.  It is worth restating that those are just their gains. How does your existing wealth stack up against their gains?

The Other 99ers

OccupyWallStreet has given rise to Occupy actions all over the United States and other countries as well.   One of the many slogans of this growing grassroots movement is “We are the 99%.”  This is a powerful slogan—highlighting the ways in which our current system serves the interests of a very small number of people.  Case in point: the top 1% of income earners captured 65% of all the growth in income over the period 2002 to 2007.  

Before this movement, there was another movement of 99ers.  Those were the unemployed facing life without a job and without any unemployment benefits.  Their ranks are about to grow again.  According to the Wall Street Journal, some 2.2 million people currently receiving unemployment benefits will lose them by Feb. 11, 2012 if Congress doesn’t renew our expanded unemployment benefits programs before the end of the year.

 

Here is some background on the two programs slated to end, the federal Emergency Unemployment Compensation (EUC) program and the federal-state Extended Benefits (EB) program. Workers in all states are typically eligible to receive up to 26 weeks of Unemployed Insurance (UI) benefits from the regular state-funded unemployment compensation program.  Workers in any state who exhausted their UI benefits became eligible for up to 34 additional weeks of benefits thanks to the EUC program. That number went up to 53 weeks in states that had especially high unemployment rates (see chart below). Workers who exhausted their UI and EUC benefits were eligible for a maximum 20 additional weeks of coverage through the EB program if their state’s unemployment insurance laws allowed it.

So, depending on what state you live in and how bad the unemployment rate is, an unemployed person would receive the base 26 weeks, possibly an additional 53 weeks under the EUC program, and possibly a further 20 weeks under the EB program, for a maximum of 99 weeks. What is up for renewal now is not an extension of benefits beyond the 99 weeks, but continuation of the EUC and EB programs. 

If Congress lets those programs expire, people who would have received benefits beyond the 26 week limit will lose them once they run though the weeks corresponding to the program that now provides them benefits.  For example, workers receiving EUC benefits will not be eligible for EB benefits.  And workers receiving UI benefits will not be eligible for EUC benefits.  And of course all new unemployed will be limited to 26 weeks. 

The assumption seems to be that there are jobs out there for the taking.  In reality, people just cannot find work.  Here are two charts from the Federal Reserve Bank of St. Louis that illustrate just how bad the job market has been for American workers.  The first shows the percentage of unemployed who have been out of work for 27 weeks or more.  The second shows the median duration of unemployment.

 

Here is what the Wall Street Journal has to say about recent and projected unemployment trends:

The number of Americans out of work for more than six months rose by 208,000 to 6.2 million in September, the Labor Department said last week. Some 44.6% of all of those who are unemployed have been sidelined for at least six months. Most of those individuals — nearly 4.4 million — have been out of work for at least a year.

In past recessions, unemployment extensions continued until the unemployment rate dropped below 7.5%. That’s a long way from the 9.1% rate recorded for September. Indeed, economists in the latest Wall Street Journal forecasting survey see the rate still elevated at 8.2% in December 2013.

So, why is Congress reluctant to renew our extended unemployment benefits programs, a renewal which doesn’t even help those that have gone through their 99 weeks?  According to the Wall Street Journal:

The Congressional Budget Office estimates that it would cost around $44 billion to extend benefits through 2012. That makes it a tough sell in a Congress looking to trim deficits. 

That’s right–$44 billion is just too much money to spend in a budget that includes close to a trillion dollars to fund the Pentagon, fight wars in Afghanistan and Iraq, and maintain costly and intrusive domestic security programs.

What can we do?  The best response is to deepen our support for the Occupy America movement and force a change in priorities. 

The Economic Crisis: Causes And Responses

An April 2011 Gallup poll found that 29% of Americans thought that the U.S. economy was in a depression.  Another 26% thought it was only a recession.   This is scary since according to the National Bureau of Economic Research we have been in an economic expansion since June 2009.

Why would so many Americans feel this way you might ask.  Here is one reason.  According to recent Census Bureau data, during the recession, which lasted from December 2007 to June 2009, inflation-adjusted median household income fell by 3.2%.  Between June 2009 and June 2011, a period of economic expansion, inflation-adjusted median household income fell by 6.7%.   This decline is illustrated in the New York Times chart below.

. . .

I recently appeared on the Alliance for Democracy’s “Populist Dialogue” TV show to talk about our economic crisis and possible responses to it.  You can watch the show here or below.

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Free Trade Above All

Agreement on Technical Barriers to Trade (TBT)—what could that be you ask?  It is one of the many agreements enforced by the World Trade Organization (WTO).    

The WTO is said to be concerned only with the promotion of free trade for our collective benefit.  And, according to the WTO, the TBT was negotiated to achieve that very aim. In the words of the WTO:

Technical regulations and product standards may vary from country to country. Having many different regulations and standards makes life difficult for producers and exporters. If regulations are set arbitrarily, they could be used as an excuse for protectionism. The Agreement on Technical Barriers to Trade tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles, while also providing members with the right to implement measures to achieve legitimate policy objectives, such as the protection of human health and safety, or the environment.

Sounds reasonable—well, the United States just lost two cases this past September in which foreign governments charged the United States with violating that agreement.

First case: a WTO panel ruled in Mexico’s favor against U.S. measures designed to protect dolphins.  The United States allows tuna fishers that use dolphin-safe nets to label their tuna sold in the U.S with a dolphin-safe label.  According to Mexico, this unfairly discriminates against those fishers that want to use different methods of production.  The WTO agreed—the U.S. was being an unfair trader.  No more labels.  

Second case: a WTO panel ruled against U.S. measures designed to reduce teenage smoking.  Among other things, the U.S. measures banned the sale of many flavored cigarettes–in particular clove cigarettes–which were seen as likely to hook young smokers.  Indonesia is a major producer and exporter to the United States of clove cigarettes and it argued that the U.S. ban discriminated against its products.  The WTO agreed—the U.S. was being an unfair trader.   

It also looks likely that a WTO panel will find against U.S. consumer labeling laws that allow country of origin labeling for beef.  If consumers knew where their beef came from it might influence their purchasing decisions.  That could have a negative effect on sales of imported beef.  

Free trade in the eyes of the WTO means maximum freedom for corporations to produce and sell products as they want.  Said differently, it means a world in which governments are forbidden to take steps to protect the environment or the health of its citizens if doing so interferes with private profit making. 

This is just one agreement.  The WTO presides over many more that are equally, if not more, scandalous.  You will be hard pressed to read about these decisions in the press.  The reason: it might encourage people to question the free trade agreements with Korea, Colombia, and Panama that the U.S. government is promoting, since they also include TBTs.  My recently published analysis of the U.S.-Korea Free Trade Agreement can be read here.