Cover Wars: Fortune Loses

The editors of Fortune magazine had hired the cartoonist Chris Ware to design the cover of the magazine’s May 2010 issue, which includes its annual listing of the country’s top 500 corporations as ranked by revenue.

They were no doubt hoping to get a cover that resonated with some of the magazine’s past cover glamor–You can see examples of past Fortune magazine covers here.

Well, Ware produced a stunner, but his inclusion of exploited Mexican factory workers, Guantanamo Bay prisoners, and a number of funny hits on corporate greed and federal bailouts was clearly not what the editors had hoped for.  So, they rejected it.

But you can still see it.  You will need to expand its size (by clicking on it to get a larger view and then clicking once again to get an even larger view) by going here.





Anger and Confusion

Everyone is angry about the big salaries CEOs have been drawing despite the Great Recession that has left almost everyone else struggling and scared.

The anger is understandable—check out the AFL-CIO’s executive paywatch site.  There you will see the following:

Bank of America Corp.
Thomas Montag
2009 Total Compensation: $29,930,431

JPMorgan Chase & Co.
James Dimon
2009 Total Compensation:

Citigroup Inc.
John Havens
2009 Total Compensation: $11,276,454

Morgan Stanley
Walid Chammah
2009 Total Compensation: $10,021,969

The Goldman Sachs Group Inc.
Lloyd Blankfein
2009 Total Compensation: $9,862,657

Wells Fargo
John Stumpf
2009 Total Compensation: $21,340,547

It helps to put these compensation numbers in a bit of perspective.  If you were to earn $100,000 a year, it would take you 90 years of work to make $9 million dollars, which is still less than what any of the above made in just one year.

But, to a large extent, our anger at these people and their earnings is all very acceptable to those who profit from the status quo.  That is one reason that the media is willing to give visibility to (or actually encourage) the public anger over the issue.  Lowering executive salaries will do little to change the dynamics of a system that resists labor law reform, promotes free trade agreements, champions war spending, seeks privatization, ignores income inequality, and welcomes cuts in public services, etc.

Yes, we should be mad, but we need to focus our anger at the structures that really shape our lives.  In this regard, it is depressing to read what Andrew Kohut, president of Pew Research Center, has to say about the results of a series of recent Pew surveys.

In short, the surveys show that people are increasingly blaming the government for our problems and viewing a smaller, less interventionist public sector as the answer to our problems.  While existing government programs and policies are far from perfect, this perspective is a recipe for far greater suffering.  Afterall, the smaller the government, the more powerful business becomes.

Here is a sample of what Pew found:

By almost every conceivable measure, Americans are less positive and more critical of their government these days. . . .

As in the past, poor performance is the most persistent criticism of the federal government. But increasingly Americans say that government has the wrong priorities and that has a negative effect on their day-to-day lives. Sixty-two percent say that government policies unfairly benefit some groups, while nearly as many (56%) say that government does not do enough to help average Americans.

There is also growing concern about the size and power of the federal government. The public is now evenly divided over whether federal government programs should be maintained to deal with important problems or cut back greatly to reduce the power of government.

A desire for smaller government is particularly evident since Barack Obama took office. In four surveys over the past year, about half have consistently said they would rather have a smaller government with fewer services, while about 40% have consistently preferred a bigger government providing more services. In October 2008, shortly before the presidential election, the public was evenly split on this question.

The public is now divided over whether it is a good idea for the government to exert more control over the economy than it has in recent years. Just 40% say this is a good idea, while a 51% majority says it is not. Last March, by 54% to 37%, more people said it was a good idea for the government to exert more control over the economy. The exception here is the undiminished support for the government to more strictly regulate the way major financial companies do business. This is favored by a 61% to 31% margin.

We have a lot of work to do.

Ideological Struggle-Part III

People are mad—the economy is tanking and understandably we want to know who to blame.  Of course, AIG (and its bonus payments) is an easy target.  So is the failed bank bailout.  And the media is happy to oblige us with lots of stories.

The problem is that we are dealing with something bigger—a structural crisis.  That is something that the media refuses to address.

In an earlier post I described how most mainstream economists believe that capitalism is a stable system that produces and maintains full employment.  For these economists, serious problems must be caused by developments that are, at root, external to the workings of the system.  Examples include technology shocks or overly aggressive or misdirected government policy.

In reality capitalism is a system that generates contradictions—and crises.

Imagine you are a capitalist.  You hire workers and other inputs needed for production.  Your goal is to maximize profits.   So, what do you do?  If you are a “good” capitalist you find ways to get your workers to produce the very most they can for the lowest possible wage.

But if every capitalist does this we end up in a situation where production soars way beyond the purchasing power of the population.   What then?  Well, we are likely to end up in recession.  Unable to sell all their goods, capitalists will cut production and lay off workers, who will then have even less money, leading to a downward spiral.

It is true that capitalists themselves might demand enough (investment) goods and services to fill the gap—but that is a risky thing to count on.  There has to be some great new invention or access to some big new market to encourage such new spending in the face of declining household demand.

Of course we are not always in recession.  The reason is that capitalists and the government are resourceful.  They can try and promote exports and sell goods elsewhere.  Thus sometimes a potential crisis in one country can be forced onto another—think third world.  Or the government can engage in serious spending (directly by buying goods and services from companies or indirectly by transferring money to workers so that they can buy things from companies) to provide the necessary extra demand.  Or capitalists can develop (with government support) a sophisticated credit system that can lend money to workers to allow them to pump up their spending beyond what their income might allow.

These solutions can work for a time, sometimes for a long time—but they also generate their own problems.  For example, credit markets could end up triggering stock market or housing bubbles, leading to unsustainable debt-based growth.  Sound familiar?  And of course these solutions also have their class dimension—we are not all equal when it comes to enjoying the profits or sharing the pressured working conditions and employment insecurity.  AIG executives are able to defend their bonuses while GM workers are forced to renegotiate their contracts because of the structural inequalities of our system.

We got into our current mess because of structural problems.  In broad brush: growing international competition beginning in the late 1960s led to a decline in profits in manufacturing.  By the 1980s, capitalists had worked out their response.  Led by the government they restored profit margins by breaking unions and pushing down wages.  And they also gradually shifted away from manufacturing to finance.  By the late 1990s, things were in high gear.  Average earnings were generally stagnating but huge gains were being made by those at the top thanks to all sorts of financial developments, including the stock market and housing bubbles.  Workers relied on rising home prices to borrow enough money to keep consumption strong and the economy growing–at least until the housing bubble popped.

Yes, we need to block the bonuses and deal with the banking system—nationalization being the best answer to both.  But we need more than that—we have to recognize that capitalism was not working well for the great majority of us for decades and that growth was bound to end because of growing imbalances that were becoming unmanageable.  We have to start openly discussing how best to restructure our economy.  I wonder when the media will start encouraging that discussion.

Ideological Struggle–Part I

We are in the midst of very hard economic times—everyone agrees.  But there is not agreement on causes or responses.

Most mainstream economists believe that capitalism is a stable system.  For them, the private pursuit of profits keeps things in balance.  Recessions and high levels of unemployment are caused by unexpected exogenous shocks—definitely not by the workings of the capitalist system itself.  Many actually believe that the main cause of economic instability is the government; they believe that its spending generates imbalances which markets can only slowly overcome.

The biggest worry for these economists today is that we might demand regulations or restrictions on private profit-making activity (or even worse—public ownership, planning or production).  As they see it—if we would only be patient and allow market forces to work, things will return to normal—although how they understand normal is itself an important issue that needs further discussion.

This seriously flawed understanding of capitalist dynamics guides the thinking of most if not all Obama’s main economic advisors.  For example, here is how Christina D. Romer, Chairwoman of Obama’s Council of Economic Advisor, explains the business cycle:

Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy could stay forever. . . . If nothing disturbs the economy, the full-employment level of output, which naturally tends to grow as the population increases and new technologies are discovered, can be maintained forever. There is no reason why a time of full employment has to give way to either an inflationary boom or a recession.  Business cycles do occur, however, because disturbances to the economy of one sort or another push the economy above or below full employment.

What causes those disturbances?  For Romer and most of her associates the culprit more often than not is an overly aggressive use of monetary or fiscal policy by the government.  No contradictions or class tensions exist in this world.

Such a perspective has encouraged most mainstream economists to celebrate whatever “market forces” produce.  They dismissed concerns of income stagnation for the majority and celebrated the concentration of wealth in the hands of a small minority.  They dismissed concerns of deindustrialization and celebrated financialization.  They dismissed concerns of stock market and housing bubbles and celebrated the economy’s debt-driven growth.

Not surprisingly, the severity of the current crisis has taken them by surprise.  Forced by circumstances to respond, most suggest policies that are carefully designed to avoid any direct challenge to existing structures of power and wealth (think financial bailouts).  But this limitation means that their policies are incapable of addressing our immediate or long term needs.

We need better–a real debate on alternatives for a start–but we wont get it unless we organize and push for it.

To be continued.

The Stress Test

A problem banking system is one of the main factors driving our economy deeper into recession.

Most analysts believe that several of our major money center banks are technically bankrupt. Treasury Secretary Geithner believes otherwise and wants to convince investors that the banking system is fundamentally sound–there might be a few problems, but these can be addressed through some government stock purchases or loans.

He has ordered the Treasury to conduct “stress tests” on the biggest 19 U.S. banks to see how they would fare assuming a continuing deterioration in the economy. Though the tests have not yet begun, Geithner has publicly ruled out any nationalization, claiming that any problems that might emerge can and will be handled through some form of public subsidy.

This position has not reassured many investors or economists. They also don’t find the standards to be used in the test reassuring either. The tests are supposed to determine each banks likely financial health under two different economic scenarios — “baseline” and “more adverse” — covering this year and next.

The “baseline” scenario assumes that GDP growth will be -2% in 2009 and +2.1% in 2010, the unemployment rate will be 8.4% in 2009 and 8.8% in 2010, housing prices will fall 14% in 2009 and 4% more in 2010.

The “more adverse” scenario assumes that GDP will be -3.3% in 2009 and +0.5% in 2010, the unemployment rate will be 8.9% in 2009 and 10.3% in 2010, and housing prices will fall 22% in 2009 and a further 7% in 2010.

This sounds pretty bad—except for the fact that most people think it will be far worse.  Speaking about the baseline scenario, Simon Johnson (former chief economist of the IMF and now professor of economics at MIT) asks:

How exactly do we get growth over 2 percent in 2010 (and after)? The global economy is getting worse, consumer and business confidence is weak everywhere (tell me if you know different). There is no sign of housing turning around, consumers are cutting back, and large organizations are all planning to trim costs for the next financial year. Our policy response so far: moderate fiscal stimulus, underfunded housing policy, and small potatoes for the banking system.

Dean Baker, one of the sharpest analysts around, has the following to say about the assumptions underlying the scenarios:

Okay, unemployment will almost certainly reach 8.0 percent and possibly 8.1 percent in February. It might cross 8.5 percent in March. The worst case scenario is that it hits 8.9 percent by the rest of the year?

Remember, this is the same crew that told us that there was no housing bubble. When it became clear that there were serious problems, they assured us that they would be contained in the subprime market. After Bears Stearn collapsed they told us that they didn’t see another Bear Stearns out there.These stress tests indicate that our economic policy makers are still in a serious state of denial. Why isn’t the media ridiculing them and telling the public that the folks making economic policy still don’t understand the economy.

And if you have any doubts—Doug Henwood, author of the always insightful Left Business Observer, shared the following on his blog:

It was predicted in this space just two weeks ago: “Obama to coddle bankers.” Now we’ve got official confirmation of this from one of the prime coddle-ees: Citigroup. An analysis of the Treasury’s plan produced by two Citi analysts, Ryan O’Connell and Jerry Dorost, begins with this headline: “New Treasury Stress Test Guidelines Do Not Appear Onerous” and continues in this vein.

Even the conservative London-based Economist magazine appears to have thrown in the towel—after grudgingly accepting the need for nationalization, it ended one of its recent editorials as follows: “[Nationalization] is hard to swallow in a country that likes its capitalism red in tooth and claw. But better a temporary ward of the state than a permanent zombie.”

Time to Talk about Nationalization

Even the Federal Reserve Board [Fed] is beginning to acknowledge that we are in a serious economic mess.  The Nobel Prize winning economist Paul Krugman quoted the following statement found in a summary of the minutes of a recent Fed meeting:


“All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”


Translation: we are not only far from seeing the end of the recession, we are also not confident that there will be any meaningful recovery after it finally ends.


This brings us to the financial system and the need to nationalize several of the big money center banks.  Most of our top economic policy makers do not believe in nationalization—they believe that only private interests pursuing private profits can produce desirable outcomes.   For example:


  • Timothy Geithner, Treasury Secretary: “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”


  • The Washington Post reports that Mr. Geithner and Lawrence Summers (President Obama’s top economic adviser) “think governments make poor bank managers.”


And they say these things with a straight face after our privately run, profit making banks have basically steered our financial system into ruin.  Most analysts believe, and I see no reason to disagree, that several of our major money center banks–like Citi Bank and Bank of America–are now technically bankrupt.  They own various assets tied to the housing bubble that have lost most of their value.  And they have made other loans that are no longer yielding returns because of the recession.  As a result, the market value of their assets is now below the dollar value of their liabilities.


Unwilling to declare these banks bankrupt, the government has been pouring hundreds of billions of dollars into them—but with little to show for it.  We bought stock without voting rights and we bought some of their toxic assets, but the banks have used the money to pay out dividends, bonuses, and even buy other financial institutions.


If we keep this up, their death spiral will drag us all down.  So—there is only one real answer—nationalize the banks that are technically bankrupt.  If we take them over we can actually figure out how bad the mess is, and develop a plan to deal with it.  We can ensure that the new managers we put in are paid a reasonable rather than exorbitant salary, and most importantly we can direct the banks to start making the loans that are needed to support the stimulus plan and get the economy going.


This is no radical call—actually there is a growing chorus for nationalization.  As the New York Times recently editorialized:


Rescue measures have so far prevented a system-wide meltdown, but they have not reversed the downward slide or revived bank lending. . . . Done right, a takeover would be a once-and-for-all fix. The government would examine the banks’ holdings to get a realistic assessment of the toxic assets that are crippling the banks — and how much capital each bank needs, not only to survive but to begin lending again.  Institutions that are healthy enough to raise the needed capital from private investors would remain in shareholders’ hands. Those that are too weak would be taken over by the government and recapitalized with taxpayer money. . . . Taking over big failed banks will be very difficult politically. But technically it could be easier than many of the elaborate rescues that have been tried and proposed.


The Times is actually coming a bit late to the position–At the end of this post you will find links to a number of articles by economists who have been calling for nationalization.


But, now we get to a key point—the Times and most of the other economists want the government to right the banking ship and then put the newly recapitalized banks up for sale to the private sector.  And I think that is a mistake.


Here is my reasoning: We have an economy that is in need of restructuring.  One important way is to control where money goes and at what price.  In other words, we have good evidence that a banking system organized to maximize profits is not a system that automatically directs resources to the activities that we want to promote.  Now, imagine developing a government strategy that seeks to rebuild our economy along new more productive lines—for example giving priority to an expanded health care complex, mass transit system, sustainable and localized system of food production, alternative energy, green technologies, and companies that pay a living wage or respect labor and environmental rights.


And now imagine a credit system that would be responsive to those priorities.  Even imagine banks that offer credit cards with an interest rate ceiling of 8-10% rather than 20-30%.—think how many new depositors these banks would get  You get the picture.


There are lots of banks that do make reasonable returns doing reasonable business.  Well, why shouldn’t we own a few of the big ones, especially the ones that have proven that they cannot manage themselves—we could set best practices (like with credit card rates) and use the reasonable returns to support desirable social programs—this would have the added benefit of allowing us to reduce the budget deficit and/or taxes.  Owning businesses that generate reasonable profits doing the public’s business makes a lot of sense—at least to me.


Nouriel Roubini: Nationalize Insolvent Banks 2/12/2009

Dean Baker: The TARP Dog and Pony Show 2/12/2009

Naomi Klein: We’ve Got to Make Obama Do It! 2/6/2009

Nationalized Banks Are ‘Only Answer,’ Economist Stiglitz Says 2/6/2009

Jane Hamsher: Obama Financial Team to Taxpayers: You’ll Get Nothing, and Like It 2/3/2009

Paul Krugman: Bailouts for Bunglers 2/2/2009