Our May/June issue is out!

Our May/June issue is out!  Print subscribers should get their copies soon, and electronic subscribers just received their full-color pdfs. And we have posted the cover feature, an interview with economist Jayati Ghosh, The ‘Emerging’ Economies Today.  And here is this issue’s editorial note:

The Age of Misdirection

Name a problem, and someone in a position of power or privilege will have a diversionary explanation for it. One that is consistent with—or even redoubles—their power or privilege.

John Miller takes on one of these diversionary tactics in this issue’s “Up Against The Wall Street Journal.” Economist Lawrence Lindsey, erstwhile economic advisor to George W. Bush, says “progressives” are to blame for rising inequality in the United States. In fact, inequality of market incomes has risen under both Democratic and Republican administrations—thanks to the erosion of unions, weakening of the welfare state, adoption of pro-corporate “free trade” agreements, and the like. Redistributive tax and spending policy do some, but not enough, to reduce inequality.

Nor have government policymakers done what they could to spur economic recovery or restore full employment in the wake of the Great Recession. Gerald Friedman notes—in an ongoing debate with critics of his writings on Bernie Sanders’ economic program—that mainstream economists are telling us to just accept today’s stagnant economy as the new normal. That’s all well and good for large corporations and the very wealthy. The once-again-rising tide has lifted their boats. Not so for the majority, who are struggling to keep their heads above water.

We see more sleight-of-hand politics when it comes to taxes. To dodge taxes, U.S. corporations stash trillions in profits in fictitious overseas accounts. That’s still not enough for some of them, Roger Bybee points out, so they engage in “inversions”— their legal takeover by companies headquartered in lower-tax countries. Confronted with this spectacle, government and corporate leaders say: We need to cut “punishing” corporate taxes! We need a “tax holiday” for corporations to repatriate profits “trapped” abroad! The mainstream press has responded to the “Panama Papers” scandal—which revealed details about tens of thousands of offshore bank accounts, likely used to dodge taxes—in much the same vein. The Wall Street Journal, Bill Black points out in his “Comment,” argues that the rampant concealment of private wealth is nothing more than a “distraction” (and that we should focus instead on government corruption).

Privilege may be concentrated at the very top (in the United States today, increasingly so). But, as Jeannette Wicks-Lim argues in “It Pays to Be White,” the story is much more complex than just “the 1%” against everyone else. In particular, the U.S. racial caste system stacks the deck, in a multitude of ways, in favor of whites and against African Americans. The attachment to white privilege is deeply ingrained, buttressed by the belief that “White people tend to get more because they deserve more, while Black people get less because they deserve less.” That creates a deep divide within the ranks of the “99%.” And it gives today’s racist demagogues, in the ultimate misdirection, scapegoats on whom to blame society’s ills.

One way to read all this, with some justification, is that the powerful and privileged will stop at nothing to hold on to their positions. Another, however, is that they are desperately improvising as their hold on society becomes more tenuous. Elites try to shift the blame for income inequality, economic stagnation, corporate tax dodging, and so on because they understand that more and more people see these as blameworthy. It’s not just in the United States where those in power are facing challenges to their authority and legitimacy. Jayati Ghosh points out that three sectors of the capitalist world—rich “core” capitalist countries, “emerging” economies that export manufactured goods to the core, and suppliers of raw-material and intermediate inputs for emerging-economy manufacturing—are tied together by trade and finance. Stagnation in the core has undermined export-oriented manufacturing and, with it, the raw-material commodities boom. The elites in these countries will have to move towards more inclusive, demand-driven growth, or face rising protest.

Here in the United States, we may not see mass protests right now, but we do see profound mass disillusionment with private and government elites. Even when those in power have steered society into a crisis, the existing order is likely to persist so long as people believe that those who created the mess will … somehow, some way … be able to fix it. When that belief no longer holds, change can occur quite dramatically.

But change in what direction? That is not preordained.

Paul Krugman Crosses the Line

By Gerald Epstein

Cross-posted at our sister blog Triple Crisis

In his recent New York Times opinion column, “Sanders Over the Edge” (4/8/16), economist Paul Krugman offers his readers a basketful of misinformation on important economic matters about which he should – and probably does – know better. The column contains a large number of snipes and a great deal of innuendo against Bernie Sanders and his supporters, but here I focus on his claims about “Too Big To Fail” (TBTF) banks, their role – non-role, according to Krugman –  in the financial crisis, and Sanders’ understanding of the policy tools available to deal with them. Krugman’s claims about these issues are misleading, almost certainly wrong, and, in my view, call into question the credibility of his New York Times column as a source of economic information and analysis.

Krugman starts here:

“Bernie is becoming a Bernie Bro.”

I’ll leave it to others to dissect this one. Moving on:
“Let me illustrate the point … by talking about bank reform.

“The easy slogan here is ‘Break up the big banks.’ It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises? Many analysts concluded years ago that the answers to both questions were no.”

As you can see by following Krugman’s link here, this is not, what Krugman suggests it is: it is not a link to an article quoting multiple analysts presenting strong arguments with evidence that large banks were not responsible for the crisis. It is a link to an opinion piece by Paul Krugman himself. Period.

And, moreover, in this linked piece, Krugman is far more circumspect and uncertain of the answers than is implied in his statement “that many analysts concluded years ago.” So, who are these “many analysts”? On what basis did they reach their conclusions?

Certainly, we can find some analysts who argue (“conclude” is a word that suggests an answer based on a comprehensive analysis of the facts) that the financial crisis was the result of government mismanagement, or was simply a textbook example of a bank run and not due to the actions of large financial institutions per se, or were the result of the decisions of a bunch of sub-prime mortgage providers – like Angelo Mozilo Countrywide Financial that operated more or less independently, and were outside of strict government regulation, that is they were in the “shadows.”

Krugman opts for this explanation: “Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial.” But, you don’t have to have seen “The Big Short” to know that the sub-prime lenders like Countrywide Financial were just one set of  players along a powerful supply-chain that contained  multiple links. This chain was geared toward creating and selling structured, securitized financial products like collateralized debt obligation (CDOs) and CDO-squared’s, mostly produced, financed and sold by the largest (now former) investment banks, J.P. Morgan, Goldman Sachs, Lehman Brothers and commercial banks including Bank of America, Citibank. Contrary to Krugman, the U.S. government authorized Financial Crisis Inquiry Commission (FCIC) reports:

“We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions (italic added) were a key cause of this crisis .… They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.” (pp. XVIII-XIX).”

The FCIC, thus, puts a central part of the blame squarely on the, so-called “systemically important financial institutions”, which Federal Reserve Bank President Neel Kashkari and former Goldman Sachs banker calls “Too Big to Fail Banks,” and which economist Bill Black, more appropriately calls “systemically dangerous banks.” I have read much of the academic literature on the financial causes of the great financial crisis and I think it is safe to argue that most experts agree with the FCIC and not Paul Krugman.

Paul Krugman, of course, is entitled to his views. But the point here is that it is highly misleading for Krugman to imply that the consensus among economists is quite the opposite of what it is in fact.

Who does Krugman blame in addition to the sub-prime lenders?

“… the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big.”

This again is highly misleading. First of all, Lehman Brothers was very big indeed. More important, this statement implies that there were “shadow banks” that were involved in the sub-prime debacle that were somehow distinct from the household name Wall Street banks like Citibank, Bank of America, Goldman Sachs, and J.P. Morgan, that Bernie Sanders, Elizabeth Warren and everyone else who talks about TBTF mean.

If these banks were not at the center of the crisis, then why, according the Congressional Oversight Panel , did the massive and “non-shadowy” Citibank get a tax payer bail-out in the amount of  $476.2 billion in cash and guarantees. Why did similarly placed Bank of America get $336.1 billion? “Little Lehman” didn’t bring these behemoths down. Their central role, and those of other TBTF banks – in financing, buying and selling toxic mortgage products put them – and the economy – into free-fall.

Paul Krugman didn’t inform his readers that important economists who study shadow banking do not exclude these massive banks from key aspects of this shadow banking system. Far from it: these TBTF banks are increasingly seen by experts to be at the center of this global shadow finance eco-system.

Krugman similarly misinforms his readers in discussing Bernie Sanders’ command over the details of the Dodd-Frank law and what it has to say about dealing with too-big-to-fail-banks. In a widely reported – and misreported – interview with the Daily News, Sanders was asked how he would break up the big banks. Krugman was only slightly more polite than Vanity Fair magazine which proclaimed that the interview proved that “Sanders Doesn’t Know Diddly Squat About Wall Street”. Krugman referred to the “recent interview of Mr. Sanders by The Daily News, in which he repeatedly seemed unable to respond when pressed to go beyond his usual slogans.”

To sort this out, let’s look at the relevant part of the transcript:

Daily News: Okay. Well, let’s assume that you’re correct on that point. How do you go about doing it?” (That is: break up the big banks.)

Sanders: How you go about doing it is having legislation passed, or giving the authority to the secretary of treasury to determine, under Dodd-Frank, that these banks are a danger to the economy over the problem of too-big-to-fail.

Daily News: But do you think that the Fed, now, has that authority?

Sanders: Well, I don’t know if the Fed has it. But I think the administration can have it.

Daily News: How? How does a President turn to JPMorgan Chase, or have the Treasury turn to any of those banks and say, “Now you must do X, Y and Z?”

Sanders: Well, you do have authority under the Dodd-Frank legislation to do that, make that determination.

Daily News: You do, just by Federal Reserve fiat, you do?

Sanders: Yeah. Well, I believe you do.”

The relevant facts are these: Under Section 121 of the Dodd-Frank Act the  Board of the Governors of the Federal Reserve has the authority, subject to a 2/3 vote of the Financial Stability Oversight Council (FSOC) to take a range of actions, including (as a last resort) to “require the company to sell or otherwise transfer assets of off-balance-sheet-items to unaffiliated entities”, that is, to shrink the size of the bank in question. Note that the Chair of the FSOC is the Secretary of the Treasury. So, Sanders is correct that the Federal Reserve and the Secretary of the Treasury are the key players here. To be sure, Sanders’ last statement above, that Federal Reserve could break up the banks just by fiat – whatever that means – is not true under section 121.

Still, the Federal Reserve has more tools under its control through Dodd-Frank. For example, under section 619 (one of the key sections outlining the so-called Volcker Rule that tries to ban proprietary trading), states that for these financial institutions “no transaction, class of transaction, or activity may be deemed a permitted activity……(iv) would pose a threat to the financial stability of the United States.” The Federal Reserve would have significant power to issue regulations in this situation.

More generally, the goal of Dodd-Frank, as stated in Section 112 in describing the mission of the newly created Financial Stability Oversight Council (FSOC) is “eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure.” That is, end too big to fail.

In the end, Dodd-Frank does provide tools and responsibilities to the Fed and to the Secretary of the Treasury, along with other financial regulators, that can be used to break up the banks. Sanders’ answer was inelegant, to be sure, but, in reality, his answer reflects the fact that the law is on unchartered territory and in places is vague and would certainly be contested by the banks. So Bernie’s first answer is also the cleanest. “How you go about doing it is having legislation passed …”

In short, Sanders’ answers are way beyond “his usual slogans” as Krugman claims.

Is it possible that Krugman doesn’t understand these points. Seems very unlikely. I cannot begin to imagine his motives, but that is not the main issue here.

What it brings into question is Paul Krugman’s credibility as a New York Times commentator on these issue. Krugman’s credibility does not stem from his political analysis. Krugman is not a Political Scientist. Krugman’s “brand” is that he is a “brilliant, Nobel Prize winning economist.” In fact, much of his early research was brilliant; and, to be sure, Krugman did win the Nobel Prize. BUT, the misleading discussion of economics contained in his piece, “Sanders Over the Edge” does raise this question in my mind: Is Paul Krugman still qualified to write an economics opinion column for the New York Times?