Wall Street

Is London Loosing its Edge?

Ian McAllister — Wed, 07 May 2008 18:35:00 -0400

A proposal by Gordon Brown's government to up the taxes paid by resident foreigners and demand greater transparency in their offshore dealings has many fearing an exodus of London's international financiers. This comes at a time when increasing numbers of businesses in London are also moving their headquarters to countries with lower taxes. Layoffs by banks in the wake of the subprime crisis are further damaging the City's reputation as a vibrant financial center. A loss of foreign residents and international business would be devastating for a city that has emerged as New York's greatest rival for global preeminence.

Snapshot asks, could New York reclaim the top spot if London falls?

The Times - Nondom Raid will Lead to Capital Exodus
Financial Times - Big Companies Consider Domicile Status
International Herald Tribune - Job Losses Feared in British Financial Sector
Financial Times - City Job Vacancies Down by a Quarter
Bank for International Settlements -Intl. Financial Centers: A Network Perspective

Democratizing Capital

Patrick Doherty — Wed, 26 Mar 2008 15:57:00 -0400

In each formulation of American grand strategy since World War II -- until we inexplicably stopped such planning in 1992 -- the President and Congress relied on the power of the American economy to do the strategic heavy lifting. Sixteen years, however, is far too long for even the American economic engine to coast without a strategic re-alignment, and the stimulus, bailouts, subsidies and even military operations that naturally ensued have forced even Martin Wolf of the FT to declare the "dream of global free market capitalism" dead. Writing in the upcoming issue of The Nation, Sherle Schwenninger, looks to the architects of the New Deal and finds three lessons essential for re-tooling the American economic engine and bring market capitalism back home to America's shores.

Democratizing Capital

by Sherle R. Schwenninger | The Nation | April 7, 2008

Historical analogies are never exact. Yet many of the choices we have before us today are similar to ones that an earlier generation of progressives faced as the 1932 election approached. As we do today, progressives then confronted a society beset by a huge gap between classes and an economy laid flat by the bursting of the speculative excesses of the previous decade. To be sure, our economy is nowhere near Depression levels of collapse. But the choices New Deal progressives made are worth revisiting because they provide sound first principles for dealing with the economy and government today. Indeed, many of those principles are even more appropriate for today's world.

The first lesson to be learned from this earlier era is that a large middle class requires an economy that generates a broad base of jobs paying middle-class wages. The New Dealers were not opposed to "rigging" the labor and financial markets to achieve this result. New Deal progressives believed the economy should exist to serve society, not the other way around, and that the government has a duty to shape the economy to meet middle-class aspirations. A high-wage, middle-class society would, in turn, be good for the economy: living wages would not only ensure adequate demand for the economy but in so doing would spur new investment and productivity growth, creating a virtuous circle of rising living standards.

The belief of New Deal progressives in an economy that could create good middle-class jobs stemmed in part from their resistance to large social welfare subsidies to individuals, on the grounds that this would encourage an unhealthy dependence on the state. Moreover, even though they favored progressive taxation, New Dealers were skeptical of a society dependent upon the permanent redistribution of income. The principal goal of many New Deal programs was not to relieve the conditions of poverty--although they often did so--but to build physical and human capital that would allow people to escape permanently from poverty. Thus New Dealers emphasized government programs that expanded education, spread property ownership, invested in America's common physical and knowledge capital, and seeded the industries of the future. It was not perfect, in large part because it preceded the civil rights revolution and thus left out millions of African-Americans. But it did build the largest and most secure middle class America has ever known.

Today we see the consequences of a much different way of thinking about the economy and society. Over the past two decades we have been told that globalization is an immutable force and that we must bend to its demands, embracing the agenda of free trade, financial deregulation and less progressive taxation. The best we can do, we're told, is to let globalization run its course and compensate the losers, even though no amount of new social welfare measures could compensate for the loss of millions of good-paying manufacturing jobs. Thus, without any real debate, America's political elites have chosen for us a highly stratified, low-wage society with great costs to our middle-class way of life and to our productive economy.

The second New Deal principle is about achieving a high-wage economy and at the same time more widely distributing the capital and skills for wealth creation. The principal policy tool the earlier generation used was massive public investment and public building. The public investment programs they pursued not only created many new middle-class jobs but also laid the foundation for a more productive economy, which led to even more middle-class jobs. Agencies like the Tennessee Valley Authority in the 1930s and '40s were followed by even more extensive public investment initiatives in the postwar years. From 1950 to 1970, the government spent more than 3 percent of GDP on public infrastructure alone. It built everything from highways to schools, power systems to parks.

Throughout the New Deal era, public investment was America's way of enacting industrial policy. It was understood that public investment paid for itself many times over. The GI Bill alone generated returns of up to $7 for every dollar invested. And because it generated returns to the economy and society, New Dealers in the postwar period were not afraid to raise taxes or to borrow in order to ensure adequate levels of public investment. And borrow they did, even though the national debt was a much larger percentage of GDP than it is now.

For the past few decades, however, we have made a very different choice. As concerns over the budget deficit have grown, and as tax-cutting mania has taken hold, we have cut back on public investment. Since 1980 we have devoted less than 2 percent of GDP to public infrastructure and have allowed federal spending on basic research and development to decline as a percentage of GDP as well. As a result, a backlog of public investment needs--clogged roads and ports, collapsing bridges and levees, uneven broadband access, an antiquated air traffic system, an undersized energy infrastructure--has begun to cut into our economic growth and undermine our efficiency.

A third principle of middle-class America that the New Deal offers us relates to the concentration of power and capital. Earlier progressive reformers distrusted such concentrations. Not only did they threaten democracy; they also warped the economy and distorted consumption and investment. Government therefore must be a strong countervailing force to big business and oligarchic power, and must be organized so that it cannot be captured by one economic group at the expense of another or the general public.

The New Dealers were particularly concerned about the power of Wall Street and the financial community. They feared a national credit system that was dependent on Wall Street bankers, whose interests were not always aligned with the needs of homeowners, farmers and small and medium-sized producers. They therefore sought to democratize capital by creating myriad credit institutions that would ensure that all regions and sectors of the economy had access to capital. They created a variety of federally subsidized credit programs to enable people to construct homes and start businesses and to allow states and municipalities to build schools and modernize infrastructure. It was here that the New Deal was most creative--combining a strong federal state with the local and regional decentralization of capital and the local and regional control of these programs and institutions.

As with other first principles of a middle-class America, we have seen a reversal of priorities over the past few decades, as big financial institutions have again asserted their influence over the economy and economic policy. The new power of Wall Street has been evident in its successful push for financial liberalization and deregulation, in the emphasis accorded the deficit and concerns about inflation as opposed to full employment, and until recently in Washington's preference for a strong dollar, which favors financiers over real producers. This triumph of Wall Street over Main Street has been responsible in part for the hollowing out of the tradable-goods sector and for the asset bubbles and predatory lending that have wreaked havoc on the economy. Indeed, one of the first things the New Deal would have us do is reregulate the financial system and put the interests of the productive economy over those of Wall Street.

In all these respects, whether it be high wages, public investment or the decentralization of financial power, the New Deal succeeded because it changed the way the economy worked. And it did so by marrying progressive reforms with Americans' preference for independence, whether from government subsidy or big-business paternalism. This is the enduring lesson of the New Deal.

Derivatives and Leveraging

Sam Sherraden — Tue, 25 Mar 2008 16:05:00 -0400

The upswing in market sentiment after the rescue of Bear Stearns may soon come to an end. Highly leveraged financial institutions, which use large amounts of borrowed money, may still face unexpected losses as the housing market and consumer confidence continue to fall. Institutions have taken more losses on underlying assets, causing them to be even more highly leveraged than before. As underlying assets fall in value, many derivative products will also be written down.

Derivatives, which allow financial institutions to derive what something will be worth in the future, are often overestimated in value by the people that issue them. Therefore, it is commonplace for institutions holding derivatives to be worth significantly less than they think.

Snapshot asks, what regulatory framework is appropriate for dealing with highly leveraged financial institutions holding derivatives?

Whitney Tilson - Dangers of Highly Leveraged Banks
Berkshire Hathaway 2002 Annual Report - Derivatives (pp 13-15)
Financial Times - Gloom set to worsen as threat of spiral grows
Financial Times - Securities firms' future
New York Times - It's Hard to Thaw a Frozen Market

Highest Market Volitility Since 1938

Sam Sherraden — Thu, 20 Mar 2008 22:27:00 -0400

Market volatility has sky rocketed to the highest level in 70 years according to Standard & Poor's. At the same time, Merrill Lynch's monthly survey indicates that many fund managers believe equities are undervalued in absolute terms. Yet falling house prices, new credit concerns, and rising inflation may pull markets down further.

Snapshot asks, is recent volatility a sign that markets are bottoming out or that they are waiting for more bad news to take another plunge?

Chicago Board Options Exchange - Volatility Index
Bloomberg - U.S. Stock Volatility Climbs to Highest in 70 Years, S&P Says
Merrill Lynch - Fund Manager Survey Finds Cash Hitting New High as Stagflation Fears Take Hold
Financial Times - Overview: Turmoil follows Fed's Bear rescue

Financial Meltdown or Bailouts for Banks?

Sam Sherraden — Wed, 19 Mar 2008 22:04:00 -0400

Over the weekend, the government provided liquid assets to Bear Stearns and held $30bn of Bear's most questionable assets - mortgaged backed securities. In addition, the Fed opened the discount window to include investment banks and dropped interest rates by another 75bp. These signs indicate that the Fed has pulled out all the stops to provide stability to financial markets. To date, the Fed has made $650bn available. But, there is also an implicit guarantee that the Fed will provide more money to other struggling financial institutions. Had these measures not been taken, the financial system may have become completely crippled and had disastrous effects on the "real economy."

Snapshot asks, should tax payers, who will ultimately pay for these losses, support this rescue?

Wall Street Journal - The Bear Precedent
Econbrowser - Not a Bailout
Washington Post - The Fed Can't do it Alone
Bloomberg - Reid Calls Bear Stearns `Bailout' Unfair to Taxpayers