The jobs and economy roundtable

  The jobs and economy roundtable – What will America’s economy look like in ten years? Will the jobs that we lost come back? And what policies must we put in place now and in the coming years to make sure America will be healthy and prosperous again by 2021?  “America 2021” is a series that we began in our Summer 2010 issue. The idea is to bring together some of our brightest progressive minds to discuss what our country might look like roughly a decade from now.  For this edition, we take a look at jobs and the economy. We brought together five distinguished experts–Robert Atkinson, Heather Boushey, Harry J. Holzer, Thea M. Lee, and Sherle R. Schwenninger–to debate the big picture. E.J. Dionne Jr., Democracy’s editorial chair, moderated the discussion. Editors Michael Tomasky and Elbert Ventura also participated. *This discussion was edited for publication. For a PDF of an expanded transcript, click here.
 

  • Bank of America Discussing Settlement of Pimco/Fed/Blackrock Letter (Updated: Less Here than Meets the WSJ’s Eye) – Yves Smith – The Wall Street Journal reports that Bank of America is in discussions with a group of investors headed by Pimco, Blackrock, and the New York Fed that sent a letter roughly 60 days ago that was setting the groundwork for possible litigation. The underlying issue is alleged breaches of representations and warranties in 115 Countrywide securitizations. Note that this development is not unexpected, although the timing is interesting. These cases nearly always wind up being settled; the cost of pursuing them very far is extremely costly to both sides. Note the problematic issue is not the breaches of the reps and warranties, which most commentators focus on; it’s that it takes a great deal of forensic work to prove those rep and warranty failures were really what caused a particular loan to go bad. As a result, these cases tend to be fought on a loan by loan basis; even a process that constructed adequate samples for each of 115 trusts would involve a whole passel of loans. The part that appears to be a climbdown is that Bank of America had previously issued a “we will fight them on the beaches, we will fight them in the trenches” sort of statement. So they seem to be entering into talks earlier than one might have expected.  Update: This “story” is a crock. I’m no fan of Bank of America in general and particular, but the parties pressing this litigation have managed to get the press to run what amount to their press releases.
  • Dylan Ratigan on Get America Working – Dylan Ratigan is leading town hall events in various cities to help spur the establishment of a job creation movement. The goal is to push for policies that foster higher employment than the ones we’ve seen over the last thirty years, which instead promoted financialization, the use of consumer debt to paper over lack of wage growth, asset inflation and speculation, and increasing income and wealth disparity.  Ratigan wants to create a dialogue among key political groups, including ordinary citizens, investors, small business operators, and corporate leaders. His sessions will focus on four issues, as he outlined in in the Huffington Post:

      • Promote “fair trade” not “free trade”
      • Require banks to focus on lending, rather than gambling or parking funds in Treasuries
      • Rein in health care and college tuition costs
      • Reform the tax code
     
    Ruble-Renminbi Trading to Start in Russia –Russia and China are poised to take a small but symbolic step in their expanding economic relationship, a move that in the long term could make the dollar less relevant to business between the two nations.  On Wednesday, a Moscow securities exchange is scheduled to open direct trading between the Chinese currency, the renminbi, and the Russian ruble. If the market develops, it could eventually cut the dollar out of a portion of Russian and Chinese trade.  Although China’s business with Russia is only a sliver of what it does with the United States, there is room to grow: Russia is the world’s largest energy exporting nation, and China a big consumer as the world’s second-largest economy, behind the United States. And yet when a railroad tanker of Russian oil crosses the border into China, the transaction is settled in dollars.  The new currency exchange is meant to start changing that. .
     

    Congress’ Job Approval Rating Worst in Gallup History – Americans’ assessment of Congress has hit a new low, with 13% saying they approve of the way Congress is handling its job. The 83% disapproval rating is also the worst Gallup has measured in more than 30 years of tracking congressional job performance. The prior low approval rating for Congress was 14% in July 2008 when the United States was dealing with record-high gas prices and the economy was in recession. The current results are based on a Dec. 10-12 Gallup poll, conducted as Congress is finishing work on an important lame-duck session. The session has been highlighted by the agreement on taxes forged last week by President Obama and Republicans in Congress. The tax deal preserves the 2001 and 2003 income tax rates for all Americans for two years, revises the estate tax, extends unemployment benefits for the long-term unemployed for a year, and reduces payroll taxes for American workers. It is expected to pass despite vocal opposition from some lawmakers. Americans are generally more positive than negative toward the deal, but many Democrats in Congress oppose it.

     

    SEC Bracing To Lose Funds, Scaling Back Investigations – As lawmakers in Washington attempt to slash the budget, Wall Street regulation could be on the chopping block. The Securities and Exchange commission has already scaled back its investigations of potential wrongdoing, anticipating that it may lose a portion of its funding when Republicans take over the House of Representatives next year, the Wall Street Journal reports. During this critical time for the SEC, as it helps write the rules for a wave of new financial regulations, and as it tries to determine whether Wall Street firms committed wrongdoing of potentially epic proportions, the agency is paring down. To achieve its growing list of goals, the SEC had planned to increase its staff by 11 percent next year, counting on a budget increase of 12 percent, proposed by President Obama, the WSJ notes. It’s unclear at this point whether that increase will be approved. The agency, worried that the newly Republican House will push for austerity, has already cut back.

     
     

    Why Are Bankers So Rich? – Tyler Cowen has a big piece about income inequality in The American Interest that’s well worth reading. However, it’s not really about the growth of inequality. It’s about Wall Street. In particular, it’s about this question: why do financial professionals make so damn much money? The answer, of course, is that they work in an industry that’s become ungodly profitable. But how? Tyler attributes it to the practice of "going short on volatility." That is, modern finance professionals mostly gamble that what happened in the past will keep happening in the future, and disasters will never happen. In most years this makes them a lot of money (because, in fact, disasters rarely happen). But this is mysterious. After all, not everyone is going short on volatility. In fact, by definition, only half of the punters on Wall Street are doing it. The other half are taking the other side of the bet. So how can you make money doing this? Answer: find someone who doesn’t know much

    Cowen’s Counsel of Despair – Tyler Cowen’s essay in the latest American Interest is nominally about income inequality, but really it’s about the pernicious role that big finance plays in modern political economy. Cowen isn’t worried about inequality per se, but he is worried about the forces that give rise to it, and specifically the boom-bust cycle of Wall Street investment — and more specifically still, the way the “bust” part of the cycle tends to make taxpayers suffer more than the Wall Street investors themselves, thus incentivizing further recklessness and still worse crack-ups down the road: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets … The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices.The problem, he argues, is that it’s hard to see how anything can be done about this:There are more ways for banks to take risks than even knowledgeable regulators can possibly control; it just isn’t that easy to oversee a balance sheet with hundreds of billions of dollars on it, especially when short-term positions are wound down before quarterly inspections

     Doom and the Big Banks – Tyler Cowen has an interesting essay that’s ostensibly about income inequality but in practice presents a very gloomy portrait of modern finance as both utterly dysfunctional and also irredeemably so. Ross Douthat responds by invoking a conservative version of the “break up the big banks” agenda whereby bank smashing is paired with balancing the budget. I think this actually misses the full force of Cowen’s saga of doom, which doesn’t say that we won’t restrain the financial sector because it’s too politically powerful. It says we won’t restrain the financial sector because we actually can’t. For one starters, I think everyone should read Tim Fernholz on the myth of “too big to fail” where he persuasively argues that the basic logic of bailouts has very little to do with institution size. But I would also note that even though Cowen ends up dwelling on bailouts a bit in his piece, fundamentally the problem he highlights exists independently of bailout issues

    Tyler Cowen on Inequality and the Financial Sector.– Tyler Cowen has written an article for the American Interest titled The Inequality That Matters. It’s about inequality, the financial sector and the possibility of reform. I really enjoyed the essay and recommend you check it out; I’m going to write a few critical comments. 1. The essay doesn’t tackle what I think is, in one sense, the most important question – how much did a broken financial system inflate the housing bubble, especially in the United States?  It’s one thing if the financial sector drinks our milkshake a bit;  it’s another if they are creating bubbles to profit on the way up and on the way down, either by choice or by accident. 2. The essay talks about how the financial sector goes “short on volatility”, which is a bet that things won’t go crazy in the short term, or a bet that takes on tail risk.  As Kevin Drum mentions someone is on the other side of that bet.  And what do we call a product that pays out in times of high volatility, in times when an event out of the ordinary happens?  One thing to call it is “insurance.”

    Accumulating foreign reserves: private or public? -The global imbalances that we have witnessed over the last years have led to significant changes in the net investment position of some countries. Those with persistent current account deficits (e.g. the US) have seen their net investment position deteriorate, while those with persistent current account surpluses have seen their net investment position improve (such as China). An improvement in the net position represents an increase in the foreign assets held by that country relative to its liabilities (domestic assets held by foreigners).  In some of the surplus countries (certainly in China), the majority of the accumulation of foreign assets has resulted in large increases in the amount of foreign assets held by the public sector (government or central bank), what is known as foreign reserves. Have they gone too far? Is there an optimal amount of foreign reserves for a country such as China? SAFE (the State Administration of Foreign Exchange in China) provides on its web site an interesting list of FAQs regarding the current level of foreign reserves in China. To the question "What is the appropriate scale for China’s foreign reserves?" they provide an intriguing answer. They start with the assertion that "Too much foreign exchange reserves can be bad."
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