Fiorina's 2 min hate on the public sector

The latest from failed Senate Candidate and failed CEO Carly Fiorina really chaps my hide. She was on one of the gasbag Sunday shows with Paul Krugman (ht Balloon Juice), and they got into it about public vs private sector jobs. Here is some of the transcript, thanks to Think Progress:

CARLY FIORINA:I think it’s important to remember, when we talk about the economy, that a private sector job and a public sector job are not the same things. They’re not equivalent. I’m not saying public sector jobs aren’t important. But a private sector job pays for itself. A private sector job creates other jobs. A public sector job is paid for by taxpayers.

This fiction that somehow a private sector job is the only way to get money moving in the economy is such hogwash. Much of public sector is intended for investment into the commonwealth and the common good, all so we can have a decent society and invest in the future. I can give you two very good examples: my wife and me!

My wife is a public high school teacher, providing instruction on biotechnology and health care to a population of relatively low socioeconomic students that are almost all Hispanic or black. She's training the next generation of scientists and health care workers and drawing from a population with very few opportunities. This undoubtedly will have a great impact on our economy in the future as many of these kids go on to college and take 21st century jobs.

I'm a scientist, working at a private research institute, and the vast majority of my funding comes from grants from the National Institutes of Health. My work focuses on the development of the brain, with special focus on how thyroid hormone shapes neural circuits. Cretinism and other thyroid-hormone related disorders that affect the brain are still a major issue world-wide, including in the US, and research into this issue will help keep our medical costs in check throughout the 21st century.

But according to Fiorina, we're just greedy bureaucrats sucking on the public teat and twiddling our thumbs. We offer no value to the economy. The truth is we make very meager wages. Our friends in the private sector, at least those lucky enough to be in finance or the defense contract business, make mad money. Virtually every single penny we make goes into buying things or paying for services. We pay rent (which is ludicrously high in SoCal). We buy clothes and shoes for our kids. We pay for soccer and baseball leagues. We buy overpriced food and fuel. We hardly have a single penny to save from our wages every single month. But Fiorina thinks that if I fork over $1400 (!) for daycare and after-school every single month, I'm not helping to create jobs. That money must just disappear into the ether, because it once was "tax money".

I hope she runs for Gov next time around. I can't wait to end up at one of her events and ask her about these comments...

For Whom does the Bailout Bail Out?

Cross posted at Angry Bear

Both the Senate and the House have passed the big $700 billion bailout (actually now larded up to $800+ billion) to save the “financial system” from complete collapse. This is to supplement the various actions taken by the Fed and the SEC to shore up financial institutions, including halting short selling of hundreds of corporations and the creation of an alphabet soup of lending windows to “provide liquidity” to troubled institutions.

Much has been made of the fact that if nothing is done, the markets could come crashing down. Having watched some of the House floor debate this evening in my Berlin apartment thanks to the wonders of live-streaming from C-SPAN via the intertubes, I heard this argument over and over again from many members of the House. The big drop on Monday was cited as an example many times as a sign of impending doom if nothing is done. Of course, all of this is especially ironic given that the markets took a huge nosedive as soon as the House passed the bill.

Anyway, there is no doubt that a 1929-style crash would have an incredible impact upon the economy. But for whom in our society would a market crash have the most direct impact upon?

I found the answer to this question via the Economic Policy Institute in their report titled The State of Working America 2006/2007. They have a table which lists the concentration of stock ownership by income level from the year 2004, which I found particularly interesting. I decided to make a figure that illustrates some of the data from this table:
This shows that the 2.5% of the population that makes more that $250,000 a year own 44% of the shares on Wall St. Another way to look at it is that the 16.1% of the population that makes more than $100,000 per year own 73.2% of all shares. The rest of the 83.9% making less than $100,000 per year only own 26.8% of all the shares. The 57.2% of the population making less than $50, 000 own a paltry 9.2% of all shares.

To reiterate, many in Congress who supported the bailout package admitted that this needed to be passed in order to prevent a crash on Wall St. My guess is that allowing corporations to offload toxic assets onto the backs of taxpayers will certainly ease the strain on those corporations balance sheets. But do keep in mind, going forward, just who among stands to benefit the most in this "transaction".

House Bill Voted Down Open Thread

by Afferent Input

Current iteration of the bailout bill goes down in flames 205-228.

Dow is down over 700 pts. NASDAQ and S&P 500 both down over 8%.

Ugh-lee.

Go Cubs

Mrs. AI has the details.

They'll probably blow it in the end, however. They always do.

Some Thoughts on Bailouts

First, there was the shotgun marriage of Bear Stearns and JPM. Then $85 billion to AIG. Next came the loans to shore up money markets. Finally Friday’s announcement of a special program (most of the important details still unknown) that will cost “hundreds of billions of dollars”.

And of course don’t forget the alphabet soup of special facilities created by the Fed to protect the big money movers.

Bailouts, all. A lot has already been said, of course. But there are two things that I wanted to add to the conversation.

First, folks on the left and the right have referred to the recent onslaught of government bailouts as “socialism”. On the surface, it may seem that way, given that government now “controls” vast swaths of the nation’s financial system. But nothing could be further from the truth.

Let me say it more plainly; this is not socialism. Socialism is a form of government that seeks to equalize the playing field for all, insuring that that the fruits of labor are shared equally (but not fairly, necessarily. That’s one of the major reasons why socialism doesn’t work). Does anyone seriously think that captains of finance have embraced the philosophy of “workers of the world, unite!”? The same guys with multi-million dollar “golden-parachutes”, sometimes taking home more than a billion dollars in a year. The same guys who have embraced shady accounting practices so that they and their companies pay as little in taxes as possible, sometimes percentages of income far less than the average American worker. The same guys who have broken union after union over the decades. We’re supposed to believe that just this week this crew has decided to abandon Friedman and embrace Marx with open arms? Come on…

Let’s look at it another way; does anyone seriously believe that the average American stands to benefit financially from the actions taken this week? That the profits of AIG, or BS, or Fannie and Freddie will be split equally amongst the masses? Of course not. Instead, tax payer money will flow from the Treasury to shore up the accounts of what should be insolvent corporations. Essentially out of your pocket and into the hands of Wall St, only making a quick pit stop in DC. Or worse, putting it on the national credit card by selling even more treasuries. This is not socialism. Instead, this more resembles a different form of societal structure: kleptocracy.

Second, how did we get to the point that simply the failure of one company would mean utter chaos for society at large? This fact alone illustrates very nicley that the financial system ceased to be a free market long before last week. The lifeblood of free markets is competition. Competition gives birth to fair pricing of goods and services as well as efficiency of commerce. If one business fails, another takes its place.

The fact that these corporations were to big to fail means they were too big. Period. If AIG couldn’t hack it, then some other corporation would have stepped up to the plate. That is if the market place was truly free. But clearly it was not. Instead, what existed was at the very least a pseudo-monopoly. Many markets left to themselves will gradually evolve into monopolies, and one of the roles government needs to play is to insure that monopolies don’t get to the point where they distort free markets to the point where they aren’t really free anymore. Obviously government failed to meet that obligation in the financial sector the last few years.

I suppose that’s what happens when the foxes are put in charge of the hen house. Only time will tell if the foxes can keep fooling everyone into believing that there are still some hens left.

Note: It should go without saying that the above is my opinion and my opinion alone. No doubt that many of the other Angry Bears would disagree with at least some parts, if not the whole. But I'll say it anyway.

OTC Derivative Growth Since 1998

CROSS POSTED AT ANGRY BEAR

As the world financial markets head into complete meltdown, it is worth taking a moment to look back to see where all this began. Much of the current crisis stems from the shadow banking system’s dependence upon the explosive growth in derivatives market. These complex financial instruments are meant to monetize risk of default. Futures contracts, options, swaps, and many others allow one party to insure money is exchanged, but the outcome of the contract depend upon many underlying factors that make up the terms of the contract. Though many forms of derivatives are traded in exchanges, many are not necessarily.

Derivatives that not necessarily traded on market floors are known as “over-the-counter” derivatives. They are usually bilateral contracts between investment banks and a customer and can be generated simply over the phone or over the internet. This form of contracting is largely unregulated. The OTC market has been monitored by the Bank for International Settlements since at 1998, and they publish detailed information on various forms of OTC derivatives every six months. The most recent data can be found here.

This market was very big in 1998, but it has exploded since then. I’ve generated a figure of the amounts outstanding of OTC derivatives since 1998 broken down into their various types.


You should note that the Y-axis is in billions of dollars. Yes, billions. That means, as of Dec 2007 (for which BIS has the most recent data), the total OTC derivative market was almost $600 trillion dollars. In 10 years, it has gown 826%.

The growth is even more disturbing if you look at some of the subcategories of OTC derivatives. Below is a figure illustrating the ratio of amount outstanding contracts relative to the amount outstanding in June 1998 for interest rate contracts, commodity contracts, and credit default swaps.


Though commodity contracts still make up only a small proportion of the total OTC contracts outstanding (1.5%), its growth has been astronomical, increasing over 2,000% since June of 1998. Even interest rate contracts, which make up the largest portion (66%) of all OTC derivatives, increased over 900% in 10 years. And most troubling of all is the credit default swap market. These are contracts that are activated in the event of a default.
This market has increased 905% in just three and a half years since BIS starting monitoring this form of derivative. It was a mere $6.4 trillion in Dec 2004; In Dec of 2007 this market ballooned to $57.9 trillion. Just think of the unwinding of credit default swaps that is involved when big investment banks like Lehman Bros. go under.

Of course, all of it is very complicated, because derivatives are essentially a “zero-sum” instrument. They way derivatives are supposed to function is that money is exchanged depending on the outcome. Nothing is lost, at least in an ideal environment; it is only exchanged hands. But what happens when one party of the contract can’t pay?

I think we’re going to see that many times over very soon…

Ugly Ass Costume

WTF is up with this costume?

Don't get me wrong; the kid is cute enough. I just don't what's up with the two headed Curious George. I say again, WTF?