Failures Galore





Robin’s Book Report #69
A reading list by Robin Kaiser-Schatzlein
Agenda
– Letter from Me / Economic pandemic report
– Letters from You
– Reading list

***As always, I am curious what you are reading and curious what you are concerned about in terms of the economic situation, so please send me a letter if anything comes to mind. I won’t share your letter without asking first.***
 
Letter From Me:
  Hello readers,   I received a lot of mail in response to my last newsletter, some of which I am reproducing below. I also wanted to include a number of additional subjects that have drifted on to my radar in the last two weeks (in regards to the developing economic situation). I’ll do that first.  

-Fracking and energy companies might be taken over by banks, which would be illegal but would prevent them from presumably having to take major losses.  

-As mentioned in the last letter, brick and mortar retailers are beginning to fail. Neiman Marcus will file for bankruptcy. Retail like Neiman was hurting before the crisis, and many stores were funding operations on junk bonds (watch out for J Crew and JC Penney). The problem here is that there isn’t anything, that I can imagine, that wants to take up the leases for these huge stores. So the underlying entities who own the properties might also default, which could, in addition to other defaults, contribute to a financial crisis.   

-Some businesses that haven’t been bailed out yet pose a systemic threat.  

One problem with the stimulus package is that our economy is littered with all these non-bank banks that have emerged in the last decade or so (Quicken Loans is a nonbank, as is AIG). So far they don’t qualify for stimulus money. Many of them exist to skirt the lines of financial regulation, and lax enforcement has enabled their proliferation. For an illustration, an episode of Planet Money explores what would happen if everyone stopped paying their rent. The hosts speak with a landlord who pays two different businesses for his mortgage: Wells Fargo and a company called NewRez. NewRez is a nonbank mortgage servicer, meaning they collect money from mortgages and package those mortgages in securities that they in turn sell to investors. They deal in money and lending but are not considered banks by regulators.  

As I mentioned above, the problem is that these private, unregulated companies like NewRez––while a major cog in the functioning of the economy––do not yet qualify for the loans the Federal Reserve is doling out. I’m sure the government will eventually come to the rescue of these companies, but it really shows how broken our financial system is. First, businesses, especially banks and nonbanks, are so interconnected now, failures cannot be contained. Everything is systemically important, and thus Too Big To Fail. Second, new financial products and sectors often go unregulated until they cause a problem. Remember financial derivatives? Alan Greenspan told us we didn’t need to worry about them, until they blew up in 2008. Funding-starved regulators couldn’t even recognize threats if they wanted to. The financial system is massive and complicated. It’s like an overgrown garden, the size of two football fields, that’s tended by one asthmatic farmer whose tools are all dull, rusted, or missing. Novel weeds and pests fester in darkness until one day they take over. Only then are they addressed.   

Zombie firms also pose a problem. They’re loser companies that survive only by continuously rolling over lots of low-interest loans, now they might all collapse at once. Most can’t survive more than a few weeks without paying their loans.  

-Cash payments were necessary but aren’t an egalitarian victory.  

I am less surprised and excited by the direct cash payments from the government, and unlike some people I don’t see it as the end of whatever the previous economic regime was. Many influential people from across the political spectrum––from hedge fund king Ray Dalio to former Federal Reserve chairman Ben Bernanke––have openly suggested, for years, that cash payments will be necessary to stimulate the economy especially in the event that the only two tools it has to stimulate the economy (interest rates and quantitative easing) don’t work. That is, if interest rates are already so low that you cannot lower them further or quantitative easing has been stretched to the max, which is precisely the situation that we are in now. (It doesn’t matter if you’re not familiar with interest rates or quantitative easing or how they work, I barely can wrap my brain around them. What is important is that they are tools to manipulate the economy, and prior to the crisis they were already at full power.) Bernanke talked (way back in 2002) about how cash payments might be necessary to stimulate the economy in the event of an economic catastrophe. So I don’t see it as a triumph of a newly energized left or of Modern Monetary Theory. On one hand, it demonstrates the hypocrisy in grilling politicians who support Medicare for All about how they’ll pay for it, but on the other hand that line of questioning was always so obviously cynical and untrue: untold sums are always found for military spending and to offset the losses caused by tax breaks like the mortgage interest deduction. Massive government spending is not the lefty issue people make it out to be. Reagan ran enormous deficits. Actually changing US society requires a renewed, permanent emphasis on redistribution of resources, of which the cash payments aren’t evidence of. They are an attempt at maintaining the status quo, which will fail because many people will come out of this crisis with more debt and less savings. The payments are simply one of a very few options the Treasury and Federal Reserve had to avoid triggering a massive financial crash. Which is something they should do! But I don’t see it as a big change in economic policy. However, if it awakens people to the hypocrisy of asking how social programs will be paid for, that is good.   

It’s just more evidence that the question of paying for social programs like healthcare splits along ideological lines not logical, or procedural lines. People don’t oppose universal healthcare because they think it would bankrupt the country, because how would they even know? The analysis required to make that claim is tremendous; it just confirms a larger sociopolitical impulse against redistribution, which is the heart of the problem, not the funds. Minding the budget sounds apolitical, but it’s really not. Cash payments and a $2 trillion stimulus show that the funds are there, the government just didn’t want to spend it. 

  Letters from You

Michael with a correction:   Hey Rob, quick correction here: “our government’s reported plan to save small businesses during the pandemic is to provide loans at 3.75% interest” is out of date. The CARES act includes a Paycheck Protection Program (PPP), “a low-interest (1%) loan that will be forgiven if employee wages and count are maintained through June 30, 2020…. This program is available for any small business with less than 500 employees…. The PPP loan has a maturity of 2 years and an interest rate of 1%. the maximum loan amount is 2.5 X the average monthly payroll costs…. The form is relatively simple (2 fillable pages)…. The CARES Act Stimulus is $349 Billion. The banks will get overwhelmed.” [here’s the referenced Forbes article]. It’s probably underfunded, there’s been some confusion as it gets off the ground with last-minute changes, but it’s a lot better than what you have in here. That said, I personally think the whole thing is a bit of a sham, and we should just be sending out money to individuals.  

Me:    Thanks Michael. And I want to apologize to Matt, who isn’t at fault here. He wrote his letter to me before the PPP came out and I failed to follow up. However, if a business had already taken a 7(a) from the SBA you don’t qualify, and the cost is still high, from 2.75 percent to 4.75 percent.   Also, as Michael predicted, the program is way underfunded. The $350 billion pot set aside for it is already out. And there are many other problems emerging from PPP now, banks are refusing to service new customers, and banks are closing their application portals. This failure to service the wider public falls hardest on communities that have historically lacked access to credit, like black business owners. Hedge funds are applying for these small business loans too, which is surely, uselessly sucking money out of the pool.  

Ray:  

especially great letter. thanks for keeping it up, hope you’re feeling well.  

I’m nearly done with this Bertrand Russell History of Western Philosophy, it’s really good though I’m sure more than a bit biased. Apparently his wife did a lot of the historical research which is interesting. He almost like spins the battle over western thought into some kind of epic fantasy. 

 Also reading Carceral Capitalismwhich I have a feeling you’ve read. Excellent, practically a tutorial on how to write concise and engaging materialist analysis.   stay up!  

Me:    Haven’t read CC, I will check it out.

Pete:  
> Millions will immediately go back to work, which is different from the
> 1930s or the 1980s when workers were unemployed because businesses failed and sacked their workers.  

Millions will go back to work, but immediately?  I expect at least a certain amount of hysteresis: they won’t all go back to where they left or were laid off or fired, and there’ll be some messing around and delays as businesses come back to life in recovery and stage their hiring. Moreover, there will be fewer of those businesses, because some won’t have survived, or they will have had to change focus. In some places the businesses will have survived, but not all the earlier jobs.  

Of course certain businesses will need even more people… for a while. Not many, I expect. Perhaps we’ll see a new spike in temporary jobs, even a temporary spike followed by another drop.    And because so many people will want to return to paying work, we might also be looking at a Western-capitalism-driven overall lowering of wages.  

I do hope my worst fears won’t be realized, but as you already know, I don’t worship at that church.  

Me:  

You’re right about all this, and there is bound to be some interruption in the process of reopening the economy, which is looking worse than I initially expected. Mass gatherings, like music and sports events, might not happen at all for a year. And it’s likely that wariness will change workers’ behaviors. However, in this case it is important to separate unemployment as a cause of economic pain and as a result. The problem in analyzing unemployment right now is that the two groups are swirled together in the same pot, both workers who are laid off temporarily and workers who are permanently laid-off.   Both types of unemployment can be painful for the people and the society, but in different ways. What is notable about the unemployment of the 1930s or 1980s was that it was foremost the result of bad economic conditions, which caused owners to sack their employees. For all these workers, there was no job to go back to. This will surely be the case for many firms once the shutdown is over, but it is hard to say now. However, it is important to note that being unemployed––over even not making 100 percent of your salary––can cause people to save more than they usually would, which will also delay the recovery and negatively affect employment. (Though this would be welcome development for the sake of the environment.) High debt levels also constrain people’s spending. With an economy that is 3/4 dependent on consumer spending, this could be a very large problem.   

Another aspect here, as you allude to, is that high unemployment is great for owners of businesses.  The larger the pool of people seeking work, the more wages can be suppressed. Of course it doesn’t always work like this (we recently had the opposite, very low unemployment, and it didn’t raise wages meaningfully) but it will to some degree without government wage controls and/or a militant labor movement.   

What I want to stress is that the news reports of unemployment are significant but not necessarily as compared to other moments of economic strife. Media loves to compare but sometimes the comparison is wrong.
Reading list

  “Pryor Love”
The life and times of America’s comic prophet of race.
By Hilton Als (The New Yorker) 1999  
Haunting portrait of Richard Pryor.  

Dinner with Schmucks
The faux populism of contemporary food writing
by Kyle Paoletta (The Baffler)

There is something very wrong with Pete Wells’ food criticism, and this essay unearths most of it. Wells, for me, is primarily confused about the class concerns of dining and ultimately ends up all over the map, senselessly defending wildly expensive food and attacking middle-brow restaurants, while taking swipes at sacred cows (like Peter Luger and Per Se) so as to cause a scene. Ultimately, Wells loves high-brow cuisine and the standards that have been created to judge it, and struggles to imagine a different, less irrelevant paradigm.  

Into the Maw
How Obama-era economics failed us.
By Ryan Cooper (The Nation)  

I, like a lot of people, see the economic policy since the end of the Bush administration as largely an unbroken chain of bad, regressive policies. Obama reversed little of the priorities of conservative economists in government, and even went so far as to reappoint them once he came to office. This review does an amazing job presenting that argument, and if you are wondering why Obama failed to reverse or even halt economic and social inequities, this is an important piece. Biggest point is that after 2008 the status quo was maintained at all costs:  

“The Bush-Obama bailouts reflected a highly political and ideological choice on their part to preserve the financial status quo at any cost—including the enormous share of the country’s economic output gobbled up by Wall Street—and to do so while directing incomprehensible amounts of money to the banks instead of to the American people.  

Somebody was going to have to eat those losses—and Paulson, Bernanke, Geithner, and the Obama economic team were committed to making sure it wasn’t the banks.”  

The Price of the Coronavirus Pandemic
When COVID-19 recedes, it will leave behind a severe economic crisis. But, as always, some people will profit.
By Nick Paumgarten

Fun article with some good analysis of what’s going wrong in the middle portion.

Adam Curtis and Vice director Adam McKay on how Dick Cheney masterminded a rightwing revolution As told to Paul MacInnes (The Guardian)

The point they raise that is important is that fear is the overriding political ideology in both major parties today (this was the subject of Adam Curtis’ documentary series The Power of Nightmares, which is mainly about the War on Terror). Today both sides practice fear based politics, whether it’s a fear of Trump or a fear of immigrants. Very little room for an optimistic vision of the future, except in calls for universal investments in society (like universal healthcare or the Green New Deal). I also find the labor movement optimistic.

Songs from SinjarHow ISIS is hastening the end of the Yezidis’ ancient oral tradition.
By Alex Cuadros

Essay about the music and cultural history of Yezidis in Syria.

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