This Will Not Be Like the Last Crisis

** Robin's Book Report #74
A economics newsletter and reading list by Robin Kaiser-Schatzlein
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-Letter from Me/New Article Alert
-The Economic Situation: Why This Crisis Won't Be Like 2008
-Reading list

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Letter From Me:

Hey everyone,

After this newsletter, I am going to take the next week off! Let me know what books are on your summer reading list. In the reading list below, I have three books in particular I hope to finish this summer: Ian Frazier's Travels in Siberia; a book about the violent history of Indonesia since 1965; and David Hill's new history of the one-time gambling mecca of Hot Springs, AR.

Two new articles of mine came out since my last letter. The first is a piece at the American Prospect ( about a new rule that the Trump administration passed that allows private equity companies to sell products to people with retirement accounts like 401(k)s. Private equity firms charge extremely high fees, and my editor wanted to calculate how much this would cost the workers. So I called an economist, and she ran the numbers for me, and the result was that workers would be paying private equity firms $13.7 billion a year for returns that were the same as no- and low-cost mutual funds. These private equity products were once considered too risky to allow unsophisticated investors to invest in them, but no longer.

The second article is a review of a book explaining Modern Monetary Theory ( . The focus of my review was the book’s argument that “tax-dollars” don’t “pay” for anything. Procedurally, this is true. When the federal government pays for something, it doesn’t transfer money from an account where tax dollars are held. It digitally marks up the account of, say, a defense contractor like Raytheon, and then finds the money afterward. The implication is that the federal government’s spending isn’t constrained by the tax dollars it brings in, but the real resources our society has on hand. If it sends out too much money to pay for too few things, this will cause the value of money to crater and cause inflation. Hard to explain! But the premise is that the constraint on government spending is inflation, and that money is a legal and political construct meant to facilitate the distribution of real resources, not the store of
some inherent value, like gold might be.

Money comes from the government, which means that money gets into society through government spending. We’re all on welfare, that is. If the government decides to build a nice new road in some area, that benefits someone. If they invest in medical research, someone will be left with more money in their pocket. One conclusion is that economic and racial inequality can begin to be resolved pretty quickly by having the federal government give money to specific groups that need it, that is, poor people and workers. Enjoy! And let me know what you think.

The Economic Situation

-This crisis will not be like 2008; the investor class argues surreptitiously for its bail out; save restaurants.

A few weeks ago, the Atlantic posted a startlingly titled story called “** The Looming Banking Collapse (
” by Frank Partnoy. For most of you who lived through the last economic crisis in the 2008, the headline sets off alarm bells. In 2008, one epicenter of the problems was the meltdown of the banking system. For the average reader, it is reasonable to be worried about that happening again. However, the article mistakenly grafts the concerns we developed from the last crisis on to the current one, and in true Atlantic style, aims to create a sensation where none exists.

So far today the banking system has not developed many problems. In fact, banking seems to be one of the most resilient areas of our world right now. The Dodd-Frank reforms aimed to make banks more safe by requiring them to keep more capital on hand, and this seems to have worked. (A problem here, ** which I wrote about (
, is that much of the risky activity that banks engaged in pre-2008 has been shifted outside the banking sector, to non-banks.) So what is Partnoy so worried about?

The crux of the article is that banks own a financial product called consolidated loan obligations (CLOs), which are bundles of payments on the loans that corporations use to fund their daily operations. They are somewhat similar to the consolidated debt obligations (CDOs) that caused big problems in 2008 and that you might remember from Michael Lewis’ The Big Short. The problem was that these CDOs were full of terrible mortgages but the magic of finance made them appear to be solid investments and the ratings agencies like Moody’s, asleep at the wheel, rated them highly. In this story (the story of the banking collapse of 2008 that is) the CDOs were fraudulent. On top of that, the banks sold credit default swaps (CDSs) to clients who were betting these fraudulent CDOs would collapse. A CDS was a type of insurance that would pay out of a CDO defaulted. When the CDOs collapsed, banks not only lost money because they owned these fraudulent securities, but they also owed money to the people
who were betting they would collapse. This magnified the financial pain by many factors.

Partnoy is trying to compare CLOs to CDOs without acknowledging that there is no CDS component to this current crisis, and (so far), no evidence of fraud. Nathan Tankus wrote about ** this short sight in a long, fascinating take-down (
of Partnoy’s article. His conclusion is that there are real problems, and focusing on a problem that seems superficially similar to the last crisis is not useful. I agree.

But if Partnoy is way off-base, crying wolf about a non-problem, what is he after? It appears he wants to scare readers into action. After many thousands of words meander out of his keyboard, he gets to his point: we need to reopen the country ASAP, for the sake of the financial system. He writes that, “In calculating the risks of reopening the economy, we must understand the true costs of remaining closed. At some point, they will become more than the country can bear.” It’s a strange sentiment, and false duality. Must we really choose between remaining shuttered and mass harm, just to save the financial sector? Actually, we don’t. A rigorous test and trace program could allow reopening without risking workers lives, but that is not in place, and workers are justifiably hesitant to restart. What Partnoy is really shilling for here is the investor class, who have the most to lose if the financial system were to seize up. In effect, he is drawing a weak comparison to the last scary crisis,
to encourage Atlantic readers to fight for reopening.

This agenda is made more clear when Yves Smith at the blog Naked Capitalism called the Financial Times out for ** a scare-mongering article (
about the dangers of CLOs. She suggested that the FT was doing the bidding of CLO investors (mainly private equity firms) who are basically lobbying to get bailed out by the Federal Reserve. The problem is that our financial system is supposed to be structured to wipe out investors first, because they get paid to take big risks, and bailing them out is tantamount to fraud. Some things should fail so others don't.

This brings me to my last point. When companies go bankrupt, the people who get wiped out first are the speculators, like private equity firms, hedge funds, and just generally wealthy investors. For all the companies and investors that binged on cheap, reckless debt, the pandemic is the risk that they might not have been able to anticipate, but nonetheless is a risk they took. Almost any worry of financial collapse emanates from these powerful interests. As John Cassidy ** writes in the New Yorker (
, investors took on too much bad debt and now are trying to push the stock market up to prevent losses. The parts of the financial world that the Fed has bailed out, have become overheated, ** as reported in the Intercept (
. But even if there is a massive bubble in finance, as I said before, the people who will be wiped out first will be the investor class, which so far has weathered the crisis fine. In fact, ** the entire private sector seems to have been deemed too big to fail (
by the Fed.

I am just suggesting that instead of fixating on the last crisis––which was a nuclear combination of fraud and financial complexity and home-owner default––and the problems with the financial sector, we should fixate on the problems of this crisis, which is one of the first service-sector crises ever. We need to bail out the restaurant industry and their workers. This might enable them to retool for delivery without paying the exorbitant 30 percent fees that many companies like Grubhub charge their business. ** Maureen Tkacik (
writes in the Washington Post that restaurants during the crisis are suffering from financial predation at the hands of Silicon Valley firms. She finds Grubhub’s former head of innovation, saying that they are “not actually in the business of delivery. They are in the business of finance. In many ways, they are like payday lenders for restaurants and drivers. They give you the sensation of cash-flow, but at the expense of your long term future and financial stability.”

The U.S. economy is about three quarters consumer spending and with the hospitality and leisure industry still at almost 50 percent unemployment, we are looking at a big problem with almost no proposed solution. Especially because ** wealthy people’s spending on services has so far not recovered (
. If the country continues to experience low consumer spending, the pain of the crisis could lengthen by decades. That is, if consumer businesses shutter over the next year or so because there was no government program to grant them the money they need to make up the shortfall, this could remake the country.

Reading list

** The Lost Rebellious Spirit of Keynes (

The economist’s ideas are often reduced to stimulus spending. His life and work were much more radical than that.

Kim Phillips-Fein (The New Republic)

A good summary of Keynes and his contradictions. For me, I've always enjoyed reading Keynes but am always unimpressed with his very typical British patrician attitude towards workers. He was a liberated thinker and that makes him evocative and valuable, but even today his ideas seem no match for the historic injustices that need correction.

** The Jakarta Method (
: Washington's Anticommunist Crusade and the Mass Murder Program that Shaped Our World

by Vincent Bevins

Just started this book about the history of Indonesia and the mass murder campaign against so-called communists beginning in 1965.

** The Vapors (
: A Southern Family, the New York Mob, and the Rise and Fall of Hot Springs, America's Forgotten Capital of Vice

By David Hill

Just started this book too, about the history of Hot Springs, Arkansas, a gambling hot bed that once rivalled Las Vegas.

** Why Bill de Blasio Is Such a Schmuck (

By Danny Katch (Jacobin)

I was frustrated by Bill de Blasio's response to police violence in New York and I wondered why he seemed incapable of criticizing the police or even saying anything of substance. Something about him is hostile to reform, or maybe just being questioned, as this article suggests. The author recalls a meeting they had with de Blasio over school reforms in which the anger of the participants caused the Mayor to lose patience. Still doesn't explain his baffling behavior entirely, but suggests he cannot take criticism.

** Rethinking the Fed (

By Graham Steele (The Hill)

How much power should the Federal reserve have? As Steele points out here, the Fed isn't meant to make political decisions but it does all the time. What if we embraced that and used the institution to fix our economic arrangement?

"Rather than what it was meant to be, a lender of last resort, the central bank is effectively our nation’s policymaker of last resort. Outsourcing more and more authority to central bankers to solve our structural economic problems is a convenient device for a polarized Congress that can’t seem to meet the basic needs of its constituents."

Another political aspect of the Fed is revealed in the minutes of their meetings. “Anyone who has read transcripts of their interest rate-setting committee,” Steele writes, “knows that businesspeople have an influence over how these leaders views our economy.”

“In fact, the leaders of a public institution that holds itself out as apolitical make political choices all the time: They just cloak them in neutral, market-friendly language.”

** The Nutcracker Hustle: Why Selling Bootleg Cocktails Just Got Harder (

The pandemic has inspired restaurants and bars to mimic the drink. But they have legal protection to do so.

By Margot Boyer-Dry (The New York Times)

This article is about how the underground business of selling premixed cocktails (called nutcrackers) in New York is being upended because it is currently legal to sell to-go cocktails. I was happy to see this story, because I feel like underground economies in the city don't get enough attention. These bootleg cocktail vendors might be squeezed out by high end businesses. However, I think the audience for the bougie legal cocktails is different than the New Yorkers who typically buy nutcrackers from roaming vendors at the beach in Coney Island or at the West Indian Day parade, so maybe the underground won't be so threatened.
-Sara and Brent Kjelsvig-Erickson
-Anonymous donor
-Anonymous donor

Thanks for reading!

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