Tuesday, October 21, 2008

CRASH TALK TUESDAY OCTOBER 21


The first penny auction


Living History Farm - As the pace of foreclosure auctions increased between 1930 and 1932, more and more farmers became desperate. Activists demanded that state legislators halt foreclosure sales. Angry farmers marched on the capitol buildings in several states, including Nebraska.

Some farmers in Madison County, Nebraska, took matters into their own hands. In 1931, about 150 farmers showed up at a foreclosure auction at the Von Bonn family farm. The bank was selling the land and equipment because the family couldn't repay a loan. The bank expected to make hundreds, if not thousands of dollars.

As those who were there remember it, the auctioneer began with a piece of equipment. The first bid was five cents. When someone else tried to raise that bid, he was requested not to do so - forcibly. Item after item got only one or two bids. All were ridiculously low. The proceeds for that first "penny auction" were $5.35, which the bank was supposed to accept to pay off the loan.

The idea caught on. Harvey Pickrel remembers going to a penny auction where "some of the farmers wouldn't bid on anything at all - because they were trying to help the man that was being sold out." At auctions across the Midwest, farmers showed up as a group and physically prevented any real bidders from placing bids. But the banks figured out ways to get around these illegal Penny Auctions.

Farm groups and activists turned their attention to the political arena demanding a stop to foreclosure sales. Eventually, several Midwestern states, including Nebraska, enacted moratoriums on farm foreclosures. Generally the moratoriums lasted a year. The theory was that the Depression couldn't last that much longer, and then farmers would have the income to make their payments. But the Depression continued, the moratoriums ran out and farmers continued to lose their farms.

Judith Moriarty, Rense - Congressman Louis T. McFadden was a banker. He headed the Congressional Banking Committee for 11 years. He stated the following before Congress on June 10, 1932: "Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. The Federal Board, has cheated the Government of the United States and the people of the United States out of enough money to pay the national debt. This evil institution has impoverished and ruined the people of the U.S.; has bankrupted itself, and has practically bankrupted our government. It has done this through the defects of the law under which it operates, through the maladministration of that law by the Federal Reserve Board, and through the corrupt practices of the moneyed vultures who control it."

Between 1930 and 1933 more than 9000 banks close their doors and investments decreased by 90%. Ninety per cent of small community banks failed. By 1933 the banking system was a wreck. Congressional hearings in early 1933 revealed gross irresponsibility on the part of major banks, which had used billions of dollars of depositor's funds to acquire stocks and bonds and had made unsound loans to inflate the prices of these securities. The Banking Act of 1933 (the Glass-Stegall Act), was passed by Congress in the face of vociferous opposition from the American banking community. This act prohibited commercial banks from using their own assets to invest in securities (such as stocks and bonds).

In his 'Economic History of the Great Depression', John Galbraith pointed out one of the causes: "The large scale corporate thimblerigging that was going on. This took a variety of forms, of which by far the most common was the organization of corporations to hold stock in yet other corporations, which in turn held stock in yet other corporations. During 1929 one investment house, Goldman Sachs and Company, organized and sold nearly a billion dollars' worth of securities in three interconnected investment trusts . All eventually depreciated virtually to nothing." . . .

Andrew Sims, Guardian, UK - One unintended consequence of the current global financial crisis is that it will reveal what some have known for a long time, namely that a new economics is already emerging. The tragedy is that the crisis-ridden financial system has long since failed to do the basic job required - underpin the productive economy and the fundamental operating systems upon which we all depend. . .

For a vision of what an alternative might look like, the current edition of New Scientist magazine contains enough economic heresy (but scientific common sense) to choke every finance minister in the northern hemisphere and the whole staff of the International Monetary Fund. Best is the vision for what the country and economy could like in 2020. In it, we have moved from an economy of over-consumption, through-put and waste, and the anachronism of overwork and unemployment, to one which the ecological economist Herman Daly describes as, "a subtle and complex economics of maintenance, qualitative improvements, sharing, frugality, and adaptation to natural limits. It is an economics of better, not bigger."

The good thing about such an economy is that it is rich in employment and the thick weave of local, micro-economic relationships that help to create resilient economies and bind communities together. Instead of worshipping the invisible, and usually remote, hand of the market economy (which too often can be caught picking the pockets of the poor), you design an economic system in which resources flow and circulate effectively to serve the invisible heart of the core economy - made up of family, neighborhood, community and civil society.

It is already happening in place but could quickly move to a much bigger scale. Google tell their staff to spend 10% of their time not doing their job. They're free to get involved with the local community. The company has found that as a result it has made staff more innovative. A lot of research shows that such community involvement also has a very positive payback in terms of life satisfaction. A 10% rule could be introduced across the economy with time credited to the local community. But we could go further. . . . If people who over-work worked less, employment could be more equally distributed. Coupled with other innovations to ensure a basic income guaranteeing basic needs, shorter working weeks help turn us from being time-poor, to time-affluent. With more time for family, community and creative learning it makes for happier people and better neighborhoods.

Life satisfaction scores tend to be much higher among people with a more communally oriented set of values than those who are materialistic and individualistic. They are also less driven to consume for its own sake. Kick the addiction. Get time-rich. Be happy.

Toby Sanger, AlterNet- Iceland is now essentially bankrupt after the government took over its three major banks to prevent them from failing. It owes more than $60 billion overseas, about six times the value of its annual economic output. As a professor at London School of Economics said, "No Western country in peacetime has crashed so quickly and so badly."

What on earth happened to get Iceland and its banking sector into such a state? It turns out that Iceland, despite its coalition governments and Nordic social values, became a poster child for neoconservative economic policies inspired by Milton Friedman during the past decade. Friedman himself visited Iceland in 1984 and participated in what was described as a "lively television debate" with leading Socialists. This inspired a generation of young conservatives who came to power through the Independence Party in 1991 and have run its government through different coalitions since then. . .

Under the leadership of Prime Minister David Oddsson and explicitly inspired by Friedman, Iceland's neoconservative young Turks implemented a radical (but now familiar) program of privatization, tax cuts, reductions in spending and deficits, inflation targeting, central bank independence, free trade and exchange rate flexibility. Corporate taxes were cut from 50 percent down to 18 percent. Privatization and deregulation were driven directly through the prime minister's office, and the major banks were privatized.

Economic missions and reports on Iceland issued by the influential International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) largely praised and encouraged these reforms, often disregarding the rising risks for its financial sector until recently.

It wasn't as if everyone was unaware of the growing dangers of these policies. In 2001, Joseph Stiglitz, recipient of the Nobel prize in economics and one of the leading lights of the "New Keynesian" school of economics, wrote a remarkably prescient paper for the Central Bank of Iceland. In the paper, he raised alarm about a vulnerable, small, open economy such as Iceland suffering from a severe financial and economic crisis from such policies. In the absence of reforms in the "global financial architecture," Stiglitz outlined a set of regulatory and tax measures that Iceland should implement "both to reduce the likelihood of a crisis and to help manage the economy through a crisis.". . .

At first, the policies appeared to be very successful. The economy grew at a strong pace, rising until Iceland achieved one of the highest per capita GDPs in the world. In 2007 it also topped the score for the United Nation's
Human Development Index. . .

Then it all came crashing down. Inflation and short-term interest rates escalated to 14 percent, and Iceland's currency lost half its value. Now Iceland has an external debt equivalent to about $200,000 per person with virtually no prospect of repaying it.

Iceland's economic collapse wasn't caused by the subprime crisis or by the Wall Street shenanigans in the biggest economic powerhouse in the world. Instead, it was caused by the same Friedman-inspired economic policies being independently applied in one of the smallest countries in the world.

NY Times - California's energy-efficiency policies created nearly 1.5 million jobs from 1977 to 2007, while eliminating fewer than 25,000, according to a study to be released Monday. The study, conducted by David Roland-Holst, an economist at the Center for Energy, Resources and Economic Sustainability at the University of California, Berkeley, found that while the state's policies lowered employee compensation in the electric power industry by an estimated $1.6 billion over that period, it improved compensation in the state over all by $44.6 billion. Built into that figure were increases of $1.2 billion in the light industrial sector, $11.2 billion in wholesale and retail trade, $7.3 billion in the financial and insurance sectors and $17.8 billion in the service sector.

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