Is Capitalism Working?

The Dow is down 4 percent since the start of the month — the Nasdaq’s down 9% — and the financial wizards at the Times’s Upshot blog have concluded that slow growth may be the new normal. Investors everywhere are betting that financial regulators and policymakers have fired their last bullet — and have nothing left to do.

Casey Stengel raised the question about baseball’s miserable Mets long ago: anybody here know how to play this game? It’s the question more and more of us ask about economists and some of them ask about one another: how could the late great Milton Friedman have seen storm-proof clear sailing ahead, when in fact a housing bubble was about to burst all over us? How was it none of the masterminds in power saw the bank-and-insurance collapse coming in 2008?  How are they still in power, in spite of that? No repentance, nothing like radical repairs for an economic regime that’s still running fevers, can’t put young college grads to work, isn’t investing in our own fundamentals. The New York Times writes at the end of a panicky week on Wall Street, “The party is over.”

We’re beginning a series on capitalism in the register of concern: if the ideas are bad all the way down, how can the economy be made good again? Are we finally facing the fact of global slowdown? And where do we go from here?


Guest List
Jeff Madrick
financial commentator and author of Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World.
Laurence Kotlikoff
professor of economics at Boston University, and author of The Clash of Generations and the Purple Plans.

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  • Andrew

    We talk about the free movement of goods and capital. Wouldn’t globalization be better if we had free movement of labor. Mid my job goes to China or India or Mexico, I should be able to move there. But you legally cannot for the most part.

    • GuestAug27

      Globalization would work much better is we had a global trade union that would counteract the immense power the global capitalists have over the rest of us.

    • GuestAug27

      According to NAFTA, I think you are free to move at least to Mexico. However, this is not a viable option for most workers for practical obstacles too numerous to mention here.

  • Rescinding corporate personhood (via constitutional amendment) and holding corporations accountable to the public good are necessary albeit far from sufficient elements of any solution.

  • Steve Fernandez

    In the little spare time that I have, I have been looking at mathematical modeling of economic systems. In a capitalist system, all else being equal, the more wealth a person has to: invest and get more money; buy materials, manufacture products, and sell the products for a profit; and develop and market one’s products/innovations. Given that one’s ability to increase wealth is related, with a high level of confidence, to one’s wealth, it seems to follow that wealth would tend to accumulate in the hands of the richest few. This is what I have seen in some econophysics and cellular automata modeling.

    The accumulation of wealth, in the hands of the richest few, allows these few to have a disproportionate influence in shaping laws, policies, elections, and the privately owned mass media.

    So, along with the accumulation of wealth in the hand of a few, capitalist economies have a high tendency to lead to plutocracy.

    I suggest that Radio Open Source include, in the discussion of capitalism, some of the alternatives to capitalism such as: Socialist models, the Mondragon cooperative model; participatory economics; green economics.

  • This went exactly as I expected – economists arguing
    about what is ‘real’ or not.

    Kotlikoff doesn’t exaggerate the liability problem in the
    least ! And Madrick’s answer is that we would have to go to zero
    for it to be a problem? He isn’t aware of magnitude of it, let alone stress-tested any of these obligations.
    It kind of gives one an inkling of what Hank Paulson was
    up against in 2007 – he undoubtedly knew what was in the financial closet of this country.
    Winsted is a town I know well – one of the most beautiful places in New England. Working in commercial finance I uncovered a fraud by one of the old-line manufacturers located there. (By old-line I mean you can see vintage products made by this company from the 1920’s being sold on Ebay.)
    Why did the latest generation of owners commit fraud?
    Because they could NOT compete.
    The textiles machines moved south because of competition.
    In Nader’s Utopia there is no competition – no sports
    stadiums either. He doesn’t seem to understand how things work in the ‘real’ world.

    Social contact talk happened in the late 17th-century – it
    ended badly. If one wants to get an idea how that could happen, watch La Commune (Paris, 1871) directed by Peter Watkins. Be forewarned, it is not like any movie you have seen before.

    • Tyler

      Actually Kotikoff was way off when it came to debt issues. We are no where near economic insolvency by any measure. His comparison with Argentina is a great example. We do not have a dictatorship that is destroying business of all sizes.

      Even if what he means is the modern issues in Argentina those can be explained by historically having a fixed-exchange rate, which makes it very much unlike the United States. Argentina is also a great example of breaking with the economic orthodoxy of having to pay back debts a la Greece or face devastating economic consequences. Argentina declared bankruptcy and has fared much better then Greece.

      I believe Kotikoff would be better off not mentioning Argentina as it is a great example in the modern sense of how going against economic orthodoxy can be beneficial.

      • For sure we aren’t Argentina, but Kotikoff is correct about the off-balance sheet debt of the US government. I don’t see where he is accounting for the contingency of government loan guarantees.

        Funny is how Madrick used a Freidman-like answer to Kotikoff.
        When Milton was asked how we will fund ourselves
        if the Chinese stop buying, he said we would sell it to someone else.

  • Let me flesh out something about how things work.

    I’ve been looking for good work boots for a couple of
    weeks now.It’s been really difficult to find something that will

    I stumbled onto the boot I will buy, and I read a review by someone who used to own Carolina boots. Thirty years ago I used to audit Carolina shoe. A company located where the Blue Ridge Mountains meet the Smokey Mountains. People commuted to work
    from “up on the mountain”.

    Making a work boot isn’t rocket science. The art of manufacturing is motivating people to do their best work.

    The guy who ran Carolina shoe knew every one of the 200
    employees personally. He knew their names; their spouses names; their kids names. Whether they were having car problems or how their home improvements were going. Yeah, he was interested in
    that kind of stuff because he would occasionally co-sign their bank loans.
    I thought it was a tad incestuous, but you could not find a more motivated group of workers.
    What happened to Carolina shoe? Carolina was a division of HH Brown shoe, which was bought out by Warren Buffet in 1991. Unfortunately the quality has dropped. The guy who wrote the review had to give up on a lifetime of wearing Carolina boots. Evidently Buffet is staffing his companies with newly minted Harvard MBAs. It appears Carolina shoe was closed in 2000.

    The point is that the guy who made that work was a one-in-a-million manager. He loved his job and he loved his employees. The guy’s name was Otto Woerner and he was the embodiment of Capitalism. He was enthusiastic and unbelievably competitive. We were driving to lunch once and passed a jogger. Since we both jogged, we got
    into a discussion about the correct way to run. For Otto, there was nothing that couldn’t be improved..

    He passed away just last year. His obit is worth a read.

    “We were one of the first companies in Morganton that had
    black supervisors,” Horton said. “He was demanding but he was fair.”

    I don’t know if you can teach people to live the way he did
    – it is definitely worth trying. But I doubt very much if it can be legislated.

    Maybe the company making my next pair of boots is run by
    the same type of guy – I’ll know if they last.

    Good luck trying to understand capitalism.

    • geoff

      That’s an inspiring story, RWP3, but like you say, he was one in a million managers. What are the other 999,999 doing? You surely must have heard of Gresham’s law. I think the statistics confirm that it still applies, especially today when so much bad money seems to be looking for worse. That’s happening because the free market financial folks continue to invent derivative investments. Once such crap cash is in circulation, the wizards behind the curtain develop new instruments that are derivatives of those other derivatives. They have no reason to stop doing that, but does it create any value? Meanwhile, Mr. Wonderful manager is being told (by superiors, boards, analysts or even the market) that he needs to reduce expenses. What is he to do? The market must be satisfied, right?

      Please pay attention to what business as usual has become rather than what it is supposed to be. Romanticizing capitalism isn’t helpful when it’s become as toxic as it is now.

      • “Please pay attention …but does it create any value?”

        “‘Yes, it was absolutely a net good. I mean, we saw a huge
        number of positives. We saw that our loan portfolio was suddenly able to manage credit risk.”
        Terri Duhon claims she invented these derivatives.
        Her utopia of risk free banking went horribly awry, but there wasn’t the intent people think there was.

        “So it’s about using capital efficiently and using capital wisely. And we looked at our investors and we said, look, there’s investors over here, they’re getting access to, in the single names; they’re getting access to names they hadn’t previously had access to, and they’re able to diversify their portfolio. They are also able to buy protection on their portfolio to the extent that they’re looking to risk manage.

        And in the more exotic products, or the portfolio products that we were selling, the tranches of portfolios, they were getting a new product. It was diversified. They were participating in a way with us and our loan portfolio activity. We could only see positives.”

        • geoff

          WRP3, perhaps Teri could only see positives, probably because issuing specious derivatives were enriching her and her buddies. That’s natural. But did you yourself only see positives? I sure didn’t when I learned what they were up to. It was obvious this was a pyramid scheme and the CDSs were the cynical icing on the doomsday cake. You seem to believe that maximizing market efficiency is more important than transparency and fairness to investors. HFT algos are very efficient trading mechanisms, but so what? Do they bring us the economy we need? Where were you when financial engineering led us down the primrose path to a huge crash, and haven’t you learned anything since?

          • “issuing specious derivatives were enriching her and her buddies. ….It was obvious this was a pyramid scheme and the CDSs were the cynical icing on the doomsday cake. You seem to believe that maximizing market efficiency is more important than transparency and fairness to investors.”

            You watched the show?

            She and ‘her buddies’ got out of the derivatives game
            early and they were completely transparent according to her.

            I saw her trying to invalidate a law of physics – I’m just
            not sure which one it is. But that happens every time a baseball game is played – why not risk free banking?

          • geoff

            Not really a law of physics by my reckoning, but an economic principle: when derivative instruments cascade from a fundamental base of value – in this case house prices and land values – it’s only sustainable as long as those values are increasing in a real way, not through pumping up markets with speculation and specious mortgages that only give a semblance of fundamental growth. Teri’s gang got out when they felt the house of cards they had helped to create was about to fall. That was highly opportunistic and deeply cynical. It hurt millions of people and many are still suffering. You must acknowledge this.

          • There was nothing deeply cynical about it. Terri, I’m sure, considers herself a transcendentalist – she believed in a
            Utopia – her goal was to eliminate risk and create heaven on Earth.

            The fact that major frauds were committed by others was beyond her group’s control.

            “You must acknowledge this.”

            Debt is the inability or unwillingness to make difficult decisions. Debt hurts people and makes people suffer. People should stay away from debt – I know I do.

  • Potter

    I have not listened yet but I have to mention that the History channel has been running a series:”The Men who Built America”. I happened in on the Vanderbuilt (Railroads), Rockefeller (oil), Carnegie(steel) and Henry Clay Frick ( managing) episodes. What a story! I barely remember the dry history I was taught. I know these names primarily from their endowments, art collections, philanthropy, and names like “Rockefeller Center”. Carnegie, who hooked up with Frick at one point to build a bridge across the Mississippi, was bought out by JP Morgan who became the richest man in America. These men who ostensibly built America were ruthless and often at war with each other. The common man, the workers, were not their concern. Johnstown Flood can be attributed to Henry Clay Frick’s decision to lower the South Fork dam for his private resort. Unfettered capitalism.

    • If capitalism was fettered, the dam would not have been lowered?

      “common man, the workers, were not their concern”

      We were transiting from agricultural to industrial and it
      was going to take demanding and hyper competitive risk takers to make that happen. If you want to call that ruthlessness, so beit.

      • GuestAug27

        What happens if the hyper-competitive risk-takers of today decide to sacrifice 2/3 of the world’s population (including you and your children) in order for them to get richer while making large parts of the Earth uninhabitable due to pollution and climate change?

        Would your answer change if the risk-takers promised that only the brown people on the other side of the world would be sacrificed, but not you?

      • Potter

        First of all, capitalism was fettered at the time and apparently from the beginning to a degree, as was pointed out in this show. It was just not fettered in this particular way, perhaps not enough at the time or not enforced. Of course America would not have been built in quite the same way were it fettered as it is today from experience. But today, as with the Amazon controversy, we can see how clever people who want power and money are even alongside of or in the guise of doing good things. We need some of another kind of fettering in the Amazon case (for instance).

        Democracy is a work in progress and government has to be smart and itself unfettered by special interests and it’s own maintenance of power to work for the good of the people as a whole. We still have problems, obviously, getting it right.

        The Dam that Frick did not give a damn about lowering for it’s consequences to the people ahead of it should it break is a good example. Frick was warned. But he was headstrong about what he wanted to do. It was greedy.

  • GuestAug27

    As usual, a bunch of guys complaining about various problems with Capitalism, without offering an alternative to Capitalism.

    Mr. Lydon, I am looking forward to the upcoming interview with Michael Albert where you will ask him to explain PARECON – the Participatory Economy. PARECON – is a new economic system co-developed by Michel Albert that tries to avoid the cons of both capitalism and centrally-planned socialism.

  • Tyler

    I was very disappointed that Ralph Nader was cut off while talking about Hayek and a guaranteed income. It could have been a very insightful moment if he was let to go on.

    I would suspect he would have shown that what passes for a liberal idea today is really the conservatism of the past. I am one who does not believe a minimum wage is a good policy for a social safety net as it can have too many externalities and relies too heavily on a person being employed to survive.

    I would have loved Nader to have been given the ability to expand more on that as it was much more insightful then the tired normal bantering between Jeff Madrick and Laurence Kotikoff that followed.

  • Minor Heretic

    “Free Market” should always be in quotation marks, similar to “married bachelor.” A market is a set of rules; who can buy and sell, how things can be bought and sold, where, when, and what. A market is, by purpose and definition, not free. And yet this oxymoronic phrase has become holy writ. Even people who oppose the idea acknowledge it as a logical concept. Admitting that all markets are established, sanctioned, and managed by law (government) would be the beginning of a rational conversation about what we should do.

  • Robert Campbell

    Stengel had it right. “Good pitching will beat good hitting every time. And vice versa.”

  • Michael Beaton

    for now a simple question/comment : This broadcast was unusually inartfully edited. The cuts in the conversation were jarring. So… it is a podcast…why the need to make any cuts… Why not let the conversation roll? And if there is a particularly bad part, ok, cut that…but not the conversation itself! I have noticed this happening a few times on ROS…
    And if your trying to fit a timeframe for radio or something, why not publish the edited version as well as the uncut version. I don’t care how long it runs.. I am desiring the rich conversations.

    • rosmedia

      Michael, you’re correct: this wasn’t our best-sounding radio hour. Our podcast does indeed life as a live radio show, rare enough in the podcast world. It does do something for spontaneity and a sense of urgency; it hurts when we have cross-talking or people talk past the 20-minute breaks. We’re working on some better solution to this quandary, and we’ll keep listeners in the loop. Thanks for writing!

      • Michael Beaton

        Hi Rosmedia,
        Is there a cost to publishing, and then having a podcast downloaded? The costs in creating a podcast, after the mechanics of creating the content in the first place, seem to be the effort required to do the editing, and whatever task to get the resultant file uploaded to the servers. I don’t think there is a cost for downloads.
        If that is true, then why not simply upload the entire uncut conversation along with the edited one that you are making for the broadcast function.
        The podcast “On Being” Kristin Tippet does this to great affect!

        Here is my POV on this: I relish ROS conversations as being some of the best stuff available anywhere on the I/net and the podcast universe. Even when the edits are great the conversations are obviously clipped…
        Many people will only want the edited version.. fair enough. No change there. Many others, like myself, are hungry to hear more of the deep thinking of those you have on your shows… and would listen to the extended versions…
        Who knows.. maybe your guests, like Nader, Blyth and others might prefer to be heard in their entirety as well, rather than being edited into snippets?
        To respond to an implied objection in your note about ‘crosstalk’. Who knows that if the participants happened to know that the cross talk would be published it might help induce a different sensibility into the conversation?

        One of the things I admire about C.Lydon and his ways in an interview/conversation is his ability to keep it on point and moving to a point. In this case you had people who seemed more interested in ‘winning a point’, rather than discussing the game. And the edits probably exacerbated the perception.

        More to be said about that aspect of effort..My main point being..let it all hang out…
        You have the people and the moderator to do the job of having important conversations… If it gets messy, that is part of the process of getting to a conclusion… Even if the conclusion is not agreement but a more clear definition of the battle lines. Better that than yet another amorphous battle where the underlying structure of the argument is buried under undifferentiated anecdotal evidence and talking points. And etc…

        I know this repeats my point made in the first place…but I thought to underline and example it. I hope the end of your deliberations leads to more, not less, ROS being sent out…

        ummm… something about this plea of mine recalled this poem :

        Loaves and Fishes

        This is not the age of information.
        This is not
        the age of information.

        Forget the news,
        and the radio,
        and the blurred screen.

        This is the time of loaves
        and fishes.

        People are hungry,
        and one good word is bread
        for a thousand.

        –David Whyte

        That says it.

        The nation and our society is dying of hunger in the intellectual space…In terms of the poem, we don’t need more information, we need better thinking. That is the promise and the doings of ROS.

        I hope you’ll do more, rather than less.

        • Hi Michael, thanks for your feedback. To clarify, we do a live show at WBUR in Boston on Thursday nights. It’s not edited; the engineer takes out the music breaks in the two minute-long breaks at twenty minutes and forty minutes after the hour. We have to follow that NPR format or “clock,” which means Chris has to corral the conversation and then restart it twice during the hour.

          We all kind of felt the guests on last week’s show were kind of talking past each other. That happens sometimes when people are on phone lines and not in the studio with Chris.

          So, that’s our weekly podcast (the live weekly show). We also offer podcasts of other interviews Chris does (like Lawrence Wright most recently) which are separate from the weekly show, and we tend to let them run long and then edit for clarity.

          Do you have any favorites from our archive? We’d like to revive some of the oldie but goodies and put them into our itunes feed. Thanks for your support.

  • Michael Beaton

    The bit on capitalism? Clearly it is a philosophy/economic model that
    has come to the end of itself. One reason seems obvious to me as to why
    a discussion re is so easily diverted … that we are not talking about
    the same thing. And below the stories, details and facts, and the
    anecdotes there is a philosophy that is not being surfaced… So the
    discussion can only bifurcate into factions.

    Maybe there is a place in these conversations to try and get some fundamental descriptions, definitions and agreement as to the thing in question.

  • Cambridge Forecast

    Samir Amin and the problem of Polarization and Maldevelopment

    This ROS show on capitalism was excellent since it provides an alternative to the usual economist as hired-gun-for-the-1 percent syndrome which you experience in abundance in the DVD “Inside Job.”
    I propose the addition of the missing dimension: the link between American capitalism and (global) capitalism in America. You may remember the Galbraith book “American Capitalism” from the fifties. You may also dimly be aware of his “The Nature of Mass Poverty”. At that time, these “domains” were separate. Globalization means they’re now connected systemically ie the two Galbraith books would have to be conceptually “fused.”.

    The leading historian and analyst (politically on the Left) of capitalism and its transformations national-global-back to national is the Egyptian theorist Samir Amin who heads up UNITAR, Dakar, Senegal. He was short listed for
    the Nobel Prize several times and towers above other capitalism-watchers.

    In his 1998 book, “Capitalism in the Age of Globalization”. Samir Amin starts with the following heterodox overview where he analyzes capitalism as a national and global “polarization machine”:characterized by what he calls “maldevelopment”:

    “History since antiquity has been characterized by the unequal development of regions. But it is only in the modern era that polarization has become the immanent byproduct of the integration of the entire planet into the capitalist system.” (Samir Amin book, paperback, Zed Books, page 1-2)
    This analyst periodizes the capitalist system from mercantilism to the present and notes:

    “The most recent period (since 1990) in which the accumulation of these transformations has resulted in the collapse of the equilibria characteristic of the postwar world system.”
    “This evolution is not leading simply to new forms of polarization, but to global disorder.”
    (Samir Amin book, page 2).

    Samir Amin’s insight into the “collapse of the equilibria” mentioned above gives you a penetrating insight into why the mainstream economists seem so clueless as to what’s really happening and why the glossy textbooks by Krugman, Barro, Mankiw, et al have been overtaken by “Samir Amin” processes and thus seem curiously backward-looking and tangential to what’s really happening.

    Two comments:
    1. Samir Amin wrote a classic book decades ago called “Delinking” where he advises the developing world to jump ship and opt out of the world capitalist system since the developed world, led by America, would always find a way to re-exploit the peripheralized regions of the world.
    He also wrote a heterodox classic called “Maldevelopment.”

    Strange enough, the neocons also want “delinking” via subjugation, violence, bloodshed (Israel/Palestine being a microcosm) but from the top of the world and not the Samir Amin “bottom.”
    My Blog (Cambridge Forecast Group Blog) argues that America will in the end (after years and years of violence and techno-fantasy as best analyzed by the masterful book by Michael Adas, “Dominance by Design”, Harvard)) would evolve from these two “dreams of delinking” (ie Samir Amin and the mirror image of the neocons) towards a developmental “re-linking.”

    Relinking means a reorganized and modified relationship between “the West and the Rest.”
    The current head of the RBI (central bank of India), Raghuram Rajan (University of Chicago professor) realizes that the Fed is now the world central bank and that coordination with the developing world is a sine qua non for a stable global growth regime. (The developing world absorbs the shocks of quantitative easing and sudden tapering, etc. and that uncoordinated solipsistic American policies will in fact lock in a kind of chaos of global disequilibria a la Samir Amin. Recall the wild gyrations of the Indian rupee a few months ago and the destabilization it wrought.
    Raghuram Rajan is an orthodox analyst and doesn’t utilize heterodox analyses a la Samir Amin but he’s groping towards a Samir Amin-type overview with the utopianism wrung out.)
    2. Lastly: all of these analysts such as Amin and Rajan are groping towards a layer atop that represented by the Acemoglu and Robinson book, “Why National Fail” to get at the other dimension: why (global) systems fail.
    One needs the ‘holographic’ view of national-systemic-national. (my aforementioned Blog is an attempt at this)

    Richard Melson

    • “This evolution is not leading simply to new forms of polarization, but to global

      So they (the writers you list) see the world at equilibrium and then punctuated by chaos? The chaos of a Globalized disorder?

      A world at equilibrium punctuated by chaos is a concept of the ancients.

      I’m not sure which century to place this point in – I’Il say the 1700’s – where the world began to be seen as chaotic, punctuated by equilibrium.

  • GuestAug27

    Our elected representatives, after they cease to be on the payroll of “corporate persons”? Direct vote on key issues (peace/war) might also work.

    • andrewwiggin

      The problem with direct vote is that it is susceptible to paid propaganda. Just look at the record of verious pro-environmental initiatives launched in West Coast states and opposed by big corporations. All began with positive popular support, all were hit by massive ad campaigns — and all failed at the polls.

  • sk

    Adam Smith teaches that economic actors are “led by an invisible hand to promote an end which was no part of his intention”. This _does not_ teach that an invisible hand promotes any kind of _desirable end_, even for the economic actor himself. Yet that belief – that the unintended consequences of markets are good – blinds us to the reality: some consequences serve human needs, others are profoundly contrary to our most basic need – collective survival (think climate change). Economics must be re-purposed, manipulated and regulated so economy serves human needs, not the other way round.

  • Potter

    I really appreciated Ralph Nader in this discussion. I’m glad you mentioned his “third party activities” right out of the dugout. At first it seemed that no way is Nader ever going to be a happy man, such is his idealism and nostalgia. But by the end I was appreciative of his view and suggestions.

    Thank you for an engaging discussion all the way around.

  • Props to Ralph Nader for staying angry and outraged so late in life.
    I’m embarrassed to say I voted for him once – to do so, I must have been more
    confused than he was.
    In all the years, he hasn’t been able to pull his thoughts together in a cohesive whole.
    The blathering about the NIH was ridiculous.

    Farmer’s markets: where are you buying your kiwis, bananas, and oranges? Walnuts, almonds, peanuts etc? Your Maine blueberries?


  • Cambridge Forecast

    Capitalism and Financial Crises: Property Prices in the World System

    What do financial authorities have to say about capitalism and its global fragility?

    Here’s a quick sample from the upper echelon of such capitalism, banking and finance watchers, the BIS (Bank for International Settlements, Basel,
    Switzerland, the central bank of central banks)
    Professor Jeffrey Frieden (Harvard) wrote a book a couple of years ago, “Lost Decades”, which shows how out of control capital flows (think of global money on the move) can derange exchange rates and real estate prices and capsize whole economies as happened in the current situation in the US.
    What the Fed and Treasury did was to buy back the status quo ante at the cost of many trillions in “funny money”. Since no one visualizes anything but a world that has American shopping as its “locomotive”, you have to restore the old locomotive at all costs. (the Cambridge Forecast Group Blog shows the alternative).
    The current issue of the seminal journal “BIS Quarterly Review” (September 2014 (Bank for International Settlements) has a discussion on page 73, called, “House Prices as Early Warning Indicators for Financial Instability”
    which introduces ingenious but intricate indicators, signals, measures (mainly something called the AUC) and comments as follows:

    “How can property prices contribute to financial stability analysis?
    Work at the BIS (Switzerland central bank for central banks—RM) has pointed to the early warning indicator properties of real estate prices. Leverage-fueled housing booms that turn into busts have so very often been at the heart of episodes of systemic distress.Historical experience has demonstrated that the interactions between rapidly growing house prices and excessive credit expansion are a tell-tale sign of the buildup of vulnerabilities in the household sector and the source of future losses for banks.
    We illustrate the statistical relationship between residential price booms and systemic banking crises in the form of the AUC statistic.
    Recalling that exposure to frothy commercial real estate markets was at the
    root of many an episode of banking system stress,…(we need better) compilation of price indices for commercial property prices.

    Data on the commercial property markets are very patchy and hard to come
    by, especially across countries.”
    “BIS Quarterly Review” September 2014

    To get the nexus between global capital flows and housing bubbles, interacting with each other and then deranging stock markets, would require a global version of a real Dodd, Frank regulatory architecture, a reformed financial architecture for the whole system. Raghuram Rajan, head of the central bank of India, in the latest issue of “Global Finance” magazine warns about the great dangers of the current “non-system.”

    One has to come to grips with global financial flows and property prices (residential and commercial) or face the current new bubbles-cum-fragility “non-system’ system of rudderlessness. With 5.7 trillion dollars a day of foreign exchange trading (versus 15 billion a day in 1973!), one can’t take a Mr. Micawber attitude and rely on techno-miracles (“second machine age”) as
    salvation. Global political coordination is a prerequisite for a real exit.
    Richard Melson

  • Steep Sell-Off Spreads Fear to Wall Street
    NYT Updated, 9:10 p.m. October 15, 2014:

    “The party is over.”

    Is the party back on?


    The S&P500 SPX, +1.17% closed at a record high, having rung up a new closing high every month since June 2013, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

    The Dow Jones Industrial Average DJIA, +1.13% also closed at a record level, having hit an intraday high in morning session. The blue-chip index rose 195.10 points, or 1.1%, to 17,390.52, and recorded its biggest weekly gain in nearly two years. The Dow swung wildly during October – moving triple-digits 16 times out of 23, but still ended the month higher.

  • 03/20/2015 Nasdaq punches past 5,000; nears record close.

    Who thought the tech heavy Nasdaq would ever return to 5,000 after the bubble burst?

    The irony of receiving the above news in an e-mail was that I had just finished watching an NFB documentary about Fritz Schumacher, filmed a few months before his death in 1978.