Professor Kuttner’s Indictment

December 20, 2014 § Leave a comment

I recently finished reading “Debtor’s Prison”, the latest of several books written by Robert Kuttner, editor of American Prospect magazine and visiting professor at Brandeis University.   This was a recommendation from professor Milton Lower, my economics mentor.

This is an angry book but the writer does not waste space expressing his anger.  Instead he paints a vivid picture of a four-century history of stupidity, avarice and oppression that is well calculated to evoke anger in any reader equipped with even a vestigial conscience.

The History of Bankruptcy Law

The book guides you through a history of bankruptcy law,  various economic booms and busts and governmental reactions to them.  It is laced with nuggets of interesting details.

For example, did you know that Daniel Defoe (yes, the one who wrote Robinson Crusoe), played a significant role in redesigning English bankruptcy law by injecting the idea that it might be wise to let defaulting debtors remain free to work and earn money with which to pay their debts, instead of leaving  them to rot in jail?  Neither did I until I read this book.

I will not try to summarize the history that Kuttner narrates.  His thesis is that bankruptcy law was historically designed to rescue investors and business proprietors whose choices and judgments proved to be disastrous.  Individuals, by contrast, who, for whatever reason, found themselves unable to pay debts incurred to finance their consumer purchases, their rent or other private obligations, were regarded as immoral wastrels entitled to no remedy except confinement in prison.

Government Debt

About two-thirds of Kuttner’s book concern the treatment of government debt.  He contrasts two different political reactions to government debt.

The Austerity Solution

One reaction is based on fear that government debt will lead to inflation by increasing the money supply and hence, reduce the value of wealth, including bonds and other forms of contractual debt (e.g. mortgages).  This causes the wealthier segment of society to pressure government to reduce debt.

There are two ways to do that:  raise taxes and cut expenses.  Because we have a progressive tax system, raising taxes is despised even more than government debt by those with wealth.  So, austerity is the constant battle cry of the wealthy, especially the rentier class, whose wealth and income consists of holding and manipulating financial obligations, not producing real goods and services.

The Consumer Demand Solution

The solution favored by Kuttner is to use government expenditures to transfer wealth, obtained either through taxation or by incurring more debt, to the working class segment of society, thus facilitating their demand for goods and services, thus creating more income for those whose businesses satisfy that demand, thus increasing taxable revenue  and thus enabling government to reduce its debt.

In other words, to Kuttner, austerity remedies for excessive government debt is like using gasoline to put out a fire.

The Moral Argument

One idea that recurs throughout Kuttner’s book is his rejection of the argument that affording relief from debt is immoral.  He identifies this morality argument as the basis for many of the harmful policies adopted by governments to deal with debt problems.  He recounts and discusses the Rick Santelli rant that triggered the launch of the Tea Party in U.S. politics.  As the collapse of the housing bubble began, Santelli erupted in a televised angry spiel, complaining that improvident home purchasers should not be helped because that would be unfair to others who had not defaulted on their mortgages.

As Kuttner notes,  Santelli stupidly failed to mention that fire sales of foreclosed homes would drive down neighborhood home values, regardless of whether the owners were current on the their mortgage payments.

Another example:  After WWI, Britain, France and other allies spent decades trying to punish Germany for its “war guilt” by requiring it to pay a huge “war debt”.  This was obviously impossible, because the war left Germany economically prostrate, but the victorious nations, like stupid Santelli, failed to perceive the generalized damage to the entire European economy caused by keeping Germany from regaining economic stability and resuming trade with its neighbors.

Kuttner contrasts the treatment of Germany following WWI with the treatment of Germany, Italy and Japan following WWII, when the Marshal plan and other measures designed to restore their economies to economic health proved beneficial, both to them and to the economies of the allied nations who had defeated them in the war.

Kuttner also identifies the policies of Angela Merkel and her influence on the European Union’s policies toward Greece, Italy and Spain.  He recounts how her insistence on stringent austerity requirements as a price for the EU’s assistance to those struggling economies needlessly condemned their populations to impoverishment and hampered their ability to recover from their financial problems.  Chancellor Merkel, according to Kuttner, suffers from the Santelli stupidity virus.  By extending their impoverishment, their EU trading partners suffer from diminished export markets.

Kuttner also recounts the history of the IMF, beginning with its Bretton Woods birth, when it promised to be a useful central bank with resources available to restore nations from economic crises.  He describes how it was overtaken by bankers who subscribe to the Merkel-Santelli doctrine.  Now it requires that, in exchange for its help, a country must condemn its population to decades of poverty and deprivation.

As a result, in the wake of the current world-wide recession, some nations, notably India, have refused to deal with the IMF, preferring instead to cope with their economic problems with policies of their own.  As a result,  their recovery has been less traumatic and quicker than their neighbors’, who received “help” from the IMF.

Pete Peterson – Man of Many Wrecking Crews

Kuttner’s book includes a remarkable description of how a single wealthy man, Pete Peterson, has been able, over several decades, to be a significant force behind a wide array of America’s fiscal and economic policies.  Kuttner catalogs a remarkable number of ways this billionaire has managed to pick cabinet members, influence Fed policies, buy college and university curricula designed to indoctrinate generations of business school graduates and economists with Peterson’s right-wing ideology.

In this brief summary I can’t do justice to Kuttner’s carefully researched list of Peterson’s accomplishments.  I can only assure you that, as described by Kuttner, Peterson makes the Koch Brothers look like amateurs.  The Kochs merely buy politicians.  Peterson buys the minds of thousands of people who occupy jobs where they can do more damage in a month than a U.S.Senator can do in years.

Referring to Peterson, Kuttner writes:

“A former commerce secretary under Richard Nixon, he is personally close to Democratic economic eminence Robert Rubin.  The two have long promoted the idea of a grand fiscal bargain in which Democrats agree to cut social insurance and Republicans agree to higher taxes.  Peterson served as chairman of the Council on Foreign Relations, and in 2002 he led the search committee that successfully recommended Rubin protege Timothy Geithner as president of the Federal Reserve Bank of New York.  One can assume that Geithner, later Obama’s Treasury secretary, returns Peterson’s calls.

Peterson has spread his money around, giving over $50 million dollars to the influential Institute of International Economics, long headed by Democrat C.Fred Bergsten.  The outfit was duly renamed the Peterson Institute For International Economics, a separate entity from the Peterson Foundation.

This is by no means all of Peterson’s accomplishments.  It is troubling for me to realize how much this man has been able to buy adherence to his ideas and to insinuate them into the operational policies of America.  It is troubling because, as described by Kuttner, they make not the slightest sense except to enrich the wealthy and beggar the rest of us.


This is a useful and important book.  Its revelations enable you to see today’s political debates with a new pair of glasses.  My comments have covered only a small taste of the information in it.  I recommend it if you crave the ability to understand some of the context surrounding the current debates about the deficit, tax reform and the global economic market place.







Which Side Are You On?

December 13, 2014 § Leave a comment

The Scandal

As I write this, the United States Senate is debating a measure that would weaken Dodd-Frank’s regulation of  Wall Street banks, increase the amount of money a single donor can contribute to political parties and enable employers to reduce pension payments of retirees after they retire and have earned their pensions.

These outrages are attached to a budget bill whose passage is required to keep the government operating.  None of these dishonest and unwise amendments have anything to do with the budget.  They were attached to the budget bill by anonymous members of the House of Representatives at the behest of Citigroup.  There was no committee hearing.  There was no opportunity to vote on them separately.

In other words, they were so obviously the result of corruption that their sponsors would not own them.  They could only be adopted as part of a legislative blackmail scheme.

This is not, however, the real scandal.  The real scandal is that this dishonest scheme could only proceed with votes by Democratic Party members.  The bill passed the House by a narrow margin, including aye votes by 57 Democrats.
[I note with some satisfaction that no Texas Democrat voted “aye”.]

No, that is really not the real scandal.  The real scandal is that the only two elected officials who are personally identified with pressuring members of Congress to agree to these outrages are named Barack Obama and Joe Biden .  Yep.  Some things are too dishonest to make it, even given the present sorry state of our politics.  So you have to bring out the Big Guns, the Prez and Vice (pun intended).

How did this happen?  Well, we get the usual explanation.  It was a compromise; the best deal we could get.  If we don’t go along, the President won’t be able to work with Republicans on other matters.

Whoa!  Say what?  When has the President been able to work with Republicans on anything significant?  What makes anyone think this will improve in a few weeks when the GOP majority will become filibuster proof?  Just how stupid and naive are we suppose to be?  Will this be an adequate explanation for the retirees whose pensions will be decimated?   When the power of the Koch Brothers and others like them is used to gain even more control of our political parties, will we view the results and say, “Well, it’s bad, but it was worth it to avoid an ugly argument about the 2014 Budget Bill.”

The Perpetuation of “Too Big To Fail/Jail”

Dodd Frank addressed a problem that confronted us when the Wall Street Banks faced insolvency because of their fraudulent marketing of mortgage based derivatives.  They used depositor money to finance those derivatives.  If they became insolvent, the taxpayers would have to make the depositors whole because of the FDIC insurance program.  That is, the taxpayers would belatedly finance the reckless greed of the Wall Street pirates.

Dodd Frank cured this by requiring that future trading strategies that depend on derivatives and Byzantine schemes involving  sketchy tools like credit-default-swaps, that look like insurance but have no reserves, would have to be conducted by entities separate from FDIC insured deposits, with money other than depositor money.

In other words, the ones who profit from high-risk gambles would have to risk their own money, not FDIC-insured depositor money.

Predictably, this was regarded as a terrible idea by the high-risk gamblers.  They have become addicted to the system of “If I win, I pocket the money.  If I lose, you pay for the loss.”  So, Citigroup, acting for the other pirates,  just wrote a solution to their problem, forwarded it to some elected officials  they owned, who transcribed it into an amendment to the budget bill.  Their solution is part of the bill Obama and Biden have been frantically calling House and Senate members about, begging them to vote “aye”.

Thank God For the Women

Nancy Pelosi was left out of the negotiations that led to this piece of garbage.  She did not join the cheer leaders who whooped it through the House.  But the one who has filled a gaping chasm where the political soul and conscience of the Democratic Party once rested, is Elizabeth Warren.  What a thrill to see a Senator who has not forgotten how to express moral outrage.  And knows how to do it while exhibiting a razor sharp wit and a mind to match.

When she spoke on the floor of the Senate, looked squarely into the camera and addressed Citigroup, the sponsor and author of the Dodd-Frank gut job, and said, “I agree with you.  Dodd-Frank is not perfect.  It failed to break you up into small pieces.”, I just about fell in love again, despite 65 years of marriage.  She is a wonder!

Which Side Are You On?

This episode reminded me of an old union song I taught my daughters to sing when they, and I, were young.  It was written in 1931 by Florence Reese, the wife of a coal miner in Harlan County, Kentucky, during a bitter strike.  The Harlan County Sheriff was J.H. Blair, an enforcer and strike breaker for the mine owners.

One night some of Blair’s thugs stormed into the Reese home, looking for Sam Reese.  He had been tipped off and was not there.   They terrorized his wife Florence and his children but didn’t get Sam.

After they left, Florence, angry and scared, wrote a song on the back of a calendar, expressing her devotion to the union and her contempt for those who failed to support the strike.   Here is a link to Pete Seeger and his banjo, singing Florence’s song:

Whose Side Are you On

While watching CNN and MSNBC about this budget episode, I kept getting madder and madder and I remembered that old song.  So I wrote my own version:

In our US Congress
There are no neutrals there
You either vote your consciences
Or whore for billionaires

Which side are you on?
Which side are you on?
Which side are you on?
Which side are you on?

Obama we’re in danger
The wolves are at our door
We don’t need reasoned argument
We need a two-by-four


Barack Hussein Obama
How dumb can you get?
A shepherd cannot safely try
To make a wolf a pet!


It’s time to rein in Wall Street
Our country’s not for sale
At ballot box and in the streets
We must fight and prevail.


Thank God for Betsy Warren
She speaks for us out loud
She does not hedge or compromise
To blend in with the crowd

No go along to get along,
She hews to moral rules
She tells it straight and tells the truth
She has no time for fools


I don’t yet know how this drama will end, but I’m not optimistic.


Hightower on ISIS

December 8, 2014 § 1 Comment

Jim Hightower is a friend of mine. He edits and publishes a newsletter called Hightower Lowdown.  I recently discovered it.  Jim combines a seasoned political mind and a Molly Ivins sense of humor.  A few decades ago, in 1982, before Texas became a Republican stronghold, Jim was elected Texas Commissioner of Agriculture.   In 1990 he was defeated by Rick Oops Perry.

He was on Senator Ralph Yarborough’s staff for awhile; edited the Texas Observer for awhile; and has never stopped working to promote political common sense and economic justice.

I write with two purposes:  First, spread awareness of his newsletter.  Subscription costs are modest and the ideas deserve wider distribution.  Second, to make available Jim’s reaction to Barack Obama’s War on ISIS. His statement, as usual, is both thoughtful and delivered with scathingly targeted humor.  Here is a link:  Lowdown.

I’m not sure but I think Jim was the author of one of my favorite political adages:  There’s nothing in the middle of the road but dead armadillos.


The Ferguson Farce: It’s Worse Than I Thought

December 3, 2014 § Leave a comment

I just watched Lawrence O’Donnell’s program aired last night on MSNBC.  He presented a segment about the way an Assistant District Attorney advised the grand jury concerning the law pertinent to Daren Wilson’s killing of Michael Brown.  He quotes excerpts from the transcript to show that the grand jury was given a copy of the Missouri statute stating the legal standard according to which Officer Wilson’s conduct should be judged.

The statututory standard in that statute was declared unconstitutional by the U.S. Supreme Court in 1985.  It immunized a police officer for killing a person if the person was fleeing from the officer, regardless of the nature of the crime for which the officer was seeking to arrest the person.

Weeks later, the Assistant D.A., as the grand jury was finishing its deliberations, handed the grand jury a copy of the current applicable statute.   She did not tell them the reason why the statutory standard which had governed their judgment during the previous several weeks had been declared unconstitutional.  She just left them to figure it out.

Here is a link to O’Donnell’s presentation of this evidence of prosecutorial misconduct:  Ferguson Farce

I urge you to watch it.  There was never a chance for justice for Michael Brown.  The grand jury unwittingly applied a law declared unjust and unconstitutional thirty-seven years ago.


The Hulk Hogan Confession

November 25, 2014 § 1 Comment

In the aftermath of the farcical grand jury episode in Ferguson, Missouri, I am frustrated at the focus of attention on blood trails and whether the kid was moving toward the cop when the cop emptied his pistol into him.

I think the crucial event occurred in the police car in the few seconds before the cop got out of his car, his pistol drawn, and pursued Michael Brown.  The cop told the Grand Jury that, while he was in the police car, he and Brown struggled.  He said Brown tried to grab his pistol.  He said the pistol discharged twice.  We know that one of those shots hit Brown in the hand.  Describing those events, the cop said that he felt like a five-year-old struggling with Hulk Hogan.

In other words, the cop said that he realized, while he was still in the police car, that he was physically incapable of subduing Michael BrownThen, Michael Brown ran away from the police car.  The cop was absolutely safe.  He was in the police car.  He had a radio.  He could call for help.  He had Mace.  He had a truncheon or “billy club”.  He was within a few minutes drive of police headquarters.  During those few seconds, he had to make a choice:   Should he call for help?  Should he try to catch Brown and subdue him with Mace?  Did he think he might be able to arrest Brown by using his truncheon?

He rejected all those alternatives.  Knowing that he was incapable of physically subduing Brown, the cop, his pistol in hand, got out of the police car and pursued Brown.  When he made that choice, he formed the intent necessary to convict him of premeditated murder or, if we assume he was acting in response to overwhelming rage due to the pummeling he had endured at the hands of Brown, maybe involuntary homicide.  One thing is plain:  He was not acting in self-defense.  He was guilty of homicide.

The particular circumstances that surrounded the actual shooting are interesting but they are not crucial.  That encounter was caused by the cop, not Michael Brown.

I have now heard that the cop claimed he felt bound to pursue Brown because he thought Brown might assault innocent citizens.  The circumstances do not support that lame excuse.  When the cop first saw Brown and a companion walking down the street, they did not appear to be prowling around looking for people to assault.  He just told them to move to the sidewalk.  They were jaywalking.

At a trial, the cop could try to convince a jury that, feeling like a five-year-old challenging Hulk Hogan, he was so concerned about protecting others from Brown that he felt it was necessary to kill Brown.  He already knew that the only way he could control Brown was to kill him because Brown was beyond his physical ability to handle.

Another thing that makes me believe the cop was guilty of premeditated murder is the fact that he went through the farce of yelling “get down” “get down” before killing him.  He had absolutely no reason to believe, based on the encounter in the police car, that Brown was likely to become docile and obedient in response to this cop who had just shot him in the hand.  The “get down” yell was just going through the standard preparation for the killing.  Like most cops, this one probably believed that failing to obey the directions of a peace officer is sufficient basis for using deadly force.  This is not the law, but the false belief that it is, leads to numerous deaths at the hands of lawless cops.

The cop’s Hulk Hogan admission was a confession.



The Perils of Easy Money

November 22, 2014 § 2 Comments

The House of Debt

I just finished reading a book recommended by my friend, Milton Lower.  The book is The House of Debt by Atif Mian, professor of economics and public policy at Princeton, and Amir Sufi, professor of finance at the University of Chicago.

This is a short, well written book about the  the housing collapse that precipitated the Great Recession of 2008.  The writers identify the causes and recommend some policy changes that would prevent such calamities.

Their approach is similar to Thomas Piketty’s:  They base their conclusions on carefully compiled and analyzed data.  They patiently consider and discredit causation theories other than theirs and cite data-based reasons for rejecting them.

What Caused the Housing Market to Crater?

The authors present and reject three  views about the causes of recessions.  The first, and most popular, is the “fundamentals” view:  That some disaster, radical political upheaval or other unexpected catastrophe caused it.  But  no such event occurred in 2007 to trigger the recession.   The second is that “animal spirits” cause it.  That is, buyers were guilty of “irrational exuberance”. They foolishly believed prices would endlessly rise.  When they realized their folly, they panicked and the recession followed.  Finally, some have argued that banks were to blame.  They stopped loaning money thus thwarting economic expansion and the recession followed.

The authors offer convincing evidence that the latter two ideas don’t fit the facts.  They cite ample statistical evidence that residential housing prices in some areas of the country sharply increased between 2000 and 2007.  That price inflation followed a dramatic relaxation of requirements for mortgage loans, which fueled the price inflation of houses.  That is, far from withholding loans, the banks eagerly offered money to borrowers, including many  who, until the requirements were lowered, could not qualify for mortgage loans.

So, it was not “animal spirits” that caused the recession.   It was lending money to people who lacked income to pay it back.  Then, when defaults occurred, foreclosures followed, foreclosed homes depressed housing prices in surrounding neighborhoods and the downward spiral led to a general collapse of housing prices, diminished consumer demand and, hence, the Great Recession.

How Did The Housing Collapse Cause the Recession?

When residential housing prices fell, some owners continued making mortgage payments on homes that were worth less than the debt balances secured by them.  Others walked away and tendered their homes for foreclosure.   In either case, the principal assets of a giant class of homeowners, equity in their homes,  were devalued and, in many cases, wiped out.

There were two classes of people involved in these transactions:  The homeowner borrowers and the investor lenders who deposited their money in banks, who made the loans secured by the mortgages.  The impact of the housing downturn was not equally distributed.  For most of the homeowners, their only assets, the equity in their homes,  were destroyed.  For the investor lenders, their losses were only a  fraction of their total wealth, which typically included stocks, bonds, investment real estate as well as their homes.  Their losses did little or nothing to affect their propensity to spend and to maintain their lifestyles.  The homeowners, by contrast, sustained close to total asset losses and they significantly cut back their spending.

The less wealthy homeowners’ propensity to spend was greater than that of the wealthier investors.  That is, they spent a greater percentage of their income than the more wealthy investors.  So, when the far more numerous homeowners lowered their rate of spending, the impact on the total demand for goods and services in the economy was significantly affected.   In other words, the downturn in the housing market sparked a general downturn in demand throughout the economy and the Great Recession resulted.

What Was The Reason for the Relaxation of  Credit Requirements?

This is the most interesting part of the book.

In 1990, the financial markets in Thailand, in the words of Mian andSufi, “went berserk”.  There was a frenzy of inflation and speculation.  The price of real estate escalated wildly.  Foreign investors flooded Thailand with Dollars and Thailand banks grabbed them like ravenous wolves.  In due course, the bubble burst.  The foreign investors began withdrawing their money from the Thai banks.

Because the foreign investments were made in Dollars, they demanded withdrawals in Dollars.  The Thai banks did not have enough Dollars to meet th0se demands.  To avoid a complete collapse, the central bank in Asia tried to respond by making Dollars available to the desperate Thai banks, but they lacked sufficient stores of Dollars.  So, they had to appeal to the IMF [International Monetary Fund] for help.

That help came with draconian requirements for painful austerity that plagued  for decades those Asiatic central banks and the economy which they supported

Having learned a bitter lesson about the importance of ample caches of Dollars, the banks in Asia began to flood American banks with purchases of U.S. treasuries.  Instead of responding to this influx of money by lowering the interest rate on treasuries, the U.S. central bank chose to use that flood of cash to funnel money into the home mortgage market.  To accomplish this goal, it allowed and encouraged banks and other lending agencies to create mortgage backed assets and to market them as derivative securities.

This proved to be so profitable for Wall Street dealers in these securities that they sought more and more mortgages from banks.  To satisfy the demand for mortgages, the banks lowered the requirements for obtaining mortgages.  This opened up a large market consisting of people whose incomes had theretofore been too low to qualify for home ownership.  This increased demand for homes, which resulted in increased home prices.  The Wall Street bankers designed a wide assortment of complex combinations of mortgages and  constantly pressured the banks to make more and more home loans to meet the demand for mortgages as fodder for the MBA’s.

The riskier mortgages made to low income borrowers were cleverly matched with safer groups of  mortgages so that rating agencies could stamp the resulting cluster with AAA ratings.  [I have described this widespread finagling in an earlier post entitled “The Bankenstein Fiends”]  So, a mix of different risky and, in some ways, fraudulent schemes, combined to blow up the bubble that, when it popped, threatened the entire financial system of the Western industrial world.  Crazy financial speculation 7,000 miles east of the United States thus triggered  a series of events that ended in the Great Recession.

Cui Bono?

Wall Street banks made gigantic profits from the creation and marketing of the MBA’s.  They not only made money selling them, they made money using market devices that enabled them to profit handsomely when the MBA’s were finally exposed as having been flagrantly misrepresented and mistakenly rated.  They made money by selling the MBA’s and, when the value of the MBA’s lost value, they made more money.

There is a well known principle of equity, developed centuries before the birth of our country by judges sitting on the wool sack in English courts of Equity:  No one may profit from his own wrong.  This simple rule, so fundamental to any system of justice, was not only ignored, it was denounced as unwise and un-American by the ex-Wall Street bankers who advised both President Bush and President Obama when, amid a crisis, judgments had to be made about how to avoid a collapse of the financial system.

When the Wall Street banks were facing collapse the federal government had a choice:  It could use taxpayer money to bail out the banks or it could take them over, wipe out the stockholders and enable the banks to continue performing their vital role in the domestic and the international financial system.  This latter choice would have allowed the government, acting through the banks, to relieve the homeowners facing financial disaster by allowing them to postpone mortgage payments, reduce the principals of the loans secured by the mortgages, or both.

Presidents Bush and Obama chose to bail out the banks and leave the homeowners to their fate.  Billions of dollars were handed over to the banks with no strings attached.  The bankers suffered no losses.  Instead of making changes in the mortgages to alleviate the homeowners’ financial problems, they used their blank check on the U.S. Treasury to fund record bonuses and watch their stock prices soar.

The net effect of these policy choices was a giant transfer of wealth from those at the low end of the wealth spectrum to those luxuriating at the very top.

The Solution

Here is a brief summary of the remedy proposed by the authors of this book:  They proposed a revision of the standard form of a residential mortgage.  The new mortgage would be a Shared Responsibility Mortgage or SRM.  It would provide downside protection for the mortgagor and corresponding benefit to the mortgagee.

If the value of the home decreased, the monthly payments would decrease proportionately.  The extent of the decrease would be calculated by the average price of homes in the immediate neighborhood surrounding the home.  The authors observe that extant agencies are already capable of monitoring those values in zip code areas.  Regardless of the size of the monthly payments, the amortization table based on the original price of the home when the loan was made would remain the same.  So, the effect would be the reduction of the amount being repaid.

The mortgagees would be protected by an entitlement to five percent of the sales price when the home is sold.  The timing of the sale would be left to the homeowner but, if the lender had a diversified group of home mortgages in its portfolio, the five percent entitlement would result in a steady stream of return on its overall investment.  The homeowner would sustain the five percent loss, but that would represent the value of the built-in insurance against loss of equity in case of a price drop.

The underlying thesis of the book is that housing bubbles cause general economic recessions because they result in losses of consumer demand that affects the entire economy.

For example, they point out that the tech bubble that popped in 2,000 caused many to lose money, but it did not cause a recession because the losers’ propensity to consume was not significantly affected.  But the housing bubble of 2008 threatened a general collapse of the financial system.

The authors make a point that is obvious, but one I had never fully appreciated:  The problem with debt, whether it’s mortgage debt or student college debt, is that, as presently designed, it is inflexible.  When the economy experiences turbulence, the borrowers have no way to survive because their debts are like anchors that sink them.

The authors contend that recessions can be avoided if our most common debts are redesigned so that borrowers can continue to consume without sustaining crippling losses of their assets.  When consumer demand is maintained, businesses will not be forced to lay off employees.  In other words, redesigned debt documents will serve as an efficient method of distributing economic stimulus.  Instead of waiting until the economy is in recession and millions of workers have lost their jobs, the authors propose measures to avoid the job losses by maintaining consumer demand.

The authors also propose rewriting the documentation for student debt to make its repayment dependent on the job market at the time of graduation and thereafter.  They offer persuasive arguments that all pervasive debt should be designed to adjust in response to prevailing economic conditions.  They call it “equity financing”.


I have not done justice to this book.  I can only offer a taste and a suggestion that you read it.  It is packed with interesting statistics and historical examples.  It also is an example of some very sharp and disciplined analysis presented in an easily readable form.  These guys are probably wonderful teachers.  They are masters at making dense economic data interesting and understandable.  If I were Thomas Piketty, I would incorporate their proposals into my remedy for wealth inequality.






How To Incite Violence

November 22, 2014 § 1 Comment

In response to the murderous attack on Jews worshiping at a Jerusalem synagogue, Netanyahu ordered the demolition of the family homes of the two murderers.  He also ordered the demolition of the family homes of two others who recently committed violent attacks in Jerusalem.

All of the attackers are dead.  The razing of their homes does not punish them.  It punishes their families.  The United States has declared this reaction by Israel “counterproductive”.   Germany, France, Italy, Spain and Great Britain have denounced it.

This kind of collective punishment is a continuation of the policy that produced the war on Gaza that destroyed thousands of homes and killed over two thousand Palestinian civilians in response to mostly ineffective missiles launched from Gaza into Israel.

Here is a link to a Haaretz article that describes the issue:  Demolitions

I believe this persistent policy raises an ethical policy well known to lawyers:

A client is entitled to be zealously defended by his lawyer, regardless of how immoral or illegal his conduct has been.  But a lawyer may not, in any way, facilitate a client’s engagement in illegal or immoral conduct.  If he does, the lawyer becomes complicit in the illegal or immoral activity.

I believe Israel has placed the United States squarely in the middle of this dilemma.  We continue to furnish arms, supplies and money to Israel while Israel continues to engage in conduct that offends basic rules of fairness and  justice.  Collective punishment imposed on innocent people in response to violent acts by individuals violates international law.

This latter principle is sometimes subject to nuanced exceptions.  For example, when a drone bombs a house to kill an enemy, innocent people are often killed.  Such tragedies are excused as “collateral damage”.  In my opinion this excuse is a lame one in some instances but, regardless of that argument, the Israeli policy of home demolition is different.  The home demolitions ordered this week are specifically aimed at innocent victims.

We impose “sanctions” on Iran and Russia when they pursue policies that violate our values.  I think we should consider whether sanctions should be imposed when Israel does the same thing.

It also seems chutzpah  for Netanyahu to accuse Hamas and Mahmoud Abbas of “inciting” the violent episode at the Jerusalem synagogue.  The “incitement” is plainly related to the brutal occupation of Palestine by Israel, the expansion of illegal settlements on the West Bank, the network of checkpoints that serve as daily interference with normal travel by Palestinians and conflicts between Jews and Muslims at Jerusalem’s holy sites.  The demolition of homes of families who had nothing to do with the crimes committed by two now dead family members will certainly incite more violence.

One final thought:  Suppose, after two brothers bombed the Boston Marathon, Barack Obama had ordered the demolition of their families’ homes.  Do you have any doubt that a federal court would have granted a Temporary Restraining Order, prevented the demolition and probably ordered an immediate psychiatric examination of Obama to see if he was deranged?

During the recent Israeli war on Gaza, Netanyahu often said, “How would you Americans react if Mexico was lobbing missiles into your country?”   It was an effective argument because our history is replete with disproportionate responses to minor events.  The explosion on the Maine and subsequent war against Spain; the naval bombardment of Vera Cruz on 1914, in response to the arrest of 6 sailors in Tampico; and the assault on Ft. Sumter triggering the Civil War come to mind.  But I’ll bet he doesn’t make a similar argument about the home demolitions, because we have a legal system that wouldn’t permit it and a set of values that wouldn’t condone it.  We don’t punish the families of wrongdoers.


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