JPMorgan’s flacks and apologists have, unintentionally, exposed the fact that their cover story – hedging gone bad – is false. JPMorgan runs the world’s largest gambling operation in financial derivatives. The New York Times reported the key facts, but not the analytics, in an article entitled “Discord at Key JPMorgan Unit is Faulted in Loss.” The analytics suggest that the latest JPMorgan cover story – it was JPMorgan’s “Achilles the heel” (based in the UK) who caused the loss – is misleading.
My wife is no longer speaking to me. She got angry—hysterically angry—over MMT. This caught me off guard. I could not understand it. She was on the verge of throwing her wine glass across the patio. She banged the glass table where we sat with her fist, which alarmed me. This began as a quiet, after-dinner conversation pursuing her casual inquiry about how my Monopolis Monopoly Post had been received.
The New York Times’ reporters covering Europe’s financial, social, and political crises continue to channel Berlin and demonstrate an ignorance of economics so profound that it rivals the Wall Street Journal’s editorial writers and columnists. On May 18, 2012 the NYT published “Rising Greek Political Star, Foe of Austerity, Puts Europe on Edge.” The problem begins with the title. It is austerity that has put Europe over the edge. The Greek leader the article discusses is one of the best hopes from pulling Europe back from self-inflicted disaster. Most of the euro zone has been thrown into a gratuitous recession and the periphery has been cast into Great Depression levels of unemployment. The title reverses the analytics and implies that if only the peoples of the periphery would silently embrace economic catastrophe all would be well with Europe.
Given the German electorate’s long standing aversion to “fiscal profligacy” and soft currency economics (said to lead inexorably to Weimar style hyperinflation), one wonders why on earth Germany actually acceded to a “big and broad” European Monetary Union which included countries such as Greece, Portugal, Spain and Italy.Clearly, this can be better understood by viewing the country through the prism of the Three Germanys, which we’ve discussed before:Germany 1 is the Germany of the Bundesbank: the segment of the country which to this day retains huge phobias about the recurrence of Weimar-style inflation, and an almost theological belief in sound money and a corresponding hatred of inflation. It is the Germany of “sound finances” and “monetary discipline”. In many respects, these Germans are Austrian School style economists to the core. In their heart of hearts, many would probably love to be back on an international gold standard system.
Michigan Governor Rick Snyder secured passage of “Public Act 4, the Local Government and School District Fiscal Accountability Act. The Act allows the Governor to appoint emergency managers (EMs) for any government in Michigan. The EM has unlimited dictatorial powers. He can – and the EMs appointed by Snyder have exercised this power – effectively eliminate the elected government. Republicans have blocked a challenge to this remarkable law; arguing that the petitions had too small a font. Snyder has used the EM power to take over primarily cities with African-American majorities.
Chris Savage, writing in The Nation, quoted the Benton Harbor EM’s putsch:
In April the Benton Harbor EM, Joe Harris, decreed: “Absent prior express written authorization and approval by the Emergency Manager”—himself—‘no City Board, Commission or Authority shall take any action for or on behalf of the City whatsoever other than: i) Call a meeting to order, ii) Approve of meeting minutes, iii) Adjourn a meeting.’” The move in effect abolished Benton Harbor’s elected City Commission and replaced it with an unelected bureaucrat, perhaps the first time this has happened in US history.
I grew up in Michigan so I follow Snyder’s assault on democracy and African-Americans fairly closely. I can now report that European “austerians” are following Snyder’s lead.
Why does it seem like there isn’t enough money to pay for the things we really need? The headlines are filled with stories about our nation’s “debt problem” and dire warnings about our impending “bankruptcy.” As an architect who fills his waking hours thinking up all kinds of wonderful things we could be building, I’m alarmed by the idea there isn’t enough money to pay for any of them. Before wasting more time dreaming, I had to find out: Is it really true? Are we really too poor to put America back to work making and building the things we need to maintain a prosperous nation?
Searching for an answer, I discovered a small (but growing) group of economists (see here, here, here, here, here, here) who represent an emerging school of thought known as “modern monetary theory” (MMT). These men and women are valiantly trying to make us all understand a paradigm shift that occurred some forty years ago, when the world abandoned the gold standard. Their key insight shocked me: A sovereign government is never revenue constrained when it is the Monopoly issuer of its own pure fiat currency; it has all the money that’s needed to put its citizens to work building anything—and providing any service—that is desired by the public (provided the real resources are available). Even more remarkable, sovereign “deficits” in the fiat currency are just the accounting record of the surpluses that have been injected into the private economy. Eliminating the sovereign currency deficit by imposing austerity will not make the economy healthier; it will, in effect, bankrupt the citizens!
Jonathan Macey is one of the world’s most vitriolic opponents of effective financial regulatory cops on the beat. Those regulatory cops on the beat are essential to prevent a Gresham’s dynamic. When cheaters prosper markets become perverse and bad ethics drives good ethics from the markets. Macey’s argument relies on his assertion that we do not need financial regulators because he asserts that the industry is self-correcting because its officers are reliably dedicated to the interests of its customers due to their desire to maximize their executive compensation. His desired anti-regulatory policies have by and large triumphed over the last 30 years, producing the increasing criminogenic environments that drive our recurrent, intensifying financial crises. His assertions have been repeatedly been falsified by reality in those crises, but the worse his predictions fare the more dogmatic and snide he becomes in attacking those whose predictions have proven correct.
The usual apologists have rushed to the defense of Jamie Dimon, JP Morgan Chase’s CEO, after he announced that JPMorgan lost over $2 billion on purported hedges. The academic apologist-in-chief, Yale Law’s Jonathan Macey, is outraged that anyone is concerned about these matters. Macey, channeling Dimon’s flacks, asserts that the facts are as follows:
“The sole purpose of hedging is to reduce risk. The particular trades that J.P. Morgan was making were designed and intended to protect the bank’s balance sheet against losses from its exposure to the apparently increasing risk of some of its European assets, including approximately $15 billion in European distressed debt.”
My prior column explained why the purported hedge was not a hedge but a speculative investment in derivatives in contravention of the purpose of the Volcker rule. This column makes two more basic points. First, if JPMorgan’s “sole purpose” was “to reduce risk”, particularly of “$15 billion in European distressed debt” – why didn’t it sell the distressed debt? That would have eliminated the risk, which is far better than “reducing” risk. A true hedge would lock in any loss in the “European distressed debt” so the vastly better strategy if JPMorgan’s “sole purpose” was to “reduce risk” was to sell the inherently extremely risky assets. Even a true hedge is rarely perfect and has some risk of performing poorly, so selling “distressed” assets was unquestionably the superior alternative if one believes (and I don’t) Macey’s assertion that JPMorgan’s sole purpose in dealing with the distressed debt was minimizing its risk.
By Payam Sharifi The author is currently pursuing his Ph.D. in Economics and Public Administration at the University of Missouri – Kansas City
One of the most common observations I make as I frequent the comments section of MMT blogs are the arguments in objection to it. When one mentions “keystrokes”, these posters immediately think of Weimar Germany and machines printing money and throwing them out into the streets (via helicopter or otherwise). After these commentators understand (through the help of other posters) that MMT notes that inflation is the only possible constraint to the issuer of a sovereign currency, they typically have their “gotcha” moment. Quantitative Easing (QE), they note, has been responsible for higher commodity prices and hence, MMT’ers are a bunch of crazy fanatics who want to turn the nation and the world into Weimar (or Zimbabwe). The even larger implication is that enacting goals for the public purpose is not something the government should be involved with. The view that QE is responsible for higher commodity prices is not entirely without merit, but not for reasons typically ascribed to it. By understanding the institutional aspects that MMT describes, one will understand not only the real transmission mechanism but also some other problems and solutions associated with higher energy prices. This post makes an outline of these issues.