Tag Archives: Wall Street

Who’s the Fiscal Conservative Now?

Dollars and Cents

Dollars and Cents (Photo credit: kahunapulej)

The Senate is about to pass a bill that the CBO estimates will cut the deficit by $197 billion over the 10-year 2014–2023 period, but there are those from a certain party who won’t vote for the bill unless additional spending of $30 billion is added to the bill. That party is the Republican Party.

Based on the way the Republican Party likes to brand itself as the party of fiscal conservatism and the way they like to brand their opponents as “tax and spend” liberals, it is a little odd that it is members of the Republican Party who are the ones who are insisting on adding $30 billion of government spending.

It is a little odd but not a lot odd. This is the pattern of the Republican Party: they like to talk big about being conservative spenders and deficit hawks, but history shows that they are quite fond of adding to government spending so long as it is for stuff they want the government to spend its money on.

They like government to spend money on “security.” Heck they created a whole new branch of government: Homeland Security. Recent estimates are that this new department has cost us $791 billion since it began ten years ago. Even adjusting for inflation that is more money than we spent on the New Deal.

Republicans also like to spend money that end up in the coffers of corporations rather than in the pockets of individuals. When individuals benefit, their stock portfolios don’t perform nearly as well as when they use tax dollars to churn up business for publicly owned companies.

The stock market has swooned over the past few days at the thought that the Federal Reserve might soon end its stimulus package for banks and corporations. The American people only got an anemic stimulus package 5 years ago, and Republicans are blocking any consideration of doing more. One of the reasons, among many, is, I believe, that the Federal Reserve  ties its stimulus for banks and corporations to the unemployment rate. The party for Wall Street ends when people go back to work, so why would Republicans want people to go back to work?

Dominique Strauss-Kahn, Julian Assange & “Inside Job”

Dominique Strauss-Kahn (French socialist polit...

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I recently watched “Inside Job” for the first time. That was the winner of the 2011 Best Documentary, Features Academy Award, and it details the financial meltdown of 2008. I would recommend this documentary to everyone.

What I appreciate most is how it doesn’t play favorites among our two parties. This film shows how every president since Reagan has been part of the problem by hiring Wall Street insiders to positions of power within the government’s financial regulatory agencies.

This film interviews many people. Some are defensive while others are willing to criticize what was going on. One of those who criticized what had gone on was Dominique Strauss-Kahn. The day after I saw this film, I learned that he has been accused of raping a woman. I remembered him from the film, and I thought “what a shame” and “how horrible”.

The juxtaposition of these experiences about this person settled and digested a bit until I finally began to wonder about a conspiracy. My mind immediately connected to Julian Assange. Here are two foreigners who after criticizing or damaging the reputation of the U.S. government have been put away on charges of rape.

I am not a fan of conspiracy theories because I feel like they feed on paranoia and resist evidence to the contrary. On the other hand it is certainly true that sometimes conspiracies do exist. Even if my worst fears are true and these men were set up, I don’t really see this as a full-blown conspiracy, but it smells like one.

Someone with a lot more intellectual capital than me has also suspected the same thing. Paul Craig Roberts, former U.S. assistant secretary of the Treasury espouses the same idea in an interesting article here. His article goes into more detail about why the U.S. would want to derail the campaign of this man who was the front-runner to become the next president of France.

Traders Taking Us For Another Ride

Commodities index (RBA) and oil barrel (WTI) i...

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A few years ago I was intrigued by an argument I heard linking the housing debacle and great recession to the spike in gasoline prices.  I wish I could remember the source of this theory, but I can’t. The logic went this way: as urban sprawl continued in cities, people bought homes further and further away from where they worked. When gas prices spiked 3 years ago (rising to above $4 per gallon), then suddenly those people found that their cost of driving to work spiked as well.  Some could no longer afford to live where they had bought homes.  The value of their house went down because of the rising cost of commuting, and so they were stuck with homes they could no longer afford.

I acknowledge that there were many causes for the housing crash and great recession, but I think there is something to be said for the idea that rapidly rising gas prices have far reaching negative consequences to our economy.  I am reminded of this because we are seeing the beginning of another spike in the price of gas.

If you listen to the news, people will tell you that the price is going up because of the unrest in the Middle East in general, and unrest in Libya in particular.  That answer reveals the reason that oil prices are being bid up, but it doesn’t really do justice to the degree to which our current system of setting commodity prices is prone to wild swings because of the wagering going on in the trading pits.

When one thinks of the price of goods, one tends to think of the simple relationship between buyers and sellers.  If there are more buyers than sellers, then the price of a good rises, and vice versa.  Yet, the price of oil is not set by buyers and sellers of oil.  It is set by buyers and sellers of oil contracts (“futures” and “options”).  I can buy a contract from someone in which they promise to sell me oil at some future date at a certain price.  Such a contract seems hardly of interest to someone who is not in the business of refining oil.  Yet because these contracts are so liquid,  I can buy one today and sell it tomorrow and try to make a profit even though I have no interest or capacity to deliver or receive the underlying product of the contract.

Oil prices today go up and down based on folks on Wall Street trading such contracts rather than on the purchases of people who are actually interested in buying oil or gasoline (commodities trading is based in Chicago).  The price we pay at the pump has little to do with the supply of gas compared to its demand; it has everything to do with the latest price bid by the traders.

I can buy and sell “futures” for all sorts of commodities like oil.  If I bet correctly about the direction of the price of a particular commodity, then I can make a lot of money.  If I bet wrong, then I lose money.  It sounds an awful lot like a casino.  I can legally bet on all sorts of things.  I can even place a bet on the weather.

The globalization of the world’s economies give more and more power to these futures and options traders to influence prices.  As measured by the FAO Food Price Index, food prices are also headed up. Like oil, they spiked three years ago, but unlike oil, their current run-up has already surpassed that past spike. One of the reasons that food prices are going up is because last year we had droughts and floods that wiped out many crops around the world. But like oil, food prices are also heavily influenced by options and futures traders.

And this brings us back to the unrest in the Middle East. Rising food and energy prices are two of the reasons that people–who have been enduring oppressive regimes for years–recently took to the streets.  So rising commodity prices begets turmoil that begets rising commodity prices.  It turns into a chicken or egg question, but squarely in the middle of the equation are money managers who are making plenty of green for their clientele from the volatility of the price or oil and food.