Archive for January, 2009|Monthly archive page

Marx before Minsky

Previously, I made the case that the financial meltdown was basically a delayed response to the severe neglect of investment in plant, equipment, and infrastructure. I also explained the cause of this neglect.

Here, I’m going to discuss the financial side of the crisis, which, while secondary, is still important.

This crisis has been nicely described as a Minsky moment, but it may just as well be described as a Marx moment.  Marx’s term fictitious capital and the more conventional discounted present value are not entirely different, but Marx’s expression emphasizes the fact that the future is both unknown and unknowable. Continue reading

The Disastrous Toll of Fictitious Value

The world of fictitious value mesmerizes itself by using a strange language. Financial operations refer to their “shop,” as if they were standing over a workbench shaping metal or wood. Then they talk about “value creation.”

What does that mean? Suppose I start a private equity company. People give me money to create value. I can create this value by taking over a company with very little of my own money. I need a banking accomplice to give me a bridge loan and a compliant company management. Then I can “unlock” the firm’s value.

Once source of untapped value is a pension fund. Workers can be granted stock in the company as compensation. I can take over the firm, then use the pension fund to pay for some of the money I own. I can load the firm up with debt and charge it exorbitant fees. Now I have begun to “unlock” value.

Next, I can fire lots of workers, including those whose pension fund financed my takeover. By doing so, I can show that I am creating efficiencies. Once I cook the books to make the firm look profitable and sell it to a unsuspecting public.

Should anyone be surprised that many of these companies have been going bankrupt? And the workers whose pensions were central to the process? Well, they have some pretty paper.

Ain’t capital wonderful?

Stimulus Pork

Senator Max Baucus got $26 billion for private equity companies — the vultures that buy companies, load them up with debt, collect exorbitant fees, and then try to sell them to the unsuspecting public.

Senator Robert Byrd is getting $4.6 billion for clean coal.  “Clean, carbon-neutral coal can be a ‘green’ energy,” Byrd said.

What the hell other crap is out there?
Continue reading

Observations on China

I’m just now getting my energy back after my trip to China and a bout of food poisoning that I brought back. I hope I can be more attentive to the blog.

Just as an experiment, I tried to record a 15 minute discussion about my observations of China. I have to warn you that you should not expect any deep insights from fairly quick trip in which I spent most of my time in the corridors of various universities.

Mainstream Media Fights for the Little Guy in the Spirit of the Muckrackers

This article shows the ridiculous lengths that economists can go in defending the indefensible:

I. J. ALEXANDER DYCK, University of Toronto – Joseph L. Rotman School of Management
DAVID A. MOSS, Harvard Business School – Business, Government and the International Economy Unit

LUIGI ZINGALES, University of Chicago, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), University of Chicago – Polsky Center for Entrepreneurship, Graduate School of Business, European Corporate Governance Institute (ECGI)

We argue that profit-maximizing media help overcome the problem of “rational ignorance” highlighted by Downs (1957) and in so doing make elected representatives more sensitive to the interests of general voters. By collecting news and combining it with entertainment, media are able to inform passive voters on politically relevant issues. To show the impact this information has on legislative outcomes, we document the effect “muckraking” magazines had on the voting patterns of U.S. representatives and senators in the early part of the 20th century. We also show under what conditions profit-maximizing media will cater to general (less affluent) voters in their coverage, providing a counterbalance to special interests.