On The Dole

I love ths headline, speaking truth to power as they say, too often unemployment appears to have no apparent cause but it does of course, the bosses decide....Canadian employers wipe out 71000 jobs

Even though the bosses were given HR advice not to do this, they can't help themselves they have no plan to deal with the recession so they fall back on the old tried and true, lay off workers.

Fears of a million layoffs a month in corporate America

And as usual the cheery economic advisors to the bosses didn't expect this.
Canada lost 70600 jobs in November, about three times more than many economists had expected, Statistics Canada reported on Friday.

As strategist Ed Yardeni wrote, "the latest batch of economic indicators is so bad that we are either spiralling into a depression or we are within a few months of a V-shaped recovery."
Put Mr. Abramson, 42, firmly in the V-shaped camp. He doesn't believe a years-long slump is lurking in the shadows, although the markets have been trading that way.
"It's been a rough economy, which we underestimated," he says. But the market response reflects a "psychological meltdown" that has taken stocks down to ridiculous valuations.
"We've been fully invested for a period here, because we didn't believe this was going to go as far down versus valuation and economic reality as it has. We thought this was going to be a normal 20-per-cent correction." Oops.

So while Harper created a political crisis to avoid addressing the economic crisis, it slapped him in the face like a wet fish. Indeed can you say recession, the word he refuses to use. And he has no plan to address it, so he creates a political crisis to distract us from the bad news.

Harper shuts down Parliament while unemployment hits recession levels

We are in a recession, and the dark clouds of depression creep over the horizon.

Canada loses 70600 jobs in a month, most since '82
Ontario's crumbling manufacturing sector is a major reason why the 66000 of the 71000 jobs that disappeared in Canada in November did so in this province. ...

Yep the oil crash of '82 was when we had one of our worst recessions.

Good News — Conditions Resemble 1973-74!
The recession of 1974-75 was the worst since the 1930’s Great Depression. The 1973-74 bear market in anticipation of that recession was the worst bear market since that of the 1929-32 bear market (which led to the Great Depression). The mid-1970’s were indeed a miserable period.

And that was just last months unemployment figures the news continues to be bad across Canada.

GM to lay off 700 more workers in Oshawa

AbitibiBowater to shut mills, axe 1100 jobs

Closed mines, broken dreams in the town that nickel built

However we are not alone in this sudden realization that the economy is crashing, like Harper the other recession denier sits in the White House south of here.

US Loses 533000 Jobs in Biggest Drop Since 1974

The U.S. Labor Department reported Friday that last month, companies around the nation shed jobs at the fastest rate since the early 1970s, pushing the unemployment rate to its highest level in 15 years.
The figures suggest the year-old recession will approach or even exceed the 1981-1982 downturn in severity and support expectations that Federal Reserve officials will soon lower interest rates to levels not seen in a half century.

That was just the monthly unemployment rate it gets worse in the U.S. which does not have our style of EI as the unumber of unemployed or underemployed workers not on unemployment payments ballons.

Broader Unemployment Rate Hits 12.5%

One in Ten Americans Now Uses Food Stamps as Unemployment Continues to Rise

But still there are those economists who claim that the glass is half full, same guys that said there was no recession....

Unemployment hurts, but it's not a crisis yet

And some are down right optimistic......

Recession over by June?

And they are just plain wrong like they have been for the past year.

If recent downturns are any guide, it may be well into 2010 or perhaps even 2011 before unemployment peaks, which means the global economy should not count substantial U.S. consumer spending rebound any time soon. "The economy is now locked in a vicious downward spiral in which employment, incomes and spending are collapsing together," said Nigel Gault, chief U.S. economist at IHS Global Insight.

Along with the credit melt down unemployment is also a global problem.

OFF THE CHARTS A domino effect in the global work force
THE world recession is spreading, and the employment outlook is turning down almost everywhere.
Even in countries like China, the latest surveys of companies show they are reducing their work forces, providing more evidence that China cannot be the engine of the world economy when the traditional industrial powers suffer.

China fears a reverse migration
China's roaring industrial economy has been abruptly quieted by the effects of the global financial crisis. Rural provinces that supplied much of China's factory manpower are watching the beginnings of a wave of reverse migration that has the potential to shake the stability of the world's most populous nation.
Fast-rising unemployment has led to an unusual series of strikes and protests. Normally cautious government officials have offered quick concessions and talk openly of their worries about social unrest. Laid-off factory workers in Dongguan overturned patrol cars and clashed with police last Tuesday, and hundreds of taxis parked in front of a government office in nearby Chaozhou over the weekend, one of a series of driver protests.

Amid the global financial crisis, China's small and medium-sized enterprises, largely labor-intensive and vulnerable to fluctuations in domestic and external demand, are affected most. In the first half of 2008, 67,000 such companies, each with a business volume exceeding 5 million yuan, closed and laid off more than 20 million employees, said the National Development and Reform Commission. That figure doesn't include service industry firms or small companies with sales of less than 5 million yuan, as there are no authoritative figures available on those categories.

A HUNDRED per cent of the global economic growth next year will come from developing countries. This, according to Stuart E. Eizenstat, former US deputy treasury secretary, is the first time in history that developing countries will shoulder the full responsibility of pulling the global economy.
The European and US economic engines are not firing and therefore will not be able to pull the world economy along as has been done previously. Some economists, including David Carbon, chief economist at DBS Bank, believe that Asia is now more capable of standing on its own.Why then should the worker in a factory in China or Malaysia be concerned when the region, by most accounts, is in a much better economic situation than in the US and other more advanced nations? Why should economies in Asia and indeed other developing countries be concerned with rising unemployment in the US and Europe?The fact is that even though Asia is not as badly off as the US, Asia's growth is also slowing. In today's highly interconnected and globalised world, what happens in one part of the world is rapidly transmitted to the other side. Contagions spread faster. Thus, with the economic meltdown in the US and massive job losses, the demand for goods and services also falls. Offshore centres in India and in other parts of the world are also feeling the heat from the US financial and economic meltdown. The production and assembly line that snakes around the world, and in some cases making its way into remote villages, has also been affected.The unemployment numbers in Europe and other developed countries are also on the uptrend, with more joining the jobless ranks every day. This, according to some, could be the worst since the Great Depression of the 1930s

Ok folks lets do the math. Recession + Unemployment = Depression

US "Great Depression" has begun: Best of the Boards/Blogs

There's no mystery about what the government is trying to do. After the Black October crash, the government and the Bank of England got out their history books and started looking at what happened in the Great Depression. In September 1931, as unemployment reached three million, the national government slashed interest rates and abandoned the gold standard. The value of the pound fell by 25%, just as it has today. Interest rates fell from 6% to 2% - deja vu - and this led to a modest, export-led recovery. Unemployment fell marginally in 1935 as a recovery in the housing market, mainly in the south of England, boosted economic activity. The government is clearly trying to do the same today.
However, this isn't the 1930s. For one thing, there was a lot of spare capacity then in the economy, which is not the case today. We also had the Empire. Britain erected tariff walls against imports and used the colonies - yes, we still had them - to provide cheap food imports. The 1930s depression wasn't caused by consumer spending and debt, it was a classic crisis of ineffective demand.
Also: it didn't really work. Unemployment remained stubbornly high throughout the 1930s outside the south-east of England, and it was only rearmament, as the Second World War approached, that ended mass joblessness. We are in a very different situation today. We cannot seek salvation in another unsustainable boom and we certainly cannot afford to go to war.

And depressions lead to workers revolt.

Workers at Republic Windows continue sit-in after company closes

Sit Ins and plant occupations were popular in the 1930;s as well, and are far more effective than strikes, they can lead to the only obvious solution to the capitalist crisis; workers control of the means of production and the socializtion of capital.

SEE
Neo-Con Industrial Strategy.
Common Sense
Neo-Cons Have No New Ideas
Back To The Fifties
Here Come the Seventies
Wall Street Mantra


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CMHC says residential mortgage debt grew

 last year by fastest pace since 2008

The Canadian Press

Residential mortgage debt grew last year by the fastest pace since 2008 says a new report from Canada Mortgage and Housing Corp. 

The federal housing agency says that mortgage debt grew by nine per cent for the year, and topped 10 per cent in the early months of this year before rising interest rates started to slow the market. 

"The levels of investments of households are quite high. So it is a source of vulnerability," said Tania Bourassa-Ochoa, a senior economist at CMHC and co-author of the report on mortgage trends.

Banks saw a 43 per cent increase in new mortgage originations and an increase of 22 per cent for refinances compared with 2020, leading to an additional $400 billion in residential mortgages on their balance sheets, while credit unions added $54 billion.

Activity in the housing market has however slowed considerably in recent months as central banks raise interest rates to slow inflation. On Wednesday the Toronto Regional Real Estate Board said sales were down 41 per cent in June compared with last year, while on Tuesday Real Estate Board of Greater Vancouver said regional home sales were down 35 per cent in the month. 

CMHC says that variable rate mortgages were increasingly favoured last year as the discount on interest rates increased, with the mortgage type growing to 53 per cent in the second half of the year, from 34 per cent of total mortgages in the first half.

The increase of variable rate mortgages means more people are exposed to rising interest rates, though the majority of such mortgages have fixed payments so increases would most be felt at renewal.

"Canadians that took on a new mortgage with variable interest rates will be the ones that will be feeling that increase the most, and most rapidly," said Bourassa-Ochoa.

Data from last year showed that there was little indication of any problems with people making mortgage payments, as high savings rates and the buoyant housing marker helped push down mortgages in arrears, which fell across all lender types. 

In looking at inequality in the housing market, the report noted that Indigenous, Black, Arab and Latin American populations had significantly lower homeownership rates than the national average as of the 2016 census, the latest data available as the authors wrote the report.

Homeownership rates were a little under 50 per cent for the groups, while the overall rate for Canada was 74 per cent and slightly higher for white and Chinese populations.

The report noted that after controlling for demographics, metropolitan area and income, Indigenous, Black, Latin American, Arab and Filipino Canadians have lower average property values than other Canadians, a gap that has increased since the 2006 census. It said that since housing wealth is a strong indicator of economic success of future generations, any large deviations between population groups are an indication that inequalities will persist.

SEE LA REVUE GAUCHE - Left Comment: Search results for 2008 CRASH 

CAPITALI$M IS CRISIS

Titans Talking Crises at Milken Conference Hit Afresh With Flash Crash News

Jenny Surane, Gillian Tan and Michelle F. Davis, Bloomberg News

Marc Rowan, chief executive officer of Apollo Global Management LLC, right, participates in a panel discussion during the Milken Institute Global Conference in Beverly Hills, California, U.S., on Monday, May 2, 2022. The event convenes the best minds in the world to tackle its most urgent challenges and to help realize its most exciting opportunities. Photographer: Lauren Justice/Bloomberg , Bloomberg

(Bloomberg) -- As the billionaires and mere multimillionaires flocked this week to Beverly Hills, California, there was no shortage of concerns to discuss: Russia’s invasion of Ukraine, surging inflation, recession risks, supply-chain woes, the lingering pandemic.

Then, as the Milken Institute’s Global Conference was barely underway, European stocks experienced a rare flash crash when a trader on Citigroup Inc.’s London desk made an error inputting a transaction. Executives at the event cited the incident as a symptom of fragility in financial markets, with bank balance sheets stretched in the wake of post-2008 regulations.

“There is more trading going on and markets are bigger, yet banks have less balance sheet,” Jason Brady, president and chief executive officer of Thornburg Investment Management Inc., said on the sidelines of the conference. “You’re going to see more and more crazy things. What you’re seeing is an increasing number of flash crashes across markets.”

The trading shock was followed later in the day by more surprising news: Abortion rights in the U.S., in place for almost a half a century, were poised to be struck down. Already the topic had been a point of discussion at the conference, with Citigroup CEO Jane Fraser asked about divisive cultural issues including the bank’s coverage for out-of-state abortion travel. “We have 220,000 employees -- we listen to them, what are their concerns, what are their needs, and the same with our customers,” she said in a Bloomberg Television interview Monday afternoon. 

A few hours later, during a conversation, one financier stopped mid-sentence, not sure the breaking Roe v. Wade story his son had just texted him was even real. On Tuesday, a biotech investor said she skipped several morning panels because friends and colleagues were contacting her about the Supreme Court’s plans. 

Even with the myriad concerns both domestic and global -- concerns that were discussed, questioned, fretted over and even, at times, joked about during speeches, panel discussions and meals -- the investors, dealmakers, politicians and power brokers in attendance found time for levity too. It was, after all, the first time that the confab, now in its 25th year, has returned to its standard spring schedule since the pandemic began. After being grounded for much of the Covid-19 crisis, the titans were ready to cut loose.

The Milken Institute’s founder, Michael Milken, and wife Lori were in the front row of the Beverly Hilton’s ballroom Monday night as David Foster, Katharine McPhee, Vonzell Solomon, the Tenors and other performers sang tunes including Whitney Houston’s “I Have Nothing” and Neil Diamond’s “Sweet Caroline,” while Tiffany Haddish offered a surprise rendition of “Proud Mary.”

Before Haddish’s number, Chris Tucker took a turn on stage.

“I’ve never seen so many rich people in my life,” the comedian said. “I’ve never heard people talk money all day long,” he added. “Look at y’all making money right now -- he just crossed his legs, he made a million dollars,” he said, pointing out hedge fund manager Jeffrey Feinberg, seated in the front row.

Michael Milken, who founded the Milken Institute in the early 1990s, worked at Drexel Burnham Lambert in the 1980s before he was convicted for securities fraud, sent to prison and banned from the securities industry for life. Former President Donald Trump pardoned him in 2020. 

Goldman, Apollo

Elsewhere Monday night, the on-again couple Jennifer Lopez and Ben Affleck were expected at a Goldman Sachs Group Inc. party, Apollo Global Management Inc. had an event on the rooftop of the Waldorf Astoria Beverly Hills and Ares Management Corp.’s Tony Ressler and controversial German financier Lars Windhorst hosted gatherings at their respective homes.

And the flash crash didn’t stop Citigroup from partying as well. On Monday evening, former Vice Chairman Ray McGuire mingled with bank clients on a nearby rooftop terrace, with sushi and chicken sliders available for snacking. Guests departing the Citigroup-hosted event were given water with electrolytes to fight potential hangovers.

Over the weekend, Napster co-founder Sean Parker threw a dinner attended by Carlyle Group Inc.’s David Rubenstein and executives from General Motors Co., Kroger Co. and other companies. Other weekend events included a gathering at the art-filled home of one-time Walt Disney Co. President Michael Ovitz -- attended by Jim Messina, deputy chief of staff under President Barack Obama, and about 40 others -- and a dinner at Point 72 Asset Management founder Steve Cohen’s house co-hosted by former U.S. Treasury Secretary Steve Mnuchin.

Even with all the partying, global concerns were inescapable. One London-based mezzanine-debt investor who’s been to several Milken conferences said the mood seemed notably more somber this year, given market volatility and recession expectations, and that it felt harder to revel in the excess than in past years.

Cyber Threats

One senior Wall Street executive, during a conversation in the hallways of the Beverly Hilton, said industry leaders have been receiving regular classified security briefings and are fielding warnings about escalating cyber threats against the financial system. Even poolside -- a site for relaxation much of the year, but a place for Apollo co-founder Leon Black to meet with Trian Partners’ Nelson Peltz and Ed Garden during Milken -- talk turned to Ukraine.

At the cabanas, one financier who’s been in the industry for decades and has attended several past Milken events said he’d just come from a meeting where former oil tycoon Mikhail Khodorkovsky talked about the decade he spent jailed, the steps Russian President Vladimir Putin would need to take to implement a nuclear attack and the likelihood of defection among his deputies. The financier called it one of the most interesting conversations he’s ever had.

As in past years, activists descended on the Milken conference as well to seek attention for their causes. Speakers at a social-impact panel Tuesday morning, entitled “Where Values Meet Value: Doing Well by Doing Good,” had to contend with the sound of United Steelworkers protesters outside. “Hey, Chevron, you’re no good, treat your workers like you should,” they chanted, demanding better contracts.

And the Covid-19 pandemic and its attendant infection risks lingered as well. Still, attendees largely went maskless, with only a few people in one room of 50 using face coverings. The Milken Institute did provide masks to those wanting them. And Michael Milken himself wore one as he walked around the conference -- one of the few people to do so.

©2022 Bloomberg L.P.

 

Entrepreneurs’ stock losses bruise their businesses

Company growth stalls when an owner’s personal portfolio takes a hit

Peer-Reviewed Publication

UNIVERSITY OF TEXAS AT AUSTIN

When a recession takes a bite out of an entrepreneur’s personal stock portfolio, does that person’s business suffer more than those of older and larger competitors? 

New research by Marius Ring, assistant professor of finance at Texas McCombs, finds a link between the wealth of small-business owners and the health of their companies during economic downturns. When their stock portfolios lose value, their businesses suffer ripple effects: less financing and curtailed hiring. 

“Entrepreneurial wealth follows the ups and downs of economic cycles,” Ring says. “I show that for entrepreneurs whose stock portfolios take a hit, their businesses are adversely affected to a greater extent than established businesses.”

Such business constrictions are concentrated among younger companies, he noted, because older companies have more financial options. 

Ring studied stock portfolios of entrepreneurs during the 2008-2009 financial crisis in Norway, where detailed income and investing data are available. He merged the data with information from education and employment registers to trace the crash’s impacts on investors, the businesses they own, and their employees.

He found that owners’ stock shortfalls hurt businesses in multiple ways, with fledgling companies faring worse.

Hiring Hiatuses. A stock loss of 10% reduced employment growth by an average 5 percentage points from 2007 to 2010. In younger companies, job levels still had not recovered five years after the crisis began.

Shrinking employment resulted not from firings, but from less hiring. Says Ring, “Investing in new employees is likely not a top priority in a recession.” 

Investment Lessened. A 10% drop in the owner’s wealth led to cutbacks in capital available for business growth. 

• It reduced injections of outside equity 22%.
• For younger companies, it meant an 84% decline in the two-year rate of investment in plants and property.

Why are younger businesses more sensitive to their owners’ investment setbacks? The answer, says Ring, is that “more mature firms seem to be able to substitute other sources of financing, such as banks.”

Mature companies, he found, took on more bank debt after an owner’s wealth shock. Younger ones, on the other hand, saw a decrease in bank debt.

An important policy question, says Ring, is whether reduced business activity is driven more by financial forces or by psychological ones, such as a decrease in entrepreneurs’ willingness to take risks. 

His results suggest that financial constraints are more likely at play. That means government interventions, such as small-business lending subsidies, might help counter those constraints and help small businesses weather recessions. 

“Small businesses are important in most economies, and most of these firms rely heavily on their owners for financing,” Ring says. “Owners can be a viable source of financing, but unfortunately, the owner’s personal wealth is likely to be hit at the same time as the firm is experiencing a downturn.” 

“Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash” is published inThe Journal of Finance.

 

---

JOURNAL

The Journal of Finance

DOI

10.1111/jofi.13280 

METHOD OF RESEARCH

Observational study

SUBJECT OF RESEARCH

People

ARTICLE TITLE

Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash

This market has all the signs of investor mania that JK Galbraith warned us about

Larry Sarb

As we approach the end of one of the most bizarre years on record, it might pay investors to reflect on a historical perspective. Hopefully, we can learn some valuable lessons. To my mind, there is no better author of such circumstances than John Kenneth Galbraith, the brilliant Canadian economist. 

© Provided by Financial Post J.K. Galbraith's A Short History of Financial Euphoria, published in 1990, deals with some of history’s most spectacular investment manias, stretching from the 17th-century Tulipmania up to the crash of 1987.

J.K. Galbraith is known for dozens of books on finance and financial history. A Short History of Financial Euphoria, published in 1990, deals with some of history’s most spectacular investment manias, stretching from the 17th-century Tulipmania up to the crash of 1987.

The must-read chapter is the second, titled “The Common Denominators,” which looks at the common threads that run though all these extraordinary events. Unfortunately, many of them are visible in today’s market.

That the same threads recur “is of no slight importance,” Galbraith notes: “Recognizing them, the sensible person or institution is or should be warned.”

However, he goes on to observe that, “the chances are not great, for built into the speculative episode is the euphoria, the mass escape from reality, that excludes any serious contemplation of the true nature of what is taking place.”

Of the factors that occur repeatedly, he says, “the first is the extreme brevity of the financial memory.”

Having been in the investment business for more than 40 years, I have witnessed this occur repeatedly. It certainly is prevalent in today’s period. Many of today’s investment population, individual and institutional participants, simply weren’t around for, or aware of, events such as the crash of Oct. 19, 1987, the dot-com bubble or the financial disaster of 2008. And, as Galbraith notes, “There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

Here’s another Galbraith insight: “Uniformly in all such events there is the thought that there is something new in the world. In all speculative episodes there is always “an element of pride in discovering what is seemingly new and greatly rewarding in the way of financial instrument or investment opportunity. The individual or institution that does so is thought to be wonderfully ahead of the mob.”

Galbraith notes an important additional truth: “As to new financial instruments, however, experience establishes a firm rule…. The rule is that financial operations do not lend themselves to innovation.”

The creation of the first index fund in 1975 was a true innovation. The following appearance of Exchange Traded Funds (ETFs) in 1993 was a very successful takeoff of the original index but built upon the very same concept. The NYSE has about 2,400 companies listed while Nasdaq numbers about 3,300. Today, there are 6,970 ETFs traded on the U.S. exchanges with dozens of different structures and flavours. In this case, the idea of reinventing the wheel has grown to such an extent that there are more ETFs than publicly traded companies, an extreme example of an idea taken to excess.

Another warning, “All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets…. All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.”

Welcome to the present. As of October 2020, America’s national debt had reached US$27 trillion. As of April 2020, debt as a percentage of GDP was 122 per cent. Ten years ago, that statistic was 84 per cent and 10 years before that, it was 58 per cent. The curve representing that statistic has gone parabolic. As Galbraith warns, excessive debt eventually can result in calamity.

Galbraith’s common denominators are clearly in play today.

I’m not telling you not to invest. I believe you can do so successfully, as long you remember to avoid the above listed sinkholes. Remember, an astute investor has to be part investor and part historian.

Our answer to not getting caught in the traps forewarned by Galbraith: stick with investments, especially in equities, which have strong balance sheets, predictable futures, huge sustainable moats around their businesses and characteristics of necessity (you can’t live without them). Whatever the crisis that arrives, your companies will still be standing.

One example today is the commercial insurance industry. What is most attractive is that the companies are trading at bargain prices, mainly due to a long period of weak underwriting pricing. Now, we are seeing a strengthening in pricing. Many of these companies have all the characteristics listed above with careful, conservative management in place. Their behaviour has been to avoid unprofitable underwriting, thus avoiding dangerous actions. With this important price shift, an increase in underwriting by these companies is underway. Companies like Fairfax, Berkshire Hathaway and Markel, all trading at what we believe are undervalued levels, offer investors a pocket of opportunity to invest while avoiding the Galbraith dangers.

Another example is Domino’s Pizza Group plc. Domino’s U.K. is part of the largest pizza franchise in the world. Delivery of pizza has grown during the pandemic, but had been expanding before that as well. The company is reasonably priced, especially when compared to its counterparts in the U.S. and Australia. It is a high-margin business as they only supply the ingredients to the franchisees, who are the ones putting up major capital investment. Again, we believe this is a business that heeds Galbraith’s warnings.

If you chose to ignore Galbraith’s insightful observations, you may fall victim to what he reportedly said many years ago : “The old generation must die off so a new set of idiots can make the same mistakes all over again.”

Larry Sarbit is a portfolio manager at Value Partners Investments in Winnipeg. He can be reached at lsarbit@vpinvestments.ca .

Analysis | UK Pension Funds Shouldn’t Be This Exciting

Pension funds are supposed to be among the least exciting financial institutions. Their job is to make long-term investments to meet the predictable needs of future retirees. They should be immune to short-term shocks. Yet last week in the UK, they were the center of an incipient financial crisis.

What led to this was a novel variation on a well-known theme: Leverage meets unforeseen events. The danger when these two collide isn’t confined to any one country or market, so regulators everywhere ought to take note. Banks are somewhat safer than they were before the crash of 2008, but risks that start outside the traditional financial system still require greater attention.

The UK pension funds’ embarrassment shows how subtle those risks can be. The funds used derivatives, so they believed, to hedge their positions — that is, to make their portfolios safer. Using a popular technique called “liability driven investment,” they guarded against the risk that lower interest rates would increase their liabilities (the present value of future pension payments) more than it boosted their assets (government bonds, stocks and other investments). They did this, in effect, by borrowing to increase their exposure to government bonds.

Unfortunately, reducing the risk from lower interest rates failed to take account of the possibility that rates might abruptly and dramatically rise — which is what happened after the UK government announced a reckless new fiscal policy on Sept. 23. Higher rates (lower bond prices) reduced the pension funds’ long-term liabilities — but also caused the funds’ derivative counterparties to demand more collateral up front. That meant selling bonds, driving their prices still lower, which called for more collateral, and so on — a vicious cycle that, for many, evoked the Lehman Brothers moment of 2008.

The Bank of England interrupted this downward spiral by promising to buy bonds at “whatever scale is necessary” to restore orderly markets. It’s too soon to say how the story ends. The debacle has made investors everywhere more anxious, and the central bank’s intervention, to put it mildly, complicates its efforts to tighten monetary policy and curb inflation.

For regulators, the lesson is this: The details of last week’s breakdown are new, but the central dynamic isn’t. Just about every case of financial contagion and crisis, from the 2008 mortgage meltdown to last year’s implosion of Archegos Capital Management, shares the same basic features.

The more leverage held by non-banks such as pension funds, hedge funds and insurers, the greater the chance that dislocations will proliferate and threaten the broader system. Regulators limit bank leverage by imposing capital requirements. In the world of so-called shadow banking, this is largely up to the counterparties. In good times, they often set collateral requirements too low, leading to huge calls for additional collateral in bad times, when markets are most stressed and least able to deliver it.

Back in 2018, the Bank of England was aware that pension funds would be hit with margin calls when interest rates went up — yet concluded all was well. Its worst-case scenario envisaged interest rates rising by 100 basis points. At the time, that seemed a lot. Already moving up, they spiked by more than that in the space of a few days — and would have gone up much more if the bank hadn’t stepped in.

Regulators need to remember that low-probability events aren’t zero-probability events: Eventually they happen, and when they do, the damage can be huge. Looking beyond banks across the ever-widening landscape of non-bank finance, they need to examine leverage in all its forms more closely — and set margin requirements and other rules that reflect how much markets can move when things go wrong.

One day, if regulators do their job, pension funds will be boring again.

More From Bloomberg Opinion:

• UK Pensions Got Margin Calls: Matt Levine

• Problems Facing the Gilt Market Aren’t Unique to the UK: Richard Cookson

• Corporate Bond Doomsayers Are a Little Premature: Jonathan Levin

The Editors are members of the Bloomberg Opinion editorial board.

More stories like this are available on bloomberg.com/opinion

Texas Supreme Court Rules Against Family in 'Overworked' Truck Driver Death

FreightWaves June 19, 2020


Despite testimony that an oilfield carrier pushed truck drivers to work more than 100 hours per week and ignore federal hours-of-service regulations, the Texas Supreme Court has ruled that the family of an "overworked" truck driver killed in a rollover crash can't file a wrongful death lawsuit against the carrier because they couldn't prove the company "intended" for him to die in a crash.

Instead, the court ruled that the family of Fabian Escobedo, who worked for Mo-Vac Service Co. in its Dilly, Texas, terminal for 12 years, could only collect workers' compensation in the crash that resulted in his death.

While Texas law allows spouses and children to recover exemplary damages under the state's Workers' Compensation Act, the attorney representing Escobedo's family, Armando P. Duran, said the law doesn't apply because Escobedo didn't have a spouse or children, which he said: "must be changed."

However, Justice Eva Guzman wrote in her opinion that the Texas legislature should align the Workers' Compensation Act with Texas' wrongful death statute to allow parents to sue.

According to Duran, the Texas Supreme Court should be "ashamed of the decision" it reached in this case.

What happened?

On May 30, 2012, Escobedo was driving a 2007 Mack truck, pulling a 1985 Reynolds tank trailer for Mo-Vac, when he veered off the road, rolled, and died of positional asphyxiation.

Urbano Garza, Mo-Vac manager from 2008 to 2012, testified that he was told by management to instruct his 30-plus truck drivers, including Escobedo, to drive past their legal driving limits to "make money" for the company.

"From what I observed, Mr. Escobedo's death was caused by greed," Garza said in his testimony.

Garza also stated that the truck drivers for Mo-Vac were ordered to work at least 100 hours per week and sometimes worked 19-24 hours straight for the oilfield carrier.

However, only a surviving spouse or heir is allowed to file for exemplary damages under Texas law. In a civil trial, exemplary damages are awarded as a way to punish a defendant for gross negligence or severe misconduct, according to Texas law.

"A hardworking Texan died alone on the side of a highway in a foreseeable accident that likely would not have occurred but for his employer's intentional disregard of laws enacted to protect workers and the public," Guzman said. "Though precedent compels me to concur in the court's conclusion that the Texas Workers' Compensation Act provides the exclusive remedy for the Escobedo family's heart-wrenching loss, I write separately to urge the Legislature to align the Act with Texas's wrongful-death statute by extending the Act's exemplary damages exception to parents who have lost a child, like the Escobedo fami

Economist Paul Krugman: Mitch McConnell is trying to create a corporate ‘slush fund’ — and Democrats should ‘just say no’

March 23, 2020 By Alex Henderson, AlterNet


Liberal economist and veteran New York Times columnist Paul Krugman has been stressing that any economic stimulus bills passed by Congress in response to the coronavirus pandemic must not be simply corporate bailouts, but provide genuine help for struggling U.S. workers. And in a March 23 Twitter thread, Krugman slams Senate Majority Leader Mitch McConnell for trying to create a corporate “slush fund.”

McConnell, according to Krugman, is wrong to approach the economic fallout from coronavirus like the crash of September 2008 and the collapse of Lehman Brothers.

“McConnell wants everyone to imagine that it’s like the immediate aftermath of Lehman, and that everything will collapse unless we give Trump a $500 billion corporate slush fund with no effective oversight,” Krugman asserts. “That’s totally unacceptable.”

That is, the clear and present need is for disaster relief, rather than stimulus. And notice how the debate over this relief is being framed: calls to help Americans in need are portrayed as "Democratic demands" rather than the decent thing to do.
— Paul Krugman (@paulkrugman) March 23, 2020

The economist adds, “Even aside from trust issues, we have this thing called bankruptcy law that often allows corporations to remain viable entities even when they can’t pay their debts. There may be cases where that won’t be enough — but then you want conditions attached to aid, a la auto bailout.”

Krugman goes on to explain why he distrusts McConnell, writing that the Kentucky Republican “has shown that he can’t be trusted when it comes to corporate giveaways. Remember how that huge 2017 corporate tax cut was supposed to lead to an investment boom, and instead was spent on stock buybacks?”

Krugman is equally critical of President Donald Trump in his thread, tweeting, “Nobody in their right mind believes that we can trust Trump to use a slush fund in a non-corrupt way, as opposed to rewarding friends — including himself — and punishing enemies…. I mean, he won’t even use the power he has to order companies to produce urgently needed medical supplies. Not a chance that he would require good behavior from bailed-out businesses.”

But McConnell wants everyone to imagine that it's like the immediate aftermath of Lehman, and that everything will collapse unless we give Trump a $500 billion corporate slush fund with no effective oversight. That's totally unacceptable 8/
— Paul Krugman (@paulkrugman) March 23, 2020

And McConnell himself has shown that he can't be trusted when it comes to corporate giveaways. Remember how that huge 2017 corporate tax cut was supposed to lead to an investment boom, and instead was spent on stock buybacks? 12/
— Paul Krugman (@paulkrugman) March 23, 2020

Even aside from trust issues, we have this thing called bankruptcy law that often allows corporations to remain viable entities even when they can't pay their debts. There may be cases where that won't be enough — but then you want conditions attached to aid, a la auto bailout
— Paul Krugman (@paulkrugman) March 23, 2020

In his thread, the Times columnist asserts that a spending bill passed by Congress needs to emphasize “disaster relief” for American workers.

“This isn’t 2008, when you arguably had to rush money to financial institutions to avoid immediate collapse,” Krugman tweets. “Stimulus is needed, but there’s time to do it right. Just say no to slush funds.”

So, once more: this isn't 2008, when you arguably had to rush money to financial institutions to avoid immediate collapse. Stimulus is needed, but there's time to do it right. Just say no to slush funds
— Paul Krugman (@paulkrugman) March 23, 2020

A predator–prey model to explain cycles in credit-led economies

Óscar Dejuán and Daniel Dejuán-Bitriá

Keywords: business cycles; financial instability; predator–prey models; post-Keynesian economics

Published in print:Mar 2018

Category:Research Article

DOI:https://doi.org/10.4337/roke.2018.02.01

Pages:159–179

Download PDF (648.9 KB)

This paper develops a predator–prey model to explain cycles in credit-led economies. The predator is the part of the financial sector that issues credit money for non-output transactions. It increases the indebtedness ratio and inflates bubbles that eventually have a negative impact on the real rate of growth (the prey). From this basis, we build a couple of models that may lead to self-contained or explosive cycles. Even in the first case, there is a risk of a financial collapse when certain variables move far away from their long-term equilibrium positions. In order to tame the cycle and avoid extreme positions, governments should ban the expansion of credit money for the purchase of assets and introduce permanent checks to risky credit.

Full Text

1 INTRODUCTION

This is a theoretical paper whose backdrop is the credit boom leading to the financial crash of 2007 and the first great recession of the twenty-first century. This crisis witnesses the ‘financial instability hypothesis’ of Minsky (1964; 1982; 1986; 1992). It also shows that the ‘originate-to-distribute model of banking,’ which characterizes our financialized economy, has accelerated the deterioration of the debt structures. Section 2 revises the key data of this process in the USA – the epicenter of the financial turmoil.

The Minskyan ‘financial instability hypothesis’ is deployed by means of a predator–prey model. This model was introduced in the natural sciences by Lotka and Volterra. Through a system of differential equations, they captured the systemic interdependency among marine species. In Volterra (1926), the higher the population of whiting (prey), the higher the food ratio and population of sharks (predator). After a certain point, the smaller population of whiting is bound to check the expansion of sharks. The traditional idea of the survival of the fittest is not always true in nature, he concluded.

Goodwin (1967) introduced the predator–prey model to explain the counter-clockwise movement in the employment rate and the labor share in income. A profit squeeze may damage the accumulation process and, therefore, the employment rate. Goodwin's model has prompted numerous extensions to the relation between distribution and accumulation. Goodwin et al. (1984) offer a survey. More recently, Arnim and Barrales (2015) have concluded that the Goodwin–Kalecki model of ‘profit squeeze’ continues to be the preferable approach to explain supply-driven cycles.

Taylor and O'Connell (1985) used a predator–prey model to formalize Minsky's hypothesis of an ongoing climate of financial fragility leading to economic crises. In a nutshell: the endogenous deterioration of the debt structure increases liquidity preference and checks productive investment.

Taylor and O'Connell (1985) was the seminal paper that encouraged post-Keynesian economists to study the dynamic competition between the real and financial sectors of the economy. 1 The new models differ mostly on the variables playing the roles of prey and predator. For Asada (2001; 2011), private debt is the predator, and income (related to capacity utilization) is the prey. In Dejuán and González-Calvet (2005), the predator is the rate of interest, while the prey is the rate of growth of real GDP. Fazzari et al. (2008) and Oreiro et al. (2013) relate the cashflow of firms (inversely related to the rate of interest) to their investment decisions. Taylor (2012) relates Minsky with Goodwin-style cycles.

Without using a proper predatory–prey model, Ryoo and Skott build a variety of stock-flow consistent models to show the relationship between the increasing leverage of firms, the capital gains resulting from the sale of stocks, and the investment decisions that depend on Tobin's q. The final effects on the real economy will depend on whether we adopt a Kaleckian view (capacity utilization closure) or a Kaldorian one (profit share closure). In the Kaldorian version, the real sector itself has an inherent tendency towards cyclical behavior (‘short cycles’), along with the cyclical forces generated by endogenous changes in financial practices (‘long waves’) (Skott 1994; Ryoo and Skott 2008; Skott and Ryoo 2008; Ryoo 2013a; 2013b). 2 Palley (1994; 2011) contrasts the long financial cycles leading to financial crashes with the traditional business cycles. Palley (2013, p. 65) states that credit-led capitalism has developed a ‘predator–prey’ mechanism.

Our paper has also been influenced by Badhuri et al. (2006) and Werner (1997; 2005; 2015). Badhuri et al. confront the real economy (from which output and profits accrue) and the virtual one that inflates bubbles and capital gains. Werner differentiates between the circuit of output transactions and the circuit of non-output transactions (assets). The first circuit is a positive-game. The second circuit is a zero-sum game where bubbles are inflated. He reinstates the ‘quantity theory of credit’ to explain asset inflation.

In our paper, the prey will be the productive sector represented by the rate of growth of real GDP. 3 Since our interest is in the impact of financial forces, we will consider an economy that is growing at the autonomous trend marked by the expansion permanent autonomous demand, with inflation controlled by the central bank. In Section 3 we combine the Keynesian–Kaleckian principle of effective demand (Keynes 1936; Kalecki 1971) and the multiplier-accelerator mechanism. This is the supermultiplier model introduced by Hicks (1950), Serrano (1995), Bortis (1997), Dejuán (2005; 2016), and Serrano and Freitas (2015).

Following Werner (1997), the predator has been identified with the financial sector when it provides credit for non-output transactions. It brings about higher indebtedness ratios and bubbles that (eventually) damage the real economy. Section 4 analyses the forces that affect creditworthiness and their influences on aggregate demand: default rate, indebtedness ratio, burden of debt, vertigo–stampede effects, wealth effects.

In Section 5 (and in the mathematical Appendix 1) we build a variety of predator–prey models leading to self-contained or explosive cycles. Even the first ones may lead to a credit crunch and a recession. This happens when the gap between the current trend of certain variables and their long-term equilibrium rate becomes too broad. Arguably, one of the main contributions of this paper is the presence of gravity centers compatible with the principle of effective demand. The expected growth of permanent demand, provided it endures long enough, is an attractor of the growth of output at full capacity (not full employment). The same rate plus the inflation target fixed by the Central Bank marks the long-term equilibrium growth of credit. In a Sraffian mood, the fundamental value of assets (discounted at the normal rate of profit) becomes a gravity center of asset inflation (Sraffa 1960).

The conclusions of the paper are summed up in Section 6. In order to tame the cycle and avoid extreme positions, governments should ban the expansion of credit money for the purchase of assets and introduce permanent checks to risky credit.

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