kathmandu: Close-up of pussywillow catkins. (Default)
I read this book called Catastrophe in the Making about New Orleans and Hurricane Katrina. It took the long view, tracing New Orleans' history from its start as a very small settlement where piracy was an important part of the local economy to the modern day.

One of the things the author pointed out was that, of the several canals in and around New Orleans, only the first two were built with local money. They were small, short canals that made local shipping more efficient, and local business-owners found it worthwhile to build them.

Every canal after that was a product of the Growth Machine.

The Growth Machine is the author's term for when a group of business-owners and local government officials band together and announce they're going to "boost Smalltown" and "help Smalltown grow" and so forth. They petition the state and national government for grants for large construction projects---it may be a canal, or a highway, or a dam, or 'urban renewal'. They claim it will produce wonderful economic development, new businesses, trade, agriculture, the sky's the limit!

But it doesn't. The real point of these projects is to bring in outside money for the construction. The construction-company owner and his buddy the mayor pass out the grant money to their supporters, thereby entrenching their own power more firmly. The construction does happen, but it never generates any new economic activity. The local economy "grows" by exactly the amount of grant money coming in, for exactly as long as the grant runs, and then it goes back to its old size. The town didn't have the skills and opportunity to make productive use of the construction, or the construction was never capable of being useful. No canal on earth could have turned New Orleans the river town into the seaport it wanted to be, and the river that the grant applications described as narrow, shallow, choked with snags, and plagued by fogs was still deeper and wider than any canal they could have built. The canals built with federal grant money were mostly obsolete before they were finished, or obsolete soon after, but from their boosters' perspective, that wasn't a problem; it had never really been about shipping, only about getting the money. Which was why they had patiently lobbied, for decades, over the Army Corps of Engineers' strong objections, for federal funding: they certainly weren't going to fund useless canals themselves. Just like the pirates of old, they were bringing in outside resources rather than producing anything.

A few days after I read this I watched some early episodes of Leverage that I'd missed the first time around. In the first episode, Sophie pretends to represent the Nigerian government, looking for a contractor to build a fleet of small planes. The airplane-company guy points out that Nigeria has very few airports, with very bad runways, could they really use new planes? And Sophie says that that isn't the point, now is it? The planes will be paid for with foreign aid, so don't worry your pretty little head about it.

And I thought, this is the Growth Machine. Foreign grant money coming in, and someone will get the contract in exchange for supporting the politicians in power, and all the sub-contractors will get their own shares to hand out in exchange for support, and probably there will be bribes at every step. And it won't matter to the lobbyists if the planes are never used.

It's useful to have a term for a phenomenon that comes up so often. Makes it easier to distinguish the Growth Machine from real development.
kathmandu: Close-up of pussywillow catkins. (Default)
Crooked Timber had a post by John Holbo last month on The Economics of Elfland. It included a paragraph saying:

Zombie economics is all well and good. But maybe we need a volume on the Economics of Elfland. ‘The Magic of Money’ is a standard theme. It’s mysterious stuff, how it grows and breeds and exerts strange power over the mind, charming whole populations. All gold, in an economic sense, is fairy gold. It lasts as long as the spell it casts lasts. So how has the general subject of economics – not just money and gold – been treated in fairy tales? There’s Midas, of course. Bit of a cautionary tale, that one. I can’t think of too many examples, but I expect they would tend to be along Jack Frost lines. The magical creation of money is an invitation to satire. Are there fairy tales about elves crashing the economy with fairy gold-induced hyper-inflation? Or saving the economy with a heroic helicopter drop? Stories about elves themselves fleeing Elfland for the human world, with its relatively stable currencies? Hedge fund managers practicing crude ‘hedge magic’, to get rich quick, only to call up dark forces beyond their control or comprehension?


No there aren't stories like that, because Holbo has fundamentally misunderstood the stories about fairy gold. When a fairy makes a deal with a human, and pays in golden coins that turn into dead leaves in the morning, that wasn't real fairy currency. The whole point of the story is that the human has been scammed. The fairy deceived the human into thinking dead leaves were valuable just long enough to get away.

In our economy, fairy gold was all those promises about the money to be made from real estate. Banks were making mortgages they knew the borrowers could never pay off, but recording the loans as though they were worth real money. Fairy gold evaporating is a metaphor for those loans going bust, the phantom income having to be removed from bank balance sheets, those houses turning out not to be capable of attracting that much real money.
kathmandu: Close-up of pussywillow catkins. (Default)
A majority of delinquent [home] loans (and loans in foreclosure) are prime loans.

Subprime mortgages are made at extra-high interest rates to borrowers who have bad credit. The worst loans made during the bubble were to people with good credit (meaning they were 'prime' borrowers) but nowhere near enough income to make the payments on bubble-inflated prices. Now that the teaser interest rates are expiring, they can't make payments and their loans are headed for foreclosure.
kathmandu: Close-up of pussywillow catkins. (Default)
So "health care reform" passed. Except that this isn't anything to do with actual health care; this is about insurance. And it doesn't really qualify as reform either. Oh, they say it bans insurance companies from refusing to take customers with pre-existing conditions, and that it bans insurance companies from denying coverage when you try to use it (PDF, but a great summary. You should go read it), but some states have bans like that already, and they don't help. Bans are only effective if they have strong enforcement clauses. This has very weak enforcement clauses: companies that deny coverage will be fined ten dollars a day. That's $3,650 a year. Just one specialized medical procedure can cost more than that; surgery can cost a lot more. So insurance companies will find it totally worthwhile to deny coverage, pay $3,650 a year fine, and let people die of kidney failure or whatever.

When you get right down to it, almost the only thing this bill does---besides making it even harder to get an abortion when you need one---is require all of us Americans to pay lots of money to insurance companies, without getting actual health care in exchange. If the money we can pay is not enough, the government will pay even more of our collective tax money to make sure the insurance companies get as much money as they want.

This is, in fact, the third leg of the bailout. Finance, Insurance, and Real Estate got us into economic trouble. Finance and Real Estate have already been bailed out. Now it's Insurance's turn.
kathmandu: Close-up of pussywillow catkins. (Default)
This isn't about health care. This is a bailout.

The bill as it seems likely to pass forces individuals to pay lots of money to insurance companies. People who don't pay money to insurance companies will be fined. If that still doesn't produce enough money to satisfy the insurance companies, the government will pay extra money directly to the insurance companies.

The financial industry (banks and investment brokers), the real-estate industry, and the insurance industry, are all so closely intertwined that economists treat them as one sector of the economy. In this current economic crash, we've already seen bailouts for the banking industry and the real-estate industry. This is the third part, bailing out the insurance industry.

Health care is just an excuse. You can tell because anything that might have improved actual health care has been systematically stripped out of the bill: no guaranteed publicly funded care, no publicly-run insurance, no option to just pay a doctor directly, no anything that wouldn't allow private insurance companies to rake off tons of money.
kathmandu: Close-up of pussywillow catkins. (Default)
I read a lot of economics blogs, and I'm getting very tired of seeing people use the term 'fiat money' to describe any currency that isn't backed by gold. That's not what fiat money is. Fiat money is like the old Soviet ruble: the government just decreed what the ruble was worth, regardless of outside reality.

What we have, in the U.S. dollar, is consensus money: everybody goes out and exchanges dollars for goods and services, and prices develop by agreement: one dollar = one hamburger, or 1/7th of a paperback book, 1/5th of a footlong grinder from Subway, 1/15th of a CD, and so on. If somebody claims that their dollar is worth more, that they should be able to buy a whole lobster dinner for one dollar, they can claim that all day, but no one will sell them a lobster dinner, because everyone else agrees that lobster dinners are worth a lot more than one dollar. That's consensus money.

But I just recently realized that we do have a form of fiat money. See, money isn't just cash. It's also the money in bank accounts, investment accounts, and the value of physical objects. Normally banks are required to keep track of what their loans and other investments are worth: what price they sell for on the open market. This is called 'mark to market', and it keeps the official price in line with the consensus value of the investment.

But early this year, the government announced that it would no longer require banks to mark the value of their investments as what the market agreed they were worth. Now the banks get to 'mark to model': declare an arbitrary value, regardless of what anyone would actually be willing to pay.

Mark-to-model is fiat money: the banks just decide how much they want their loans to be worth, and announce that It Is So. Look at a negative-amortization option ARM, where the borrower has never paid back any principal, never even kept up with interest. That is obviously a loan the borrower can't or won't repay, and all the principal is lost. The loan is worthless. But under mark-to-model, the bank can claim that the loan is worth lots of money, just based on their word. That is fiat money.

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