Sunday, January 31, 2016

Will Those Who Led the Financial System Into Crisis Ever Face Charges?

The American Bar Association (ABA) Journal has just published an article that asks the question whether any of the individuals that crashed the housing market and engaged in fraudulent behavior leading up to the financial market crisis, will ever face charges?  This is particularly timely as the statute of limitations for securities fraud in many of those cases will run in 2016.  Corporate Justice Blog contributor Dean Steven Ramirez asks this question pointedly in his upcoming book with the NYU Press entitled "Corrupted Justice" where he along with his co-author Mary Kreiner Ramirez describe the behavior of corporate executives at Countrywide, Lehman Brothers, Bear Stearns, and AIG, amongst others, and conclude that fraud was one of the primary causes of the Great Recession of 2008.

According to the ABA Journal, quoting law professor William Black, big banks handed out lousy loans while selling to outsiders that the loans were quality products suitable for packaging into investment offerings.  From the article: 

"[Professor] Black has been a constant critic of the Justice Department’s failure to prosecute lenders with the same verve they’ve gone after borrowers, and his testimony reflected that concern. The lenders didn’t care about misstatements on loan documents, Black testified and the defense argued, because they intended to make the loans no matter what. They wanted to push through as many mortgages as possible and collect their fees and bonuses, and then claim the loans met rigorous underwriting standards, selling them in large lots to other financial institutions and investors."

The article continues: "In the years since the crash, federal prosecutors have used splashy press conferences to announce top banks’ multibillion-dollar settlements (typically paid by shareholders) in cases arising from the subprime mortgage mess. But criminal prosecutions have been reserved almost exclusively for the borrowers. . . . 'Not to excuse wrongdoing by some borrowers, but clearly these were the business plans of large financial institutions, undertaken by human beings within them and, I presume, at the direction of senior executives in furthering the business plan,' says Phil Angelides, a former California state treasurer who chaired the federal Financial Crisis Inquiry Commission’s probe of the causes of the meltdown of 2007-2010.  The Financial Crisis Inquiry Report, released in 2011, was particularly pointed in its criticism of Wall Street, which it found had taken advantage of unprepared regulatory agencies that had been methodically defanged through deregulation over several years. The report noted a term coined on Wall Street that captured the carefree wheeling and dealing in the run-up to the meltdown: “IBGYBG”—”I’ll be gone, you’ll be gone.” The term, the report states, “referred to deals that brought in big fees up front while risking much larger losses in the future.”

Whether any corporate leaders that engaged in loan writing while being influenced by IBGYBG thinking will be prosecuted may be one of the important questions of 2016.

Monday, January 18, 2016

Dodd-Frank Test Looms


Financial markets across the world plunged during the first two weeks of 2016. Global equity markets, for exmple, suffered the worst first two week loss in 20 years. The problem is continued signs of severe macroeconomic weakness which this blog highlighted starting in late 2014, and throughout 2015. Thus, RBS recently advised investors to sell everything to avoid a deflationary vortex.


China in particular has slowed down, dragging most other emerging markets down with it. Chinese stocks are down nearly 20% just in 2016. Emerging markets shares have shed 35% since their recent peak in 2014. Oil prices literally collapsed over the last year (see chart) along with commodities generally, suggesting chronically weak demand. Non-energy commodities crashed by 33% just since mid-2014. Thus, there will be massive financial losses arising from emerging markets, China, energy, and commodities, much of it debt.

In fact, as recently as last week, the megabanks started recognizing losses in their energy loan portfolios. While the losses remain contained right now, one wonders what lies buried in the derivatives books of the megabanks. One indication of the possible losses in derivatives related to energy and other non-performing debt is the fact that the megabanks lobbied successfully to continue selling FDIC-backed derivatives within their banking subsidiaries, as discussed in real time about a year ago on this blog. This indicates there are likely more losses buried in the derivatives markets that logically should end up hitting the capital of the megabanks. Further weakness will inevitably lead to further loss recognition at the megabanks.

The Fed's recent efforts to hike interest rates only exacerbates this global macroeconomic weakness. One commentator termed the Fed's rate hike a policy "blunder." The case for a deflationary vortex, first highlighted in late 2014 on this blog, now seems compelling. The Fed seems as oblivious as it was in mid-2007 to the potential for another financial crisis.

All of this led George Soros to recently raise the specter of a financial crisis like 2008. Soros, of course is a financial genius, with a long record of powerful financial insights and trading successes. Betting against Soros is not a path to success. Soros stated: "When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.” Former US Treasury Secretary Lawrence Summers recently stated: "the global risk to domestic economic performance in the United States, Europe and many emerging markets is as great as any time I can remember. It is time for policymakers to hope for the best and plan for the worst."

Which brings me to the point of this post: Can policymakers count on the Dodd-Frank Act to save us from the horrors of 2008-2009? 


In my next post, I will explain why the answer to that question is a resounding NO!

Friday, January 1, 2016

Happy New Year

photo courtesy of Mark Lane/Wikimedia Commons




We wish all of our readers, followers, contributors, and commentators a happy and healthy 2016.  As always, it is our hope that 2016 will lead to saner and fairer economic polices across the nation and across the world so that crushing economic inequality becomes a distant memory.  Here is to a wonderful 2016.

Tuesday, October 13, 2015

Native Lives Matter, Too

Today in the New York Times, Lydia Millet crafted an Op-Ed that shines a harsh light on police killing of American Indians in the United States.  At a time when #BlackLivesMatter is driving media attention and conversation, Millet writes in "Native Lives Matter, Too" that American Indians are virtually invisible when it comes to loss of life at the hands of law enforcement when per capita, American Indians suffer a higher percentage of killing at the hands of law enforcement than any other race. The Op-Ed states:

"American Indians are more likely than any other racial group to be killed by the police, according to the Center on Juvenile and Criminal Justice, which studied police killings from 1999 to 2011 (the rate was determined as a percentage of total population). But apart from media outlets like Indian Country Today, almost no attention is paid to this pattern of violence against already devastated peoples. When it comes to American Indians, mainstream America suffers from willful blindness."

She further writes:  "Economic and health statistics, as well as police-violence statistics, shed light on the pressures on American Indian communities and individuals: Indian youths have the highest suicide rate of any United States ethnic group. Adolescent women have suicide rates four times the rate of white women in the same age group. Indians suffer from an infant mortality rate 60 percent higher than that of Caucasians, a 50 percent higher AIDS rate, and a rate of accidental death (including car crashes) more than twice that of the general population.  At the root of much of this is economic inequality: Indians are the poorest people in the United States, with a poverty rate in 2013 that was about twice the national average at 29.2 percent — meaning almost one in three Indians lives in poverty."

Sunday, October 4, 2015

NEW LAW REVIEW ARTICLE: Toward a Critical Corporate Law Pedagogy and Scholarship


Image result for wash u law reviewCheryl Wade, dre cummings and I have just posted a new law review article on SSRN that challenges mainstream corporate law scholars and teachers to think more deeply about the role of the modern public corporation in America and beyond. More specifically, we show that corporate law and regulation permits the corporation to operate as a key mechanism of: 1) racial and economic inequality, 2) the devolution of our political system towards a corporatocracy, 3) the continuation of mass incarceration, 4) the Great Financial Crisis of 2008-2009, and 5) even the creeping privatization of education. The article just came out in the Washington University Law Review
Here is the abstract:
In recent years, the publicly held corporation has assumed a central position in both the economic and political spheres of American life. Economically, the public corporation has long acted as the key institution within American capitalism. Politically, the public corporation now can use its economic might to sway electoral outcomes as never before. Indeed, individuals who control public firms wield more economic might and political power today than ever before. These truths profoundly shape American society. The power, control, and role of the public corporation under law and regulation, therefore, hold more importance than at any other time period.  
Even though corporate law and regulation define all aspects of this central economic and political institution within the American system, the development of corporate law is impeded by a deficient pedagogy — and thus, to a certain degree, scholarship — that scarcely mentions the power and influence corporations hold. Critical voices, in particular, are excluded from virtually all corporate law textbooks. Many corporate law texts taught in law school classrooms treat the social role of the public corporation as a black box of corporate law pedagogy and, by extension, mainstream legal scholarship. Indeed, a relentless stream of legal scholarship challenging the law and regulation of the public firm from the perspective of its broader social and economic implications receives little to no mention in the key textbooks adopted and taught from in law schools today. This Article challenges the dominant corporate law master narrative perpetuated in all of the major business law textbooks. This master narrative prevents students of the law and legal scholars from fully understanding and analyzing the changing nature and evolution of law and power in the United States. 
This article forms the basic template of our forthcoming textbook, Business Organizations: A Critical Perspective. The article is available in full for free download, here.

Monday, September 28, 2015

Wealth Inequality Gap Widens Across Racial and Ethnic Lines

The Pew Research Center reports that the wealth inequality gap has widened since the Great Recession.  According to Pew:  "The Great Recession, fueled by the crises in the housing and financial markets, was universally hard on the net worth of American families. But even as the economic recovery has begun to mend asset prices, not all households have benefited alike, and wealth inequality has widened along racial and ethnic lines.  The wealth of white households was 13 times the median wealth of black households in 2013, compared with eight times the wealth in 2010, according to a new Pew Research Center analysis of data from the Federal Reserve’s Survey of Consumer Finances. Likewise, the wealth of white households is now more than 10 times the wealth of Hispanic households, compared with nine times the wealth in 2010."  The median net worth of white families at the end of 2013 was $141,900, while the median net worth of black families at the end of 2013 was $11,000, while the net worth of Hispanic familes was $13,700 as shown in the chart above.  Essentially then, white family net worth is 13x greater than that for black families and 10x greater than that for Hispanic families.

Since 2010, white household wealth has increased by about 2.5% while black and Hispanic household wealth has fallen by 33.7% for black families and fallen by 14.3% for Hispanic families.  Why?  Stock markets have rebounded since the crash in 2008 and generally while households own more stock in retirement accounts than black or Hispanic households, according to Pew.  Further, all households have reduced asset ownership since the Great Recession, but black and Hispanic households have shed assets at greater rates than white households, including lesser homeownership.

Inequality in the United States continues unabated and the trend is that the gap is getting worse, not better.  Again, according to Pew:  "[T]he racial and ethnic wealth gaps in 2013 are at or about their highest levels observed in the 30 years for which we have data."

Wednesday, September 23, 2015

Rupturing the School-to-Prison Pipeline

On Friday, September 25, 2015, the Robert H. McKinney School of Law at Indiana University Indianapolis will host a timely symposium on Rupturing the School-to-Prison Pipeline: State Government Efforts Toward Expungement Reform.  This conference will focus on one of the leading issues in the country: the relationship between the juvenile justice system and the education system.  From the conference description: "Starting a few decades ago, we witnessed school districts across the nation adopt and adhere strictly to zero-tolerance policies in relation to students behavior.  As a result, hundreds if not thousands, of youth are funneled into the criminal justice system for grievances that, in prior years, would have warranted grade penalties, detention, or in-school suspension, but now carry with them a possible juvenile criminal conviction.  Since many state governments do not see the utility in expunging these adjudications, many young people are hampered in their efforts to advance their education, gain employment, or obtain housing because of existing juvenile adjudications.  State governments can act to make minor indiscretions a learning experience and not a life-altering label." 

The symposium will focus on juvenile record keeping, confidentiality and expungement, and will introduce best practices for state governments, local law enforcement agencies and school districts.  The agenda for the program can be accessed here:  Agenda

One constant refrain at the Corporate Justice Blog is how to best enhance the human economic potential of all our nation's citizens.  Often the CJB focuses on policies or practices that act to destroy the human potential and capacity of our citizens to reach their highest capabilities due to short-circuiting entanglements with the criminal justice system in the U.S.  It is difficult to imagine a greater disrupter of human potential than the criminalization of typical adolescent behavior that is trending in the ongoing school-to-prison pipeline.  This program at IUPUI McKinney aims to debate and resolve these problems and tensions.

Thursday, September 17, 2015

NEW LAW REVIEW ARTICLE: New Guiding Principles for ERM

Kristin Johnson and I just posted a new article addressing the new standards for enterprise risk management (ERM) imposed by Congress and regulators in the wake of the Great Financial Crisis of 2008. The article is entitled: "New Guiding Principles: Macroprudential Solutions to Risk Management Oversight and Systemic Risk Concerns."   

The article is the first to comprehensively assess the entire legal and regulatory response to the financial crisis in terms of enterprise risk management in the financial sector. It is also the first analysis to express skepticism of the new risk management regime due to flaws in general corporate governance law and regulation. Professor Johnson and I pioneered legal scholarship in the ERM arena, with prior works like thisthis, and this, and this piece extends our research into this key area of growing importance in financial regulation and corporate governance. Many of our prior works argued for improvements in ERM that ultimately became law. 

Here is the abstract for our most recent publication on ERM:

The financial crisis of 2008 revealed massive failures in risk management throughout the financial sector. Congress and federal regulators responded to these manifest failures with initiatives to reconstruct risk management structures within large financial institutions and public firms. Nevertheless, these initiatives rely upon proper corporate governance frameworks creating proper incentives for senior managers and directors to attend to risk management. As such, these initiatives are unlikely to succeed and expose our economy to continued macroprudential risks and resulting financial instability. In sum, these corporate governance-oriented reforms are too weak to stem the tidal wave of enterprise risk and systemic risk that risk management failures at financial firms engender. Continued reliance on these types of reforms is not inherently problematic. The failure to recognize the limits of this approach, however, may well lead to even more devastating risk management failures, market disruptions, and the realization of irreversible systemic risks.

The article was part of a symposium on financial regulation sponsored by the St. Thomas Law Journal, and is available for free download here.

Saturday, September 12, 2015

NEW LAW REVIEW ARTICLE: Capitalism, Inequality, and Reform

Richard Delgado is one of the nation's foremost legal scholars. So, it is with great hesitation that I disagree with him. Nevertheless in the course of debating my book, Lawless Capitalism, we reached a fundamental impasse regarding the nature of capitalism and its adaptability to egalitarian reform under law.

I argue that because of its fundamental values of meritocratic competition, broad-based economic opportunity, and economic growth, capitalism can achieve durable egalitarian reforms under conditions of low economic inequality. On the other hand, high economic inequality means that powerful elites control sufficient resources to subvert law and regulation in their favor while short-circuiting any semblance of meritocracy and real economic opportunity for the mass of fellow citizens. Naturally, such behavior leads to retarded economic growth. Of equal importance, I argue that high inequality corrodes the rule of law, as economic elites wield more resources to free themselves from the constraints of law and regulation in ways that others cannot. With very high inequality the rule of law ceases to exist and instead elites use law as an instrument of oppression. Rule by law displaces the rule of law.

Professor Delgado is skeptical that capitalism can ever achieve durable reform under law. His disagreement is stated far better than I could summarize, here and here.

Lawless Capitalism constitutes a legal and regulatory case-study in how financial elites subverted law and regulation before and during the Great Financial Crisis of 2008. As such, it builds upon the work of Mancur Olson and the work of other high-profile economists that shows how high inequality subverts the rule of law. Essentially, elites gain control of the law rather than operating under the rule of law. Nowhere is this dynamic more evident that with respect to Wall Street megabanks today, as this blog has chronicled, here and here. Indeed, it is fair to say that this blog leads the world in cataloguing the abuse of the rule of law by those holding concentrated economic resources.


American capitalism can rightly be criticized for failing to reform itself in any meaningful way following the Great Financial Crisis of 2008. Yet, this is not an inherent flaw of capitalism as some, such as Richard Delgado, suggest. Historically, such as during the Great Depression, American capitalism did achieve egalitarian reforms. In other nations, such as Denmark and Japan, more egalitarian forms of capitalism have taken root. These more egalitarian forms of capitalism occurred within systems featuring much lower economic inequality than that which prevails in the US in recent years. This suggests that capitalism can devolve into lawless capitalism under conditions of high economic inequality, whereby economic elites can dominate law and regulation to entrench themselves in ways that retard general macroeconomic growth. This is consistent with theoretical and empirical work from economics. The article concludes that high economic inequality (not capitalism per se) presents a unique danger to core values of capitalism, such as meritocratic competition, sustainable economic growth, and a broad distribution of economic opportunity. This is all consistent with the thesis of Lawless Capitalism which posits that high economic inequality led to legal and regulatory subversion for great profit for small bands of financial elites and great cost to the entire global economy during the Great Financial Crisis of 2008. Further, the US now faces the prospect of an entrenched elite with massive economic power and the incentive to sabotage economic growth for profit.
The full article just came out in the Wake Forest Law Review and is available on SSRN for free download, here.

Tuesday, September 1, 2015

"Hip Hop and the Law" Just Published

Dear Readers,

I am excited to share with you that the Carolina Academic Press has just published HIP HOP AND THE LAW, an innovative scholarly collaboration and textbook edited by our colleagues andré douglas pond cummings, Donald F. Tibbs, and the late Pamela Bridgewater.  

The book is dedicated to Pamela Bridgewater in recognition of her work in editing this book, her final scholarly effort, and in honor of the lasting contributions she made to our community.

The book features MANY of the members of the minority professor listserv (and I am proud to be a contributor).  Its chapters explore the varied ways hip hop music and culture interact with and comment on American law. These essays speak to a multitude of substantive issues, including the content of a hip hop and the law perspective and the interaction between the hip hop consciousness and 21st century legal activism. These chapters also provide incisive hip-hop driven accounts of various doctrinal issues ranging from intellectual property to mass incarceration.  

This volume is available now from Carolina Academic Press.  It is not only a substantive contribution to this growing area of scholarship, but it also provides a substantial text for classroom use for those interested in offering a Hip Hop and the Law course.

Please join me in congratulating dré and Tibbs and the many contributors to this volume for this accomplishment.

best, 

Atiba R. Ellis
Professor of Law
West Virginia University College of Law
101 Law Center Drive | P.O. Box 6130 | Morgantown, WV  26505-6130
Office:  304.293.4810 | Fax:  304.293.8102 | atiba.ellis@mail.wvu.edu

Thursday, August 27, 2015

Reveal, Restore and Resurrect: The Truth About Racial Disparities in the Arkansas Criminal Justice System

On August 28-29th, 2015, the University of Arkansas at Little Rock William H. Bowen School of Law will host a critically important conference "Reveal, Restore and Resurrect: The Truth About Racial Disparities in the Arkansas Criminal Justice System."  This conference, based on the newly completed report  generated by the Racial Disparities in the Arkansas Criminal Justice System Research Project which found fairly stark racial disparities in Arkansas's policing and prison outcomes, will seek to uncover the reasons that racial disparities exist in Arkansas's criminal justice system and develop strategies to overcome and equalize criminal punishment in The Natural State.

The slate includes several keynote speakers, panels that include activists, scholars, judges, and formerly incarcerated persons, and scheduled time to brainstorm on strategies and proposals to end criminal justice racial disparities in Arkansas and across the nation.

Saturday, August 22, 2015

One Ugly Week in Global Finance (Deflation 2015 Update)


Nevertheless, that was probably not the worst news of the week. In fact, the US stock market is late to the real horror show--which is a deflationary vortex that is rapidly spreading throughout the global economy, particularly in Asia and emerging markets. Consider the following news from last week:

1) On Monday morning the WSJ reported: "Japan’s economy contracted in the second quarter as overseas demand for Japanese goods slumped and households spent less, raising the possibility the government will act to bolster an anemic recovery. Japan’s gross domestic product shrank 1.6% on an annualized basis in the April-June quarter, according to data released Monday by the Cabinet Office." Japan teeters toward recession.

2) On Monday the FT reported that: "Russia, Turkey, Malaysia and Taiwan headed a lengthening list of emerging market countries seeing their currencies pummelled by markets’ continued fixation with China’s slowdown and an imminent US rate rise." Emerging market currency devaluations means more exported deflation worldwide.

3) On Tuesday USA Today reported that China's main stock index "plunged more than 6% . . . and other Asian markets also declined as investors appeared to show a delayed reaction to news that China's market regulator would allow market forces to play a greater role in determining stock prices.The mainland China stock benchmark's 6.2% drop to 3,748.16 was its biggest decline in three weeks. The index fell 8.5% in late July as worries about China's ability to maintain high economic growth levels undermined investor confidence." China's stock market crash now mirrors the Crash of 1929.

4) On Wednesday USA Today reported that: "The stock market closed lower Wednesday after minutes from the Federal Reserve's last policy meeting showed the central bank was 'approaching' its first rate hike in nearly a decade. . . .The Dow Jones industrial average ended down 162 points" and "[t]he energy sector was the hardest hit as oil prices tumbled about 4% after a government report showed that U.S. crude stockpiles rose. U.S. benchmark crude fell $1.82 to $40.80 a barrel." Oil prices now stand at a six year low threatening a huge part of the global economy with an oil depression.

5) On Thursday CNBC reported that "China, which is at the heart of the region's deflation challenge, has seen 41 consecutive months of falling producer - or wholesale - prices. In July, the country's producer prices index (PPI) fell 5.4 percent from a year earlier, the worst reading since late 2009, during the aftermath of the global financial crisis. Over the past nine months, PPI deflation pressures have reached nine out of ten economies in the region." Virtually all of Asia is now in a "deflationary funk."

6) Yesterday Bloomberg reported that: "The Bloomberg Commodity Index of 22 raw materials dropped Wednesday to its lowest since 2002, paced this year by declines in nickel, sugar, and crude oil" and that "[s]lumping prices for raw materials have wiped out $2.05 trillion from the shares of mining and oil companies since the middle of last year." Emerging markets now face a "death spiral" of falling commodity prices and falling currencies.

7) Yesterday the WSJ reported that: "[t]he Caixin China Manufacturing Purchasing Managers' Index . . . fell to a 77-month low in August." This private survey contradicts official sources and proves China is in much worse shape than previously thought.

All of this highlights that serious deflation haunts the global economy with China, Japan and other emerging markets suffering serious economic slowdowns accompanied by severe crashes in the market price of almost all commodities. Now, these nations are exporting deflation through falling currencies which effectively slash prices on everything they produce. This constitutes a serious threat to the global economy.  On top of those problems, Greece and the Eurozone are still a mess.

This blog first discussed this "perfect storm" of financial threats on December 12, 2014 and again on December 14, 2014. At that time I bemoaned the lack of any effective mechanism for sound fiscal and monetary stimulus for the global economy. I have made the same point with respect to the Eurozone. I wrote a law review article (a book review of Globalization and its Discontents by Joseph Stiglitz) on this point in 2003, and I addressed this flaw in global financial architecture in Lawless Capitalism. I have also blogged on pro-growth reforms that would help lift the global economy out of its structural deflationary malaise, such as empowering people to move freely to their highest and best use or banking currency reserves.

The other major problem with all these extreme market moves relates to the world's unregulated and opaque derivatives markets. Here, the question of the day relates to the exposure of the megabanks to the oil patch, the emerging market sector and China. My bet is that the megabanks booked big profits on all that soon-to-be distressed debt and now face the losses from those derivatives deals. If so, this meltdowm in Asia and the energy sector is about to hit home on Wall Street and our dysfunctional financial sector. Think MF Global or the London Whale.

Right now, the US economy does not face any Doomsday threat; but, that can change quickly if it turns out our oil sector collapses or the megabanks must book huge losses on derivatives transactions involving commodities, Asia or emerging markets.

Wednesday, August 19, 2015

High Inequality and Deflation 2015: Rigged Globalization



The above chart shows the massive cash hoarding undertaken in order to influence the price of exports from developing countries. While the crash of 2008 momentarily slowed the growth of world currency reserves, they promptly soared after mid-2009 as nations desperately sought to grow through exports at the expense of the price-competitiveness of other nations.

Of course, the best nation for consumption and imports is by far the USA so it is only natural that exporting nations seek to accumulate dollars to make their manufacturing sector more price competitive in dollar terms, as depicted above, showing about 2/3 of all reserves are held in dollar denominated instruments.

Today currency reserves amount to about $12 trillion--and thus represent a substantial use of the world's total capital. Essentially, developing nations face incentives to buy dollars in order to weaken their currency and strengthen the dollar because reserves subsidize the export sector of their economies. The US dollar is the ideal reserve currency because the market for dollar assets is deep and liquid.

In theory, and to some degree in practice, currency reserves serve a legitimate purpose for developing countries. Countries accumulating foreign currency reserves can use them to defend the value of their currency in the event their currency is subject to speculative attack or any financial crisis causes currency disruptions. By selling foreign currency reserves, such as dollars, they can restrict the supply of their own national currency and cause it increase in value relative to the dollar. It can be very important to defend the value of a national currency because the vast majority of international debt is denominated in dollars. This means that if a currency dives in value relative to the dollar debt burdens can increase often dramatically. As a result nations cannot allow the value of their currency to dive or public and private debt burdens can spiral out of control and a financial crisis may ensue.

Fine. But, economists have shown again and again that the degree of reserve accumulation cannot be explained by the need to defend  a currency's value in time of crisis. Instead, they have identified 20 nations that clearly accumulate currency reserves to lower the cost of their exports to the US and other developed nations. This currency manipulation through constant accumulation of dollar reserves is highly costly to the global economy.

According to Maurice Obstfeld and Kenneth Rogoff the accumulation of currency reserves was "intimately connected" to the financial crisis because it allowed the US "to borrow cheaply abroad and thereby finance its unsustainable housing bubble." The stronger dollar meant lower cost exports, lower inflation and thus lower interest rates. The constant purchase of dollar denominated assets (no country holds actual currency as currency reserves opting instead for the safest and most liquid dollar-denominated assets) also lower interest rates in the US as well as the developed world. I explained this dynamic in detail in chapter 4 of Lawless Capitalism.

Today, this festering problem with our global economy appears to be spawning global deflation throughout emerging markets and even into China and Japan. Basically, by accumulating reserves central banks in exporting countries divert investment from their own economies in order to purchase low-yielding debt of developing countries. Over the long term this suppressed investments hobbles their growth.

Meanwhile, in the developed world, currency reserves mean more debt and fewer jobs as is evident (see chart above demonstrating the role of the Euro in reserves). In the US and the Eurozone, economists estimate that the entire output gap experienced since the financial crisis can be attributed to currency reserves. Experts estimate that the US alone has lost up to 5.8 million jobs.

Thus growing currency reserves are a powerful deflationary force.

As Nobel laureate Joesph Stiglitz stated in 2010: "the UN Commission of Experts on Reforms of the International Monetary and Financial System highlighted the ways in which the dollar reserve system contributed to global financial instability and a weak global economy. While many of its arguments were already well known—Triffin had noted that the reserve currency country got increasingly in debt as others’ held more of its IOU’s as part of their reserves,and Keynes had noted that the build-up of reserves by surplus countries led to weaknesses in global aggregate demand—the crisis gave them increased salience." Stiglitz also argues there is a remarkably "simple" solution to this issue--to expand the use of special drawing rights issued by the IMF. This would serve as a mechanism for broadening the burden of the reserve currency.

I extended this concept to argue in favor of a more aggressive investment approach for these reserves by creating a global development bank for currency reserves to fund infrastructure projects like schools, universities, water supplies, green energy platforms, and to actualize economic human rights.

Nevertheless, such common sense solutions have gained no traction in the wake of the financial crisis. Instead, as is evident in the chart above reserve accumulation has proceeded apace. Why?

High Inequality. When a small group controls massive wealth they can dictate law for their profit regardless of costs to society as a whole. This irrational model of globalization fattens transnational corporate profits--and by extension executive compensation. They produce cheap in China and sell cheap in the US because the dollar is the reserve currency. I formalized this basic point in American Corporate Governance Law and Globalization.

In sum, globalization has been hijacked and sabotaged by powerful interests in the US that profit from the deflationary forces unleashed by the constant accumulation of massive currency reserves.

Tuesday, August 11, 2015

High Inequality and Deflation 2015: The Problem of Too Much Savings

Today, China devalued its currency, effectively cutting the price on everything it produces. It was the largest devaluation out of China in 21 years. It is just the latest sign of spreading deflationary pressures. It will probably get much worse from here.

A potentially historic deflationary vortex threatens to engulf the world. In fact, a recent survey of financial experts found that an overwhelming majority think that deflation is a much larger worry than inflation. Worse, the Fed seems determined to raise interest rates notwithstanding the deepening slowdown behind falling prices. The Fed seems oblivious to the fact that despite massive monetary stimulus, a deflationary spiral simply cannot be discounted.

This blog has long covered the deflationary forces gripping the global economy on a step by step basis. That vortex is manifestly forming today as evidenced by the oil and commodities crash, the apparent crash in China, the increasing deflationary pressure emanating from the Eurozone and Japan, negative interest rates worldwide, collapsing emerging market exchange rates, and a world awash in debt and debt defaults. Today, it is fair to say that world economy hangs by a thread above a vortext of deflationary forces. What are the roots of this deflationary threat?


Perhaps the most deflationary force in the world today is very high economic inequality in the US. I will support and defend this proposition in a series of blog posts, starting with this one.

The first problem with high economic inequality is that the marginal propensity to consume is much higher for the middle class and lower classes than for the very wealthy. High inequality therefore leads to too much savings.

The very wealthy save much more of their income. This means that as the very wealthy control more of the nation's GDP, and today they control a historically high amount of GDP (as demonstrated in the chart at right), the more national income than diverted from growth stimulating consumption and toward savings. Too much savings leads to savings gluts and bubbles because massive income is diverted from consumption to savings but too many consumers are deprived of the ability to pursue growth-enhancing innovation. That leads to too much savings and not enough productive investment opportunities.

At the same time, more global GDP has been diverted from consumption to savings by the continuing growth of globalization and China as the world's manufacturer. The savings rate in China is about 50 percent, compared to 18 percent for the US. India saves nearly twice as much as the US. So every time jobs move from the US in search of cheaper labor it leads to higher corporate profits for the top income earners here who enjoy dividends and incentive bonus compensation as well as more savings in developing economies such as China or India. The net result is a massive transfer of global demand to less stimulative savings. This point is more fully documented in Chapter 4 of my book Lawless Capitalism, entitled "Rigged Globalization."

In a forthcoming post, I will discuss the highly dysfunctional global financial system that is supposed to channel savings to productive investment but does not. The point here is simply that massive money is drained from the economy to fund a highly sub-optimal global economic system and distribution of income, and that is highly deflationary.

ADDENDUM (AUG. 12, 2015):

“As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.” China's currency devaluation could spark "tidal wave of deflation," Guardian (quoting Société Générale economist Albert Edwards).

Thursday, July 30, 2015

Law For Black Lives Matter

On July 31st and August 1st, 2015 in Harlem, NY, the Black Lives Matter movement is moving aggressively into the legal arena at the Law For Black Lives conference.  Sponsored by the Center for Constitutional Rights and the Bertha Foundation, "#Law4BlackLives is a national gathering of lawyers, law students, legal workers, and jailhouse lawyers who are committed to building a world where #BlackLivesMatter.  More than a meeting or a conference, this gathering is a call to action for legal advocates from diverse parts of the country to join together and spend a day dreaming about how we can support the growing Movement For Black Lives.  This space will prioritize the voices and leadership of people of color, most importantly Black lawyers and legal advocates."

Events on Thursday, July 30 - Friday, July 31 will be held at the Riverside Church in Harlem (490 Riverside Dr, New York, NY 10027).

Events on Saturday, August 1 will be held at Columbia University (Lerner Hall - 2920 Broadway, New York, NY 10027).