Signs of the Economic Apocalypse, 6-25-07

From Signs of the Times:

Gold closed at 657.00 dollars an ounce Friday, down 0.3% from $658.70 at the close of the previous Friday. The dollar closed at 0.7426 euros Friday, down 0.6% from 0.7469 at the previous week’s close. That put the euro at 1.3466 dollars compared to 1.3388 the Friday before. Gold in euros would be 487.90, down 0.8% from 492.01 for the week. Oil closed at 69.14 dollars a barrel Friday, up 1.7% from $68.00 at the close of the week before. Oil in euros would be 51.34 euros a barrel, up 1.1% from 50.79 for the week. The gold/oil ratio closed at 9.50 Friday, down 2.0% from 9.69 the Friday before. In U.S. stocks, the Dow Jones Industrial Average closed at 13,360.26 Friday, down 2.1% from 13,639.48 at the close of the week before. The NASDAQ closed at 2,588.96 Friday, down 1.5% from 2,626.71 for the week. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 5.13% Friday, down four basis points from 5.17 at the end of the previous week.

Stocks fell last week on news that problems in the subprime mortgage market are affecting hedge funds.

Wall Street stumbles as subprime worries reemerge

Jennifer Coogan

Jun 22, 2007

NEW YORK (Reuters) - Stocks tumbled on Friday, wrapping up their worst week since a global sell-off in February amid fears that trouble at two Bear Stearns hedge funds may signal worse problems lie ahead for credit markets.

Investors also were rattled by news that Democrats in the U.S. Congress introduced legislation to end a tax advantage for investment fund managers as well as a jump in volatility ahead of the rebalancing of several important benchmark indexes.

The session's losses did not derail the market debut of private equity firm Blackstone Group LP, which surged over 13 percent following the biggest U.S. initial public offering in five years.

However, the broader financial sector did not fare nearly as well. The S&P financials group sank to a two-month low as efforts by Bear Stearns Cos. to rescue one of two ailing hedge funds with steep losses on subprime mortgage bonds focused attention on troubles in the sector.

Investors worry Bear's problems could presage a credit crunch that would stall the takeover boom that has powered the stock indexes to all-time highs.

"This shows that the subprime market is not some funny little area, this is serious stuff and has the potential of upsetting a lot of apple carts," said Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey. "There are a lot of players in this game, everybody was involved because it was a very lucrative market."

The Dow Jones industrial average was down 183.31 points, or 1.35 percent, at 13,362.53. The Standard & Poor's 500 Index was down 19.50 points, or 1.28 percent, at 1,502.69. The Nasdaq Composite Index was down 28.00 points, or 1.07 percent, at 2,588.96.

For the week, the Dow lost 2.1 percent, the S&P shed 2 percent and the Nasdaq slipped 1.4 percent.

Bear Stearns said on Friday it will provide up to $3.2 billion in financing for a struggling hedge fund that it manages, but sources said a second fund is still working out a restructuring plan with creditors. Bear Stearns shares fell 1.4 percent to $143.75, capping a 4.2 percent decline on the week.

Other investment banks with large mortgage exposure also dropped. Lehman Brothers Holdings stock fell 3.3 percent to $76.62. Merrill Lynch & Co. stock was down 3.2 percent to $84.48. The S&P financials lost 1.7 percent.

Blackstone shares surged 13.1 percent to $35.06 in its market debut as the largest private equity firm to go public, raised $4.13 billion in an initial public offering on Thursday.

The Bear Stearns hedge fund problem looks unfortunately like a harbinger of worse things to come:

Bear Stearns funds collapse hits subprime securities market

Nick Beams
21 June 2007

The major investment and brokerage firm Merrill Lynch is going ahead with a sale of $850 billion worth of financial assets seized from two troubled hedge funds controlled by another major Wall Street firm Bear Stearns.

The confrontation between the two Wall Street giants started to unfold on Tuesday following news that the two hedge funds, set up only 10 months ago, were experiencing sharp falls in the valuation of their assets.

Initial reports suggest there is interest from other investors in purchasing the assets, consisting mainly of collateral-backed debt obligations, mostly related to subprime mortgages. Provided buyers can be found, the sale process is expected to proceed smoothly. But if the assets have to be liquidated at so-called “fire sale” prices this could trigger turbulence across financial markets.

The decision to sell came after the rejection of a plan by Bear Stearns to save the funds. Under the plan, Bear Stearns would have put up $1.5 billion with other banks contributing $500 million in new equity to meet margin calls. In return, creditors would have had to agree not to make margin calls for another 12 months.

Merrill Lynch apparently rejected the plan because it felt that over a period of 12 months the market could move against the Bear Stearns investments.

The collapse of the two funds is symptomatic of problems in US financial markets caused by the fall off in the housing market, which has exposed the risky financing operations undertaken during the housing boom. It is estimated that since 2000 Wall Street has created more than $1.8 trillion worth of securities backed by subprime mortgages.

Now with the national median home price set to show the first annual decline since the Great Depression and the stock of unsold homes at a record 4.2 million, Wall Street firms, which have invested heavily in mortgage-backed securities, are beginning to feel the effects.

Goldman Sachs, the world’s biggest securities firm, and Bear Stearns, the largest underwriter of mortgage-backed securities in 2006, have both reported that the increase in foreclosures has hit their profits. Bear Stearns said profits fell 10 percent, while Goldman Sachs reported a 1 percent gain, the smallest increase for three quarters.

The brief history of the failed Bear Stearns hedge funds is indicative of the way in which the market pressure to accumulate ever-greater profits leads to increasingly risky ventures.

The two funds—High-Grade Structured Credit Strategies Enhanced Leverage Fund and the High Grade Structured Credit Strategies Fund—were set up by Bear Stearns just 10 months ago.

As the length of their names indicates, they were to be engaged in highly complex operations in the securities markets. But while the methods were complicated, the underlying profit plan was simple: the aim was to borrow a large amount of money to make big bets on the sub-prime mortgage backed securities market. The market has seen an increasing degree of turbulence in the recent period because of the increased level of mortgage defaults by high-risk borrowers.

The funds manager, Ralph Cioffi, described by the Financial Times as having a “stellar reputation”, apparently believed that collaterised debt obligations (CDOs) backed by subprime mortgages would start to increase in value over the longer term following their recent decline.

With Bear Stearns, one of the biggest operators in the mortgage business, and given Cioffi’s reputation, money for the funds was not hard to come by. Some of the world’s biggest finance companies, including Citigroup, Barclays, Merrill Lynch, Goldman Sachs, Deutsche Bank, Credit Suisse and Bank of America extended as much as $9 billion in credit. The funds also raised around $600 million in equity from investors, including $40 million from Bear Stearns and its executives.

Problems started to emerge last month when Enhanced Leverage reported that its value fell 6.75 percent in April after its bets in the mortgage market had gone wrong. Two weeks later it reported that the loss was 18 percent, sending a shiver of fear through investors.

The sudden increase in the loss estimate indicates the inherent valuation problems in the complex derivatives markets in which the funds were dealing.

As an article in Wednesday’s edition of the Wall Street Journal explained: “Unlike stocks and Treasury bonds, whose prices are continually quoted and easily explained, many of these derivative instruments trade infrequently and don’t have clear market prices. To come up with market values for these investments—a process known as ‘marking’ their positions to market—investment funds often rely on their own valuation models.

“They might also ask the dealers who sell them the bonds to update them on changes in the bonds’ underlying value. When there are no sales to base prices on, dealers come up with prices based on their own statistical models and an array of assumptions about what’s happening in the market or the assets that back the securities.”

This means that there can be some very rapid shifts in valuations. A market value in “normal” times may be very different from one obtained in a period of stress—and the transition from one period to another can take place quickly.

According to the Wall Street Journal, there has been “no indication that Bear Stearns’s managers sought to mislead lenders or investors about the value of the funds. Indeed, the firm’s approach to valuing its securities seems to be in line with guidelines set up by Moody’s Investor Service, which evaluates hedge-fund practices. But this crisis does point to the kinds of valuation problems hedge funds and their investors can run into, even when they follow sound practices.”

These words bring to mind the collapse of the Long Term Capital Management (LTCM) hedge fund in 1998. LTCM also followed “sound practices”—its valuation and pricing model was designed by Nobel laureates—but an unexpected shift in currency market valuations led to the collapse of the fund, necessitating a $3 billion bailout organised by the then Federal Reserve Board chairman Alan Greenspan in order to prevent a meltdown of the financial system.

Since the LTCM collapse, the spreading of risk had made markets less vulnerable to the collapse of a single fund. But as Financial Times commentator Gillian Tett observed: “Although the financial system has absorbed isolated failures, no one knows what might happen with a string of collapses.

In such an environment with massively leveraged hedge funds creating derivatives on a huge pile of really bad debt, a huge collapse can take place quickly. But it won’t take place without warning. The word has been going out that the plug will get pulled soon, and we ignore it at our peril.

It’s Official: The Crash of the U.S. Economy has begun

Richard C. Cook

June 14, 2007

It’s official. Mark your calendars. The crash of the U.S. economy has begun. It was announced the morning of Wednesday, June 13, 2007, by economic writers Steven Pearlstein and Robert Samuelson in the pages of the Washington Post, one of the foremost house organs of the U.S. monetary elite.

Pearlstein’s column was titled, “The Takeover Boom, About to Go Bust” and concerned the extraordinary amount of debt vs. operating profits of companies currently subject to leveraged buyouts.

In language remarkably alarmist for the usually ultra-bland pages of the Post, Pearlstein wrote, “It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring.”

Further, “Falling stock prices will cause companies to reduce their hiring and capital spending while governments will be forced to raise taxes or reduce services, as revenue from capital gains taxes declines. And the combination of reduced wealth and higher interest rates will finally cause consumers to pull back on their debt-financed consumption. It happened after the junk-bond and savings-and-loan collapses of the late 1980s. It happened after the tech and telecom bust of the late '90s. And it will happen this time.”

Samuelson’s column, “The End of Cheap Credit,” left the door slightly ajar in case the collapse is not quite so severe. He wrote of rising interest rates, “As the price of money increases, borrowing and the economy might weaken. The deep slump in housing could worsen. We could also discover that the long period of cheap credit has left a nasty residue.”

Other writers with less prestigious platforms than the Post have been talking about an approaching financial bust for a couple of years. Among them has been economist Michael Hudson, author of an article on the housing bubble titled, “The New Road to Serfdom” in the May 2006 issue of Harper’s. Hudson has been speaking in interviews of a “break in the chain” of debt payments leading to a “long, slow economic crash,” with “asset deflation,” “mass defaults on mortgages,” and a “huge asset grab” by the rich who are able to protect their cash through money laundering and hedging with foreign currency bonds.

Among those poised to profit from the crash is the Carlyle Group, the equity fund that includes the Bush family and other high-profile investors with insider government connections. A January 2007 memorandum to company managers from founding partner William E. Conway, Jr., recently appeared which stated that, when the current “liquidity environment”—i.e., cheap credit—ends, “the buying opportunity will be a once in a lifetime chance.”

The fact that the crash is now being announced by the Post shows that it is a done deal. The Bilderbergers, or whomever it is that the Post reports to, have decided. It lets everyone know loud and clear that it’s time to batten down the hatches, run for cover, lay in two years of canned food, shield your assets, whatever.

Those left holding the bag will be the ordinary people whose assets are loaded with debt, such as tens of millions of mortgagees, millions of young people with student loans that can never be written off due to the “reformed” 2005 bankruptcy law, or vast numbers of workers with 401(k)s or other pension plans that are locked into the stock market.

In other words, it sounds eerily like 2000-2002 except maybe on a much larger scale. Then it was “only” the tenth worse bear market in history, but over a trillion dollars in wealth simply vanished. What makes today’s instance seem particularly unfair is that the preceding recovery that is now ending—the “jobless” one—was so anemic.

Neither Perlstein nor Samuelson gets to the bottom of the crisis, though they, like Conway of the Carlyle Group, point to the end of cheap credit. But interest rates are set by people who run central banks and financial institutions. They may be influenced by “the market,” but the market is controlled by people with money who want to maximize their profits.

Key to what is going on is that the Federal Reserve is refusing to follow the pattern set during the long reign of Fed Chairman Alan Greenspan in responding to shaky economic trends with lengthy infusions of credit as he did during the dot.com bubble of the 1990s and the housing bubble of 2001-2005.

This time around, Greenspan’s successor, Ben Bernanke, is sitting tight. With the economy teetering on the brink, the Fed is allowing rates to remain steady. The Fed claims their policy is due to the danger of rising “core inflation.” But this cannot be true. The biggest consumer item, houses and real estate, is tanking. Officially, unemployment is low, but mainly due to low-paying service jobs. Commodities have edged up, including food and gasoline, but that’s no reason to allow the entire national economy to be submerged.

So what is really happening? Actually, it’s simple. The difference today is that China and other large investors from abroad, including Middle Eastern oil magnates, are telling the U.S. that if interest rates come down, thereby devaluing their already-sliding dollar portfolios further, they will no longer support with their investments the bloated U.S. trade and fiscal deficits.

Of course we got ourselves into this quandary by shipping our manufacturing to China and other cheap-labor markets over the last generation. “Dollar hegemony” is backfiring. In fact China is using its American dollars to replace the International Monetary Fund as a lender to developing nations in Africa and elsewhere. As an additional insult, China now may be dictating a new generation of economic decline for the American people who are forced to buy their products at Wal-Mart by maxing out what is left of our available credit card debt.

About a year ago, a former Reagan Treasury official, now a well-known cable TV commentator, said that China had become “America’s bank” and commented approvingly that “it’s cheaper to print money than make cars anymore.” Ha ha.

It is truly staggering that none of the “mainstream” political candidates from either party has attacked this subject on the campaign trail. All are heavily funded by the financier elite who will profit no matter how bad the U.S. economy suffers. Every candidate except Ron Paul and Dennis Kucinich treats the Federal Reserve like the fifth graven image on Mount Rushmore. And even the so-called progressives are silent. The weekend before the Perlstein/ Samuelson articles came out, there was a huge progressive conference in Washington, D.C., called “Taming the Corporate Giant.” Not a single session was devoted to financial issues.

What is likely to happen? I’d suggest four possible scenarios:

1. Acceptance by the U.S. population of diminished prosperity and a declining role in the world. Grin and bear it. Live with your parents into your 40s instead of your 30s. Work two or three part-time jobs on the side, if you can find them. Die young if you lose your health care. Declare bankruptcy if you can, or just walk away from your debts until they bring back debtor’s prison like they’ve done in Dubai. Meanwhile, China buys more and more U.S. properties, homes, and businesses, as economists close to the Federal Reserve have suggested. If you’re an enterprising illegal immigrant, have fun continuing to jack up the underground economy, avoid business licenses and taxes, and rent out group houses to your friends.

2. Times of economic crisis produce international tension and politicians tend to go to war rather than face the economic music. The classic example is the worldwide depression of the 1930s leading to World War II. Conditions in the coming years could be as bad as they were then. We could have a really big war if the U.S. decides once and for all to haul off and let China, or whomever, have it in the chops. If they don’t want our dollars or our debt any more, how about a few nukes?


3. Maybe we’ll finally have a revolution either from the right or the center involving martial law, suspension of the Bill of Rights, etc., combined with some kind of military or forced-labor dictatorship. We’re halfway there anyway. Forget about a revolution from the left. They wouldn’t want to make anyone mad at them for being too radical.

4. Could there ever be a real try at reform, maybe even an attempt just to get back to the New Deal? Since the causes of the crisis are monetary, so would be the solutions. The first step would be for the Federal Reserve System to be abolished as a bank of issue and a transformation of the nation’s credit system into a genuine public utility by the federal government. This way we could rebuild our manufacturing and public infrastructure and develop an income assurance policy that would benefit everyone.

The latter is the only sensible solution. There are monetary reformers who know how to do it if anyone gave them half a chance.

Ah yes, the Carlyle Group, Pathocrat Central, sees a huge buying opportunity of a lifetime in the coming crash. Did the Clintons liquidate their stock holdings for the reasons stated, to avoid conflicts of interest as Hillary runs for president? Or do they know something?

How did we get to this place, the edge of a huge cliff? It took three and a half centuries of capitalism to create so much debt and so much servitude and malaise among the workforce, whether affluent of poor. It took some three millennia of religious programming to set the stage. Is there anything we can do about it?

An editorial comment on an optimistic essay in the Wall Street Journal article in the Signs of the Times has this to say about our predicament:

Technological progress and the illusion of prosperity is the trap. In fact, humanity is going in circles. Material progress means nothing if it is not accompanied by evolution of our inner lives, of our knowledge of ourselves. The technological world around us is the expression of our inner lives: mechanical, programmed, focused on greed and survival.

But how many people are ready to understand that truth? The world is as it is because it is the expression of mankind, 6 billion people getting ready to walk off a cliff at the orders of the psychopaths in charge, all the while thinking they are building a future for their kids. However, for those who have some spark of conscience in them, they understand, if ony subconsciously, that the rosy future is an illusion. Hence the growing anxiety, the greater numbers of individuals on anti-depressants and anti-anxiety medicine. Some part of them is screaming at them to wake up and see the world as it really is.

Last week we discussed the authoritarian nature of the workplace even in so-called democratic countries and the debilitating effects of learning to survive in such an environment. According to Laura Knight-Jadczyk, writing about the deep history of the “immigration problem,” this is no accident and speaks directly to our predicament.

First we must consider that the development of an adult human's gifts, skills, realistic thought, and psychological world-view is optimal when the level and quality of his education and the demands of his professional practice correspond to his actual talents and abilities. This is the aim of most normal human beings: to achieve a position in life that allows productive creativity, freedom, the pursuit of happiness, etc. And, the fact is, when many people in a society are able to achieve such a standard of life, the society itself - as a whole - benefits from this collective, individual achievement. What is more, such an individual would feel that the society in which he or she lives is socially just and equitable.

When, however, the group of pathological deviants in a society begins gradually maneuvering to control more and more of the wealth and resources of that society, utilizing their special knowledge of human psychology based on something like game theory, and the society itself has been dumbed down, has no adequate and accurate psychological knowledge to defend themselves from predation, interesting things begin to happen.

One of the first dynamics to come into play is that the deviants who have risen to the top by virtue of their lack of conscience and special abilities already mentioned, seek to force other individuals to exercise functions which deny their humanity, their talents, their intelligence. The deviants also arrogate to themselves and their cronies - other deviants - jobs and positions for which they are not only ill-suited, but totally incapable of performing effectively and efficiently.

Another aspect of the problem is when we find individuals (not pathological) who obtain important positions because they belong to the privileged elite group in power. If their talents and abilities are inadequate to their position, they will avoid the problems they are supposed to solve in their position, instead devoting themselves to those minor things that don't really matter - but which they can do - in a grandiose and ostentatious way. We call them "upwardly adjusted" because they are operating at a higher level than they are capable of managing. An individual in such a situation is likely to develop a progressive case of histrionics and tests will show, as the study quoted above, that their correctness of reasoning actually deteriorates.

So, in order to hold onto their high position in the face of the unbearable (and thus, denied), realization of their incompetence, such an individual will begin to direct attacks against anyone with greater talent or skill, even actively seeking to remove them - or have them removed - from their position which, of course, engenders in the other person a feeling of injustice regarding this "downward social adjustment." Naturally, upwardly-adjusted people favor "whip-cracking" governments which will protect their positions and their incompetence.

… Capitalism, as it is practiced in the United States, as well as its so-called "democracy," gives increased access to unrestricted power and control over resources, including other human beings. It is not absolute power that corrupts, it is power that attracts the corrupt.

So it is that the U.S. system was set up by and for psychopaths, and it has only been the informed citizenry that has kept them in check until recent years. Over the past 100 years or so, as psychopaths have gradually taken over those positions where they could consolidate their power and gains, they began a deliberate program of dumbing down the populace, utilizing the education system, medical system, science, the media, etc. There is no area of U.S. society that has not been co-opted and corrupted to the purposes of the Pathocracy.

In such a society, a normal person may start out basically healthy, but after a period of exposure to psychopathy in the workplace, things take on a different tone. If circumstances are brought to bear on an average person with a lack of psychological knowledge so that he or she is forced to perform functions which do not fit his abilities and talents, he begins to feel cheated and even overwhelmed by duties which prevent him from achieving his own self-realization. In such a situation, the person begins to dissociate, to daydream about a world where he or she is what he should be, deserves to be, and is capable of being. This is particularly true if the professional adjustment is downward. A particular danger of the downward adjustment is that the individual, not being regularly challenged, fails to establish an accurate estimation of his own abilities and talents. In his dissociated daydreams, he "fixes" the unfair world and dreams of having the power to do so. In this way, he acquires psychopathic traits even though he may not be a psychopath.

… Upward and downward social adjustments results in a total waste of any society's most precious resource: the talent pool of its members. This process will lead to increasing dissatisfaction and tensions among individuals and social groups. Evolution or devolution in all areas of cultural, economic and political life depend on the extent to which this human resource talent pool is properly utilized. And, as Lobaczewski points out, in the final analysis, it also determines whether there will be evolution or revolution.

Certainly, in such a society as described above, there will be people who are capable of figuring out what is wrong to some extent, and to begin to try to apply their abilities to right the widespread social injustice. They may approach the problem from the point of view of legislative reforms, or from the point of view of religious moral revival, or disseminating accurate psychological knowledge about the nature of the problem among the masses. Elimination of social injustice and revival of morals and education level of the society could deprive a pathocracy of any chance to take over. And so, such reformers and moralists must be consistently neutralized by various means. If they can't be bought or co-opted, they will be defamed and their character assassinated. The most dangerous among them will be murdered by various set-ups so that the blame never falls on the deviants.

The one hopeful scenario outlined in the above article by Richard Cook (abolishing the current Federal Reserve system, rebuilding industrial and public infrastructure and assuring adequate incomes), could only happen when normal humanity (those with potential consciences) gains a true understanding of what it is up against: the pathocracy or psychopaths who rule. When that happens, steps can be taken to limit the damage the psychopaths can do, but until that happens, we will be helpless. As Knight-Jadczyk concludes:

There are only two things that can bring a psychopath under submission: 1) a bigger psychopath; 2) the non-violent, absolute refusal of all others to submit to their controls no matter the consequences. If every single normal person in the U.S. (and elsewhere) simply sat down and refused to lift a hand to further one single aim of the psychopathic agenda, en masse, if people refused to pay taxes, if soldiers refused to fight, if government workers and corporate drones refused to go to work, if doctors refused to treat psychopathic elites and their families, the whole system would grind to a screeching halt.

But that can only happen if the masses of people KNOW about psychopathy in all its horrible details. Only if they know that they are dealing with creatures that really aren't human can they have the understanding of what they must do. And only when they get miserable enough that the misery that the psychopath will inflict on them in the beginning of their resistance pales in comparison, will they have the will to do this. That, or the understanding of the world the psychopaths are creating for their children in which case love for the future of humanity will motivate them to resist.

Signs of the Economic Apocalypse, 6-18-07

From Signs of the Times:

Gold closed at 658.70 dollars an ounce Friday, up 1.3% from $650.30 at the close of the previous Friday. The dollar closed at 0.7469 euros Friday, down 0.1% from 0.7478 at the previous week’s close. That put the euro at 1.3388 dollars compared to 1.3373 the Friday before. Gold in euros would be 492.01 an ounce, up 1.2% from 486.28 for the week. Oil closed at 68.00 dollars a barrel Friday, up 5.0% from $64.76 for the week. Oil in euros would be 50.79 euros a barrel, up 4.9% from 48.43 for the week. The gold/oil ratio closed at 9.69 Friday, down 3.6% from 10.04 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,639.48 Friday, up 1.6% from 13,424.39 at the close of the week before. The NASDAQ closed at 2,626.71 Friday, up 2.1% from 2,573.54 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.17%, up six basis points from 5.11 at the end of the previous week.

U.S. interest rates continued to climb and the price of oil jumped 5% last week. U.S. stocks rallied in the second half of the week, with the Dow ending up 1.6% on better than expected inflation news. The so-called “core” inflation rate (which doesn’t include energy prices) only rose 0.1% rather than the expected 0.2%. But overall prices rose faster than they have in 20 months in May. The hope of investors is that the wave of low-cost labor will offset higher energy prices.

Stocks surge, Dow jumps almost 86 points

Tim Paradis, AP Business Writer
June 16, 2007

NEW YORK - Wall Street barreled higher again Friday after the week's most anticipated economic reading indicated that inflation excluding the price of gas remained tepid last month, easing some concerns that have jolted stock and bond markets in recent sessions.

The Dow Jones industrial average in the past three days has surged more than 344 points, the biggest three-day point gain since November 2004. The blue-chip index is now less than 40 points below its record close reached June 4.

The three major stock indexes finished the week higher, even as Friday's consumer price index showed prices rose at the fastest pace in 20 months in May as the cost of gas jumped. Investors were enthusiastic that the core CPI, which excludes food and energy prices, rose 0.1 percent. The figure, which the inflation-wary Federal Reserve watches closely, was below the 0.2 percent increase Wall Street expected.

The yield on the benchmark 10-year Treasury note fell to 5.16 percent Friday from 5.23 percent late Thursday after release of the CPI report helped ease concerns that the Fed might raise interest rates this year.

The notion of a rate hike gained traction last week when inflation concerns sent the yield on the 10-year note above 5 percent for the first time since last summer. Subsequent spikes in bond yields, which move in the opposite direction as prices, roiled stock markets last week and early this week.

"Today's numbers showed us that the little spook we had last week and earlier this week was misplaced," said Rob Lutts, president and chief investment officer at Cabot Money Management Inc.

The Dow jumped 85.76, or 0.63 percent, to 13,639.48.

Broader stock indicators also rose Friday. The Standard & Poor's 500 index rose 9.94, or 0.65 percent, to 1,532.91, moving near its record close of 1,539.18, hit June 4.

The Nasdaq composite index, still well off its record levels reached during the dot-com boom, rose 27.30, or 1.05 percent, to 2,626.71.

For the week, the Dow rose 1.60 percent, the S&P 500 index rose 1.67 percent, and the Nasdaq composite index gained 2.07 percent. The S&P 500 and the Nasdaq more than offset their losses of last week, while the Dow regained nearly all the ground it had lost.

The dollar was mixed against other major currencies Friday, while gold prices rose.

Lutts contended that concerns about inflation have been overblown and that increased trade and further intertwining of world economies will stave off major spikes in prices.

"What you're getting is a contribution of hundreds of millions of lower-cost workers coming into our economy. It's very positive for all economic activity," Lutts said…

How nice for all those investors, those who own. For those of us who work, the “hundreds of millions of lower cost workers” mean that our incomes will continue to drop. More and more of our energy will be sucked into the system. What will be left? I came across a couple of random passages last week that highlight the issue. First this from Salon’s advice columnist, Cary Tennis:

I was a very naive young man when I left school in my early 20s. The first thing I noticed when I began working was that the workplace was profoundly undemocratic. If I hadn't been so naive perhaps it would not have shocked me, but it did shock me, for I realized that people outside of the academic world spend nearly all their productive time working, and if they are not working in a democratic setting then they are not practicing democracy in the most important arena of their lives, and so, for all practical purposes, they are not living in a democracy. They are living under authoritarian rule. They vote about large issues outside of the workplace, true, but in their daily lives they have no vote. They have no vote over who will lead them in the office or what the rules will be under which they labor.

The people who actually rule their daily lives are called "bosses." True, one is free to quit. But wherever one goes, there is another boss who is not elected and who is not subject to the will of those he or she rules over.

Yes, yes, I was naive. But this is how I experienced work -- as a shocking example of authoritarianism.

I also found that work was really tiring, and that people after work did not have the energy to work on their projects. This too shocked me. Whatever art or writing or sports they might be doing, they let these things go, because they were tired. So I saw a nation of people whose energies were being wasted.

This sounds sillier and more naive all the time. And yet it was my experience.
So I thought, not me, that will not happen to me. I will work but I will not allow it to tire me out. I will write, and make music and live my life, even though I am working in an authoritarian organization in the daytime.

But I did not have the strength and endurance to do so. I lost the battle. I took refuge in addiction, so shameful was my failure to be an artist in America and also a worker in America.

So I do harbor a good bit of rage against the system. I think that many of us live terrible lives in the workplaces and offices of America -- terrible lives because we do not rule over our own conditions, we do not elect our own workplace leaders, we do not decide our own workplace issues, and we do not do the work that is most suitable to us, the work at which we would be most brilliant and productive.

Instead, we live like slaves.

I know that may sound crazy and naive, but it is how I feel. I feel that far too many of us live like slaves, and I do not understand why that should be so in a country in which we are supposed to be free to govern ourselves. It seems to me that if we are to govern ourselves we should govern the conditions under which we labor for survival.

Is the draining of energy away from creative pursuits an accident? Was this always the case? Coincidentally, I was also reading the memoirs of a 1960s music producer, Joe Boyd. Boyd concluded the book with some thoughts on the sixties ferment and the economic situation that made it possible, for better or worse:

The atmosphere in which music flourished then had a lot to do with economics. It was a time of unprecedented prosperity. People are supposedly wealthier now, yet most feel they haven’t enough money and time is at an even greater premium. The prediction that our biggest dilemma in the new millennium would be how to use the endless hours of leisure time freed up by computers has proved to be futurology’s least amusing joke. In the sixties, we had surpluses of both money and time.

Friends of mine lived comfortably in Greenwich Village, Harvard Square, Bayswater, Santa Monica and on the Left Bank and were, by current standards, broke. Yet they survived easily on occasional coffee-house gigs or part-time work. Today, urbanites must feverishly maximize their economic potential just to maintain a small flat in Hoboken, Somerville, Hackney, Korea Town or Belleville. The economy of the sixties cut us a lot of slack, leaving time to travel, take drugs, write songs and rethink the universe. There was a feeling that nothing was nailed down, that an assumption held was worth challenging. The meek regularly took on the mighty and often won—or at least drew. Debt-free students with time on their hands forced the Pentagon to stop using drafted American kids as cannon fodder and altered the political landscape of France.

The tightening of the fiscal screws that begain with the 1973 oil crisis may not have been a conspiracy to rein in this dangerous laxness, but it has certainly worked out to the advantage of the powerful. Ever since, prices have ratcheted upwards in relation to hours worked and the results of this squeeze can be seen everywhere. Protesters today seem like peasants outside the castle gates compared to the fiercely determined and unified crowds I joined in the sixties. Our confidence grew out of a feeling that large sections of the population—and the media—were with us and from what we saw as the inexorable power of our music and our convictions. In our glorious optimism, we believed that ‘when the mode of music changes, the walls of the city shake.’ And we achieved a great deal before the authorities figured out how to capitalize on our self-destructiveness. Right-wing commentators still spit with anger when they contemplate how fundamentally the sixties altered society. (Joe Boyd, White Bicycles: Making Music in the 1960s, London: Serpent’s Tail, 2006, pp. 267-8.)

The whole thing actually was a conspiracy, and we can put names to it. William Simon and Nelson Rockefeller, just to name two. William Simon was Treasury Secretary under Richard Nixon. Simon resented the fact that the capitalist system funded artists and academics who opposed capitalist values. He wasn’t alone in thinking that back in the late sixties and early seventies, but Simon did something about it. He began a program of funding right wing thought and policy proposals, most of which have been implemented in the last three decades. Here’s Bill Moyers:

It is widely accepted in Washington today that there is nothing wrong with a democracy dominated by the people with money. But of course there is. Money has democracy in a stranglehold and is suffocating it…

The rich have the right to buy more homes than anyone else. They have the right to buy more cars, more clothes, or more vacations than anyone else. But they don't have the right to buy more democracy than anyone else.

I know: This sounds very much like a call for class war. But the class war was declared a generation ago, in a powerful polemic by a wealthy right-winger, William Simon, who was soon to be Secretary of the Treasury. By the end of the '70s, corporate America had begun a stealthy assault on the rest of our society and the principles of our democracy. Looking backward, it all seems so clear that we wonder how we could have ignored the warning signs at the time.

What has been happening to the middle and working classes is not the result of Adam Smith's invisible hand but the direct consequence of corporate activism, intellectual collusion, the rise of a religious orthodoxy that has made an idol of wealth and power, and a host of political decisions favoring the powerful monied interests who were determined to get back the privileges they had lost with the Depression and the New Deal. They set out to trash the social contract; to cut workforces and their wages; to scour the globe in search of cheap labor; and to shred the social safety net that was supposed to protect people from hardships beyond their control. Business Week put it bluntly: "Some people will obviously have to do with less….It will be a bitter pill for many Americans to swallow the idea of doing with less so that big business can have more."

To create the intellectual framework for this revolution in public policy, they funded conservative think tanks - the Heritage Foundation, the Hoover Institution, and the American Enterprise Institute - that churned out study after study advocating their agenda.

To put political muscle behind these ideas, they created a formidable political machine. Thomas Edsall of The Washington Post, one of the few journalists to cover the issues of class, wrote: "During the 1970s, business refined its ability to act as a class, submerging competitive instincts in favor of joint, cooperative action in the legislative area." Big business political action committees flooded the political arena with a deluge of dollars. And they built alliances with the Religious Right - Jerry Falwell's Moral Majority and Pat Robertson's Christian Coalition - who happily contrived a cultural war as a smokescreen to hide the economic plunder of the very people who were enlisted as foot soldiers in the war.

And they won. Warren Buffett, one of the richest men in America and the savviest investor of them all, put it this way: "If there was a class war, my class won." Well, there was, Mr. Buffett, and as a recent headline in The Washington Post proclaimed: ‘Business Wins With Bush."

Look at the spoils of victory: Over the past three years, they've pushed through $2 trillion dollars in tax cuts. More than half of the benefits are going to the wealthiest 1 percent. You could call it trickle-down economics, except that the only thing that trickled down was a sea of red ink in our state and local governments, forcing them to cut services and raise taxes on middle class working America.

Now the Congressional Budget Office forecasts deficits totaling $2.75 trillion over the next 10 years. These deficits have been part of their strategy. The late Sen. Daniel Patrick Moynihan tried to warn us, when he predicted that President Reagan's real strategy was to force the government to cut domestic social programs by fostering federal deficits of historic dimensions. President Reagan's own budget director, David Stockman, admitted as much. Now the leading right-wing political strategist, Grover Norquist, says the goal is to "starve the beast" - with trillions of dollars in deficits resulting from trillions of dollars in tax cuts, until the U.S. government is so anemic and anorexic it can be drowned in the bathtub.

Take note: The corporate conservatives and their allies in the political and Religious Right are achieving a vast transformation of American life that only they understand because they are its advocates, its architects, and its beneficiaries. In creating the greatest economic inequality in the advanced world, they have saddled our nation, our states, and our cities and counties with structural deficits that will last until our children's children are ready for retirement; and they are systematically stripping government of all its functions except rewarding the rich and waging war.

And, yes, they are proud of what they have done to our economy and our society. If instead of producing a news magazine I was writing for Saturday Night Live, I couldn't have made up the things that this crew in Washington have been saying. The president's chief economic adviser says shipping technical and professional jobs overseas is good for the economy. The president's Council of Economic Advisers reports that hamburger chefs in fast food restaurants can be considered manufacturing workers. The president's labor secretary says it doesn't matter if job growth has stalled because "the stock market is the ultimate arbiter." And the president's Federal Reserve chair says that the tax cuts may force cutbacks in Social Security - but hey, we should make the tax cuts permanent anyway. You just can't make this stuff up. You have to hear it to believe it. This may be the first class war in history where the victims will die laughing.

But what they are doing to middle class and working Americans and the poor - and to the workings of American democracy - is no laughing matter. It calls for righteous indignation and action. Otherwise our democracy will degenerate into a shell of itself in which the privileged and the powerful sustain their own way of life at the expense of others and the United States becomes another Latin America with a small crust of the rich at the top governing a nation of serfs.

And this was all done by weakening labor unions in the developed world and killing labor organizers in the poor countries. Cheap labor in the poor countries and debt slaves in the rich countries. The racking up of huge structural deficits enriched the corporations and their owners and will impoverish everyone else. And it was all planned. In the following piece about Nelson Rockefeller from 1975, written by the well-known journalist Robert Scheer, we can see the Rockefellers’ hands on the dial turning it back in another direction. The essay, “Nelson Rockefeller Takes Care of Everybody,” can be found in a collection of Scheer’s work called Thinking Tuna Fish and Talking Death: Essays on the Pornography of Power (New York, Hill and Wang, 1988). Scheer, at the time a well-known leftist journalist, was allowed to spend several weeks following Nelson Rockefeller around. He describes a typical day hanging with Rockefeller:

Once we stopped to have cocktails with the entire Supreme Court, another afternoon it was an hour with the Empress and the Shah of Iran, and on a third occasion Rocky spent a relaxing evening at the Kennedy center with Nancy and Henry Kissinger. In the process, I kept finding myself squeezed up against a lot of the people whom I had spent most of my adult life demonstrating against. They are not a bad bunch of people to have hors d’oeuvres with, if you can forget things like the Shah’s secret police or Attica. But I came away from all this with no doubts at all that America has a ruling class and that it gets along quite smoothly with its counterparts abroad.

Ironically, I had just published a book (America After Nixon) on the power of the top multinational corporations and the ways they run this country. The day I was trying to get on the Rockefeller plane, Business Week had just come out with a long, serious review. Although the reviewer considered me a Marxist, he said my main thesis about the crisis of corporate power was valid. As I stood in Morrow’s office, I looked down on his desk and saw my picture and the review staring up at me. My immediate thought was “Damn, it’s all over and the Secret Service is going to hustle my ass out of here in two minutes.”

But it was just the opposite. Rockefeller greeted me with “Hey fellow, I see ya got a best-seller on your hands. Looks like a really interesting book.” Since the main point of my book, which was hardly a best-seller, is that people like the Rockefellers pretty much run this country at the expense of the rest of us, I was perplexed. But after getting to know the man, I came to understand that Rockefeller implicitly believes in the Marxist analysis of economic classes and struggle—he’s just on the other side...

Rockefeller: I’m a great believer in planning.

Scheer: What kind of planning?

Rockefeller: Economic, social, political, military, total world planning.

Scheer: Does the question of class enter into this at all?

Rockefeller: Not for me.

I asked him when we were on that plane ride about any possible conflicts between the needs of the multinational corporations and labor, and he said there were none: “My feeling is that that segment [labor] is terribly important, but they’re going to be taken care of if our economic system works, which is what I was talking to these guys about—we’re hobbling the economic system by accelerating social objectives.

The “guys” that he had been talking with were Arthur Burns, head of the Federal Reserve Board, and Alan Greenspan, the President’s top economic advisor.”

…I knew something important must be happening, because as I crossed the lobby with Morrow, he suddenly said, “Oh, there’s David. Hi, David, this is Bob Scheer. Bob, this is David Rockefeller and his wife, Margaret.”

David was in a golfing getup and was very relaxed and friendly, as was his wife, who wanted to know if Nelson’s wife, Happy, had gotten in yet. Within the next half hour I saw Thomas Murphy, chairman of General Motors, and Edgar Speer, head of U.S. Steel.

It turned out that we had flown down to one of the very important quarterly meetings of the Business Council, a group of the country’s to two hundred industrialists and bankers. Rockefeller closeted himself with some of the leaders to go over his speech for that night. I wandered the lobby in a daze. After fifteen years of doubts, college debates with professors, and confusion about whether America really has a ruling class, I had suddenly found myself right smack in the middle of it.” (Scheer, op cit., pp. 200-2)

Rockefeller then addressed the group after dinner:

“I enjoy this opportunity because, frankly, ladies and gentlemen, I feel that those of you in this room symbolize, really, the essence of what our country stands for… Now we find ourselves in a situation in which many of these values are challenged as never before… No group knows this better than you, because you men and women—so many of you representing much-maligned multinational corporations… we, as Americans, should be so grateful that your ingenuity and your imagination and your drive has seen the opportunities that existed in this world.” (Scheer, pp. 202-3)

On the plane ride back, Scheer asked Rockefeller about his brother David. He said,

“Well, David is concerned with the world, he’s the banker, so he has to take care of the global problems, and I started with the domestic—how to build domestic consensus for what needs to be done.” (Scheer, p. 203)

…There is no question but that in terms of the current planning within the executive branch of government, Gerald Ford is a bystander—a small-town politician—and that Rockefeller’s old club is running things. It is certainly spinning the big visions about where things should go in this country over the next forty years and making decisions that will very dramatically affect our world. And we are not, in any sense, participating in those decisions.

Rockefeller believes that American corporate capitalism is at a point of crisis in the world, and he is quite frank in stating that the working out of concrete plans for the survival of that system is the main contribution that he must make in what remains of his life… He told me: “A lot of people don’t want to be bothered or upset or disturbed by these awful things that are happening abroad, but more and more they are coming to realize that this is the fact, and I happen to be a great believer in Darwin’s concept of the survival of the fittest, those who can adapt to their environment. Okay, that’s the way I feel [and then he pulls me closer with those almost whispered tones of the Godfather]. This is a very exciting, open period, and if we are as smart and intelligent as I think we are as a nation, we’ll work these things out, and if we get rid of the emotional things, I mean get them behind us… our emotional traumas are, I think, going to pass and we’ll be able to settle down and sort this stuff out and approach it intelligently. I’m very optimistic about the future. I’m glad to see you. You really understand me.”

By “awful things,” he means poorer people in the world wanting a share of the pie; by “emotional issues,” he means all of the resistance from Vietnam to Attica that people put up to his rule; and by being glad to see me, he means he thinks he’s got me conned because I kept my mouth shut and nodded appreciatively every few minutes. (Scheer, pp. 217-8)

Thirty-two years later it is clear that the world we live in was created, not by the utopian dreamers of the sixties, but by the high-level right-wing reactionaries. Some even say that the upswelling of utopian revolution was engineered by the Rockefeller types to help build that “domestic consensus for what needs to be done.”

Going back to what Cary Tennis and Joe Boyd were talking about, the difficulty of truly creative artistic or political action in a global capitalist world, Rockefeller had that covered as well. His other obsession, after building that domestic consensus, was modern art patronage. Scheer tells how Rockefeller related an anecdote about a discussion he had with Henry Luce and others in 1945 about whether or not modern art was subversive. Rockefeller, through an art historian he had bought, Alfred H. Barr, convinced Luce that it was not. For Rockefeller, art wasn’t subversive because it could be coopted and its energies turned toward supporting the system, as modern art did in the U.S. dominated post-World War II era. Scheer concludes:

What Rockefeller wants from his art is what he is what he wants from his politics. He doesn’t want the rest of us to get “emotional,” because to be emotional would mean to be pissed off at the Rockefellers. Get it? Anger, hate, emotion are expressed or contained in one corner of the museum. If you can accept that, baby, then make your funny-looking beds or weird constructions, or drip paint all over the f******* canvas; he couldn’t care less.

It’s only when the finger of the artist points at the sources of power in this country that he reacts. Do that and you’re being rude, adolescent, simplistic, fanatical, and, worst of all, emotional. People of real power are never emotional; they don’t have to be, because they can just administer. If you have power and can just administer, then emotion is wasteful.

Rockefeller’s influence over the arts now extends into the worlds of symphonies, ballets, operas, and individual fellowships. This is done through the vehicle of a lifelong friend, Nancy Hanks, who has been in his employ virtually throughout her adult life. She is now on the government payroll as the chairman of the National Endowment for the Arts. Do you know what that means? It means that you are in your loft somewhere and there’s no money for going out for tacos anymore and you’re about to give up on the whole bit—and how do you know you can paint or write, anyway, and who says you’re special and why don’t you get a real job, like, in the post office and forget this art stuff? Right? And just at that moment, and old professor of yours hears that you’re going nuts and says, “I’ll tell you what. I’ll write a letter and maybe, just maybe you’ll get a grant from the National Endowment for the Arts.” And do you know what that means? Why, to begin with, you get a cabin somewhere in the country so you can get your head together and create. Your kid goes to a private school and isn’t beaten up for a while, and you take your love out to the best French restaurants. And you have a year to create, and you want to really know what? You don’t have to produce a goddamn thing. They don’t even want to to produce something, because then they have to edit it, print it, or hang it, and that causes problems for them. All they really want you to do is acquiesce (know the word: Adapt with grace and the world’s your oyster).

And Nancy, by virtue of her association with Rockefeller, is the lady in the country who can give you so much money that you can hardly handle it…

Art has its place, all right, and Nancy has worked out a scheme to make sure it doesn’t become a public issue. For those interested in the subject, I would recommend a reading of The Performing Arts—the Rockefeller-panel reports on the future of theater, dance, and music in America, which Nancy told me contain ten-year plans already implemented to prevent the socialization of American art. What she means is keeping the power over ballet, opera, Lincoln Center, museums, etc., in the hands of the same people who form the boards of directors of the largest corporations—yet getting the public, you and me, through tax dollars, to pay for it. (Scheer, pp. 210-1)

Thirty years later the public money doesn’t flow to artists like it used to, but Rockefeller’s vision of corporate sponsored art remains the model for official high culture. Low culture is dominated by the centralized corporate media conglomerates. What is left is the hope of an unofficial high and middle-brow culture of the internet. If Rockefeller were alive today, no doubt he would be making plans to recapture the internet.

Signs of the Economic Apocalypse, 6-11-07

From Signs of the Times:

Gold closed at 650.30 dollars an ounce Friday, down 4.1% from $676.90 at the close of the previous Friday. The dollar closed at 0.7478 euros Friday, up 0.6% from 0.7435 at the previous week’s close. That put the euro at 1.3373 dollars compared to 1.3449 the Friday before. Gold in euros would be 486.28 euros an ounce, down 3.5% from 503.31 for the week. Oil closed at 64.76 dollars a barrel Friday, down 0.5% from $65.08 at the close of the week before. Oil in euros would be 48.43 euros a barrel, up less than 0.1% from 48.39 for the week. The gold/oil ratio closed at 10.04 Friday, down 3.6% from 10.40 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,424.39 Friday, down 1.8% from 13,668.11 at the close of the week before. The NASDAQ closed at 2,573.54 Friday, down 1.6% from 2,613.92 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.11% Friday, up 16 basis points from 4.95 for the week (and up 25 basis over the past two weeks).



Big moves in the markets last week. The Dow lost a lot of ground through Thursday, but regained some on Friday to close down less than 2% for the week. But gold dropped 4% and the ten-year T-note rose to 5.11%. Something seems to be up but what is it? It seems that second quarter growth in the U.S. will be higher than the sluggish first quarter. That could lead to higher U.S. interest rates, as could the quiet moves away from U.S. Treasury paper by other countries’ central banks. Which could lead to lower gold prices (higher interest rates make currencies more valuable). But the strength of the swings are worrisome.

European stocks, which had been doing very well lately, were rocked by a “three-alarm” sell recommendation by Morgan Stanley:

Morgan Stanley's 3-Alarm Sell Signal
The firm issues a "full house" warning on European equities, fueling big declines in stock markets Wednesday

Will Andrews

June 6, 2007, 2:40PM EST

There have been a number of bearish analyst calls on stocks amid the recent global stock rally, but it took a three-alarm warning from Morgan Stanley on European equities to catch investors' attention. The note, which was released June 4 but didn't seem to attract the market's attention until June 6, helped spark a big sell-off during the European session and also contributed to big declines on Wall Street, with the Dow Jones industrial average down over 150 points at one point. The Nasdaq and S&P 500 indexes were both off about 1% in afternoon trading.

Indeed, major European indexes, buffeted by interest rate worries after the European Central Bank raised its benchmark interest rate by a quarter point to 4% on June 6, took a big hit. London's FTSE 100 index fell 1.7%, as did the CAC-40 index in Paris. The Dax index in Frankfurt suffered the worst damage on the day, falling 2.4%.

What caused all the fuss? In the note from the firm's chief European equity strategist Teun Draaisma and other Morgan Stanley staff analysts, the company issued a "Full House" sell signal on European equities. "[W]e now have a tactical sell signal as rates are rising and hitting critical levels." The firm pointed to signals from three indicators: A fundamentals indicator, which tripped because of higher bond yields and higher new orders from manufacturers in the U.S, and existing sell signals on its valuation and risk indicators.

"Such a full house sell signal across these three indicators is rare, and has occurred only five times since 1980", the firm said. Equities have always been down in the next six months following such signals, according to Morgan Stanley, on average by 15%, with previous occasions including September, 1987, and April, 2002. "We now have the choice – jump on the strong momentum, or play the odds that our models give us," the firm said in the report. "We prefer to be on the right side of those odds."

Morgan Stanley strategists concurred with some recent thinking on the market: "Yes, we agree that the economy is fine, large caps are cheap and M&A is buoyant." But Morgan Stanley argues that at this stage of bull markets, larger corrections become more frequent, caused by little changes in the macroeconomic environment.

The strategists hedged a bit, noting that cautious investor sentiment can negate a valuation sell signal. "One explanation why our models haven't worked yet in the last few weeks is sentiment: arguably the wall of worry is still being climbed." The firm said its indicators are suggesting an equity market correction, and it is expecting one. "We remain neutral equities, overweight cash, underweight bonds, and continue to have a preference for large caps."

While Morgan Stanley's call on European stocks took a dramatic turn, its view on U.S. equities remains unchanged. In a June 4 note, chief U.S. strategist Henry McVey said there had been no change to the company's U.S. asset allocation. "Despite the additional upside we are forecasting, we do not believe that now is the time to pile into equities." For the U.S., Morgan Stanley continues to have an equal weight rating on stocks, at 65% of its recommended portfolio, while it is overweight cash (10%), and underweight bonds (25%).

Chris Burba, a technical market strategist for Standard & Poor's, says the MS note was a contributing factor to Wall Street's June 6 sell-off. While there may have been some initial confusion as to whether Morgan Stanley was making its call for Europe exclusively or for other markets, Burba notes that "even if it's just for Europe it's still worrisome for U.S. investors." Burba points to other factors weighing on U.S. stocks, including a recent uptick in interest rates and worries about Federal Reserve rate hikes later this year. (S&P, like BusinessWeek.com, is a unit of The McGraw-Hill Cos.

European media were a bit late to the party, but they jumped in head first Wednesday as the "Full House" note circulated more widely. "Morgan Stanley has advised clients to slash exposure to the stock market after its three key warning indicators began flashing a 'Full House' sell signal for the first time since the dotcom bust" wrote London's Daily Telegraph on June 6.

A Morgan Stanley spokesman confirmed to BusinessWeek that the sell signal was targeted at European equities. Some of the confusion in other markets may have resulted from early media reports about the release of the note, which "blew things out of proportion," said the Europe-based spokesman, who declined to be identified because of firm policy.

With global equity investors nervous after recent big gains – and more worried about rising inflation and interest rates – a big bearish call from anywhere can spark a rush to the exits.

In the U.S. stocks rose Friday after a week-long selloff. According to some analysts, the selloff and the rise on Friday were both related to the drop in bonds (meaning higher yields or interest rates). Higher interest rates can mean lower corporate profits. So dropping stock prices. Or, higher interest rates indicate a strong economy, and higher profits, so stock prices go up:

Stocks still have room to extend rally

Herbert Lash

Fri Jun 8, 7:09 PM ET

NEW YORK (Reuters) - Stocks could move higher next week after a bond market rout led investors to wonder if the threat of inflation was on the horizon or if the economy was actually stronger than expected, and good for stocks.

Major stock market gauges recovered on Friday after a bond sell-off pushed the benchmark 10-year U.S. Treasury note's yield up to 5.25 percent -- matching the fed funds rate target at one point -- from levels below 5 percent a week ago. That jump in government bond yields rattled investors who, skittish about a bull market that has lasted longer than most, worry that rising capital costs will cut corporate profits.

Around midday on Friday, stocks began rallying as the 10-year note's yield retreated to around 5.11 percent.

Friday's recovery after a three-day slide is a good indication of where the market is headed as investors realized they overreacted to a spike in market interest rates, said David Joy, market strategist at RiverSource Investments.

"Interest rates are where they should be, and we haven't had any inflation. This a little adjustment to a new level of rates, a level that the stock market doesn't have a problem with," Joy said.

The blue-chip Dow Jones industrial average climbed 157.66 points, or 1.19 percent, to end Friday's session at 13,424.39. The broad Standard & Poor's 500 index gained 16.95 points, or 1.14 percent, to finish at 1,507.67. The Nasdaq Composite Index advanced 32.16 points, or 1.27 percent, to close at 2,573.54.

Falling oil prices on Friday also helped the major U.S. stock indexes rebound. U.S. crude oil for July slid $2.17 to settle at $64.76 a barrel on the New York Mercantile Exchange. For the week, NYMEX July crude fell 32 cents.

For the week, though, the effects of the pullback were visible, with the Dow average ending down 1.78 percent, the S&P 500 falling 1.87 percent and the Nasdaq losing 1.54 percent.

For the year so far, however, the Dow is still up 7.71 percent, while the S&P 500 is up 6.30 percent and the Nasdaq is up 6.55 percent.

With memories of the dot-com bust still fresh, many investors are cautious and trying to identify an inflection point, Joy said. But stronger growth, absent inflationary pressures, is good for stocks, he said.

"The bond market has realized rates should be a little higher, given how strong the economy is," he said.

In other news, the media took notice of a troubling recent trend. The super-rich buying massive tracks of land in South America. Why are they doing this? To secure fresh water sources? To have a place to sit out the next ice age? To set up their own kingdoms in a post-war or post apocalyptic world? The following article that drew attention to the phenomenon raises many questions and answers few. It also highlights the sinister undertones of the world conservation movement:

American buys slices of South America

Shane Romig

Jun 9, 7:25 PM ET

LOS ESTEROS DEL IBERA, Argentina - Associated Press

The American multimillionaire who founded the North Face and Esprit clothing lines says he is trying to save the planet by buying bits of it. First Douglas Tompkins purchased a huge swath of southern Chile, and now he's hoping to save the northeast wetlands of neighboring Argentina.

He has snapped up more than half a million acres of the Esteros del Ibera, a vast Argentine marshland teeming with wildlife.

Tompkins, 64, is a hero to some for his environmental stewardship. Others resent his land purchases as a foreign challenge to their national patrimony.

In an interview with The Associated Press, Tompkins said industrialized agriculture is chewing up big chunks of Argentina's fragile marshland and savanna, and that essential topsoil is disappearing as a result.

"Everywhere I look here in Argentina I see massive abuse of the soil ... just like what happened in the U.S. 20 or 30 years ago," he said.

Tompkins hopes to do in Argentina what he did in Chile — create broad stretches of land protected from agribusiness or industrial development, and one day turn them over to the government as nature reserves.

Wealthy foreigners have bought an estimated 4.5 million acres in Argentina and Chile in the past 15 years for private Patagonian playgrounds. Sylvester Stallone, Ted Turner and Italian fashion designer Luciano Benetton all have large holdings set amid pristine mountains and lakes.

So, too, has the Bush family in Paraguay. Why did they not mention this?

Tompkins was among the early ones, buying a 35-mile-wide strip of Chile from a Pacific coastal bay to the country's Andean mountain border with Argentina. He said his purchases were intended specifically to protect the environment.

Argentine officials took notice and eagerly courted Tompkins' philanthropy, flying him to several areas of ecological significance in the late 1990s — when the government was strapped for cash because of the economic crisis.

"The land conservation budget was burning a hole in our pocket," Tompkins said.
He bought a 120,000-acre ranch in 1998 and has increased his Argentine holdings to nearly 600,000 acres since then. He now owns well over 1 million acres in Chile and Argentina, a combined area about the size of Rhode Island.

The financial details of the transactions were not disclosed because they were private deals between Tompkins and landowners. There was no major opposition to the deals initially because Tompkins bought the land parcels gradually, keeping a low profile.

Critics now weave many conspiracy theories, accusing Tompkins of seeking control of one of South America's biggest fresh water reserves, and worrying that he might never cede the lands to the state.

"These lands should not belong to an individual, much less a foreigner," said Luis D'Elia, who argues the American could gain "control of resources that are going to be scarce in the future, like water."

Tompkins' Argentine holdings sit atop the huge Guarani Aquifer, which extends north into Paraguay.

Last year, D'Elia, then a minister in Argentina's left-leaning cabinet, accused Tompkins of blocking access to public roads and cut through some locked gates to the land trust's property.

"He blundered in cutting the provincial road, the only access for the people living in the area," D'Elia argued.

This month lawmakers in Corrientes province, where the wetlands are located, modified the local constitution to block foreigners from buying land considered a strategic resource. The law appeared to target any new attempts by Tompkins to increase his holdings.

Tompkins responded in an e-mailed statement from his publicist that such changes would be unconstitutional and likely trigger legal challenges.

Jose Luis Niella, a Catholic priest and social activist, said many poor people no longer have access to lands where ancestors lived freely for generations. "It's not fair for him to be concerned only with protecting the environment," Niella said.

In Chile, independent Sen. Antonio Horvath said the Chilean government must have final say on land usage, complaining that Tompkins' purchases were "effectively splitting the country in two."

Opposition lawmakers in both countries have sought unsuccessfully to expropriate Tompkins' purchases or put limits on extremely large landholdings.

The Argentine wetlands remain wild for now, with marsh deer feeding on tall grasses, families of capybaras splashing through the muddy water and caymans sunning themselves on the banks of small islands. An ostrich-like nandu tries to peck its way in through a screen door at one of the eco-tourism lodges opened for visitors in three renovated ranch houses.

Tompkins' Conservation Land Trust recently released its first anteater into the wild and wants to reintroduce otters and even jaguars.

Tompkins shrugs off the protests.

"If you had to go to bed every night thinking about every accusation that would come up the next day, you'd be consumed," he said. "Some of that stuff is laughable. ... You've just got to live with that and focus on the things you're doing."

Tompkins insists he'll eventually return the land to both governments to be preserved as nature reserves or parks, but will hold onto it for now "as a very good example of what private conservation can do."

Finally, more evidence that former Federal Reserve Board chairman, Alan Greenspan, deliberately encouraged the housing bubble just like he did the dot com stock bubble. We have known for a long time that he encouraged borrowers to take risky variable rate, low initial payment mortgages. He did this publicly at the time. Now we find out that he blocked any Fed oversight of shady lenders:

Greenspan nixed idea of subprime crackdown: paper

Sat Jun 9, 6:03 PM ET

CHICAGO (Reuters) - Alan Greenspan, when chairman of the Federal Reserve, brushed off an idea to boost scrutiny of subprime mortgage lenders, a former Fed governor told the Wall Street Journal.

In an interview published on Saturday, Edward Gramlich, who was a Fed governor from 1997 to 2005, said he proposed to Greenspan in or around 2000 that the Fed start sending examiners into the offices of consumer-finance lenders that were units of Fed-regulated banks.

"He was opposed to it, so I didn't really pursue it," said Gramlich, who said he raised the idea with Greenspan personally rather than going to the full board of governors.

Gramlich is now a senior fellow at the Urban Institute, a nonpartisan Washington-based research group.

Greenspan, who retired from the Fed in early 2006, told the Journal he did not recall a specific discussion on subprime lenders but would have been opposed to a crackdown.

"For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile," Greenspan said.

Subprime loans, typically made to borrowers with poor credit histories, have hurt the U.S. mortgage market in recent months as higher interest rates led to rising defaults and delinquencies.

Under new Chairman Ben Bernanke the Fed has started reviewing its oversight of holding-company units.

Signs of the Economic Apocalypse, 6-4-07

From Signs of the Times:

Gold closed at 676.90 dollars an ounce Friday, up 2.3% from $661.40 at the close of the previous Friday. The dollar closed at 0.7435 euros Friday, down less than 0.1% from 0.7439 at the previous week’s close. That put the euro at 1.3449 dollars compared to 1.3442 the Friday before. Gold in euros would be 503.31 euros an ounce, up 2.3% from 492.04 for the week. Oil closed at 65.08 dollars a barrel Friday, down 0.2% from $65.20 at the close of the week before. Oil in euros would be 48.39 euros a barrel, down 0.2% from 48.50 for the week. The gold/oil ratio closed at 10.40, up 2.6% from 10.14 at the close of the previous Friday. In U.S. stocks, the Dow Jones Industrial Average closed at 13,668.11 Friday, up 1.2% from 13,507.28 for the week. The NASDAQ closed at 2,613.92 Friday, up 2.2% from 2,557.19 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.95%, up nine basis points from 4.86 for the week.

The economic news mostly positive last week. In the U.S., consumer confidence was higher despite falling housing prices and higher gasoline prices. First quarter economic growth numbers came out on Thursday showing almost no growth, but that was overshadowed by better than expected employment numbers, leading analysts to think that growth will pick up in the second quarter. Finally, the Chinese stock market dropped, losing between 2.7% and 5% on Friday alone, but that was due to a deliberate move on the part of the Chinese government to cool the stock boom a bit by increasing taxes on stock profits. Adding to the good feelings, the drop in Chinese stocks didn’t spread to other global stock markets. Markets in Asia, Europe, Canada, and Mexico all rallied.

Most of the good news centered around stocks meaning that the good news is that corporate profits will be higher. Unfortunately for those of us who can’t live on stock investments, that means that pay will be less and jobs will be fewer. Sure enough incomes are down. And, worse is yet to come as world auto production will be moving from developed countries to China. According to the blogger Xymphora, The Cerberus purchase of Chrysler was done for exactly that reason:

American Cars: Made in China

May 31, 2007

Chris Floyd points out that the humanitarian disaster in Somalia is even worse than that in Darfur, and that the Somalia disaster is caused by the kind of American intervention and ‘regime change’ that the Zionists are screaming for in Sudan. Of course, the Somalia regime change was yet another Israeli-inspired replacement of a government which was considered to be too Islamist. Floyd concludes by making the same big mistake that has become commonplace: alleging that the United States is in an energy war in East Africa with the Chinese. It is certainly true that the Zionist infiltrators in the American government we know as neocons have always hated China, and to the extent they still control American foreign policy they are doing whatever they can to cause conflict with China. However, as the American Establishment slowly retakes control of the American government, we will be seeing American foreign policy again reflect the real interests of the Establishment.

Since mathematicians started working on perfecting manufacturing as part of the American war effort in the 1940s, it has taken decades for the utopian dream of the capitalists – manufacturing anything, anywhere, including where labor costs are the lowest – to be realized. There have been many false attempts at dropping factories in the middle of nowhere, but no matter how many Western managers and techniques have been applied, they all ended in financial disaster. It was only in the 1980s that computer control mechanisms were perfected to the extent that capital was completely mobile. Since, both for legal and personal reasons, labor isn’t mobile, an immediate arbitrage situation appeared whereby capital could take even a larger slice of the pie from labor. Thus, the sudden renewed interest in ‘free trade’. China quickly became the obvious choice for manufacturing, with its combination of extremely low wages, totalitarian police state discipline, and welcoming government policies intending to use factories to modernize the country.

Just about everything that can be manufactured for the American market is now manufactured in China. There is no debate in the American Establishment: their wealth, and the financial health of the United States, is dependent on Chinese manufacturing. Since Chinese manufacturing is itself dependent on a reliable source of energy, there is no real conflict between the United States and China over oil (although there may be phony conflicts caused by the continuing malign influence of the Zionists in the American government). This fact has huge repercussion on American policy in the Middle East (more on this to come).

The one industry where manufacturing is still largely done in the United States is the automobile industry. The huge size of the industry, together with the iconic symbolism of the automobile in American life, meant that it was politically impossible to make the obvious move to manufacture automobiles in China. Now that the big three American automobile manufacturers are effectively insolvent, the time has come to make the move to China. Why was the incompetently managed, and serially insolvent, Chrysler attractive to Cerberus? Chrysler is the first American automobile manufacturer to set up manufacturing in China for the American market. Keith Naughton writes:

“Now the new owners at Chrysler promise to rethink what it means to be a car company. Cerberus Capital Management, the Wall Street private-equity firm named for the three-headed dog that guards the gates of Hell, has Motown rabid with speculation this week about the fallout from its $7.4 billion buyout of beleaguered Chrysler. A skilled and secretive turnaround outfit, Cerberus is expected to overhaul Chrysler in a way that could create a new model for Detroit, which badly needs a tuneup. Last year, GM, Ford and Chrysler combined to lose more than $16 billion, as the remnants of Henry Ford’s old model finally ran out of gas. Detroit insiders say they expect Cerberus to shake up the moribund American auto industry by asking this simple question: does a car company have to build all its own cars?

It could prove to be a transformative question. Rather than each Detroit automaker building every kind of car and truck – and losing their shirt on most of them – they could be design and brand houses that build only the things that make them money. After all, the thinking goes, customers only care about the product, the brand and the price. Why not focus on designing a car, marketing it and selling it, rather than manufacturing it?”

Cerberus will want to make Chrysler attractive so it can resell it in a few years at a big profit. There is no way to do that by continuing to manufacture in the United States. Despite some questions, the China deal is still on. Once the profits start rolling in, it is inevitable that all American automobile manufacturers will follow. The television industry disappeared in the United States with nary a whimper, and the automobile industry is sure to follow.

The Nation published an lengthy article on “heterodox” or non-neoclassical economists. These economists’ critiques of “autistic” economics conform to basic common sense and good science, but have been suppressed within the economics discipline. The reaction of the economics establishment is revealing of some truths that even a left publication like The Nation won’t confront: the vectoring of academic disciplines to serve the interest of the pathocracy.

Hip Heterodoxy

Christopher Hayes

[from the June 11, 2007 issue]

It's a Friday night in January, and I am searching for a free drink among 9,000 economists. Every year a sizable portion of the nation's economists descend on some lucky city for the Allied Social Science Associations Annual Meeting, the economics field's largest gathering, a kind of carnival of suits and supply curves. Most academic disciplines have a similar annual convention, but no other can boast the same influence on American politics and policy--after all, Presidents don't appoint a council of anthropological advisers. It doesn't take long for mainstream academic thinking to become the foundation for the government's macroeconomic policy. In 1968 Milton Friedman, then president of the American Economics Association (AEA), devoted his presidential address to arguing against Keynesian meddling in the economy and for a monetary policy focused on restraining inflation. A decade later, his prescriptions would be largely adopted. In 2005 onetime Reagan adviser Martin Feldstein called for Social Security privatization just as Republicans in Washington were mobilizing (unsuccessfully) toward the same end.

This year's conference attendees are packed into the mammoth glass-and-brick Chicago Hyatt. On the second evening, I come across two receptions facing off across a basement hallway. If you wanted to get a sense of the status hierarchies of the profession, this was a perfect tableau. On one side, a reception in honor of the impending rebroadcast of the late Milton Friedman's famed miniseries Free to Choose, a wildly successful bit of laissez-faire propaganda now set to reach a new generation of unsuspecting blue-state audiences. The room is packed and festive, with several Nobel laureates milling about, chicken satay skewers available for noshing and an open bar. (A man behind me in line complains of the free drinks that "Milton wouldn't approve! Because we're not getting the true price of the drinks.") Across the hall, a reception hosted by the Economic Policy Institute (EPI), a left-liberal Washington think tank that advocates policies--higher minimum wage, easier paths to unionization, social insurance--that are in almost every detail the opposite of everything that Friedman stood for. In that room, perhaps thirty people gather, picking at the cheese cubes and shelling out $6 a drink at the cash bar. The EPI's Max Sawicky, an imposing presence with a long gray ponytail and growling voice, tells me the turnout is better than usual.

After grabbing a free drink in the Friedman reception, I strike up a conversation with economist Michael Perelman in the hallway. Balding, with long gray hair, he has the intense, unblinking mien of a self-published science fiction writer, or a former grad student of Timothy Leary's. Perelman, who is there for the EPI reception, works at the margins of the discipline; he is one of a few hundred self-described "heterodox" economists at the conference. His last book, Railroading Economics, was about the creation of the "free market mythology," and his next book is titled The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression. I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

Mafia is probably a tad hyperbolic, but there is undoubtedly something of a code of omertà within the discipline. Just ask Alan Blinder and David Card. Blinder, a renowned Princeton economist and former Clinton economic adviser, has long been a zealous advocate of trade liberalization. But this past March, the Wall Street Journal ran a front-page article on Blinder's concerns about the massive dislocations that the current trade regime and outsourcing trends might bring for American workers. He suddenly found himself under fire from fellow economists for stepping out of line. Card, a highly esteemed economist at the University of California, Berkeley, caught flak for his heresy not on trade but on the minimum wage. In 1994 he conducted a study to see whether an increase in the minimum wage in New Jersey had the negative effect on employment that basic neoclassical theory would predict. He found it didn't. In fact, his regression analysis showed that, controlling for other factors, New Jersey gained fast-food jobs after increasing its minimum wage, compared with Pennsylvania, which hadn't raised wages. The paper attracted a tremendous amount of attention and criticism, and Card himself largely abandoned working on the minimum wage. In a 2006 interview, he explained his decision to leave the topic behind this way: "I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole."

What a great illustration of how discipline is enforced in academia! If economics were a true science, it wouldn’t have a “cause.” This incident reveals the “cause,” the real agenda: to influence policy to create a society where fundamentally limited people (hence the “autistic” term) have an advantage.

As Card's and Blinder's experiences show, the "mafia" still flexes its muscles, but there are also signs that its hold on power is slipping. While the discipline remains dominated by a "neoclassical" consensus that is generally pro-market and suspicious of government intervention, an explosion of new research programs and methods have provided strong evidence that many of the pillars of that consensus rest on a foundation of sand. In fact, just before the reception, AEA president George Akerlof, a Nobel laureate as respected in the profession as they come, gave what was in many senses a radical address, attacking some of the discipline's most basic assumptions about what drives human economic behavior. (Three men standing near me in the Friedman reception had referred to it as "crap.")

For this reason, I had expected the mood at the EPI reception to be upbeat. But the crowd was desultory. Things in the field were opening up, Sawicky conceded, "but it doesn't matter much, if it's still dominated by a bunch of reactionaries." In other words, while the ideas of Sawicky and his heterodox colleagues may have moved into the mainstream, they themselves have not.

So extreme is the marginalization of heterodox economists, most people don't even know they exist. Despite the fact that as many as one in five professional economists belongs to a professional association that might be described as heterodox, the phrase "heterodox economics" has appeared exactly once in the New York Times since 1981. During that same period "intelligent design," a theory endorsed by not a single published, peer-reviewed piece of scholarship, has appeared 367 times.

It doesn't take much to call forth an impressive amount of bile from heterodox economists toward their mainstream brethren. John Tiemstra, president of the Association for Social Economics and a professor at Calvin College, summed up his feelings this way: "I go to the cocktail parties for my old schools, MIT and Oberlin, and people are all excited about Freakonomics. I kind of wince and go off to another corner or have another drink." After the EPI gathering, Peter Dorman, an economist at Evergreen State College with a gentle, bearded air, related an e-mail exchange he once had with Hal Varian, a well-respected Berkeley economist who's moderately liberal but firmly committed to the neoclassical approach. Varian wrote to Dorman that there was no point in presenting "both sides" of the debate about trade, because one side--the view that benefits from unfettered trade are absolute--was like astronomy, while any other view was like astrology. "So I told him I didn't buy the traditional trade theory," Dorman said. "'Was I an astrologer?' And he said yes!"

The Birth of Orthodoxy

The term "heterodox"--like, say, "infidel"--is necessarily imprecise; it categorizes people by what they don't believe rather than what they do. In the case of heterodox economists, what they don't believe is the neoclassical model that anchors the economics profession. Classical economics refers to the theories laid out by Adam Smith and David Ricardo in the eighteenth and nineteenth centuries, which emphasized the power of the "invisible hand" of the market to promote the division of labor and economic growth. Smith famously summed up the recipe for prosperity as "peace, easy taxes, and a tolerable administration of justice," with "all the rest being brought about by the natural course of things."

A hundred years after Smith, a group of "neoclassical" economists came along and added a few key features to his account, which continue to ground the field to this day--that humans are rational, utility-maximizing agents with fixed preferences, that they make decisions "at the margins" and that the mechanisms of supply and demand (operating free of government interference) will lead to a general equilibrium whereby resources are allocated efficiently.

That view dominated for the next sixty years until John Maynard Keynes came along in a period of global economic crisis and proposed a new way of looking at the economy, one focused on national economies as systems that were decidedly imperfect and prone to failure. In the wake of Keynes's work in the 1930s and '40s, economists had a problem on their hands. They had two models for how an economy worked: the neoclassical account of supply, demand and prices (microeconomics) and Keynes's account of the relationships among consumer demand, employment and money (macroeconomics). In the 1940s and '50s, a series of legendary economists formally fused the two, producing the "neoclassical synthesis." Many of the pioneers of this work, from Paul Samuelson to Kenneth Arrow, were famously liberal. But their work stressed the ways in which markets, functioning on their own without interference, tended to an interdependence described as "general equilibrium." In their wake came a parade of libertarian economists, like Milton Friedman and his Chicago School colleagues, who pushed the neoclassical model to leave Keynes behind completely, to fully embrace the logical extremes of a world of self-interested rational actors--a back-to-the-future gambit dubbed the "new classical" economics.

In terms of the implications for the relative value of market and nonmarket forces in allocating resources, the new classical view didn't differ substantially from Adam Smith's original contention. In the same way classical economics was born as a brief for laissez-faire capitalism, against the prevailing interventionist mercantilism of the day, the new classical model reaffirmed the value of markets in the wake of Keynes's critiques.

And it came to dovetail quite neatly with a worldview that has dominated the past thirty years of globalization, which Notre Dame heterodox economist David Ruccio succinctly summed up to me as one in which "markets, private property and minimal government will achieve maximum welfare."

But the neoclassical model didn't leave its mark only on economics. In an audacious burst of methodological imperialism, Chicago Schoolers like Gary Becker used the framework of rational individuals seeking to maximize their utility to analyze and explain everything from tax evasion to teen pregnancy. This laid the groundwork for the public discourse we have today, in which Freakonomics spends 101 weeks on the bestseller list and policy-makers obsessively invoke "incentives" as the panacea for any given social problem. ("Incentive pay" for teachers! Give poor kids sneakers, and they'll be A students!) Indeed, the cradle for much of our policy discussions can be found in the first chapter of just about any introductory economics textbook, where the basic precepts of the neoclassical framework are described under the rubric of "thinking like an economist."

The problem, then, that heterodox economists face is that they are economists who don't "think like economists." Many point out that humans aren't rational, or not nearly as rational as the theory would have them be (and, further, that in the aggregate this creates market failures). Others point out that humans are social creatures, not individual agents, and their preferences and behaviors are forged by social structures: institutions, habits, social mores and culture all mediate and drive economic behavior. Others say that price and value aren't interchangeable and that prices don't arise from the simple intersection of supply and demand curves, while some argue that unequal power between different sectors of society affects how markets operate. Dissent from the mainstream of economics is not new; indeed, it's nearly as old as the profession itself. Marx was a kind of heterodox economist, as was Thorstein Veblen. John Kenneth Galbraith spent his whole life as an economic dissident, and the political ferment of the 1960s ushered in a relatively large class of radical economists who together founded the Union for Radical Political Economics, which exists to this day.

In 2000 the economics graduate students at the École Normale Supérieure staged a mutiny, signing a manifesto that objected to the "autistic" economics they were being taught. "Too often," the students wrote, "the lectures leave no place for reflection. Out of all the approaches to economic questions that exist, generally only one is presented to us. This approach is supposed to explain everything by means of a purely axiomatic process, as if this were THE economic truth. We do not accept this dogmatism."

The rebellion spread across Europe and gave rise to a fairly vibrant Post-Autistic Economics movement in places like England and Germany. But in the United States, the Post-Autistic movement never caught fire, and dissident economists remain clustered in a handful of locations: the University of Utah; UMass, Amherst; the University of Missouri, Kansas City; The New School; Notre Dame; and in a few professional associations and journals. "We're between 5 and 10 percent in the academy," Frederic Lee, who edits the Heterodox Economics Newsletter, tells me. "That might be generous. It's not very much, but it would be like saying Jews only constitute 5 percent of Europe. Yeah, sure, after you slaughter 'em. The issue isn't that you're small--the issue is that you're there at all."

The chief complaint of heterodox economists is that the social hierarchy of the profession prevents their ideas from getting the hearing they deserve. Thomas Palley, a dissident economist who received his PhD from Yale and once worked for the AFL-CIO, says that many heterodox ideas "can't be rejected on scientific grounds. They meet all the tests of the profession--they don't meet tastes of the profession. So then you have to answer where the tastes come from."

..Richard Jensen, the neoclassical chair of the department, defended the split as solely an issue of "standards." But it's precisely the validity of those standards that's at issue. "They don't see themselves as cleansing alternative approaches," says Frederic Lee. "They simply see themselves as saying, This is good economics, and that's bad economics."

…In his keynote talk to the Association of Social Economists, environmental economist John Gowdy referred to this as the "Clint Eastwood defense: 'We ain't like that no more.'" But he then added that in some respects it was true. The mainstream, he said, has "gone beyond the free-market ideology. There's a wide variety of empirical work being published." The empirical work that Gowdy and other heterodox economists tend to cite most is that of behavioral economists, those who study how humans actually reason about economic decisions, calculate risk and respond to incentives. What they routinely find is that the rational utility maximizer of the neoclassical model is a convenient fiction. A growing literature shows humans to be systematically biased in their calculations of risk, disposed to punish antisocial behavior, even at a cost to themselves. By creating a framework for empirically testing one of the founding axioms of the field, behavioral economics has opened a space for dissenters that can get a hearing from the mainstream. If you were to draw an intellectual Venn diagram of mainstream and heterodox economics, the behavioral economists would be in the intersecting section.

But despite the fact that much of their work is devoted to upending Homo economicus, the behavioralists have achieved widespread mainstream acceptance. Daniel Kahneman, who helped establish the field along with his late colleague Amos Tversky, won the Nobel Prize for his work in 2002. So then one has to ask, Just what set of characteristics defines what gets to be called "mainstream economics"? And the answer can seem maddeningly circular: Mainstream economics isn't defined so much by some limited set of ideas or approaches. Mainstream economics is that work done by mainstream economists and published in mainstream journals.

The More Things Change...

…A month after the conference, I went to talk more with David Ruccio in his Hyde Park apartment. He'd just returned from Brazil, glowing about a country where you could smoke indoors: "There is no repression here!" one of his hosts had told him when he asked if he could light up. Ruccio laughed and lit a cigarette, sitting next to a fireplace. I laid out for him my impressions of the AEA conference: If the mainstream itself is opening up, molting the restrictive Homo economicus and general equilibrium casing, then is the field changing? And does that mean that the worldview of neoliberalism, and market fetishistic policy prescriptions, are losing the important intellectual bedrock in which they are grounded?

Ruccio wasn't quite buying it. "There's a fracturing taking place," he conceded. "It's very hard to put your thumb on what neoclassical economics is. And yeah, there are new research agendas, but what gets taught at every institution in the country from undergraduate to graduate is the same utility-maximizing story. The teaching remains the same, and the policies remain the same."

He continued, "Some of the critiques, as has always been the case, are integrated in some fashion. They take in the critique in order to change the model but not upset the model." Behavioral economists, for example, don't generally argue for abandoning the general equilibrium model, instead choosing to see their work as adding "frictions" to it. "It's what drives people like me crazy," Ruccio went on. "Because the more disturbing questions are ignored--unequal power or exploitation, those critiques never come in. They say, Look, we've changed. And we look and say, No, you haven't."

Another classic establishment manoever: a tactical absorbtion of just enough elements of the critique to strengthen orthodoxy.

'Shoots of Spring'

No one would call Berkeley's George Akerlof a heterodox economist, but his ideas have always been iconoclastic. Back in the 1960s, he noticed that there was something systematically wrong with the market for used cars. His insight was that the problem was "asymmetric information"; the dealer knew if the car was a lemon, and you didn't. Initially no journal would accept his paper "The Market for Lemons," but eventually it was published to much acclaim, and asymmetric information was recognized as a serious breakthrough. He shared the 2001 Nobel Prize for his work on the topic.

Akerlof's AEA address was titled "The Missing Motivation in Macroeconomics," and its purpose was to argue that the basic theory of human behavior upon which neoclassical economics rests is incomplete and that the incompleteness leads to a host of theoretical errors. The "missing motivation" of the title were social norms, people's conceptions of how they should act, which Akerlof argued played a central role in people's economic activity. Once these social norms are integrated into economic theory, Akerlof argued, many of the anti-Keynesian arguments made by Friedman and his ilk begin to fall apart. "The Keynesians based their models on their observation of motivations," Akerlof notes, "rather than on abstract derivations. If there is a difference between real behavior and behavior derived from abstract preferences, New Classical economics has no way to pick up those differences. In contrast, models with norms based on observation will systematically incorporate such behavior." Writing in the New York Times, Louis Uchitelle said the talk could "push prevailing economic theory further away from the free market approach that has generally held sway for the last four decades."

If the heterodox economists were nonplussed or only grudgingly positive about the speech, many mainstream economists weren't psyched about it either. NYU's Mark Gertler told Uchitelle that Akerlof was "stepping out of line," and one Chicago School economist I e-mailed said he "hated it" and added that it had made one of his colleagues "depressed."

The word "depressed" caught my eye. You only get depressed by something you disagree with if you think others are going to find it persuasive--that is, if you think that the pendulum isn't swinging your way.

"There's a recognition that it's pretty hard to believe in the rational expectations and equilibria which were sold to students in the 1980s, when you had to read them, and not only read them but send them up as your benchmark," Thomas Palley, the former AFL-CIO economist, told me. "In 1983 there were more voices and more possibility, but the world was closing. Now we're coming from a black hole and there are shoots of spring."

It’s commencement season in the United States, and the following mock commencement speech depicts the world that the economics profession helped to create: one in which our lives are vectored either to become a pathocrat or serve their interests. It also hints at how such a world will necessarily collapse on itself once all of the society’s creative energy is employed to prop up an entropic system.

The speech grads should hear

Daniel Brook

June 1, 2007

Four years ago, you were all gathered before me on this quad as eager freshmen; today we are gathered here again, to send you off into what MTV has dubbed "the real world." [pause for laugh, look surprised and flattered when it comes]

Back then I urged you to embark upon a liberal arts education. By sophomore year, reality began to set in, and your schedules included a "practical" course or two. You dipped your toes into Economics 101 and, as it's known on this campus, "Accounting for Lemmings." Ultimately, most of you, like most American undergraduates, majored in a pre-professional field.

While it is customary to inspire graduates with a plea to go forth and serve humanity, I will take the advice of one of your eloquent classmates and "cut the crap." This college, like many in our great nation, is sending most of you into the world burdened by five-figures worth of tuition debt and without a loan forgiveness program for public service. Choose to be a teacher in Boston and you'll find you've been priced out of homeownership in 91.7 percent of the region's census tracts. Take a government or nonprofit job in Washington, and get ready to commute two hours a day from affordable West Virginia if you want to start a family. Or you can go corporate and embrace the five-fold pay advantage of entry-level K Street lobbyists over Capitol Hill staffers.

During your four idyllic years here, your class has become known for its creativity. This year, we had a record number of entries in both our entrepreneurship concept contest and our playwrights festival. Should any of you decide to pursue a self-employed existence be sure you don't have any preexisting medical conditions, because if you do, you will not be able to get health insurance. Even those of you with more mundane aspirations must be careful: nearly 40 percent of entry-level jobs for college graduates no longer include employer-provided insurance.

To the parents who are shaking their heads and muttering "it was always thus," I say, it was not. In the 1970s, students could pay nearly three-quarters of their tuition with a Pell Grant; today, a grant covers only one-third. As recently as 1984, the cost of housing in San Francisco was just 63 percent higher than in the average American locale, proverbial Peoria; now it is three times as expensive. When I graduated from this university in the 1960s, my tuition was one-third of what it is today. (And to the chairman of economics: yes, Dr. Wisenheimer, I remembered to adjust for inflation.)

This may sound quite hopeless. Yet, if you managed to squeeze an American history course into your schedule of McKinsey & Company recruiting panels, you might have learned that these seemingly immutable financial facts of life are not foreordained. You might have learned that many public universities used to be free and private tuitions modest. And you might have studied how the rightward political swing of recent decades -- from Barry Goldwater's 1964 campaign up to President Bush's Ownership Society --changed all that.

You'd know about how Ronald Reagan, as governor of California, overturned a hundred-year tradition that the University of California system would be tuition-free and as president, Reagan's federal human resources policy explicitly channeled top candidates into the private sector.

While I have enjoyed flouting convention in this speech, there is one convention I dare not overturn: ending on an upbeat note.

I would be remiss not to mention the remarkable opportunities available to those who successfully stifle their impulses toward service and creativity. With your prestigious degrees, you can easily join the ranks of America's millionaire yes-men and yes-women. In a nation with literally millions of millionaires, there's no need to build a better mouse trap or even to rise to the top of your profession.

It's just a matter of choosing the right field and always answering in the affirmative. "Yes" to hundred-hour workweeks; "yes" to never seeing your children; "yes" to your boss's capricious 3 a.m. BlackBerry demands.

As one of our trustees confided to me, every law partner at the eighth-best law firm in Cleveland is now a millionaire; the dead weight on the Wall Street trading floors get bigger Christmas bonuses than our department chairs make in a year. So think small. Aim low. Aspire to corporate mediocrity. And if you ever feel handcuffed to a job as pocket-lining as it is soul-crushing, then and only then, I urge you to give something back -- preferably in the form of a check to the alumni fund.

Daniel Brook is author of "The Trap: Selling Out to Stay Afloat in Winner-Take-All America."