Monthly Archives: November 2011

Brain Dump: Playing with Puzzle Pieces of a Framework

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I’ve been playing around with another way of pulling together the pieces of my framework, and I’ve gotten stuck. To help me get unstuck, here’s a brain dump of what I’ve been thinking about:

If our economy isn’t “natural” and wasn’t inevitable, then what is the alternative? How do we create a more just economy that actually works?

3 Pillars:
1) Changing the Balance of Power
2) Tangible Dreams: “Stack the Deck in Favor of the Good Guys”
3) Uncertainty: “We’re Not As Smart As We Think We Are”

1) Changing the Balance of Power
Power is inextricably part of markets
Power sets the agenda — if we don’t have it, others set what’s “inevitable,” what “market failure”
How the economy is structured: strengthens/weakens power
You haven’t really made a change unless it’s politically sustainable
Individual choice versus power together Consumer choice versus organizing together
Making decisions together versus Parklets
Power: necessary, but not enough

2) Tangible Dreams
Don’t Think Small
“All Corporations Are Evil” won’t work — Need a Yes, not just a No
To have real power, Vision needs to have “Good Guys”
Ex: “How Do the Good Guys Make Payroll?”

3) Uncertainty/Humility
Economy: wasn’t “inevitable,” but also isn’t controllable
Bridging the Chasm — Ex: Alta Gracia
“We’re Not As Smart As We Think We Are”

The Little Organic Agriculture Engine That Could

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One of the big slams on organic agriculture is that it’s just not productive enough. But now, according to Mother Jones’ Tom Philpott, more solid evidence “from the very heart of Big Ag, rural Iowa” that it ain’t so:

Iowa State University’s Leopold Center for Sustainable Agriculture runs the Long-Term Agroecological Research Experiment (LTAR), which began in 1998, which has just released its latest results.

At the LTAR fields in Adair County, the (LTAR) runs four fields: one managed with the Midwest-standard two-year corn-soy rotation featuring the full range of agrochemicals; and the other ones organically managed with three different crop-rotation systems….

So, in yield terms, both of the organic rotations featuring corn beat the Adair County average and came close to the conventional patch. Two of the three organic rotations featuring soybeans beat both the county average and the conventional patch; and both of the organic rotations featuring oats trounced the county average….

And in terms of economic returns to farmers—market price for crops minus costs—the contest isn’t even close. Organic crops draw a higher price in the market and don’t require expenditures for pricy inputs like synthetic fertilizer and pesticides.

Moreover, organic management improved soil’s ability to retain nutrients. “Total nitrogen increased by 33 percent in the organic system,” Leopold reports, and “researchers measured higher concentrations of carbon, potassium, phosphorous, magnesium and calcium in the organic soils.

So if organic farming is such a good competitor, why aren’t more farmers doing it?

The last line of the Leopold Center’s report offers a clue: “Skilled management is an adequate replacement for synthetic chemicals.” Look at it like this: In the Corn Belt, technology and monocropping have reduced farming to a relatively simple endeavor. You douse your fields in synthetic and mined fertilizers and plant them in in corn one year, soy the next. When the inevitable plague of pests arrives—weeds and bugs love monocrops—you attack them with an arsenal of poisons. Then, you harvest and sell to vast multinational companies—Cargill and ADM—with the built infrastructure on the ground to make the transaction easy.
Farmers are understandably reluctant to switch away from that paint-by-the-numbers style. To make organic farming work, you have to stay ahead of the weeds and bugs by rotating in more crops than just corn and soy. And weed management requires other strategies just driving a chemical tank through the field or hiring a crop-duster: planting cover crops, tilling at just the right time, mulching. And selling, say, oats or alfalfa is trickier, because the infrastructure for marketing them has largely been dismantled over the past 50 years.

But that doesn’t mean that organic farming is impractical, as Borlaug insisted. It just means that we need to move public policy away from blind support for industrial agriculture (no easy trick), and learn to support the hordes of young people seeking careers in high-skilled, eco-minded farming.

So if we stop Stacking the Deck in favor of Big Ag and start stacking it in favor of local organic farmers, more farmers are likely to switch, and more young folks are likely to become farmers — no small thing considering how rapidly the farming population is aging.

The Economic Power of Playing Nicely with Others

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In an American Prospect article, Robert Kuttner reviews an interesting book by Yochai Benkler, “the pioneering expert on the economics of collaborative networks as facilitated by the Internet,” called The Penguin and the Leviathan on: How Cooperation Triumphs over Self-Interest:

[the book] uses examples as diverse as Zipcar, Wikipedia, open-source software, and Chicago’s community policing to contend that cooperative systems often outperform the competitive and hierarchical ones of free-market theory….

Reviewing reams of experimental studies…, Benkler finds that the economic paradigm misconceives human nature: “In practically no human society examined under controlled conditions have the majority of people consistently behaved selfishly.” We’ve all behaved reciprocally or done altruistic things, he writes, “because we knew intuitively that they were simply the right thing to do.” Happily, Benkler adds, “the Internet has allowed social, nonmarket behavior to move from the periphery of the industrial economy to the very core of the global, networked information economy.”…

For Benkler, the Leviathan of his title refers to both the bureaucratic state and the internally authoritarian corporation. The superior alternative to both is collaborative enterprise, symbolized by Tux the Penguin, the mascot and logo of Linux open-source software.

Kuttner points out that although “Benkler’s parallel universe [is] immensely appealing,” Benkler is way too optimistic that “the sheer logic of collaborative enterprise will transform the distribution of political power.” There’s nothing inevitable about it.

The ground rules of commerce can foster or strangle more collaborative forms of enterprise—and these rules are fruits of political power….

Long before its debut on the Internet, we’ve seen this movie. Half a century ago, America was far friendlier to credit unions, mutual insurance companies, nonprofit building-and-loan societies, farmer and worker cooperatives, and nonprofit hospitals and health plans. In the 1970s, authors were writing hopeful articles and books about worker-owned firms. This sector, which once accounted for a much larger share of American commerce, has mostly been bought out or crowded out by conventional business thanks to changes in rules promoted by economic elites. For example, Blue Cross in most states converted from nonprofit to for-profit because its executives saw a chance to make a buck and had sufficient influence on state governments to get the necessary permission. All the big mutual insurance companies save State Farm have likewise become stock companies. This is less about efficiency than profit and power to set the rules….

Political decisions will create the regulatory framework that allows the collaborative model to flourish or founder.

Although Benkler may be Pollyannish — and may not take seriously enough the critical role of the state (hello? Creating the Internet?) — it sounds like his book points to a lot of good hard evidence about the economic power of cooperation. Definitely something that any serious economic framework should figure out how to incorporate.

The Cry Wolf Project

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I just discovered a useful, entertaining site: the Cry Wolf Project. Here’s what they’re trying to do:

Throughout American history virtually every legislative initiative for progressive reform has been achieved only after bitter struggle by citizens, workers and advocates demanding fundamental rights and protections. In each case, they were met with claims that the proposal will “kill jobs,” generate a stifling government bureaucracy, or curtail economic growth.

The Cry Wolf Project is a network of advocates, researchers and scholars dedicated to demonstrating that, in fact, conservatives and business groups are only “crying wolf” to delay, prevent and weaken important and common sense regulations that save lives, clean our environment and make our families more secure.

In addition to a blog that tags & bags wolf criers, the site slices and dices wolf cry quotes by who said them and by topic. My favorite so far: from Alan Greenspan:

“[It is a] collectivist [myth that business people] would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings….It is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

-Alan Greenspan, writing in Ayn Rand’s Objectivist newsletter.
01/01/1963

Definitely worth checking out.

Old-School 1%: " The Fairness of Taxing More Lightly Income from Wages, Salaries or from Investments Is beyond Question"

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Via Michael Lind, a great 1924 quote from Andrew Mellon, who was according to Wikipedia the “the third highest income tax payer in the US behind only John D. Rockefeller and Henry Ford” in the 1920s:

The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs.

Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.

My how times have changed.

Sweating the Geeky Finance Details — or Not?

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Every once in a while I’ll read a snarky post by a liberal/lefty finance blogger saying that Gretchen Morgenstern, the famous New York Times finance reporter, doesn’t really know what she’s talking about. Most of the time they don’t give enough detail for me to understand what they’re talking about — especially since I don’t read or write about Finance often enough to be fluent in financese (that portion of my brain is already filled up with the useless geeky details from my day job of managing software projects). Yesterday, the very sharp Felix Salmon gave us a nice example.

Gretchen Morgenstern wrote a piece on the fall of MF Global, which she blamed in part on credit default swaps (CDS). The International Swaps and Derivatives Association media.comment blog smacked back:

MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions. Repos, of course, are NOT OTC derivatives. (They’re also not listed derivatives.) They are basic tools of corporate finance commonly used to finance cash bond positions.

We would have thought that, with a little checking, this point would be pretty obvious to one and all.

Salmon replied:

Obviously, ISDA wins this particular argument: it’s right, and the NYT is wrong. But don’t hold your breath waiting for a correction: Morgenson is one of those reporters who sees CDS beneath every rock, and even blamed CDS for Greece’s fiscal problems — twice. Neither of those columns received a correction.

In the Greece case, Morgenson saw CDS when she was actually looking at currency swaps, which are at least derivatives. In the MF Global case, she’s seeing CDS when she was actually looking at bog-standard repos, which aren’t derivatives at all.

But here’s the thing: the really annoying part of this episode is not that Morgenson is wrong. It’s that with a little bit of honesty and a little less derivaphobia, she might actually be on to something.
Here’s Morgenson: Continue reading →

Is a Biblical Jubilee on Some Housing Debt Possible?

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A biblical Jubilee for clearing or reducing some mortgage debt? That’s the kind of radical idea you’d expect in a magazine like the Nation. But as William Greider points out in a recent Nation, more and more folks squarely in the middle are coming to the conclusion that if we don’t start radically cutting back on the principal many homeowners, whose mortgages now far outstrip the actual value of their homes, the housing market may never really recover.

Take Stephen Roach, the Morgan Stanley analyst who made headlines this summer when he floated the idea:

“Some form of debt forgiveness would be a clear positive,” Roach told me. “Debt forgiveness is a big deal when so many Americans are underwater and unable to keep up with their payments. Writing off debts would help them build up their savings. The saving rate is up, but not nearly enough. With debt reduction, people would feel less reluctant to spend money on new things. If you can do that, then companies will feel more confident about future demand, less reluctant about hiring more workers.”

Roach thinks the executive branch can engineer dramatic debt reduction with or without the approval of Congress. Fannie and Freddie together hold something like $1.5 trillion in housing loans or mortgage-backed securities. The Federal Reserve has nearly another trillion on its balance sheet. As owners, they could unilaterally grant new, more realistic terms to stressed borrowers. “Government can do this by simply telling Fannie Mae and Freddie Mac to take a write-down on their outstanding loans,” Roach explains. “Then the government can put pressure on the banks to do the same thing. The banks will resist, but they have to go along if the government is forceful enough.”

The Fed can likewise become a major influence for debt reduction, Roach says. Conservative traditionalists would naturally be appalled if the Fed directly aided the real economy of consumers and producers, but that objection was nullified by the financial crisis, when the central bank pumped hundreds of billions into nonbank corporations like AIG and General Electric.

If the Federal Reserve is reluctant to modify mortgages, says Roach, it can easily fund the process indirectly by creating new money and buying bonds issued by Fannie and Freddie, just as the Fed purchases Treasury bonds. “The Fed can assist by buying Fannie and Freddie bonds with the emphasis on reducing principal for the borrowers,” Roach explains. “It would be like ‘quantitative easing’ aimed at debt reduction,” a reference to the Fed’s purchases of mortgage-backed securities, Treasury notes and other assets to stimulate recovery.

Another mainstream financial analyst makes a similar case:

Laurie Goodman, the Amherst Securities housing-finance expert, assured the Senate Banking Committee in September that debt reduction is readily doable in the financial and real estate industries. “We actually know exactly what it takes to create a successful modification: reduce principal, give the borrower substantial payment relief and modify the borrower in the early stages of delinquency,” she said.

To illustrate, Goodman suggests that a bank or mortgage servicer could reduce an underwater mortgage from $150,000 to $115,000 with a “shared appreciation” agreement. The homeowner would no longer be underwater and would gain some positive equity. If the property is sold in the future, any appreciation in its market value must be shared with the lender. She pointed out that a major mortgage servicer, Ocwen Financial, is already doing such deals. The creditor will get
25 percent of any future market gain. In many cases, that sounds like a better deal for the lender than holding on to the bad mortgage and eventually getting nothing.

“I would like to think principal reduction would be a mandatory part of the government’s modification program,” Goodman said. “The Treasury has not let it happen.”

And as Felix Salmon notes, even some seriously “red-in-tooth-and-claw capitalists” are starting to argue it’s inevitable:

Now comes word that Greg Lippmann, of all people — one of the big winners of the subprime bust, and a man who became extraordinarily wealthy playing in the mortgage CDS market — is thinking along similar lines himself.

“Principal reductions are necessary to help ameliorate the housing crisis,” Lippmann, chief investment officer for New York-based hedge fund LibreMax Capital LLC, said in an Oct. 31 letter to investors obtained by Bloomberg News. The step will also lower losses on loans underlying mortgage bonds, he said.

In other words, Lippmann sees what’s pretty obvious — principal reductions are not only helpful but necessary if the housing mess is going to clear. The question isn’t whether they’re going to happen, it’s how they’re going to happen.

Politically, of course making this happen would be very difficult. But then again, back during the summer nobody was predicting a populist grassroots explosion either.