Still a teacher at heart, U.S. Sen. Elizabeth Warren moved smoothly through her “America’s Agenda” program. The senator talked about her family’s meager resources as she was growing up. She spoke of how her mother, after her father suffered a heart attack, “put on lipstick, squared her shoulders and walked over to Sears and got a minimum wage job,” thus saving the family station wagon and their home.

She said one in three people who have a credit file are in collection, suggesting the loss of a strong middle class, and she knows why that’s happened.  From 1935 to 1980 … all the new income was divided … and 90 percent went to us … so what went wrong?

She described how problems began with Reagan and trickle-down economics, which she said helped the “rich and powerful become wealthy” in the hope that their wealth would flow down to the middle class. And then when the whole thing fell apart, as it was bound to do in 2008,” the taxpayers suffered, she said, “There are still remaining loopholes that need to be closed, and suggested that closing just one – allowing “giant corporations” to receive tax deductions for bonuses they pay out – would save $55 billion over a decade. That money could be used to refinance all student loans, replace every water pipe in Flint, Michigan, and more than 60 other cities, and give raises to every person on Social Security or on disability and to veterans. Organizers said about 100 people were turned away from Wednesday’s event when the room was filled but were allowed to stand in a hallway, where they could hear the speech and were offered an opportunity to take a photograph with Ms. Warren when the event ended.

Meeting with reporters, Ms. Warren said she is extremely concerned about the “growing threat of Zika.”The Democrats have been pushing the Republicans to do adequate funding on the research and to make sure the public health associations have the money they need to deal with mosquito control,” she said, adding that she felt she and other senators should be in Washington voting more money for that purpose.

Thor Benson writes:  When you enter the ballot booth this November, keep in mind that you could very well be voting for the captain of sinking ship. You may be voting for the next president who will have to steer us through a financial meltdown, and it’s all because we never truly learned from our mistakes.

Note: Lloyd Blankenfein of Goldman Sachs has financed and provided clients to Clinton’s son-in-law.

The financial crisis of 2008 happened because the banks were too big, they were too opaque and they were engaging in risky business practices. Where are we now? Many of the banks are much bigger, they’re still opaque and they’re still engaging in risky business practices. This is a recipe for (another) disaster..

“We don’t actually know a lot of what goes on in banking,” Anat Admati, a professor of finance and economics at Stanford University, told Salon. “We don’t have good monitoring of it.”

Admati said a lot of what banks do is deeply buried in vast financial records, so it’s extremely difficult to follow what industries banks are involved in and what they’re doing. She said the banks benefit from this opaqueness, because it means they can get away with risky business practices while no one knows what’s going on.

The banks are also very interconnected, in various ways. Through contracts and their investments, these enormous and volatile corporations are closely working together and exposing themselves to danger together, which means when one big bank falls, they all start to tumble.

One of the major risks banks take is not having enough equity to be considered stable. If there is a financial crisis, a bank with a lot of equity has a buffer that can help prevent it from failing, but many banks currently operate with less than 10 percent equity. “The numbers are pathetic,” Admati said. She said they’ve improved slightly since the financial crash, but their equity numbers are still dangerously low.

Through various mergers and expansions, these banks have become so large that it’s hard to fathom how large they truly are. “All student debt in this country, which is considered a huge problem, is approximately $1.3 trillion,” Admati said. “That is a fraction of JPMorgan Chase. That is like half of the accounting numbers of JP Morgan Chase.” She said these banks have their hands in nearly every part of the economy, and they’re not going to get smaller any time soon unless something is done.
Richard Wolff, a professor of economics emeritus at the University of Massachusetts, Amherst, also believes we are facing another major bailout if things don’t change soon. He said the “growth of student and auto loan debts relative to mass capacity to carry such debts” could be the cause. Admati points out that the Dodd-Frank Wall Street Reform and Consumer Protection Act, which came after the 2008 financial crisis and was meant to prevent another one from happening, hasn’t adequately changed how banks operate.

Goldman Sachs Group, Inc. Chairman and Chief Executive Officer Lloyd Blankfein; JPMorgan Chase Company Chairman and Chief Executive Officer James Dimon; Morgan Stanley Chairman John Mack, and Bank of America Corporation Chief Executive Officer and President Brian Moynihan, testify on Capitol Hill in Washington.

At the heart of the economic theory of Milton Friedman, a giant in the field of eocnomics, is the idea that people do not spend based on what they earn today, but rather on what they expect to earn in a lifetime. This permanent income hypothesis (PIH) is still central to economic theory.

Noah Smith writes:   That assumption about human behavior has huge implications for policy. If true, the PIH means that the effectiveness of a fiscal stimulus is likely to be a lot lower than economists thought in the 1960s. If the government tries to goose spending by mailing people checks, people will just deposit the money in the bank, instead of going out and consuming.

It’s also important for finance. Lots of academic theories are based on the PIH. Friedman’s idea says that consumers want to smooth out their consumption — they don’t like dips. So in theory people will spend a lot for financial assets that pay off during recessions, allowing them to avoid tightening their belts.

There probably are a lot of consumers out there who do behave just the way that Friedman imagined. But the problem is, there are a lot of others who act very differently. Slowly, economists have been building up evidence that the latter group is important and sizable.

A blow to the mathematical version of the theory came in 2006, when Georgetown economists Matthew Canzoneri, Robert Cumby and Behzad Diba wrote a paper testing the consumption Euler equation directly against real financial data — something that, for reasons that escape me, no economist seems to have actually tried before. The equation says that when interest rates are high, people save more and consume less — this is the way they smooth their consumption, as Friedman predicted. But Canzoneri et al. found that the opposite is true — for whatever reason, the fact is that people tend to consume more when rates are high.

A Congressional report, issued in the US “Too Big to Jail,” details a tame settlement with HSBC, a large global bank, that clearly protected executives from criminal charges.

It is important to note that when Barack Obama assumed the Presidency in the US, his background in finance and economics was weak.  He took the advice and advisors of Bill and Hillary Clinton.  The Clintons have always protected the higher ups of the financial sector.

A Department of Justice 2012 settlement with HSBC, after the bank had been accused of laundering over $900 million for drug traffickers and processing transactions for countries subject to US sanctions.

HSBC and its American subsidiary, HSBC Bank USA, agreed to pay almost $2 billion under the settlement.  Yet prosecution was delayed because the company agreed to change its behavior.

Such deals suggest that banks are too important to prosecute.

The report on HSBC was not adopted by the full House committee, but neither did it generate a dissent from others on the committee. It was released, the staff said, “to shed light on whether D.O.J. is making prosecutorial decisions based on the size of financial institutions and D.O.J.’s belief that such prosecutions could negatively impact the economy.”

David A. Skeel, a professor of corporate law at the University of Pennsylvania Law School, said he was struck by this change. “This is one case where it looks like the government might have been able to prosecute misbehaving executives during the crisis period, yet it waived its right to do so,” he said in an email.

The report should be viewed as “evidence of an abuse of the regulatory system,” finance professor Edward J. Kane said. “And unless proven otherwise, this is just the tip of the iceberg.”

Thomas Piketty whose book on income inequality was an international sensation, followed up with an argument that inequality is a major driver of Middle Eastern terrorism, including the Islamic State attacks on Paris earlier this month — and Western nations have themselves largely to blame for that inequality.

Piketty writes that the Middle East’s political and social system has been made fragile by the high concentration of oil wealth into a few countries with relatively little population. If you look at the region between Egypt and Iran — which includes Syria — you find several oil monarchies controlling between 60 and 70 percent of wealth, while housing just a bit more than 10 percent of the 300 million people living in that area.

This concentration of so much wealth in countries with so small a share of the population, he says, makes the region “the most unequal on the planet.”

Within those monarchies, he continues, a small slice of people controls most of the wealth, while a large — including women and refugees — are kept in a state of “semi-slavery.” Those economic conditions, he says, have become justifications for jihadists, along with the casualties of a series of wars in the region perpetuated by Western powers.

Piketty is particularly scathing when he blames the inequality of the region, and the persistence of oil monarchies that perpetuate it, on the West: “These are the regimes that are militarily and politically supported by Western powers, all too happy to get some crumbs to fund their [soccer] clubs or sell some weapons. No wonder our lessons in social justice and democracy find little welcome among Middle Eastern youth.”

Terrorism that is rooted in inequality, Piketty continues, is best combated economically.

The argument has not gained much notice in the United States thus far. This is perhaps the reason that some commentators have failed to understand the rise of Donald Trump and Bernie Sanders.  It may have also impelled Brexit.

Whether inequality is a root cause of the Islamic State should be debated fully in the Presidentail raace in the US.

Mervyn King who led the European Central Bank has written a new book: Th End of Alchemy.  In it, he discusses the apparent stagnation in developed economies worldwide.  He attributes this in part to the low-interest rate policies of the central bank, which bring purchases from the future into the present.  That is, if you plan to buy a big ticket item, why not buy it when interest rates are low.

King observes that every time you do this, you bring more future purchases to the present and begin to dig a big hole in the future. King writes: Monetary stimulus via low interest rates works largely by giving incentives to bring forward spending from the future to the present. But this is a short-term effect. After a time, tomorrow becomes today. Then we have to repeat the exercise and bring forward spending from the new tomorrow to the new today. As time passes, we will be digging larger and larger holes in future demand. The result is a self-reinforcing path of weak growth in the economy.”

While the math to such a suggestion has not been worked out, it is a provocative one in the face of current economic conditions.

King has a three-pronged approach the future planning:  irst, economic reforms to boost productivity, which he hopes will change that depressing narrative by which consumers determine their behavior. Second, trade liberalization, mainly in services (such as insurance, consulting, data analysis, and so on), since trade in goods is already quite free. Third, restoring exchange rate flexibility, which basically seems to mean ending the euro.  While ending the euro is a startling idea, the first two policies have been advocated by the IMF for sixty years.

Raising productivity is a big potential source of economic growth in China. But it’s also a potential source of layoffs and uncomfortable societal changes.

The McKinsey China report, released last month, is the latest in a series of productivity studies that MGI, the consulting firm’s research arm, has been producing since the early 1990s. The first ones showed that German and Japanese employment-and-growth/service-sector-productivity-and-international-competitiveness were on the whole far less productive than their U.S. counterparts.

A worker in the highly protected and fragmented food-processing industry — which employs more workers than the auto, computer, consumer-electronics and machine-tool industries combined — produces $39 worth of food in an hour, compared with an American counterpart’s $119. Productivity gains have been the main driver of rising living standards in country after country. That was the case in Japan, too, but spectacular productivity growth in a few key industries in the 1970s and 1980s failed to spread to the rest of the economy and eventually slowed to a near halt even in those industries.

There are some Chinese companies with productivity near rich-country levels, and many that lag dramatically. But the stars and the laggards aren’t concentrated in particular industries as in Japan. “In every sector there are leaders that achieve global competitiveness and yet there is also a long tail,” emailed Shanghai-based McKinsey senior partner and MGI director Jonathan Woetzel, who worked on both the China productivity report and the 2015 Japan one.

Woetzel thinks this is a sign that China may find it easier to raise productivity than Japan did. All it will take is more companies emulating the industry leaders through digitization, globalization, lean production, automation — and maybe even some things that don’t end in -ion.

What could keep that from happening? Well, China’s banks have kept a lot of the productivity laggards in business by continuing to lend to them. And it’s China’s government that controls the biggest banks, as well as a lot of the low-productivity companies they lend to.

Chinese President Xi Jinping actually talked about reforming these state-owned enterprises.

In some ways China’s leaders seem more willing than Japan’s to accept the upheaval that often comes with productivity gains. They are unwilling, however, to cede control of the economy. And that may be what keeps them from realizing their $5 trillion opportunity.

Anat Admati argues:  We examine the pervasive view that ‘equity is expensive, which leads to claims that high capital requirements are costly for society and would affect credit markets adversely.

We find that arguments made to support this view are fallacious, irrelevant to the policy debate by confusing private and social costs, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. And while debt’s informational insensitivity may provide valuable liquidity, increased capital (and reduced leverage) can enhance this benefit. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support.

We conclude that bank equity is not socially expensive, and that high leverage at the levels allowed, for example, by the Basel III agreement is not necessary for banks to perform all their socially valuable functions and likely makes banking inefficient. Better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal. Except for government subsidies and viewed from an ex ante perspective, high leverage may not even be privately optimal for banks.

Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.

Hundreds of journalists around the world pored over the 11.5 million files leaked last year by an anonymous source that reveal how the rich and powerful in numerous countries use tax havens to hide their wealth. The files were leaked from one of the world’s most secretive offshore companies, Mossack Fonseca, a law firm based in Panama. They were obtained from an anonymous source by the German newspaper Süddeutsche Zeitung, who shared them with the International Consortium of Investigative Journalists. The collaboration, which did not include The New York Times, had at its center,  Frederik Obermaier, an investigative reporter at Süddeutsche Zeitung, which helped publish the Panama Papers, and Michael Hudson, senior editor at the International Consortium of Investigative Journalists.

Emails show Clinton State Department pushed Panama pact [amid] warnings it would help the rich hide money.  The Panama FTA pushed for by Obama and Clinton, watchdog groups said, effectively barred the United States from cracking down on questionable activities. Instead of requiring concessions of the Panamanian government on banking rules and regulations, combating tax haven abuse in Panama could violate the agreement. Should the U.S. embark on such an endeavor, it could be exposed to fines from international authorities.

The United States seems, in many ways, to be working at cross purposes. The U.S. Justice Department has gone after Swiss banks in a big way, gotten huge settlements with some of the biggest banks, and even some of the smaller Swiss banks, and put pressure, but there are many other examples of the United States either having policies which encourage money being moved around secretly or where we’re turning a blind eye. You know, there are states like Delaware and Nevada where there’s just as much secrecy, just as much privacy; if you want to get a company, if you want to have a shell company and not have your name publicly attached to it, you can do that.

India turns up in the context of dozens of very, very interesting cases, for example, where our colleague, Ritu Sarin, specialized on. And what she found that was amazing, it was tracks leading to prominent politicians.