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Record Bank Profits:  Good News, Bad News

By Shlomo Maital   

     good news bad news

   Dear readers, you’re probably tired of the old ‘good news, bad news’ format.  But there’s no other way to explain American bank profits.

   The good news:  The net income (profit) of the six biggest American banks (J.P. Morgan, $6.5 b.; Wells Fargo,  $5.5 b.,  Citigroup, $4.2 b., Bank of America, $4.0 b., Goldman Sachs $1.9 b., Morgan Stanley, $1.0 b.) in the 2nd quarter of 2013 (April May and June) totals $23.1 b.  Note: that’s for THREE MONTHS.  For a whole year, multiply by four:  over $100 b.!   

   The bad news:   The banks are raking in the money again, back to what they did before 2008, before the crash,  making piles of money mostly from ‘nostrum’ trading (buying and selling assets for their own accounts), taking advantage of near-zero interest rates that they pay when they borrow, charging relatively high rates to us poor customers.    Big-bank profits are back to what they were before the crash,  in mid-2007.  Way to go, banks! 

    The good news:  Because the banks are making so much money, efforts of U.S. Treasury Secretary Jacob Lew,  and others, to re-enact a version of Glass Steagall (putting a Chinese wall between commercial banking and investment banking, thus keeping banks from illicitly mixing the two, at our expense) are more likely to succeed.  The banks are strong, making money – they cannot plead the legislation will ruin them.  Lew is talking tough.

    The bad news:   The banks are back in the drivers’ seat.  When Fed Chair Ben Bernanke just HINTED he MIGHT at some distant point in the future MAYBE possibly just a tad raise ..perish the thought….interest rates, but ONLY if unemployment fell, GDP boomed, and Pope Francis went on tour with the Rolling Stones…. Wall St. bashed the price of stocks down, so fiercely, that Bernanke had to crawl to Congress and explain he was …misunderstood.  He basically sang that old Animals song,   “But I’m just a soul whose intentions are good. Oh Lord, please don’t let me be misunderstood.”   There is no way, he promised, that the Fed is going to help the banks break their permanent addiction to infinite quantities of near-zero-interest-rate money.  The Fed will continue to buy $85 b. worth of bonds every single month for the foreseeable future.  Buying bonds raised their price and thus lowers their yields. 

    If you find all this very tiresome, believe me so do I.  There seems to be no possible way that we the people can get control of our destiny back into our hands, and the hands of our leaders, away from the banks and Wall St.   With big-bank profits back to their previous highs, before the crash, we the people will probably fall asleep again – until the next big crash, until the next bank cries that it is “too big to fail”.    We ordinary people may be hooked on Ritalin (see previous blog).  But the banks are hooked on cheap money. 

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Ritalin  Surpasses Cocaine

By Shlomo Maital   

           Ritalin

   Methylphenidate (brand name  Ritalin) is a psychostimulant drug approved for treatment of ADHD or attention-deficit hyperactivity disorder, developed by Novartis.  For some kids with ADHD it is without doubt helpful.   But the capacity of society to misuse drugs seems limitless.  Illegal Ritalin users outnumber by far those who use cocaine.  Here are some facts, published in an investigative report in the Israeli daily Haaretz:

  *  In 2011, the U.S. Department of Health and Human Services estimated that 5 percent of Americans in the 18-25 age bracket were using the substances illegally. According to a study whose results were published in the online community Her Company ‏(on the Huffington Post website‏), the number of illegal users is more than the percentage that use cocaine and LSD combined.

  *  The increasing use of Ritalin is a phenomenon that is occupying American universities. The extensive research being conducted about the use of the medications we know as Ritalin, Concerta or Adderall has led them to be dubbed “study drugs” or “smart drugs.” A staggering number of college kids in the US (and elsewhere) pop Ritalin before exams.

  According to the authors of the investigative study,   :

  “The present generation, particularly adolescents and children, is constantly subject to attention and concentration disorders. Accordingly, some will argue that this generation requires Ritalin as a steady diet.    In fact, this form of disorder is built into modern life. The extensive culture of screens, working on different subjects simultaneously − which is part of almost every field − the rapid shifting from Facebook to email to news sites and so on: all this requires parallel attention. The phenomenon is well known; in fact, it’s likely that while reading this article, you started to tap your foot nervously, checked your email from time to time and possibly also looked at a newly posted Facebook status.”

    So here is the dilemma.  Modern life involves serious multitasking…multiple screens, smartphones,  computer screens, conversations, all at the same time.  This creates massive stress.  To help us deal with the stress, we pop a pill,  Ritalin.  The pill is widely available, because some kids legitimately need it.  But the rest of us? 

   What about changing the underlying causes  in our lives that make   Ritalin helpful?   The fact you can pop a pill means that fewer and fewer people will bother to think about why they need it in the first place.   

Haaretz,  “Class A drug: Affluent Israeli highschoolers are taking Ritalin without doing their homework”    By Sivan Klingbail, Shay Fogelman, Naomi Darom and Shanee Shiloh.    Jul. 20, 2013

Rethinking GDP: Counting Creativity

By Shlomo Maital   

               GDP            

    We have long known that the key measure of our wellbeing, known as Gross Domestic Product, invented by J.M. Keynes, is flawed.  Now, America’s Bureau of Economic Analysis is rethinking GDP measurement.  Among other things, spending on innovation, known as Research and Development, will now be reclassified.  No longer will it be a mere business expense, as generally-accepted accounting procedures.  Instead, as it should be, R&D will be included in gross capital formation or investment.   As Bloomberg Business Week notes, in its latest edition:

    On July 31, the U.S. Bureau of Economic Analysis will rewrite history on a grand scale by restating the size   and composition of the gross domestic product, all the way back to the first year it was recorded, 1929. The biggest change will be the reclassification—nay, the elevation—of research and development. R&D will no longer be treated as a mere expense, like the electricity bill or food for the company cafeteria. It will be categorized on the government’s books as an investment, akin to constructing a factory or digging a mine. In another victory for intellectual property, original works of art such as films, music, and books will be treated for the first time as long-lived assets.

The effect of the change on America’s GDP will be quite small.  The impact will largely be a morale-booster.   For gross capital formation as a per cent of GDP, America ranks 123rd in the world (!) out of 142 countries, according to the Global Innovation Index 2013.    America invests only 16.2 % of its GDP.  If you account for depreciation and obsolescence, and deduct it from that 16 % (which is ‘gross’,  to get ‘net’), about 15% of GDP,  you find that America barely increases its capital stock at all.  U.S. infrastructure (roads, bridges, airports, public transportation, trains)  all show it.  Now, U.S. infrastructure will still look Third World. But at least the investment number will look a bit better.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
July 2013
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