From the Dollars & Sense blog comes this NY Times piece about a Communist run town in Spain providing jobs and housing.  The NY Times focuses far too much time on what the mayor does than on how they put their Communist economy into practice.  Last I knew towns had councils that acted as a municipality's legislature.  My guess is that they are approving the town's municipal housing program and farming cooperative.  Here is the wikipedia entry that lists more about the town council.

The reporter wrote a similar article for the International Herald Tribune that appeared in the Boston Globe a month ago.

I meant to write this before, but Eliot Spitzer beat me to it.   I agree that we should force the folks who got bonuses at AIG to give them back (Doug Henwood blogs about how to do that), or tax them at 150% percent. 

However, the real scandal is that while millions of people have been laid off, UAW members are forced to renegotiate their contracts, and the US government is bailing out the banking sector seemingly without any upside, AIG paid out tens of billions of dollars to banks, hedge funds and others making good on the poorly setup Credit Default Swap (CDS) contracts that AIG entered into.

As he writes:

It all appears, once again, to be the same insiders protecting
themselves against sharing the pain and risk of their own bad
adventure. The payments to AIG’s counterparties are justified with an
appeal to the sanctity of contract. If AIG’s contracts turned out to be
shaky, the theory goes, then the whole edifice of the financial system
would collapse.

But
wait a moment, aren’t we in the midst of reopening contracts all over
the place to share the burden of this crisis? From raising taxes—income
taxes to sales taxes—to properly reopening labor contracts, we are all
being asked to pitch in and carry our share of the burden. Workers
around the country are being asked to take pay cuts and accept shorter
work weeks so that colleagues won’t be laid off. Why can’t Wall Street
royalty shoulder some of the burden? Why did Goldman have to get back
100 cents on the dollar? Didn’t we already give Goldman a $25 billion
capital infusion, and aren’t they sitting on more than $100 billion in
cash? Haven’t we been told recently that they are beginning to come
back to fiscal stability? If that is so, couldn’t they have accepted a
discount, and couldn’t they have agreed to certain conditions before
the AIG dollars—that is, our dollars—flowed?

The appearance that
this was all an inside job is overwhelming. AIG was nothing more than a
conduit for huge capital flows to the same old suspects, with no reason
or explanation.

The US government owns 80% of AIG, right.  It would have gone bankrupt without our money potentially taking down the economy.  So why don’t we force AIG to renegotiate the CDS contracts it has entered into.  What are the parties on the other end of the CDSs going to do, have us call in the money they have borrowed from us?

Hat tip to Dollars & Sense for citing Spitzer’s article.

Latvia's center-right government fell today.  It is the second to fall after Iceland.

Common Dreams has a great article
by Rebecca Solnit on the situation on Iceland (from TomDispatch).  She
goes into more depth than other articles I have seen and provides some
useful analysis and history.   I liked the characterization of Iceland
as a hedge fund and a country rolled into one. 

There is now a Socialist & Left-Green coalition running the
government.  Everyone seems to be blaise about the fact that the new PM
is an out lesbian, which is most gratifying.  It also looks like the
Left-Green Party *may* come out on top in the April elections, though
we shall see.  Back in October, Doug Henwood interviewed Ögmundur Jónasson, head of the Left Green delegation in the Icelandic parliament on his radio show.  If you don't, you should subscribe to his newsletter, or at least read his blog.

Dollars & Sense posted some interesting links (many from the Financial Times, it would appear) on their blog including:

• The double digit annualized GDP falls in Japan and Latvia.  Other parts of Asia don't look very healthy either.
• The health and economic cost of the increasing obesity epidemic in Mexico (MY NOTE: spurred by all of our subsidies to corn production.)
• Several analyses of the new financial stabilization plan announced yesterday.  D&S summarized with:

You should read the article yourself.

My brief review of the economic stimulus bill is that it will be too little to buoy a US economy that is dropping off of a cliff and is directed at the wrong areas.  There are too many tax cuts, which will end up being saved rather than spent, and too little government spending, especially to state and local governments who will end up cutting tens of thousands if not hundreds of thousands of jobs, further increasing unemployment.

If you doubt that the US economy is dropping off of a cliff, then check out these graphs.  First, from The Big Picture, personal consumption expenditures is falling at a rate not seen in over forty years:

And second this graphic on the change in industrial production now, versus the average of all post war recessions as well as the best case and worst case [from Brad Setser’s Follow the Money Blog].  If this were a “normal” recession, we would be starting to bounce back.  This is not a normal recession.

Well, it looks like Obama's financial team has its head just as much in the sand as Bush's team, and more importantly, Japan's team from their ten year financial crisis in the 90s.  Tim Duy (by way of Mark Thoma) reports that Obama's plan to deal with financial crisis:

As the post points out, we tried this with Citigroup and Bank of America, and, at least by the measure of their stock prices, it hasn't worked.

Quick history lesson: 

When Japan's asset bubble burst in 1990, many banks were left insolvent with loans that just weren't going to be paid.  The Japanese government didn't insist that such banks update their balance sheets to reflect the insolvent loans.  On paper the banks were fine, but in reality they were bankrupt.  The end result was that these zombie banks lived on for years, suppressing lending and helping to keep the Japanese economy in a recession for ten years.

Apparently we are repeating Japan's mistakes as Tim Duy says:

The solution, of course, is for federal banking regulators to examine banks that look troubled, and nationalize insolvent banks.  The share holders get scalped, but what did they expect?  Once the feds clean them up, they can then sell them off for a profit when the economy bounces back. 

We did this for many savings and loans in the late 80s, but Obama's economics team seems to be avoiding nationalizing troubled banks (Citygroup, BoA, …).  Instead, the federal government will guarantee or insure the toxic assets on the bank balance sheets.  Heads the banks and their shareholders win, tails the taxpayers lose.

These folks should know they are putting good money after bad, here, but I guess they still believe their precious neoclassical economics more than reality.  Its looking like it will be a really long recession, it not something worse.

NOTE: Dollars & Sense has a partial reprint of a Yves Smith article on the same subject.  Naked Capitalism has the whole article.  Both this one and Tim Duy's are worth the read.