Populist Backlash
It’s 10:45 PM at the White House and I hope Barack and David Axelrod are having a beer on the second floor. One year ago they won a generational election as the anti-establishment candidate of change. Tonight, no matter how you slice it, the Democrats lost two big statehouses (New Jersey and Virginia), because they were perceived as the party of the establishment. A little more than two hours ago I read a speech by a famous investor who explained in simple terms how a Democratic Congress, in the fall of 2008 and then a Democratic administration, in the spring of 2009, got played by the oligarchs on Wall Street.
David Einhorn, who runs Greenlight Capital is a pretty smart investor. I don’t always agree with him, but he gave a speech a couple of weeks ago that I hope will eventually reach the desk of our President. Einhorn’s belief, like mine, is that much of the backlash flowing around the health care debate (or even tonight’s election) is not really about healthcare–but more about a general sense that the average citizen is a pawn in a rigged game run by corporate special interests and a clueless Congress. The real root of the populist anger was in the bailout of the banks.
In the context of the recent economic crisis, a highly motivated and organized banking lobby has demonstrated enormous influence. Bankers advance ideas like, “without banks, we would have no economy.” Of course, there was a public interest in protecting the guts of the system, but the ATMs could have continued working, even with forced debt-to-equity conversions that would not have required any public funds. Instead, our leaders responded by handing over hundreds of billions of taxpayer dollars to protect the speculative investments of bank shareholders and creditors. This has been particularly remarkable, considering that most agree that these same banks had an enormous role in creating this mess which has thrown millions out of their homes and jobs.
The critical line here is, “but the ATMs could have continued working, even with forced debt-to-equity conversions that would not have required any public funds”. In other words, Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citibank and Merrill Lynch bondholders might have had to convert all their debt to equity, but the system would have survived without the $700 billion tax-payer bailout. But what is Geithner proposing now?
On the anniversary of Lehman’s failure, President Obama gave a terrific speech. He said, “Those on Wall Street cannot resume taking risks without regard for the consequences, and expect that next time, American taxpayers will be there to break the fall.” Later he advocated an end of “too big to fail.” Then he added, “For a market to function, those who invest and lend in that market must believe that their money is actually at risk.” These are good points that he should run by his policy team, because Secretary Geithner’s reform proposal does exactly the opposite.
The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone’s shampoo, in that it gives the appearance of officially “doing something” and adds to our bureaucracy without really making anything safer. With the ensuing government bailout, we have now institutionalized the idea of too big- to-fail and insulated investors from risk.
And Einhorn also points out that the problem of Credit Default Swaps has not gone away, it’s merely been subsidized by the taxpayers while the vultures throw more companies into bankruptcy (CIT yesterday, GMAC maybe tomorrow).
The proposed reform does not deal with the serious risks that the recent crisis exposed. Credit Default Swaps, which create large, correlated and asymmetric risks, scared the authorities into spending hundreds of billions of taxpayer money to prevent the speculators who made bad bets from having to pay. CDS are also highly anti-social. Bondholders who also hold CDS make a bigger return when the issuing firms fail. As a result, holders of so-called “basis packages” – a bond and a CDS – have an incentive to use their position as bondholders to force bankruptcy triggering payment on their CDS, rather than negotiate traditional out of court restructurings or covenant amendments with troubled creditors. Press accounts have noted that this dynamic has contributed to the recent bankruptcies of Abitibi-Bowater, General Growth Properties, Six Flags and even General Motors. They are a pending problem in CIT’s efforts to avoid bankruptcy. The reform proposal to create a CDS clearing house does nothing more than maintain private profits and socialized risks by moving the counter-party risk from the private sector to a newly created too-big-to-fail entity. I think that trying to make safer CDS is like trying to make safer asbestos. How many real businesses have to fail before policy makers decide to simply ban them?
Larry Summers and Tim Geithner and even Rahm Emanuel, have been so inside the Wall Street game for so long that they have no idea of the level of anger directed at the capitalists who have managed to scam a few trillion out of the public coffers with phrases like “without the banks, we would have no economy”. President Obama needs to listen to other voices on the economy or else the pitchfork brigade may show up outside the White House next November. We did not elect him to bring us more of the same–more dominance of our national policy by the military industrial complex, the Big Banks, Big Pharma, Big Insurance and Big Oil.
The irony is that if Obama started kicking ass and taking names with the syncophants of the Fortune 500 that sit in Congress, I bet a lot of Glenn Beck’s audience might even take notice. And surely, Axelrod doesn’t plan to run the 2010 campaign without the youth vote, which was totally absent tonight. This is a teaching moment. Let’s hope the President understands this.
What you just said is: “Obama needs to kill off the Dem donors.”
And you need to say it clearly… It will be Obama siding with Glenn Beck BECAUSE Beck is right. Wall Street is the DEMOCRAT base. Be clear:
They scared Bush.
Obama they paid off.
RE-READ that.
Morgan Warstler
November 3, 2009 at 8:06 pm
We’ll see if he has the guts to take on the oligarchs. It will be the fight of his life.
Jon Taplin
November 3, 2009 at 8:15 pm
I couldn’t agree with you more – about the post itself, and about the fight he’ll have to stage.
It was creepy watching Mad Men the other night, and seeing how they handled the Kennedy assassination. Some responses – especially to Oswald’s shooting – indicated a reflexive concern about how much influence the Mob really had.
Couldn’t help thinking about parallels, and the sense that the country is under something very malign.
Alex Bowles
November 4, 2009 at 4:16 am
God Alex- I had the exact same reaction to the Mad Men episode. I was so depressed, I felt like I had been dragged through the assassination all over again.
Jon Taplin
November 4, 2009 at 6:46 am
I think Obama would do well to listen to George Will (and I’m sure some liberals too), ANY company that got govt money should have to pay its executives what a G-15 makes until that money is returned.
The bi-partisanship on this amongst the voters would be stunning.
Morgan Warstler
November 4, 2009 at 6:04 am
Yessir. No one trusts the Beltway or Wall Street now. Class war it is then.
len
November 4, 2009 at 6:16 am
The nut of what is coming is in those Wal-Mart commercials explaining how much the average American family saves a year by shopping China Inc. It’s Capone’s Soup Kitchens.
That and the Brits remaking V and polishing a bad series in the original with mediocre CGI in the remake will stroke the paranoid buttons good and proper. Now where can we find a crisis du jour?
Semiotic kitsch in service of credit defaults and arms twisting for arms. Whatta world. Whatta world.
len
November 4, 2009 at 7:13 am
Ohhh great.
More “RE-READ that.”
Wheeeee!
Dan
November 3, 2009 at 8:54 pm
The American people feel that we’ve been taken, swindled. But people have a short attention span and can even be forgiving. The Wall Streeters and special wealth interests in all parts of the economy would have been wise to quietly count their plunder and lie low for a few years.
Instead they are inflaming the public, showing their disdain, by resisting all change and reform; and by continuing, even accelerating, the brazen consolidation of wealth.
So, Democrats may be the first to feel the public wrath. But I believe we may be entering a post-political-party era.
Aren’t people beginning to think that politicians of either party are only frontmen, paid for and owned by the special wealth interests? Is the public about ready to bypass the political frontmen and take revenge at the source of the arrogance and greed? This is how revolutions begin. It’s difficult to tell how close we may be to true revolution. It seems unlikely. But anger can go out of control. And America is very angry.
BJH
November 3, 2009 at 9:09 pm
If you look at the numbers, registered Independents already outnumber Republicans and Democrats alike.
Alex Bowles
November 4, 2009 at 4:24 am
A very important point, Alex, and it bears out Jon’s reading of this as a populist development. BJH seems to have a pretty sensive finger on the pulse too.
My own sense is that the elephant in the room is socialism, the hasty nationalization of pretty near every sector of our economy. We here know that the Administration in fact is striving to rescue capitalism, as FDR sought to do, but a hell of a lot of voters don’t see it that way; they see stalking socialism and it upsets their metaphysics, their mythic picture of what this country has been and should be.
Were Obama as bold as need be, he’d level with us, at this teachable moment, and explain the distnctions between his policies and those of, say, a Swedish Social Democrat. Because if he and his party are to succeed probably the only alternative is to suck it up and go for a bout of Clintonian triangulation. (That would be a mistake, as this is no time for moderates.)
Hugo
November 4, 2009 at 11:55 am
Hugo,
This is embarrassing. You should know better. The Obama administration is doing no such thing. It is coddling the banks, bailing out the senile Detroit auto industry and making the health insurance business a little nervous. To paraphrase Col. Jessup: “Nationalizing? You can’t HANDLE nationalizing!”
A key messaging problem with health insurance reform has been the careless conflation of health insurance with heath care. Health care spending may be a sixth of the economy, but the insurance business is supposed to be mainly a thin administrative layer. The big bucks are for delivering care. Nobody has said word ONE about nationalizing any part of that. And only one or two brave members of Congress have mentioned the possibility of really nationalizing even the insurance component. It has been “off the table” from the beginning.
Seth
November 4, 2009 at 12:08 pm
But Seth, I expressly acknoledged as much, while worrying that voters’ perceptions result from a misreading of the record. The record should be defended. If not, then Obama’s tent will have to be struck, the opportunity lost.
Hugo
November 8, 2009 at 8:12 am
But haven’t we thrown away FAR more money on Fanny/Freddy and the auto companies? Frankly, I’ll take JP Morgan & Goldman repayment any day when compared to the likelihood that we’ll see a penny of the money spent on GM.
Noah
November 3, 2009 at 9:12 pm
I hope you’re not serious, because that is completely backwards.
Apesofmath
November 3, 2009 at 11:07 pm
Kewl! We have liftoff! More Warstler, to generate more of those wonderful sentiments of his that are the kind that get guys like him beaten into bloody pulps in fern bars across the land…
Like so much about Warstler, of course, that’s just misdirected rage. Let’s remember how it works:
1. So far at least, everyone dies, sometime before their 115th birthday (subject to biotech “advances,” of course, that might further change the game. How old is Wen Jiabao, actually?)
2. Warstler’s-World people figure out some scam or other to dominate via chokehold or silken garrote a smaller or larger piece of the politico-economy, while toadies like W cheerlead and wave bloody shirts and hold up straw men and drag red herrings and shake shiny objects to distract the grabee from his real plight.
3. Using that grip, they extract labor and money from not only the grabee, but also notes payable out of the REAL wealth created by future generations, incrementally weakening the grabee so the grabbing is easier now and in the future, reducing the rate of Real Wealth generation and the vitality of the squeaking, choking grabee.
4. The W-W people set up to live very, very, very, very, very large, pretty much outside any kind of mutuality with the grabees.
5. The W-W people get to live out their lives, almost every single one of them, undisturbed by conscience or conviction (internal or judicial) with a grin and a sneer, fearless in the presence of purple-faced rage and distress on the part of the restrained grabee. As the species itself gets weaker and weaker and finally, as the last drop of economic life blood is squeezed out of it, dies.
No consequences, no balancing force, no change. And always someone to whisper that “It’s the natural order of things.”
Thanks, Jon, for letting the little rodent back in the house. Will he and others engage in a crowing contest (“WE’RE NUMBER ONE IN MEDICAL TOYS!” vs “NYC RULES!”)? I personally have been running out of things to hate that are piquant enough to cause my aging gorge to rise.
RE-READ that, Prince Charming. YOU WIN. Now isn’t that special?
JTMcPhee
November 4, 2009 at 4:58 am
Noah, net to “the banks,” of which the Fannie-Freddie is part of the mix, of “tax-expenditure” and “gigantic-sucking-sound-wealth-transfer-upward-at-the-cost-of-future-generations-of-actually-productive-people” dollars past, present and future, is way out in front of GM-class expenditures, which are in turn kind of dwarfed by MIC money — wise heads say the “war on terror” is already at at least $2 trillion and likely to be closer to $3 trillion. Of course, there really are no generally accepted accounting standards that let anyone make any sense out of the flux of real and derivative wealth, and the many veins and arteries out of which these parasites and predators are draining our blood for their undeserved pleasure.
How many pennies do you think JP-G-S, which is busily buying up, drum roll, fucking Fannie Mae tax credits” for peanuts, against April 15’s sucker-bet reckoning, is likely to pay back? In either case it’s a false dichotomy — they are all part of the same vampire that’s sucking the species dry.
JTMcPhee
November 4, 2009 at 5:10 am
Hopefully others here know more than I (I’m hoping this is wrong), but this doesn’t look like anything other than turning his back:
http://www.salon.com/opinion/feature/2009/10/30/tarp/index.html
AMusingFool
November 4, 2009 at 6:03 am
Not that I like the GOP, but Wall Street has favored the democrats for at least a decade if not longer. That’s probably in large part due to the fact that finance exists in deep blue electoral territory. Dodd, Schumer, Frank are all in the tank.
If the financial district was located in the south, perhaps the GOP would be getting all those Wall Street lobby dollars.
Here’s praying Peter Schiff has a shot to bring some sanity to the senate.
As for the economy, Obama’s policies are part of the problem, including TARP, which he supported and voted for. If you recall, the conservatives opposed it, at least initially. There didn’t appear to be much hesitation on the part of congressional leadership. That’s the real problem.
John Papola
November 4, 2009 at 6:11 am
JP, just curious — you got a reference to where the lobby/campaign contribution/PAC money from “Wall Street” has gone more to Blue-bloods than Red-heads, or just a feeling? Granted, of course, the fundamental proposition that the whole effin’ bunch of them are nothing but an apparently incurable infestation of parasites, but while maybe a few of “dem” are even deeper in what used to be the watch-fob pockets in the vests covering the bellies of the Robber Barons of yore than the Reds, but let’s not forget who institutionalized an Imperial presidency, the fine art of regulatory capture, and massive upward migration of wealth and theft from the future.
And let’s not fall prey to the Red-Blue, Ford-Chevy, PC-Mac team loyalties, and get blindsided again and again by one TARP play after another.
The biggest pain is knowing that if “we the people” could somehow throw the bastards all out in a bunch, the Imperial machinery would just ring in a new crop with the same credentials, because we are so easily distracted by shiny objects and appeals to our carefully cultivated prejudices and unreciprocated “loyalties.”
I wonder, in the event of a populist assault on Wall Street and G-S’s new $2.4 billion World Headquarters at 200 Vesey street, and indiscriminate slaughter of derivative peddlers, what the average military dude would do if ordered to fire upon the crowd… But of course there are lots and lots of ex-military types who are happy to get a paycheck from those inside the Palisades to provide for their “security.”
But I have to add, WHICH “conservatives” did not support TARP initially? You think there are friends to your notion of what the economy should behave like in that crowd?
JTMcPhee
November 4, 2009 at 8:29 am
Grim outlook. To be able to do the changes you will need some unity behind a rational way of correcting the course. There should be only one man at the helm and less brouhaha. Comes a time when opinions are not welcomed on board. Changes must happen. The new world was born out of the mistakes and greed of Europe. No more dogmas.
bernard
November 4, 2009 at 6:45 am
About the banks : money doesn´t disappear just like that. Follow the money … Where was it invested in and for what. How much of that stimulus was able to make its way to the streets ?
Does any body know ?
bernard
November 4, 2009 at 7:19 am
Bernanke is refusing to say.
This is why the anger is building, Bernard. The door swung open long enough for people to see the depth of it. Their 401ks evaporated in a few short months. Everyone is affected and no one is reaping the consequences of the crimes. They elected Obama thinking he was a hero but so far it appears he is a bot. He wanted to be President. Now he is. Now what?
JFK had some of the same problems. About the time he was finally getting the hang of it, he took a drive in Dallas. He could never shake his father’s shadow enemywise or partner wise. No one can prove what went down but the appearance is enough to keep the History Channel busy for two or three weeks a season. Appearance will do.
The anger isn’t subsiding. Cars for Clunkers can’t go far enough and the money is already vanishing as you observe into the invisible hands.
True or only appearance, appearance is enough.
So now we’re log walking on a fast river in a storm.
len
November 4, 2009 at 8:11 am
bernard,
Yes the money does, more or less, just disappear. Our money was used to fill the big blanks on banks’ balance-sheets which appeared when people’s over-valued houses suddenly started changing hands at drastically lower prices. The home equity vanished, resulting in vanishing bank capital as under-water homeowners defaulted, which we the taxpayers then replenished — at the banks. The banks of course haven’t passed it along to homeowners (why am I not surprised by this).
The stimulus is something different. Maybe 20-30% of it has been spent by now (not sure of the numbers) and it has been a mixed bag of worthwhile infrastructure spending, tax breaks and miscellaneous ’stuff we wanted to spend on anyway’. I suspect it has had a real effect in slowing the downturn — in other words, the stats in the papers like unemployment, retail sales, etc. would look a lot worse if the stimulus plan hadn’t been enacted. But real recovery probably requires something more organic — a revival of confidence in the future, renewed business investment, consumer spending, exports, etc. That seems to be happening. But the acid test will be the level of unemployment.
“What if they had a recovery, but only rich people were invited?” seems to be the story line in the U.S. for the past decade. It’s good to be an American capitalist enjoying the globalization process and it’s cheap wages and low environmental standards. Not so good to be an American worker, being replaced and fed toxic goods from overseas.
That’s why the HFD (the Hedge fund Democrats) need to start listening to the DFH’s warnings — like this post from Jon. The populist backlash is coming. But if the public sees “Democrat” as synonymous with “pimp for banksters” then that backlash will have an R by its name.
Seth
November 4, 2009 at 9:48 am
It’s interesting — it seems to me that there’s two kinds of money in circulation. There’s the stuff that represents the kind of wealth and transactions that are generated by what you might call “real” economic activity, from growing cereal and vegetables to mining coal and yellowcake to building still more condominiums. Then there’s the “money” that is created out of whole cloth, so to speak, by cutting up big green TARPs and derivatizing from securitizing and monetizing.
And we the people who work in the former part of the economy are stupid enough to accept, as payment for our goods and services and labor, not only the certificates of exchange that are necessary to make the “old-fashioned, satisfy-Maslow’s-basic-needs economy” tenable, but those evanescent and really valueless Funny Bucks that come out of the machinery of The Street.
I wonder if there is a way to do like some nations have done: Declare that as of a certain date, the Funny Munny has no value, and is replaced by a new currency altogether, and all that justifiable-only-by-mealymouthed-bullshit-about-”facilitating liquidity” stuff is no longer legal tender except in on-line Monopoly games or as a substitute for Charmin TM.
JTMcPhee
November 4, 2009 at 9:10 am
You’re touching a deep insight, JTM. I’m in production hell right now, but when I have some time later I’ll try to explain what I believe is the real deal on “real” money vs. “fake” money (inflation in excess of money demand).
This is the heart of lots of problems.
In the meantime, read this extended quote from John Maynard Keynes in his “The Economic Consequences of Peace”. He understood money very deeply before he threw all of that understanding out the window in order to convince the British to inflate away their fixed wages problem with “The General Theory” (it’s anything but general).
http://mungowitzend.blogspot.com/2009/08/keynes-paul-krugman-of-roosevelt.html
John Papola
November 4, 2009 at 9:51 am
JP: can’t help but read this slap at Keynes as: “I’ve actually read The Economic Consequences of the Peace now and I’m really impressed with this guy who did after all become an international celebrity on the basis of this little intellectual book. However, I still haven’t managed to read The General Theory of Employment, Interest and Money so I’ll continue to trash talk it like my political heroes all do (when they can be bothered to say anything at all about intellectual matters).”
It’s true the General Theory is much harder to follow than the Economic Consequences, but it’s the same guy writing it and he didn’t undergo some kind of radical transformation between the two books. It also doesn’t say what “post-Keynesian” economists all “know” it says: “hurrah for deficits!”
Keynes big problem with the public is that he was simply bursting with ideas. The public wants only one idea at a time and pretty much resents hearing from anyone who ‘contains multitudes’ as Whitman’s put it.
The General Theory resembles Hamlet in one very particular way — it contains more quotations that have entered general usage than any text of a comparable length by any author of its era. It rewards reading, even if the level of interest is very uneven from chapter to chapter.
Seth
November 4, 2009 at 11:48 am
I don’t subscribe to ad hominem logic. Ideas aren’t right because Keynes said them or wrong because he said them.
For starters, while I will admit that I haven’t read the GT front to back, I have worked hard to understand the concepts from many sources and have had my understanding confirmed directly by people that know and love keynes (specifically, Lord Robert Skidelsky).
What’s unquestionably true is that his thinking WAS radically different in the GT than Consequences or The Treatise on Money. He rejects the loanable funds market, for starters which he readily admits in the book is a radical change. In so doing, he breaks what interest actually does (coordinate time preferences) and this is the deepest flaw. The broken window fallacy (pyramids, ditches and war as stimulus) is equally wrong and also quite evil in its consequences (if not it’s intentions).
Keynes was bursting with ideas. Most of them were not original to him, including “The Paradox of Thrift”.
Know this. I take this stuff very seriously and honestly. It’s a not a game that’s all about proving Hayek right and Keynes wrong. It’s about trying to understand what holds true and what’s nonsense or fallacy.
John Papola
November 4, 2009 at 11:56 am
John:
Well, we have Keynes account of that in the form of this quote commonly attributed to him:
I’m glad you don’t match the stereotype I was reading into your comment. I’ve read too many ignorant criticisms of Keynes. Makes me cranky. Keep reading and calling it as you see it!
Seth
November 4, 2009 at 12:23 pm
Just for historical accuracy, the quote from Keynes, mentioned by Seth, is…
Keynes [In answer to being asked "Aren't you being inconsistent?"]:
“Well, when I get new information, I rethink my position. What, sir, do you do with new information?”
Fentex
November 4, 2009 at 12:46 pm
I don’t think there’s much need for competitive analysis and “real-deal explanation” here, just acute observation of the “follow the money” kind.
This is more than “government-caused inflation” at work, and our economic system is so much more than “ordered relationships between debtors and creditors,” so let’s not get into haggling over which set of descriptors is more or less complete and that all that’s needed is more constitutional rule of law. I read the book, saw the movie, none of that is real. I don’t believe “the answer” is going to be found in economic theorizing or philosophical pin-dancing-on-the-heads-of to decide whose models fit best or who wins the “I called it” prize. Couldn’t care less about force-fitting pieces of what seems pretty clearly to be happening all ’round, into precisely squared post-holes of one “school of economic thought” or another.
The people who are stealing from us and our great-grandchildren are an amalgam of really smart folks in the “financial industry” and a few equally toxic sorts in places like our MIC, who can put up the curtains and the blow the smoke and fan the flames and project the holographic images, in cahoots with folks who are feathering their nests in a wonderful synergy of greed and self-perpetuating gerrymandered incumbency. Every time that’s happened in the past, there’s been a rather disorganized realignment of the social order.
If you give a toot about our species, as opposed to which school of fish is swimming in what they would argue is the main current, you should be joining with others rather than worrying about whose theory is “right,” and taking the internist’s approach to assessing the patient (and increasingly im-patient), and intervening with medication and radiation and surgery and therapy.
The other thing is just to keep pulling the sledges while they pile on the rocks from their green fields until we are wasted enough to send off to the knackers, and our children plant and harvest their crops.
But that’s just me.
JTMcPhee
November 4, 2009 at 2:26 pm
This “there’s no point in digging any deeper than my gut instinct and complex system aggregate analogy” is unfortunate for any real discussion, JTM.
Do you simply like to rant in broad strokes? I’m curious what your goal is. Honestly. Don’t take this as me trying to be a judgmental jerk. I genuinely want to understand what you hope to accomplish with your approach. If it’s simply simpatico, that’s fine.
John Papola
November 4, 2009 at 3:40 pm
“My goal?” To have at least a sense that the lives of my grandchildren will be something other than serfdom and sharecropping to a debauched and declining ruling class of a dying species. I would not want them to be eating “Soylent Green” and checking out at the suicide parlor.
I would also NOT like to see some folks start acting out in actual real life what you see on increasingly popular cathartic TV shows like “Dexter” and “White Collar” and “Dark Blue” and such, although my lizard brain would no doubt take some grim delight in heads with $500 haircuts and hidden cosmetic surgery scars, reeking of expensive cologne and such, mounted on pikes up and down Wall and Vesey and K Streets. Once again, where there’s no consequences for a particular set of behaviors (physiologists call it “negative feedback”) there’s no restorative impetus moving the body politic in the direction of meta-stability.
I get that you think “economics” and political systems are apart from the “natural world.” I don’t, and while the time scales of effects are much longer than the 6 minutes it takes your brain to die if you are deprived of oxygen, “human-induced climate change” for example is the result of political and economic activity, vastly non-governmental although the actors (including each of us) have let the coercive power of the state become just another arm of too many businesses. But government and hierarchy and even your ‘rule of law’ don’t come out of all those tiny little decisions (to eat a Big MacTM and drink a CokeTM from a StyrofoamTM cup, and every externality that those little acts add up to) or ‘contracts,’ they come out of a necessity for something to preserve as much order as greed, self-interest, sociopathy and the Second Law of Thermodynamics allows.
My goal would be to see the homeostatic processes that we call “history” and “economics” and “politics” trend more toward a longer-term stability, and one of those current “green-marketing” catch phrases being robbed of meaning by marketeers, “sustainability.” It seems to me that you want to label and intellectualize and discuss and try to figure out who is “right.” I fear, but maybe in my inner heart, along with the “tea-baggers” and all those people who are still buying guns and ammo like there’s no tomorrow, I maybe court the kind of “rectifying catharsis” that old Thomas Jefferson was talking about with his watered-with-the-blood language. Knowing full well that mobs in the streets just bring new sets of predators and parasites to power.
You appear to think that discussion and haggling over the relative power and right-ness of various “authorities” has some utility in moving the human biomass toward a sustainable set of beliefs and behaviors and interactions. I think we are way past that, that we are into the range of multiple chaotic tipping points of processes that a few have been able to warp to their personal gain at the mortal peril of the rest of us. And as for broad strokes, how do you think those irrational voters’ minds work? You think you can sell a majority on your ‘rule of law’? You’re talking to consumers, not citizens, not committed parts of a polity.
You see here that many, maybe most people, don’t find any magnetism in the worldview you propound. To my mind, your prescription does not seem to have a prayer of dealing at all with the heart of darkness that in my “gut” view is rushing the whole herd of us over the cliff, behind a bunch of “leaders” trying to surf the polls and stay in front of the mob.
Real discussion? You can give names to the demons, but what does that do to stop G-S and such from fleecing us? There’s 307 million-odd of us, a small fraction votes, and fewer of those votes actually count. Does your economic philosophy have an action-driving prescription for how you stop Geithner and Paulson and all the people who support, protect and defend them from bleeding us like a pig strung up before it’s spitted for the barbecue? I’d like to know what that is, because my “gut” tells me that as economists and historians of all sorts have pointed out, each age has a few nodes where the actions of a very few people can move the whole mass of humanity down one of various paths.
So there’s another broad-strokes rant for you — my challenge to you, as a student seeking to deepen your useful understanding of how humans interact and maybe what their goals and norms should be, is to name the actions that can be taken to undo, without massive disruption and violence and megadeaths, the powers of the current oligarchs, without raising up a new set of Pharaohs in their stead.
JTMcPhee
November 4, 2009 at 5:22 pm
And I will start thinking your economic theorizing has some utility when it can account for and express a way to dissipate THIS, and THIS,, and of course THIS. And when Katie Couric follows up her question to that Marine sniper with “How do you know that is a ‘terrorist?’” and “What do you feel when you learn you have killed an innocent person?”
JTMcPhee
November 4, 2009 at 5:50 pm
I look at last night and feel no more or less panicked than I did yesterday.
1. A swing back was expected. The highs and momentum of last year cannot be sustained. That coalition was fragile then and grows evermore so.
2. The economy is a tough nut. Fixes will be slow. The Republicans do better with Jobs Jobs Jobs than Democrats do with feed the poor from the church coffers.
3. Note the gay marriage issue tends to hobble the Democrats. Sometimes one supports an issue because it is the right thing to do. That one will always be a loser in popular votes even if it is the right thing to support. We want to feel good about this one but it has a cost. 31 tries and 31 losses means it’s time to change strategy.
4. Better now than next year. It’s time to turn up some heat and slow boil the topics that will get more focus in the mid terms. Preparing political topics has a lot in common with preparing pinto beans. The voters are angry for good reasons. It’s time to quit blaming Fox and step up. Blaming Fox is just pig wrestling.
The Dems do need a dash of cold water. Both parties are riven with deep divisions. Some navel gazing and then some come to jesus meetings are useful right about now before the next series.
len
November 4, 2009 at 9:36 am
Eliot Spitzer agrees.
http://www.newdeal20.org/?p=6046
Gordon
November 4, 2009 at 10:59 am
Last time I cooked beans, I had to wash ‘em off several times, with cold water, and soak ‘em, before putting them on to simmer. Wonder what the analogy might have to teach?
Thesis, antithesis, synthesis?
JTMcPhee
November 4, 2009 at 11:03 am
The longer and more often they boil, the better they get. Don’t drain all the juice on the first pass. It’s a slow cooking bean but done well, it keeps. Then you make chili.
len
November 4, 2009 at 11:33 am
To make it clear for literalists like JP, the average voter understands less than 1% of what JP talks about and thinks about it even less. They feel the discomfort and vote almost the way amoeba react to an environment.
Topic preparation or issue mongering takes months and even a year or so of prep work in the media. Think of it like a long campaign prior to releasing a block buster. Generate the buzz carefully and it resonates with the issues or fashion trends of the day. Good opening weekend. Fight against that daily zeitgeist and it sinks regardless of the content of the film. Some films get cult status because even though they open badly, they actually have meaning to some significant set of people. The same goes for politicians.
Beans, beans, good for your heart….
len
November 4, 2009 at 12:58 pm
What you’re touching on is very important. It’s the myth of the rational voter. It’s the reason why important decisions in the allocation or scarce resources cannot be left to winner-take-all majoritarian democracy but should instead be left to subtle, try to customize for each need as best as possible, world of voluntary individual (and, yes, voluntary collective) action.
John Papola
November 4, 2009 at 1:14 pm
IMO, it means his staff needs a trip to the barn. For Obama to win 2012, he can’t be trotting around the pasture keeping the Demo cows inside their fences. He has to be seen to govern fairly but well. Stunts like sending him to plead for the Olympics are just dumb as sheep. He IS the head of the party and should take a lesson from Bill Clinton and use that through the staff.
They’ll volunteer but only if they are secure that they aren’t going out of pasture where the wolves are hanging out in the woods waiting for a stray. It’s a game of small numbers right now that can be turned into big numbers later.
From where I sit Hillary’s staff is doing a better job for their boss right now. He may want to have a private chat and get some thoughts for reflection. I’d have a beer with Bill as well as Rahm.
len
November 4, 2009 at 1:40 pm
On topic… as a New Jersey resident and taxpayer living in essex county, I can tell you that the Christie win (who knows if he’ll be any better, really) is a rejection by the independents of tax-and-spend progressivism that is bankrupting the state.
It has a uniquely insane public education funding scheme concocted and legislated directly by the court system. The result is the city of Newark spends 17k/student per year for the most expensive failed system in America. Spending isn’t the key to improvement. It’s just the pathway to inflation and parasitic feasting.
And that’s precisely what The Soprano State has to offer: a public sector so large and so corrupt (because it’s so large and invasive) that the parasite is eating the host. New Jersey had virtually no net private sector job growth DURING THE BOOM.
This election in New Jersey was not about Obama. But it was about the ideology that has run New Jersey into the ground: statist progressive corporatism. So, in that sense, it is a rejection of Obama’s ideology as well as his Goldman Sachs buddy, Corzine.
Again, I don’t expect real change with Christie. That would mean job one would attack the education system. That would best be handled the Cory Booker way: school vouchers. Screw the teacher’s unions. They’re parasites that feed off the taxpayers and harm the kids of Newark as they line their pockets.
John Papola
November 4, 2009 at 12:13 pm
Can you elaborate a bit on the Newark school system? What are the ‘parasites’ doing? And how does this account for the 17k/child?
Seth
November 4, 2009 at 12:37 pm
@Seth,
Not embarrassing at all. Look closer, please. I’m not pronouncing except to say that the voters are a bit paranoid and that their paranoia could be dispelled. It’s not all that gamey or sophisticated, just straight-up politics. Otherwise the Administration will continue to get hammered, whereas I want them to do great deeds. Obama could wave all this away with a flash of his bony southpaw, but Axelrod and the others probably don’t have the brass to put the Prrsident up to it.
So you can bet on further losses.
Hugo
November 4, 2009 at 1:13 pm
Obama’s chastising of Wall St. in Jan was classic “sophomoric politics” – all talk and no walk. Although it played well for the evening news, the “players” began to take notice.
After the AIG farce, they knew there would be no investigations and no indictments, and the market began its magical mystery tour to levels that make even the hucksters blush.
Obama is destined for second tier status unless he takes on the financiers, bankers and marketers who perpetrated the gutting of our investments. Huh? This issue cuts to the core. Too many lost too much, and the no one has been held accountable.
Less than a year from mid-terms and despite the administration’s best effort, health care reform will not carry the day. “jobs, Jobs, JOBS, homes, Homes, HOMES and accountability, Accountability, ACCOUNTABILITY” will determine the outcome. Best to stop winking and start swinging!
Roman
November 4, 2009 at 2:06 pm
J.P.,
First, I know your state to be quite beautiful.
Second, what’s the deal there with the court-ordered school equalization? I hadn’t realized that you guys also were under the hammer.
Hugo
November 4, 2009 at 2:21 pm
This offers a great overview:
Eric Hanushek on public school finance:
http://www.econtalk.org/archives/2008/07/hanushek_on_edu_2.html
New Jersey is unique in the country for it’s court-legislated (yes, that’s right) finance of the school system.
John Papola
November 4, 2009 at 3:32 pm
Hanushek is providing a broad general argument about public education and waving his hands in the direction of judicial activism and dumb theories of education. All fine, but not an answer to my question: what is Newark spending 17k per student on, and how do you trace the overspending to parasitism by the teachers’ unions?
Seth
November 4, 2009 at 5:18 pm
I believe Hanushek is a respected non-partisan guy who’s studied these issues pretty intensely, so I’m not sure he’s just waving his hands.
I don’t know about the composition of Newark’s spending. Clearly, though, it’s dramatically higher than anywhere else and the results aren’t good. Cory Booker and some members of the Newark city council want vouchers. They want to introduce choice and student-oriented incentives.
That’s the extent of my knowledge. There is a point where my issue specialization has to give way to deference to people who I respect and believe to be honest scholars. If they turn out to be hacks, I seek a new source.
Hope that helps.
John Papola
November 4, 2009 at 6:20 pm
Yeah. Helps us remember that reporting and repetition of assertions that may comport with our preconceptions, to the point that we feel no compulsion to check their validity and are more motivated by “winning the argument,” is not a sound basis for trying to understand what it takes to keep the social contract or the nation or the species alive.
And that the view from a posthole or other narrow excavation into one corner of the world of wisdom tends also to be very “specialized.”
And yes, these same observations and limitations apply to this humble author, in diamonds (I was going to say “in spades,” but recently a local politician lost an election for using that phrase, which gave the “winner” a great opportunity to “go negative,” attract a good fraction of the black vote, and give them good reasons down the road to wish they were not touchy single-issue people.
Gullibility and bullshitting and spinning and all the rest. Wake up. Look around. Smell the coffee of which the price is manipulated by one of those concentrations of “market power,” like oil and cereal and such. With price points set at the very limit of elasticity and a little beyond, which any engineer will tell you is one guaranteed means of ensuring premature failure of a structure.
Fucking stupid human tricks.
JTMcPhee
November 5, 2009 at 5:24 am
You mentioned that you live near Newark. I thought that might give you some insight into the situation that a 30,000ft overview of education issues from a Hoover Institution fellow in California wouldn’t provide. No such luck.
We’re stuck talking about a concrete situation almost exclusively in terms of ideologically inflected social-sciency generalizations.
Seth
November 4, 2009 at 6:40 pm
That’s a fair criticism, Seth. I moved into Essex county 3 years ago and have a 4 year old. I hope to make some short documentaries on New Jersey issues and study the stuff in more depth at some point soon. For now, though, the best I can do is read and listen on my communte into the city everyday.
I’m sensitive to letting my priors dominate my filtration of info, but I’m also not ashamed to apply the principles I believe to be true in the absense of contradictory data.
I don’t hide from the contradictory data, though. I seek it out.
In the end, I’m not nearly as informed as Id like to be on all the issues I care about because I care about too many topics. Lately my focus is the business cycles and monetary policy theory. Healthcare is second in line with education coming right next to that.
It’s all a learning process.
John Papola
November 5, 2009 at 5:49 am
Yep blame it on the judge, “the government” — when “the problem” is the usual one — a complex set of interactions that proves once again that the enemy is “us.” Because we can’t just go with the notion that we are all shades of pink and yellow and tan and brown, and cling to our tribes, and takeevery advantage of one another that we can get away with, and clling to the myth of constitutional rule of law, we got the courts having to do what our broken social contract can’t. The fix is not in “blaming the government”– it’s in fixing ourselves. Which we don’t want to do, because WE might be the ones to win the lottery next.
JTMcPhee
November 4, 2009 at 2:38 pm
The natural world is a complex system with evolution and emergent order. It works. It finds a homeostatic equilibrium. Why? There’s no “too big to fail”. As Nassim Taleb puts it, nature breaks such fragile, unstable complexity before it can become systemic.
The government isn’t simply “us”, JTM. It’s a systemic, monopolist of deadly force. That makes it special and its role outsized.
All that said, if the public at large doesn’t push for change and accept the need for rule of law, instead opting for special interest theft, it is indeed their fault.
John Papola
November 4, 2009 at 3:35 pm
There is no distinction between us and the natural world – we are of it.
So there’s little to be gained by saying we differ from some arbitrarily specified natural order.
Such arbitrary distinction merely presuming a conclusion (we differ because we are defined as differing).
When humanity defies the red in tooth and claw violence of daily existence between the hunter and hunted we disrupt such equilibriums between people.
It isn’t an accident, it isn’t an exception to nature, it is us choosing better lives for ourselves.
Fentex
November 4, 2009 at 4:53 pm
There’s a significant difference: planning and story telling. Humans plan in ways that no other being on earth appears capable of… and not all for the good.
Our brains are also attenuated toward condensing complexity into simply linear stories that often drop the most vital details.
When you combine these two uniquely human qualities you get he problem of hubris and central planning based on aggregate ex-post story telling that’s probably near-useless (the crisis was a failure of deregulation, for example).
In the broader sense, we are still, despite these failings, part of the natural order whether we like it or not. And the natural order includes scarcity, which is why economic analysis is valuable when it’s done with humility and respect for the margin for error.
John Papola
November 6, 2009 at 7:47 am
CNN reports Carly Fiorina is entering a California Senate race and Meg Whitman is running for Governor.
Hot d***! A fun season begins! Woohoo!
len
November 4, 2009 at 4:03 pm
Yeah, I totally see Obama listening to voices other than Jafar whispering in his ear….erm, I meant Rahm Emanuel.
I remember writing here – as early as the week Obama was elected – that the only way he can live up to his promise is if those who voted for him keep his feet to the fire. From day one.
I guess it took a year for people to take notice that Obama may talk the talk but he walks way right of center.
Armand Asante
November 4, 2009 at 6:44 pm
I don’t think he walks right of center. I have the impression he stands in the center and tries to negotiate between the edges.
Which may work fine in the politics he’s used to but seems less than is needed from the U.S President now.
Fentex
November 4, 2009 at 9:37 pm
Seeing as how the right keeps moving their edge further right, and the left is willing to support Obama now matter what he does – this means Obama is negotiating between two right-moving edges.
Ergo, Obama walks right of center.
QED
Armand Asante
November 5, 2009 at 2:44 am
Ha. Love the Aladin reference.
John Papola
November 6, 2009 at 11:38 am
I have read this morning all the above posts and I must say that I agree with JTM´s surgical description of the momentum we all are experiencing regardless of age, race, religion or location. Its a cruel and vivid description of a reality that goes beyond any theory. How to survive all this as a specie. What kind of world my kids will find. Tough questions.
bernard
November 5, 2009 at 4:34 am
Be concerned but sangine, Bernard. My generation was scared witless by the threats of nuclear anilhilation, pollution, sunspots, alien invasions, you name it, we framed it. And we’re still here.
The signal/noise problem is tougher because in the presence of global ubiquitous communications, it is harder to discriminate. Do I think the systems were better forty years ago? No. There was less of it but it was highly filtered and controlled. There are pluses and minuses to that but as one who worked a career for ensuring we could talk across our borders, have immediate access to what is published, I think it better that today we can at least make up our own minds after listening to a lot of points of view. Choice of topics has become our choice. Choose wisely.
Will we survive? Yes. It is increasingly not about survival but lifestyle. This planet’s life systems in aggregate will handle so much and then as most systems do it has a way of reducing numbers. Whether it is by our hand or a bug’s, populations can’t increase indefinitely without border expansions and you of all of us know how devastating that can be on the organic systems. So some pain is involved unless as JT notes, these communications systems result in a moreorless global aha.
So it isn’t will we live but how will we live? We seem to be swinging towards tribalism and that may not be bad in the sense that community establishes a need to live, to care and nourish. It can also lead to a will to triumph as someone wrote and triumphalism from the Caesar’s to Schickelgruber to Mao to Bush is seldom a good willing.
Still, I think it is time for the Americans to take off the hair coat. We are in very divisive times driven by insane media and nefarious politics, but the American people are a good people. The same Goobers some go long on here also created Farm Aid. They believe in their God, they help their neighbors, they try to raise strong children, and yes, they love NASCAR and football. Whatever may seem crude or violent, they are a good people. They need jobs, they need health care and they need to believe in each other, but they also need to remember that their grandfathers did not wish to conquer the planet or extend a global empire. They need to remember a flat screen TV does not make them better neighbors or more worthy Christians, Jews, Hindus or Muslims. They need to know the same God is God and that this belief with out proof or intervention has for the better part of millenia caused them to draw back from the precipice of holocausts and when holocausts have come to lay down their lives, the lives of their young and their fortunes to roll it back.
Pain and sacrifice are part of how we go on as a species. There is no escape from that. It is the price of surviving. As I’ve said before, the measure of love is not what we gain but what we will gladly lose for the good of others. This is not a belief held just here in the West or in the Christian churches. It is a universal belief held in every church, mosque, temple, sanctuary or wherever two gather to celebrate life.
What kind of world will your kids find? The same as mine: the one we make for them. It is a simple answer and none truer or more important. Whatever God we bring, we bring with our own hands. Whatever future they share, we conjure.
len
November 5, 2009 at 6:52 am
Beautifully done, Len. Truly.
John Papola
November 5, 2009 at 7:13 am
Thanks Ien.
bernard
November 5, 2009 at 8:29 am
NO CHANGE IN SIGHT:
http://www.thenewamerican.com/index.php/usnews/congress/2216-subcommittee-guts-ron-pauls-bill-to-audit-the-fed
Seriously. Geithner, aside from being a tax cheat, was one of the crucial voices at the heart of this entire boom/bust. He was championing the low rates that helped drive the speculative bubbles to their enormous size and he was doling out the bailouts to his cronies as his bubble burst.
When it comes to the macroeconomy and financial crisis, the foxes are watching the henhouse. This was Obama’s choice. He re-nominated Bernanke. He picked Summers and Geithner.
This isn’t about a great leader being driven in the wrong direction by his subordinates. This is about terrible leadership based on corporatism and corruption.
John Papola
November 5, 2009 at 10:44 am
JP
This won’t end well for Obama.
The idea that a juiced market can somehow can replace leadership and accountability is ludicrous.
When your auto mechanic sees right through the talking points and empty gestures you have reason to be nervous.
Roman
November 5, 2009 at 11:02 am
The Fed and FDIC are the true systemic risk.
Failure breeds strength and prudence and it’s the price for having a system where the winning gets to keep his honest spoils. Fed and FDIC take away the failure and destroy the ecosystem. They are the over-used antibiotics that lead to “too-big-to-fail” superbugs.
REAL change means attacking this problem. But this administrations isn’t capable of that (probably none are). They don’t get it. It’s all about lining up party majority with ideological “policies” like the so-called healthcare “reform”.
That’s not what our system needs. What our system needs is accountability and better incentive alignment. There’s none in sight. Just more of the same.
John Papola
November 5, 2009 at 11:11 am
OK, JP. You’re boss of the world for a week. Seriously now, what ya gonna replace the Fed and FDIC with? Granted that the best approach with the least long-term pain seems to me at least to be a decapitating strike on the main nest of these aliens. Since it’s obvious, as you put it, that there are no incentive vectors that have a prayer of deflecting the present “velocity of money” and “momentum of capital (however you want to define that)” and “sum of all fears.”
And if you are really studying business cycles, I would once again recommend a look-see at “the beer game,”, which is supposed to be only about “supply chain management.” But it illustrates for anyone, except the careerist-blinded “capitalist” and most of the professors who preach from its text, to see, the inevitable and invariable-except-in-minutiae behaviors of the folks that play it (B-School future Geithners and Lays and Madoffs.) And that the exemplar is not limited to this little corner of the consumption-driven, growth-is-everything-good economy. And the way the outcome is always the same (greed and unwarranted optimism and your wonderful self-correcting self-interest produce inevitable “irrational exuberance” bubble-and-bust, given the real-world imperfectibility of humans and the impossibility of the kinds of information flows that can happen in “natural systems” but not in ones mediated by language and greed and deceit.) From the link:
“During the game emotions run high. Many players report feelings of frustration and helplessness. Many blame their teammates for their problems; occasionally heated arguments break out. After the game I ask the players to sketch their best estimate of the pattern of customer demand, that is, the contents of the customer order deck. Only the retailers have direct knowledge of that demand. The vast majority invariably draw a fluctuating pattern for customer demand, rising from the initial rate of 4 to a peak around 20 cases per week, then plunging.
“’After all, it isn’t my fault,’ people tell me, ‘if a huge surge in demand wiped out my stock and forced me to run a backlog. Then you tricked me – just when the tap began to flow, you made the customers go on the wagon, so I got stuck with all this excess inventory.’ Blaming the customer for the cycle is plausible. It is psychologically safe. And it is dead wrong. In fact, customer demand begins at four cases per week, then rises to eight cases per week in week five and remains completely constant ever after.
“This revelation is often greeted by disbelief. How could the wild oscillations arise when the environment is virtually constant? Since the cycle isn’t a consequence of fickle customers, players realize their own actions must have created the cycle. Though each player was free to make their own decisions, the same patterns of behavior emerge in every game, vividly demonstrating the powerful role of the system in shaping our behavior.”
All of which tells me, at least, that for humane-ity to exist, there’s some kind of natural limit to the size of the long-term-viable social unit.
The “business cycle” isn’t a set of equations, it’s a description of post-Eden human nature in large-scale scarce-resource urban-ity. There is no accountability, no negative-feedback restoring force, where in the nature of things, as Empire grows, the lawless and shameless and self-interested figure out how to dominate the landscape and, like a cancerous tumor, hide out in expensive suits with lots of money to pay lawyers and politicians and Xe-guys and other forms of security, and insulate themselves from “accountability” until their unbridled ravaging of resources kills the organism. Or early surgery removes the blight. Which assumes a wise surgeon indeed, with really perfect knowledge of the organism’s anatomy and physiology, and really perfect skills and tools.
And don’t forget the difference between inductive, and deductive, and dogmatic, and didactic, and the wisdom and bit of humility shown in your 11/4 at 4:20 and 11/5 at 5/49.
And yes, I know, I have a beam or log in my own eye. Working on that.
JTMcPhee
November 6, 2009 at 5:29 am
When I am told that somehow the money disappeared… that it was electronical money …that the stimulus was employed to buy inexistent investments, I have serious doubts on all these intelligent economical prognosis about the system that rules wall street. Even the Feds cannot justify the stimulus. The reality of it is that lots of families lost everything they had.
I agree totally with JTM’s acute observations. There is a saying here in south America :
- You cannot let the vultures guard your meat.
bernard
November 6, 2009 at 8:44 am
Bernard. The key thing to remember is that money in and of itself is not wealth. Money’s purchasing power in goods is the wealth and, more specifically, goods themselves are wealth.
So when there is an inflationary period, wealth is redistributed to people that receive the new money because they are able to spend it before the rising prices drain its purchasing power. More specifically, their act of spending is what pushes up the prices.
To get specific: the expansion of the money supply both by the Fed and the banks themselves poured money into loans for new housing construction. The people that bought or built in 2003 got more house for their dollar than the people in 2006. That was an inflationary redistribution of wealth from the 2006 homebuyers to the 2003 homebuyers.
This is known as the “Cantillon Effect”.
It would be amazing if we could track the flow of newly created money through the economy to analyze how it impacts the relative prices of different goods and industries.
In this boom, the housing policies made housing a relatively better investment return, which is why housing boomed this time relative to other durable goods (which also boomed, like cars). Durable goods experience larger Boom/Bust cycles because of the impact of the monetary expansion/contraction on interest rates which are a major incentivizing price for these goods.
Banks create money by lending out more than they have in reserves.
When a bank fails or a loan is repaid, the total money supply does literally fall. In a healthy economy, particular bank failures or loan repayments are balanced with other new banks being started and new loans being issued. The result is a relatively stable price level (think pre-Fed gold standard days).
With stable prices, the cantillon effect doesn’t occur because booms in one area are accompanied by contractions in others. Horse and buggy makes way for the car. Radio gives way to TV. Normal dynamics.
When you have an inflation, though, everything booms. This is what makes the monetary boom unsustainable. During the boom, no banks fail, most businesses see higher demand and prices rise. Then, the costs of production catch up and it becomes hard to profit. The inflation leads to a contraction in the money supply via the Centra Bank if they’re half-way decent or gold flowing out of the country (or else it will lead to a hyper-inflation).
When that turning point occurs, the boom turns to bust. And so it went again this time. The boom went until the interest rates were pushed back up from 1% to 6% as Bernanke sought to prevent increasing inflation. Without new money, many of the boom businesses see their demand dry up (like housing post 2006) and go bust. This is widespread because the inflation was throughout the entire economy, but, again, it’s more severe in the interest-rate sensitive industries of durable, long-term investments and capital goods. Houses. Autos. Factories. Machinery.
Is this understandable? Is it helpful?
John Papola
November 6, 2009 at 9:05 am
Sarmana Mitra, writing for Forbes, has come to the (obvious) conclusion that what’s passed for ‘free-market enterprise’ in the last decade or so is anything but.
The proof, she so rightly observes, is that none of outcomes worth defending ‘on principle’ are actually taking place. To the contrary, we’ve spent the years since Reagan’s election suffering through a staunch and near-violent ideological defense of a system that produces the exact opposite of what it promises.
In her words, Capitalism’s fundamental flaw is that the system isn’t rewarding the right people: innovators and creators.
Instead, the spoils are going to speculators, who have not only created no real economic value, they’ve demolished the basis for anyone who deserves to make money to make anything at all.
The place where this problem has become unavoidable is in the Federal response to the crisis in banking. The lie just can’t continue. Frankly, it’s embarrassing to see how committed the Obama administration remains to a world-view that even its chief architect (Alan Greenspan) has rejected.
Maybe that’s because his chosen advisers – Summers in particular – embody this fraud. The thing is, smart people have stopped buying it, due mostly to two glaring errors:
1) Obama’s response to the banking crisis does nothing to realign the system in a manner that subordinates innovators and creators to speculators. If anything, it tilts things even further in the wrong direction by securing the firms that have done the most to destabilize the broader economy.
2) It does nothing to recognize the utter moral worthlessness of speculators (aka ‘gamblers’) within these firms. Given that the system – as constructed – depends on an implicit acceptance of their integrity as humans (and thus, the ability to self-govern in the absence of any meaningful external regulation), this is actually a very big deal.
There seems to be plenty of spin about how Obama is loosing his base in the far left as he tacks further towards the center.
But the real problem is that he’s not actually stopping there. Instead, he’s adopting the most destructive positions of the extreme right. Not the social ones, of course. In terms of window dressing, he still appears eminently reasonable.
But in terms of his commitment to The Big Lie, he’s as bad – if not worse – than the Bush Brigade.
Those guys, after all, had the benefit of living before the Crash. The idea of a collapse was, well, speculative. But to remain committed to this crap after it’s ended up in the ditch is the height of folly.
Even Chris Dodd is realizing how badly the regulators failed in their deference to the finance industry. It’s odd to see him fighting a post-Crash / Democrat run White House in an effort to deliver coherent reform.
I don’t think Obama’s in any danger of becoming a one-term president (not yet anyway). But if he wants to do more than just pass the time, he’ll need to ditch Summers and Geithner pronto, and go to work demolishing the idea that purely speculative operations are the right and natural home for Victors and Spoils.
You can’t just take stuff. You have to make it. And don’t reply with that bullshit about the need for investors willing to take risks to finance creation.
That argument gets you nowhere when the ‘investors’ aren’t actually using their own money, and the ‘risks’ are all hedged by unwilling taxpayers who only get involved when things go wrong.
And for the record, the majority of private equity deals do not include actual investment. To the contrary, they typically see their targets acquiring huge debt, before being stripped then flipped. It’s a cash-extraction proposition, not one centered on value-creation. And it’s been one of the most profitable things you could do with your money over the past decade.
That has got to end.
Alex Bowles
November 6, 2009 at 9:23 am
FIRST, THE SUGAR:
We probably agree on important areas here in the financial excesses and their perversely re-distributive outcomes (as I layed out above).
THE MEDICINE:
Your post is an unreasonable and ideologically driven generalization. A tremendous amount of real investment and innovation has taken place over the past 30 years. That’s unequivocally true. Our standard of living is dramatically better and not just for the rich.
Moreover, the notion that Obama is adhering to a worldview rejected by Greenspan (presumably “free-market fundementalism”) is frankly pure nonsense. Greenspan’s “rejection” was nothing more than an effort to cast blame on anyone but himself when he bears a good part of the blame thanks to his “Greenspan Put” and loose money.
What Obama is doing is simply being a conservative powermonger. He’s trying to maintain the status quo and consolidate central power in the process via a quid-pro-quo corporatist boondoggle.
Bush did the same. None of this is free market capitalism. That much is certainly true. It is a slander to use the word capitalism anywhere near this nightmare.
There was a time when banks cared about maintaining enough reserves to look healthy for their customers and bondholders. But the combination of FDIC shutting off the customer’s incentive to regulate their bank and the Fed/Treasury bailing out the bondholders at 100%, all market regulation and discipline has been stripped away. The result is a banking system prepared to push the limit on reserves through every means possible with noone but cozy former bankers-turned-government-“regulators” to stop them.
THAT is the problem. There was a great deregulation. The deregulation of the natural market discipline by government insurance and bailouts.
And so you are right about the great evils done by run-away Wall Street pirates and parasites. You’ve just got the causality reversed.
John Papola
November 6, 2009 at 9:38 am
The thundering sound of rocking-horse hooves pounding through warstler-space is once again heard in the land.
“Your post is an unreasonable and ideologically driven generalization. A tremendous amount of real investment and innovation has taken place over the past 30 years. That’s unequivocally true. Our standard of living is dramatically better and not just for the rich.”
Want an unreasonable and ideological generalization? Look in the mirror, bubbie. Where do you live, New York person who shouts about how NEW YORK RULES!? Since when has “the standard of living” gotten any better for the vast, vast majority who live outside YOUR “production” space, in those places that the formerly almost-annual New Yorker Magazine cover looked so haughtily down on, where scale-wise, just SoHo is ten times the size of Texas, let alone Indiana and California combined?
“the deregulation of the natural market discipline by government insurance and bailouts.” My man, if you are really a student of Economics, it might behoove you to do like weathermen ought to do — go outside, look up at the storm clouds, and stop proclaiming everything ought to be sunny-side-up if only the isobars behaved the way your thesis said they should.
JTMcPhee
November 6, 2009 at 11:41 am
If you want to subscribe to the church of nostalgianomics where evrythubg was better in the 50’s and 60’s, that’s fine. It’s a fantasy land, but go right ahead.
As for my “New York” world… we all have our limits in knowledge and experience. I grew up outside of Allentown, PA and only moves to NY after school a decade ago.
My wife’s entire family is in Detroit area. I’m not blind to the fact that there are people suffering all the time. But I can’t let these broad consemnations slide especially when they accompany criticism of ideology.
The past 30 years has seen enormous progress, especially around the world. The fall of communism. The rise of hundreds of millions of Chinese, Indians and eastern Europeans out of poverty.
Enormous innovation in everything. These are the great fruits of liberalization and the collapse of state planning.
The next wave will likely be the reform of european welfare statism in the face of insolvency. That will be a painful challenge.
JTM, I welcome your criticsm even if it’s often from another dimension of thought. But it’s too broad strokes.
Btw, I am going to respond to your question above soon. I’m on a bus to Newark right now from the port authority. You know, living the fat cat life
John Papola
November 6, 2009 at 11:57 am
Yes it is clear, coherent, rational and Cartesian. Nevertheless it doesn´t justify rape and pillage. You guys are surprised when a little country gets pissed when big corporation do there routine tap dance. So things should be kept at distance to sustain an acute observation. No dogmas, this the XXI century ( anything goes even quantum) and most of the scholars ( the guys that are supposed to know) I have met in the past have been wrong in the future, with exceptions of course.
I like to cook and when I do it I personally go to my farmers market and carefully choose the produces and discuss the prices.
Thanks JP I know you mean well.
bernard
November 6, 2009 at 9:48 am
“Nevertheless it doesn´t justify rape and pillage.”
This feels like a non-sequitor, Bernard. I’m utterly against all theft and violence. I’m simply pointing out the mechanism by which the banking system performs this theft when it’s prudence has been stripped away.
No dogmas (other than the non-aggression axiom). Just detail and attempts at understanding.
Speculation isn’t evil when it’s done with your own money. Everyone is a speculator that takes any amount of risk. When you’re playing the game with your money, you play it more prudently. When you’re playing with someone else’s money, either through a leveraged deal or a taxpayer-funded political boondoggle, prudence goes out the window.
John Papola
November 6, 2009 at 9:59 am
All right JP you have a point. Bare with me I am just a bit disappointed and not moved anymore by all this political circus. Bread and circus and nothing changes only for the worst. It is not a question of quantity but of quality, of ” humane” down to earth quality. I don´t see it in the real world. Theft happened in Wall St and violence is happening in Irak,and Afghanistan and I am glad yiou are against that. Because I am.
bernard
November 6, 2009 at 10:50 am
Knock it off with the straw man nonsense, JP.
I never said there hasn’t been any real investment or innovation in the past 30 years. Nor did I say that Obama is some sort of unreconstructed Objectivist. Those are both conspicuously moronic assertions, neither of which I came close to making.
What I did say (though in not quite these words) is that the rewards from speculative investments in poorly-regulated financial instruments by individuals and firms with artificially limited exposure to downside risk have vastly outstripped the rewards from actual investments in the real economy, and that now, in the aftermath of the inevitable meltdown of the fake free market, the refusal of the Obama administration to challenge the political power of the big banks and private equity firms that did the most damage has left the wrong people with dominion over the economy, and the right people out in the cold.
The key phrase is poorly regulated financial instruments. Ratings agencies, for example, have tried to defend themselves from liability in the sub-prime fiasco by asserting that their AAA certifications were simply matters of opinion, that all opinions are subjective, and that any attempt to punish them for what they say they think is really an attack on the 1st Amendment and the freedom of speech.
In short, they’re a bunch of f#@%!*g weasels with Sarah Palin levels of credibility, which is fine – right up to the point where their opinions are actually factored into decisions made by government regulators charged with verifying that banks are in compliance with their capital reserve requirements.
The fact that companies as demonstrably unaccountable as S&P, Moody’s and Fitch are allowed to play a role in the regulation of financial instruments is a de facto incitement against the quality of that regulation.
And of course, their actions within the market introduced a major disadvantage to any players who still strive to earn their livings, instead of meeting their quarterly expectations by cooking the books.
So who let these hustlers in? Was it the Socialists? Resurgent Communists? Haters of America, the Free World, and All That’s Good and True? Did the Terrorists do this to us?
No, of course not. They, the banks, and their regulators (I use that word loosely) were all pillars of the Great Capitalist Enterprise. And that’s the rub – the system did this to itself.
So you’re right, the result was an affront to Capitalism. But this wasn’t an attack by its opponents. Like Rome, it collapsed from within.
And all this is because Capitalism does not favor incumbents. To the contrary, it makes targets of them, and organizes itself around their dislocation. Needless to say, incumbents don’t appreciate this – even if this basic fact was at the core of their own ascents. And so they turn to politics – which, being very human – are never perfect.
Inevitably, they seek to expand and exploit imperfections within government – specifically ones that allow them to operate outside of market disciplines by looking for artificial checks on free competition. In some cases, they actually petition for pointless and inefficient regulation, knowing that can provide barriers that upstarts can’t afford to scale.
And as long as politics remain imperfect, there will never be any such thing as a perfectly free market. Somebody is always trying to maintain their position by gaming the system, and the political system will always permit this – to a degree.
The real question is whether corruption is limited to what can take place in the shadows, or whether its permitted to flourish in plain sight.
As long as it’s minimized, those who want to play by the rules can do so safely. But once corruption starts to operate in broad daylight, integrity becomes a liability, good souls shut down, and things get grim.
And some of the most dangerous contributors to this shift are the fundamentalists (free market or otherwise) who will block the good for not being perfect.
Distracting from reality by focusing on prescriptions for a perfectly free market is like a demand for perfect justice, which is like a search for magical flying unicorns that poo candy.
All fool’s errands. Useful, too, for those aiming to preserve a corrupt status quo, as they can burn up a lot of energy while getting about as far as a hamster in its wheel.
Far better to be committed to the simple rule of law, knowing full well that it will – at times – restrict the full potential of markets, individual liberty, and margins of profit, but that – in return – it will keep each of these things from eating themselves.
That, by the way, is the core or my contention with 43 and 44 alike – neither seems terribly concerned with the rule of law. Both men seem entirely absorbed by a sense of exceptionalism. Neither appears to have approached governance with a sense of humility and an open appreciation of government’s limits. Not the Constitutionally proscribed boundaries, mind you, but the deeper imperfections within humans who run it that caused the Founding Fathers to create checks in the first place – checks which will never work perfectly.
A President who is truly up to the office is somebody who – like a doctor or a priest – will look an openly corrupt incumbent in the eye and say “I’m sorry, but you’re going to die.”
Alex Bowles
November 6, 2009 at 2:18 pm
Alex,
First, let me say that there is a great deal of things about which we clearly agree. Still, I have not launched a strawman attack. Your opening of that post is a broad-strokes condemnation of supposed free market capitalism for the past 30 years. here’s the long quote:
——————-
“Sarmana Mitra, writing for Forbes, has come to the (obvious) conclusion that what’s passed for ‘free-market enterprise’ in the last decade or so is anything but.
The proof, she so rightly observes, is that none of outcomes worth defending ‘on principle’ are actually taking place. To the contrary, we’ve spent the years since Reagan’s election suffering through a staunch and near-violent ideological defense of a system that produces the exact opposite of what it promises.
In her words, Capitalism’s fundamental flaw is that the system isn’t rewarding the right people: innovators and creators.
Instead, the spoils are going to speculators, who have not only created no real economic value, they’ve demolished the basis for anyone who deserves to make money to make anything at all.”
—————————
This is a broad attack on capitalism and I see no refining or narrowing of the framing in the remainder of the post. If you want to talk about strawmen, when it comes to this post, you should re-read your own writing here.
And while you’re refining the scope of your assault to poorly regulated instruments here, that was not apparent at all in the post I was responding to. Instead it sounded like Krugman/Warren/DeLong nostalgianomics crazy talk.
The failure of an SEC-maintained cartel of ratings agencies to properly rate mortgage-backed securities which were getting special treatment by Central Banks is hardly a case of “Capitalism’s collapse from within”.
Now, if you hit find-and-replace in your post using “Corporatism” instead of “Capitalism”, you and I would be in agreement. The difference matters a great deal.
Greenspan was not a free-marketeer. He was the head of the most powerful central bank on earth. That makes him a monarch that once believed in democracy and still talks as if he does even as his actions and position demonstrate the opposite.
Actions are what matters. They override words and intentions of the present and past.
Again, I bet that you and I agree far more than one would think. But words matter. Calling something “Capitalism” when it is clearly not is a harmful misuse of language that leads to the wrong conclusions for how we should think about moving forward.
John Papola
November 6, 2009 at 2:49 pm
Careful, Alex… They say it’s death, at a dinner party, to converse about politics or religion. It would appear there’s another True Believer at table, who has invested so much in discovering the True Nature of the God of the Almighty Free Market Capitalism, done his study of the Sacred Texts, felt the resonation in his soul, and read, learned and inwardly digested the secret meanings of the Twelve Great Truths that he can’t take the slightest slight, real or imagined, to What He Knows To Be The Truth.
The Golden Rule has no place in that view of universe. Especially where there are Broad Stroke Condemnations of the Central Truths.
JP, you and I and Alex and most everybody else here know that something is very wrong in the world. But capitalizing and apotheosizing “Capitalism” is no part of any anodyne. And I hope for all our sakes that a True Believer in Free Market Capitalism, as you understand it, is not driving the bus as we move forward.
JTMcPhee
November 6, 2009 at 6:48 pm
JTM,
You’ve really got me all wrong, my friend. The golden rule is utterly central to my entire way of life. Admittedly, it is my fault partly for your impression because I stay in the domain of economic thought in these comments.
My worldview is not, however, built around “efficient markets” or “the beauty of profit” or some Randian exaltation of the self-interest as lord.
My guiding principle is peace. Voluntary, peaceful exchange that facilitates loving, growing, healthy and prosperous human connection. I reject violence as an option to be considered, while acknowledging that it’s going to happen anyway. That’s why we, as a society, must build the institutions that can protect individual liberty and peace in balance with the challenges of the commons. It all comes back to peace, though. Peace comes above all.
I am a loving, spiritual person that sees us all being connected. I do yoga (got engaged in Thailand on an Ashtanga retreat). I surf. I love my family and cherish fatherhood above all of this other stuff. So long as my family is with me and healthy, I could live in a hut (with a mac and fast internet).
Hope that sheds a little humanity in the spirit of the start of the weekend.
John Papola
November 6, 2009 at 7:13 pm
Alex,
This is a notion worth reflecting on a bit.
I have a few reactions to it. First up is, “damn straight! tell it, brother!” … Which I have to admit is perhaps a bit self-interested. I’ve bit “ethically inhibited” and applied skills to engineering which might easily have been more profitably used in finance. So, yeah, I’m envious of the Masters of the Universe, people I don’t respect much intellectually, yet can’t hold a candle to financially.
The second is: “but wasn’t it ever thus?” When have innovators ever really been rewarded in a dramatic way? Silicon Valley has stories (and frankly legends or myths) about out-sized rewards to innovators. It’s fun to think of Bill Gates as an engineering nerd, but I think it’s a lot more accurate to describe him as a sharp poker player and deal-maker. He sized up a massive opportunity and grabbed onto it with a maniacal commitment.
And when have artists ever been appreciated while they were still alive? Their economic value is generally roughly zero until they die and then either goes to precisely zero or maybe starts staggering upward as a trace of glamor or scandal begins to create a “prestige” bubble among collectors.
We’d be really lucky if 80% of the wealth were held by as much as 20% of the population. Human society has always been a Darwinian competition which selects for traits that don’t appeal to refined aesthetic tastes. Pushiness, persistence, self-confidence, brassiness, dogmatism, chutzpah, disregard for the truth or fairness, etc.
Anybody want to reassure me with a heart-warming counter narrative about Horatio Alger or the like?
Seth
November 6, 2009 at 3:01 pm
Seth, have you read The Black Swan? I recommend it.
John Papola
November 6, 2009 at 3:30 pm
No, I haven’t read The Black Swan, but I’ve read lots of Taleb’s work (both his technical work in finance and a previous popular book) for years before that came out. I’m pretty familiar with his take on the world.
Not at all reassuring about my fear that the world is run by crooks and always will be
Seth
November 6, 2009 at 6:00 pm
Indeed there has always been elites. That’s nothing new.
The key is building the social and civil institutions that limit the damage that can be done by madmen.
This is in contrast to the old progressive ambition of “bold action” and “reform” which demands high levels of discretionary power.
Constitutional restraints that keep areas off the table for the politicians seem to be the best answer we’ve got so far. They killed FDR’s fascistic NRA, after all. Sadly the post “pack the court” America seems to have very little functional constitutional restraint in play.
John Papola
November 6, 2009 at 6:17 pm
Hazard works miracles.
bernard
November 6, 2009 at 6:13 pm
Obama:
1) Wind-up toy of the oligarchs?
2) Highly articulate sociopath?
3) Inexperienced wimp?
4) Social climber who is in it for the $$$?
In our great political duopoly, the ONLY solution left before us is to vote out all the incumbents each and every term until the message is heard and the system is completely flushed.
Did you think the system will change itself?
billy-bob
November 7, 2009 at 10:36 am
Systems as they are today will prevail unless the people decide otherwise. Changes are happening in the real world ( less water, electricity, food ect…) and the capacity of adaptation is key to survival. Old cliches wont do the trick. We are waiting for the sound of a different drummer or the same one with a different beat. The problem with monolitique dogmas is that they don´t change easily. ie-Tell a little lady that she shouldn´t be using her 8 cylinder Cadillac to go to the market. Unless she is convinced (education) she wont do it. The people are the key and information (education) is the power.
bernard
November 8, 2009 at 9:25 am