Savage Capital II

This morning it is deja vu all over again. In March of 2008, after having warned my readers for three months that a crash was coming, I wrote a piece about what I called Savage Capitalism. The short selling sharks had managed to crash Bear Stearns and now were swimming around with blood on their snouts looking for their next prey. It would be Lehman Bros. The whole notion that the great fortunes of the present day were made selling short, was a particularly dispiriting one.

I’m a boomer and I was raised in the 50′s with a healthy respect for the great companies and fortunes made from producing the goods America wanted. Whether General Electric, Ford Motor, AT&T, IBM, all were producing world class quality products. Even banks like Chase Manhattan and Bank Of America added great value to the American economy. But things are different now. The great fortunes get built betting on failure. John Paulson, who personally made $5 Billion in 2010, did it by shorting mortgage securities that he designed to fail. George Soros made $1Billion in 1992 shorting the British Pound.

At this very moment the school of short-selling sharks is circling the bonds of Portugal, Greece, Italy, Spain and Ireland. Their big score is if they can get one of those countries to default. At a certain point, like Greenmail, these become self-fulfilling prophesies. But why is capitalism so vulnerable to these crashes? Nouriel Roublini thinks he knows.

So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.

Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities.

This is the issue I’ve been trying to raise in the past weeks. Extremes of inequality do not come without costs. But it’s not just a problem of civil unrest. It affects the middle class too. A financial market that is controlled by computers and High Frequency trading is not performing the role of providing capital to industry or even providing a secure place to the average investor to put their retirement money. Look at this chart of Apple over the last week.

Was there anything that Apple did as a firm to cause their valuation to fluctuate so drastically in the last five days? No. It’s just the damn high frequency trader’s algorithms slamming in and out of the stock. How is this societally productive? It isn’t.

Look, we are in a hell of a fix as a country. We need to create about 6 million jobs in the next 24 months. Many of those jobs will need to be for people without a college education and those can’t be just hamburger flipping jobs. We need to re-employ the carpenters, masons and machinists that have been laid off in the last four years. How are we going to do that? We don’t need a lot of new houses or office buildings. What we do have is a lot of broken down school houses, police stations and fire houses. We need a Rebuild America Plan and I think it has to be done on the local level. Obama should announce that we are going to experiment with 50 different solutions to put people back to work. Every state will be given a block grant based on a percentage of what their citizens paid in Federal Income Tax. These grants would have no strings attached, but rather be used as the state sees fit to rebuild their crumbling schools bridges and roads.

The next 15 months is going to be a battle for the soul of America. On the one side are the Savage Capitalists making fortunes on the 450 point drop on the Dow this morning. Enabling them are politicians like Pat Toomey and Jeb Hensarling, fighting to preserve unregulated markets and Hedge Fund Tax Breaks. They believe there is no role for the public sector in America’s recovery. On the other side are those of us who believe that the road to recovery starts with rebuilding those public goods like schools and roads and in process put a lot of middle class folks with real skills back to work. This is a fight worth having.

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61 Responses to Savage Capital II

  1. Roman says:

    Jon,

    Thrilled to see your “on the air” sign lit up once again. Please don’t go dark again, there’s too much at stake.

    “On the one side are the Savage Capitalists making fortunes on the 450 point drop on the Dow this morning.”

    You’re implying the sharks have political souls. Do they? Obama’s hoping so (as are his opponents) and that their spoils grace his coffers in 2012, as they did in 2008.

  2. John Papola says:

    Bear Stearns crashed Bear Stearns, Jon. Don’t shoot the messenger.

    Funny thing. For every seller, there’s a buyer. For every guy shorting a stock, there’s someone he’s selling it to who thinks things are going to turn around. Bashing short-selling is one of the most hackneyed complaints of those who confuse (or choose to misunderstand) the symptoms for the disease. What’s happening is that the fake debt-inflated nominal scam “recovery” is giving way to reveal that it was all fraud.

    The public sector has shown us what it can do for the recovery: make it long, deep and further indebted. We tried Keynesianism and intergalactic debt for years now. It’s failed. Time for the old time fiscal religion that was in play during the 1950s and prior.

  3. Alex Bowles says:

    Sadly, I think it’s going to be a lesser-of-two-evils contest, and one that won’t be too hard to decide when the opposition is rallying around a “Burn Down the EPA” platform that is, quite literally, toxic.

    Throw in the prospect of not one but two Scalia / Thomas-grade Supreme Court nominations, and a decisive percentage of Dems and Independents are likely to conclude that 2012 is all about damage-control. If this becomes the prevailing dynamic, Obama can win in spite of his accelerating irrelevance.

    If (what’s left of) the Middle Class really does determine everything, “deleveraging” really is a big deal. Just consider the mindset it involves – you feel trapped, and down, but not defeated. Indeed, you see a path to self (re)possession, but it’s long and rocky. What you need is a grim and steely determination that allows you to put up with a tremendous amount of crap in the near term, so you can maintain your focus on the horizon. Yes, you’d appreciate help. But you’re not seriously expecting it. You will, however, beat the daylights out of anything that deliberately gets in your way. You’re taking care of your own problems first. Then you’ll worry about the rest of society.

    In this situation, I suspect that a significant majority are willing to tolerate a sub-par Presidential offering if the alternative is conspicuously dangerous. No one will be excited about voting. The re-election won’t be cause for any real celebration. Obama will get another four years, but the people who let him have it will be sure to let him know that he’s winning by default. They’ll start looking for his replacement as soon as humanly possible. It sucks, but so does everything else. The important thing is keeping calm and carrying on.

    Four years later, people will have learned to live with less. The virtues of stoicism will be much clearer. So will the sense of having survived something truly cataclysmic. At this point, I think people will be far more keen on a real restoration. Not fake feel-good change, the actual root and branch, tear out the old and set it on fire so it will just die already and allow the work of reconstruction to begin.

    A guy like Andrew Cuomo – who is currently pressing for a state-level constitutional convention to ban gerrymandering in New York – may be the guy to lead it. Assuming he does well with his agenda in New York he’s have both the track record and (by that point) a suitably educated and responsive electorate to run on a platform of Real Change. Unlike the last one, this pitch would be brutally specific. Assuming that California’s electoral reforms are also paying dividends, it would also be backed up by hard evidence.

    Given the skill he displayed in getting gay marriage passed in New York (over the head of Archbishop Dolan, no less), I’d watch his constitutional convention aims as though they were a dress rehearsal for the same play made at the national level. Take a constitutional ban on gerrymandering and closed primaries, add a requirement that all private campaign donors be citizens eligible to vote, and you’d have broken the toxic trifecta that’s at the very heart of our congressional malaise. And you’d do it in a way that would block the lunatics on the Supreme Court from undermining progress with a rehash of the Citizens United ruling. Even more importantly, you’d do it with the kind of grand, unprecedented gesture needed to signal the end of a major, decade-plus interregnum.

  4. Jon Taplin says:

    Alex-Once again I am heartened by your optimism. I do think deleveraging is the main factor of the age and that ‘s why Papola’s three years of warning cries that the wolf of hyperinflation is at the door are ringing less and less relevant. Why is the ten year treasury at an all time low if we are in an inflationary era. Whe are in fact facing potentially massive deflation. All the idiots listening to Rush and Beck telling them to buy gold are going to wake up one morning and realize they were the victims of a massive talk radio advertising con and that gold was just the latest bubble to be inflated.

  5. Roman says:

    Alex,

    Interesting observations, the takeaway is summed up in “…a significant majority are willing to tolerate a sub-par Presidential offering if the alternative is conspicuously dangerous.” Temperament, not policies and promises, is the key, and what watchers will be watching for. If they find another Reagan, game over.

    It’s also worth noting that Obama has escaped, so far, an inter-party challenge. Although term one has been a train wreck, and term two is an almost certainty, a public accounting is required nonetheless.

  6. rhbee says:

    To rebuild the school buildings without rebuilding the idea of what the school could be is just make work. We have wasted many years in the school house logic of denying the enormous effect of computers on the way we think, work, socialize, and learn. Real online schools, text books on readers, teachers who can use both and teach too, that’s what we need to rebuild.

    We need to change our way of employment. For every necessary job we should share the work at double the pay starting from the bottom of the janitorial force right through top CFO who wouldn’t accomplish any of that bonusfied life he or she has without the rest of us.

    Remember, when the revolution comes we won’t just see it on TV.

  7. Martin Pitts says:

    The federal economic stats that are published widely through the Fed, Treasury Department and Commerce are heavily skewed toward housing and home construction. The Fed has discount rates at all time lows, and bonds are doing okay because the international electronic investor octopi have stayed in T-Bills for safety. Despite the obstructionist, treasonous repubs in congress, Warren Buffett said that his seventy plus companies are slowly recovering. But after all this the macro level US economy still looks like Japan in 1995. There may be a change needed in the form of our measures of what is good and what is bad for our economy and our nation. Maybe the stats we rely on are a “modified limited hang out” from Watergate days or a canard or a red herring put in place to frighten the people.

  8. woodnsoul says:

    What really annoys me is that the guys on Wall Street who are supposed to be smart, really are just con artists who now own a bunch of congressional reps and senators, who cost less than the yachts and airplanes they [the cons] own.

    It is still an issue of privatizing profits and socializing losses.

    Until the DC-Wall Street axis is gone, it will all continue. Or, congressional reps could charge more…

  9. John Papola says:

    “Papola’s three years of warning cries that the wolf of hyperinflation is at the door”…

    Ehem. Please quote these, Jon. I haven’t been saying that.

  10. John Papola says:

    Jon, When I read your posts, I question your sincerity in pursuit of truth. It feels like a thin layer of pop econobabble over top of “elect democrats”. Consider this notion that our country’s “soul” is to be determined by an election. This is just nuts. The degree of power and control by the president that this statement assumes, and the degrees of difference between e GOP and DEMS this statement assumes is simply unjustifiable. It’s certainly incompatible with a notion of “the new federalism”, an impulse of yours which I love.

    Next up is your chart of Apple above. This is demogoguery and nonsense. To show that graph and opine that markets are just nonsense is beyond foolish. Expand the graph, Jon. Better yet, read up on the performance or index funds over time. You really don’t have any sense of the “fallacy of composition” which you appear to be willfully employing here to make your point.

    “deleveraging” is s buzzword. For every borrower, there’s a lender. When the borrower “deleverages”, the lender gets the money. The lender can consume or invest or whatever and they’re doing so today instead of yesterday because by lending they had foregone consumption yesterday. No macro harm done.

    The REAL problem is when you’ve gone into debt and spent the money on unproductive bad investments or consumption. I that case, you are poorer and so is the economy at large. So the question one must as is whether the public sector is good at creating sustainable value that pays productivity dividends. I say no.

  11. John Papola says:

    Please provide the evidence that there is no more (or very little) “middle class”, btw. That would be helpful to me since this line sure seems like a political buzzword.

  12. Martin Pitts says:

    Perhaps Papola should read this post and reconsider his soggy dreams of the wonders of laissez-faire-everything capitalism.

    Posted MONDAY, DECEMBER 6, 2010
    Martinshushu

    The Economics of Money And Banking

    Economics is a science in name only. The field was created to study the wonder of industrialization in England around 1800. One of the founders was Thomas Malthus. Later in his life Malthus was a friend and muse of Harriet Martineau who wrote about how British capitalists were the new paragons of social brilliance. The problem with dear Harriet was her deafness. Certainly she was very attentive to Malthus when she met with him near the end of his life. But note that Malthus had a cleft pallet so how could Harriet not have misreported Malthus sage and sad predictions of population explosion and subsequent direness for the common man.

    That nudge of history reminds this writer of Ronnie Reagan who during his eight year White House sleepover was completely without short and long term memory because of degenerative dementia. Understanding the modern art of economics requires a quick wit and a profound memory. To help the old guy think more clearly, Reagan’s handlers called up a muse and monetarist from Chicago named Milton Friedman. Note that the term “monetarist” signifies a base interest in all things banking. Just like Harriet Martineau, Friedman listened to some mentor Malthus through a horn vaguely and wrote it all down for the reverent press and republican sycophants. Ronnie and all the Reaganistes declared that a fanatical “Trickle Down” doctrine was the new apotheosis forever and ever for the entire economy of our great nation. Kaiser Ronnie and his rightwing gang practically canonized Friedman. And the Marine Band seductively played “Hail To The Chief” as the chauvinistic, amnesic media all jumped on the wagon.

    Now three decades later, Bennie Bernanke sounds a lot like Ronnie Reagan. But Bennie knows his math and he can remember most things it seems. So maybe Bennie is like Ronnie and he is unable to hear the cries of the regular people out there in fields and in what’s left of their factories. Last night on CBS Sixty Minutes show Bernanke said:

    “The unemployment rate is just not going down … unemployment is just about the same as it was in mid 2009 when the economy started growing, And it looks that at current rates that it may take some years before the unemployment rate is back down to more normal levels. … At the rate we are going it could be four or five years before we are back to a more normal unemployed net rate, somewhere in the vicinity of say five or six percent.”

    What’s wrong here? The problem is that the Fed and the White House under both Bush and Obama decided to bail out and protect all the guys on Wall Street and the giant banks like Bank of America and Citi and Chase and Wells Fargo. Remember that it is rarely stated but the real reason that Merrill Lynch was taken over by Bank of America was to speed up and lubricate the lending of money to the failing stock broker. In essence Merrill Lynch became a bank under the US Federal Reserve system. Some estimates set the cost of the bank bail out at four trillion dollars.

    Helping all those huge financial corporations avoid going belly up was good. But here’s the real Bad, Big Problem with all of that: They should have bailed out the regular working people first. How? The government should have spent the four trillion dollars on a massive infrastructure program across the nation. That way people can get back to work much quicker than what is happening. Give the people a paycheck. Let them build high speed rail and subways and fix the potholes and build wind generators and solar power stations and on and on. This is not to forget or diminish the automotive industry bailout that is still an ongoing good solution. It made jobs and not just spurts of consumption.

    Give a guy a fish, and he can eat for a day. Give a guy a fishing pole and line, and he can eat until the fish stop biting. Give the nation some tools and some infrastructure and the economy can grow for a long, long time.

    But the sad truth of our economic problems is that the Giant Banks sit on their money while their CEOs and Chairmen decide exactly how to divvy up their windfalls from the US Treasury and the Federal Reserve Bank. Warren Buffett needs more donuts for his Gulfstream Netjet and the B of A CEO Kenneth Lewis needs more lounge chairs at his place in Florida.

    The banks are not our friends. They are essentially our enemies. We must stop throwing money at them hoping the multiplier effect will give us a new job. This is nuts. This is backwards. The media blitz we endure constantly from the banks is enough to indicate that there is a lie within their media massages.

    Have not regular citizens the ability to raise the economy? Give them a chance and they will. The banks don’t give a spit in the ocean about the regular people of America. The big banks are corporations. Businesses. They want to make a lot of money. They make their money on the backs of regular people of the USA. It is time to reverse the way the government has financed the financials.

  13. John Papola says:

    “The problem is that the Fed and the White House under both Bush and Obama decided to bail out and protect all the guys on Wall Street and the giant banks like Bank of America and Citi and Chase and Wells Fargo. “

    um… and what part of this could honestly be considered part of Laissez Faire Capitalism exactly? I think you’ve got some pretty important pieces of this puzzle very confused. The Fed is part of the government and it’s interventions are the #1 thing I oppose. I oppose it’s very existence, much as I oppose mercantilism, a defunct English doctrine whose modern proponents are largely on the left today.

    Try again after you’ve looked up what “laissez faire” actually means.

  14. Fentex says:

    For every borrower, there’s a lender.

    This isn’t exactly true, if it were there would be no reason to support specie currency because the purpose of specie currency is to force the existence of a lender for every borrower.

    Money is created in fiat economies by allowing banks to lend more than their assets cover. This is the creation of wealth in fiat economies. And it is, essentially, money being borrowed without anyone really losing wealth in the lending (so it’s having borrowing without a lender).

    The amount of fiat cash that banks have been allowed to create is part of the problem the world currently faces. Lots of cash with nothing to do but look for a bubble to inflate.

    It has been exacerbatted by banks not properly accounting for how much cash they invent in their lending – it seems probable they have routinely over-leveraged their assets (as seen by regulations chasing the amount of leverage after the fact rather than setting firm limits).

    My point is that simple rules like “For every borrower, there’s a lender.” are born of logic that doesn’t hold true in fiat economies.

    I agree that it was a mistake to prop up the failed banks. They should have been allowed to fail. Arguments that this would create problems with loss of liquidity were childishly foolish.

    Goverments with fiat currencies will never have a problem of too little liquidity (though the very reason many are wary of fiat currencies is the opposite problem of too much).

    There is too much cash, it is concentrated in too few entites, it is chasing bubbles and looking for debtors to pay interest and it’s unwillingness to disperse is choking economic activity while it’s handlers attempt to distort markets to make it’s concentrated bulk invent profit.

    Letting the banks fail would have let the cash flow and killed off much of the invented excess that still weighs heavily.

  15. Teedjay says:

    @John Popola:

    “We tried Keynesianism and intergalactic debt for years now. It’s failed. Time for the old time fiscal religion that was in play during the 1950s and prior.”

    During the period 1945 – 1973 governments around the world adopted Keynesian policies and the results was the greatest economic expansion of all time (aka the “Golden Age of Capitalism”).

    A key part of this expansion (at least in the US) was the New Deal welfare system. This provided Keynesian “automatic stabilizers” that provided counter-cyclical fiscal policy in times of recession.

    The 1950s were a time of high growth precisely because of Keynesian policies.

    The reason growth is currently stagnant in much of the Western world is because many governments are implementing pointless austerity measures at the worst possible time.

  16. John Papola says:

    “During the period 1945 – 1973 governments around the world adopted Keynesian policies and the results was the greatest economic expansion of all time (aka the “Golden Age of Capitalism”).”

    I assume you don’t include the United States in this statement and I find it, um, curious, that you stop the clock at 1973. Could it be because the 1970’s saw the full revelation of a inflationary recession around the world due to those Keynesian policies?

    But lets back up.

    In 1945/46, as the US demobilized, nearly all young Keynesian economists were screaming that we’d go into a depression if government spending collapsed and the troops all came home. Here’s the late Paul Samuelson:

    “were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.”

    This was the consensus. It was shockingly, embarrassingly wrong. The very OPPOSITE happened. Government spending DID collapse so that in 1945, total government spending was $118 billion and in 1947 it was $57 billion. 48%!!! How about unemployment? in 1946 it was 3.9% and in 1948 it was 3.8%. So spending collapsed, millions of americans were fired from the armament jobs, ten million came home from abroad… and the economy did great, even as the federal government ran a SURPLUS in 1947, 1948 and 1949.

    Truman and Eisenhower did NOT follow Keynesian policies. Starting the clock on the “keynesian age” in 1945 is dead wrong, at least for the largest economy on earth. Oh, and war spending and destruction isn’t “stimulus” even if Paul Krugman repeats that evil fraud every time his lips move. Wars destroy wealth. Drafts are not a cure for unemployment anymore than slavery would be.

    The first time that Keynesian economic truly reached the level of policy makers was in the 1960s with LBJ. The result was nearly an immediate increase in deficits and inflation.

    Look at the chart:
    http://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/

    The application of Keynesian economics and it’s nonsensical “multiplier” nonsense where deficits pay for themselves with growth even if you’re fighting a war with the money NEVER worked in the US. All it did was produce inflation and then recession with inflation, which Keynesians still claim, blindly, is impossible because of the “output gap”. So in one decade, the world is thrown into a inflationary mess. That’s the “keynesian age”.

    Here’s two other examples of Keynesianism being falsified.

    The US experienced a VERY deep recession in 1920 and it was over quick even as government policy followed a massive “austerity” program. Here’s economist George Selgin:

    “In many respects the boom-bust cycle that started in April 1919 was typically “Hayekian”: during the boom year ending in April 1920 the Fed held its rediscount rate at 4 percent despite rising money market rates. Commercial banks took advantage of the low rate–as they’d actually been encouraged to do by the Fed–by borrowing from the Fed in order to re-lend at a profit, causing bank loans and investments to increase by just over 25 percent. General prices, and prices of commodities and land and other factors of production especially, in turn rose more rapidly than they had since the Civil War, exacerbating a gold drain that had begun with the armistice. Under the circumstances a reversal was only a matter of time.

    When it came, the reversal was both sudden and sharp. Commodity prices tumbled from an index value of 248 in May 1920 to one of just 141 the following August, while consumer prices witnessed their greatest rate of deflation ever. Businesses were unable to pay their bills, industrial production fell by an unheard of 30 percent, and almost 5 millions workers lost their jobs, bringing the unemployment rate, which had been less than 2 percent, to just below 12 percent. Yet by August 1921 recovery was well underway. What’s more, it was so swift that by the spring of 1923 unemployment had given way to a pronounced labor shortage, while industrial production reached a new peak.”

    http://www.freebanking.org/2011/08/18/an-austere-recovery/

    Sure sounds like the success in 1946.

    Then there’s Canda’s amazing fiscal reversal. Starting in 1997, Canada SLASHED spending under the very same pressure we face now over being downgraded and overburdened with debt. Their debt to GDP ratio went from 70% in 1996 to 30% today. Unemployment during the late 90s FELL!

    read all about it:
    http://mercatus.org/sites/default/files/publication/Canada's%20Reversed%20Budget.Henderson.5.5.11_0.pdf

    Then, of course, there’s our current mess and the prediction for unemployment by the administration vs. the reality. “It would have been worse” is a nonsense, non-science assertion made by hacks fiddling with computer models.

    These are the ACTUAL facts and the actual record for Keynesianism.

    But hey, if you want to hold on to this ludicrous, falsified, totally defunct rehash of Thomas Malthus’s “underconsumptionist” doctrine, be my guest. In the real world, savings are the vital source of building productive capacity for the future (aka “investment”), wars and waster are destructive and wasteful, and we would all be POORER if the US dumped trillions into a military buildup, just we were all very poor during WWII when war spending crowded out basic material wealth and you couldn’t buy new cars or appliances.

    But yeah, throw in with this clown hoping for a fake alien invasion:

    (http://youtu.be/E1Fzzs7oVaA)

  17. John Papola says:

    Oh… and that Keynesian spending experiment in Japan after their inflationary bubble burst sure doesn’t support the doctrine either. Trillions of yen… and all they got was cement and debt so crushing that it’s crowding out everything else.

  18. Jon Taplin says:

    First off, it’s nice to see some of the regulars back at the discussion and some new faces too.

    Now to John Papola- There is so much wrong with your commentary that I almost don’t know where to start. First on short selling. I’m afraid I’m going to have to pull rank on you, because I spent four years as an investment banker at Merrill Lynch. What is happening in Europe is called “Naked Short selling”, essentially buying insurance on the failure of Greek or Portuguese bonds YOU DON’T OWN. That is not the classic stupid buyer/aggressive seller your perfect market guru’s talk about.

    Now on to the bigger picture of Keynes vs. Hayek (your life’s obsession) :) To say that Eisenhower abandoned Keynesian policies in the 1950′s is absurd. Government spending on the Military and on the Interstate Highway system was extremely Keynesian. In fact it was named Military Keynesianism. The fact that even the Interstate Highway system was named the Dwight D. Eisenhower National System of Interstate and Defense Highways, shows that Ike was able to use Republican anti-Communism to get the Congress to spend $425 Billion on a public works project!

    As to our current mess, Roublini is right. Read the quote from my original post.
    “Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.”

    American firms are sitting on $1.5 Trillion of cash. There reason for not spending has nothing to do with access to capital. They are drowning in capital. It is that we are in a potentially deflationary environment (which you and I have been arguing about for 3 years). If demand is slackening, why would you ever build new plant?

    The Republicans have no answer for this mess. But politically President Obama is in a bind, because the idea of a $100-200 billion stimulus will never get past a Republican party convinced that Federal stimulus is useless. So I have a way to turn this issue around. The President should heed the words of Justice Brandeis when he defended FDR’s attempts to try local experiment in the Depression. Brandeis wrote, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” The President should propose that the Federal Treasury should send to the states unrestricted block grants for the sole purpose of fostering 50 different experiments on how to get our country back to work. Each state’s grant would be a percentage on how much was collected from that state in Federal taxes. The governors of the states would be encouraged to put the money to work immediately repairing schools, police stations, roads and bridges. In nine months all the governors would meet at the White House to share best practices. What worked; what didn’t work.
    >

  19. BobbyG says:

    ” But politically President Obama is in a bind, because the idea of a $100-200 billion stimulus will never get past a Republican party convinced that Federal stimulus is useless.”
    ___

    What Mitch McConnell et at are utterly, consistently clear on has nothing to do with the arguable economic “utility” of another stimulus effort. The economy must get worse so Obama can be Necklaced with it.

  20. Teedjay says:

    @John Papola:

    “This was the consensus. It was shockingly, embarrassingly wrong. The very OPPOSITE happened.”

    Paul Samuelson was indeed wrong about the post-WWII economy. However Keynes himself rejected the idea of post-war stagnation because he believed that the (then relatively new) social security would mean that saving would be lower and hence consumption would be higher. (Although I’m not sure of the relevance of this anyway).

    “even as the federal government ran a SURPLUS in 1947, 1948 and 1949.”

    Well yes. Keynesians advocate running surpluses in good times, and deficit spending my governments in recessions.

    “Truman and Eisenhower did NOT follow Keynesian policies.”

    As Jon says, they built the interstate highway system!

    I note you have not attempted to argue against my point about welfare and Keynesian automatic stabilizers. I’ll chalk that up as a win :)

    As to the point about stagflation: the inflation of the 1970s was caused by a combination of the oil shocks, the failure of the grain harvest in the USSR (thus increasing purchases of grain by the Soviets), and the fact that the US government had dissolved the primary commodity buffer stocks they had used to maintain price stability up until the late 1960s. As prices rose unions demanded higher pay and an inflationary spiral began.

    Finding the right balance between sustaining demand and causing inflation is tricky, but in a recession your problem is *de*-flation not inflation!

    Attacking Paul Krugman for pointing out that WWII had a stimulative effect on the economy is a little disingenuous. Krugman has made it clear he views war as wasteful and economically destructive, his point is that WWII is an object example of how Keynesian stimulus can work.

  21. Kevin Jones says:

    Good points Bobby! I fear we are at an impasse that with no real solutions in play. We cannot hide our collective heads in the sand any longer…we, the public have got to accept blame for our part in this mess. As long as John and Jane Q public keep buying Chinese products, US businesses have no real reason to open manufacturing plants here. We have for far too long bought cheaper and cheaper, looking for that next great deal, all the while purchasing ourselves out of jobs! We have all witnessed the mass migration of our jobs overseas…now that we have even less purchasing power, the masses are looking for even cheaper products, none of which are made in the US! Round and round we go…pointing fingers and helping to enrich the Chinese! Go USA!

  22. Martin Pitts says:

    Avoiding a morass of more specific criticism, one central question comes to mind from these posts. What macro-model for the US economy must be formed in order to go forward with vigor in the coming decade and beyond? Jon’s suggestion for the federal block grants sounds like a good place to start. How can these be carried out? The effects of programs like those are not short run. Not much will show up in the one year time line. And how many nut job flea party Governors are out there now… like that guy down in Florida. Those types will take the money and deposit it in offshore accounts. But the essential idea is sound and doable. And risking a California Chauvinism accusation, the grants would certainly benefit the more enlightened states like ours.
    In addition to the individual state grants maybe the President could raid his black ops budget, and pour some more money into DARPA and other advanced research like an NIH program to develop new creations in cellular and molecular biology.

  23. Alex Bowles says:

    Here’s an interesting post from Credit Writedowns, pointing out the correlation between serious unemployment and housing bubbles.

    Again, while demand is the key factor holding back employment growth, it seems these charts are telling a story of structural issues holding back that demand. To my mind, these charts speak to the over-riding importance of high private sector debt and deleveraging after a credit bubble. This has not been a garden-variety recession.

    @Kevin – I don’t know about this “accepting blame” nonsense. Personally, I see no reason for millions who have no direct engagement with self-dealing investment banks, hopelessly conflicted credit ratings agencies, or the mindblowingly reckless insurance of securities to accept blame for a massive control fraud aided and abetted by a regulatory structure over which non-partisan voters have lost all meaningful control.

    But what this does indicate is that people (broadly speaking) are doing what they can to get out of this mess. In that sense, they’re a hell of a lot more focused, rational, and sensibly committed than the idiots in the financial sector who created this mess, and the equally witless policy makers we’ve been expecting to fix the problems expediently.

    What both those groups have in common is a pathological focus on the very short term. whether it’s the nightly news cycle, the quarterly return, or (at most) the next election, none of these people have the slightest commitment to long-term projects. And my point is that paying off a large pile of debt is a long-term project. In that sense, there’s a huge – and growing – gap between the priorities of the financial and political classes, and the increasingly singular priority of people in general.

    So regardless of how ill-advised racking up all that debt may have been, the commitment to pay it off – especially in the absence of any signs of intelligent life from DC – is very, very smart. And there’s widespread consensus on this score, being expressed not so much in what people are saying, but in the way they people are actually behaving. Even the lunatics in the Tea Party, whose strangling of the public sector is very badly timed, can been seen as expressing the right anti-debt sentiment, even if their chosen target is exactly wrong.

    All of this comes back to the highly dysfunctional patterns that are produced by excessively concentrated capital, which Fentex summed up beautifully.

    There is too much cash, it is concentrated in too few entites, it is chasing bubbles and looking for debtors to pay interest and it’s unwillingness to disperse is choking economic activity while its handlers attempt to distort markets to make it’s concentrated bulk invent profit.

    Deleveraging is, in essence, a highly decentralized, bottom-up attack on this situation exactly, like an immune-system response to a dangerous pathogen. Presently, it’s getting less than no help from DC, in that DC seems hell-bent on preserving this status quo. So the fever continues. And it going to keep continuing until that debt is manageable. If the job market remains terminally insecure, then the amount of debt considered “manageable” approaches zero. Indeed, it shoots past zero and into the black in the form of personal savings. The whole “keep enough cash on hand to survive three months” rule of thumb is ancient history. After the shock we’ve been through, I suspect most people won’t feel secure with less than 9-12 months reserves on hand. Given that the vast majority of Americans have nothing remotely close to this, it’s safe to say that nearly every committed debt-repayment effort will become a concentrated savings effort.

    In other words, limited demand will persist long after all the debt is gone. The damage is now deep enough to shape an entire generation. The real problem is the continued existence of the Bubble Factory. Too many people know in their bones that the Obama administration utterly failed to restrain the psychotic banking sector in any meaningful way. Maybe the rot in the Senate is too deep for this to have ever been a realistic possibility, or maybe not. What matters is that the fuckers who did this end up even richer, even more politically influential, even more dangerous, and everybody knows it.

    Four years after the meltdown started, and we are all still extraordinarily exposed. Indeed, we feel more at risk than ever, having spent the last three years seeing just how bad governance in this country has become. Protection – not prosperity – has become the overarching concern.

    If our policy makers took the very simple and intelligent steps of removing bankruptcy exemptions from mortgage and student loan debt, and reversed the 2005 law the made discharging credit card debt much harder, all of this would turn around very swiftly. For one, huge amounts of debt would simply vanish. Some of this would be by order of bankruptcy judges, but most would come from lenders who were suddenly very motivated to keep people from filing for protection. That would accelerate the deleveraging dramatically.

    It would also throw some of the biggest lenders into insolvency – which is the whole idea. Proper exposure to bankruptcy law would correct one of the major (and majorly unreported) flaws that produced this debt bubble in the first place. It would also trigger Federal processes designed to unwind broken banks in an orderly fashion. The log jam would start to clear. Yes, a lot of stock and bond holders would take it on the chin, but that, too, is a good thing. The benefitted not from making impressive investments in industry or society, but by rigging the mechanisms of social management to benefit themselves to the lasting detriment of the larger economy. As Fentex noted, they’re not using this capital to invest in markets, but to invest in the distortion of markets.

    Above all, it would restore faith that the government is working for its people, not against them. Presently, we’re living in the financial equivalent of LA in the 1970′s – choking on fumes produced by industries and practices that are allowed to freely pollute the entire ecosystem. Restoring the fearsome power of bankruptcy judges would do more to clean up this environment than any budget increase at the SEC, or even the establishment of and independent CPFB.

    But of course, this will never happen. Not under the current closed and gerrymandered system dependent on the toxic trade between special interests and the legislators who can endlessly tweak the law and the tax code in their favor. So the fever continues its work while the patient remains weak and incapacitated. Only the more tectonic shifts now underway promise to sort this out. But it may take another decade for things to work themselves out this way.

    In the meantime? Onward through the fog. The good news is that a critical mass of people are responding smartly, if grimly.

  24. John Papola says:

    Okay, here’s comes and all-in-one for y’all.

    Fentex,

    Money creation doesn’t in and of itself produce debt. It can trick people into taking on more debt when it lowers interest rates by padding the supply of loanable funds in the banking system. But that’s still not quite direct debt production. Federal Reserve Notes are not debt instruments.

    Individual banks don’t create new money and pure investment firms which don’t offer demand deposits don’t even create money systemically. If you deposit $1000 in the bank, they can only lend a portion of that out. They can’t lend more than that. But, as I’m sure you know, that, say, $900 which is lent may be deposited in another bank a portion of which may be lent. So MULTIPLE banks can increase the money supply via the money multiplier. But this is constrained by two factors: base money supply and reserve ratios. If that first $1000 wasn’t new money, then it came from somewhere (a mattress, another bank, the same bank). In the mattress case, it may be introducing a short run inflation to match the deflation when it was shoved in the mattress. No big deal. If it came from a bank, though, the total system did NOT increase the money supply. Only the Fed can do that by creating more base money. Now, if the banking system as a whole lowers their reserve ratios, there can be a one-time increase in the money supply.

    So the money multiplier can create new debtors, but there ARE lenders: the banks and their interest-seeking depositors. The great problem is that we have a system of government protections of the banks which reduce or eliminate their need to compete on soundness, such as FDIC and a history of creditor bailouts. The big banks also have come to assume, rightly, that Uncle Sam will save them. This is our biggest problem I think. But I will say that these money and banking issues are very, very complex. I don’t understand them all, nobody does or can and am still studying to get better.

    Taplin,

    What is happening in Europe is called “Naked Short selling”, essentially buying insurance on the failure of Greek or Portuguese bonds YOU DON’T OWN.

    What exactly are you attributing to Naked Short Selling with regard to Europe? Could you provide your evidence for this claim, because financial markets are pretty big and claiming that price moves (if that’s what you’re talking about) are attributable to one group demands evidence.

    That is not the classic stupid buyer/aggressive seller your perfect market guru’s talk about.

    You still don’t get where I’m coming from or the Austrian tradition, do you Jon? NO Austrian economist talks about “perfect markets”. Zero. None. “Perfect” is a nonsense term. Austrians focus on uncertainty, entrepreneurial calculation in a world of uncertainty and the role of relative prices on marginal choices. It’s either time to study up on this stuff so that you stop making these chicago-school attacks on me in ignorance.

    Government spending on the Military and on the Interstate Highway system was extremely Keynesian.

    This statement is nonsense. Do you simply want to call ALL government spending “keynesian” and thus eliminate the concept of what Keynesian economics actually asserts? Keynesianism is a very specific, technocratic framework that works exclusively on national aggregate data. So I’ve presented the aggregate data. Government spending after WWII COLLAPSED. Those numbers include ALL spending. The IHS is pissing in the bucket of the total government spending pool AND it was PAID FOR BY GAS TAXES, which take money OUT of the economy. $425 Billion over 35 years paid for by taxes is NOT “keynesian”. Sorry. Keynesianism is about using DEFICITS to offset increases in private sector saving if lending and investment spending don’t stabilize nominal spending. The IHS and cold war military spending is just nonsequitor and irrelevent.

    Read James Buchanan’s “Democracy in Deficit”. Keynesianism didn’t become active policy until the 1960s. That’s the simply facts of history.

    As to our current mess, Roublini is right. Read the quote from my original post.
    “Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand…. If demand is slackening, why would you ever build new plant?”

    Now you’re sounding like a Keynesian complete with the over-aggregated analysis that blinds you to everything that matters about an economy. Talking about the activity of ALL firms as a single blog is useless non-information. SOME firms are facing slack demand, which means they should shrink. Other firms, such as all of silicon valley, food, energy and the entire healthcare sector, are seeing demand spiking like crazy. Hence, we STILL have high energy prices, healthcare prices rising at double-digits and food prices rising. Keynesianism acts as if you can treat the whole economy as a blob and ignore the different sectors. This renders it useless. It’s not economics. There are no people or prices in Keynesianism. It’s just statistical handwaving.

    And even if you look at aggregate data, we’ve got strong wage inflation on TOP of asset price inflation AND general CPI inflation (thought the latter is low). http://blogs.reuters.com/felix-salmon/2011/05/19/should-the-fed-be-worried-about-wage-inflation/

    So to talk about being in a “potential deflationary environment” is pretty bizarre. The fact of the matter is, much of the Fed’s massive expansion in the monetary base has fueled emerging market speculation, international capital flows and asset bubbles. CPI is a poor measure to follow and nobody should look at just one measure anyway. “Core” CPI is just a fraudulent metric in it’s use. Commodities aren’t simply “volatile”. They’re also rising for years on end.

    Then, of course, there’s the fact that CPI using a weird metric for housing prices: monthly equivalent rents. This is a preposterous idea which basically amounts to guesswork. How many houses are rented where you live, Jon? Is there a market rental price of any consequence? Nope. So, instead, this fake fudge factor leads the CPI to underestimate inflation during period of rapid housing price rises (since those rental calcs to keep up) and UNDER estimate inflation during rapid housing price declines. Hmmm… that sure sounds relevant to our current decade of macroeconomic activity doesn’t it?

    “The Republicans have no answer for this mess. But politically President Obama is in a bind, because the idea of a $100-200 billion stimulus will never get past a Republican party convinced that Federal stimulus is useless.”

    We’ve seen what the DC clowns and their so-called “stimulus” does, Jon. That’s the past 2 years. The administration said that 800 billion dollar stimulus would reduce unemployment. It didn’t. Unemployment is higher now than their “do nothing” worst case, and MUCH higher than when the stimulus was passed. Why on EARTH would ANYONE believe that more stimulus would have any impact at all? Is there some magic number where the stimulus goes from having no effect at all to being parabolic? The results are in.

    “The President should propose that the Federal Treasury should send to the states unrestricted block grants for the sole purpose of fostering 50 different experiments on how to get our country back to work.

    There’s another way to do this. Rather than borrow from all to give to all, which is ludicrous, just radically CUT the federal government and devolve power and taxing potential back to the states. Same effect. The states can raise taxes and “experiment”. I welcome that challenge as a new Austinite. So far, the Texas experiment has shown the way: http://www.politicalmathblog.com/?p=1590

    The REAL data tells the tale, not Krugman’s pathetic all out lies.

    Bobby G,

    Did you know that the ratings agencies are a politically-protected cartel thanks to SEC regulations and many other regulations while require the acquisition of AAA ratings for various assets? They aren’t creatures of a competitive market. They’re corporatist scum.

    Teejay,

    Your analysis of the stagflation is bizarre. For starters, the US had price controls and shortage on oil. But that aside, a rising price for one product will simply reduce people’s purchasing power for other products. It doesn’t cause inflation in and of itself. This is some defunct and long-abandoned “cost-push” nonsense. Inflation is a rise in the OVERALL price level. For that, you need monetary forces. So if people in the aggregate were getting hit with higher gas prices but were STILL able to spend just as much on other goods, that means that there was money creation to feed that nominal spending.

    More importantly, though, the rapid pace of inflation and aggregate demand did NOT, as keynesianism proclaims, eliminate unemployment. There’s a reason why crude fiscal Keynesianism was, at least in academia, sent to the woodshed after the 70s.

    Also, would you care to explain where sky high oil prices today have not produced rapid CPI? If your “cost push” analysis had any economic merit, we should have seen rapid CPI growth over these recent oil price boom periods. We didn’t. Cost-push is nonsense.

    And, um, how exactly do explain the steady rise in inflation starting 1966 up to 1972? No oil shock there.

    I’ve addressed the bunk argument about the IHS. Keynesianism is about aggregate spending. I provided the aggregates.

    Attacking Paul Krugman for pointing out that WWII had a stimulative effect on the economy is a little disingenuous. Krugman has made it clear he views war as wasteful and economically destructive, his point is that WWII is an object example of how Keynesian stimulus can work.

    His analysis is insane garbage. Wars destroy wealth. The US standard of living during WWII was abysmal. He can equivocate about not liking war all he wants, but his record is clear. He said that he through 9/11 would be a stimulus to the economy. He said that Iraq was a stimulus to the economy. Summers said that the tsunami could be a stimulus to Japan. Now he’s hoping that someone will fake an Alien invasion.

    This is ludicrous, evil crackpot nonsense. Destroying stuff makes us poorer. Period. Make-work wastes resources and makes us poorer. Period. Krugman deserves every arrow I can fire for his horrifying intellectual support for destruction and warmongering as stimulus.

    Kevin Jones,

    “As long as John and Jane Q public keep buying Chinese products, US businesses have no real reason to open manufacturing plants here.”

    I’ll let the far-from-libertarian San Francisco fed smash this fake common knowledge for me:
    http://www.frbsf.org/publications/economics/letter/2011/el2011-25.html

    Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label.

  25. BobbyG says:

    John -

    “Bobby G,

    Did you know that the ratings agencies are a politically-protected cartel thanks to SEC regulations and many other regulations while require the acquisition of AAA ratings for various assets? They aren’t creatures of a competitive market. They’re corporatist scum.”

    This is some kind of INSIGHT you’re purporting to lay on me?

    Apropos of this, regarding regulators and CRAs:

    “Opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.”

    - Yves Smith

  26. John Papola says:

    Teejay,

    Keynes himself rejected the idea of post-war stagnation because he believed that the (then relatively new) social security would mean that saving would be lower and hence consumption would be higher.

    You refer to this idea as if it isn’t horrifying. Consumption is, um CONSUMPTION. It is the using up of wealth. Consumption does not create wealth. The fact that Keynes may have said this (and it sure sounds like him) only highlights that he had an absolutely ludicrous and destructive idea about the most basic elements of growth and prosperity: savings. It also highlights the reason why his nonsense fake-economics is utterly incompatible with any concept of environmentalism or sustainability.

    Keynes saw any looking toward the future or planning and saving for the future as an evil. It was all about the short-term circular flow of spending for him. But where, exactly, does one get the means to build a company? I’m in the building stage of my company right now. We don’t have revenue coming in because we’re just getting started. We don’t have worries about “demand” because we aren’t yet producing our product. Nobody can demand what does not yet exist.

    The creation of new capacity for serving people comes from SAVINGS. Keynes reveals the full disfunction and delusion of his bankrupt “economics” with your reference.

  27. John Papola says:

    So long as “regulation” is talked about in 1-dimensional terms where you can have “more regulation” or “less regulation”, the discussion is basically worthless.

    Is it “more regulation” or “less regulation” for the Basil II rules to reward holding mortgage backed securities over other financial assets by setting lower capital requirements?

    Is it “more regulation” or “less regulation” for the Fed to run an expansionary monetary policy which drove down interest rates below the natural rate were the supply of savings not padded with new dollars?

    Is it “more regulation” or “less regulation” to have government sponsored enterprises buying up and securitizing sub-prime debt on a large scale in collusion with organizations like Country Wide while taking advantage of their “government sponsorship” and clear congressional protection to do all this at lower-than-market interest?

    Is it a problem of “more regulation” or “less regulation” that state pension funds and countless other investors looking to get a yield in the Fed-created low rate environment ran for mortgage assets which the government favored, rewarded with lower capital requirements, heavily subsidized and inflated into a bubble asset?

    Now, all of what I’m saying is looking back to the causes of our financial panic prior to 2007 or 2008. But many were seeds planted right around this time last post-bubble. It was in weak post tech-bubble recovery that the Fed decided to keep money ultra-cheap, with active cheerleading from Keynesians like Paul Krugman, who thought the fed should “replace the tech bubble with a real estate bubble”.

    If you want to get rid of the bubble factory, have a look at what actually created it: the Fed and it’s cartel of bailed-out banister babies with their revolving door to DC.

    Some of us thought these parasites should have been allowed to fail in 2008. I don’t think there’s a single demand-obsessed Keynesian who was vocal for that.

    You’re either for the bailouts and the banksters, or you’re against them. If your team is on the record as saying that the biggest problem was the failure to bail out Lehman, you’re Team Bankster. That’s the record. Hiding behind technocrat macro-mumbo-jumbo can’t escape that.

  28. John Papola says:

    Let me just offer something to balance things out.

    Once can be opposed vehemently to Keynesianism, respect Austrian economics, and ALSO be open to some kind of social safety net as a second-best compromise (or even embrace it).

    My grand compromised would go like this:

    Provide every adult American citizen a guaranteed minimum income immaterial of private income. Let’s say, $12k / year. That’s around 2.7 Trillion per year.

    in exchange, we do the following:

    Eliminate all minimum wage laws.
    Eliminate social security, medicare, medicaid and welfare, school assistance. Essentially the entire current wealth transfer apparatus.
    Eliminate ALL corporate subsidies. ALL. no more green boondoggles or bank bailouts.

    So that’s the social safety net reform and it destroys a monstrous central planning operation that has ruined healthcare in the process. How do we pay for this?

    Well, we also eliminate the following:

    The federal income, payroll, capital gains and corporate taxes and replace them with a 20% flat federal sales tax on all transactions. No exceptions. No loop holes.

    There sheer amount of cost and complexity this would lift from entrepreneurs would be amazing. No more annual filing. No more income statements to the government.

    Is the math on all of this right? I’m not sure. But it’s a broad-strokes grand compromise to provide a safety net while break the back of the special interest concentrated benefits and dispersed cost nightmare.

    I can support this type of compromise while still recognizing that Keynesian macroeconomics is witchdoctor pseudo-scientific BS.

  29. Teedjay says:

    ” We don’t have worries about “demand” because we aren’t yet producing our product. Nobody can demand what does not yet exist.”

    But presumably when you get your company up and running you’d like people to (*ahem*) consume whatever goods and services your business provides?

    Let’s be clear. One person’s consumption is another person’s income. If aggregate consumption falls, aggregate income falls. A fall in aggregate income is a recession. Recessions are bad.

    What Keynes showed is that saving is not automatically converted into investment in real capital assets. This is because people can “save” their income in liquid financial assets (cash money, checking accounts, T-bills). These liquid financial assets are not *automatically* converted into real investment. Yes, banks lend out deposits to businesses that in turn purchase real capital assets, but at the moment we see banks focussing more on rebuilding their balance sheets rather than lending to small businesses. And in times of economic weakness businesses invest less anyway.

    The result can be high involuntary unemployment. Being involuntarily unemployed is profoundly unpleasant. Keynes recognised the evil of this short term unemployment and advocated government spending to provide jobs during recessions.

    See also: http://en.wikipedia.org/wiki/Paradox_of_thrift

  30. Morgan Wastrel says:

    John Papola offers quite a compromise- an exquisitely well balanced equation. Deeply thoughtful.

    12K a year! As Randy Newman sang in his epic song, Sail Away, “It’s great to be an American.”

  31. John Papola says:

    Teedjay…

    Thanks for the intro-macro overview. Got it. Been there, done that.

    The leap from the concerns of one firm to the economy as a whole that you (and Keynes) are making is a fallacy of composition. Moreover, you (and Keynes) are making no distinction or even acknowledgement in the difference between nominal activity and real activity.

    If aggregate demand falls due to the hoarding of cash or the failure of the financial institutions to lend (say, because there are zombie banks propped up by the Government that should have been liquidated and are instead acting as capital sponges)… you get deflation.

    So what’s the problem with deflation? Well, there doesn’t need to be any problem. There are long periods of economic growth happening amid deflation, in fact, the growth has and should CAUSE gentle deflation. In that instance, the firms who are increasing their productivity anticipate their increased output and lower prices (and are, in fact, SEEKING to do that in the first place). So the late 1800s saw steady economic growth with some periods proving to be the strongest sustained growth in our history, and were experiencing a fall in the price level.

    But deflation driven by inelastic currencies amid hoarding or a government-wrecked banking zombies makes it hard for firms to know what’s happening to prices overall. This is money illusion. Is reduced nominal demand going to be offset by reduced cost of living and input prices? Is it a change in customer preferences that should warrant a new business strategy? Are people just freaked out and will come back to your business when the uncertainty ends? If so, what is causing the heightened uncertainty for your customers?

    Increases in the demand for base money by people or banks has a solution: increases in the supply of base money. But paying Joe to dig ditches with money borrowed from Harry does virtually NOTHING to change the fact that Bank of America’s balance sheet in under water nor that Jerry’s store is seeing falling demand due to his customers being freaked out.

    Keynesianism sandblasts away EVERYTHING above under a information less blob of useless aggregate data. Saying “total spending = total income” is tautological film flam, not economics.

    Guess what, if you get deflation and price and wages are allowed to adjust downward, the recession ends as entrepreneurs see input prices fall below output prices and profitability is restored. That is exactly what happened in 1921 after an industrial crash that was worse than 2008/09.

    So the REAL linchpin in Keynesianism is the assumption of “sticky wages and prices”. Well, if any keynesian economists, especially Paul Krugman, actually believed their theory at all, they’d be the loudest advocates of policies to reduce wage and price inflexibility. Instead, you have Paul Krugman DECRYING that Texas has wage flexibility (and correspondingly higher job creation). Sticky wages induce unemployment. Krugman used to understand and write about this when he was an actual economist. Now he’s not an economist. Any other commentator who pushes for legislated higher nominal wage rates AND keynesian policies is a liar and fraud.

    None of this sticky wage stuff eliminates the fact that Keynesianism is blind to the structure of production and relative prices. It fails even with flexible prices on the grounds of socialist calculation.

    GM saw demand collapse. How does the government know that the demand will return with a recover? How do they know that? Investors thought otherwise and still do. Why were/are they wrong? Why should I trust the same clowns force-feeding us corn-based ethanol to pick winners and losing and “stimulate” them? Central planning doesn’t work, guys. Ignore prices at your peril.

    Krugman and the rest will claim that where the spending goes doesn’t matter, but this is true insanity. Build up for Alien invasions won’t make us a wealthier society. Even a child could understand that.

    Keynesianism gets so utterly lost in short run nominal nonsense that it totally ignores the fact that economics is ultimately about REAL RESOURCES. Land, Labor, Equipment, Time. Nominal prices are a fluttering veil over top of this reality, but Keynesians never see through the veil nor care to look. They hand wave this away through mistaken use of aggregates about “slack capacity” as if there is a blob of “capacity” that can produce “widgets”. Sorry, that’s not economics. That accounting stats pretending to be economics. In reality, some sectors are making full use of their capacity and others aren’t. Some are seeing prices rise while others fall. Averaging those together doesn’t tell us anything more about the sustainability or health of an economy than telling you two men’s height and weight and nothing else.

    Lastly, the fact that the government CAN borrow at very low rates of interest now does NOT mean that it SHOULD any more than the fact that sub-prime borrowers COULD borrow at low interest rates but clearly SHOULDN’T have.

  32. John Hayden says:

    There must be a pony buried in this room. There has to be.

  33. Morgan Wastrel says:

    In America you’ll get food to eat
    Won’t have to run through the jungle
    And scuff up your feet
    You’ll just sing about Jesus and drink wine all day
    It’s great to be an American

    Ain’t no lions or tigers ain’t no mamba snake
    Just the sweet watermelon and the buckwheat cake
    Ev’rybody is as happy as a man can be
    Climb aboard little wog sail away with me

    Sail away sail away
    We will cross the mighty ocean into Charleston Bay
    Sail away-sail away
    We will cross the mighty ocean into Charleston Bay

    In America every man is free
    To take care of his home and his family
    You’ll be as happy as a monkey in a monkey tree
    You’re all gonna be an American

  34. Roga says:

    Missed you Jon! Great to have you back!

  35. Anonymous says:

    I’m posting this link to an American Prospect piece by Robert Kuttner, just to see what it’ll do to the tempers of the ‘vehement’ anti-Keynesians. http://is.gd/KLBucS (PDF)

    Economic history is filled with bouts of financial euphoria followed by painful mornings after. When nations awake saddled with debts incurred to finance wars, episodes of failed speculation, or grand projects that haven’t paid off, they have two choices. Either the creditor class prevails at the expense of everyone else, or governments find ways to reduce the debt burden so that the productive power of the economy can recover.

    It goes on to note that

    Bankruptcy ingeniously provides orderly relief from past debt so that the productive enterprise is not needlessly destroyed…American business values the bankruptcy system for its own purposes, even though investors occasionally take a bath. But the same business elite looks askance when others—homeowners, small nations, the entire economic system—seek relief from punishing and economically perverse debt.

    The conclusion is blunt.

    Debt politics pits the claims of the past against the productive potential of the future.

    The supporting examples it provides are especially good, if sobering. The first is the catastrophe that followed the Treaty of Versailles. The second is the much more intelligent follow up to WW2.

  36. Alex Bowles says:

    Above comment was mine. Anonymous post was inadvertent.

  37. John Papola says:

    Alex,

    It was the Fed and Treasury which have acted both now and for decades in support of creditors, not any decentralized market activity. The people which compose “the market” were going to let the bad banks fail or go bankrupt and see their creditors take a haircut. It was the might state which ensured (and continues to ensure) that these clowns got PAR on their debts. Russ Roberts documents the long history of the US Fed and Treasury bailing out creditors at par with far more rigor and honesty than this article.

    http://mercatus.org/publication/gambling-other-peoples-money.

    If I didn’t know better, I would think that Robert Kuttner was advocating a let the insolvent firms fail and uphold the rule of law approach, as have I and the rest of those interested in classical liberal values and economics. But I know that he’s not. It’s a populist scam call for more inflation, nothing more. It’s not even Keynesian as I’ll discuss below. He seems to agree with Keynesians like Brad DeLong that the government should have bailed out everyone INCLUDING LEHMAN. Funny thing how that Keynesianism tends to lead to advocating creditor rescues and socialization of losses. Kinda undermines the whole underlying bias of the piece. And, um, the “beneficial” fake bankruptcy of New GM is looking like a punishing socialization of losses to me, not a success. Pardon me for not buying hook-line-and-sinker the doomsday predictions of people who’ve never gotten a prediction right.

    Now on to the sloppy history of economics embedded in this stinker. For starters, the late 1940s and early 1950s were NOT a period of easy money. A look at inflation during that period should make that obvious to anyone interested in, um, the truth. This was the “take away the punchbowl” era of Fed policy. Moreover, one cannot escape the consensus among Keynesians that a demilitarizing fiscal contraction would cause a depression worse than 1930… and the opposite happened. I’m happy to see that the writer is ignoring the very notion of fiscal stimulus. That suggests a move in the right direction and an implicit acknowledgement that it failed.

    He sure doesn’t remember how the Bretton Woods system fell apart as part of the unleashing of global inflation once Keynesian fiscal and monetary policies started to really take hold with policy makers in the 1960s. The “Keynesian Age” is 1965-1980. Not a good time. Claiming 1946-1973 for the Keynesians is dishonestly truncated on the tail and empirically wrong on the head.

    People truly interested in Keynes know that his work and writings in the 1920s, especially the excellent Economic Consequences of the Peace, was of a very different sort than his adopt-every-crank-idea-of-the-past-century General Theory, which ushered in the dark ages of Macroeconomics resurrected from the tomb of Sir Thomas Malthus. Keynes of 1919 was a largely classical economist. Keynes and Hayek, in keeping with classical macroeconomics, BOTH saw the return to par gold values of the British currency as a terrible mistake. This was hardly controversial stuff. Hume and Ricardo would have made similar criticisms.

    But outside of criticizing monetary policy lead deflation (which nearly all good economists agree is bad) Keynes was no inflationist. Not ever. In fact, if the writer actually cared about the Keynes of 1919 and what he wrote in the Economic Consequences of the Peace, he’d not DARE advocate inflation and easy money. Here is Keynes on the social terror of inflation from the book:

    Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.
    Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
    Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
    In the latter stages of the war all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as ‘profiteers’ the popular indignation against the more obvious consequences of their vicious methods. These ‘profiteers’ are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century. But they have no plan for replacing it.

    Oops. This article is populist nonsense on stilts. We might as well resurrect the zombie corpse of Willam Jennings Bryant to rehash the “free silver” inflationist movement in all it’s loopy glory. The writer wants “regulation” from the very organization that has been bailing out creditors. He wants to “democratize” money… which just means print lots of it. Nothing more.

    Pay no attention to the fact that the very people being stolen from in an inflation are millions and millions of dollar holders, pensioners, fixed-income retirement folks, etc. Keynes understood that inflation destroys the middle class and wrecks the economy. I know Keynes. This monetary crank Robert Kuttner is no Keynes.

    Alex, I thought you cared enough to do your homework on this stuff.

  38. Martin Pitts says:

    Albert Einstein once said that he gave up studying Economics because it was too hard. Bertrand Russell gave up studying Economics because it was too easy. Essentially Economics is not a science, it is an art. Just like the poor player who struts and frets his hour upon the stage from MacBeth, the trillions of words written and published in feigned confidence about the art of economics are little more than jabber for fearful fops. Smell the roses flea party people. Life is short.

  39. John Papola says:

    Economics is not an art. Sorry. Is biology an “art” because there is vast areas of unknown and complex interaction? No. Is sociology and the study of human social interaction an “art”? No. Is the study of ecosystems and natural environments an “art”? Nope. Economics is the study of human decision making in a world of scarcity. And there is actually overwhelming consensus on a vast body of economic theory and it’s repeated empirical proof: microeconomics.

    So-called “macroeconomics” is wherebthings become fuzzy and those who claim to have “models” predicting certain outcomes within two decimal points are trafficking in what Hayek called scientism. Keynesianism is largely pseudo-science, hence the failure of these economists to reevaluate their ideas after their repeated failures and failed predictions.

    While I appreciate feeling that economics is just all nonsense given the genuine nonsense spewed regarding the economy as a whole. But most of economics delivers useful insights. It’s not art. I say this as an artist.

    But hand waving

  40. Alex Bowles says:

    @JP

    WTF? The citation referred to bankruptcy law. So you go off on a tangent about inflation, The Fed, Lenin, and the kitchen sink? And skip bankruptcy altogether?

    The point is that a critical mass of household balance sheets are deep underwater, and nobody with credit good enough to get a loan wants one because of the phenomenal drag created by all those people who, in spite of declining incomes, are paying off more debt than ever – even if the rate is so slow that it will take a decade for them to get anyplace close to feeling comfortable again.

    I agree that trying to inflate our way out of this predicament is a terrible idea. And printing money for people to pay down their debts means printing a lot of money. It’s a non-starter.

    Rather, you want to wipe out the debt. If enough of this happens to wipe out the people holding the debts, that’s a nice bonus. Lord knows they’ve got it coming. But it isn’t actually the point. Nor should that be the aim.

    The aim is to restore health to the household finances of this critical mass who, for reasons that were only partly their fault, ended up holding nearly all of the bag. I actually appreciate the moral hazard arguments that critics of bailouts make. And I’m generally opposed to direct redistribution of income (if the State is going to spend money, it should – with very few exceptions – focus on shared services and common infrastructure). And that’s why I was suggesting bankruptcy courts as the preferable mechanism for ridding ourselves of this massive hangover.

    What that means, specifically, is reversing the 2005 law that made the discharge of unsecured debt under Chapter 11 much harder, and adding outstanding mortgage debt to the range of obligations subject to bankruptcy proceedings.

    This would terrify mortgage lenders. With effects that would be almost entirely beneficial in the short, medium, and long term.

    Short term, of course, is that people would see their debt levels plummet. Lenders, suddenly wanting to do anything and everything possible to keep people facing bankruptcy from going under would start renegotiating mortgages like crazy. Not just lowering abusively high interest rates, but writing off principle, so that the amount outstanding was in line with the actual value of the home. In cases where people do lose their homes anyway, they would – at the very least – be free from the hideous overhang of having to pay debt on property they no longer possess. Bankruptcy could (finally) do what it’s supposed to – let people get on with their lives while punishing lenders for making stupid, reckless bets.

    In the medium term, this would probably lead to major problems for banks holding lots of toxic paper. I say “not a moment too soon.” If the combination of voluntary write-offs and adverse judicial proceedings reduced the worst players to a point of obvious insolvency, then the established process for unwinding bad banks could (finally) kick in, passing the losses onto the shareholders, bondholders, and employees who profited the most from The Big Con.

    In the long term, the effect of this massacre (and it would be a massacre) would leave the entire lending sector exceedingly cautious about mortgage lending. In other words, the ‘self-correcting magic’ the Greenspan hung his hat on would finally be real. Only it wouldn’t be real for magical reasons. It would be real for the very pedestrian reason that lenders would (finally) be back on the hook for the loans they made. In other words, a cataclysmic event like this would restore a fundamental check, the removal of which has caused so much trouble.

    Critically, people would stop seeing their homes as ‘investments’. Rather, they’d see them as very large purchases, paid for over an extended period, with a large cash rebate made available when they eventually sell. This is sober. This is rational. This is the way it ought to be. You want to invest? Take chances? Win big? Awesome. Welcome to America. Build something new, or find someone who can. Back ‘em to the hilt. Change the world. Have fun. But don’t ruin the seat of stability and well-being for everyone. Houses are for living in, not gambling on.

    Wipe out a big chunk of the debt that’s choking this sector (and everyone exposed to it), and you can really start to put the bubble in the rear view mirror. People can live again, breathe again, relax again, have lives again. They’re no longer stuck in a virtual debtors prison. People with a lot of money can’t rely on the IOU’s they’re holding for income. Instead, they have to invest. Not in derivatives or poker chips, but in the real economy. The engine restarts.

    It’s not Keynesian stimulus, in that you’re not relying entirely on government spending gathered from taxes to get things going. But it’s similar, in that you’re relying on money that already exists to make things happen. In this case, you’re erasing claims made by the past so that the same dollars can, instead, be directed towards the future. Critically, you’re not printing money in a way that’s almost certain to trigger inflation.

    The concept isn’t new. In fact, it’s ancient. It’s called a jubilee.

  41. Martin Pitts says:

    Alex Bowles,
    Brilliant and pragmatic look at the continuing, massive social injustice of the banking and financial industry. Go to any superior court in any town in America and you finds lines of people who are being taken to court by their credit card companies and their banks. The lawyers squeeze as much money from the debtors as the courts will allow. And the courts, in turn, are overburdened and only want to clear the cases as quickly as possible neglecting justice. It is time for a “jubilee” including a manumission for the credit slaves of our nation.

    PS to Jon Taplin: Is the new chair of the President’s Economic Council, Alan Krueger, an old classmate of yours? Do we now have a mole in the White House?

  42. John Papola says:

    Alex,

    WTF? The citation referred to bankruptcy law. So you go off on a tangent about inflation, The Fed, Lenin, and the kitchen sink? And skip bankruptcy altogether?

    I read the whole article to get the full context. He walks through his bankruptcy story in order to arrive at using inflation to reduce nominal debts, which is a kind of insidious bankruptcy. This is why it ends with “we need to democratize money once again”. I read that as a call to inflate. “Cheap money and expansive investment kept America from sinking back into depression”. That’s what he wrote. It’s nonsense. That’s the article, so I responded to it.

    As to the rest of what you’re saying, there are parts of it I like (ending the view of housing as an “investment”). This paragraph is glorious and pure Adam Smith:

    Critically, people would stop seeing their homes as ‘investments’. Rather, they’d see them as very large purchases, paid for over an extended period, with a large cash rebate made available when they eventually sell. This is sober. This is rational. This is the way it ought to be. You want to invest? Take chances? Win big? Awesome. Welcome to America. Build something new, or find someone who can. Back ‘em to the hilt. Change the world. Have fun. But don’t ruin the seat of stability and well-being for everyone. Houses are for living in, not gambling on.

    Bravo, Alex. If only the American political system had any hope of allowing this realism to return (it doesn’t). But here’s what doesn’t happen:

    Wipe out a big chunk of the debt that’s choking this sector (and everyone exposed to it), and you can really start to put the bubble in the rear view mirror.

    Just to be clear, there is no “wiping out” of real debt. You can only redistribute it and eventually pay it off with new production. So what you’re saying is allow more Americans to transfer their mortgage debt to their lender. Okay. That’s not a “wipe out”. That’s a transfer. It may be a more just transfer. I don’t know. That’s a case-by-case judgement that can’t be honestly made from the top-down. It’s very hard to even think about what comes next, though, and the economic consequences are not at all clear. If we had a remotely healthy and competitive banking system, the result would be a reduction in available funds for loans to other people. So the transfer of the debt would be from current mortgage holders to potential future borrowers. I think that’s already happening right now, though as a result of the zombie bank problem. Still, it’s not at all clear that what you’re saying would lead to increased growth or opportunity for working people. Not at all. In the end, I think your approach is still built on Keynesian assumptions which I strongly reject, namely, the idea that growth and economic health is driven by consumption and that it superior to have more middle class consumers because they consume more. This is wrong and it’s embedded in you conclusion:

    It’s not Keynesian stimulus, in that you’re not relying entirely on government spending gathered from taxes to get things going. But it’s similar, in that you’re relying on money that already exists to make things happen. In this case, you’re erasing claims made by the past so that the same dollars can, instead, be directed towards the future.

    The debts are real. The true problem is that trillions in actual land, labor and capital resources were dumped into unproductive housing and consumption goods. We’re poorer now. Moving forward is going to be all about finding ways of creating and producing value for each other. Entrepreneurship and innovation is the key to paying off our debts and growing the economy overall.

    The problems of unemployment in our country are not about underwater homeowners from a demand perspective. They’re about a host of microeconomic problems from higher minimum wages to increased expected costs of higher due to Obamacare to state and local licensing requirements to zombie banks that should have (and still should be) liquidated which are currently soaking up reserves instead of lending because they are undercapitalized or insolvent. If you want to stick it to the people who screwed up, you should want for the bad banks to fail and for their supports to be fully ended. By all means go after fraud in mortgage lending. Go after it HARD. Maybe the bankruptcy changes you want to see would be a good thing. I honestly don’t know enough about bankruptcy law, the changes made, nor the moral hazard dangerous to comment much further on your recommendation.

    I will agree with you on one point for sure. To the extent that unemployment has been made worse because there are people trapped in homes that are under water and thus are less mobile, it could help to make it easier for them to declare bankruptcy and move somewhere (like Texas) where the economy is better or their particular skills are in demand. That could really help.

    You know what would also seem to help? Allowing mortgages to be recourse loans, as they have in Canada. Also, let’s end fannie and freddie and watch the silly 30 year mortgage disappear. End the mortgage tax deduction too. These kinds of reforms would go a long way toward normalizing the housing market along the “housing is not an investment” course.

  43. Morgan Warstler says:

    1. “You’re all gonna be an American”

    No truer words. Capitalism is the winning meme. Like Rock-n-Roll muzak, you just can’t get away from it.

    2. Martin, you appear to be a half-wit. For fun I might ruin your day.

    3. NONE of you answer pappy’s point, that the moment the government is used to SECURE special privileges for certain businessmen, capitalism is no longer in play, and government is AS USUAL at fault.

    The goal of older business is to gain legal advantage… this is what government should be against – with the whole of its being.

    GM, GE, and Buffett – a good government MUST cast these scoundrels aside.

    Unlike Pappy, I have no faith that government’s elected officials can be trusted on this front…. so I want laws that legal favor SMB (small and medium business) structurally – build our very house tilting into the wind of corporatism.

    4. Distributism

    Tappy (Jon), I think that part and parcel of your flirting with states’ rights – you should tie in distributism. Look it up.

  44. John Papola says:

    I think Jon, Alex and many others need to re-acquaint themselves with the some of the Left’s actual scholarship. Start with “Triumph of Conservatism” by anti-capitalist Gabriel Kolko. I’m told by friend who’ve studied the book (I haven’t read it yet) that it makes a scathing and powerful rebuke of this notion that government-as-regulator was ever a counter-weight to business interests. The progressive era was a sham. It was neo-mercantilism and turned back the clock on the victories of the true liberals like Mill and Smith and Locke.

  45. Morgan Wastrel says:

    You’ve already lost.

  46. Alex Bowles says:

    @JP

    I honestly don’t know enough about bankruptcy law, the changes made, nor the moral hazard dangerous to comment much further on your recommendation.

    And there’s your problem: you’ve got an enormous gap in your education with regard to the basic mechanism of modern, credit-based economies.

    If you don’t understand the fundamental value of bankruptcy law – and the purpose of the special courts that administer it – you cannot begin to understand how contemporary finance works. Even more importantly, you cannot expect to understand what – exactly – is shaping the financial industry’s agenda in Washington, and how thoroughly this has warped the rest of our politics in light of extreme regulatory capture.

  47. Alex Bowles says:

    I used to think that libertarians were opposed to heavy authoritarian governance in general. Turns out it’s just left-wing tyrants they’re really concerned about.

    Bastions of libertarian thinking – like the Cato Institute – seem only too happy to dismiss its transgressions when they’re ‘necessary evils’ committed by the far-right. Personally, I lost all respect for their shop when they opened their doors to Jose Piñera, a member of Pinochet’s cabinet.

    They tried finessing this addition to their staff by simply writing off the thousands who were straight-up murdered by that administration as ‘terrorists’. Not that these charges were ever pursued in open court. Rather, people were simply kidnapped in the middle of the night, stuffed into helicopters, flown over the Pacific, and dropped to their watery graves – but not before having their chests carved open to ensure that their bodies would actually sink.

    And this is in a country where the courts were pliant.

    It’s also worth noting that Cato’s crusade against Social Security (which is what Mr. Piñera became a part of) is conspicuously free from any component that would fortify trust in the public markets that (they say) provide a preferable means for funding secure retirements.

    Goodness knows that SS is not without serious problems. But this batshit crazy “see no evil in the freemarket” fundamentalism strikes an awful lot of people as jumping out of the plane first before you start worrying about whether you’ve actually got a working parachute.

    So it’s no wonder they struggle to win votes in a democracy. No surprise, either, that they take a dim view of the system that’s keeping them in check. More on that here.

    I say all this, by the way, as a former contributor to Cato. Today, I’m far less interested in hearing why government can never work, and far more interested in the ways – however imperfect – that it actually does.

  48. John Papola says:

    Holy cow. Pulling out the Pinochet stuff, seriously? This was incredibly disappointing. It’s as if Naomi Klein logged in, having not read a single comment, and posted with your name.

    I was born in 1977, dude. What in the world does this have to do with me, my understanding of macroeconomics, or anything else. I was trying to engage your ideas, Alex. If you wish to play a game of guilt-by-association using straw men, that’s unfortunate. I don’t work for Cato. I haven’t a clue what Cato has to do with any of this at all. And, um this is just garbage ad hominem logic which so easily cuts both ways that it leaves not a single man standing.

    Back to, you know, that ACTUAL DISCUSSION. I’m not utterly ignorant of what bankruptcy is. I’ve probably listened to more discussions on the subject than 95% of America. I was just admitting that my knowledge of the particulars in this case is very small. You’ve totally disregarded the rest of my points and ignored the actual core elements of the article you wanted me to read so that I could get my anti-keynesian panties in a twist.

    Yes, the banking system has captured DC, as any good student of history or the work of Chicago economists like George Stigler would expect. It’s no surprise when the most powerful institution of government in our economy is an inherently corrupt central bank which deals with big broker dealers and has a board composed of the very banks it’s supposed to “regulate”.

    And, um, I totally understand that banks don’t want people defaulting on their loans. Duh. Yes, I also understand that the bankruptcy process appears to have social value as a way of limiting liability and encouraging theoretically healthy risk taking. I’m open to an alternative world without such a system, but I understand what it does. It’s limited liability.

    And I don’t actually necessarily disagree that mortgage borrowers shouldn’t be able to declare bankruptcy based on the older rules. If you took a minute to make you case instead of going off into Shock Doctine Delirium Land, we might have already found an area of strong agreement.

    My beef is with you ECONOMIC analysis, not your legal one. They are actually different. Bankruptcy is a legal issue. I can indeed try to understand the implications of having a more or less lenient bankruptcy legal framework from an economic point of view without knowing the particulars beyond “it makes it easier for mortgage borrowers to default”. Your spending-based analysis is what I refute. It seems as if you fail to understand who actually made the money in a real estate deal: the SELLER.

    When Gary buys a house from Lenny with zero down for $500,000 borrowed from Wells Fargo and the price collapses, guess who made out like a bandit? LENNY! Not Wells Fargo. They’re just as screwed as Gary. Actually, they’re MORE screwed. THEY gave Lenny the $500,000 and they’re NOT getting that back. Gary put down nothing, risked nothing and I don’t weep for him one bit. Sorry. Been in Gary’s shoes.

    Now, if Gary loses his job and has to sell the house for $300,000… the question is, how much of that $200,000 loss should Gary be forced to pay for? All of it? None of it?

    Either way, the macroeconomic implications of these issues aren’t relevant to spending. They aren’t Keynesian. LENNY is out there spending away. The question is about dividing up who pays for the Lenny’s good fortune.

    So do you want to try to explore this stuff deeper, or trot out some other “libertarians are hypocrites because of X, not that I’m saying YOU’RE a hypocrite… but I really am” nonsense that amounts to mudslinging trash?

  49. Morgan Warstler says:

    “If you don’t understand the fundamental value of bankruptcy law – and the purpose of the special courts that administer it – you cannot begin to understand how contemporary finance works. Even more importantly, you cannot expect to understand what – exactly – is shaping the financial industry’s agenda in Washington, and how thoroughly this has warped the rest of our politics in light of extreme regulatory capture.”

    Ok, I understand it. What’s your point?

  50. Martin Pitts says:

    A couple of months ago some other wanna-be Spin Weenie called me a “Stalinist.” Now another calls me a “half-wit?” Perhaps these pathetic people were brain-wrecked by Fox News?

    Posted On Martinshushu Blog
    WEDNESDAY, MAY 4, 2011

    How the Spin Weenies Damage & Disparage America

    We now have discovered a fitting tag for all the masters of deceit in the media and politics: Spin Weenie.

    Generally any master of deceit in media and politics who tries to damage and disparage our nation is a spin weenie. Spin weenie can be used as a noun like “A little known spin weenie from Orange County, Marilyn Davenport, sent out photos with President Obama’s face on a monkey…” Spin weenie as an adjective can be used like: “Spin weenie reports about the birth certificate are laughable says…” Or as a verb: “FOX News reporters spin weenie stories into praise for anything radical republican, the true interests of the nation be damned…”

    Nipping at the heels of our President, various republican spin weenies are now trying to claim the credit for finally dealing with Osama Bin Laden. The FOX News go-to spin weenie Karl Rove states that his thugs water-boarded key info out of prisoners down in Guantanamo. Former Bush White House spin weenie Barry Jackson pulls the strings on Speaker John Boehner’s back to spin weenie the house toward more and more Stalinist legislation. Other spin weenies like the carious Koch Brothers and their Cato Institute buy mountains of media commercials attempting to spin weenie our nation toward an Ayn Rand flavored Fascism. An even smaller-minded spin weenie, Ted Hoagland from Texas, runs those cable TV commercials narrated by spin weenie Huckabee that advocate destroying the health of our nation by dismantling our health care laws.

    The best way to deal with the spin weenies is to apply a little common sense to their messages.

    When former toxic VEEP spin weenie Dick Cheney declares the nation in peril from lack of leadership just pause a moment… Recall spin weenie Cheney’s leadership in perjuring us into a ground war in an Asian desert country that cost the lives of thousands of American soldiers and tens of thousands of civilians. Recall all the spin weenies around President Reagan who tried to get us to believe that Reagan was some sort of deity in order to conceal Reagan’s degenerative dementia. Recall the iconic spin weenie Henry Kissinger’s bombing of Cambodia leading to Pol Pot and the Khmer Rouge butchers, plus spin weenie Kissinger’s criminal manipulation of the Chilean body politic leading to Pinochet’s fascist murderous regime.

    Over history all the spin weenies form a mathematical field of wanna-be despots and vicious posers. Listen Americans: let’s spin the spin weenies out of our nation’s consciousness and forever out of our government.

  51. Morgan Wastrel says:

    Faith?!?

    What does with have to do with it? Especially yours?

  52. Morgan Warstler says:

    Never mind Martin, you’re worthless.

  53. Morgan Wastrel says:

    You’re already lost.

  54. John Papola says:

    Martin, you’re clearly a talking point-spewing partisan party hack. That post could literally have been written by an automated script which scrubs the party hack websites for overlapping phrases and then assembles them into a string.

    Meanwhile, ACTUAL American Fascism has only INCREASED under Obama. Genuine thinkers like Glenn Greenwald at Salon.com have been cataloguing this nightmare (drug war, libya, afpak, crony capitalism, police state terror, etc). What has Glenn gotten for his valiant liberalism? Vicious attacks by party hack drones like yourself who clearly get their ideas from reading the cliff notes of Naomi Klein’s dishonest screeds. Glenn’s thus getting more libertarian by the day as he sees the true face of the political left’s shameless hypocrisy.

    Let’s take a great example. Howard Dean was the “anti-war” candidate in 2004. Remember him? Well, that was all fraud and lies. Here’s the TRUE Howard Dean on Libya:

    “It’s very smart. You don’t put boots on the ground. You don’t commit trillions of dollars to a war in Iraq,” he said. “You do it with the other tools that we have that frankly work much better over the long term because you don’t get a lot of public resistance — drones, special operations forces, use of intelligence agencies. That’s exactly what he did.”

    source – http://www.theatlantic.com/politics/archive/2011/08/what-happened-to-howard-dean-anti-war-champion/244103/

    How about that? It’s great to drone-murder women and children because voters don’t care. This guy should be sent to the very-much-still-open-gitmo (remember that) and given a taste of the torture that should have been ended under Obama the fraud but wasn’t.

    Your approach isn’t just infuriatingly childish, it’s shockingly ignorant of basic reality. You’re not a liberal at all, you’re a toady. Nothing more.

    Meanwhile, for every Koch, there’s a Soros. The balance of support for despotism is HEAVILY tilted to the left on body count. How many ideological supporters of Mao, the Soviet Union, etc should we drum up if you REALLY want to play THAT stupid game. Let’s not forget that Progressive Teddy Roosevelt swung his “big stick” at the Japanese, setting the stage for pearl harbor, Wilson got us needlessly into WWI and then lead the way on the Treaty of Versailles which set the stage for german hyperinflation and the rise of hitler, Truman dropped the bomb and launched the Korean war, LBJ turned Vietnam into a full meat grinder and Nixon was by every account a left-progressive, much like George Bush.

    If you’re going to play the full blown “attack on partisan broad strokes nonsense”, don’t bring your knife to this gunfight. You’ll lose.

    Any honest left-liberal should be standing side-by-side with true libertarians in disgust at Bush’s third term under Obama. Those who aren’t, should understand what they really are: mindless, thoughtless party hacks.

    MEANWHILE…

    Hey Alex? Where you at?

  55. John Papola says:

    PS…

    I went on a talking-point-spewing rant of my own for effect, though I do indeed believe that the “progressive era” of politics has hundreds of millions of lives lost in blood on its hands so I stand by my rant as an incomplete but reasonable subset of reality.

  56. John Papola says:

    One more thing, Martin. Did you by any chance actually look at which party had more financial support in either 2008 or 2010? I think the GOP sucks, but I think hypocrisy sucks worse. Anyone trying to claim the Democrats are less bought-and-sold or less well funded by crooks and banksters is living a lie.

  57. John Papola says:

    This thread appears to be dying. But since two posters have brought up libertarians and pinochet, let me allow Roderick Long to rebut such nonsense sensibly:

    One reason for Lind’s conflation is that he automatically translates being anti-democracy into being pro-autocracy — because he assumes that the only alternative to democracy is autocracy. But in fact there is a third option; rather than the many dictating to the few or the few dictating to the many, what libertarians seek is a world where nobody is in a position to dictate to anybody — or at least to get as close to that situation as possible. (It might be argued that such a system actually has a better claim to the term “democracy” than those regimes that typically receive that label.) For anarchist libertarians, this means replacing the state entirely with networks of voluntary association; for minarchist libertarians, it means structuring the machinery of government in such a way as to make it as difficult as possible to abuse.

    In other words, libertarians don’t oppose democracy (in the conventional sense) because they hanker after autocracy; they oppose democracy because it is too much like autocracy.

    And even this point assumes, generously, that existing democracies really are majoritarian. As many libertarians have argued, the logic of monopoly government and special-interest capture explains why real-life “democracies” tend to be plutocratic oligarchies in democratic trappings.

    And even this point assumes, generously, that existing democracies really are majoritarian. As many libertarians have argued, the logic of monopoly government and special-interest capture explains why real-life “democracies” tend to be plutocratic oligarchies in democratic trappings.

    In a related conflation, Lind repeatedly refers to “conservatives and libertarians” as though these two groups can be lumped together. But libertarianism at its most consistent is fundamentally opposed to conservatism; indeed it has often been argued that libertarianism is best understood as a form of radical leftism. (Certainly there are prominent figures who combine aspects of both libertarian and conservative rhetoric, but the same could be said of virtually any two ideologies.)

    http://bleedingheartlibertarians.com/2011/08/libertarians-in-jackboots/

  58. Jon Taplin says:

    OK Papola- You got my attention. Let us stipulate that any version of an anarchist libertarian solution to the problem of how to govern greedy guys who have got a smooth sales pitch? When you get that figured out, give me a call.

  59. John Papola says:

    Taplin,

    Show me the government solution that tempers rather than magnifies (or elects) the greedy guys who have got a smooth sales pitch.

    We have ample cases of competition taking down big guys and put them out of business. Where is the corollary in government? They never kill a program. They reward horrible agencies and institutions like the Fed with more power after they screw up. They put the wolves in charge of the henhouse time after time (Dodd/Frank).

    I don’t get it. You’re a smart guy. Surely you see that what we have doesn’t work.

    You and I already have the shared answer: radical decentralization of political power.

  60. John Papola says:

    Alex, your distasteful exit from this macro/bankruptcy discussion is pretty disappointing.

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