Economic Dreams - Economic Nightmares

Minsky on 'Flawed Capitalism', 'Flawed Economics'

I am a fan of Hyman Minsky's work, but have not read — until now — any of his books. I am currently reading Stabilizing an Unstable Economy. Here is a timely quote, from Chapter 12, "Introduction to Policy", emphasizing our current plight both as to our political economy and misguided economic ideology/methodology. It could have been written yesterday but was first published in 1986:

… We need to embark on a program os serious change even as we need to be aware that a once-and-for-all resolution of the flaws in capitalism cannot be achieved. Even if a program of reform is successful, the success will be transitory. Innovations, particularly in finance, assure that problems of instability will continue to crop up; the result will be equivalent but not identical bouts of instability to those that are so eviedent in history.

Political leaders and the economists who advise them are to blame for promising more than they or the economy can deliver. The established advisers have failed to make the political leadership and the public aware of the limitations that economics processes and the the ability to administer impose on what policy can achieve. … [O]ur economic leadership does not seem to be aware that the normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment, and poverty in the midst of what could be virtually universal affluence—in short, that financially complex capitalism is inherently flawed.

Economic advisors, whether liberal or conservative, believe in the fundamental "soundness" of the economy. Finding fault with one thing or another, they may advocate policies such as changing Federal Reserve operating techniques, tax reforms, national health insurance, and wars on poverty, but all in all they are satisfied with the basic institutions of modern capitalism. According to today's gospel [extant faults] are due to secondary, not to fundamental, characteristics.

[T]he economists of the policy-advising establishment differ about details: some propose to fine-tune the economy by fiscal tinkering, others want to achieve a natural rate of employment through steady monetary growth. Neither, however, sees anything basically wrong with capitalism as such. The credit crunch of 1966, the liquidity squeeze of 1970, the banking crises of 1974-75, the inflationary spiral of 1979-80 and the distress, national and international, of 1981-82 are, in their view, aberrations, due to either "shocks" or "errors." Since nothing is basically wrong, they also hold that incisive corrective measures are not needed.

The truth of the matter is that something is fundamentally wrong with our economy. As we have shown, a capitalist economy is inherently flawed because its investment and financing processes introduce endogenous destabilizing forces. The markets of a capitalist economy are not well suited to accommodate specialized, long-lived, expensive capital assets. In fact, the underlying economic theory of the policy establishment does not allow for capital assets and financial relations such as exist. The activities of Wall Street and the inputs of bankers to production and investment are not integrated into, but are added onto, the basic allocation-oriented theory.

Economic policy discussions in recent years have centered on how much more (or less) on the one—fiscal policy—and how much less (or more) of the other—monetary policy—is necessary for economic stability and growth. If we are to do better in the future, we must launch a serious debate that looks beyond the level and the techniques of fiscal and monetary policy. Such a debate will acknowledge the instability of our economy and inquire whether this inherent instability is amplified or attenuated by our system of institutions and policy interventions. ….

Today's economic crisis is as profound … as that of the 1930s. … There is no consensus as to what we should do. Conservatives call for freeing up the markets even as their corporate clients lobby for legislation [to] institutionalize and legitimize their market power…. [C]orporate America pays lip service to Adam Smith, while striving to sustain and legitimize the very thing that Smith abhorred—state-mandated market power.

Liberals, instead of articulating and incisive critique of our capitalism as such and pioneering innovative experimentation and change, are wedded to the past. They support minimum-wage increases without questioning whether these laws have served any real purpose since the Great Depression, when reflation was the policy objective. Liberals are unwilling to face up to the shortcomings of policies inherited from the past and are, fundamentally, timid about setting forth in new directions.

As a consequence, instead of analysis and ideas, we get slogans: free markets, economic growth, national planning, supply-side, industrial policy—imprecise phrases that face up to neither the what nor the how of policy objectives. The various programs for change are based on misconceptions of both the strengths and the weaknesses of market processes. One of the reasons for the intellectual poverty of policy proposals is that they continue to be based on ideas drawn from neoclassical theory. Although economic theory is relevant to policy (without an understanding of how our economy works we cannot find cures), for an economic theory to be relevant what happens in the world must be a possible even in the theory. On that score alone, standard economic theory is a failure; the instability so evident in our system cannot happen if the core of standard theory is to be believed.

Today's economic policy is a patchwork. Every change designed to correct some shortcoming has side effects that adversely affect some other aspect of economic and social life. Every ad hoc intervention breeds further intervention. If we wish to improve upon what we now have, we must embark upon an age of institutional and structural reforms that will check the tendencies toward instability and inflation. Standard theory, however, offers us no guidance on that score; for the problems are outside the domain of relevance of the theory. A new era of reform cannot be simply a series of piecemeal changes. Rather, a thorough, integrated approach to our economics problems must be developed; policy must range over the entire economic landscape and fit the pieces together in a consistent, workable way: Piecemeal approaches and patchwork changes will only make a bad situation worse.

Poverty in the midst of plenty and joyless affluence are but symptoms of a profound disorder [Tibor Scitovsky, The Joyless Economy (New York: Oxford University Press, 1976)]. As we have pointed out, persistent financial and economic instability is normal in our capitalist economy. The commitment to growth through private investment—combined with government transfer payments and exploding defense spending—amplifies financial instability and chronic inflation. Indeed, our problems are in part the result of how we have chosen, inadvertently and in ignorance of the consequences, to run the economy. An alternative policy strategy is needed now. We have to go back to square one — 1933 — and build a structure of policy that is based upon a modem [modern?] understanding of how our type of economy generates financial fragility, unemployment, and inflation. [pp. 319-23]

Note: whereas in Minsky's day inflation tended to be more self-grown, today's inflation tends to wander the globe accompanying unfettered capital mobility. Note further that Minsky was careful to introduce his policy 'remedies' with this caution: "Even as I warn against the handwaving that passes for much policy prescription I must warn the reader that I feel much more comfortable with my diagnosis of what ails our economy and analysis of the causes of our discontents than I do with the remedies I propose."

Gas Prices Not 'Outrageous'

On mainstream news this morning I heard our Utah Governor declare US gas prices "outrageous". Memorial Day national news coverage labeled them "sky high." Wrong! Gas prices only seem outrageous to we Americans who George W. Bush correctly noted are "addicted to oil".

Europeans, by contrast, have lived with high gas prices for years, using proceeds to fund social programs, re-build infrastructure, etc. In addition, as noted in a May 21 Senate-side Congressional hearing Exploring the Skyrocketing Price of Oil (3 hrs), Europeans used gas tax differentials to correctly steer transportation systems toward diesel and away from gasoline, which proves ever-more important now that clean diesel is available. And to steer transportation system toward mass transit and away from single-vehicle transportation. Meanwhile we Americans sat around watching TV and partying until world market forces pushed prices upward, allowing most of the recent 'surplus' to be captured as record profits, record CEO compensation, etc. by what I'll call the Petrochemical Industrial Complex. Finally, Europeans are now beginning to look toward a future free of dependence on petrochemicals and their commingled carbon-loading propensities.

Even though we Americans are just now beginning to face the reality of high gas prices, the prices themselves are not the problem. In fact "sky high" prices are finally getting us to pay attention, however feebly, to alternative sources of energy that are compatible with global climate systems and human survival. As noted in the Congressional hearing, planet Earth is not in jeopardy, rather it is we humans (along with myriad other species) who are at risk. The Earth has worked its way through five Great Extinctions in the past and arguable done remarkably well. But it is in no way clear that we humans will survive the Sixth Great Extinction. Tragically, we humans may be contributing to our collective demise by clamoring for lower gas prices.

This is not to say that all is well in petrochemical industrial complex, medical industrial complex, financial industrial complex, military industrial complex America. But that is a story for another post (or several hundred posts). In the meantime 3 hours are well-spent viewing the hearing. If you want a sneak peak, go to 2:15 in the videocast and watch Senator Charles Schumer (D-NY) in action, followed by others as the hearing winds up.

Note: cross posted at Ecological Economics

Butier Responds to Greenspan's Latest Attempt to Rewrite History

{Updated, April 9}
At maverecon Willem Butier counters Alan Greenspan's latest claim the he and the US Fed not be held responsible, in large part, for our current mess. Butier's eight policy "tragedies":

1. The Greenspan Fed (August 1987 - January 2006) did indeed contribute, through excessively lax monetary policy, to the US housing boom that has now turned to bust.
2. The Greenspan-Bernanke put is real. It is an example of an inappropriate monetary policy response to a stock market decline.
3. The Greenspan Fed focused erroneously on core inflation, rather than using all available brain cells to predict underlying headline inflation in the medium term.
4. The Greenspan Fed failed to appreciate the downside of the rapid securitisation during the first half of this decade and acted exclusively as a cheerleader for its undoubted virtues.
5. The Greenspan Fed displayed a naive faith in the self-regulating and self-policing properties of financial markets and private financial institutions.
6. The Greenspan Fed, by enabling the rescue of Long Term Capital Management in 1998, acted as a moral hazard incubator.
7. The failure of the Greenspan Fed to press, before or after LTCM, for a special insolvency resolution regime with prompt corrective action features for all highly leveraged private financial institutions that were likely to be deemed too big and too systemically important to fail, demonstrates either bad judgement or regulatory capture.
8. During his years as Chairman of the Federal Reserve Board, Mr. Greenspan's statements reflected a partial (in every sense of the world) understanding of how free competitive markets based on private ownership work. This partial understanding guided his actions as monetary policy maker and financial regulator. Mr Greenspan's theories have been comprehensively refuted by the financial crises of 1997/98 and 2007/08.

Butier elaborates on each. We will bring forward only one, dealing with possibilities for moral hazard. But before we do, I just found Martin Wolf's counter-balancing position, Ft.com, April 8, still praising Greenspan, while fearing that over-zealous regulatory reform spaned by a Greenspan "blame game" will kill the "good" that free-er (my word, Wolf uses "free) market mechanisms bring. Whereas Butier lists eight "tragedies" of Fed policy/practice, Wolf highlights two: (1) regulators should have been "tougher", in subprime and elsewhere, and (2) monetary policy should have been tigher, not looser — to lean against prevailing winds of excess instead of leaning with them.

David Beckworth, via Macro and Other Musings, adds insight into why Butier's critique is on target:

… [T]he Federal Reserve is a monetary hegemon. It holds the world's main reserve currency and many emerging markets are pegged to dollar. Thus, it's monetary policy is exported across the globe. This means that the ECB, even though the Euro officially floats, has to be mindful of U.S. monetary policy lest its currency becomes too expensive relative to the dollar and all the other currencies pegged to the dollar. The Fed's loosening, therefore, of monetary policy in the early-to-mid 2000s triggered a global liquidity glut that set the stage the subsequent housing boom-bust cycle. This is not to say the 'saving glut' and financial innovation had no role, but rather that loose monetary policy was a key factor behind the boom. …

Back To Butier:

The Greenspan Fed: a tragedy of errors, Willem Butier, maverecon:Financial Times, April 8: Mr Greenspan's apologia pro vita sua in the Financial Times of Monday, April 7 2008 fails to convince. …

Grizzly Times, Yet Some Hope on Horizon

Grizzly Bears roam the financial landscape: Doug Noland and Michael Shedlock here (or here) are ever-bearish, but so is Barry Ritholtz (Forbes video link). The "D" word is uttered ever-more-frequently. Yet I find myself thinking that just beyond this likely deep recession we are at the leading edge of a reformation: re-forming financial institutions—private and government—and bringing US and other banking "kicking and screaming" into the 21st Century.

In this I share hopes with Brad DeLong, Paul McCulley, Robert Shiller, and George Soros (or better still watch Soros: via the Financial Times in extended post). No one who is awake believes we will escape our current moment without at minimum a deep, prolonged recession. But some observers, like those just mentioned are less cynical than are they who believe that we are predestined to once-again repeat the tragedies of the recent past and earlier times—in particular to continue to reward speculative excess.

As per reform, Thursday's Senate Oversight hearings on the Bear Stearns mess (C-Span video link)) is almost 5 hrs. long, but worth watching to better understand where Ben Bernanke (Fed), Timothy Geithner ( NY Fed), Christopher Cox (SEC), and Robert Steel (Treasury) stand regarding hoped-for reregulation. (I recommend first panel: 3 hr. 40 min.)

It is by no means certain that we will indeed reregulate our system to once-again disallow the worst excesses of extended bouts of irrational exuberance and the irrational pessimism that must follow. But wu might. We must! I've hoped for reforms too often in the past and been disappointed, but signs of hope are on the horizon at a time when moderates are beginning to take the reins of power in the US Congress away from borrow-and-spend neoCons on the far right and traditional tax-and-spend Democrats on the far left.

Let's not be eager to blame the Federal Reserve, the Treasury, and the SEC for this mess. NeoCons and "free market fundamentalism" are better targets for blame. And let's not forget that there was good reason for bringing the Federal Reserve system into being long ago—to curb the excesses of "boom and bust" cycles. The system worked reasonably well after the late 20s, early 30s debacle to disallow Hyman Minsky’s PONZI FINANCE moments. That is, it worked well until the so-called "Republican Revolution" dismantled regulatory functions of government here in the US.

I’m not naïve enough to believe that we could have weathered the storms brought about by recent financial and technological innovations without some pain, but the real tragedy I see is that "we the people" of the USA haven't yet figured out that we need good government to accompany good markets—and that neither can work effectively in isolation or without continued vigilance and oversight from citizens and the press (now fortified with internet commentary).

Government agencies and institutions must begin to wake up to realities that W. Edwards Deming, Peter Drucker, and many newer management writers have helped the best of our private-sector entities understand—that innovation and quality reform must be institutionalized into the fabric of agencies and institutions, to be ongoing and ever-vigilant of changes in external environment that must be incorporated into internal corporate and government cultures. Let's hope wider government reform begins with the Fed, the SEC, and the Treasury.

Everyone Hates Treasury Secretary Paulson's Reform Proposal

{Updated April 1, 2}

Ok. Some are cheering, if softly. But not among folks I read regularly. Clearly Robert Reich hates Secretary Paulson's self-proclaimed reform proposal, concluding: "Hank Paulson's discussion paper – it's not even meant to be enacted under the Bush Administration – is not broad, it's not an overhaul, and heaven forbid, if we're facing another Great Depression, it will do absolutely zilch to head it off."

More dissent:
Not "Calculated Risk" or Paul Krugman.
Not Clive Crook
Not Willem Buiter
Not Barry Ritholtz or Michael Mandel

Last but not least:

Stephen Cecchetti, soon to be Economic Advisor to the Bank of International Settlements, in a 19 min. Bloomberg audio podcast with Tom Keene says "Paulson Proposal isn't right first move". Included are good insights into much-needed regulatory reform, particularly w/r/t leverage and the troubling phenomenon of investment banks, hedge funds etc. moving where-ever around the world to avoid any specific country's regulatory requirements.

A few tidbits from Crook:

The new Treasury blueprint for reforming financial regulation is not really a blueprint at all. (The full document is here; or see a Treasury summary of it here.) It says some sensible things and has some good ideas, but for the most part it is an agenda for discussion rather than a detailed plan. Given that the Treasury has been working on this thing at least since March 2007, it is surprisingly thin.

Moreover, it is concerned exclusively with the structure of the regulatory system. I think that getting this right is more important than Paul Krugman does—he calls this the Dilbert strategy—but Paul is surely right to complain that a better structure will get you only so far. It is a question of form and content. What the rules say matters more than which regulators are responsible for enforcing them, and the so-called blueprint does not go into that. …

At least there is some agreement that "Something should be done." Duh! AND: It's about time. But 'not yet', of course it's an election year! Next year the excuse will be something else.

Here is CNNMoney Good plan, bad plan - Reaction to Paulson, demonstrating that mainstream media will always find opposing views, no matter how far and wide the search.

Still, I'm a wee bit hopeful, as is Paul McCulley, that we may at least avoid a Depression and get some needed financial regulatory reform as well—but it will take time and much deliberation, and perchance more pain felt by stock and bond fund holders as well as by taxpapers in general. Here's Paul McCulley's latest perspective [PDF] on the general financial/economic landscape—not specifically on Paulson's proposal. I think McCulley nails it! What do others think?

'W' as Hoover?

A 'wild card' scenario, for sure. But what if the Bush Administration were to now retreat to its ideological roots — i.e. "markets rock, government sucks" — and pretend that market forces alone ought to bring us out of this credit crunch? Having contributed mightily to the stage-setting for the current crisis, the Administration might indeed catapult it into full-scale depression. Here is Gaius Marius' workup of this possibility:

the potential for real problems, gaius marius, Decline and Fall of Western Civilization, March 14: there's a canard in american political history that herbert hoover did nothing to alleviate the onset of the depression. such was the angle of attack from franklin roosevelt in 1932, and so successful was that campaign that its propaganda became embedded in american mythology.

it's not so, of course -- hoover was a very activist commerce secretary who took an active role in creating the credit excesses of the 1920s, and then an even greater activist stance in forestalling the bust. the new deal was his deal, by and large, carried out in grand scale by roosevelt as the depression wore on.

one can argue about the wisdom of government intervention in the aftermath of the bubble bursting, of course. but the original sin is in the creation of the bubble -- something that can only be done with government at minimum standing aside from its natural regulatory role, and indeed in this case was facilitated by manipulation of interest rates and the underwriting of massive credit backstops in the form of the GSEs.

many american conservatives are so totally divorced from reality on the issue so as to be dangerous. they generally have encouraged all manner of government facilitation of the credit bubble under the bush administration since 2000, but there remains underneath an ideological and utopian desire for non-interference. and now that long-building problems which arose with government complicity are surfacing, the animal desire to flee the problem (and all responsibility for creating it) is also surfacing -- in the form of belated laissez-faire.

moral hazard aside, an honest history of capitalism will reveal that every major crack-up since the tulip mania of the 1620s was addressed with government-taxpayer bailouts on some level. it is part of capitalism to do so -- the losses, once too great, are socialized, and this is the price paid for the long-term benefits of price-driven resource allocation. that this fact isn't part of the ideological mantra of capitalism as defined by the zealots and high priests is as meaningless as the fact that the doctors and philosophers of communism were disappointed by the impurity of the system in practice. and it is very important for in situ leadership to understand that ideological purity is a noose by which they will be hung if they insist.

what has happened in the united states is not good, but it is probably manageable IF government recapitalization of the banking system gets underway. however, the sort of public denial of deep-seated problems at the heart of the system that our executive leadership is apparently willing to forward -- beyond being yet another dimwitted escapade of a kind with that which led them to eschew the "reality-based community" over iraq -- can have massive ramifications if it results even in just a significant delay of action. once a deflationary credit unwind gets underway, it can be extremely difficult to stop. the key will be to support the banks well before that happens, and then to move into the credit markets with a measure of regulatory zeal longer-term to prevent the kind of credit underwriting lapses that characterized 2002-2007.

it seems almost comic that the tragic administration of george w. bush -- unsatisfied with trashing american soft power and cultural advantage, unsatisfied with plunging this nation into a fiscal and military morass in the middle east, unsatisfied with widening and hardening virtually every division in the american political landscape -- would take its infamous conflation of raging incompetence and ideological zeal to the final length of sealing the american economy in a tomb. and yet it might. if the administration draws a line against government recapitalization and tries to defend it, it will actually become what roosevelt once only painted the adminstration of herbert hoover as. and that would have the potential for real problems.

Lingering question: Did Herbert Hoover get a "bad rap" re: The Great Depression? That is, is Marius correct in this assertion: "hoover was a very activist commerce secretary who took an active role in creating the credit excesses of the 1920s, and then an even greater activist stance in forestalling the bust. the new deal was his deal, by and large"? See, by contrast, The Ordeal of Herbert Hoover.

Minsky Moment and Trillion Dollar Meltdown: What might Help?

George Magnus, UBS Senior Economic Advisor, widely credited for popularizing the "Minsky Moment" phrase a year ago, once-again invokes Hyman Minsky and suggests that we are likely facing a Trillion dollar financial meltdown when all eventually gets added up. And he says that "fixing the problem" goes way beyond simple Monetary Policy fixes. Legislative and regulatory fixes will need to accompany monetary policy fixes.

Magnus believes that Ben Bernanke sees the crisis in proper perspective and believes that the US Fed is doing what is necessary, although not sufficient to stem the worst outcomes from this crisis. Here is a link to three-part video (3 minutes per part, Feb 25) featuring Magnus as interviewed by Financial Times Gillian Tett. In part three, Magnus predicts a Credit Crisis Bailout (by the US Government and others) by October.

Meanwhile, US Treasury Secretary Henry Paulson is in full attack mode as to a Credit Bailout. And Allan Meltzer suggests (Feb 28) that, far from doing what appears proper and necessary, the Fed is repeating the mistakes of the 1970s.

Of the three, I think Magnus is more likely correct.

P.S. I'm wandering off for a few days skiing in the Utah mountains.

Not Your Father's Expansion - Or Recession

Max Wolff offers up a reasoned explanation of why we aren't going to get out of our mess easily, or soon. Soundbite: "Our recent economic performance was the offspring of financial innovation, low interest rates, massive consumer borrowing and asset price inflation. All is running in reverse now. The mechanics of the boom have become the engine of the bust." More:

Credit Crunch and Asset Deflation Recession, Max Fraad Wolff, Huffington Times, Feb. 12: … I believe that our post 2001 economic boom was uniquely and imprudently based on consumer credit and asset inflation. Equities rebounded and performed well- particularly outside the US -- since 2003. American home prices surged. All of this was based on consumer credit. Employment and personal earnings growth was weak across the last few years. Thus, it would not be shocking to see less profound earnings and employment downturn as recession begins. If you boom on house price inflation and consumer credit, you bust when they bust. They are busting now.

How bad is the housing scene? There was a 53% increase in the value of American homes as assets from 2002-2007. The price of all homes increased from $14 trillion to $21 trillion [PDF]. These are paper gains that rise and fall. Now they are falling and likely will decline by at least 15%, or over $3 trillion, before the end of 2009. Across the same period there was a 73% or $4.4 trillion increase in home mortgage debt. [PDF] This isn't going away. In fact, thanks to teaser intro rates and balloon options mortgages, it will rise. Consumer credit borrowing increased by $492 billion or 25%. We borrowed so much and so fast against our inflating homes that the average American went from owning 56% of their home in 2002 to owning 50% in 2007 [PDF]. As prices fall and debt levels remain the same, this percentage will fall further. Very soon the Average American family will own less than the half the value of their home!

From 2002-2007 there was a 55% -- $16 trillion -- increase in financial asset prices, from $29trillion to $45 trillion. [PDF] The prices of financial assets tend to be sensitive to corporate profits and credit conditions. Over the last 4-5 years corporate profits have risen sharply and are at 77 year highs as a percentage of national income. Corporate profit performance has been the mirror image of employee compensation. It has outperformed averages and surged to all time highs. Low interest rates and financial innovation allowed greater profitability and opportunity to corporations, particular those engaged in the booming credit and housing markets. Our recent economic performance was the offspring of financial innovation, low interest rates, massive consumer borrowing and asset price inflation. All is running in reverse now. The mechanics of the boom have become the engine of the bust.

This was not your father's expansion. It was not based on excellent overall economic growth. It was not based on salary and wage growth. There was only a 31%, $2.4 trillion, in disposable income over the last 6 years. Consumer debt increased by $2.4 trillion more than disposable personal income from 2002-2007. Housing and financial price inflation ran at many times the rate of income growth. Debt growth fueled consumer borrowing. A financial asset and housing boom based on easy money and financial innovation created a national economy dependent on assets and home price increases and further credit access. We are now faced with declining housing prices, falling asset prices and squeamish lenders fearful of overly indebted consumers. This is why I believe we are already in a recession or near recession. The near term future will be defined by significant economic weakness.

We don't see particular weakness in jobs and earnings because the recent recovery 2003-2007 was spectacularly weak in terms of job and income growth. The average wage and salary annual percentage gain across 55 years of expansions ran at about 3.8%. Our recent expansion has seen only 1.9% growth in wages and salaries. This is half the average annual wage and salary growth. That is how we reached the dubious low water mark for wages and salaries as a percentage of national income in 2006. In 2006 only 51.6% of national income went to wages and salaries, this is the lowest percentage since 1929 when data collection began. [PDF] We will have to wait to see weakness in the already limping areas of employment and earnings. I don't see how this bodes well for the near term future or acts to dispute our recessionary trajectory?

We are in the early to middle stages of asset price deflation and credit limitation. This is where we found growth and it will be where we find pain in the coming year. More important than the general forecast is the specific policy lesson that our inorganic and unusual recovery offers. It is unsafe, inequitable and fragile to build and base economic performance on asset price inflation and debt. This economic arrangement produces redistribution of wealth from debtors to creditors and creates a very delicate and poorly shared expansion. Sadly, the weakness that comes from the end of the boom falls heavily on the shoulders of those who gained little from the expansion. It must be with this in mind that we make policy and rebuild.

Dean Baker: More Transparency, Accountability Needed from Fed

Dean Baker recommends that the media and the American people need to hold the Fed accountable as part of US Government, rather than allowing it to act as a mostly-owned subsidiary of Wall Street banks. Sounds reasonable to me. Here's Baker:

Profit motive, Dean Baker, Feb. 5: Much of the policy elite hold the view that the Federal Reserve's conduct of monetary policy is best carried through in the dark, far way from political debate. This is a profoundly anti-democratic attitude, since the Fed's monetary policy is likely to have far more impact on the economy than anything the politicians spend their time screaming about as the elections roll around.

And we all know that the Fed has done an absolutely atrocious job in managing the economy in the last decade. First, Alan Greenspan adopted the view that financial bubbles are cute and decided to let the stock bubble expand until it had created nearly $10 trillion in wealth. Its collapse gave us the 2001 recession. While Greenspan was confident that he could easily deal with the fallout from a stock bubble recession, the fact is that we did not regain the lost jobs until the very end of 2004.

Furthermore, Greenspan relied on the growth of another bubble, in housing, to escape the damage from the stock bubble. This bubble is now bursting, giving us yet another recession, which promises to be much longer and deeper than the last one. This track record suggests that the Fed is in need of some very real oversight.

Unfortunately, the media still treat the Fed as being above the political realm. They never question whether its policies are designed to serve the economy or special interests, such as the major Wall Street banks.

If the media did apply serious scrutiny to the Fed's conduct of monetary policy, they might well be asking about the motives for the most recent round of rate reductions. There can be little doubt that the economy is in serious trouble and badly in need of stimulus, but it is not clear that the recent rate cuts will provide a boost to growth. …

There is one route through which lower interest rates will boost the economy. They should help push down the value of the dollar. This will help to boost exports and reduce our trade deficit, although the cost will be somewhat higher inflation, which is undoubtedly one of the factors explaining the jump in long-term interest rates.

It may be that Fed chairman Ben Bernanke is consciously pursuing a lower dollar as the best way to stimulate the economy, but it would be useful if he explained this policy. An explicit commitment to a low-dollar policy is likely to help bring about the goal of a lower dollar, since the statement will affect investors expectations.

It would also be helpful if Bernanke would explain his policy because there is an obvious alternative, less benign, explanation. When banks borrow money they pay the short-term rate. They mostly lend money at the long-term rate. Fed actions that increase the spread between long-term and short-term rates directly increase bank profits. Those with a suspicious mindset might think that the Fed is more interested in beefing up the profits of banks that are rolling in bad debt than in boosting the economy.

Along these lines, the special "term auction facility" that the Fed created to allow banks to borrow money in secret also raises serious questions. The Fed claims to have established this mechanism because it was worried that financial markets attach a stigma to borrowing from the Fed. Whether or not the financial markets are right to attach a stigma, the TAC creates a group of insiders that know about bank borrowing and a group of outsiders who remain clueless.

The country did not get into the current crisis because of too much transparency. There seems little reason to depart from the Fed's longstanding practice of publicly disclosing bank borrowings from the Fed.

It is impossible to know the motivations of Bernanke and the other Fed governors, but there are certainly grounds for suspicion that they may hold the interests of the major Wall Street banks above the interests of the general public. The Fed is an arm of the government, and it is long past time that its conduct of monetary policy received the full scrutiny of the media and Congress.

Don't Trust 'The Press'

Dean Baker tells us that we ought not trust the media. In this case it's because they seem to have bought into the 'economy is sound' story for too long, missing the housing and stock bubbles and instead cheering on the ongoing American-led consumption party. On that latter note, Robert Reich tells us that the party is over—the American consumer is tapped out. Worse, the power brokers (including the media) don't yet see it:

The US economy, Pravda style, Dean Baker, The Guardian, Jan 28: … Just as the Soviet press [in the bad old 'cold war' days] wanted the public to trust the wisdom of the party bosses, … pillars of the [American] elite media want the public to believe that the experts who are the insiders on the decision-making process in Washington are uniquely qualified to craft policy. …

Misunderstanding the economy's weakness earlier this month is trivial compared to the much more grandiose mistake of failing to recognize the $8 trillion housing bubble, or before that, a $10 trillion stock bubble. If performance mattered, then the experts who got things so hugely wrong would no longer be the ones shaping public policy. Instead, with the Washington Post style beautification process, experts can jump from policy disaster to policy disaster and never have their failures affect their standing.

If we are ever to have an open debate on economics, or any other area of public policy, we will need media that honestly discuss policy failures and that hold those in charge accountable. In the current situation, the economic disaster facing the economy was entirely preventable, but the Federal Reserve and the rest of the inside crew were either too incompetent to recognize the housing bubble or felt the short-term benefits outweighed the costs that the country would inevitably face when the bubble burst. … [Most] major news outlets chose to hide any serious debate on the problems posed by the bubble on the way up, and they would like to prevent any discussion of this massive policy failure even in retrospect.


The Real Recession Problem: Consumers Are at the End of Their Ropes, Robert Reich, Jan. 28: … [Business tax breaks exemplify] the illogic of what’s called supply-side economics. If you reduce the cost of investing, so the thinking goes, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there's no point in making it, regardless of how many tax breaks go into it.

Which gets us to the real problem. Most consumers are at the end of their ropes and can't buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing.

Most of what's being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich — which means they already have most of what they want. Instead of buying, the rich invest most of their earnings wherever around the world they can get the highest return.

Add all this together and there's just not enough consumer demand out there to keep the American economy going. We're finally reaping the whirlwind of widening inequality and ever more concentrated wealth. Supply-siders who want to cut taxes on corporations and the rich just don’t get it. Neither does most of official Washington.

Jim Cramer's Rant: 'Fiction in Financials'

Normally I'm not one to recommend financial madman Jim Cramer's rants. But I'll make an exception today for: Cramer Rages on Banks: 'Where's the SEC?!'. The video feed (embedded in the CNBC post) is well-worth a few minutes of your time, even to endure a short ad at the beginning. The CNBC post begins, "Why isn't the Securities and Exchange Commission getting more involved in the whole banking sector writedown situation? Especially since the numbers are likely to get worse, not better? That's what Jim Cramer, CNBC's resident stock guru, wants to know." Then continues:

… "It's all fiction!" [Cramer] declared during a forceful exchange ….

"How can we have these levels of fiction in financials after Sarbanes-Oxley? How do people get away with this? How do they live with themselves?"

Cramer made his comments while reviewing results from Merrill. But his real consternation surrounded the insurers who cover banking investments. Some of those insurers haven't come clean about their liabilities, Cramer speculated. Eventually they will, and then the "fiction" will disappear, he said.

The banking sector and its related industries are all too chummy, Cramer accused. That led the numbers related to mortgage investments -- investments that are currently souring -- to break from reality.

"I think the financial guys all belong to the same club and they got to protect each other," he said.

Worse, those executives behind the current credit crunch are unlikely to get any punishment for their mistakes and disingenuousness about their numbers, Cramer opined.

"I'm fed up with it. The American people should be fed up with it. And the SEC should be fed up with it," Cramer said.

"This is what the SEC is supposed to protect us from," he added. …

P.S. Cramer takes aim too at so-called "mortgage insurers".

Hat Tip: Paul Kedrosky, Infectious Greed.

British Humorists Bird and Fortune:The Banking Crisis

John Bird and John Forture are noted for their staged "interviews". This parody of the Banking Crisis made me laugh out loud. It's too bad that that the crisis is more the stuff of tragedy than comedy. Still, this little video ought not to be missed: You Tube — It's Credit and It's Crunchy

HT: BULL! NOT BULL — Favorite Videos

Note: I deleted an earlier, similar post where I inappropriately attributed "It's Credit and It's Crunchy" to humorist John Cleese. Apologies to Bird and Forture

More from Bird and Fortune: You Tube — The Subprime Crisis and Structured Investment Vehicles (SIVs)

Squandered Trust

Those wishing to understand why systems seemingly as corrupt as ours here in the US seem so resilient and resistant to change, ought to read or re-read John Kenneth Galbraith's The Great Crash 1929 — as I have recommended before. Yesterday, over at Information Arbitrage, Roger Ehrenberg suggested that our financial system is badly in need of governance both at the corporate and government levels. Ehrenberg asked, then answered this fundamental question: "Who is at fault? Everybody." I agreed, in follow-up comments, noting that:

Maybe, finally the shit has hit the fan in a big enough way that people will demand change — eventually after enough pain has been felt by enough people — as they did after the mess that began in the eurphoria of the 1920s and ended with the mess of the 1930s. Only after a big-enough mess will the corruption within the various, connected systems be dealt with and cleaned up. … Good governance is needed from within (corporations) and from without (government, press, academia).

After the cleansing, if and when we get such, we can once again expect honesty from corporations and government agencies who will be trying hard to win back the respect they have squandered during [the] "looting" — the "main play" of the recent-past era (assuming that it began to end in August (and continued to end this week)).

"Everybody" includes corporate boards, managers, investors, auditors, appraisers, "rating agencies", the Press, government overseers (e.g. the Congress, the Administration, federal agencies, the Fed).

Ehrenberg noted in another recent post, again echoing my own sentiments, that the problem is one of squandered trust. Ehrenberg and I disagree on minor points, like the national debt being such a big problem, but we do see eye to eye that many have squandered much-needed trust in our systems — and not just our financial systems!

Here is a little added perspective from Galbraith's The Great Crash 1929 that I left as a comment on James Hamilton's Econbrowser early this year, responding to his post, The New Deal and the Great Depression:

[Me:] It proves interesting to reread John Kenneth Galbraith's The Great Crash 1929. It is as though history is being rewritten before our eyes. Substitute hedge funds for "investment trusts" and it reads pretty much parallel. Frightening! I keep hoping to see daylight beyond what I perceive to be a gathering storm. Daylight will indeed be forthcoming [sometime after] a storm, but the interim may be ugly.

The Great Crash 1929
Chapter II, "Something Should Be Done":

"…like all booms, it had to end. When prices stopped rising—when the supply of people who were buying for an increase was exhausted—then ownership on margin would become meaningless and everyone would want to sell. The market wouldn't level out; it would fall precipitately.

"All this being so, the position of the people who had at least nominal responsibility for what was going on was a complex one. One of the oldest puzzles of politics is who is to regulate the regulators. But and equally baffling problem, which has never received the attention it deserves is who is to make wise those who are required to have wisdom.

Some of those in positions of authority wanted the boom to continue. They were making money out of it, and they may have had an intimation of the personal disaster which awaited them when the boom came to an end. "But there were also some who saw, however dimly, that a wild speculation was in progress and that something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.

… "The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Some one would certainly be blamed for the ultimate collapse when it came. "There was no question whatsoever as to who would be blamed should the boom be deliberately deflated. …

… "Clearly the Federal Reserve was less interested in checking speculation than in detaching itself from responsibility for the speculation.


Chapter III, "In Goldman, Sachs We Trust"

… ""The most notable piece of speculative architecture of the late twenties, and the one by which, more than any other device, the public demand for common stocks was satisfied, "was the investment trust or company. The investment trust did not promote new enterprises or enlarge old ones. It merely arranged that people could own stock in old companies through the medium of new ones. …

"Knowledge, manipulative skill, or financial genius were not the only magic of the investment trust. There was also leverage. … Leverage, it was later to develop, works both ways.”

Chapter IV, "The Twilight of Illusion"

… "To a few alarmed observers it seemed as though Wall Street were by way of devouring all the money of the entire world. However, in accordance with the cultural practice, as the summer passed, the sound and responsible spokesmen decried not the increase in brokers’ loans, but those who insisted on attaching significance to this trend. There was a sharp criticism of the prophets of doom." (empahsis added)

{Update, Nov 9}

I might as well add Bill FLeckenstein's gloom to this already gloomy post:

Yesterday's Flip Flop, William Fleckenstein, Nov 9, Minyanville … I've talked about a dislocation [or "crash"] fairly often and it hasn't happened. Such events have an extremely low probability of occurring. But for folks to think it's not possible would be wrong. The stage has been set, such that the low probability is far, far higher than "normal."

That is thanks to the reckless policies pursued by the Greenspan Fed for the last decade and a half, which have enabled the risks to pile up while rewarding folks for ignoring them. The Fed's efforts to stave off small forest fires from happening has only guaranteed that we will have a gigantic one.

So, we are at a moment in time where a crash is far more likely to happen than at any time before. Does this mean it will happen? Not necessarily. But for folks to think it's not possible would be wrong. It feels to me like that could be right around the corner.

I am not rooting for this, but it seems to be inevitable. What I am rooting for is the return of sanity, which is something that only a large wipeout might bring about. "We have to stop the cycle of bailing out risk-takers, and that is where we are now. At some point, "too big to fail" will become "too big to bail out." And it feels like we may be at that point.

In Defense of Government

I'm heartened to note an upwelling of support for government, finally, in the blogosphere I read. And heartened to see that the strident defense of Free Market Fundamentalism has waned in the wake of recent market/political aberration and scandal. Here are snips from four recent pieces talking about support for govenment and/or reasons for such support. One is from Paul Krugman, as interviewed by Ezra Klein from The American Prospect suggesting that a new dawn may be breaking for "progressives". One is from George Monboit, framed in the context of the Northern Rock bank meltdown, suggesting that "libertarianism" is a belief-system that can only survive when "perpetually subsidized by responsible citizens" of structured governments. Two are from Douglas Amy, as published on his recently renowned, Government is Good website:

TAP [Ezra Klein] Talks to Paul Krugman, The American Prospect, Oct 25: … EK: … [O]ne of the things you mention [in The Conscience of a Liberal] is that [tmes] have changed, and they've changed in part because the forces that kept egalitarian norms and egalitarian culture in place have dissolved. And to some degree, to put it in Galbraith's terms, the countervailing powers have receded, you don't have the government in the same way, the unions in the same way, you don't have the media channeling outrage on this. But how did we get to the place where we've accepted it?

PK: Well I think the outrage is starting to happen now. It takes a while, and part of it is just people … I have the sense that a lot people don't understand how rich the rich are. For the middle-class, it's a lot of the frog in the slowly warming pot syndrome. That year to year the fact that you're falling behind, that you're not getting anywhere despite a growing economy, is not that obvious, and you can chalk it up to your individual experience. But you look back at 35 years of technological progress, rising productivity, and at best arguable gains for the median family, then you can really see it. And the forces at the top are so large that, in a way, they're unimaginable, it's hard to get people focused on it. People at the [NY Times], when I did an article on inequality for the magazine five years ago, and they had artwork illustrating mansions, which I talked about in the article, but what they showed were not. Those were big new McMansions, $3 million dollar, 6,000 square foot homes. But they weren't what the truly rich were building. So people don't have a sense of how far it's gone.

EK: And you talk in the book a lot about political culture, and you touch a little bit on culture culture, but I want to focus on that. We've had "greed is good," Alex Keaton, corporate social responsibility … There's been this real move, not just in the politics and the taxes and so forth, but in the culture, to say, this is ok, even virtuous.

PK: It's the twenties all over again. We can think about what the cultural roots of this would have been, but I think the Great Depression and the war, and the fact that you had a powerful union movement, that forces of equality were big players in the society created a culture where people could say with full-throated voices we did that. …

PK: … [T]here's a progressive movement where there wasn't one before. Clinton came in when the Democratic Party was basically an uncoordinated coalition of people with their own special interests. There is a real progressive movement now. They've learned something from [particularly, the recent health care] debate. …

EK: Toward the end of [The Conscience of a Liberal], you define a liberal as someone who believes in these ideas, and you differentiate that from a progressive as someone who takes action on these ideas. I'm curious where you got that, because I haven't heard it before.

PK: Yeah, it's my own. A lot of people use progressive because liberal has become a bad word, and I don't think that's ultimately a strategy that is going to work, so you might as well adopt the traditional label. But I think in terms of movements a lot. Movement conservatism is a very real force, and movement conservatives, which are by some standards not true conservatives whatever that means. Now we do have a movement, and progressive is mostly used to denote that movement. The American Prospect or the Center for American Progress are clearly progressive movement institutions. That seems to me to be a natural distinction. The values they're exposing are clearly those that have been traditionally associated with liberalism, but the progressive movement is something new. If we had that movement in 1991, as Trent Lott would say, "we wouldn't have all these problems today."

---

Libertarians are True Social Parasites, George Monboit, Oct 23: … Wherever modern humans, living outside the narrow social mores of the clan, are allowed to pursue their genetic interests without constraint, they will hurt other people. They will grab other people's resources, they will dump their waste in other people's habitats, they will cheat, lie, steal and kill. And if they have power and weapons, no one will be able to stop them except those with more power and better weapons. Our genetic inheritance makes us smart enough to see that when the old society breaks down, we should appease those who are more powerful than ourselves, and exploit those who are less powerful. The survival strategies which once ensured cooperation among equals now ensure subservience to those who have broken the social contract.

The democratic challenge, which becomes ever more complex as the scale of human interactions increases, is to mimic the governance system of the small hominid troop. We need a state that rewards us for cooperating and punishes us for cheating and stealing. At the same time we must ensure that the state is also treated like a member of the hominid clan and punished when it acts against the common good. Human welfare, just as it was a million years ago, is guaranteed only by mutual scrutiny and regulation. …

Unless tax-payers' money and public services are available to repair the destruction it causes, libertarianism destroys people's savings, wrecks their lives and trashes their environment. It is the belief system of the free-rider, who is perpetually subsidised by responsible citizens. As biologists we both know what this means. Self-serving as governments might be, the true social parasites are those who demand their dissolution.

---

Government is Good, Welcome: … This site challenges many of common criticisms of government — that it is massively wasteful, incompetent, the enemy of economic prosperity, etc. An objective examination of the actual record of government reveals that most of these charges are exaggerated, misleading, or simply wrong. This is not to deny that American government has its problems. For one thing, it is certainly not as democratic and accountable as it could be, and special interests have way too much political power. Such problems need to be fixed, and this site identifies several needed reforms. Nonetheless, whatever drawbacks this institution has right now are far outweighed by the enormous benefits that we all enjoy from a vast array of public sector programs. On the whole, government is good.

Government is Good, Introduction: We Need to Stand Up for Government: We need to better understand the indispensable roles that government plays in our society, and we need to come to the defense of this unfairly maligned institution.

One reason why conservatives have been winning their ideological war against government is that too few people have been vigorously defending this institution. When was the last time you heard someone offering a positive vision of government — government as a good thing? To their credit, many centrist and liberal politicians have tried to defend various public sector programs — such as environmental protection and Social Security — from the conservative onslaught. But what they have rarely done is to defend the idea that government itself is valuable and beneficial. So while conservatives have been fighting on two fronts — attacking government programs and government itself — the defenders have been fighting back mostly by trying to protect programs. They have not been making the positive case for a healthier and more active public sector. …

This retreat from government must stop. Clearly many centrist and liberal lawmakers understand the valuable and indispensable role that government plays in our society, but they seem to believe that if they too jump on the anti-government band-wagon, this will take the issue away from the conservatives. But this strategy has utterly failed. It has only added fuel to the anti-government fire that Republicans have been stoking for years. Far from abandoning this issue, the right has only pressed harder in their efforts to delegitimize government and create the minimal state. What we need instead is a reasoned and vigorous counter-attack against the anti-government juggernaut — one that champions the vital roles that public sector plays in our society. That is what this website provides — it makes the case that government is good. …

"Conservative" Economic Policy Dies a Timely Death

Obituary: Conservative Economic Policy, Jared Bernstein, TPM Café, Oct 19: Conservative economic policy is dead. It committed suicide.

Its allegiance to market solutions, tax cuts and spending cuts, supply-side nonsense, manipulative and corrosive ties to industry and the rich, have left it wholly unable to cope with the challenges we face. Its terribly limited toolbox simply cannot address the economic insecurities and opportunities generated by today's global, interconnected, polluted, insecure, dynamic, bubble-prone economy.

What's more, progressives have developed an alternative policy set with the flexibility to combine market forces with the necessary regulation and redistribution to address these challenges. Whether that agenda will ever see the light of day is another question.

… The fundamental flaw with conservative economic policy is its reliance on markets for problems that markets can’t solve. It is widely recognized, for example, that consumer-driven health care … does not begin to address the challenge of health care reform. Similarly, while we can all agree that globalization has many positive attributes, simply calling for more "free trade" doesn't address either pervasive income losses to many Americans or the unfulfilled promise of trade to the poor in developing countries.

A related flaw is the inability of the empty conservative toolbox to deal with the critical economic questions of the day. How much regulation is necessary to both foster growth and innovation while avoiding the rampant speculation that has infected key sectors, such and housing and financial markets? The conservative answer is "none," and that's obviously wrong. The last two economic recoveries have been crippled by bursting speculative bubbles. But the trick, of course, is correctly calibrating the regulatory agenda.

On inequality, … [There is] nothing in [conservative ideology's] toolbox to address inequality. To the contrary, their tax policies exacerbate it.

And while education provides a critical leg up, it cannot be the sole policy solution for inequality …. When the benefits of (accelerated) productivity growth are flowing almost exclusively to a narrow sliver at the very top of the wealth scale, something else besides "enhanced returns to skills" is going on.

… Too much power rests in the hands of too few right now, and they have used their political and financial power to pursue violent, shortsighted foreign policy, steer the lion's share of growth their way, and avoid dealing with the challenges of global warming, health care, and inequality.

So we are left with a riddle: how can conservative, economic elites be both powerful and dead at the same time?

It's because they are zombies: their ideas that are dead but their political and economic clout remains prodigious and threatening. They can still win elections. But they cannot govern—they're proving that with every new failure of the government they demonize but still dominate. … Yet zombies are always dangerous, and while the tide appears to be turning against them, their defeat is by no means a sure thing. …

In my decades of life as a progressive economist, I've never seen such an outpouring of good ideas. … But good policy solutions by themselves won’t win the day. I remain deeply nervous that progressives will fail to tap this uniquely clear moment of the failure of conservative policy. And the stakes are very high. If we squander this opportunity—if we fail to get the majority of the electorate behind the progressive ideas touted above, or we fail to push wavering centrist democrats toward these ideas—we may not be able to repair the damage. I don't mean to be alarmist, but we must stop the zombies before it's too late.

Naomi Klein on: 'Shock Doctrine' and Greenspan

{Updated 9/30}

Naomi Kleins' book, The Shock Doctrine: The Rise of Disaster Capitalism is nothing if not controversial. So is Klein. Commentary surrounding Klein's book is raising important questions as to what effect activist economists have on politics. Those familiar with Robert Heilbroner's works, e.g. The Worldly Philosophers, Behind the Veil of Economics already know well what impact the most well-known and powerful economists have on politics.

In The Shock Doctrine Klein takes on Milton Friedman and "the Chicago boys", blaming them for planting the seeds of so-called free-market capitalism in the minds of disciples, paving the way for alleged "crony capitalism" that followed. William Grieder's appraisal of Friedman is also damning. So is Joseph Stiglitz's, in his "Bleakonomics" review of Klein's The Shock Doctrine. Here's Alexander Cockburn's review , which views Friedman in a slightly less evil light. Yesterday, Klein took on Alan Greenspan:

Greenspan and the Myth of the True Believer, Naomi Klein, The Nation,Sept. 27: … Since I began touring with my book The Shock Doctrine, I have had a number of exchanges like this, revolving around the same basic question: When hard-right political leaders and their advisers apply brutal economic shock therapy, do they honestly believe the trickle-down effects will build equitable societies--or are they just deliberately creating the conditions for yet another corporate feeding frenzy? Put bluntly, Has the world been transformed over the past three decades by lofty ideology or by lowly greed?

A definitive answer would require reading the minds of men like Dick Cheney and Paul Bremer, so I tend to dodge. The ideology in question holds that self-interest is the engine that drives society to its greatest heights. Isn't pursuing their own self-interest (and that of their campaign donors) compatible with that philosophy? That's the beauty: They don't have to choose. Unfortunately, this rarely satisfies graduate students looking for deeper meaning. Thankfully I now have a new escape hatch: quoting Alan Greenspan.

His autobiography, The Age of Turbulence, has been marketed as a mystery solved: The man who bit his tongue for eighteen years as head of the Federal Reserve was finally going to tell the world what he really believed. And Greenspan has delivered, using his book and the surrounding publicity as a platform for his "libertarian Republican" ideology, chiding George W. Bush for abandoning the crusade for small government and revealing that he became a policy-maker because he thought he could advance his radical ideology more effectively "as an insider, rather than as a critical pamphleteer" on the margins. Yet what is most interesting about Greenspan's story is what it reveals about the ambiguous role of ideas in the free-market crusade. Given that Greenspan is perhaps the world's most powerful living free-market ideologue, it is significant that his commitment to ideology seems rather thin and perfunctory--less zealous belief, more convenient cover story.

Much of the debate around Greenspan's legacy has revolved around the matter of hypocrisy, of a man preaching laissez-faire who repeatedly intervened in the market to save the wealthiest players. The economy that is Greenspan's legacy hardly fits the definition of a libertarian market but looks very much like another phenomenon described in his book: "When a government's leaders routinely seek out private-sector individuals or businesses and, in exchange for political support, bestow favors on them, the society is said to be in the grip of 'crony capitalism.'" He was talking about Indonesia under Suharto, but my mind went straight to Iraq under Halliburton. Greenspan is currently warning the world about a dangerous looming backlash against capitalism. Apparently, this has nothing at all to do with the policies of negligent deregulation that were his trademark. Nothing to do with stagnant wages due to free trade and weakened unions, nor with pensions lost to Enron or the dot-com crash, or homes seized in the subprime mortgage crisis. According to Greenspan, rampant inequality is caused by lousy high schools (which also has nothing to do with his ideology's war on the public sphere). I debated Greenspan on Democracy Now! recently and was stunned that this man who preaches the doctrine of personal responsibility refuses to take any at all.

Yet ideological contradictions are only relevant if Greenspan really is a true believer. I'm not convinced. Greenspan writes that as a student he had no interest in big ideas. Unlike his classmates who were in the thrall of Keynesianism with its promise of building a better world, Greenspan was simply good at math. He started doing research for powerful corporations; it was profitable, but Greenspan made no claims to a higher social contribution.

Then he discovered Ayn Rand. "What she did…was to make me think why capitalism is not only efficient and practical, but also moral," he said in 1974.

Rand's ideas about the "utopia of greed" allowed Greenspan to keep doing what he was doing but infused his corporate service with a powerful new sense of mission: Making money wasn't just good for him; it was good for society as a whole. Of course, the flip side of this is the cruel disregard for those left behind. "Undeviating purpose and rationality achieve joy and fulfillment," Greenspan wrote as a zealous new convert. "Parasites who persistently avoid either purpose or reason perish as they should." Was it this mindset that served him well as he supported shock therapy in Russia (72 million impoverished) and in East Asia after the 1997 economic crisis (24 million pushed into unemployment)?

Rand has played this role of greed-enabler for countless disciples. According to the New York Times, Atlas Shrugged, her novel that ends with the hero tracing a dollar sign in the air like a benediction, stands as "one of the most influential business books ever written." Since Rand is simply pulped-up Adam Smith, her influence on men like Greenspan suggests an interesting possibility. Perhaps the true purpose of the entire literature of trickle-down theory is to liberate entrepreneurs to pursue their narrowest advantage while claiming global altruistic motives--not so much an economic philosophy as an elaborate, retroactive rationale.

What Greenspan teaches us is that trickle-down isn't really an ideology after all. It's more like the friend we call after some embarrassing excess so that they will tell us, "Don't beat yourself up: You deserve it."

For more Shock Doctrine (and commentary) see:

The Guardian, Shock Doctrine minisite

Joseph Stiglitz's NY Times review, "Bleakonomics",Sept 30:

… Some readers may see Klein's findings as evidence of a giant conspiracy, a conclusion she explicitly disavows. It’s not the conspiracies that wreck the world but the series of wrong turns, failed policies, and little and big unfairnesses that add up. Still, those decisions are guided by larger mind-sets. Market fundamentalists never really appreciated the institutions required to make an economy function well, let alone the broader social fabric that civilizations require to prosper and flourish. Klein ends on a hopeful note, describing nongovernmental organizations and activists around the world who are trying to make a difference. After 500 pages of "The Shock Doctrine," it's clear they have their work cut out for them.

The Politics of Future Promises

Over at Econbrowser, James Hamilton has been detailing his concerns about meeting future pension and health care obligations, interrelating them with the subprime meltdown, the derivatives/hedge fund 'problematic', etc. Today, Hamilton points to several contemporary examples — in California, Tenessee, New Jersey — and concludes:

If there were just one or two such stories, one might regard it as a mistake here or a miscalculation there. But the phenomenon is too widespread to be dismissed as accidental. I am forced to conclude that a pervasive feature of modern American politics is for elected officials to lavish benefits on their current power base, promising or in many cases legally obligating the government to make future payments that will prove to be extraordinarily costly to deliver. I conclude that the reason elected officials keep doing this is because that is what voters want.

I have not read Bryan Caplan's new book, but I must say the cover does a nice job of conveying what the issue may be.

The Debt and the Deficit

I am a big fan of Peter Bernstein. I recently re-read The Debt and the Deficit to refresh my mind as to where we stand relative to both. Bernstein co-authored the book with Robert Heilbroner back in 1989. Heilbroner and Bernstein argue that, by itself, cutting the American budget deficit will not increase private savings, indeed it might help make it worse. In response to the question, "Can we raise the national savings rate by cutting the budget deficit?", they say:

The answer is no if that will result in a further squeeze on household and business income. The answer is yes if at the same time we are committed to measures to improve the productivity and international competitiveness of the American economy. And the achievement of these goals is critically dependent on a high level of public as well as private investment.

I highly recommend this little book to any who struggle with our current and historical debt and deficit problems. Too bad Heilbroner and Bernstein's insights were not followed. Here in the USA, we might have turned around our slide into household sector "dissaving". We might have rethought our using the military-industrial complex for purposes of Military Keynesianism (to whatever extent this very controversial proposition may have been employed (see also Republic or Empire)). We might have imposed a gas tax, as they then advised, in an era long before allegations of corporate wrong-doing and price gouging became fashionable.

All of it might have been done while keeping an eye open to the need to move more slowly into Globalization with some form of nation-to-nation capital flow controls to keep "hot money" from creating ever-bigger bubbles to later burst wreaking havoc afterwards. All of it might have been done with some form of policy to moderate the waves of outsourcing and offshoring that have plagued middle-class workers in the "more developed" countries. Oh well!

Dumbed Down in America: Myths we live by

Are we being dumbed down by contemporary mythmakers? Jim Willie says Yes, and includes "economists from many corners, [b]udget advisors, brokerage analysts, government spokesmen, and academic charlatans [as] modern soothsayers, hardly ever correct, always revered, never understood." Willie goes on to say, "whenever things are about to go badly, we face more economic myths in the process of being shattered, and are soon subjected to new ones." Here's more:

The Tragedy of Busted Myths, Jim Willie [9/2/06]: Mythology is powerful. Just a few thousand years ago, men would go to war over strange beliefs about gods and goddesses, or make decisions of state, or act upon the fate of cities and hamlets, or enter into big trade agreements, or embark on grand voyages, or agree to marriage, all after consulting the oracles. They were the gurus of their day, replaced today by economists from many corners. Budget advisors, brokerage analysts, government spokesmen, and academic charlatans are the modern soothsayers, hardly ever correct, always revered, never understood. It seems whenever things are about to go badly, we face more economic myths in the process of being shattered, and are soon subjected to new ones. In their failed wake, we install more controlling (corrupting) mechanisms like the Plunge Protection Team after crises like the 1987 Black Monday and the 2000 Tech Telecom bust.

Once again the motive in promoting silly myths is the same, or at least the nucleus motive is the same. Domestically, that is to deceive the hapless ignorant hopeful public to continue to trust the leadership out of Washington DC and New York City, to continue to remain invested in the Wall Street game, to continue to participate in the consumption game, to avoid a panic and head for exits before the losses mount. On the foreign front, the motive is to encourage other nations to continue to send their hard earned savings into the Great Black Hole that is the USEconomy, to continue to supply and satisfy its desperate credit needs, to continue to pay for the entry fee for selling in its vast marketplace. The unspoken motive is to enable the aristocrats to continue to churn their machinery, to ply their trade of exploiting the great paper game, to further the squeeze on the middle class. In fact, the middle class is the greatest loser from inflation's impact and heavy cost.

INFLATION WRECKAGE
Inflation has its hidden costs. Writers, analysts, and pundits catch the easy victims, like savers who are robbed of the stored value from the drip drip drip of erosion. Like small-time participants who shun the opportunity to grow big. Rising wages, which at first seem like an advantage from a steadily inflating economic system, have turned on the masters of the inflationary machinery. Job outsourcing to Asia has ripped the manufacturing foundation of the USEconomy clean off its mooring and capstone, deprived it of legitimate wealth generation. Consequently, the participants of our mfg-less society have been deceived into believing that consumption within retail chains can stand in its place. It offers the benefit of cleaner air, less sweat, and more fun. What's not to like? Let's go shopping, the great medication for the depressed. Instead of factories belching out smoke, noxious fumes, and rendering its workers musclebound but with damaged bodies from chemical intake, we have clean tidy shopping malls, nifty prevalent consumer retail chains, really cool electronic stores, and nice smelling furniture marts.

Complimenting the networks of consumer havens are our homes, the veritable piggy banks. Who needs to save anymore, so passé? We have mutual funds and trading accounts. So we have suffered a deadly transition from making products in an industrial setting, wherein added value is gained from human labor with the aid of sophisticated machines. We now stand with one foot in the financial credit spin cycle replete with mortgages and car loans and vendor financed sales, not to mention the world of stocks and bonds, and the other foot in the service collage known to keep our devices and grounds in working order and looking spiffy.

Is this progress? No way! It is a tragedy in the making, fully denied. We crossed the Rubicon ten years ago, maybe as long ago as the 1971. The most reckless and irresponsible phase change has been the overdue dependence within the USEconomy on the inflated equity of the entire housing sector. Indeed it sustains the system to a great degree. Americans have not saved actively since the mid-1990 decade, when Greenspan endorsed irrational exuberance by warning about it, but continuing to feed the destructive damaging condition. Several years later, Greenspan actively shocked the world by claiming that gains in home equity suddenly realized should be regarded as legitimate wealth. This is unprecedented in the modern era for a central banker. Worse still, in 2005 Greenspan added insult to injury by stating that "People who took on too much debt were desirous of financial harm." He urged the housing bubble stampede, then stepped out of its path on political fallout. The central question should be "Will the Greenspan legacy be directly linked to the upcoming crisis in housing and the USEconomy, which is of his own making?" Given the utterly imbecilic naïve confounded lack of comprehension of economic matters, blame is likely to go to the current USFed Chairman Bernanke by the present public and current leaders alike.

The entire nation has been dumbed down on all matters economic, at least on the macro level. The crisis will happen on Ben's watch. It is not preventable. Its pathogenesis was designed and laid out carelessly but meticulously by Mr Greenspan. He split town to leave Bernanke with the headache, and likely blame. Without a doubt, Ben was selected to become the bagholder. Poor Ben has less charisma than Alan, perhaps equal ability to explain and confuse, but he tragically has no more available bubbles to engineer like Alan did. Housing is the last bubble. Well, to be more clear, the commodity bull is the final bubble, but it is of a cost nature.

CITATION OF CURRENT MYTHS
The present situation is overflowing with falsehoods, nonsensical beliefs, indefensible notions being actively promoted when required. … It is inconceivable to me how any sane, well educated, competent academic Economics professor of repute could defend a single listed item. Yet the great majority of this corrupted profession do precisely that, defend and promote and carry on the great game. The corruption is of thought process. An economic system dependent upon inflation requires the associated cancerous defensive thought to complement the cancerous policy itself. A certain level of cheerleading is also necessary to keep the public bought in.

Almost all current myths will soon unravel in tragic fashion. Do not expect apologies when they do. Expect instead blame to be put on speculators, blame to be put on the mortgage industry (maybe even Fanny Mae & Freddie Mac), blame to be put on reckless consumers, blame to be put on past administrations, blame to be put on Congress, blame to be put on outsourcing corporations, blame to be put on the Chinese. Do not expect much blame to be put on the high priests Greenspan or Samuelson or Friedman. They are untouchable. Give better than 50-50 odds that sufficient blame will be lodged on Bernanke, to the point that he might be dismissed and shown the door before all monthly calendar pages of 2007 are turned.

Here is a cornucopia of current crazy myths at work, the underpinnings for each to unravel in tragic fashion. Steadfast belief in them would be funny if not so tragic in doling out misery. The list could fill volumes, but in the interest of time and space, only the major prominent myths are cited. The authors and proponents to each myth should feel shame, but they do not, at least not publicly. My guess is that privately, they might offer derision and contempt for the public who accepts their spun claptrap silly beliefs which hold the system together and keeps the caste structure in place. This list is simply mindboggling.

Jim Webb and Jon Tester on Trade and Globalization

Last Sunday morning Senators-elect Jon Tester (Montana) and Jim Webb (Virginia) joined Tim Russert for MSNBC's Meet the press. I liked what I heard on employment, trade, globalization, and the plight of workers—number 1 issue for each of them. We will all have to stay tuned for more on both talk and delivery from the newly elected Democratic power bases in both the House and the Senate. Here is a snip:

Late-Summer Bearish Sentiment:

As the summer fades into fall, I've been torn away from my blogs, among other things preparing a garden wedding for my daughter. I will also be away again in late Sept. – early Oct. when I wander off into the wilds of Wyoming's Wind River Mts. for an extended fall camping/hiking/hunting trip. Posts will continue to be few and far between. Today I thought I would at least touch bases with the primarily bearish sentiment that gets passed along periodically on this blog:

Nouriel Roubini (9/5),

…[F]or a moment, … leave aside the issue of whether my recession call is correct or not. …[W]hat happens to stock prices when recessions do come[?].…[I]n most episodes, the stock market peaks a few months before the actual start of the recession and starts falling even before the formal start of the recession (i.e. before the peak of the business cycle). …[T]he cumulative fall in stock prices from their pre-recession peak to their bottom level in the actual recession is well above the 17.5% figure for the stock price fall from the start of a recession to the lowest level of such stock prices during a recession. This average fall in stock prices from pre-recession peak to into-recession bottom is actually close to 28%, an extremely severe and sharp bearish downfall. …

[This time around] equity valuations for homebuilders have already sharply fallen, by about 40% relative to their peaks of last year. Does the earliest bust of the housing sector relative to the overall economy imply that homebuilders’ equity valuations - that have already sharply fallen – will bottom out earlier than those for the general stock market during the coming slowdown and recession? Not necessarily as the sharp fall of the housing sector and the depth of the housing bust may be much deeper and more protracted than that of the overall economy. So, one cannot assume that housing sector’s stock market valuations will bottom out before the overall stock market does during the coming economic downturn.

… [B]eware of the large amount of bullish spin that is being peddled today by bulls that are now starting to recognize that a hard landing or a recession is more likely: they need to spin the bad news about the economy as suggesting that such bad news are actually very good news for the stock markets. … [emphasis added]

Brad Setser, musing over "Yet more evidence that the US is the best place in the world to invest. Or maybe not." concludes (9/5), " … Watch out should America's creditors ever realize that they are getting taken to the cleaners, year in and year out."

Stephen Roach hedges his bets (9/1), remaining cautiously optimistic as to "structural rebalancing" while getting more pessimistic as to "the cyclical outlook for the world economy." Roach says "when judged against the rapidly changing state of the US housing market -- or even the pressures building in an overheated Chinese economy -- progress on the structural front has been swamped by the emerging downside pressures on the global business cycle." … "The good news is that the stewards of globalization are finally working together to temper the risks associated with such a shakeout. On balance, I remain constructive on the structural prognosis while I have turned more pessimistic on the cyclical outlook."

Bill Gross concludes, (Sept 06) "U.S. stocks … will stutter, perhaps stagger, as investors understand that much future wealth has been spoken for, if not already digested, by a boomer generation acting as consumers of first and last resort."

Paul McCulley concludes (Sept 06) "…[W]e are convinced the property market is going to continue to surprise on the downside and the knock-on effect on consumer spending and job creation is also going to surprise on the downside."

Barry Ritholtz says (9/6) "…What, me worry?" will eventually turn into "WHAT? Me worried!" My question isn't if but when. And judging from the skepticism I've been hearing, I'm betting its sooner rather than later."

For Grizzly Bear sentiment, see Elaine Supkis (9/6) and JucoJames (7/17)

Dave Altig offers a different perspective that ought not to be set aside lightly. After all, who among us knows much of anything concretely about past, present, or future. On (8/25) Altig said, "...To put it straight, I harbor no illusions about the state of the residential housing market. …[M]y tendency is to focus on the trajectory of the entire economy. [Even] [i]n the best of times there are some sectors of the economy that struggle, and it is not clear that these are the appropriate objects of policy.

More to the point, softening in housing markets, and attendant consequences on consumer spending and GDP growth, are already embedded in every reasonable forecast. They also include the expectation that the future will in part bring a rising share of business investment along with a falling share of household consumption. … … I'm just not sure that the incoming data is convincing enough yet to substantially alter our forecasts about the general health of the U.S. economy. I should emphasize that I am very far from sanguine about those forecasts.

Altig adds (9/5), "... [B]ut as Arnold Kling notes, Shiller-Case futures [PDF] on home prices suggest 'a rate of decline of 5% a year... by May 2007.' And that is for 10 of the most bubbly -- er, frothy -- markets in the country. Not trivial, but still, it seems to me, in the realm soft-landing expectations. ... [D]espite Nouriel Roubini's insistence of the pervasive influence of the residential housing market on employment, I just don't see it ... The general pattern of economic activity thus far this year has played out about as expected, excepting the negative influence of yet another round of energy price shocks."

Finally, let me leave you with Barry Ritholtz' more general appraisal of sentiment (9/5):