Steve Randy Waldman is Rightfully Worried

In his Valentine post (Feb. 14) Steve Randy Waldman asks, Can we handle the truth? The essence of his message is that the empire is collapsing around us, and there is no easy fix. The credit bubbles have imploded, leaving us with a mountain of debt. Corruption, dereliction of duty, and ideological blindness exist on massive scales. Waldman, in part:

Both globally and within most nations, the patterns of consumption required to sustain existing social arrangements are inconsistent with the distribution of the fruits of production. Social and economic stability, therefore, depend upon redistribution for which there is no overt legal framework or political consensus. To square this circle, the financial and government sectors have evolved means of hiding redistribution in complex, continually improvised arrangements. Unsurprisingly, massive wealth distributions arranged in this way leave much to be desired, in terms of straight corruption (the financial and government sectors redistribute a lot of wealth to themselves), justice (e.g. wealth is redistributed to those who happen to speculate early in bubbles), and sustainability (the illusion of value behind the claims of those from whom wealth is taken may prove fragile, but “loss realizations” are socially disruptive if they are not carefully paced and allocated). …

Neither financial nor political reform can succeed unless we overcome the social and economic contradictions we have relied upon the financial sector to literally paper over. …

Our choices are to overtly align the fruits of production with patterns of consumption, to continue to employ accounting fictions and magic to pretend away the contradictions, or to undergo some form of collapse.

Waldman hasn't been particularly happy in awhile. Neither have I. Over a year ago he said, in part:

Cassandra had a brilliant post not long ago called "an idea crunch". Read it if you haven't. Ultimately, a financial system has to find productive projects for the private parties to invest in. The government can invest directly, can delegate investment to the best and the brightest, can saturate the public's demand for money until private parties try to find other means of storing wealth. But it's what real human beings do with real resources that ultimately matters. Our financial system didn't fail because it was overlevered. It failed because it was uncreative: It could not conjure up worthwhile things to do with the capital it was asked to invest, and instead of owning up to that, it pretended that poor projects were good. Financial markets are ultimately information systems. The only way out of this is to discover worthwhile things to do, or more importantly, to develop better means of generating a diverse menu of worthwhile things to do going forward. Right now, the government is being asked to do what the semi-private financial system could not: generate a positive real return on trillions of dollars of undifferentiated future claims. The stakes are very high — that Moldbugian monetary Nash equilibrium can be a bitch. Money is the bubble that need not pop, but that's no guarantee that it won't. Anything that's desirable only because everybody desires it is just a single major failure away from being yesterday's darling. If unthinkable banking system failures can occur, so can unthinkable failures of the monetary system.

This last comes from Winterspeak Wonderland and Miraculus Mencius, Interfluidity, 01/27/2009, which is worth reading studying in its entirety. 

OK. Maybe our finacial system was overlevered. But as Waldman suggests the problems run so much deeper. We are in the grasp of the unthinkable: a failed monetary system, or better stated a failed political economic system. It certainly is not the first time, nor likely the last. What can we learn?

Maybe we can learn that the problem is bigger than most of us want to think it is. We must admit that there was/is a good deal of "book cooking" going on, and people who knew that the kiting  was ongoing were paid well to keep quiet. Others were simply blind — some blinded by ideology — or distracted. The looting of the system is, in hindsight, massive and ought to have been nipped in the bud in a civil society. But it wasn't this time around just like it wasn't last time around, 1929. No better time to talk about reform—reform writ much larger than finance.

And maybe we ought to look beyond finance and politics for problems. We are in the midst of another great transformation, wherein jobs are vanishing at an unprecedented pace. Between computerized robotics in manufacturing, computer automated design, and self-help from automated scanners (banking and grocery, etc.), not to mention outsourcing to so-called emerging market economies, it is becoming harder and harder to see exactly were American jobs are supposed to come from.

Note: I'm bringing Waldman into this blog right now because he has been conversing with some who may give us insight into how to better run the world's financial system. Or maybe Steve and I are both delusional, "playing with the devil," so to speak. More on "Chartalism" and other new-age banking ideas to come.

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