“I’m so bored. I hate my life.” - Britney Spears

Das Langweilige ist interessant geworden, weil das Interessante angefangen hat langweilig zu werden. – Thomas Mann

"Never for money/always for love" - The Talking Heads

Wednesday, January 21, 2009

Another one bites the dust

The zona landed at my place this afternoon. I may have to interrupt Limited Inc for a bit, although I hope not. My landlord wants 450 dollars in back rent which, long story short, I didn’t know I owed. Possible eviction looms – but such,such are the breaks! It will be hard to plug in this laptop into a sapling in a field.

However, while I’m still electrified: LI readers should check out the discussion between James Surowiecki and John Quiggin
about nationalizing banks, since it gets to the heart of a matter that has been obscured by the thousandfold murk of pundits and University of Chicago economists.

Surowiecki starts things off by putting all his cards on the table:

“Like Kevin Drum, I think that as the “nationalize now” meme has taken hold in the blogosphere, people are talking about nationalization “awfully casually.” One way this manifests itself is in the argument that the only reason people are skeptical of nationalization is because it’s “un-American,” when, in fact, I think people are skeptical of it for two big reasons:

1) Two years of financial crisis does not invalidate the general principle that private enterprise is typically better at efficiently allocating resources than government; and
2) the idea of the state literally determining which companies and individuals do or don’t get credit is, even to a non-libertarian, at least a little troubling.”

Quiggin keeps the discussion confined, unfortunately, to the technical question of the state of the financial services sector:

“What’s needed in the present case is not only to fix the problems of individual banks, problems on a much bigger scale than have been seen before (even in the leadup to the Great Depression, the financial sector played a smaller role in the economy than in the recent bubble), but to reconstruct a failed global financial system. It’s kind of like rewiring an electrical system in near-meltdown, while keeping the power on (this is possible, but tricky and dangerous). The job is likely to be much slower than the rescues mentioned above, and the institutions that emerge from it will be very different from those that went in.
But, contra Surowiecki this time, this only strengthens the argument for nationalisation. Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.”

I commented extensively at CT. Arguments which I’ll repeat here.

“I like the way Surowiecki casts the terms of the argument. It is precisely the fact that, contra his Chicago-ish point of view, private enterprise did not do a good job of allocating capital which is the strongest argument in favor of a national bank.

Was the allocation of capital towards financial innovations and away from, say, energy innovations, and towards inflating assets, like homes, and away from infrastructure an accident of the system? I’d argue that it wasn’t. That is, I’d argue that the private enterprise system was caught in a trap in which it couldn’t profitably allocate capital in the most efficient way. The allocation of capital to the housing market was both inefficient and the best solution that the private enterprise system could come up with. Like all bubbles when they pop, the housing bubble is now being seen as one big mistake. It wasn’t – it emerged from a crisis in the system of the Great Moderation as a logical solution to the problems caused by the collapse of the tech bubble. And, in fact, it was entirely rational to bet that rising housing prices would still find a market with a population of homeowners who, in the nineties, seem to shake off the slowdown in the rate of income increases they’d suffered under Reagan and Bush. I believe the standard ratio for buying a house is that its price be three times the yearly income of the household. From what I read, nationwide, in the naughties, that ratio went to 4:1. If you look at the spread, you’ll see that this reflects, exactly, the stagnation of incomes over the last eight years. And that reflects, exactly, the cul de sac in which we sit with a system that has overemphasized free market solutions over the last thirty years.”

Now, an objection was made to my statement of the case by a conservative, who brought out the argument that conservatives have now been forced back upon. Basically, we are told, due to the government refusing to regulate Fannie Mac and Freddie Mae, this mess happened – so it is the government’s fault again.

I find this argument false in its details, but, more than that, misplaced in terms of the level of argument. In actuality, as conservatives happily pointed out in 2005, and as neo-liberals pointed out extensively in the nineties, we live in an economic environment in which business is freer to operate as it will than at any time since the 1920s. If this isn’t true, than of course we need some explanation of what happened to the Republican revolution of 1994, what happened to the innumerable references to the American model versus the European one, or what happened to Alan Greenspan, or what happened, indeed, to Greg Mankiew, one of Bush’s economic advisors in 2003-2004, who is now promoting the Fannie Mae story. Memory hole has never widened so suddenly or so fast.

So, let’s hypothesize that the conservatives, before the crash, were right – that is, their description of the general tendency of the American economy was right.

This, then, is what I would say:

“But, in essence, that is neither here nor there. In fact, the private sector acted as rationally as it could by pumping money into the housing bubble. In other words, it wasn’t some contingency that caused the private sector to misallocate capital. Nor was it interference from the government – in fact, the degree of government regulation diminished. Rather, the problem was one of structure. The private sector, contra the neo-classical model, doesn’t operate under conditions of full employment, and does operate within a business cycle that determines the investment landscape at any one time. In other words, it was due to the structure of the private sector that capital was allocated suboptimally and inefficiently. The conservative economic policies of the Clinton and Bush administration had retracted the kind of positive interference by the government to give the private sector the fullest possible space to maneuver. And the private sector took advantage of that space – in fact, in 2004, you would find conservative economists or publicists, like Mankiw and Larry Kudlow, bragging about how well it was operating. It was a boom. However, this boom depended on battering the bargaining power of labor so that there was no median rise in household income, while at the same time creating more credit for the median household to use.
The housing bubble, in other words, was the best solution the private sector, under the freest conditions since the 1920s, could come up with.
Now, those conditions are not going to be changed no matter how much money is poured into failing banks and hedge funds. They are only going to be changed by inflating incomes. This will not come about if business and commerce aren’t revived. But there are no sources within the private sector for that revival. Which is why liquidate liquidate liquidate will only lead to ever worse conditions. To revive the economy in this phase of the business cycle, command and control economics, using the power of the state to, for instance, capitalize a Reindustrialization facility, is the best and shortest way.
Again, the argument here isn’t whether the Democrats or the Republicans should have done x or y to regulate Fannie Mae. The argument is that the regulatory environment was the most business-friendly since the twenties, and the Free markets responded by allocating capital in those ideal conditions as the market decided was most efficient – that is, most profitable. it seems to me that you don’t get to test many economic models as well as we get to test the model of free markets lately.”
To put this as strongly as possible: the housing bubble saved our national ass in the post tech crash. It was deliberately intended to. The private sector was allowed to allocate capital with few strings attached. The mangle of inequality – that is, the increase in both the relative poverty of the median household and the increase in its buying power, or credit line – worked to create the necessary political atmosphere in which business could operate with less and less regulatory supervision by the government. The crash we are feeling intensely now was simply postponed a few years by policies that allowed ever more money to be made by the ever fewer. And the result is this disaster. But this disaster would have happened in 2003 without a deliberate policy of easy money and de-regulation. We are suffering through a structural contradiction that was bound to hit us one day or another.


abb1 said...

The private sector (capitalism) has its strong point: it's great for mass-production of cheap junk; short term, ever cheaper ever more abundant. If that's the goal, leave the private sector alone, it'll manage.

Cheap mortgage was their product, they produced plenty of it, and now it's a crisis of overproduction; their warehouses are full of cheap mortgages nad no one is buying.

The government sector, I imagine, can do pretty much anything except mass-production of cheap junk. But the government is going to act in the interests of its patrons and its patrons are large multi-national corporations, the influence of the general population is insignificant.

So, I'll say: first fix the government, and then let the government figure out what to do; it won't be too complicated.

BrianM said...

"So, I'll say: first fix the government, and then let the government figure out what to do; IT WON'T BE TOO COMPLICATED."

Thousands of years of history might suggest that this statement is not really true :)

abb1 said...

Well, not to make it perfect or anything, but something like what the FDR administration did in the 30s; mostly by trial and error, of course, but at least moving in the right direction.

roger said...

I hold to a broadly adaptionist view of institutions, and think that they adapt to their social landscapes - to which they have contributed, it should be remembered - as those landscapes change. Which is a butter won't melt in my mouth way of saying that of course Governments tend towards corruption, corporations to pilfering, NGOS to victimmongering, etc.

What I find interesting about the years of the Reagan plutocracy, which has started to die last year, was how very cheaply Congress and the executive branch could be bought. Compared to inflation elsewhere, the political market has been a real bargain. The inkind benefit - revolving doors between industry and politicians and their aides and the over benefit - political contributions - don't amount to a lot of cash, looked at objectively.

Which is why I think the political market is going to change radically. Just as the internet destroyed the old music business, I think it is beginning to destroy the old political market. Without the internet, Obama would clearly be a footnote. But I think that is just the beginning. In the political marketplace, money flows almost entirely to raise the bar to entry for competitors. This is why politicians love to reveal their contribution figures. And really, who in Atlanta is going to care about a representative from some district in Minnesota? This, however, has changed. The changes have been slow - although in the perspective of the market, they've been very fast - but they are starting to gain critical mass (I can't help it! the jargon demon is upon me! quick, get me a power point slide!). The old bribers now connfront a whole new landscape of bribery, in which individual contributions can be directed in unpredictable ways via the net. Just like napster, which petered out, signaled the end of the music biz's distribution system, Dean's run in 2004 was the signal that change was coming and coming fast to the political marketplace.

This, I think, is Obama's secret power in the political process. Sure, Dixie seats will remain safe for troglodytes, but the truth is that you have to have monopoly control of the bribe machinery to rule from 40 percent, which was Bush's thing.

roger said...

ps - my brother made the best comment about Cheney last night. He said that Biden should have turned to Cheney, hoisted him out of the wheel chair, and told Obama, this guy is a fuckin' goldbricker, dude! He can fuckin' walk.

abb1 said...

Institutions do adapt, of course, but there are ways to adapt: to camouflage, to grow a pair of wings and fly away, or to grow longer claws and sharper teeth. I don't think it's possible to tell how they are going to evolve.

Bribe machinery evolves too. As I wrote here a while ago, the media have become more politicized and direct bribes by contribution may already count less than media ownership.

p said...

Well, I thought "commode with legs" is a pretty good description of John Thain.

roger said...

Well, abb1, the safest prediction is that the future is unpredictable, which is bound to be true (and so, technically, bound to be false - but what's a little cretan liar paradox among friends?)

So, Ill put myself out there and predict anyway.

The bribemakers in the old political marketplace had stable preferences. A Disney PAC, year after year, was aimed at making Disney money. A Union PAC was aimed at making the worker more money. Around these central preferences, others swirled. But one could reliably count on them over time.

However, this is not true about the internet donor system. Here, the preferences of the donors seem to be all attitudinal. And it is much harder to make a set of stable preferences out of attitude. I can motivate disney to donate with the promise, say, of corrupting IP law to favor it. But how am I to get x in Athens, Georgia, to donate to a campaign in, say, Connecticut?

The solution is sensationalism, or the politics of outrage. This is because donation is often part of the ultimate game - you donate to get revenge, to seek fairness - and so one needs to find a way to tap this among donors. Hence, the search for reasons to be scandalized, and the puzzle that seemingly deeper, much more important structural matters go undiscussed. The healthcare system in the U.S. is, I would guess, disliked by the vast majority of Americans, but decade after decade, nothing happens. On the other hand, certain professionals - say Ann Coulter - can say, oh, that John Edwards is a fag, and it causes an explosion among people who don't normally care. And who are certainly not going to donate to some obscure candidate because of his policy paper on healthcare - even though that paper might be much more pertinent to their well being. Thus, the explosions are profit and loss things too - and so the money flows both pro and con through the nets.

This poses a problem of sorts for Obama. His instinct, it seems to me, is to be a peacemaker, to make gestures towards the GOP, to get to be McCain's friend, of all things. But he is a product of the new internet driven political marketplace. The politics of outrage drive that marketplace. Now, this might turn out to be a plus - he can remain above it, and the internet marketmakers can still stir the pot. Of course, Bush has helped by fueling the outrage of a whole generation, much as Carter seems to have fueled the outrage on the right.

All of which leads to a rather soggy prediction that these two poles - the politics of outrage and the politics of bipartisanship - will shape the way politics is represented on the liberal side for the next couple of years.

abb1 said...

I understand.

But what I'm saying is that there is a possibility that the donations - if they can't be controlled anymore - might simply become irrelevant, if, say, Disney (with friends) decides to buy all the newspapers, radio and TV stations in the country.

That's what the donation money is spent on, the media, correct? But if I own the newspaper I'll still beat you easily no matter how much donation money you collected.

If the rules don't work anymore, they'll just change the rules; they have the power.