Deficit deceit and the rentier class (10 June 2011)

It drives me a little crazy when I read any kind of reporting or polling on the U.S. deficit and all the phony concern people feel obliged to exhibit about it. It's a bit like when people complain about how many thousands of dollars a baseball player gets paid per at bat or something -- that fact that we know about it to complain is testimony to why the player deserves it. Fears about the deficit size has nothing to do with any impact it will have on most ordinary people and everything to do with media coverage of big numbers and the admonitory tone that is reflexively adopted. Matt Yglesias linked to an image that gets at the problem; it depicts a van covered in anti-abortion and anti-debt-limit-raising slogans. Yglesias writes, "It’s a problem for the country when strong emotional and ideological views about abortion get intimately linked in people’s ideas with views about much more technical questions about the merits of raising the debt ceiling or whether we have too much inflation or too little." When these things are lumped together, it means that both have become subject to demagoguery and tribalism, about winning at the expense of enemies, who in the case of the deficit are wholly imagined.

The losers in the deficit-reduction scenarios being worked out in Washington are basically everyone who is not a rentier, as this recent Krugman column argues: "Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense." Who, exactly, are the rentiers? Krugman has some data here. He concludes that "it’s very much about benefits to the wealthy versus benefits to the middle class."

Krugman is elucidating a case made by Robert Kuttner in this essay (pdf) for the American Prospect, which inspired Mike Konczal to do some good analysis here and assemble a bunch of useful links here. Kuttner's basic point is that debt politics is about protecting previous creditors from accepting any losses (full repayment, despite the risk premium they had already been earning as interest) and protecting them from inflation, which reduces the value of their claims. (An argument for why inflation -- most obviously wage inflation -- would help most of us here.) Here's how Konczal puts it, in the context of the financial sector's recent recovery in profits (while the rest of the economy sputters):

Whatever you think of the financial sector being that profitable, it is important to remember what those post-crisis profits represent. Those profits aren’t the reward for effectively allocating capital to a recovering economy. The financial sector actually did a terrible job of that in the past decade. And capital isn’t being allocated anyway. Much of the capital in the economy is sitting on the balance sheets of banks and large corporations.

These profits are based off milking the bad debts of the housing and credit bubbles while Americans struggling under a crushing debt load. Instead of sharing the losses, the financial sector has locked itself into the profit stream and left the real economy to deal with the mess. These profits reflect, in Kuttner’s excellent phrasing, the claims of the past, not the potential of the future.

At Interfluidty, Steve Randy Waldman points out that big banks become rentiers because of implicit government guarantees that they won't be allowed to fail. Those guarantees in turn are perpetuated by bankers' outsize influence in politics:

when we modified accounting standards to eliminate the risk that bad loans on the books would translate to failures, when we funded their recapitalization on the sly, we changed banks. We transformed them from nervous debtors into pure rentiers, who see a lot more upside in squeezing borrowers than in eliminating a crippling debt overhang. And since banks are, shall we say, not entirely disenfranchised among policymakers, we increased the difficulty of making policy that includes accommodations between creditors and debtors, accommodations that permit the economy to move forward rather than stare back over its shoulder, nervously and greedily, at a gigantic pile of old debt.

As a result, politicians serve banks' interests and unemployment starts to be regarded as a permanent feature of the economic landscape, unfortunate but "structural" and not at all related to the suffocating claims of the rentier class.

Rentiers always argue from their interests that austerity is necessary and whip up support for their position with a bunch of misleading rhetoric about how reduced debt generates economic confidence that encourages business owners to expand and hire. There's not much evidence to support this idea; the recent experiment with austerity in the UK suggests that ruthless budget cutting removes demand from the economy by impoverishing everyone but the rentiers, and this stifles growth across the board. Everyone loses, not just the people who were once supposedly "winning" by benefiting from spendthrift government bureaucrats and their allegedly indefensible spending programs. But that doesn't prevent the idea from taking hold among regular voters, who are presumably seduced by the fallacious logic of budget cutting as inherently virtuous, as though government debt and personal debt were analogous (they aren't) and as if debt is a moral failing (it's not, especially in an economy that explicitly relies on entrepreneurialism).

No one who is not living entirely on bondholdings -- no one who has to work -- should be rooting for austerity or bothering at all with deficit worries. Such worries are not really their worries; they are the transferred worries of elites who need to manipulate voters to protect their financial interests and their privilege in a democracy.

Konczal linked to this 1943 article by Michael Kalecki, "Political Aspects of Full Employment," which serves as a useful reminder about what is at stake in austerity debates -- not fiscal responsibility or the insecure future of welfare spending but labor discipline:

One might expect business leaders and their experts to be more in favour of subsidising mass consumption (by means of family allowances, subsidies to keep down the prices of necessities, etc.) than of public investment; for by subsidizing consumption the government would not be embarking on any sort of enterprise. In practice, however, this is not the case. Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that 'you shall earn your bread in sweat' -- unless you happen to have private means.... The maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the 'sack' would cease to play its role as a 'disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.

This seems more true than ever with "factory discipline" dissolved for many workers into post-Fordist arrangements of self-exploitation. Independent "free agents" and flexible workers have even less bargaining power and less of a basis for solidarity, less grounds to demand their share of profits earned from the increased productivity that has come from workers' devoting ever more time to work -- from all aspects of everyday life, in effect, becoming work, as consumption becomes a mode of immaterial production.

But capitalists are always fighting a two-front war in democracies, against workers and against their representatives in the government, who might begin to change the social framework to give workers more bargaining power. Capitalism is predicated on the asymmetries of power, on capital's ability to compel workers to sell their labor power. Capitalists must fight anything that threatens that imbalance, regardless of whether it leads to an aggregate increase of social wealth or even improves their individual profits.

UPDATE: In this post Yglesias links to a paper called “Financialization, Rentier Interests, and Central Bank Policy” (pdf) which describes central bank policy as serving the interests of keeping asset prices stable rather than raising employment levels. As Yglesias puts it: "For all the rising salience of goldbug cranks whining about fiat money, the Fed has hardly been indifferent to the potential for monetary expansion. It’s just that the goal of monetary expansion has been to do just enough to stabilize financial asset prices without going far enough to produce catch-up growth in the labor market.
What’s more, from the point of view of capital maybe it’s better not to catch up. As long as growth is positive and unemployment isn’t rising then maintaining a large 8-9% of the labor force out of work could be a useful tool of wage restraint."
Not to be too functionalist about it, but it often seems like a good idea to work backward from the need for labor discipline to understand certain vagaries of economic policy; at the level of policy and not individual firms, class struggle and getting leverage over workers matters more than efficiency or profit or even growth.

Blaming everyone and no one (9 June 2009)

Feeling a bit sorry for the bankers, historian Harold James in this Project Syndicate op-ed attempts to shift some of the blame for the economic crisis on, of all things, postmodernism.

Other academic disciplines have looked rather smugly at the public humiliation of their colleagues in economics. The non-mathematical appear to have their revenge, as the perils of over-reliance on complex symbolic notation and arcane formulae are relentlessly exposed.
In fact, developments or fashions in other academic disciplines and also in the general culture contributed at least as much to a willingness to engage in absurd risks and to provide and accept valuations of complex and inherently unfathomable securities. The general cultural developments are sometimes termed post-modernism, which involves the replacement of reason by intuition, feeling, and allusion.

Sure. That seems fair enough. It is easy to picture the trading floor at Goldman Sachs littered with Lyotard, easy to imagine risk management falling through the cracks because all the continental philosophy bankers customarily read persuaded them they should believe in nothing and that so-called "risk" was just a signifier with no fixed transcendental relevance. When they were through decentering their subjectivity, the minions at credit-rating agencies went ahead and gave structured securities whatever the hell rating was requested; after all, any evaluative criteria will be compromised by the tautological assumptions that are always already tacitly accepted.

As far as I can tell, James is not joking. He wants readers to believe that postmodernism is responsible for a climate of irresponsibility among bankers on Wall Street -- and not something more immediately salient and obvious like, say, greed. This is an actual, undoctored quote from James's essay: "At the era's height, major financial players built vastly expensive collections of highly abstract modern art. A post-modern neglect or disdain for reality generated the sense that the whole world was constantly shifting and malleable, and might be as transient and meaningless as stock quotations." It seems a pretty postmodern way to argue, actually; just present a few incoherent juxtapositions of vaguely associated notions and demand that readers tease out and decide what it might mean (or better yet, have them settle on undecidability itself). James argues that financial innovation, political cowardice, and postmodernism all worked together so that "every sort of value - including financial values - came to be seen as arbitrary and fundamentally absurd." But just because philosophers may have been exploring the possibility that there was no "there" there with regard to Western values doesn't mean they advocated the idea that fictitious values should be actively created to artificially inflate asset values, or that derivatives whose notional value far exceeded the assets from which they were derived should be written. Just because both critical theory and quantitative finance are hard for laypeople to comprehend does not make them morally equivalent. And the fact that a postmodern analysis could be used to elucidate the techniques of finance (the building something out nothing aspects of it anyway) revealed how awry finance had become; it didn't supply a justification for it. Greed did that. The spirit motivating philosophers ( a concern for ways in which ideology distorts what passes for truth) is fundamentally different than the one that spurred financial innovators; to elide them is to discredit the whole notion of responsibility, which seems to be James's aim. In his final paragraph, he laments the possibility that society might regress to a "medieval" witch-hunt mentality by playing blame games. Better by far to suggest that everyone is responsible in some small way and preserve the existing social order.

A non-risible critique about the role of ideas in the crisis from Neil Sinhababu can be found here, and it demonstrates how a postmodernish style of inquiry can actually help unmask problems rather than contribute to them:

economists have managed to convince people of indefensible views on normative topics such as what it's rational for individuals to do, what's an appropriate object of moral criticism, and what would be a good distribution of resources. I don't know how many of them would, when pressed, defend these sorts of claims -- their discipline isn't supposed to be one that makes normative claims.
Saying you're not making any normative claims is, of course, a good way of getting people to accept the normative claims you make. A lot more in this sort of thing depends on the sorts of emotions that get communicated as people talk about stuff and the loaded words you use. Pareto optimality, for example, has 'optimality' built into it, and who doesn't like optimality? Of course, as Rawls tells us, a distribution where one person owns all tradable goods and services while nobody else has anything is Pareto optimal.
In any event, this is the kind of thing we ought to be concerned about, both as citizens and as philosophers. While ideas from other parts of academia can't get out to the public, economists are convincing people of ridiculous theses in moral and political philosophy that their research doesn't even support. (It probably helps that widespread social acceptance of these theses is favorable to the interests of very wealthy people.)

Undoing ideology with policy (24 April 2009)

When an industry gains disproportionate social power, as the finance and real-estate industries had in the pat decade, there must be an associated ideology that legitimates that ascendancy. It surprises me that this notion sometimes seems a shocking discovery to those who cover business, as though it never occurred to them that they were dealing in ideology in their coverage of CEOs and on earnings calls and in shareholders letters and the rest of the official communications from corporate America, not to mention the efforts of their lobbying arms to plant their preferred soundbites into the speeches of politicians. Of course, those in the business press often function as ideologists themselves, suffering from the "cognitive regulatory capture" that Willem Buiter claimed happened to the Federal Reserve under Greenspan. Business journalists often seem more enamored than critical of the titans of industry who deign to speak to them, and they typically accept in its entirely ethics derived from a faith in deregulated markets. Workers are depersonalized into "labor" or "wages" -- an unfortunate cost of doing business and an obstacle that the heroes of capitalism must overcome.

They are used to economists playing by the same rules, so they seem a bit flummoxed when someone like MIT economist Simon Johnson (interviewed here by Salon) rises to prominence by declaring the obvious point that the finance industry exercised political power for its own good and not the good of the country. But that is how the system plainly works; I don't think one is being unduly cynical to recognize that in the US, money is openly and obviously used to gain political power (via campaign contributions and marketing efforts), which is then used to further an industry's agenda. The "good of the country" is an afterthought, a premise cooked up in the ex post facto spin.

In the interview Johnson suggests that economic realities will be sufficient to dispel the effects of that spin. In response to whether greater regulation and a mandated bank breakup would end the oligarchy, he replies:

The breaking of the belief system is an outcome of the crash. The belief system is kind of a perpetuating mechanism but when the economic realities change, people stop believing the same things. I think one advantage of a society like the United States, a democracy, is that we can change our minds pretty quickly on some things, even some firmly held beliefs. I am not saying throw capitalism out with the bath water. I'm saying big finance has just become too powerful and it needs to be reined in. There are some relatively straightforward technocratic steps that can be taken that will move us in the right direction. But I'm not a starry-eyed idealist -- I don't think this is going to change massively overnight.

Throughout the interview he is at great pains to avoid being marginalized as a "radical," to shift the sense of the center toward his position through a kind of rhetorical calm. That's certainly a prudent course, though the country may be more in the mood for scapegoats and show trials than incremental change. The banking business would like us to believe that it was just a few bad apples who can be tossed out while keeping the ideology in tact, whereas the rabble-rousing, tea-bagging set seems to want vengeance. The danger is that the fervor for scapegoats could prove a distraction, leaving the underlying system unaffected. In this you can see how the right-wing may hope to steer the populist uproar.

Addendum: Matt Yglesias makes a related point here, where he wonders why Americans seem to think CEOs have more credible opinions on policy than other citizens.

Zack McMillan of the Memphis Commercial Appeal recounts for us a great moment in ideology in America, as FedEx CEO Fred Smith deigns to speak to the Memphis City Council. Note that the very premise of the event, that a wealthy CEO should be considered a source of public policy insights, is, though very common in today’s America, a highly ideological notion. Relative to a person selected at random, Smith is no more likely to have substantive insights into the issues facing the Memphis City Council, but much more likely to be deliberately lying in order to personally enrich himself.

But in the United States, when a wealthy and powerful person wants to opine on public affairs, this is viewed not with suspicion (”what’s this rich guy trying to pull?”) but with delight. The mere fact that someone is rich is held to demonstrate that he’s entitled to massively disproportionate political influence even beyond what he’s able to directly purchase.

Needless to say, Smith's ideas were entirely self-serving.

Crybaby bankers (21 April 2009)

Be sure to sharpen your pitchforks before reading Gabe Sherman's New York magazine schadenfreude-fest about pouty investment bankers, who from behind the cloak of anonymity complain about how unfair life has suddenly become for them. It turns out the bankers are "angry" because they are having to pay higher taxes and because their plutocratic bonuses seem to be a thing of the past. As Sherman notes, "In a witch hunt, the witches have feelings too" -- but then, one could sympathize with the witches because they were singled out unfairly by an unruly mob of religious bigots. The fury at the bankers, in their callous cluelessness and their reckless endangerment of the global economy in pursuit of an extra Hamptons mansion or two, seems altogether justified and rational. The bankers aren't some misunderstood group of well-meaning citizens; they are a group that prided themselves on their sharklike mercilessness and tenacity in extracting every last bit of advantage for themselves, and they would smirk when they rehearsed the exculpatory excuse that such single-minded greed had the inevitable by-product of economic efficiency. They were wrong about that, and they should probably get as much forgiveness as they would give us if we were opposite them at the bargaining table.

When bankers were capitalism's winners, they had no problem lording it over everyone else; it seems appropriate they taste the full sting of loserdom. Sherman writes that Wall Street bankers, analysts, and traders "had believed Wall Street was where the winners of American capitalism went. Now they were feeling shamed for their work." To which I would say "good" -- only the rest of the article makes it clear that they are a group incapable of feeling shame.

What I found most irritating is the expression of overclass entitlement in such complaints as this:

“No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?” e-mails an irate Citigroup executive to a colleague.

This is a good reminder that those cretins at "elite" schools really do think they are better than you, regardless of what they or you do -- or rather that whatever they do is inherently more important and valuable because of their pedigree. As Sherman puts it, "they see themselves as the fighter pilots of capitalism," to which Time blogger Justin Fox replies, "Actually, they may more closely resemble the bumper-car drivers of capitalism, spending more time tangling with each other than doing anything useful."

From the sound of the people whining to Sherman, the bankers lost sight of the principle that meritocracy have some clear relationship to merit. Instead they assert a marketocracy and claim that it amounts to the same thing. One banker declares, "The truth is, the market determines what people are worth." Um, that's not the "truth" as in being some fundamental law of society. That's an ideological precept that has been concocted to rationalize drastic income inequality. And do bankers really want to start measuring what people are "worth" by the money they make, by market performance, at this juncture? Considering all the value banks have destroyed, that must mean the investment bankers are actually "worth" less than nothing -- they owe society several years of their working lives, by that sort of accounting. The "truth" is that people who work for no other reason than money will take as much as they can get at all times, unless some greater authority sets a limit. Will that limit seem arbitrary to them? Of course. But the amount at which they would feel content will always be arbitrary as well, since it is always at least one dollar more than whatever they are currently receiving. Listening to investment bankers' advice on compensation would be like canvassing for ideas about drug-law reform in the parking lot at a Dead show.

Sherman recounts how Wall Street came to gobble up a greater percentage of the corporate profits earned in the U.S. economy, which supplied them with the firepower to press for more financial deregulation. He quotes economist Simon Johnson, who's article on the subject in the Atlantic is essential reading: "“The system as a whole became unstable because Wall Street developed this disproportionate influence. It’s an entire system of belief they had to create." That belief system involved the idolatry of deregulated markets (which basically render them less transparent) and risk-spreading procedures which maximized the cut for middlemen -- which is essentially what investment bankers are. But the ideology they espoused claimed that this process was generating economic efficiency, not profits for parasites. Perhaps at the dawn of the financial free-for-all, bankers worked harder to find better ways to allocate capital, but by the end they were merely rent seekers who felt entitled to their cut by virtue of their pedigree, by a sort of plutocratic fiat. Their hard work went into what Johnson has labeled "tunnelling" -- insiders funneling money out of legitimate enterprises because they know the end of the bubble is near.

In short, the New York article succeeded in accomplishing its goal with me; it made me disgusted and angry. Ryan Avent implies that there might be something irresponsible in this:

Personally, I find this all very disconcerting. A round of all-out class warfare would be good for no one, and I generally agree with the idea that markets ought to set compensation levels. The brazenness with which executives are disregarding public concern over these issues is just adding fuel to an already uncomfortably hot fire.

I don't agree that "markets" (in practice, often boards of directors) set compensation levels appropriately -- it seems like a market for lemons, at this point, and is ripe for reform. And if it takes class-warfare rhetoric to steel the resolve of politicians to do something, than articles like Sherman's are probably valuable. The problem is that financial journalists do little complaining about executives' brazenness during ordinary economic times, when political action might actually work as preventive care rather than triage.

Bank rescues: the not so New Deal (27 March 2009)

Economist Willem Buiter, who also serves as a highly engaging and polemical blogger for FT, wants to know why more bankers and board members are not being perp-walked.

It is clear that the vast majority of the large border-crossing banks are continuing to exploit every accounting trick in the book to avoid recognising the marked-to-market losses on their dodgy assets. With most banks cursed with paper-thin equity cushions in relation to their assets, a more intense, let alone a quasi-forensic scrutiny of the balance sheet by a nosy expert paid for and acting on behalf of the government shareholder could easily precipitate a move from partial to full state ownership and thence into insolvency and an orderly restructuring or liquidation.
Too many bank insiders have exploited their monopoly of information and the control it bestows on them, to enrich themselves by robbing their shareholders blind. There has been a spectacular failure of corporate governance. Boards have foresaken their fiduciary duties. Surely, even the liability insurance taken out by board members ought not to shelter those who are guilty of, at best, such willful negligence and dereliction of duty? Where are the class actions suits by disgruntled shareholders? Where are the board members in handcuffs?
Now that there is no meat left on the shareholder drumstick, the rogue managers and employees are going after a piece of the really juicy bird - the ever-patient tax payer. I hope they choke on it.

These are good questions, and it would seem imperative that some punishment be doled out to some deserving scapegoats at some point, if only to defuse populist anger. The fact that all the malefactors in this crisis can't be punished shouldn't prevent authorities from singling out a few and laying the groundwork for the "few bad apples" argument -- i.e., it wasn't that the whole system was bad; there were just a few naughty bankers who abused our trust.

Paul Krugman, in his editorial today, will have none of that -- it sounds as though he wants, like Lionel Hutz, to put the system on trial. He describes securitization as a scheme to enrich financial intermediaries with no value added in terms of risk management or beneficial capital allocation:

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.
But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.
Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.

Economist Arnold Kling concurs, adding the codicil that securitization has always been a perversion of free-market principles. "My view is that securitization of mortgages would never have emerged in a free market. Instead, it came from our country's industrial policy supporting housing. Every major advance in mortgage securitization was a regulatory/accounting gimmick, encouraged or created in Washington." The insane promotion of homeowning for its own sake has caused no end of trouble. Perhaps, as this Boston Globe thinkpiece suggests, we're ready to move away from that ideology and stop subsidizing housing to the detriment of the rest of the economy.

Anyway, Krugman is wary of the few bad apples scenario, worrying that "the underlying vision" of the Obama administration "remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules." But that system, in his view, has proven a failure, and isn't worth saving. What will replace it though? Is he perhaps edging closer to Steven Waldman's idea of replacing credit administered by banks with a system of flat transfers for consumers, and investment trusts and locally targeted "narrow banks" for businesses. When mainstream discussion reaches that point, we'll know then that we are truly verging on a new New Deal.

Reflections on revolution (26 March 2009)

In the past, I've occasionally adopted the stance of an armchair revolutionary and opined about how to subvert the state apparatus and destabilize the corporate hegemony and that sort of thing. If pressed about it then, I would probably have had in mind a vague notion that Gramscian organic intellectuals -- people I would relate to and endorse -- would somehow lead the charge, that the efficacious force for radical social change would evolve out of the antiglobalization movement that disrupted the WTO meetings in Seattle in 1999. That was before I had even a rudimentary understanding of the financial system, and social change, in my mind, evinced itself only as a new virtuous life we all could be leading as individuals, not exploiting anyone with our consumerist purchases or any other manifestation of our destructive selfishness. Somehow everyone would be able to feel cool by doing the right thing -- which was more of an aesthetic matter than an ethical one -- and these virtuous new behaviors would never come to seem conformist or anything other than fulfilling and personally gratifying and expressive of our full uniqueness, etc., etc.

But unfortunately, that sort of personalized, self-contained revolution -- together with a few righteous protest marches here and there -- seems altogether irrelevant to the macro forces that shape the world's institutions and systems. Now I've become much more cynical, Burkean. I'm fearful that the "will of the people" becomes relevant only when it becomes a virulent populism, that the revolution will be led not by organic intellectuals who can articulate a plan of attack in the name of a righteous cause, but by demagogic opportunists who can tap into an atavistic rage among the masses, who can exploit their ignorance to achieve no goal other than the seizure of power for its own sake. The revolution often transpires as a series of chaotic, reactionary upheavals that no one can hope to control, regardless of their historical inevitability. In short, revolutions don't happen because smart people suddenly have more influence and scope to operate; they happen because the ignorant get riled up. This happens when it suddenly becomes impossible to ignore that their ignorance is being exploited by the "powerful."

As many have pointed out (though not so bluntly), that is what seems to be happening now in the wake of the serial bank bailouts. Well-informed critics have been saying for years that the real-estate bubble was unsustainable, that financial derivatives should be regulated, that leverage rations were too high, that ratings agencies faced conflicts of interest, that the quants' computer models were unreliable. But their complaints went unheeded; critics were marginalized further, and nothing changed. Now, after the fact, the same criticism is more likely to be raised in the tone Matt Taibbi adopts in this piece, which is well worth reading, even though the implications of its tone are scary. This sort of critique seems entirely righteous, and its deliberately inflammatory rhetoric is what seems to make it credible:

There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs — a company whose average employee still made more than $350,000 last year, even in the midst of a depression — was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole. That's the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers' credit card.

The people who have spent their lives cloistered in this Wall Street community aren't much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don't know what the hell LIBOR is or how a REIT works or how to use the word "zero coupon bond" in a sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them.

The degree to which we all feel somewhat powerless in the face of these monumental events warrants the contemptuous tone, which is proportionate to our impotence. In the run-up to the Iraq War, a similar impotence was felt, but generally only by those who could be ignored as pacifistic pansies from whom impotence was to be expected. The populace at large could enjoy a good war as a pep rally inspiring nationalistic pride. But there is no vicarious pride, no shock and awe to be found in the bank bailouts.

As this populist contempt builds, it worsens the conditions for doing business, the same conditions that bankers have already abused -- so it becomes a vicious spiral. Corruption seems like it may as well be the rule, from the top down to the little people. The tunneling Simon Johnson described becomes the rule for everyone -- the purpose of doing business is to loot, not to produce.

The furor over the AIG bonuses, et.al. has Felix Salmon wondering if class warfare has at last reached America.

In one corner are the technocrats not only in finance but also in government and the media: people who can understand the importance of distinguishing between a $250,000 base salary, a $2.5 million bonus, a $250 million bonus pool, a $2.5 billion bonus pool, a $250 billion bailout package, a $2.5 trillion monetary stimulus, and so on.
In the other corner are the real people, the angry people, the unemployed people -- and with them their elected representatives in Congress. They're not interested in such distinctions any more, they're not interested in what's fair or what's sensible. They saw their real wages stagnate for decades as the orgy of plutocratic self-congratulation reached obscene levels only to keep on growing. All they ever had was the American Dream: the idea that they, too, might one day become dynastically wealthy and join the overclass.
Now, of course, that dream is shattered.

Carson Gross, a guest poster at Basline Scenario, examines "the cultural costs of bailout nation" and reaches similar conclusions. "There may be technical solutions to the banking problem. However, if those solutions do enough damage to the cultural framework on which the system was based in the first place, even the most brilliant among them will be useless." The real problem, though, is that cultural framework may always have been inherently flawed, or as Marixsts argue, riven with unreconcilable contradictions.

What's frightening is that no one knows in precisely what form this incipient class warfare will erupt. Would anyone be shocked to see anti-Semitism spike over the next few months?

Update: This morning, the NYT tries to throw some cold water on populist fire with this sentimental letter from a former AIG trader.

Problems with preventing foreclosures (13 Dec 2008)

I have this sense that I should be cheering on the efforts of FDIC chair Sheila Bair, who is seeking to ensure that more TARP bailout money goes toward helping prevent foreclosures. I am probably supposed to be glad that she's fighting for the little guy against Wall Street bankers and other undeserving beneficiaries of socialism for the rich. But instead, the idea of helping homeowners out with their mortgages makes me angrier than helping out irresponsible industries. Haven't home buyers had enough help already on their mortgages in the form of tax breaks and Fed-orchestrated interest rate adjustments? Helping keep or put people into homes they couldn't afford is what has caused much of the economic mess we're in to begin with. Continuing down that road seems foolhardy -- solving the problems of a burst bubble by reinflating it.

And mortgage modification programs -- hard enough to implement since securitization has made it near impossible to figure out who owns the loans -- often don't work. People who have their mortgage rejiggered to prevent foreclosure often end up redefaulting.

But what stokes my anger about foreclosure prevention is that I can relate directly to the decisions that got underwater homeowners where they are. Many of them were making poor decisions at my level, accepting the sorts of deals that were available to me but that I didn't pursue. They took advantage of the housing bubble while prudent (or timid) people like me didn't, and now that they are facing consequences, part of me -- the vindictive, reptilian-brain part -- wants them to suffer. Instead society is poised to reward them for their poor decisionmaking at the expense of chumps like me who didn't follow the herd into McMansions in the exurbs.

Thanks to an apotheosis of various ideological strains prevalent here -- rugged individualism, fetishized private property, the freedom of open space, the need for consipcuous consumption and identity display through possessions -- American society has a tendency to make homeownership seem like the ticket to legitimacy and adulthood, as if it's the only way to mark a seriousness about belonging to your community. This tends to discourage other forms of community organization as well as making homeownership appear more of a boon than it often proves to be. Felix Salmon cites recent research into the pleasures of home ownership that yielded results that seem almost unbelievable, considering the prevailing attitudes:

I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home. Several factors might be at work: homeowners derive more pain (but no more joy) from both their home and their neighborhood. They are also more likely to be 12 pounds heavier, report lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships. She is also less likely to consider herself to enjoy being with people... The results are robust after controlling for reported financial stress.

Homeowners use their homes to retreat from society and lessen their awareness of their true interdependence with it. To a degree, people focus on their houses to the exclusion of the surrounding community -- building good fences, making good neighbors, that sort of thing. This apparently can become an unhealthy withdrawal. So maybe I shouldn't be so angry -- resisting the mantra of homeownership has saved me a lot of psychic misery.

Anyway, I completely agree with Salmon's reaction:

It's idiotic. I don't expect Americans to all go to Germany and realize how happy people are when they don't need to worry about all the stresses which accompany homeownership. But I do think that substantially all of the upside to homeownership in recent years has been a function of rising house prices. Now that's come to an end, it's hard to see why anybody would want to buy.
In fact, if Americans could be persuaded that rent payments aren't "wasted money" and that owning often makes less financial sense than renting, I think the rate of homeownership might, happily, drop substantially. But it's not going to happen. The ideal of homeownership is deeply embedded in the American psyche, and any datapoints which don't fit into that ideal are automatically discarded.

Rent is not "throwing money away" anymore than buying food at the grocery store is "throwing money away" since you didn't plant your own garden and raise your own livestock. Shelter is something you consume; it's not an investment. Bailing out homeowners is rewarding the people who treated housing as an investment and not a consumption good, a fulfillment of personal need. Preventing foreclosures is often a matter of rescuing people from their failure to properly assess risk, not from some unforeseen natural disaster. Let's not pretend this is any different from bailing out imprudent or inept investment bankers.

The financial crisis and generational warfare (2 Dec 2008)

Many someone should ask financial analyst James Quinn what he really thinks of Baby Boomers:

Of course, not all Baby Boomers are shallow, greedy, and corrupt. Mostly Boomers with power and wealth fall into this category. There were 76 million Baby Boomers born between 1946 and 1963. They now make up 28% of the U.S. population. Their impact on America is undeniable. The defining events of their generation have been the Kennedy assassination, Vietnam, Kent State, Woodstock, the 1st man on the moon, and now the collapse of our Ponzi scheme financial system. They rebelled against their parents, protested the Vietnam War, and settled down in 2,300 square foot cookie cutter McMansions with perfectly manicured lawns, in mall infested suburbia. They have raised overscheduled spoiled children, moved up the corporate ladder by pushing paper rather than making things, lived above their means in order to keep up with their neighbors, bought whatever they wanted using debt, and never worried about the future. Over optimism, unrealistic assumptions, selfishness and conspicuous consumption have been their defining characteristics.

It's hard to disagree with any of the analysis, though the tone is occasionally scarily combative. I wonder whether as the recession worsens or drags on, if such sentiment will spread from the disgruntled-analyst sector to the younger generations at large, whether it will shape policy toward the social safety net for the elderly: Will we say, the Boomers blew their chance and lived beyond their means; if they don't get the Social Security benefits they expected, then tough shit. It's natural to want to hold irresponsible borrowers responsible for our overleveraged economy, especially since, as Rebecca Wilder points out here, household debt has yet to drop: "lax lending standards on credit cards allowed consumers to become overly indebted to credit card creditors. Interestingly enough, revolving consumer credit was still 43% of overall credit on November 12, 2008. When will it fall?"

But in many ways, the forces that have driven us into debt are systemic, institutional -- the interlocking forces of assets replacing savings for many families, of status hinging on consumption levels, of the service economy supplanting heavier industry, of more aggressive omnipresent marketing, etc. But I wonder whether there is cyclical generational component to attitudes toward consumerism. As part of the generational warfare, the practices of frugality have been co-opted by hipsterism as a kind of ironic, oppositional stance to the boomer generation. In the 1960s, boomers allegedly rejected their parents' prudent austerity for hedonism, reconceived as the essence of freedom. Perhaps those of us born in the 1960s and 1970s will now war against that hedonism (which turned into financial imprudence) out of necessity, but we will feel all righteous about it as if it were our generation-defining choice.

Income inequality as source of financial chaos (10 October 2008)

Building on a Matt Yglesias post, Kevin Drum sketches an interesting case for income inequality being at the heart of the current financial chaos.

We usually argue about rising income inequality in moral terms, but there's a practical side to it too: when all the economic growth a country produces goes to a very small class of rich people, stupid things happen. The rich can't possibly consume enough to spend all this money, so they start casting around for something, anything, to do with all the cash they have sloshing around. And since, in an ever more unequal economy that nonetheless preaches ever rising living standards, the poor need payday loans to keep up and the stagnating middle class needs HELOCs, that's where their money goes. It still gets spent, eventually, on things like cars and food and new furniture, because that's what middle class people mostly spend their money on, but instead of being spent directly by people who are earning it, it gets funneled downward to them via increased debt and financial legerdemain that extracts more and more money upward from poor to rich with each cycle.
That's not sustainable. Median income growth produces not just growth, but stable growth for everyone, the rich included. Top end growth, almost by definition, produces unstable, unsustainable growth. Modern economies are driven by consumer spending, and if you want consumer spending to increase consistently you have to increase consumer income. All the financial wizardry in the world will never change that.
Social justice aside, that's why the single most important financial statistic for any modern economy is real median income growth. If you have it, you're in pretty good shape no matter what else is going on. If you don't, you're a banana republic. Guess which one we've become?

Slavoj Žižek makes a similar case in this LRB essay:

If the bailout plan really is a ‘socialist’ measure, it is a very peculiar one: a ‘socialist’ measure whose aim is to help not the poor but the rich, not those who borrow but those who lend. ‘Socialism’ is OK, it seems, when it serves to save capitalism. But what if ‘moral hazard’ is inscribed in the fundamental structure of capitalism? The problem is that there is no way to separate the welfare of Main Street from that of Wall Street. Their relationship is non-transitive: what is good for Wall Street isn’t necessarily good for Main Street, but Main Street can’t thrive if Wall Street isn’t doing well – and this asymmetry gives an a priori advantage to Wall Street.
The standard ‘trickle-down’ argument against redistribution (through progressive taxation etc) is that instead of making the poor richer, it makes the rich poorer. However, this apparently anti-interventionist attitude actually contains an argument for the current state intervention: although we all want the poor to get better, it is counter-productive to help them directly, since they are not the dynamic and productive element; the only intervention needed is to help the rich get richer, and then the profits will automatically spread down to the poor. Throw enough money at Wall Street, and it will eventually trickle down to Main Street. If you want people to have money to build, don’t give it to them directly, help those who are lending it to them. This is the only way to create genuine prosperity – otherwise, the state is merely distributing money to the needy at the expense of those who create wealth.
It is all too easy to dismiss this line of reasoning as a hypocritical defence of the rich. The problem is that as long as we are stuck with capitalism, there is a truth in it: the collapse of Wall Street really will hit ordinary workers.

Instead of making more money in the wage-stagnant Bush era, most people were merely gaining the opportunity to borrow more from the people and institutions that really were making money, and lots of it. Instead of getting a fair share of general prosperity, we got to pay interest on a simulacrum of it. Now the financial magic tricks don't seem to be working anymore, and no one has any place to turn for the funds to maintain the facade. So things could get pretty scary for "ordinary workers". The brownshirt rallies McCain and his disgraceful running mate are leading may only worsen as the effects of the global financial apocalypse pass through to the "real economy." That may be in the form of layoffs or dramatic drop-offs in production or the disappearance of goods from retail shelves as international shipping, which runs on credit, breaks down. Already it is manifesting as an unwillingness of consumers to spend. Under different circumstances, that might have struck me as good news, but there's nothing like a Depression to remind us how glorious the world of goods is by snatching it away from us, just as we start to take plenitude for granted. Am I too pessimistic or humanistic in thinking that a lasting change in our consumerism can only come if we volunteer for it, not when it is forced on us by events? Maybe I need to become more materialist in my thinking.

Bad bailout (22 Sept 2008)

Since returning from vacation, I've read little other than posts about the banking industry's continued implosion and the various bailouts meant to rescue it. The most recent issue is Treasury secretary Hank Paulson's plan to spend unlimited billions without any oversight buying up banks' bad assets in a contemporary version of the Resolution Trust Company, which was deployed during the 1980s savings-and-loan bailout. Paulson's idea seems to be to stop the financial crisis by fixing banks' balance sheets once and for all, through the magic process of letting banks replace failing, ill-considered, or impossible-to-price items on it with what the banks want them to be worth in government (aka taxpayer) cash. With the toxic assets -- strange how toxic has moved from a business journalism cliche to a virtual term of art -- cleansed from the system, banks can resume borrowing short and lending long again as their business model demands. As Mark Thoma points out, this will work if the problem is illiquidity. If the banks are actually insolvent, what's needed to bail them out is a massive capital infusion -- money for nothing. Given the nature of the assets the government would acquire under the Paulson plan, it's not clear if there is a difference.

Most experts and pundits and economists who have commented on Paulson's plan seem to hate it. (Steven Waldman has a good roundup here.) Some question it because it rewards an industry for its failure to effectively perform its most basic function -- evaluate credit risk so that it can make loans to make money. Some are skeptical because it gives Paulson unchecked power to help his former compatriots on Wall Street. (The proposal features this banana-republic-appropriate codicil: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.") Some wonder why it uses taxpayer money to prop up an industry that has doled out to itself millions in bonus money while doing nothing to help the wage-earning classes directly. Some are curious about why the banks should be able to get away with selling assets no one else wants to the government at sweetheart prices. Many note that this is risk-free socialism for the rich -- the gains of entrepreneurship are privatized while the losses are socialized. Accordingly, most commentators want to see a taxpayer stake added to the plan, under which the government gets to own part of the firms it helps out -- a debt-for-equity arrangement of some sort. But such an arrangement would threaten to nationalize the banking industry.

Would that be a terrible thing? It could, in economist Luigi Zingales's phrase, "save capitalism from the capitalists." Of course, bankers don't like such a thing, and as Zingales points out, it is much easier for those few bankers to coordinate and argue their side to Congress then the many taxpayers who would get nothing under the Paulson plan. So it seems unlikely that the plan will be modified too much in our favor. But hey, we got a lot of overpriced and inefficient houses in the exurbs out of this whole mess.

Fanny and Freddie Got Fingered (14 July 2008)

Okay, that entry title makes no sense for a post about the impending Freddie Mac/Fannie Mae bailout, but I just wanted to make a pun referencing the funniest movie of the 1990s.

Freddie Mac and Fannie Mae are in the business of guaranteeing residential mortgages, and not an inconsiderable amount of them -- more than half, as economist Jared Bernstein notes here. Freddie and Fannie masquerade as independent companies, but investors have always assumed that they are really government agencies and therefore can never go broke. If a spate of mortgages they had guaranteed went bad, taxpayer money would simply be requisitioned to allow the firms to continue operating, since they clearly don't have the capital on hand to deal with any significant problems. The wisdom of that assumption is now being put to the test, as Fannie and Freddie are spirialing into oblivion.

As mortgages became more and more subprime, they chose to keep up their market share, as Tanta at Calculated Risk details in this comprehensive post. Because of restrictions in their charters, they managed to avoid the worst of the housing bubble's excesses, but, as Tanta argues, they therefore missed the opportunity to use their clout to impose some discipline on the subprime business, and instead it remained the wild west of financing, a place full of dupes, dishonest brokers, and fat profits to reap -- as long as housing prices continued rising. That didn't happen, as many housing bubble skeptics including Dean Baker and Nouriel Roubini had predicted at the time. To ease problems the credit crunch brought to the private-lending market, legislators pushed to expand Fannie and Freddie's operations, a idea that investors are now seeming to recognize is a pretty bad one, likely to make their loan portfolios -- already threatened by sinking home prices everywhere -- become even worse.

With the companies' insolvency looming, the government has to do something (without them, buying and selling houses in America could become well nigh impossible), but the Republicans in charge are loath to admit the necessity of nationalizing them, nor are they eager to stick it to Wall Street by letting all of Fannie and Freddie's investors burn. So Treasury secretary Hank Paulson, confronted by a kind of ideological zugzwang, tried to gain a tempo by making an ambiguous speech (admirably parsed here by Felix Salmon). And that's where things stand currently.

At the FT site, Willem Buiter has the best explanation of what's wrong with all of this: it's "dishonest socialism":

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.
Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican administrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.
The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification. The creation of the Delaware SPV that houses $30 billion worth of the most toxic waste from the Bear Stearns balance sheet (with only $1 billion of JP Morgan money standing between the tax payer and the likely losses on the $29 billion committed by the Fed to fund the SPV on a non-recourse basis) is the clearest example of quasi-fiscal obfuscation I have come across in an advanced industrial country. The decision by the Fed to ‘invite’ the primary dealers and their clearers to collude in the (over) pricing of illiquid collateral offered by the primary dealers to the Fed at the newly created TSLF and PDCF (by the Fed accepting the pricing/valuation by the clearers of the illiquid collateral) is another example of the abuse of the Fed as a vehicle for channeling taxpayer-financed subsidies to the primary dealers. This form of socialism for the rich is therefore well-established.

This is how oligarchs prefer the economy to operate: Privatize the gains, socialize the risk. And it seems to me that the obfuscation brought on by the sacredness attributed to homeownership -- that anything is excusable as long as it helps "families" experience the indelible blessing of owning property -- is what enables it.