The Treasury Officials and the Bloggers (24 Aug 2010)

I know I would feel much better informed about what is going on in government if all press conferences were like the one the Treasury Department held with a group of econobloggers last week and all corrospondents were as frank, thorough and perceptive as Steve Waldman is in this recounting. There's not much reason for optimism in what he reports, but the very fact of his report seems itself a reason to be somewhat optimistic at least about some of the changes in the public sphere and the media. Conversations about policy that once never circulated beyond the upper crust of the power elite are now accessible to the likes of us, if we bother to seek them out.

But as Waldman suggests, this may be a subtle way to placate those most likely to articulate criticism of various policies without those policies being altered. He begins by emphasizing that the Treasury officials are by and large friendly and intelligent:

I am very, very angry at Treasury, and the administration it serves. But put me at a table with smart, articulate people who are willing to argue but who are otherwise pleasant towards me, and I will like them. One or two of the “senior Treasury officials” had the grace to be a bit creepy in their demeanor. But, cruelly, the rest were lively, thoughtful, and willing to engage as though we were equals. Occasionally, under attack, they expressed hints of frustration in their body language — the indignation of hardworking people unjustly accused. But they kept on in good spirits until their time was up. I like these people, and that renders me untrustworthy. Abstractly, I think some of them should be replaced and perhaps disgraced. But having chatted so cordially, I’m far less likely to take up pitchforks against them.

This strikes me as a basic and important point of how power functions. There are not really evil geniuses in government or elsewhere plotting to be cruel and relishing the misery of the little people -- such people are rare sociopathic anomalies, even if capitalism as a system fosters incentives to developing a sociopathic subjectivity. Because they are situated within a bureaucracy, people in positions of power lose sight of the big picture and reconfigure their typically good intentions in terms of the limited scope of their job responsibilities and, most important, make a ethical priority of being warm and human in their personal exchanges with the people their work brings them into contact with.

Anyway, that is what the technostructure is all about, I think -- bureaucratizing away unpleasant realities about the overall effects of what we are doing while bringing us into enough "team" situations and interpersonal exchanges to allow us to feel good and cooperative and successful at caring about people and not greed or profit.

So it does little good to attack the good intentions of the people in government if you want to have a grown-up discussion about politics or the economy; unfortunately the commercial media does virtually nothing but discuss politics and policy in terms of personality and character. (Richard Sennett's The Fall of Public Man assesses some of the reasons for this; maybe if I wasn't on vacation and had the book with me I'd cite some of them.) But it also means that we have to go against our own grain and put aside the collegiality and self-regard that is our general reward for participating in society in order to sustain a critical view. Waldman explains how this process fans out, defining the hierarchy behind the bureaucracy:

Drawn to the Secretary’s conference room by curiosity, vanity, ambition, and conceit, I’ve been neutered a bit. There’s an irony to that, because some of the people I met with may have been neutered, in precisely the same way and to disastrous effect, by their own meetings and mentorings with the Robert Rubins and Jamie Dimons of the world.

His own reservations notwithstanding, Waldman offers a good critique of the state of financial reform and economic policy. Here are some points that jumped out at me.

1. "Like a gas under pressure, the financial sector pushes and prods for places where high returns can be earned at someone else’s risk." This is the financial sector's reason for being in capitalism; the sector collectively overrides any ethical reasons people might have for not testing the regulatory boundaries and forces every actor to play at the margin of legality. It generates the capitalist ethos over and against our personal inclinations to be considerate and reciprocal in our dealings. It generates systemic greed that exposes all possible modes of exploitation. Waldman notes "how well aligned the incentives of equityholders, bank managers, and traders are at highly levered institutions. All three groups benefit by putting creditors’ resources at risk and earning outsize profit against limited costs (loss of equity value or loss of a job)." They don't check and balance each other; the balance must come from outside regulation.

The systemic nature of the pressure to test limits to find the most extreme profits points to why Waldman and others are always arguing for "structural rather than supervisory regulation" -- hard-and-fast rules that are easy to assess and comparatively transparent. The point is to erect an obstacle that changes the banks' incentives from profiting by gaming regulations (and shifting risk to the taxpayers by being too big to fail) to finding socially productive uses for capital. Waldman has a long footnote that elaborates his reasoning on this that is impossible to excerpt but is crucial reading.

2. About HAMP, a Treasury program meant to deal with the mass of underwater mortgages:

I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”. Treasury officials are not cruel people. I’m sure they would have preferred if the program had worked out better for homeowners as well. But they have larger concerns, and from their perspective, HAMP has helped to address those.

The degree to which the officials are not "cruel people" is the degree to which they can convince themselves that helping the "system" helps ordinary people. But to have any kind of critical perspective on society, you have to be able to recognize the status quo -- the people who are already profiting from existing relations -- as something that is not inherently worth defending in order to explore possible relations that might be more equitable, more just. The problem is that power invests us in the status quo and at the same time makes us feel moral only by preserving that status quo. To put that a different way, power is contingent on the ability to sell the status quo as necessary -- to qualify for power within bureaucracy one must convincingly demonstrate that one has made that association of incumbent interests with the "good".

The alternative is a form of power that takes an explicitly revolutionary and "dangerous" form that typically threatens personal identity. One is no longer a collaborative and cooperative part of society but its enemy.

To return to the case of big banks, their interests are fundamentally opposed to those of ordinary Americans, who bear the risks for their speculations under the existing economic arrangements. Treasury officials have talked themselves out of that recognition as a condition of their job. Waldman writes:

Perhaps Treasury officials really can’t see how limiting “size” might help. But I don’t think that’s right. These are very, very smart people. I think they understand the merits of the structural approach to financial regulation, but view the transition costs as simply too large to bear. But that begs the question of costs to whom, and whether (per the HAMP conversation above) it is wise to conflate the health of status quo financial institutions with the welfare of the economy as a whole.

How can that conflation be prevented? How can transition "costs" be reconceived as social progress?

3. "I view the current macro-sluggishness as a function of insufficient demand, yet stand with the hypothetical public in being hesitant to support 'stimulus' and 'jobs' programs that strike me as haphazardly targeted and sometimes wasteful or corrupt." This highlights the conflict between the goals of the bureaucracy, the goals of the individuals who populate it and the personal goals we have as citizens in a democracy. What specifically should be "demanded" in order to increase demand? What are the appropriate channels for stimulating it, and should it even be stimulated if it can only be done in a way we would regard as socially corrupt? We want to put our collective productive capacity to use, but we have evolved a system that has undermined our capability to believe in the signals indicating what we might need as a society. Profit has come unmoored from social necessity, or the ideological overlay that associates the two has unraveled. People can find "productive" ways to spend their time but the economy is not set up to reward their efforts, and stakeholders seem to have exposed as looting the system rather than facilitating the appropriate investment of our productive capacities. That is to say the government and the banks, from the view of "ordinary people", seem to have their interests aligned in protecting their ability to loot the system. And there is no clear alternative politics for shifting those interests, or bringing in new people with different interests -- people who might make a difference rather than assume the mantle of the bureaucracy as it already exists.

The Austerity Debate (18 June 2010)

Steve Randy Waldman delivers, as usual, a clarifying post on the ongoing "austerity debate" -- the discussion among economists and pundits and politicians about whether the government should engage in more stimulus spending to support an economic recovery that may or may not be starting and help create jobs to reduce the unemployment rate (still hovering near 10%), or whether it should impose austerity measures to control the deficit and ostensibly protect the currency and prod the jobless into looking harder for work by cutting off their unemployment benefits. Waldman links to several posts that set the stage.

This debate has come to head recently with the Senate voting to block an extension of unemployment benefits, among other fiscal measures. This infuriates a lot of people (me included) because it seems to privilege political demagoguery about deficits and the interests of the leisure class over economic growth and the rest of us. It plays upon the idea that the unemployed are merely too lazy or fussy about taking jobs, not that they lack relevant skills or that employers aren't willing to hire. It also depicts downward mobility as something the unemployed should simply accept, as if moving down the wage-chain in jobs doesn't have a permanent effect on one's earning potential and prospects.

Also, austerity preaching from government sends the signal to businesses that the climate will be unfavorable, and prompts them to buy back shares rather than seek out other investment opportunities or expand. And everyone around the world can't be austere at the same time; that just amounts to worldwide depression.

Waldman's entire post is well worth reading, but a few things jumped out at me:

1. This is relevant to the notion of free labor, of the sort the networked economy has made more prominent. Waldman is question the idea of austerity at the expense of putting unemployed people to work: "Doing paid work has social meaning beyond the fact of the activity, and doing what is ordinarily paid work for free has a very different social meaning. It is perfectly possible, and perfectly common, that a person’s gains from doing work are greater than their total pay, so that in theory you could confiscate their wages or pay them nothing and they would still do the job. But in practice, you can’t do that, because if you don’t actually pay them, it is no longer paid work. The nonmonetary benefits of work are inconveniently bundled with a paycheck." I'm perhaps under the influence of all sorts of quasi-utopian "end of work" literature, but I wonder if the pleasures of work are inseparable from the paycheck. Perhaps under capitalism, the "in practice" Waldman is talking about, it is. The point I take away from this is that as our society is configured, free work is irreparably stigmatized and thus demoralizing. You have to be working for wages first in order to secure what capitalism makes into the second-order benefits -- job satisfaction, meaning, participation in the "general intellect" or what have you.

2. Waldman is worried that increased fiscal intervention could promote an aura of corruption: "Transfers of relative purchasing power from other citizens to the beneficiaries of government spending may call into question the legitimacy of the distribution of opportunity, wealth, and influence and of the government itself. Perceptions of make-work or corrupt contracting are deeply corrosive." This is what Tea Party types tend to harp on -- freeloaders soaking up their hard-earned tax dollars, etc. Demagoguery certainly helps encourage this attitude; it is easy to put across in sensationalist terms and highly divisive and useful politically. Strangely, no one seems to have much incentive to sell the idea of stimulus; the establishment media is apparently more interested in maintaining an appearance of political balance than in encouraging the economic growth that might in turn help their businesses. But some corruption is probably inevitable with government handouts, particularly since the alibi of "market forces" cannot be invoked to explain unfair distributions. And there is the Hayekian fear of the central planner, unconditioned by meaningful price signals, using resources inefficiently. Waldman suggests such effects are not merely a danger in the short-term; rather, they acquire momentum: "Since economic activity is habit forming and temporary interventions become permanent, the cost of poor government choices can be high. It matters very much what work the government is paying for. Work must be well-tailored to the talents, interests, and future prospects of individuals. Employing people badly is much worse than just giving them money." One might point to the farm-subsidies situation in that regard.

3. This is just well-put, clarifying what is ultimately at stake in these often abstract discussions: "Savers really could flee the euro, dollar, yen or yuan. Interest rates here or there could suddenly spike. A sudden dash to gold is possible. None of these financial market events would directly affect the real resources at our disposal, but any of them could devastate our ability to organize economic behavior, and would call into question the legitimacy of economic outcomes and the stability of governments." The "real resources" of an economy can't put themselves to work for our benefit automatically -- we can't put ourselves to work in a socially beneficial way through sheer force of will. There needs to be a communicative system that relays what society actually needs, revealing what uses of resources are desirable and useful and which are corrupt and which are wasteful and so on. Markets, for better or worse, are the main way this information is revealed, but the markets themselves need to be regulated so that they serve this purpose (and not the purpose of further enriching the fat-cat class and their running dogs). Production must be socially organized in such a way that the outcomes are recognized as legitimate -- are markets the only way to secure social legitimacy when capitalism has become hegemonic? -- and this legitimacy redounds to the ruling order, legitimizing the government as serving the people and not itself.

4. Waldman says we should expect, perhaps even hope for more "austerity theater" -- political noise about austerity while stimulus continues in the shadows. "We should expect policymakers to justify their actions with a lot of intuitive but awful theory. As the Modern Monetary Theorists remind us, the analogy between a fiat-currency-issuing government and a budget-constrained household is poor. It is, nevertheless, the framework under which most citizens and savers understand government accounts, and forms the basis of conventional discourse." Basically, governments are not like households (I can't just go and print more money for myself to pay my rent, for instance), but voters can seemingly only understand discussions about the federal budgets in terms of what they themselves have to do to make ends meet. And politicians feel obliged to cater to this ignorance, helping reproduce it by endorsing the "common-sense" view that you can't go on running deficits for ever and that the piper must be eventually be paid.

5. His conclusion: "We have intellectual work to do that goes beyond choosing a deficit level. The austerity/stimulus debate is make-work for the chattering classes." In other words, the austerity debate is a stalling tactic to prevent the consideration of specific interventions that might allow policymakers to assert some control over the economic cycle. Engaging in the debate is tantamount to conceding there's nothing we can do.

Kapital cool (31 Dec 2008)

Prompted by the availability of David Harvey's lectures, I have been reading Marx's Capital and am sure to have all sorts of mind-numbing posts about the insights I've derived from it in the new year. (Look forward to my close reading of footnote 39 in the chapter about large-scale industry.) But I was glad to read that, like Sarkozy I am part of a current fad for Marx, prompted apparently by the end of capitalism as we know it and all that. The Times of London reported on the Marxmania in October:

Visitors to Karl Marx’s birthplace in Trier have soared – 40,000 so far this year – with many coming from China, eastern Germany, Cuba and Bolivia.“I can’t tell you how many times I have heard people say: ‘The man was right!’,” says Beatrix Bouvier, chief curator of the museum. Alexander Kluge, the film director, is preparing to make a blockbuster film out of Das Kapital. Little wonder, since Marx comes highly recommended. President Sarkozy of France has been seen flicking through the book, while the Peer Steinbrück, the German Finance Minister, recently admitted: “Certain parts of Marx’s thinking are really not so bad.” The Archbishop of Canterbury, Rowan Williams, gave him a decent review last month: “Marx long ago observed the way in which unbridled capitalism became a kind of mythology, ascribing reality, power and agency to things that had no life in themselves.” Even the Pope has put in a good word for the old atheist – praising his “great analytical skill”.

And according to Princeton historian Howard James,

The implication of Marx’s renewed popularity is that capitalism is now universally accepted as being fundamentally broken, with the financial system at the heart of the problem. Marx’s description of “the fetishism of commodities” — the translation of goods into tradable assets, disembodied from either the process of creation or their usefulness — seems entirely relevant to the complex process of securitization, in which values seem to be hidden by obscure transactions.

(James does warn against adopting the Communist Manifesto as solution to the financial crisis, however.)

The most relevant part of Capital to the current crisis that I've read thus far comes in chapter 3, about money, section 3(b) (here in a somewhat lackluster translation):

The function of money as the means of payment implies a contradiction without a terminus medius. In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. In so far as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of products, but as the individual incarnation of social labour, as the independent form of existence of exchange value, as the universal commodity. This contradiction comes to a head in those phases of industrial and commercial crises which are known as monetary crises. Such a crisis occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed, from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities becomes value-less, and their value vanishes in the presence of its own independent form. On the eve of crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere: money alone is a commodity! As the hart pants after fresh water, so pants his soul after money, the only wealth. In a crisis, the antithesis between commodities and their value-form, money, becomes heightened into an absolute contradiction. Hence, in such events, the form under which money appears is of no importance. The money famine continues, whether payments have to be made in gold or in credit money such as bank notes.

In troubled credit markets, all collateral is suspect.

Getting zirpish (17 Dec 2008)

In the wake of the Fed's moves yesterday, the word of the day in the econoblogosphere today is ZIRP: zero interest rate policy. (This is also known as "quantitative easing" -- what happens when Fed rates can't be cut any further, but the Federal Reserve still wants to influence them in the wild.) In other words, the Fed has made its last rate cut. The technical terminology and wonkery involved here may make this seem like something ordinary people can safely ignore, but to judge by the reaction among Fed watchers, it's as though one of the four horseman of financial apocalypse has rode onto the scene.

By pushing the rates to zero, Fed Chairman Ben Bernanke is, in effect, making good on his suggestion in 2002 that central banks can drop money from helicopters in the event of deflation. Martin Wolf, in this FT editorial, puts a dark spin on this turn of events.

As Robert Mugabe has shown, anybody can run a printing press successfully. Once the interest rate hits zero, the Fed can perform much further easing. Indeed, it can create money without limit. Imagine what would happen if an alchemist could transform lead into gold, at no cost. Gold would not be worth much. Central banks can create infinite quantities of money, at no cost. So they can reduce its value to nothing without difficulty. Curing deflation is child’s play in a “fiat money” – a man-made money – system.

The upshot: If we keep printing money, it eventually becomes worthless. Wolf doesn't predict Weimar-style hyperinflation for the U.S., but does expect acute inflation years down the road.

Whether or not ZIRP will work to get more money into the system and narrow credit spreads between Treasurys and commercial rates seems to be a matter of some debate thus far -- Yves Smith rounds up some opinions here, noting the disquieting air of desperation in the Fed's moves. Calculated Risk notes that money-market funds may be induced to give negative returns -- rather akin to the calamity that helped spark the mayhem in the wake of Lehman Brothers' collapse.

Basically, the Fed is done now with anything resembling the conventional monetary policy of the past few decades and is in terra incognita. We can only hope the atmosphere is hospitable.

Commercial paper (8 Oct 2008)

With the federal government announcing that it will intervene in the commercial-paper market -- the realm of short-term financing for businesses to maintain operations -- Justin Fox links to NYT's Floyd Norris fretting about all this rampant socialism. He makes a few logical leaps forward and concludes:

So we may soon have the government deciding which companies deserve short-term loans, and at what interest rates. Does this remind anyone else of central planning systems?

This would seem a legitimate fear, except that the government plays favorites with business sectors all the time. That's how the housing crisis became so acute in the first place, because of the federal support for widespread homeownership that created a fertile field for financial shenanigans.

Central planning isn't a matter of the commissars in the Politboro issuing five-year plans; it's a matter of regulatory capture, of skewing the playing field with tax and trade policies and creating a system of crony capitalism. Dean Baker details some of the many recent ways conservatives advanced crony capitalism here; Jamie Galbraith's The Predator State also looks at how free-market dogma masks the way plutocrats use government to loot the economy. Thomas Frank's new book explores the theme as well.

But the government's move to buy commercial paper remains problematic. The ultimate purpose seems to be to prevent credit from drying up for businesses that are otherwise creditworthy but can't get funds from banks whose capital is tied up in cleaning up its other messes. It used to be that money markets would buy the paper, get a better yield than Treasurys, and pass along the better rate to mutual fund investors. But the chaos in the markets have made this too risky, particularly since the "buck was broken" by a prominent money-market fund last week -- investors lost prinicpal in a money market fund. (Money market accounts seem like bank accounts, but they are not; when the buck is broke, in effect it's as though someone else is withdrawing funds from your savings account.)

The banks themselves can't get funding, because investors are frightened by the losses creditors suffered in the big-time failures we've already witnessed. Justin Fox explains:

What's been causing the various bank scares and failures of recent weeks has been an increasing unwillingness of anybody to extend these kinds of loans to banks. An at least partially rational unwillingness, given that senior unsecured creditors took big hits in both the Lehman Brothers bankruptcy and the seizure of Washington Mutual by the FDIC. Now you might argue that this is a healthy capitalistic development, one that will make providers of such credit more discerning in the future. But there's no way that a creditor could have discerned by looking at the balance sheets of the respective institutions that his money was in dramatically more danger at Lehman and Wamu than at Bear Stearns and Wachovia, where the government acted to protect creditors. It was purely a question of guessing what regulators would do, not weighing the risks of the financial institution.

That's the problem caused by haphazard bailouts, but America has too many banks to for the government to secure them all, so the sense that lending to American banks in a guessing game will apparently continue, despite the $700 billion Treasury plan to suck up loser mortgage-related assets.

The NYT article about the Fed's move notes the inevitable conflicts of interest -- the Fed basically becomes an investor in markets rather than a market referee dictating the rules of the game. But without moves such as this, the Fed and the Treasury Department seem to fear there would be no game at all.