What’s Wrong with the World

The men signed of the cross of Christ go gaily in the dark.

About

What’s Wrong with the World is dedicated to the defense of what remains of Christendom, the civilization made by the men of the Cross of Christ. Athwart two hostile Powers we stand: the Jihad and Liberalism...read more

Notes on the crisis.

I'm standin' in the shadows with an aching heart
I'm lookin' at the world, tear itself apart

— Bob Dylan, “Mississippi


Here Dylan has given us a brilliant summation of the condition of the simple citizen in the face of the economic crisis that exploded in our faces in mid-September, and which may well prove more momentous than another calamity, another September, seven years earlier.

I can only speak as the simplest layman, and even that may be too bold. No doubt whatever I say about the crisis will include error, for the world of finance, despite by best efforts, remains to me mind-bogglingly opaque in many respects.

Nevertheless, I feel it is a perfectly defensible statement to say that we have beheld some astonishing sights in these last two months. At the height of the crisis in September, I asked a knowledgeable friend to try to explain what he was observing. He groped briefly for a way to convey it, then said, “Imagine you woke up and the sky was green instead of blue.” Another analogy he used was, “What if you looked, and found that the sun was rising in the west?”

We have witnessed Porsche take control of Volkswagen, not by purchasing shares (the old fashioned way), but by purchasing, outside from view, derivatives that force other people to sell VW stock. Disgruntled Europeans took to the papers to denounce the mercenary shrewdness of Porsche, accusing it of behaving like ruthless hedge fund. The charge is not far-fetched: Porsche made substantially more profit exercising options (another company’s options) than it did selling cars.

We saw the world’s biggest insurer, with an empire of sturdy assets, brought to its knees by the weight of some other, even more arcane derivatives. We saw the country of Mexico, a big oil-producer, hedge an entire year’s worth of oil exports against oil, again through the mechanism of financial derivatives. These derivatives, as I understand them, amount to a kind of unregulated market in abstracted risk. Companies and banks and hedge funds buy and sell, not products, not even futures on products, but packages of risk on the profitability (or lack thereof) of products. Mexico paid several investment banks a cool 1.2 billion dollars to assume the downside risk on oil. No product changed hands, only an abstraction of risk.

Everything is happening so fast. Recall that for a couple weeks in late September, the Europeans were enjoying a good laugh at our expense: there was giddy talk of the end of American economic hegemony, the resurgence of the European model, and so on — until the crisis vaulted the Atlantic. Now we read that the recession in Germany — a country which wisely avoided the both a housing bubble and an overextension of consumer credit — may well be deeper than the one in America.

The dread word DEFLATION has appeared in newspapers and on the business news channels, with appalling regularity of late. It is pretty clear that the bursting of the housing bubble provoked a hysterical flight to commodities, above all oil, which in turn experienced its own rapid and ruinous bubble. Perhaps the only pleasurable thing in this whole mess has been watching the spectacle of OPEC’s pathetic flailing against forces beyond its control.

Is it possible that we're in the midst of the death throes of the Globalization project of the last 60 years? The Financial Times reports on how manufacturers with huge globalized supply chains have taken the striking step of encouraging their suppliers to come to them for aid in lieu of the banks when things get tight. Now obviously these manufacturers are not doing this out of the kindness of their hearts. It’s a matter of interest and even necessity. If some link in those supply chains is irrecoverably broken, companies could be ruined in a matter of days.

But the undercurrent of the FT article, as I read it, is that globalization has made even solid, conservatively-financed companies extremely vulnerable, and that they are rethinking Globalization itself.

You really have the feeling that you’re watching the world tear itself apart. The Treasury Department, hoping to save the banking sector that is the lubricant of the whole economy, is shoveling money into the banks with abandon, but (a) the banks are so desperate to deleverage that the money is vanishing as fast as it arrives, and (b) it’s an open question whether anyone out there among consumers is even looking to borrow from them. Senators, in turn, threaten to “mandate” that the banks start loaning. But only a very strange mandate indeed would insist that they lend money they don’t have to people who don’t want to borrow it.

Here at What’s Wrong with the World, we had a somewhat rancorous debate over the merits of the Troubled Asset Relief Program proposed to Congress back in September by Treasury Secretary Paulson and finally passed with modification in October. Its purpose was ably analogized by Zippy. Well, forget about all that. The TARP money is doing different things now, mostly purchasing preferred shares and warrants in banks. In short it’s assisting in the deleveraging of the financial sector.

The picture of Wall Street, stock markets and investment that most of us have grown up with is shattered, probably irretrievably. Someone sent me an email yesterday which made mention of the fact that in the year 2000 the NASDAQ was above 5000. I laughed out loud at that.

It was hollow laughter.

You watch these developments and your first instinct (if you are, say, me) tends towards outrage. Where is all this flipping money coming from? And just what the hell happens when US sovereign debt is no longer seen as a secure investment by China, Japan, the Gulf states, etc.? Why won’t the bloody banks start lending? What about buying up bad mortgages, Mr. Secretary? — But after a bit of investigation, the enormity of the whole situation hits you, and outrage is replaced by resignation tinged with sympathy. The banks ain’t lending because no one wants to borrow money, and no one wants to lend it. The TARP transmogrified into a quasi-nationalization program because the opportunity to put a firewall around the bad mortgage-backed securities had passed, and maybe never really existed in the first place. The money is coming from the sale of US debt; and for the time being, everyone and their uncle is racing to protect what wealth they have left in US debt. So we got that going for us, which is nice.

How long that will last is a rather disconcerting question. No doubt the budget deficit will cross over into the trillions soon. Cities, states, companies, funds — they’re all lined up at the federal dole. Even more disconcerting is real possibility that all this debt-financed expenditure won’t do any good, because banks, countries and individuals, spooked and demoralized, are absorbing it as fast as it arrives and not even thinking of putting it to productive use. A steady contraction in demand is staring us in the face, and it is far from obvious that government spending can arrest it.

So you get to a place where criticism is just impotent. I am constitutionally hostile to bailouts. And yet here I sit thinking that maybe letting Lehman Brothers fail, instead of rescuing it, was the decisive mistake. Or not. My criticism is disarmed by circumstance. The best I can do is fumble for some kind of reactive understanding. I’m standing in the shadows with an aching heart.

Comments (125)

A quibble: I don't know which Dylan song those lines are from, but it's not "Mississippi" - I know that song by heart, and those lines aren't in it. Good article, though!

Warren: Dylan is constantly fiddling with the words of his own songs, changing them from one performance to another. The lines are from "Mississippi," but from an earlier version of it than the terrific later recording of it that appeared on LOVE AND THEFT.

It's the version that appears on the 3rd disc of Tell Tale Signs. Follow the link at the top for a Youtube sample.

"I’m standing in the shadows with an aching heart."

We were once the world's largest manufacturer and exporter of cars, steel and oil with a standard of lving and natioanl independence fueled by cheap energy, affordable land & housing, and the world's highest paid workforce. Detroit lifted the American blue-collar worker into the middle class, while Al Kaline's muscular Tigers and Motown's dominance of the music business made the city a state of mind envied the world over.

Levi Stubbs and the Four Tops are my soundtrack for the epic moral, cultural and economic disaster that has followed in the 42 years since this song was written;

“Standing in the shadows of love
Waitin' for the heartaches to come
Can't you see me standing in the shadows of love
I getting ready for the heartaches to come
I'd run but there's no where to go
'Cause heartaches will follow me I know…

… All alone I'll desperately be
With misery my only company
Come today, in fact come tomorrow
Sorrow, I ain't got nothin' but sorrow

1966

http://calculatedrisk.blogspot.com/2008/11/graph-worst-crash-since-great.html

A graph to lighten your mood - if you are betting against the market. If one or two of the big three automakers go down in flames, it could fairly easily equal or surpass the Great Depression in terms of market decline.

I read somewhere that banks are lending money at an accelerated rate from previous years, but the commercial paper market is so weak they cannot repackage and resell it anymore.

Well, I'll be. I stand corrected.

Kevin (and I guess Paul),

I still maintain a bit of optimism, despite the fact that there is a good chance that I may lose by job soon, because I think the proper historical perspective helps provide a needed dose of optimism. In the Fall of 1989, do you really think anyone who witnessed the fall of the Berlin Wall (I was at Checkpoint Charlie in the Spring of 1990 and the experience shaped my thinking to this day) thought it would happen in their lifetimes? Or that those on the Left who surveyed the landscape in the early 80s, when unemployment was in the double digits (which it hasn't reached during this economic recession...yet) and a supposed epidemic of homelessness stalked the land (not to mention all sorts of urban disfunction); ever thought that the economy would come roaring back, unemployment in 2000 would drop to the lowest levels it has been measured at since 1969 (when I was born), or that many urban disfunctions would at least start to decline?

Kevin sings a hymn of praise for the Detroit of the 50s...but it was built on the wreckage of a devasted Europe and Asia the desperately needed our goods and service, including our military might to keep it safe from the Soviet Union and its satellites (and it was also built on a demographic boom that is getting older, adding to our future problems).

So yes, it seems bad right now, but we still have a lot going for us and based on my reading of history, it could be a lot worse. I'll close with VDH, since he's a much better writer than me and I can't think of the appropriate song to use as a counterpoint to Dylan and Motown:

"Thoughts on a recession

I remember the recession of the early 1980s well and it was not pretty. In 1979 I applied for an academic job and was told there were 4 tenure-track openings nationwide in my field and 150 active candidates with Classics PhDs competing for them. When I then turned to farming, the first crop loan I co-signed on was in fall 1980 and taken out at an interest rate of 16%. By 1983 the price of raisins had fallen from $1,400 a ton to $480 in a single year. The local raisin cooperative went broke, and renounced their capital debt to their own members (we lost $70,000) whose vineyards had just plunged in value from $15,000 an acre to $4,000.

Things, in other words, when one measures inflation, interest rates, and unemployment, were far worse then than now. I used to wonder why my grandfather had saved two barrels of used, rusted bent and worthless vineyard staples in the back of the barn amid rat nests and spider webs, salvaged from an old vineyard that was uprooted in the 1950s. By 1983 I was reusing them all to mend vineyard wire. We may get to that, but so far we are not in such a mess yet, despite the Great Depression/FDR rhetoric.

But even more importantly, there are already self-correcting mechanisms under way. Oil has crashed like no period in history. Gas is below $2 a gallon and getting even cheaper. The country is already saving over $1 billion a day in imported fuel costs from its former highs and that affects everything from transportation to manufacturing.

Talk about stimuluses—if such a $2 gallon savings from previous highs continues, the average commuter may save $1500 a year. That not only saves consumers billions, but means our enemies and rivals in Iran, Middle East, Russia, and Venezuela suddenly have billions less to spend on terrorism, new weapons systems, and general mischief. (They may become more desperate and adventuresome, but will still have less wherewithal).

Housing prices for young people in states like California are suddenly affordable for the first time in decades. The war in Iraq is less dangerous for Americans than are neighborhoods in our major cities. Not all is doom and gloom as we read. Capitalism is no more dead than it was supposedly in 1980, 1991 or 2001. The world is less dangerous now than in 1979. There was a reason we were not attacked in the seven years after 9/11—though it will take a decade from now for most to fathom why."

I thought Paulson's buying the "distressed assets" with all that federal debt was the Only Thing That Will Save Us. Perhaps he'd better get to it. Oh. Never mind.

Jeff --

My Notes do not necessarily carry over in their somber tone or doomsday expectations to other spheres of life. The world that is tearing itself apart is the high sophisticated dreamworld that was investment finance. Much of the world deserved to be punched in the nose, frankly.

Nor should you take Dylan to be delivering yet another poet's elegy. Another verse goes:

But my heart is not weary, it's light and it's free
I got nothin' but affection for those who sail with me.

Here is the quintessential greatness of Dylan: to write a sad song that yet evinces whimsy and joy. Chesterton was a master of paradox too.

+ + +

Hanson makes a good point vis-a-vis the oil price collapse (thought we should not forget that some people are nailed on the supply side of the who don't deserve it). As I said in the post, it wonderful to watch the squabbling despots of OPEC rendered impotent, however briefly.

I thought Paulson's buying the "distressed assets" with all that federal debt was the Only Thing That Will Save Us. Perhaps he'd better get to it. Oh. Never mind.
I don't remember anyone ever saying that the original TARP was the only possible plan, or even the best possible plan. But it was a plan, an eminently reasonable one, in an immediate crisis where if the Treasury Secretary paused to zip his fly the butterfly effect could produce trillions in losses. Congress screwed that one up by not immediately approving the TARP and saying soothing things to the public, instead delaying it and bickering while the heart attack proceeded, doing inestimable structural damage in the process.

But I am (and the equity markets are, if anyone has noticed) about ready to strangle Paulson for ditching the original TARP plan. The uncertainty caused by all the gear shifting is murder, even though the basic structural risks are a lot lower than they were a month ago or so.

The war in Iraq is less dangerous for Americans than are neighborhoods in our major cities.

Jeff,
Has Hanson finally accepted self-parody as his only viable career option, or should we really feel better that after years of Utopian scheming, ethnic cleansing and militarized social engineering, Baghdad and Newark can now both lay equal claim as scenic urban backdrops to the next Mad Max sequel? Hansen, despite, or maybe because of, his fascination for war,lacks a genuine sense for the tragic nature of life. For him the rise and fall of nations and their peoples is an abstract exercise that allows him to selectively find precursors to his policy preferences of the present. He writes self-justifying political hagiographies, not history. All then that is left, is the farce of a grasping ideologue feebly waving his "creative destruction" placard at theater patrons exiting his bathos flooded performance of "The New Rome".

"Things, in other words, when one measures inflation, interest rates, and unemployment, were far worse then than now."

Recessions typically don't begin, but usually end with people losing their homes. This is more than a bust following a boom. Having lived through it, I would sign-up for a 1982 level recession in a heart-beat. Sadly, this is a traumatic rearrangement to the American way of life, as it was packaged and sold by a generation of dream-weavers and avaricious empire-builders. Those who railed against our nation's self-immolation on the pyre of globalization, were treated like the prophets of the past and scorned as knuckle-dragging nativists who just didn't understand the financial revolution that allowed people to consume at unsustainable rates even as their real wages remained flat. Do you want to know what the Dow would have been, or what middle-class life would have looked like without the Tech Bubble, the Credit Bubble, The Great American Housing Build-out, our subservient trading relationship with China and our massive indebtedness to that same country? Stayed tuned.

Kevin sings a hymn of praise for the Detroit of the 50s...but it was built on the wreckage of a devasted Europe and Asia the desperately needed our goods and service...

Yes, I am aware of how post-WWII became an economic superpower, but the ascent began prior to the first World War and the rate and depth of our decline was not inevitable. None of it. Least of all the demographic collapse. The conservative understands that with every advance something is lost and it falls to him to preserve the memory of those goods that recede with time. What merit or solace can we find though, in the demise of Detroit, or the fact that since 1978 close to 17,000 US companies have been purchased by foreign entities? I know what we lost, but what did we gain in the great sell-off, or if you prefer trade-off? Cheaper plasma TV's and p.c.'s?

I hope I am wrong, like everyone else, my own family will suffer greatly. And while, I am not optimistic, I am hopeful that in our travails, as false idols come crashing down, we will rediscover the right ordering of all our desires and be freed from the bondage of a insidious and insatiable technocracy that destroys our human dignity as it cleverly caters to our lower nature.

Kevin,

Are you really Maximos in disguise?

I won't pick apart your rant, point by point, because I don't want to hijack this post (e.g. surely you realize that a number presented without any context -- 17,000 US companies sold -- is meaningless...does this represent a historical anomoly? didn't the British own lots of American companies back in the day? how many foreign companies do Americans own vis a vis the foreigners?, etc.)

I will, however, defend VDH to the death. Here is a guy soaking in Greek classical thought and you accuse him of lacking a "genuine sense for the tragic nature of life." Practically every other column he writes, including those about war, remind anyone who will listen that of course war is terrible -- Iraq is just NO DIFFERENT from previous wars (except for low American casualty rates) -- and it is the tragic nature of mankind (or his fallen nature if you prefer, see e.g. Romans, Chapter 1) that will ensure war is a constant of human history.

But I am (and the equity markets are, if anyone has noticed) about ready to strangle Paulson for ditching the original TARP plan. The uncertainty caused by all the gear shifting is murder, even though the basic structural risks are a lot lower than they were a month ago or so.

I'm glad to hear that, anyway. Still, the fact that he has completely ditched the plan and that we're still struggling along seems to indicate to the layman that perhaps the urgency of his actually buying the assets is not, and even was not, overwhelming. And his chopping and changing might lend some credibility to the idea that he shouldn't simply be written a blank check and trusted to the hilt.

Jeff,
I hope you apologize to Maximos for the slur, though I thank you for the compliment.

VDH considers himself a student of history, yet consistently fails to learn from it - nation-building in Afghanistan, the graveyard of empires? - or, shrugs his shoulders at the consequences of an avoidable war of choice that has cost us blood, treasure, prestige and reconfigured the Middle Eastern geopolitical check board in favor of Iran, radical Islamists, while giving credence to Bin Laden's narrative; America plans to occupy and enslave the oil-rich nations of Islam. The call to jihad is now justified in terms of self-defense as it grows in adherents. Too bad vdh can't rewrite the ending, or his role in leading us to this debacle. There are limits to even his imaginative interpretations of history.

Lydia --

We even have the remarkable admission by Paulson under congressional questioning that he had already abandoned the original TARP plan even before Congress passed it.

That said, we also have behind us the loss of about half the equity wealth of the country in the last two months as evidence of the urgency of the situation.

In other words, there are ample reasons to criticize Paulson and Bernanke; but those reasons do not include "crying wolf." They knew they were staring at the abyss, at least WRT their bizarre world of sophisticated finance, and they tried to tell us.

Now we can go on cursing that world to the pit of hell, as many would like to; but the fact is (correct me if I'm wrong, Zippy) it's pretty much gone: smashed to pieces in the span of a few months. Much of it deserves that fate.

Kevin, your connection of the economy to the war in Iraq requires several steps of implication and ought to be unpacked. How, exactly, do you think Iraq and the finance crisis are related? By the underlying utopianism beneath their development? There may be something to that. It should be explored.

I am concerned about the inclination to lay blame everywhere, the tendency toward bitterness and ill-will. The emotionalism and mistrust I see in so places. We need to keep our wits about us. We need to have a Burkean mind to repair and mitigate, not exaggerate and inflame. Some people want to demonize Paulson; many want to demonize Bush; still others a class of commentators and operators; others the sub-prime lenders, or the corporate managers, or the derivatives peddlers, or preachers of "the-world-is-flatism". And on and on.

But we need to think how we can climb out of this hole, not keep digging to discover who's prints are on the broken shovels and other tools.

The historians can handle that business later on.

Lydia:

...seems to indicate to the layman that perhaps the urgency of his actually buying the assets is not, and even was not, overwhelming.

Well, that is like saying that the defibrillator paddles were not so urgent because he did CPR instead and had already decided to do so before he got in the ambulance. IOW, completely unmoving as a substantive matter, though perhaps rhetorically satisfying. And I think the patient would be better off if he had used the defibrillator paddles, and if he hadn't had to argue with the supply clerk for a week about getting them out of stock.

Paul:

...but the fact is (correct me if I'm wrong, Zippy) it's pretty much gone: smashed to pieces in the span of a few months. Much of it deserves that fate.
I think (though I could be wrong) that a lot of the apocolyptic stuff is a bit overstated. Apocolyptic talk is characteristic of every equity market capitulation, though as always this could be the time that it is for real. The specific potential structural catastrophe is receding into the past, having been mitigated to some extent by the technical acts of equity injection, commercial paper backstop, etc, and even more by the psychological effect of governments having shown the will to act, and act in concert -- though that doesn't mean that, having dodged fatality by heart attack, we won't now die of a stroke. Now the patient faces months in the hospital, spiraling expenses in a time of no income, plenty of misery, etc. But at least he's alive.

The auto industry thing is a side show in my opinion. Those companies were already the walking dead, and it just took a period of financial weakness to push them over the edge. They ought to be reorganized under Chapter 11 like the airlines were, and resistance to doing so is a rare perfect alignment of the interests of labor, management, and Democratic politics in that industry. But I agree with Jim Manzi that it is not in the interests of the taxpayers to do a non-chapter-11 rescue there. (The government may need to guarantee some loans under Chapter 11, but that is a different story).

But we need to think how we can climb out of this hole, not keep digging to discover who's prints are on the broken shovels and other tools.
That's exactly right, Paul. Well said.

Zippy, I've heard some people mention Chapter 7 bankruptcy for the autos. Can you tell us what, in a nutshell, the difference is? I gather that Cha. 7 is harsher -- a more total admission of ruin and defeat.

I'm no expert, but as I understand it a Chapter 7 is just a liquidation. The company goes bye-bye and what remains is treated as just a big bag of assets, all of which are sold off to the highest bidder; then the proceeds are used to pay creditors. In Chapter 11 the company still exists but everything - labor contracts, supply contracts, dealer contracts, management and management compensation, etc - goes into re-negotiation more or less from scratch, with the courts oversight and some pretty well-defined rules (as these things go) of what takes precedence over what.

I expect that a Chapter 7 here would be worse for everyone, including creditors and taxpayers. There may be an argument for the government to just stay out of it and allow an asset sale; intuitively I think it is probably weaker than the argument for a reorganization, but I could be convinced otherwise by a detailed analyst brief showing exactly how liquidation is better than reorganization.

Some commentators are trying to position a non-Chapter-11 loan guarantee program (or something) as a de-facto Chapter 11. I don't buy it. What they are trying to do is keep certain things - labor contracts, for example - behind a firewall instead of explicitly throwing them on the pile for renegotiation.

Now as a de-facto matter everything is still negotiable even without Chapter 11. It is just less orderly, with more behind the scenes jockeying.

The situation brings to mind the circumstances of many venture capital and private equity firms. The way these funds work is that they "raise a fund" -- that is, they get capital commitments from limited partners. But the fund managers don't actually get the money right away: they make 'capital calls' when it is time to make an investment, and the limited partners are contractually required to send in the money at that time. If the limited partners don't send in the money they go into default, usually with pretty bad consequences for the limited partner -- typically his invested share gets divvied up amongst the other limited partners and he just goes bye-bye, for example. But the interesting thing right now is that -- rumor has it, I'm just saying -- limited partners are proactively calling up the fund managers and saying "gee, it would be great if you didn't make any capital calls now, because then I won't have to default".

Another classic case was when a CEO who shall remain nameless didn't like the direction the board wanted to take the company. There was a particular board member, who shall also remain nameless, who was pushing hard for this different direction, and the rest of the board was behind him. And of course as a formal matter, the board is the boss of the CEO, has the authority to tell him what to do, and can fire him if he does not. However, this CEO went to his entire management team, got resignation letters from them all, slapped those letters down in the board meeting and issued an ultimatum: either accept all of our resignations and run the thing yourself, or one of the members of the board has to resign, and by the way I'd like it to be you.

He got his way.

The larger point is that formal authority and material power are different things; and in my opinion those ought to be coherent with each other whenever possible. So the auto companies ought to go into Chapter 11.

Our sick and twisted society is reaping what it has sowed.

GOOD!!! LET IT DIE!!!

The only way back to a sane world is for this one to be completely destroyed... nothing that has not died can ever be resurrected.
This is the only rational position for a Christian these days, it's a complete waste of time and energy to be a "conservative", there's nothing left to conserve. We need to be revolutionaries frankly. Destroy this godless, sick and perverse society and build a new one from scratch. Its the only way left.

Well, that is like saying that the defibrillator paddles were not so urgent because he did CPR instead and had already decided to do so before he got in the ambulance.

Suppose that a guy runs into a hospital screaming about how he needs the defibrillator now, OR THE PATIENT WILL DIE! The supply clerk, takes a couple of minutes to give him the thing, partly because he asks some questions, and partly because he isn't known for being the quickest worker. Once the guy has the defibrillator, he doesn't rush off to the patient, but stands there looking at the device, fiddling with the nobs and whatnot, for another five minutes before saying "ah, forget it. I'll use CPR instead; I knew when I came in here that the defibrillator wasn't really the best idea."

There are a lot of things one could say about such a situation. But saying it's all the fault of the supply clerk for not handing the thing over even faster is not one of them.

But we need to think how we can climb out of this hole, not keep digging to discover who's prints are on the broken shovels and other tools.

The historians can handle that business later on.

Paul, my worry is that we're going to be told over and over and over again that the government must _do_ something, something huge and expensive, involving more and more debt to bail out more and more situations (the auto companies being the latest), and that if we have just set aside the past in the name of not being bitter or laying blame, we're going to have a kind of corporate amnesia so that each new demand is met as if it were the first and as if we must acquiesce in it without learning from anything that has gone before. This could amount to just digging the hole deeper. Something very much like this could be said of the failure to root out or even try to root out the imperative to lend to uncredit-worthy borrowers under government programs.

my worry is that we're going to be told over and over and over again that the government must _do_ something, something huge and expensive

Well, for the next two years, that's what we've got with the Dems. The power of Conservatives to resist this almost negligible. But our power to repair and mitigate is considerably stronger. How can we adjust the stimulus legislation that is surely coming, to favor competition and freedom, is what we ought to think about.

Considering the severity of the situation, the Democrats, being almost completely in charge, will be desperate at times to get GOP votes to cover their a**es. There is an opportunity in there.

But as for actually stopping the big Keynesian explosion of spending -- I don't see what good there is in working hard against it right now. Sure, we need to build the foundation to explain its failure (a lot better than the opponents of the New Deal did), but again, this is not the immediate issue, at least to my mind.

Oh, well, at least the record will show that there were those of us opposing "the big Keynesian explosion of spending" in the first place. So at least we won't be urging it next time around, either. :-)

But saying it's all the fault of the supply clerk for not handing the thing over even faster is not one of them.
Sure. But then, nobody is saying that the heart attack is the supply clerk's fault at all (though in this case it is partly the fault of Congress, with plenty of blame to go around elsewhere as well).

I'm just saying that the supply clerk was ignorant, should have gotten the Hell out of the way, and caused a lot of excess damage by not doing so.

Kevin, Are you really Maximos in disguise?

What's so funny about this is that the same thought had occurred to me time and again in past threads as the eloquence and style of rhetoric as well as the chiming of similar notions across several sundry articles between the two would seem almost identical.


...my worry is that we're going to be told over and over and over again that the government must _do_ something, something huge and expensive, involving more and more debt to bail out more and more situations (the auto companies being the latest), and that if we have just set aside the past in the name of not being bitter or laying blame, we're going to have a kind of corporate amnesia so that each new demand is met as if it were the first and as if we must acquiesce in it without learning from anything that has gone before. This could amount to just digging the hole deeper. Something very much like this could be said of the failure to root out or even try to root out the imperative to lend to uncredit-worthy borrowers under government programs.

Excuse me, but has the fact that history has yet again repeated itself in our immediate circumstances gone unnoticed or is it just simply that everybody has gone mad?

Citi was #1; a behemoth originally worth $200 billion.

It is at the verge of collapse with its stock under $5 and market cap to the point where if the government were to inject yet another $25 billion, it would outright own it.

Bail, bail, bail or else all will go to Hell!

If it did AIG, so it can do so for me!

As a matter of fact, Ari, we've seen numerous things -- high-profile, momentous things -- that are the farther thing from being repetitions of history. In two months we have seen more financial singularities, so to speak, than in the previous decade.

I guess what I am saying is that, in my judgment, there is ample reason to be very very skeptical that the old models apply as they used to.

As a matter of fact, Ari, we've seen numerous things -- high-profile, momentous things -- that are the farther thing from being repetitions of history. In two months we have seen more financial singularities, so to speak, than in the previous decade.

And, yet, folks continue to draw parallels between our times and those of the 1930s.


I guess what I am saying is that, in my judgment, there is ample reason to be very very skeptical that the old models apply as they used to.

If that is indeed the case, then why are folks applying the old models to our rather unique circumstances?


I'm just saying that the supply clerk was ignorant, should have gotten the Hell out of the way, and caused a lot of excess damage by not doing so.

There's the missed opportunity: if we had passed the first bill, perhaps Paulson would have actually acted on it!

Sorry for my skepticism, but I fail to see that Paulson would have acted any differently.

I don't think Citi needs a bailout. It has plenty of liquidity, and the rookie CEO has done a great job in a horrendous environment; it's stock price is just being hammered on profit uncertainty in an irrational market.

Also and separately a heart attack is, naturally, just an analogy. Markets are their own kind of thing. When the TARP was announced, the markets immediately started discounting it in, both in terms of pricing and in other behaviors. Credibly grabbing the defibrillator in itself starts to restart the heart.

You see this all the time: the market bakes in some good news (again, both in prices and behavior); then when the actual event arrives prices will sometimes drop, because the real event is now over. Actually markets are even more forward-looking than that: buy the rumor, sell the news, as they say. So the whole "Paulson then fiddled with the knobs for a few minutes" thing is where the analogy breaks. It isn't the knob-fiddling, as in implementation timing, which is the big deal: it is in changing course altogether.

And that is also why the change of course on the TARP has precipitated some pretty nasty effects. The market in mortgage backed securities had recovered somewhat on the presumption that the TARP asset-buying program was coming; now it is reacting negatively. Beyond that the course-changing in itself is a source of uncertainty. Uncertainty means risk, and risk means further discounts in illiquid asset prices.

More generally, in order to speak intelligently about a thing we have to have a grasp of the nature of that thing.

Well, Ari, I hope you can see, at least theoretically, that, has Paulson been able to buy the toxic MBS starting on, say, the Autumn equinox, he might -- mind you: might -- have been able to avoid having to go with the quasi-nationalization plan.

People are comparing this to the 1930s because that is the only deflationary period we have to go on in the last hundred years. The only other data point I've seen mentioned in the so-called "lost decade" in Japan in the 1990s. I think the latter possibility is far more desirable, though still pretty durned grim.

Excuse me, but has the fact that history has yet again repeated itself in our immediate circumstances gone unnoticed or is it just simply that everybody has gone mad?

No, Ari, I was trying to be, er, tactful. I realize it's not one of my gifts. Frankly, I'm still at the "outrage" stage Paul mentions in the main post. And, like you, I tend to feel that the skeptics have been justified in the event and that more "I was wrongs" ought to be being uttered by advocates of the bailout. But I doubt that this will happen, I realize that I am no expert, and I should probably go back to being tactful.

I guess the question to me is something like:

"What would the Great Depression of the Modern Era actually look like?"

There are so many things about conditions in the 1930s that differ from our current age that make the two hardly comparable.


On the matter of the purchase of MBS, the only thing I could see there is the psychological effect that would've, at best, allayed certain fears.

I don't believe it would've prevented the kind of Kapitalism which now exists.

Government bureaucrats and leftist interventionists cannot solve this problem. It has no political solution -- absolutely none. But the bureaucrats and interventionists who cannot solve this problem can make it worse, and have already proved it again this time around. They are incapable of understanding either their impotence or their ignorance. They have come face-to-face with those ugly things about themselves and the economy for decades, but without benefit.

Let the people themselves do what needs to be done; let them select the winners and losers; let the chips fall where they may. But as long as we think the solution is found in Washington, no solution will be found, no repair will be forthcoming.

But we live in an age where even the Republican candidates think that the state is omnicompetent. The greatest miscalculation in the McCain candidacy was his decision to suspend his campaign and to go to Washington until a solution was found. That decision was both economically and politically foolish in the extreme. He should have said that he'd never go to Washington for such a purpose because the solution to this challenge will never be found in Washington. It will be found with the American people making their own decisions, or it will not be found at all. He should have vowed to spend his time and energy with the American people and not with his fellow politicos.

But that's not who he is. John McCain confuses having an attitude and striking a pose with having a principle. He is a maverick, and mavericks sometimes do good things. But strutting through political life by being a maverick is not the same as working your way through political life as a man of Burkean prudence.

Wow, Michael. I don't know if you've ever written a comment I've agreed with more heartily. Esp. this:

It will be found with the American people making their own decisions, or it will not be found at all.

One paragraph in a WSJ article I read earlier this morning (re: Waxman) says it all for me:

Like George Miller, Barney Frank and the other liberals produced by Vietnam and Watergate, Mr. Waxman belongs to a cohort whose power has been checked -- one way or the other -- by Ronald Reagan, Bill Clinton's New Democrat tendencies, the Republican sweep of 1994 and George W. Bush. Now with a new Democratic President and a crisis to use as a lever for a sweeping expansion of government, they aren't about to let an old warhorse with scruples about the costs of regulation interfere with their moment to govern.


Just as the economic crisis became the principal vehicle that facilitated Obama's ascension to the Presidency, it will be the very same that will bring these liberals to the very heights of power as it has in having stacked the deck in their favor.

It seems evident by the recent spectacle in Washington (a la Maxine Waters et al.) that the prerogative for such Democrats is this sweeping expansion of government that has always been their goal whereas swift resolution to the economic crisis before us is all but secondary (besides, they have the tyrannical rule of the Republicans for 8 years of bad policy to blame anyway).

Notes on the Crisis? More like Notes On a Scandal!

It will be found with the American people making their own decisions, or it will not be found at all.

You mean the very ones amongst those responsible for our present crisis in the first place?

"The root cause of today's crisis lies not in the housing market but in America's foreign debt. Over the past four years the U.S. private sector has borrowed an astonishing $3 trillion from the rest of the world. The money, directly and indirectly, came from countries such as China, Germany, Japan, and Saudi Arabia, which ran huge trade surpluses with America. Foreign investors trusted their funds to U.S. financial institutions, which used much of the money for mortgage loans.

But American families took on a lot more debt than they could comfortably afford. Now no one is sure how much of that towering sum the U.S. is going to pay back—and all the uncertainty is roiling the financial markets.

SINCE MID-2004, AMERICAN HOUSEHOLDS HAVE TAKEN ON A BIT MORE THAN $3 TRILLION IN MORTGAGE DEBT."

SOURCE: Chief Economist Michael Mandel

AND

"Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today's crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

'I think we're undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue,' said Greg McBride, senior analyst at Bankrate.com. 'THIS ENTIRE CREDIT CRUNCH IS A WAKEUP CALL TO ANYBODY WHO WAS ATTEMPTING TO BORROW THEIR WAY TO PROSPERITY.'


AMERICANS ARE MORE RELIANT ON DEBT THEN EVER BEFORE.

The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations — like car lease payments and homeowner's insurance — are added in, about one of every five household dollars is now claimed by bills.

The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to make it more difficult for consumers to seek court protection and shed responsibility for paying off debt. But in a sign of just how much households have become dependent on borrowing, the average amount of credit card debt discharged in Chapter 7 bankruptcy filings has tripled — to $61,000 per person — from what it was before the law was passed.

'We are going to have to cut back,' said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C. thinktank. 'We've really been living beyond our means.'"

SOURCE: http://www.msnbc.msn.com/id/27149408/

Well, then, maybe it won't be found at all. But you can't make something from nothing. Taanstafl, and all that. I still think it's true, and if anything, recent events have supported it yet again.

Ari,
I'm distinguishing between the actions of the American citizens as they go about their private business, on the one hand, and the actions of an interventionist government that intruded itself into the business of housing loans by establishing a set of perverse and unwise incentives (both for banks and for borrowers) the implementation of which triggered this meltdown, on the other.

I think certain economists (most of whom use a more realistic top-down approach to gauge things as opposed to the overly optimistic analysts at Wall Street & beyond) had it right when they assessed that if the bail-out approach was to be effective, it would require trillions of dollars and not the petty $700 billion approved by Congress.

Perhaps Paulson finally realized this as well?

IOW, maybe the only solution is to ride the storm out and let the chips fall where they may.

I anticipate that, as before when I mentioned the same, my detractors will again accuse me of being insensitive to the needs of the populist.

I think you mean "populace," Ari. Unless you have some particular populist in mind. :-)

Ooopss... Freudian slip -- my bad!

Thanks, Lydia!

Michael --

How silly it seems to me to rage against McCain. His campaign is an appears to me a relic already. We should instead steel ourselves to oppose his forthcoming folly -- on, for instance, the issue of judges, where he may form another Gang of _____ to ease Obama's packing of the courts with Leftists.

I would agree that his bumbling of the TARP situation was a miserable mistake which exacerbated his problems.

I guess I just don't quite share the hostility to the state that you and Lydia evince. I certainly distrust the state, but it is not obvious to me that just letting the corporations sort the mess out themselves (which is what the "keep our hands off" view must amount to, right?) is tenable.

What worries me is that we misallocate resources so drastically that the next generation of good ideas and energy and insight and confidence flee from America. But guys, new ideas in business need capital; and if we're committed to just letting capital be degraded and ruined in a rapid and ruthless sorting out, well we may not get any truly Free Enterprise for a generation and more.

Which is why I support, prudentially, the idea of trying to rescue some of that capital out of this collapse.

Paul, I'll tell ya', I don't think "we," which inevitably will mean the experts who tell Congress what bailout they need to vote for next (and right now, dammit!), or Paulson, who will decide how to spend the 700 + billion, know what the heck we are doing to bring about the better outcome you're seeking. And maybe, just maybe, that's because this sort of government intervention *cannot by the nature of the case* be helpful, in the long or even the medium run, and is likely only to be harmful. I think that's a possibility that must be taken very seriously. It seems far too hard to accept that government can't do anything truly, objectively helpful in the way of a rescue (as opposed, for example, to "doing something" just in the sense of removing the perverse incentives that were partly responsible for the problem in the first place), but what if that is just _true_?

...it is not obvious to me that just letting the corporations sort the mess out themselves (which is what the "keep our hands off" view must amount to, right?) is tenable.

Why is this thought so prevalent amongst so many?

It is as if the "we must bail out or else" is the answer -- the only answer, in fact, and that it will solve things.

Has anybody given even a pittance of thought as to whether or not the bail-out solution (as that passed by Congress) actually addresses the problem, the very elements that led us to our present predicament in the first place? That it would solve the problem? That it would not actually exacerbate the current crisis?

$250 billion has already been committed.

Do you really think dedicating the remainder to bail out everybody and their uncle will solve things?

What if after doing so things remain the same or that we find ourselves in even more dire straits?

What then?

I think that's possibility that must be taken very seriously.

So do I. I think the possibly that the state can do only harm is a serious one.

But it is certainly not the only possibility. And some others equally must be taken very seriously.

Ben Bernanke probably knows more about the economics of the Great Depression than any living man. Ari disputes that we can use knowledge of the Depression, but I ask what other examples of deflation in a modern Western economy have we? So call me an elitist by this knowledge I do count in his favor. And indeed it seems to me that the Federal Reserve has moved pretty effectively. Treasury, of course, is another story.

It is also possible that the architecture of the capitalism we have known for several decades is an illusion fostered and preserved by the state, and therefore that it would not be wise to hurl our frustration against every effort to soften the collapse, and recover what might be saved.

Has anybody given even a pittance of thought as to whether or not the bail-out solution (as that passed by Congress) actually addresses the problem, the very elements that led us to our present predicament in the first place?

That was not the goal of the TARP. The goal of the TARP was to prevent a cascade of bank failures which would result in a near total loss in liquidity. As originally imagined, it was supposed to be a giant sponge sucking up all the poisonous debt that was killing the financial sector, which would temporarily enable the markets to function as before. Instead it ended up being an infusion of new capital, which has a better long term upside potential but leaves the markets weaker in the short run.

On the automakers, I believe the problem is that Chapter 11 in today's market unavoidably becomes Chapter 7. Outside of a government loan, as Zippy suggested, there isn't any alternative means of credit for them to tap into during reorganization.

This discussion is awesome! Back when the TARP was being discussed, I was sympathetic to Zippy's eloquent arguments (and explanation of the financial system). Zippy and Jim Manzi are two of the best smart conservatives writing about the economy and someone over at NRO or "The Weekly Standard" should persuade Zippy to start writing pieces for them.

That said, having just finished Amity Shales history of The Great Depression, and followed some of the academic revisionist papers, I think Lydia's comments are probably closer to the mark. What Shales emphasizes, time and again, is that all of FDR's (and the Democratic Congress) "experiments" sowed uncertainty in markets and make long-term capital investment difficult (which was compounded by the liquidity crisis of the time and the fact that there was an international trade war). In other words, had FDR and Congress tried to do less; had they focused their efforts on removing barriers to trade and investment (high tax rates and especially high tariffs); and instead had they maybe focused their efforts on temporary help for the homeless, unemployed, etc.; there is a good chance the "Great" Depression would have been less than Great.

And finally, I think the point about the people (and the market) figuring our solutions on their own is a good one. Remember, had the government not stepped in, many families would not have been able to buy a home with no money down, or at a 103% loan to value ratio, or refinance with load products that they shouldn't have been using. It was government intervention that created a lot of the shaky foundations that are now crumbling before us. Check out some of Steve Sailer's great pieces on the sub-prime melt-down.

Zippy and Jim Manzi are two of the best smart conservatives writing about the economy and someone over at NRO or "The Weekly Standard" should persuade Zippy to start writing pieces for them.

Didn't you already know that Zippy is a 30-something retired millionaire that came out of the Tech Boom?

I would think he knows something about these things.

Zippy should be writing pieces for the NRO or "The Weekly Standard"?

I'm still waiting on an autobiographical piece from him concerning his entrepreneurial business success!

Paul,

As is sometimes the case, I was apparently unclear.

I don't mean to sound hostile to the state. But I do mean to say that the nation is better served when the state sticks to things for which it is competent. I don't think that economic intervention is normally one of them. I am indeed an ardent and committed supporter of government -- good government -- but I think that in the marketplace the government is normally not much good.

Also, I didn't mean to say I wanted the corporations to sort things out for themselves. I meant to say that I wanted the people to sort things out for themselves. That includes deciding which corporations live and which ones die. Corporations work for the people. If they do not serve the people well, they will not survive, nor should they. But I want the people, not the government, to pick the winners and losers. They will do so if the government does not intervene to skew the marketplace and its verdicts by giving sweetheart deals and bailouts to their favorites.

Nor do I mean to rail against McCain. But I do say that his views are economically under-informed and therefore counterproductive. He was more right than perhaps he realized when he said that he doesn't understand the marketplace. We Republicans nominated him, and although he is clearly more correct than Obama on virtually every issue, nominating him was not a sign of our prudence or insight.

The government will not and cannot rescue capital. But in recent weeks it has wasted many, many billions of dollars, and with no appreciable progress to date. Government caused the problem we face, and in trying to solve the problem it caused, it made that problem far, far worse. You cannot -- you absolutely cannot -- find a solution by looking to Washington. The DC politicos are so backwards on the point that some of them actually say this problem was caused by deregulation, as if we needed more government involvement not less. Government intervention is at the root of this crisis, not at the root of its cure.

But as for actually stopping the big Keynesian explosion of spending -- I don't see what good there is in working hard against it right now. Sure, we need to build the foundation to explain its failure (a lot better than the opponents of the New Deal did), but again, this is not the immediate issue, at least to my mind.
Ben Bernanke probably knows more about the economics of the Great Depression than any living man.

Either we, as self-styled conservatives, at least have some _objections_ to big Keynesian explosions of spending or we don't. Advocating our simply trusting to the expertise of an unreconstructed Keynesian (which I gather is what Bernanke is) is hardly a matter of simply resigning ourselves to Keynesian explosions of spending because we've elected a Democrat President. Instead, it's a matter of positively recommending that all of us, conservatives included, stay on-board with having Keynesians (put in their positions by Republicans) continue to run the economic activity of the government, regardless of who happens to be in the White House. If that's really what's being proposed, then I suggest it might actually make sense for conservatives to ask themselves if that's what we really _want_. Granted, we can't get what we want anyway, but since much of what we conservative bloggers do is to talk about what we would like to have if we could have it, let's at least ask ourselves if "an economy run by unreconstructed Keynesians" is what we want.

It is also possible that the architecture of the capitalism we have known for several decades is an illusion fostered and preserved by the state, and therefore that it would not be wise to hurl our frustration against every effort to soften the collapse, and recover what might be saved.

Oh, it might very well be true that the architecture of the capitalism we have known for several decades is an illusion fostered and preserved by the state. I just find it implausible that further government bailouts are going to soften the collapse and recover what might be saved--without, at a minimum, making for a bigger collapse later on, possibly without even doing any good in the short run. It seems to me that such actions are just committing us more deeply to illusion--specifically, the illusion that you can get something for nothing and that government can create wealth out of thin air by an act of will, saving us from the consequences of past economic foolishness.

"Government caused the problem we face, and in trying to solve the problem it caused, it made that problem far, far worse."

No, a particular ideology that has controlled one or more branches of our government for most of the last 27 years has led to the present situation. It hasn't helped that the party associated with that ideology evolved into little better than an ongoing criminal conspiracy in that time period while the "opposition" was gutless and stuck on defense.

Alan Greenspan recently pointed out that markets don't seem to work as that ideology predicted. Communism has the good sense to rool over and die awhile back. Be nice if the superstitions surrounding markets would do likewise.

I was contemplating another problem associated with our present situation and lo, it turns out that Paul Krugman has written on it.

http://economistsview.typepad.com/economistsview/2008/11/paul-krugman--2.html

We need a Constitutional Amendment that has a new administration taking power on December 1 and a new Congress a week after the election.

The government does not bail out anyone. Taxpayers do. The government just decides to which corporations they want to redistribute our money.

Because I know better what I want from the marketplace for my money than does anyone else in the world, I want to decide where my money goes. I want every individual to decide where his or her money goes. If it goes where each one thinks it ought to go, the aggregate result will be better than if some government bureaucrat decided on our behalf where it ought go -- a bureaucratic decision that NECESSARILY has to be under-informed. No bureaucrats, no bureaucracy, can possibly have available to them all the information needed to invest the money of all those millions of taxpayers in a way that's best for each one. What's less than the best for each one individually will not magically become the best for all when taken as a whole. Because of the crippling limitations and burdens of the radically imperfect knowledge possessed by all bureaucrats and all bureaucracies, their decisions can only be more harmful to the whole than the decisions we ourselves make for ourselves before the redistributionists get their hands on our money.

Alan Greenspan recently pointed out that markets don't seem to work as that ideology predicted.

Greenspan?

You mean the guy who specifically & explicitly over the past 10 years made statements to the effect that he supported free market absolutism, supported subprime mortgages, supported the growth of adjustable rate mortgages specifically; the latter 2 which required people putting less money down and being able to own homes who didn't have the financial wherewithal to do so.

In face, Greenspan had actually referred to it saying, "We discovered previously unrecognized borrowing capacities".

Amazing that the man who ushered in the Era of Cheap Money with his unsustainable rate cut & his other now-proven failed policies which led up to our current financial turmoil has demonstrated during the course of his testimony in October a fit of convenient amnesia as to certain events in his career as Federal Reserve Chairman.

Al,
Sure the ideology led to the crisis -- the ideology that says government can fix these and similar problems. Any ideology that thinks that government can fix this leads to even greater economic peril. If you bring government in to fix this, no matter by what specific ideology you do it, you make life worse, not better. No matter what ideology you have, government cannot do this job. No ideology of government intervention will work.

No ideology of government intervention will work.

Look at how many times sectors of the economy that get deregulated are followed by scandals and bankruptcy. Government intervention may or may not work in this particular situation, but to say that it has no positive role at all is ludicrous.

It has no political solution -- absolutely none. But the bureaucrats and interventionists who cannot solve this problem can make it worse, and have already proved it again this time around. They are incapable of understanding either their impotence or their ignorance.
Some of the truest words I have read thus far. I have never been able to shake the thought that "Letting the chips fall where the may" might have been the best thing that could have happened, and at this point it is the wisest course of action.

After reading Zippy's posts, I am convinced Chapter 11 must be the direction of our beloved auto industry.

Paul's examples of the abstraction in the financial architecture were revealing in the sense that many of those who designed it did not know how to keep it standing even if it was functional and shined with beauty for awhile. And if that is the case how can we count on those that built it to reconstruct it after it has crumbled.

New engineers must emerge and determine the future. Of course these new players will be those that emerge from the ruble, but surely they will take what they saw and use it to build the new structure much stronger. Hopefully, even with the politicians breathing down thier necks our survivors can build a new framework faster and stronger than our competitors. And with regards to that I defer to Mr Dylan:

But my heart is not weary, it's light and it's free
I got nothin' but affection for those who sail with me.

We are still intelligent engineers. Geniuses really...what's there to worry about?

Step2:
We agree about things like scandals and bankruptcy.

But that's not what I meant here by "government intervention." Scandal, deceit, fraud, criminal coercion, etc. all are things that we rightly rely upon government to resist and to curtail. To that sort of involvement I have no objection whatever, and was not criticizing in this context. I was criticizing the policy interventions that, for example, put incentives in front of lending institutions to grant mortgages to minority folks who could not reasonably be expected to sustain them, and in the wake of the crisis those massive mortgage failures caused, tried to fix the crisis with even more idiotic policy interventions. If they had stayed out from the beginning, and then declined to follow up the first failure with another, we would be better off all around.

Best,
MB

...surely you realize that a number presented without any context -- 17,000 US companies sold -- is meaningless...does this represent a historical anomoly? didn't the British own lots of American companies back in the day? how many foreign companies do Americans own vis a vis the foreigners?, etc.

Jeff, I don't know how much context I can provide, other than I prefer Americans controlling the economic fate and national security policies of our nation. The share of foreign-owned U.S. companies as a percentage of the whole is 13.9 percent. Back in 1971, foreign companies owned 1.3 percent of all corporate U.S. assets. Our massive trade imbalance suggests that US ownership of foreign entities does not come close to balancing the ledger, and I fear that as this fire sale continues "Independence Day" will come tinged with sadness.

Also to put VDH's assurances that this is just another recession, you should know, since 1983, debt has expanded by 8.9% a year, GDP by 5.9%. How do you make up the delta? With a credit bubble, of course. Over the 25 years, total debt - private and public, financial and non-financial - has risen by $45.1 trillion, GDP by only $10.9 trillion!

Over the 25 years, total debt - private and public, financial and non-financial - has risen by $45.1 trillion, GDP by only $10.9 trillion!

The first number is cumulative, while the second is annualized. If you told me that over a given time period an individual's debt had increased $45,100, while his yearly salary had increased only $10,900, this would tell me very little about his overall financial situation.

I'd also note that fear of an impending economic takeover by foreigners seems to have a cyclical character to it. Back in the 1970s talk was that the country was being bought by Arabs. In the late 1980s it was the Japanese who were said to be taking advantage of the Great American fire sale. Today fear seems to be centered on China and the middle east. Given falling oil prices and a drop in consumer demand for products manufactured in China, I suspect that the current "take over" won't be lasting too much longer. Then again, since I don't see foreigners wanting to invest in American companies as something to be dreaded, the prospect of such investment receding doesn't fill me with joy the way it does the Lou Dobbs' of the world.

"this would tell me very little about his overall financial situation."

In 2005, the average U.S. savings rate was a negative 1%. 3 million high-paying manufacturing jobs have been lost over past 5 years. Please massage those numbers and see how it accords with the overall financial situation.

"Then again, since I don't see foreigners wanting to invest in American companies as something to be dreaded.."

Really? Let's look at the causes, consequences of "foreign investment"
*American manufacturers suffer a 22 percent structural cost disadvantage compared to overseas competitors through taxes, health and pension benefits, litigation, regulation, and unequal environmental protection.
*Our trade deficit, at $711.6 billion in 2007 constitutes a transfer of wealth to foreign entities. Hard to label the pronounced decline of such vital industries as steel,publishing, textiles, machine tools, automobiles and electronics through bankruptcy and foreign acquisition as a sign of "economic health", but I'll let you try.
*More than 44 percent of our total federal deficit and finance nearly 100 percent of all new borrowings is held by foreign entities
China, Japan, Great Britain and Saudi Arabia account for more than $2.3 trillion in loans. Japan holds around $517.2 billion while China holds nearly $405.5 billion in loans. Do you see a downside to any of this in relationship to our ability to remain in control of our own destiny?
* This past August, the United States' Commerce Department’s Bureau of Economic Analysis (BEA) announced it would stop publishing a key report tracking foreign direct investments (FDI) into the U.S. Through the discontinuation of the BEA’s “New Investment Series,” the U.S. government and the American public will no longer be able to distinguish between FDI used to acquire existing U.S. assets from FDI used to establish new U.S. businesses.Kind of make me wonder why. You?

What are you thoughts regarding the possible purchase of Citigroup by a Chinese sovereign fund and what percentage of ownership is acceptable to you? I was assume 100%, and if not, why not?

EDIT
What are your thoughts regarding the possible purchase of Citigroup by a Chinese sovereign fund? I would assume that in principle 100% Chinese ownership would be acceptable to you, but if not, why not?

Kevin, your connection of the economy to the war in Iraq requires several steps of implication and ought to be unpacked.

Actually Paul I was responding to VDH’s mind-numbing assertion that “The war in Iraq is less dangerous for Americans than are neighborhoods in our major cities.” Classic non-sequitur delivered in the same absurd vein as; more Americans will die in car accidents than in our occupations of Iraq and Afghanistan, yet no one wants to ban automobiles.”
Only a Greek classicist with an inexplicable soft spot for the Spartan warrior ethic could find consolation in such nonsense.

Beyond the obvious connection between our military actions in the Middle East and our dependence on oil, both the war and the economic crisis took root in the same infertile soil. In each case, bi-partisan elites thought their mastery of human affairs had reached new scientifically-empowered heights and that they were no longer constrained by the limits of previous ages. We were not only the Superpower, but the very benevolent head engineer of globalization; the material, social, political and economic architecture that would usher in a new age of universal peace and prosperity. We would share democratic capitalism’s unprecedented bounty with a world aching for its riches. Our motives were pure. Our position and power virtually unchallenged.

Here in America, we would expand home-ownership, while simultaneously inflating the cost of housing. New, creative, no money-down, variable-rate mortgage vehicles and generous lending standards would; 1) make the American Dream affordable to those currently left out and 2) compensate current homeowners for their declining purchasing power and flat income by making the equity in their homes a source of enrichment.

Better still, the financial industry, would reconstruct the very notion of risk. It would no longer be an unpleasant fact to be mitigated or hedged against, but through computer-generated algorithms and a series of interlinked but incredibly sophisticated investment vehicles, a source of unprecedented wealth. Only a slight exaggeration to say, that for some; debt was gold and default meant; paid in advance. The best and brightest technocrats of both parties worked hand in hand to spread the wealth, while earning a handsome and just compensation for their ingenuity in surmounting the old barriers posed by personal judgment and other non-rational criteria that too often entailed bias. Bigotry and green-eye shade accounting were slain. So too; transparency, accountability and personal responsibility.

Abroad, there were troublesome holdouts brazenly impeding progress. In a vital part of the world, relics from the Bronze Age, enthralled by ancient irrational tribal and religious beliefs and practices threatened the secure and safe transfer of goods and services across the global marketplace. Some of these retrograde elements contrived to slaughter thousands of innocent lives in the heart of the Western financial capitol in what they called retaliation for our presence in their “holy lands and sites.” Our response would not simply be the killing of these murderers, but a complete cultural and political transformation of the backwards people and civilization from which they sprung. All that stood in the way of the project was the will to apply our technological, military and scientific prowess to the problem, and a new day would dawn.

In each crisis we see the tragic consequences when ideology, hubris, good intentions and the will to power combine to trump the traditional classical and Christian understanding of man’s limitations and the indispensable virtue of humility, need for self-restraint and the right ordering of loyalties and affections.


It appears that we are actually going to count the horse's teeth if today's You Tube and the appointments to date mean anything.

3 million high-paying manufacturing jobs have been lost over past 5 years. Please massage those numbers and see how it accords with the overall financial situation.

The loss of 3 million manufacturing jobs over the last five years *sounds* bad, and it certainly is bad for many of those three million workers. But is it a sign that the economy as a whole is in trouble? Not necessarily. For example, while manufacturing employment has been dropping in recent years, manufacturing output has been rising, and was 22% higher in 2007 than it was in 1998. America hasn't stopped manufacturing things; it's just doing so more efficiently and productively, which means that fewer worker are needed to manufacture more products (the process here is analogous to the transformation in agriculture over the past 100 years; many fewer people work in agriculture now than did in 1900, yet the U.S. produces more food now than it did then).

In 2005, the average U.S. savings rate was a negative 1%.

Again, this sounds scary, but the reality does not quite match the hype. While the average savings rate has declined in recent years, this has chiefly been due to changes in the behavior of the very wealthy (who, as a rule, tend to have lower savings rates than the poor and middle class).

Our trade deficit, at $711.6 billion in 2007 constitutes a transfer of wealth to foreign entities.

Well yes. It also represents a transfer of wealth from foreign entities to us. When I buy a car from a Japanese company, for example, the company gains something (my money) and I gain something (the car). Both of us are better off due to the exchange. It is not the case that their gain is my loss, or visa versa. So the fact that trade with other nations makes them wealthy is no evidence that trade is bad for America.

Hard to label the pronounced decline of such vital industries as steel,publishing, textiles, machine tools, automobiles and electronics through bankruptcy and foreign acquisition as a sign of "economic health", but I'll let you try.

There's a lot of confusion and wrongheadedness packed into this sentence, such that it is hard for me to know where to begin. Let me try starting here: You describe various industries - steel, publishing, textiles, machine tools, automobiles, and electronics - as being "vital." What exactly do you mean by this? If you mean that it is impossible for a country to be economically healthy unless it has large domestic production in each of these areas, then this is surely false. There are plenty of country that lack major domestic production in one or more of these areas, and yet are doing quite well economically speaking. If, on the other hand, what you mean is that an economically healthy nation needs ready access to automobiles, electronics, etc., then this is certainly true, but the error comes in thinking that the only way people can get access to these items is if they are produced domestically, rather than by producing some other good or service for which they can be exchanged.

American manufacturers suffer a 22 percent structural cost disadvantage compared to overseas competitors through taxes, health and pension benefits, litigation, regulation, and unequal environmental protection.

Assuming this is true, what bearing does it have on whether foreign investment in American companies is good or bad (same question for the other factoids you mention)?

Blackadder rocks my (capitalist) world! I second everything he says and direct Kevin to this interesting historical survey of foreign direct investment in the U.S. --

http://www.answers.com/topic/foreign-investment-in-the-united-states

Also, I'd like to know the source of that 13.9% figure...it seems hight to me, although nothing I would get worked up about. Again, it is not clear to me what this figure means in isolation. How much of the Chinese economy is owned by foreigners? How much of the Saudi economy? How much of Russia's economy? Great Britain? Etc.

Kevin likes to cherry pick data to make a case that the U.S. is doomed. But pulling back from the crisis of the moment suggest we still have a lot going for us and once we re-learn the wisdom of thrift, we'll come roaring back due to our structural advantages (e.g. software development, bio-medical research, entrepreneurial spirit that still attracts lots of foreign talent, etc.)

Blackadder and Jeff,
Wow, if you guys want to be the Lounge Act on the Titanic, makes sure you grab the mike during “Hayek Hour” We’re in the early throes of the biggest economic crisis this nation has faced since the Depression and you both tout the systemic failures and bad policies that have brought us to this critical point as either advantages or incidental.

We’ve gone from the world’s largest exporter to it biggest importer. From top creditor to the world’s largest debtor and from an economy of production to one based on consumption. None of what has followed apparently causes either of you any alarm. Wages maybe flat, but we can always tap into our credit lines and home equity to enjoy the cheap Chinese imports, take pride in the fact that we’re producing more goods with less jobs and marvel at the cult of efficiency and the sweet wonders of labor arbitrage. And, when our "non-vital" jobs are shipped overseas, we can always work for Goldman Sachs (oops!), find a new trade until it too is out-sourced, go on the dole, or abandon our communities. Large swaths of underemployed or idle males may create some unpleasant pathologies and costly public expenditures, but we have options. As long as we have gas in our tanks, secured by the blood of young Americans fighting in some distant Islamic sand-traps, we can easily drive away to Silicon Valley or find something in bio-medical research. Right?

Other countries will keep buying our, uh incredibly valuable Treasury notes to finance our life-style. It might entail our assuming the role of military protector for Europe and significant parts of Asia so as to spare those countries the expense of providing for their own security while adding to our own soaring federal deficit, but hey; isn’t that what friends are for? The friend part does get some people nervous, in particular, when it comes to Saudi Arabia and China. Neocons normally consider those countries as geopolitical adversaries, with the former financing and providing the manpower for the Jihad, but through the miracle of the market, we should never fret that they, or any other foreign state with interests all its own, might use their economic leverage over us to wreck the party. Only a professional buzz-kill, the kind that warned against “flexible lending standards” and the all-night casino of mystery derivatives and inscrutable default swaps would talk of potential down-side risk.

Just listening to you guys has made me feel better. Being upside down in everything from personal, corporate, public and federal debt, while certifiably unbalanced in our trading relationships never felt so good. A lot of memorable lines, but this is my favorite; “There are plenty of countries that lack major domestic production in one or more of these areas, and yet are doing quite well economically speaking.” The unspoken punch-line; “too bad we’re not one of them” - was classic.

Michael,

I am glad we agree on things like deregulation. Although minority lending did play a role in this, the general lack of oversight and regulation was the main cause. Nothing in the CRA requires zero down payment, no credit checks, and various other shenanigans that led to these defaults. Keep in mind that half of all subprime mortgages were not affected by CRA, with another 30 percent only covered by its weakest provisions. So there was some government intervention, but not nearly enough to explain the magnitude of the crisis. To quote this Barron's article, Washington was an enabler of Wall Street greed for reasons completely unrelated to minority lending.
http://online.barrons.com/article/SB122246742997580395.html

"It presupposes that the free play of market forces can operate in one direction only, given the constitution of man and the world, namely, toward the self-regulation of supply and demand, and toward economic efficiency and progress.
This determinism, in which man is completely controlled by the binding laws of the market while believing he acts in freedom from them, includes yet another and perhaps even more astounding presupposition, namely, that the natural laws of the market are in essence good (if I may be permitted so to speak) and necessarily work for the good, whatever may be true of the morality of individuals."
Cardinal Josef Ratzinger
June 1985

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,.."Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,...”
Allan Greenspan
0ctober 22, 2008

Step 2,

CRA wasn't the problem...it was Freddie and Fannie and all sorts of government schemes to make sure folks who were previously considered credit risks could get loans they couldn't pay back. Again, I recommend you check our Sailer's blog for some of the specifics.

I will concede, however, that many of the exotic financial derivatives were built on these risky mortgages and someone at Moody's or Standard & Poors, etc. should have been sounding the alarm. The fact that they did not, suggests we do need at least some degree of strengthened regulation and/or investors should be able to sue these rating agencies that were so wrong about the debt they were supposed to be grading.

Kevin,

Blackadder and I present you with all sorts of broader economic facts and analysis and your response is to repeat the same silly data isolated from any broader context. I will agree, however, with your desire to see Asia and Europe shoulder more of their own defense burden. I think it would be good for our economy as well as their long-term health...their own societies seem to have forgotten the importance and necessity of good old fashioned military force to solve at least some problems.

I will concede, however, that many of the exotic financial derivatives were built on these risky mortgages and someone at Moody's or Standard & Poors, etc. should have been sounding the alarm.

Jeff,
The CDO & CDS market losses significantly dwarf the tallied costs in the sub-prime and Alt-A mortgages. The creators of these instruments have to bear responsibility, so too the rating agencies and the anti-regulatory climate of both the Clinton-Rubin and Bush-O'Neill-Snow-Paulson administrations. Greed, ignorance, incompetence and our unlimited capability for self-deception all course through this saga.

Like those on the libertine Left, the libertarian Right are better at smashing moral frameworks than they are at building anything of genuine and lasting value. To the bitter end, they will argue against man's fallen nature and insist we;
Cannot. Legislate. Morality.

The one good thing that may come of this is that devotees of each cult will lose their religion.

I will agree, however, with your desire to see Asia and Europe shoulder more of their own defense burden.

Well Jeff, I'm sure you do, but thanks to our current state of indebtedness to them, we're not in a good bargaining position. I suppose we could renounce our debt, but hard to imagine what such a shock to the international economic order we've so sedulously constructed might lead to.


once we re-learn the wisdom of thrift

We're learning it the hardest possible way. As the cash-strapped consumer cuts back, our economy will continue to crater before it can get better. The structural flaws of a system based on endless consumption as the engine for growth are worsened when labor arbitrage is a tool for a managerial class covered in transnational interests and loyalties.

God help us.

"and the anti-regulatory climate of both the Clinton-Rubin and Bush-O'Neill-Snow-Paulson administrations..."

More properly we should refer to the "anti-regulatory climate" of the Reagan, Bush, Clinton, Bush administrations and we should not forget that Carter isn't blameless. Also the roots of this go back to the conservative revival that began back in the 1950s.

"The one good thing that may come of this is that devotees of each cult will lose their religion."

I guess you haven't been reading the posts north of here and places like The Corner or listened to talk radio (speaking of which, Nate Silver had some interesting comments: http://www.fivethirtyeight.com/2008/11/did-talk-radio-kill-conservatism.html).

Nothing in libertarianism is inconsistent with belief in the fallen nature of man. If anything, I would say that libertarians and other free market types tend to have a darker than average view of human nature (or, to be more precise, a more consistently dark view of it). If a typical libertarian opposes government regulation of business, it's not because he denies that people are often selfish and power hungry, but because he recognizes that people do not cease to be selfish and power hungry just because they work for the government. If he thinks that "greed" is not a sufficient explanation for some economic problem - higher prices, say - this is not because he denies that businessmen are often greedy, but because he thinks it implausible that they suddenly became greedy just before they raised their prices.

Kevin,
Deregulation was not to blame, unless you mean that the government should have stepped in to regulate itself out of the home loan marketplace.

Either we, as self-styled conservatives, at least have some _objections_ to big Keynesian explosions of spending or we don't.

As far as I understand the term, the one major Keynesian piece of legislation so far is the stimulus checks the Traesury cut back in the spring. Perhaps the auto bailout could be called Keynesian in the sense that the unions will win, but it hasn't happened. And of course everyone expects a ginormous (as my 4 year old has taken to saying) outpouring of New Deal-style federal spending on roads, bridges, ports, and a thousand fields of pork under Obama.

But the activity undertaken by the Treasury and the Fed since the detonation back in September would be hard, again in my understanding of the word, to describe as Keynesian. For one thing they were far more interested in supply-side than demand-side. For another, by the Fed especially, they were commitments of capital to backstop this or that; rather than the standard Keynesian method of stimulating consumers with actual cash to the market, quickly.

Also, I guess I am just less ideological on economics than a lot of people here. We're in uncharted waters. We would do well, in my judgment, to favor empiricism over repetition of doctrine especially since the doctrine being repeated has just been thrown from power (more on that in a moment).

Consider then, empirically, that it may well be that the key mistake was to take the "let the chips fall" approach to Lehman Brothers. I certainly favored this when it happened, and was irked when AIG was rescued a few days later.

But I did not know what was inside of AIG. And now I do. At least I have a workable notion of it. It was, in part, a good chunk of the credit derivatives market which on paper reached up near $50 trillion. 3 or 4 times the size of the economy. It was a ticking time bomb.

What does Capitalist doctrine have to say about the credit default swap?

The inadequacy of any answer to that question leaves me . . . well back in that place where Burkean empiricism seems wiser.

++++

Now, look, it must also be remembered that the left wing of the Democratic party will very shortly be running this country. This in part (let's face it) because the party associated with Capitalism has just been rebuked savagely by the voters.

What's wrong with the world? One thing wrong is the idea that a market can hold credit derivatives with paper wealth exceeding by many times its real assets.

More broadly what's wrong is that it is tyranny to subject the real world to abstractions.

But Capitalism went wrong, folks, and we can't go around answering, like our opponents of old, that it was never truly tried.

Doubtless this has been a source of jubilation to some around here, but one of the reasons I have not bestirred myself to comment in recent months is that it is infinitely wearisome to read people prating on about the financial collapse as though the entire thing could be laid at the feet of do-gooder leftists who wanted banks to lend to poor minorities. Obviously, the metastasis within the market for derivatives, the exemption of these markets, not to mention the markets for default swaps, from regulation, precisely on the grounds that markets and their participants were self-regulating, had nothing to do with it. Obviously, the decision to exempt the investment banks from reserve requirements had nothing to do with it; neither did Greenspan's luridly profligate monetary policy. Obviously, none of the "financial innovations" created by the provate sector to expand lending had anything to do with the crisis. In fact, the entire financial architecture that is now coming down around us would have remained standing, in all of its excessively-leveraged, predicated-upon-nothing-more-than-the-engineered (by Greenspan)-ability-to-withdraw-equity-from-appreciating-assets obscenity, had it not been for those pesky minority subprimes, despite the manifest fact that they represented but a fraction of the total amount of leverage.

Use your illusions, boys.

If conservatives continues to traffic in the lunatic belief that deregulation had nothing to do with this crisis, expressing a fundamentalist and ideological faith in the essential malevolence and/or incompetence of government, coupled with an analogous faith in the efficacy of some mythologized and abstract 'private sector' - not that deregulation was the sole cause, mind you - then they will richly merit the protracted errand into the wilderness that probably awaits them. And I won't give a damn.

Paul,
Interventionism failed.
Interventionism and capitalism are not the same.

Welcome to opposite world, in which the exemption of entire swathes of new markets in exotic and esoteric financial instruments from regulation constitutes interventionism. The absence of intervention is intervention.

Wow.

I know plenty of Austrians who would say something much like that, at last concerning quite a few decades past, and with reason. And who would back it up by saying exactly what you suggested above, Paul, that the "capitalism" we have had going for quite a while has been an illusion held up by the state. The fact that some party is "associated with capitalism in the public mind" is hardly an argument on the subject. And didn't Maximos (of all people) tell us months ago how much the people who "take their von Mises seriously" hated the derivatives market?

By "Keynesian" I meant chiefly the notion that the government must buy us out of trouble by increasing federal debt. Whether the money is spent on bailing out corporations or on direct handouts to purchasers doesn't change the underlying logic: Government must borrow our way back to prosperity, must engage in rescue programs involving vast sums of money taken from taxpayers or borrowed, and these will work and be ultimately better for everyone.

Sorry, my post was in response to Paul's. The "something much like that" referred to capitalism's "not having been tried." Maximos and I posted at the same time.

Well Maximos sure came back with a torch in hand.

Alas I must say, though I share his general analysis, I cannot carry that same torch.

I do prefer Capitalism, and want it preserved not destroyed. And I do agree that interventionism played a part -- a big part.

But if Capitalism is going to be preserved, it's going to be because its friends were pragmatic, clear-headed, ready to learn and adapt, etc.; that they kept their equanimity and charity at a time of panic and bitterness.

Burkean.

Most Austrians do, in fact, if my own experience may be taken as indicative, detest the derivatives market, because it is a development of a financial system predicated upon fiat money and central banking. They are, of course, wise to remain skeptical of the Masters of the Universe, but we should be clear about what follows from this: unless we are going to revert to a hard-money financial system*, which we are not, we will need hard regulatory curbs on speculative excess, inasmuch as modern financial systems, when untrammeled, tend to exhibit a tendency in this direction.

* = To be perfectly fair, however, the Austrian literature is replete with endless tomes on financial bubbles and panics throughout history, most of which occurred in systems based upon hard money. The argument there is that these panics and bubbles originated in a failure to observe the rules of that system. Insofar as the gold standard is dead, this is all academic, in the colloquially pejorative sense of the term.

I share Paul's instinct, to be certain, but I am no longer clear on what it means to affirm capitalism in this day and age. If capitalism means the ideology of open, self-regulating markets, then that ideology should be burned with a stake through its heart. Burn, baby, burn.

More broadly, I think the entire interventionism/deregulation dualism sterile and unprofitable, a product more of ideological thought than nuanced analysis, inasmuch as, beyond a certain minimal level of development, economic architecture just is artifactual, an intervention - by legislation, custom, and so forth - absent which such architectures would not exist at all. Certainly, the financial systems we are discussing are artifactual in this sense, and so it makes little sense to decry government-mandated subprime lending as an intervention, but to regard derivatives as some organic, natural entities arising, as a simple, gradualistic adaptation, out of the unplanned interactions of billions of people. We should, in brief, be discussing the rules of the game, and worrying less about a hackneyed state/business dualism that tells us nothing about modern, financialized economies actually operate.

Lydia, is it your view that the Treasury Dept. and the Federal Reserve should taken the Lehman Brothers approach to every aspect of the crisis? "Sorry to hear about your troubles, gentlemen, but there ain't nothing we can do. Have a good day."

The Fed was wrong to backstop money market funds and the commercial paper market, and more broadly dead wrong to ever expand its balance sheet?

Every active step was folly and will result in ruin?

My view is that there were plenty of bad moves. But there were some good moves, and ironically enough, the good moves seem to be of the more active or interventionist variety.

Now I do not extrapolate from this to say that Capitalism is discredited forever or something. Indeed, as I have said, the connection of each individual action is not always easily judged on the scale of Capitalist or non-Capitalist.

This was a world of high finance engineering (a kind of dreamworld) which was untouched by much doctrine of the philosophical sort. The credit default swap appears to have been invented in the late 1990s. Adam Smith, strangely enough, had little to say about it.

This was a world of high finance engineering (a kind of dreamworld) which was untouched by much doctrine of the philosophical sort. The credit default swap appears to have been invented in the late 1990s. Adam Smith, strangely enough, had little to say about it.

Conservatives should recover their horror of abstraction, and recognize that these derivatives embody much of the very tendency which they otherwise decry. We can make do without most of these instruments, and did, for by far the better part of our history as a people. Actual economic realities and the realities of human nature are analogous, as are arcane speculative instruments and utopian fantasies of the reconstitution of society, or ideological doctrines generally: truncations of being.

It seems to me that some folks think the whole economic crisis could have been averted had we applied different principles of finance. I disagree. This is an issue of political economy, not of finance. By that I mean that political economy is a wisdom, a philosophy, an exercise in prudence -- and not a financial calculation.

The number-crunchers go wrong precisely because they think they can transform human beings and human action into aggregate numbers, and then run their aggregate numbers through multiple elaborate calculations, which yield more numbers, upon which they devise future public policy, as if in the move from humans to integers the most important things of all, namely the human beings themselves, were not either lost or radically deformed. The social sciences make the mistake of aping the natural sciences, and of applying many of the methods and presuppositions of the natural sciences to human beings. But we are not mere bodies (as Ed Feser is trying to demonstrate for us in many ways), and we are not numbers, though the natural and social scientists treat us as if we were. Until we learn that human beings and their actions are not reducible bodies and to numbers, our public policy will be unsuited to the real world.

It's not a matter of finessing numbers; it's matter of discernment and prudence regarding human persons and their choices, not fine shades of financial theory and number crunching. Until we learn that human beings are creatures of incentive, and that government entry into the marketplace normally entails introducing distortive and perverse incentives, we cannot make significant progress in political economy.

Lydia, is it your view that the Treasury Dept. and the Federal Reserve should taken the Lehman Brothers approach to every aspect of the crisis? "Sorry to hear about your troubles, gentlemen, but there ain't nothing we can do. Have a good day."

As far as I can now tell, yes, that's my view.

I would say I'm open to being convinced otherwise, but the thing is, Zippy (whom I respect tremendously) had a jolly good shot at it weeks ago, and although I curbed my ideologue tendencies to the point that Aristocles misunderstood me and took me to be in favor of the bailout (which I hope is now cleared up), I was never convinced. In fact, the whole bailout approach seemed to me to be a request for a kind of wild, to my mind irresponsible, granting of power and huge sums of debt-found money to the government because we had to do something. It seemed to me folly and even a demand for a flinging of caution to the winds as a matter of principle. I could not and still cannot understand the attraction of it.

Sure, I probably know less about the details of this than anybody else in this thread. Them's just my opinions. But as far as I can tell, nobody has yet refuted the idea that you can't create wealth and fix the economy by shaking a giant, government-sized magic wand. My inclinations in favor of the nut-case world of hard-money economics have been only crystallized by recent events.

Now you can order me a padded cell and straitjacket. :-)

We can make do without most of these instruments, and did, for by far the better part of our history as a people. Actual economic realities and the realities of human nature are analogous, as are arcane speculative instruments and utopian fantasies of the reconstitution of society, or ideological doctrines generally: truncations of being.

I agree that we can do without them, but let's not kid ourselves: it's gonna be a long, hard, frightening withdrawal.

And there is no dishonor in trying to mitigate its effects.

One other to (to several commenters): It seems rather churlish and misleading to denigrate men like Paulson and Kashkari as bureaucrats. In truth they are businessmen who took government jobs in the second half of Bush's second term. They were investment bankers. Bernanke is an academic economist. I suppose Maximos will tell us that these titles are worse than bureaucrat. :)

Michael, I agree with your most recent comment almost in its entirety, my one demurral being with the implicit notion that it is only government which creates perverse incentives. Not only the present crisis, but the history of financial panics, demonstrates that the private sector is quite capable of creating its own perverse incentives.

And there is no dishonor in trying to mitigate its effects.

Not in the slightest, which is why, since the inception of this running discussion here, I've been on the pro-intervention side of the debate.

As regards investment bankers and academic economics, well, I tend to regard the former as being every bit as destructive as the worst of bureaucrats, and regard the latter with ambivalence. Some are wonderful, others horrible, and many somewhere in the middle.

Paul,
Businessmen playing the role of bureaucrat does not make the function and effect of bureaucrats any less destructive or counterproductive. The apostles themselves could not make bureaucracy work, much less can businessmen like Paulson and Kashkari. Modern bureaucracy needs fixing; it is not the fix.

Trying to mitigate trouble is not a bad thing -- unless you try to do in ways that simply cannot work. The ways we've tried to date are just such ways.

By the way, I know that several people in this thread have heaped scorn upon the connection drawn between the push to increase loans to the uncredit-worthy (in Fannie Mae, for example) and the crisis. But there hasn't been any attempt to address the perverse incentive of the expectation of bailout. It hardly seems reasonable to call it "capitalism" when financiers do crazy, unsustainable things having the "too big to fail" idea in the back of their minds. One of the whole points of capitalism as I have always understood it is precisely that it takes advantage of the hard facts of cause and effect rather than trying to make consequences go away. Bailouts negate the entire real-world, reality-check idea that is absolutely fundamental to capitalism. Calling speculative, unsound money transactions undertaken with the assumption that the government will borrow money and get you out of the soup if things go wrong "capitalism" sounds to me like saying that Junior is "hunting" if he goes out, shoots wildly at trees, shoots himself in the foot, Dad pays the medical bills, and finally a dead 10-point buck that somebody else shot is delivered to the front door with "Junior's deer" on a tag attached to its antlers.

As far as I can now tell, yes, that's my view.

To me that is just not a tenable position in light of the facts, Lydia. The effect of Lehman's bankruptcy was to show that some huge proportion of the entire private sector was at risk in the event of a panicked collapse of the derivatives markets. So many firms, large, medium and small, would have perished that never deserved it; firms with sound conservative finance and good models of business; thousands upon thousands, not just in bankruptcy but utterly liquidated. The repercussions would have been staggering, and in the end would have redounded to the immense benefit of the largest and most ruthless.

And that some good moves have been made is also not a position that, in my view, can endure a confrontation with the facts. The Fed backstopped money market funds, yes; but taxpayers will likely never pay a dime for that. Money market funds are very conservative instruments. It was pure panic that threatened them, compounded by forced liquidations. Backing commercial paper (Zippy, if your reading, please correct me if I'm wrong) similarly: it seems to have worked pretty well, according to the reports I read.

Or what about the doubling of FDIC coverage for savings accounts? That put taxpayers, theoretically, on the hook for billions upon billions. But was it wrong to encourage panicked people not to withdraw all their money?

Max,
Thank you.

I did not mean to imply that only government was to blame. I don't believe that, regret giving that impression. Indeed, based upon what I take to be Christian teaching concerning human nature, I cannot think that only government is to blame.

Best,
MB

ERRATA:

Second paragraph at 4:27: "And that some good moves have been made" should read "And that NO good moves have been made" . . .

Michael, I missed your comment at 4:02. Good one. I agree in a very fundamental sense with it.

More broadly what's wrong is that it is tyranny to subject the real world to abstractions.

We labor under nothing but abstraction. The libertarian and the marxist are both determinists, convinced that with the right application of morally neutral, scientifically-proven and purely rational standards we can remove human folly from obstructing the implementation of their dream-scapes.They both have invented a truncated, bloodless form, in place of the spiritual being that is man, to serve as the pawn in their plans.

Keep that torch in your hands, Maximos, as heat is needed to generate light. While I pray we are spared social unrest, I know too if it comes it will be due to darkness. Long tolerated illusions have made a crisis ripe for exploitation by those eager to plant an E.U.-style monstrosity upon American soil. Healthy anger now, beats impotent rage later.

Maximos says: "If conservatives continues to traffic in the lunatic belief that deregulation had nothing to do with this crisis, expressing a fundamentalist and ideological faith in the essential malevolence and/or incompetence of government..."

Warren Buffett says the following in a recent interview:

QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the regulators, where were the regulators for what was happening, and can something like this be prevented from happening again?

Mr. BUFFETT: Well, it's really an incredible case study in regulation
because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that's $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.

QUICK: Mm-hmm.

Mr. BUFFETT: And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went--wrote 100 page reports, and they said, 'We've looked at these people and their standards are fine and their directors are fine and everything was fine.' And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350--340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn't have a word in there about themselves, and they're the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation.

QUICK: That sounds like an argument against regulation, though. Is that what you're saying?

Mr. BUFFETT: It's an argument explaining--it's an argument that managing complex financial institutions where the management wants to deceive you can be very, very difficult.

Maximos says: "Conservatives should recover their horror of abstraction, and recognize that these derivatives embody much of the very tendency which they otherwise decry."

I say, should conservatives really recoil in horror from math (which is one big abstraction...square root of negative one anyone?), concepts like the "soul", character traits like "virtue", etc. Seems to me conservatives won't be left with much. But seriously, since Maximos has been back, he has been reading from the same Leftist playbook on the economy that he always reads from. Derivatives are dangerous? How come the market in futures is doing just fine? Or the interest rate swap market? Credit default swaps are dangerous? In what way and how did they exactly contribute to our current problems (remember: just because a market isn't regulated it doesn't mean rules and safeguards don't develop organically to ensure that market can work...AIG had to come hat in hand to the governmenttell me exactly how the 'unregulated' market in CDOs 'failed' and why a specific government regulation would have helped)?

Believe it or not, I'm not against all regulation -- it is part of the "architecture" of markets as Maximos likes to say and we need it for markets to function smoothly (e.g. contract enforcement). The issue is always what should the regulation look like and why will the specific regulation help the market function better. Here are some good posts that get at some of these issues:

1)

http://www.marginalrevolution.com/marginalrevolution/2008/09/the-regulation.html

2)

http://www.marginalrevolution.com/marginalrevolution/2008/09/a-new-insurance.html

3)

http://www.marginalrevolution.com/marginalrevolution/2008/10/roger-congleton.html

I could go on, but bookmark "Marginal Revolution" and start reading daily.

Derivatives are dangerous? How come the market in futures is doing just fine? Or the interest rate swap market? Credit default swaps are dangerous?

Futures are functioning pretty well in part, I would surmise, because they are traded on standardized exchanges. Unlike, oh, say, credit default swaps. (I know there are efforts ongoing to put CDS on an exchange.)

As for interest rate swaps, well, the swap spreads last week were reflecting extraordinary disorder: mathematical impossibilities like negative interest and so forth.

As I've said several times now on this thread, it is far from clear to me how academic economic doctrine applies to all this derivative engineering. How reasonable is it to have a market in credit derivatives which exceeds by several multiples the entire wealth of the country? So that when things get ugly the credit derivatives are enough to put the whole banking and insurance industries, along with money market funds and the commercial paper market, at risk of total collapse?

Do you have quotations from Hayek and Friedman declaring that Capitalism is never free unless finance wizards are allowed to package risk into little bundles of abstractions and trade them at will?

It seems to me that the credit derivative market is an area where it will be some time before academic economic theory catches up to events. So the repeated assertion of economic doctrine seems beside the point.

What Paul said.

Incidentally, I agree with the recommendations in the first MR link. The reason many of these markets, such as that for default swaps, failed was that there were no capitalization requirements, limits on leverage. Because they were exempted by a series of late-Clinton "reforms", enacted under the superstitious belief in self-regulation, and perpetuated with worshipful reverence under Bush.

As for the bits about Freddie, Fannie, and Sarbanes-Oxley, all that demonstrates is that specific regulations, and the implementation thereof, can be radically flawed, not that regulation itself is impracticable, and markets should there fore function wholly autonomously.

I'll second Paul's wise comments with the following caveat -- just because something is complicated or new doesn't mean we need to freak out and claim that the key is BETTER regulation. For every "master of the universe" PhD that came up with some sort of engineered financial product, there had to be a sucker to buy the product. The interesting question for me is why were there so many suckers? Is it because regulators should have demanded more information? But in the absence of such information, why didn't buyers stay away from these engineered financial products as too risky?

Untangling and understanding the process by which smart people decided to bet dangerously large sums of money on risky investments will take some time. My guess is that the answer won't be "if only regulation X and Y" were in place, this would have never have happened. Instead it will be a complicated tale that involves a lot of government programs and involvement in financial markets that created adverse incentives, AS WELL AS, a certain recognition that given the government's involvement in these markets, the regulations that did exist should have done a better job of protecting investors.

How reasonable is it to have a market in credit derivatives which exceeds by several multiples the entire wealth of the country?

The total net worth of U.S. households in 2007 was just shy of $60 trillion. The total value of credit default swap contracts in the entire world is somewhere between $45 and $63 trillion. So the factual premise underlying your question is wrong.

A credit default swap is basically a kind of insurance. If we were to calculate the total value of every insurance policy issued in the United States, home, life, health, auto, etc., we would end up with a ginormous number. Does that prove that insurance generally is absurd and unsustainable? I don't think so.

Does that prove that insurance generally is absurd and unsustainable? I don't think so.

Of course not. What it proves is that insurance providers should be regulated to ensure that they are adequately capitalize, that their market procedures are transparent, etc. None of this was true of default swaps.

The interesting question for me is why were there so many suckers?

The fundamental fantasy of limitless expansion towards the finite infinity, and a lot of mythmaking intended to paper over the disjunction between the speculative economy and the actual productive forces of the economy.

Instead it will be a complicated tale that involves a lot of government programs and involvement in financial markets that created adverse incentives, AS WELL AS, a certain recognition that given the government's involvement in these markets, the regulations that did exist should have done a better job of protecting investors.

Which is more or less what I've been arguing, lo, these three months. Which is not a simple morality tale of misguided intervention, but rather one of poor regulations in certain places, perverse incentives in others, and dereliction of regulatory duty in still others.

Blackadder: I used the word "wealth" when I should have used GDP. My bad.

Maximos,

It is delightful (and rare) to come to agreement about economic matters with you, although this rather limited agreement about "poor regulations in certain places, perverse incentives in others, and dereliction of regulatory duty in still others" seem to be at odds with your previous more sweeping statement denouncing "abstraction", "derivatives", and "arcane speculative instruments."

Again, because it bears worth repeating, for most people a call option on a stock is arcane...does that make a call option something we should do away with? No, as Paul says, it means we should make sure that those who trade such options can handle the risk (at least better than the average Joe). This doesn't mean that "abstraction" is bad and "manufacturing widgets is good".

There are arguments against such financial abstractions that do not touch on the question of how best to regulate them. I have hinted at as much in mentioning the structural disjunction between the speculative economy and the productive forces of the economy, namely, that the speculative exuberance proved unsustainable, in large part, because there was/is not enough "manufacturing of widgets" taking place, meaning that the ability to pay for all of things we were buying on credit was rather less than presupposed by the financial models of the MoTU. I believe that the reasons for this are numerous and complicated, but to discuss them would be to rehash three years of debate, from EM to WWWtW, over the themes of political economy.

Most generally, abstraction in finance detaches lenders from borrowers in the concrete circumstances in which the latter are found, detaches financial elites from ordinary folks and their conditions of life. The default swap is a perfect illustration of this process. It makes sense, when understood on its own terms, but it is perfectly suited to a financial system which slices, dices, and bundles debt obligations into a variety of instruments. By contrast, in an era less enamored of abstraction and mathematical modeling, lenders had to be intimately familiar with the local circumstances of their lenders, because they were going to to be on the hook, and would have something tangible as collateral if the borrowers couldn't pay. They'd have to concern themselves with the circumstances that would enable their borrowers to repay. The default swap presupposes a great degree of separation between origination and destination; it's a way of hedging against the failure of risk-management strategies that were supposed to minimize the risk of large pools of debt, which is somewhat ironic. In brief, the present system is predicated upon the assumption of foundational factors not necessarily in evidence. Almost everyone recognizes that the middle classes are suffering a bit of a pinch - this is a recurrent theme in Jim Manzi's writing, Manzi being one of the few adults left at National Review - and if that is the case, than ability to pay is not in evidence; and if ability to pay isn't in evidence, then all of these abstractions become much, much less tenable.

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago. http://bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home

This doesn't mean that "abstraction" is bad and "manufacturing widgets is good”

My Lord, Jeff what is it going to take for you to question some of our more toxic cultural assumptions and your own deeply held ideological nostrums? Highly intelligent people invented, bought and sold instruments they did not understand and still cannot unravel. A good many of the rest of us will pay for their personally profitable flight into abstraction with our jobs, homes, retirements and college funds, while the lucky ones will only be assessed with higher taxes. Future generations will be…forget it, who even cares. Let them climb out of it by conjuring up their own vaporous Ponzi Schemes. They can transfer the losses onto the next cohort.

Something horrible results when the self-giving integral to any relationship is lost and intimacy is replaced by the bloodless notion of a “transaction” executed with a distant, disincarnate other. Isn’t it obvious that we should, for so many reasons, manufacture most of the very goods we purchase? Does one have to tour the corridors of despair like the former manufacturing communities and mill towns that stretch from Buffalo to Bridgeport to note the very tattooed and listless people left behind by the great “free trade” boom? I know you both don’t mean too, but you and Blackadder have a tendency to sound like New Class intellectuals - the right-wing variety – as you brandish theories and slogans that fly in the face of reality. Conservatism can’t reside simply inside one’s mind; it must have a heart and connect with the flesh and blood people it purports to serve. Abstraction is your enemy.


Wait a minute: Does this mean, Kevin, that you are _against_ the bailout of Citigroup? But I thought...Well, let's just say I'm confused. I thought that the people in this thread (e.g., me) who are opposing bailouts were, inter alia, the ones being accused of being addicted to abstractions. ??

And btw, "Ponzi scheme" sounds just about right to me.

Lydia, after Paulson's bait and switch over TARP, I'm wary of forming any opinions, other than this; our managers are using the only option open to them. They'll run the printers non-stop and hope we can somehow right ourselves before our foreign creditors stop buying US Treasury notes.

When I refer to Ponzi Schemes, I mean the whole array of private and public sector policies that lead us here. From the free trade zealots who thought our manufacturing work-force could transition into an "Information Economy", to the casino capitalists who finally built a roulette table they couldn't rig, to the various front-men who told us to shop until we drop, because we control the world's supply chain, discount outlets and easy to access ATM machines. The whole thing is such a unspeakable mess, that I understand why parts of the population are voting for "right to die" amendments. They're exhausted and don't believe there is anything worth living for once the Home Shopping Network goes of the air.

They'll run the printers non-stop...

Kevin's underlying message: BUY GOLD!

Kevin,

As Maximos already alluded to in his admirably restrained response to my last comment, he and I (and other free-market fans) have been going at it for the past couple of years over the whole notion that "something horrible results when the self-giving integral to any relationship is lost and intimacy is replaced by the bloodless notion of a “transaction” executed with a distant, disincarnate other." I think the empirical example of the actual world in which people buy and trade everything from financial derivatives to software, to medical drugs, to old-fashion widgets disproves your notions about "bloodless" transactions (believe me, in the really good old days, there was plenty of blood, because folks would rather plunder than trade!).

I would also note that for all those "former manufacturing communities and mill towns that stretch from Buffalo to Bridgeport" there are thriving communities in the South and West, where the factories still churn out cars (at wages and benefits that are actually profitable for Toyota and Honda, etc.) and where the information economy has brought real, tangible wealth to lots and lots of middle-class professionals (here I think of my classmate from high-school who uses his State of Illinois education to write computer games for mobile phones and other portable devices to make a comfortable living...just like millions of other folks who thrive in the computer field, etc.)

Maximos,

Manzi is joined by Ponnuru and Frum (not to mention other reform conservatives writing for other publications) who have been arguing that the Republican party has to do a better job to "speak to middle-class concerns" and make sure the middle-class grows and thrives in this country. I am sympathetic to their arguments, but still think the libertarians are right to caution us that the picture of the "stagnant" middle-class is more complicated than "things were better in the 50s" stories and we risk using the government as a blunt instrument that will do more to harm economic growth than help it. I think their political and policy success will be achieved if we can avoid national health-care and instead push market-based solutions that use prices (and profits) to help us control costs and bring affordable care to more Americans (e.g. make health-care portable, allow citizens in one state to buy insurance from another, etc. -- the guy to read is David Gratzer:
http://www.manhattan-institute.org/html/gratzer.htm)

Kevin has a career in writing tragedy or something involving pathos.

Kevin has a career in writing tragedy or something involving pathos.

Doesn't Kevin work in the financial market? I would think he has suffered much tragedy.

The tenor of his comments would, thus, seem quite understandable even if not poignant to some.

Regardless, quite the feat to put things in such manner considering the lost art of oratory.

“Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits.

“I just think senior managers got addicted to the revenues and arrogant about the risks they were running,” said one person who worked in the C.D.O. group. “As long as you could grow revenues, you could keep your bonus growing.”

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street.”


http://www.nytimes.com/2008/11/23/business/23citi.html?_r=1

Ari & Step2,
Rubin’s acolytes, will now pass through the revolving door again, to staff the Treasury and Office of Economic Advisors during the Age of Obama and finish off what they started years ago. Farce, not tragedy is our fate.

As anticipated, the bailout has ballooned from $700 billion to $7.4 trillion.

Amazing.

You're right, Ari. It's amazing. Not surprising, but amazing nonetheless. And, it seems to me, it will get far worse before it gets better. It will get better sooner the less the government does. But the government is in mood to stop it's foolishness, even though the bailouts are foolish beyond belief. There's no end in sight.

Put your money under your pillow. Sleep with your eyes open. the shadowy figure lurking outside your window is a relative: Uncle Sam.

I think of my classmate from high-school who uses his State of Illinois education to write computer games

Jeff,
You’re exhortations to enjoy the view as we drive-off the cliff gives the whole trip an exhilarating feel that would otherwise be missing. That you can celebrate the economic conditions causing us to careen into low-wage, high-debt servitude is bracing.

Your friend profited from the Information Age economy. So did I. Is that the extent of our concern? Maybe your friend designs the very video games that men in the “rust belt” enjoy during intermittent bouts of gross underemployment at record shops and convenience stores, while numbing themselves with the fruits of their homemade crystal meth labs. You like Steve Sailer. Fine, he knows the bell–curve of intelligence and aptitude, what does he say about the fact that when their jobs were shipped overseas, the ability for many men to make their mark in the world became confined to ink-carvings on their anatomies? Great news, for tattoo entrepreneurs, but is fatal resignation all he offers in the face of such a monumental human calamity? Can’t we re-think the trade-policies that have us dependent on the kindness of strangers and left large segments of our countrymen in despondency?

The problem with your theorizing is it assumes the economy is autonomous from the culture, and holds primacy over other human goods and concerns. You isolate the deterministic logic of the market and its various practices, such as outsourcing, from the impact in has on individuals, families and communities. Despite your friend’s success, overall, would you honestly tell anyone residing outside of India that computer programming is a good option?

You’ve isolated theory from reality and it is a shame. Soaring levels of debt and trade imbalances work hand in hand to spawn additional agents of decline. The credit bubble was a desperately applied lever to mitigate flat wages and it was certain to boomerang. We both abhor the State-managed solution of greater moral hazard, less innovation and more soul-deadening regimentation, yet it only nears closer as a result of your refusal to entertain causes for our self-destruction that upset your ideological framework.

Hang-on, we just crashed through the guard-rail. Serf City, here we come.

Some Middle Eastern sovereign funds see the West in a downward spiral and will pass on the discounted sell-off. Others see our declining assets as their own road to economic supremacy.
You have it to hand to our bankstas; instead of the relatively slow erosion of our nation's economic base through free trade, they've decided to just place our country in the global bargain bin and get it over with quickly;

"Speaking at the Dubai International Financial Centre conference yesterday, Mr al-Ansari said that falling stock prices in the West could provide some Gulf countries with an opportunity to develop their own economies. Investing in technology and manufacturing companies would allow these states to encourage operations to be moved to the Gulf, which would provide jobs for the region's rapidly growing population. “To become the largest shareholders in the ten largest companies in the world would cost about $50 billion at present and that's actually not a lot of money,” he said. “Imagine the power and influence this region would have if we were the shareholders in the ten, twenty, thirty largest companies in the world.”"

Imagine.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5233278.ece

But we all know that this is merely another form of exchange, in which things of equal value are exchanged, and everyone comes out ahead, having gotten what he wanted. If foreign entities are willing to invest in America, all that demonstrates is that those entities possess confidence in the American economy.

Thus are the distinctions between debtors and creditors, independence and creeping vassalage, self-reliance and postmodern colonialism, effaces by the dessicating formalisms of mere exchange.

Perhaps I'm not getting your point, Max. If so, my apologies. But this isn't an exchange. It's a massive handout, an enormous bailout; a stupidly devised rescue. A rescue is not an exchange.

Ah, no, the "exchange" to which I was referring was that contemplated by some officials in the Gulf, who apparently openly consider it a means of exercising power.

"But this isn't an exchange."

Sure it is. Wall Street and Washington manage to exchange American jobs for cheap foreign consumer goods all the time. It is called trade - free trade to be precise. One problem though; they forgot the worker and the consumer tend to be the one and the same "economic unit".

One of the ramifications of this oversight was a decline in wages for middle and working class Americans. Their remedy was to artificially inflate the value of houses through a variety of financial instruments that would allow homeowners to use their abodes as ATM's, while stimulating a fabulous bull market and creating enormous wealth for the brilliant originators of these mortgages, the securities that backed the mortgages and the many derivative instruments that blossomed in a wisely deregulated marketplace.

Sadly, what goes up on illusion comes down in reality. Declining assets can be purchased by anyone on an open market and so we're having the world's biggest fire sale. Some of the buyers will invariably be chaps like the ones in Dubai, who see opportunity where others see disaster. Our business and economic leaders know many Americans are partial as to who manages our ports, let allow who should purchase our entire financial system and all other affiliated properties, so they've put aside their free trade ideology for the time being and borrowed from foreign creditors, taxpayers and future generations to "Buy American". No solution is perfect though, and some undesirable buyers will inevitably participate in the exchanging of goods for cash, Don't worry, the magic of the market will get us out of this temporary downturn. It always does.


Paul, I didn't know where to post this lengthy report from the Washington Post on What Went Wrong, but it should be required reading for everyone trying to get a handle on the crisis.

"A decade ago, long before the financial calamity now sweeping the world, the federal government's economic brain trust heard a clarion warning and declared in unison: You're wrong.

The meeting of the President's Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. -- all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power...

...Born wanted to shine a light into the dark. She had offered no specific oversight plan, but after months of making noise about the dangers that this enormous market posed to the financial system, she now wanted to open a formal discussion about whether to regulate them -- and if so, how.

Greenspan, Rubin and Levitt were determined to derail her effort. Privately, Rubin had expressed concern about derivatives' unruly growth. But he agreed with Greenspan and Levitt that these newer contracts, often called "swaps," weren't exactly futures."

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/14/AR2008101403343.html

Post a comment


Bold Italic Underline Quote

Note: In order to limit duplicate comments, please submit a comment only once. A comment may take a few minutes to appear beneath the article.

Although this site does not actively hold comments for moderation, some comments are automatically held by the blog system. For best results, limit the number of links (including links in your signature line to your own website) to under 3 per comment as all comments with a large number of links will be automatically held. If your comment is held for any reason, please be patient and an author or administrator will approve it. Do not resubmit the same comment as subsequent submissions of the same comment will be held as well.