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Economics

Convinced that the people are the only safe depositories of their own liberty, and that they are not safe unless enlightened to a certain degree, I have looked on our present state of liberty as a short-lived possession unless the mass of the people could be informed to a certain degree.

-Thomas Jefferson

Ever since the global financial meltdown of 2007-08 I’ve thought, off and on, about what, exactly, economics was.  Not in a philosophical or, really, a pedagogical sense, but in a purely practical sense.  As in, what does Economics do for or mean to the population at large?

Watching the video below, and noting how far not only perception is from reality, but how vastly further reality is from what people want it to be, I think those chasms represent part of an answer.

At the end of this interesting Guardian piece on privatization in the UK is a good crystallization of an argument I’ve made, or tried to, in a few blog posts:

Markets are in the end man-made devices for utilitarian purposes, not a force of nature that we should not try to resist.

Most of us in the West like to think we’ve moved far beyond the atavistic proclivity of seeing spirits, or agency, in the moon, stars, and wind.  But if you listen closely, and without deference, to what you hear from economists and pundits, you’ll soon realize we haven’t come as far as we might think.  You’ll find we’ve traded shamans for economists, and it’s the markets that are the spirits in need of appeasement.

And only the economists know the spells.  Take this passage from Satyajit Das’ Traders Guns & Money discussing former chairman of the Fed Alan Greenspan’s elocutionary powers:

Greenspan’s regular congressional testimony attracted financial analysts, journalists and linguists in equal numbers.  An industry in interpreting Greenspan’s prognostications has developed.  Without a hint of self-parody, Greenspan himself provided guidance to interpreting his pronouncements.  ‘I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant’ the Maestro once offered as explanation.  He further clarified his position with unusual directness: ‘If I have made myself clear then you have misunderstood me.’

Does that sound more like a scientist trying to explain and elucidate, or a shaman befuddling with large arm movements, attempting to keep his place at court?

And it’s only the power that we give to the magic juju of our modern shaman that can explain why the last sentence of the Guardian piece isn’t maddeningly, heart-breakingly obvious to, and accepted by everyone:

If [markets] end up serving the interests of only a tiny minority, as is increasingly the case, we have the right – and indeed the duty – to regulate them in the interest of greater social good.

 

Forget it, Jake…it’s Chinatown

-Chinatown (1974) dir. Roman Polanski

When, in a moment of quiet contemplation, you look back on your life, at the decisions and vagaries that have brought you to where you are today, does that final line from Chinatown ever pop into your head?  It does mine.  The resigned, laconic advice seems wise when you consider the insuperable nature of the entrenched corruption and evil Jake is facing.  It’s advice that times like these make very tempting to take.

It’s been five years since the Lehman Brothers collapse, five years since the global financial melt down.  It’s been five years of economic stagnation and anemic job growth.  But sas anything of significance changed?  Have there been lessons learned and people brought to account?  Well it sure doesn’t look like it.

Take this interview with William Black, a former bank regulator and current law and economics professor.  The interview focuses on the contrast between the lack of prosecutions following the most recent financial crisis and what happened after the Savings and Load debacle of the 80’s and early 90’s.  The entire interview is wide ranging and worth a read, but I’ll excerpt some of the more depressing bits:

And what people don’t understand about the criminal justice system is there are roughly a million people employed in it — and of course, millions incarcerated in it. But of the million employees, 2,300 do elite white-collar investigations. And of those 2,300, you have to contrast that to the number of industries in the United States, which is over 1,300. Notice I didn’t say ‘corporations,’ I said ‘industries.’

So a couple of things should be obvious. First, the FBI agents will not have expertise in the industry. And second, they can’t patrol the beat. They have to wait until a criminal referral comes in, and won’t come from the bank itself. Banks don’t make criminal referrals against their CEOs.

It could episodically come from whistleblowers, but against an epidemic of fraud that can never work. It has to come overwhelmingly from the regulators. So when the regulators ceased making criminal referrals — which had nothing to do with an end of crime, obviously; it just had to do with a refusal to be involved in the prosecutorial effort anymore — they doomed us to a disaster where we would not succeed.

So here we get a sense of how the deck is stacked against any sort of robust law enforcement efforts, not only against the big players, but the little fish as well.  A few beats later Black says this:

Because of changes in executive compensation, it’s very uncommon for people to blow the whistle in the modern era. What people often don’t understand is that executive compensation bonuses go down very low in the food chain. And so if I’m a boss and I see a crime being committed, it isn’t just that I risk losing my bonus, it’s that Fred and Mary who report to me — Fred with three kids about to go to college and Mary with a kid that has severe problems — they’ll lose their bonuses as well. And so it’s not even my greed — it’s my altruism that gets in the way.

I might interpret how low in the food chain executive compensation goes as something akin to Mob “dirtying up” or just flat out bribery, but I suppose using altruism to shield top executives from whistle blowers does have a certain dark poetry to it, even if I don’t necessarily buy it.  And then, for the cheery on top, Black’s opinion of what we can expect going forward:

The failure to prosecute under any theory of economics and any theory of criminality means that the next crisis is far more likely, and that it’s going to be far larger, because this accounting control fraud recipe is a sure thing that guarantees that you will be made wealthy immediately as the controlling officers, and there will be no risk — zero. Not a single elite banker who caused this crisis is in prison, period. So you have absolutely maximized what we call a “criminogenic environment,” and a key element of that, as you say, is that we have taken moral hazard — the fraud dimension — and maximized it.

Sleep tight.  Also a good segue (I was certain that word was spelled ‘segway’) for another another heart warming piece over at the Institute for New Economic Thinking titled “The Next Financial Crisis” by Eric J. Weiner.  Again the whole piece is worth a read, but here are a few excerpts:

By the time the real crisis hit and Lehman and Bear Stearns imploded, the Dow was below 10,000. The S&P 500 index was down almost 30%. The market was waiting for more bad news.

But that was five years ago. Surely in the intervening half a decade we’ve made the necessary changes to create safer financial markets that aren’t as susceptible to damaging excess and are insulated enough that they can’t crush the overall economy?

In a word, no. Indeed, there have been practically no structural changes in our financial system at all. The systemic risks of another bubble booming and busting remain as acute as they were five years ago. All that’s different, for now, are the surrounding economic conditions.

The real problem, however, is that we haven’t responded to the lessons of five years ago by making substantive changes. Banks that were deemed “too big to fail” by the federal government during the crisis — Bank of America, Citigroup and JPMorgan Chase — remain, well, too big to fail. Wall Street is back to creating synthetic collateralized debt obligations, one of the more pernicious varieties of securities that blew up during the crash. And some consumers can still get a federally guaranteed mortgage with just 3.5% down.

The point is that although the economic conditions for a bubble haven’t yet materialized, the seeds of our destruction are still there, lying dormant. And with the same financial system in place, another crisis essentially is waiting to happen.

There are no simple answers. It will take a complex plan to seriously regulate a system that affects the broader economy in ways that it never has before and is dominated by banks the size of sovereign nations.

No simple answers?  At this point in history can Americans comprehend, or tolerate, any other kind?  I’ve read the Internet, so I have my doubts.  So what to do?  How to avoid the next financial disaster?  How to hold those who caused the last one to account?

I find myself bereft of brilliant ideas.  I could recommend you start a blog, but from personal experience that doesn’t appear to have much of a impact on the world.  I suppose it might help if people read it.  You could write your Congressperson or Senator I suppose…but the financial services industry writes them letters as well, and I bet their letters contain many more 0’s that yours will.  It would be kind of cool to get a form letter on some US Senate letterhead though.

Maybe it’s all the Stoic philosophy that I’ve read (actually about two pages of Epictetus, but I think I get the gist), but perhaps all this is just the part of life that needs to be borne with quiet reservation by us little people.  Perhaps the best we can hope for is the play Cassandra, able to see impending disaster, but powerless to prevent it.  Maybe we live in Chinatown.  Pleasant dreams!

Continuing on with the award winning series of “everything is rigged’ posts, here is a link to an informative piece at Barry Ritholtz’s blog.  The title is “Banks Are Manipulating Gold and Silver Markets”, but it goes on to list all kinds of market rigging, like energy, commodities, interest rates, currencies, etc.  With a plethora of links (as opposed to a plethora of piñatas).

I wonder:  At what point does the ubiquity though space and time of a phenomenon lead you to the conclusion that it’s a feature, not a bug?  Just how easily, and readily, is the invisible, though iron clad, hand of the market thwarted or appropriated?  The expansive list provided at the link would indicate that the answer is pretty damn readily.

In anything approaching a rational discourse, the endless lists of fraud, abuse, and manipulation that is the history of capitalism would serve as a insurmountable indictment against the benevolent, all powerful god of the free market.  But there is always a true believer to offer up a theodicy.  Like any fundamentalist, the market fundamentalist is looking for the practice of the pure, the true faith, one unsullied by the grimy compromises of this fallen world.  Something he will never find, at least not until he shuffles off this mortal coil to his final reward.

What’s become obvious to me: the markets aren’t magic, they’re us.  They always have been.  Markets are powerful, useful tools that can spurn innovation and improve lives.  They are tools created by us, and they can be broken by us.  They can be used for good or bad.  Having lived through the last five years of economic crisis and stagnation, how could you come to any other conclusion?

A little who?  Those who know Adam Smith only by reputation, or as a neglected saint of the modern right and libertarians may be a bit surprised at the sympathy he expressed towards the strivings of labor, particularly its attempts to organize.  I know I was.  Here’s a selection from Book I Section VIII of Wealth of Nations:

What are the common wages of labour depends everywhere upon the contract usually made between those two parties [workmen and masters], whose interests are by no means the same.  The workmen desire to get as much, the masters to give as little as possible.  The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms.  The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen.  We have no acts of parliament against combining to lower the price of work; but many against combining to raise it.  In all such disputes the masters can hold out much longer.  A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired.  many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment.  In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

We rarely hear, it has been said, of the combinations of the masters; though frequently those of workmen.  But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.