Archive for March, 2009

Is This Downturn a Crisis of Confidence or a Fundamental Error?

Tuesday, March 31st, 2009

Prefacing my thoughts on economics, as always, with the warning that I am not an economist, but only an amateur…

My non-professional observation is that when a disproportionate amount of money is controlled by the financial sector, a crash soon follows. This observation isn’t original. As Paul Krugman observed a few days ago in the New York Times:

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

Krugman concludes that this structural issue is at the root of the problem – rather than a liquidity issue with the banks:

I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

Simon Johnson, an economist formerly with the IMF, agrees with Krugman in a long piece in The Atlantic Monthly, and he echoes another point I’ve been making:

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail.

Reading both of these men, I find myself hoping they are wrong while sensing that they are at least partially right. Evan Thomas of Newsweek captured this balance nicely in his cover piece from the current issue:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he’s wrong, and you sense he’s being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking.

At the same time as Establishment defenders such as Robert Samuelson are uneasy about the scope of what Obama is proposing, other members of the Establishment are uneasy that he may not be doing enough. We don’t know who is right.

To some extent we can discount Krugman’s opposition due to his personal fantasy of how his life might work out:

Krugman says he found himself in the science fiction of Isaac Asimov, especially the “Foundation” series—”It was nerds saving civilization, quants who had a theory of society, people writing equations on a blackboard, saying, ‘See, unless you follow this formula, the empire will fail and be followed by a thousand years of barbarism’.”

His critique of Obama’s plans seems to follow this model – as his warnings take on more prophetic tones.

But there is real intellectual weight to this theory of the financial crisis as something more than a liquidity or confidence crisis. Krugman outright rejects this explanation:

[T]he banks [are] really, truly messed up: they bet heavily on unrealistic beliefs about housing and consumer debt, and lost those bets. Confidence is low because people have become realistic. [my emphasis]

In other venues, Krugman describes the problems as extending far further than this – as above when he discusses the trend towards increasing the influence of American finance and increasing income disparity. This stands on contrast to the approach of both Hank Paulson and Tim Geithner who believe that the crisis is primarily one of confidence. They are treating the crisis as a more technical and esoteric version of a bank panic solved by a show of strength, as for example, the Panic of 1907:

Shipments of gold were on the way from London to New York, and confidence had returned to the French Bourse, “owing,” reported one paper, “to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic.” During a panic, confidence is almost as good as gold.

Today, the government has taken the role of “the strong men in American finance” who are seeking a show of strength to boost confidence.

On the one side, you have economists – from Simon Johnson to Paul Krugman to Nouriel Roubini – who have been predicting doom for some time claiming that there are fundamental problems with our finance industry – and as a result of the size and influence of our finance industry – our entire economy. On the other you have men and women with power – in both finance and government – who are acting as if the problem is mainly one of a lack of confidence and a broken mechanism. 

My bet – based in no small part on my innate optimism as well as a respect for people on both sides of this debate – is that in the short term, the Geithner plans will work to restart the “old” economy. In this moment before that happens though, pressure from Europe and internal critics as well as a desire to avoid a repeat of this fiasco will enable enough forward-looking, gradualist regulation and legislation to correct the long-term problems with high finance.  Already, there are some signs that this is what is happening.

Why It’s A Good Sign That Byron Trott Is Leaving Goldman Sachs

Tuesday, March 31st, 2009

Though the articles about investment bankers leaving the big firms to start up their own smaller, competing firms seem to be trying to suggest that this is a bad thing – I find it hard to see it as anything but good. For example, an article in today’s Wall Street Journal by Heidi N. Moore and Scott Patterson suggests Byron Trott is leaving Goldman Sachs to start his own firm because of caps “on executive pay and calls for tighter regulation” on large banks. Byron Trott is significant because he is Warren Buffett’s favorite investment banker – but the article also suggests he is part of a larger trend. 

This strikes me as an almost unalloyed good. If banks like Golman Sachs, Citibank, Bank of America, JPMorgan Chase, etcetera are too big – and if the government isn’t going to break them up – then this draining of talent and resources into smaller firms run by highly competent former members of these organizations seems like the next best thing. Hopefully, this will help defuse the centralization of power and money in a few big firms which is one of the major factors that led to this crisis. 

Simon Johnson and others have argued that we need to break up these banks that are too big to fail:

Anything that is too big to fail is too big to exist.

My thought is that this might be accomplished with less political capital and more “naturally” in a market-driven approach that simply imposed regulations and costs on institutions that are “too-big-to-fail” that would serve to drive individuals to set up smaller companies.  At institutions that are too big to fail, there should be, for example, a fee similar to that paid to the FDIC by banks to finance the protection given to them. At the same time, pay – rather than being capped at a particular hard amount – should be forced to be tied to long-term results to avoid drastic short-term risk-taking; I’m sure there are other ways out there to limit pay without imposing caps. And of course, regulations should ensure that an appropriate amount of capital is available to handle any leveraged risks.

Even if this market-driven approach is not sufficient, the steps taken so far are at least moving people in the right direction.

Joe Campbell: I’m Not a Sexist Because I Disagree With Angie Harmon

Monday, March 30th, 2009

 

Contra this tirade which the Drudge Report is somewhat inexplicably promoting. (Inexplicable because it seems like such a fluff story of Hollywood conservatives elites.)

Joe Campbell (me) is not afraid to come out and say he doesn’t like how Angie Harmon is insinuating Barack Obama is accusing people of racism — but he’s sick of having to defend himself from being deemed a sexist.

“Here’s my problem with this,” I quote myself, “I’m just going to come out and say it. If I have anything to say against Harmon it’s not because I’m a sexist, it’s because I don’t like what she’s saying and anybody should be able to feel that way, but what I find now is that if you say anything against her you’re called a sexist,” Campbell told a reporter for 2parse.com, the esteemed blog. “But sexism has nothing to do with it, I don’t care what genitalia she has or doesn’t have – or what gender she identifies herself as. I’m just not crazy about what she’s saying. I mean – I understand Obama has been in office for 69 days so it’s hard to understand how he hasn’t accomplished everything he promised he would. He only has about 1,400 days in office. I know he said he’s gonna do that and change and change, so okay … but he’s still got some time. There’s still a recession over here, woman, and you clearly don’t know what you’re talking about when you say that “we’ve got unemployment at an all-time high” (Unless you mean “all-time” since after Reagan was president.) If I’m going to disagree with Angie Harmon, that doesn’t make me a sexist.  It has to do with the fact that she sounds like an uninformed dolt. If I was to disagree with W, that doesn’t make me sexist. It has nothing to do with it, it is ridiculous.”

When asked to provide any examples of the accusations of sexism that provoked this tirade, Campbell finally fell silent. 

Angie Harmon has also neglected to provide any examples of accusations of racism. 

Unfortunately, Matt Drudge has only been promoting one of these stories, so the unfounded allegations of charges of sexism insinuated by Campbell will not gain as large of an audience as the unfounded accusations of Harmon.

Campbell admitted though that the fake umbrage-taking in the media circus was entertaining, even if it detracted from the overall political discourse. “But I get to promote myself!” he said.

[Image courtesy of Bristol Motor Speedway and Dragway licensed under Creative Commons.]

The Government Role in a Capitalist Economy

Monday, March 30th, 2009

Robert J. Samuelson does a pretty good job in his column from last week of illustrating the incoherence of “the Establishment’s view” of government’s role in capitalism.

He begins his article discussing the prescient observations of Joseph Schumpeter, a 20th century economist who predicted that capitalism “sowed the seeds of its own destruction.” He described Schumpeter’s understanding of capitalism:

[Capitalism’s] chief virtue was long-term – the capacity to increase wealth and living standards. But short-term politics would fixate on its flaws – instability, unemployment, inequality. Capitalist prosperity also created an oppositional class of “intellectuals” who would nurture popular discontents and disparage values (self-enrichment, risk-taking) necessary for economic success.

Samuelson observes that Schumpeter’s observations seem to get to the heart of capitalism – yet he says, their conclusion is wrong – because capitalism survived. It survived Samuelson observes because:

We have subordinated unrestrained profit-seeking to other values. “We’ve gradually taken into account the external effects (of business) and brought them under control,” says economist Robert Frank of Cornell University. External costs include: worker injuries from industrial accidents; monopoly power; financial manipulation; pollution.

Samuelson goes on:

Successful capitalism presupposes three conditions: first, the legitimacy of the profit motive – the ability to do well, even fabulously; second, widespread markets that mediate success and failure; and finally, a legal and political system that, aside from establishing property and contractual rights, also creates public acceptance. Note that the last condition modifies the first two, because government can – through taxes, laws and regulations – weaken the profit motive and interfere with markets…

Now we’re really getting somewhere. Capitalism, it seems, must not be a matter of pure natural forces. It is not “unrestrained profit-seeking” in Samuelson’s view – nor does it exclude government intervention, as legal and political structures must modify markets and profit-making in order to “create public acceptance.” That’s a bit of an odd formulation, as anything could be justified as being done in order to “create public acceptance.” Circuses, beheadings, propaganda, war, large-scale confiscation of property – whatever. What Samuelson must mean – although it has to be inferred – is that measures designed to “create public acceptance” can only go so far before the essence of capitalism is destroyed – as he warns is imminently possible in his concluding paragraph. There is only a “thin line” he explains between capitalism and socialism – because:

If companies need to be rescued from “the market,” why shouldn’t Washington permanently run the market? That’s a dangerous mindset.

To illustrate this dangerous mindset which is empowered by an equally dangerous populism, he points to interjections of the government into the economy in the past half-century that have not been for the good – that is, those interjections in which the benefits are concentrated and the costs are dispersed, for example, ethanol subsidies and the promotion of the advantages for politically-connected companies; and those interjections that have scapegoated various groups – such as the anti-bonus tax bill. This implies – if nothing else – a confusion on Samuelson’s part.

Political actions in which the benefits are concentrated and the costs are dispersed are – as George Will put it “the supreme law of the land.” They have been the main business of American government since shortly after it’s founding – from subsidies for railroads to the laws enabling the various cartels of the Gilded Age to the military-industrial complex to agriculture subsidies in general to the bailouts of various industries. Only a few presidents have ever taken on this “supreme law of the land” and decided to extract costs from the politically influential few for the good of the many – Teddy Roosevelt as he sought to bust the trusts; FDR as he re-wrote the social contract. Most other presidents have tried to have it both ways – to give the politically influential few what they want while also attempting to achieve some common good. This has often been the source of their failure. The populist scapegoating is an entirely different matter – and is generally fleeting and while distasteful does little real damage. 

Both of these have been part of American capitalism since the beginning. Yet for some reason, Samuelson believes that capitalism is more under siege today than in the past. He never makes the case why – except to point to distasteful and inefficient aspects of American capitalism that have been around since it’s inception. This is little reason to believe that either populist scapegoating or actions with concentrated benefits and dispersed costs have increased significantly. And Samuelson does not try to make that case. Rather, he reveals the same unease that the rest of “the Establishment” has with any significant change. 

The incoherence and of this worldview is clear. What is less obvious is why. The answer is a theme I have been coming to again and again in this blog: that the free market is not a natural phenomonen, but a creation of a society and government. Thus – we did not really “[subordinate] unrestrained profit-seeking to other values” as Samuelson suggests – rather the government created costs to balance the marketplace. If a company was polluting, it was damaging those around it just as much as if it had been stealing from them. By imposing costs, the government was not so much “subordinating unrestrained profit-seeking” to some other values – but preventing one party from stealing from another. So, the government enacted regulations to reduce that pollution – and exacted costs if companies did not follow those limits. The cap-and-trade legislation promises to be an even clearer interjection of the government in this manner. The government and the society of which the government is a part together create the circumstances in which a market can truly be free.

Capitalism – alone, without a society to provide a marketplace – is a meaningless concept. Pairing a capitalist economic model with a democratic state has become a long-term successful model for progress because the “seeds of destruction” that capitalism produces are mitigated and sometimes used by the democratic state to the confer legitimacy on the model. The problem with capitalism has proved to be not as much the “instability, unemployment, inequality” that Samuelson describes – but the concentration of power among a monied and politically-influential elite that has attempted to protect the status quo and their own interests at the expense of the legitimacy of capitalism itself. Once the concentration of power reaches a certain tipping point, the market becomes less free. Which is why the government must, from time to time, step in to allow some sort of balancing to take place and to create rules for the market which allow it to operate freely.

Samuelson is concerned that this means that Washington may take it upon itself to “permantly run the market.” In this he demonstrates his lack of understanding. The government – and the society at large – have always created the rules by which the market is run – have always sought to mitigate the damage wrought by robust competition and worse. What is different now is that once again the government failed to adequately police the market. Or alternately, you could argue that the government failed to ensure the market stayed free, allowing firms to become so big and powerful they posed a systematic risk. Either way, while it would be dangerous to have a government declaring it would “run the economy” – that is not the situation we are now facing. Samuelson’s unease seems more the result of a desire to protect the status quo than any real regard for or understanding of capitalism and free markets.

A man who thinks in grand words made up of few letters.

Monday, March 30th, 2009

Bush is “a man who thinks in grand words made up of few letters..”

So said conservative magazine editor James Poulos according to Charles Homan’s new article in the Washington Monthly on Culture11.

The Obama Doctrine

Monday, March 30th, 2009

Richard Cohen in the Washington Post:

This is a tricky, auspicious moment for a young president. [Obama] is ending one century, beginning another. Concisely, he essentially laid out his approach to foreign policy in a blurb for a recently reissued book by the late theologian Reinhold Niebuhr. He wrote that he took away from Niebuhr’s works “the compelling idea that there’s serious evil in the world, and hardship and pain.” He added that “we should be humble and modest in our belief we can eliminate those things. But we shouldn’t use that as an excuse for cynicism and inaction.”

This, then, is the Obama Doctrine: wisely, to have none at all.

Outlasting America in Afghanistan

Friday, March 27th, 2009

Andrew Sullivan’s take on Afghanistan strikes me as the sad but honest truth of the matter:

America’s relatively tiny stake [in Afghanistan] means that we will always be outlasted by those with deeper commitments, wider knowledge and much greater fanaticism. And yet we plow on …

It happened before – after the forerunners of the Taliban drove the Soviet Union from Afghanistan.

Stimulus and Stability (cont.)

Friday, March 27th, 2009

Nicholas Kulish in The New York Times explains how “Europe, Aided by Safety Nets, Resists U.S. Stimulus Push.” 

I wrote a few weeks ago that:

…there seems to be some sort of inverse relationship between a society’s social safety net and the amount of stimulus spending they are proposing. 

This makes sense on a number of levels. Automatic stabilizers which should take some of the pressure off a need for a stimulus are not included here. On another level, these nations without a strong safety net must rely more heavily on economic growth for societal stability. 

If this is true, China and America would be more reliant on constant economic growth to relieve social and political pressure and would be more likely to have larger stimulus packages. France and Germany with stronger safety nets would feel more insulated and be less likely to push for large stimulus packages. This is exactly how this matter is playing out on the world stage today – with some exceptions due to political leadership. 

But both states with strong social safety nets and those without them are dependent on growth over time. But those states without strong safety nets feel the economic bumps more strongly – and downturns end up being more disruptive.

Kulish writes now that:

The Europeans say they have no need for further stimulus right now because their social safety nets, derided in good times by free market disciples as sclerotic impediments to growth, are automatically providing the spending programs that the United States Congress has to legislate…

Mr. Posen and others argue that while Germany may be doing more stimulus spending than others in Europe, it is counseling other European countries — many of which share the euro as their common currency — not to spend their way out of recession either, but to count on their safety nets to do much of the job.

Nothing groundbreaking on either of our parts – but it’s an example of how fundamental societal agreements – the social bargains underpinning the state – affect everyday policy.

Glenn Greenwald uses hyperbole the way other writers use punctuation.

Friday, March 27th, 2009

I felt as if Glenn Greenwald’s blog post earlier this week was directed at me. Probably not – as Greenwald has never linked here. But reading his piece, I felt targeted. Greenwald castigated

those who invoke Bible-like “he’s-a-master-of-11-dimensional-chess” clichés to justify whatever he does

He mocks those “who pay homage to Kim Jong Il-like imagery such as this and this.”

He calls “these drooling, worshipful, subservient sentiments.” (I don’t consider myself to have anything near this level of Obama-adoration. But discounting for the fact that Glenn Greenwald uses exaggeration the way other writers use punctuation – in other words, constantly, and as a matter of course – it felt as if he might be directing his apparently reasoned tirade.

Following the links Greenwald provides, it seems more like he has a personal beef with Al Giordano of The Field than anything else. But Greenwald addresses his point broadly and it deserves to be taken seriously.

First, one must translate from the Greenwaldese. As I said before, Greenwald uses exaggeration the way other people use punctuation – so when he says Al Giordano is invoking “Bible-like ‘he’s-a-master-of-11-dimensional-chess’ clichés” if you actually follow the link, you find a rather mundane article defending Tim Geithner and insisting that this isn’t the time to sack him unless progressives can come up with a realistic alternative. Giordano does invoke chess once:

[Obama’s opponents] are stuck playing checkers while Obama beats them at chess.

Bible-like master of 11-dimensional chess indeed. The “Kim Jong Il-like imagery” is only this LOLcat inspired image from the Sarah Palin surge of early September 2008. I liked that picture a lot – and even posted it on the blog here. It seemed to be both ironicly over-the-top yet comforting as it conveyed the very real sense from that time period that Obama was confident and in command and believed his campaign would weather that storm. With everyone hyperventilating over the Palin surge, Obama stuck to his plan and won out in the end. There has been a remarkable steadiness to Obama’s campaigning – that has perhaps carried over into his governing. As individual issues flare up each day, Obama deliberately concedes much of the daily war, choosing to focus on the long-term. Greenwald seems to find this implausible – because of his distorted view of politics. 

There are voices out there that are over-the-top in their praise of Obama – though Greenwald apparently wasn’t able to find them before publishing this piece – and Greenwald makes a valid point when he writes that trust is “a sentiment appropriate for family and friends but not political leaders.” But his view of politics as merely transactional – and more important – of moment-to-moment is idiotic. As when he writes:

Political leaders deserve support only to the extent that their actions, on a case-by-case basis, merit that support, and that has largely been the behavior of progressives towards Obama. [my emphasis]

What a ridiculous and irrational statement. Politics is about building coalitions, compromising and fighting to get as much of what you want done as possible, setting up later opportunities, judging what is the best that can be gotten at any moment. You don’t judge whether you support a politician on a case-by-case basis anymore than you judge a blogger on a post-by-post basis or sentence-by-sentence basis or clause-by-clause basis. You look at the whole picture.

Imagine a blogger such as Greenwald evaluating Abraham Lincoln. (Not because Obama is just like Lincoln – but because Lincoln’s legacy is almost unquestioned today, so he provides a useful example. And we don’t have to try too hard to imagine what these principled critics of Lincoln would sound like as there were many columnists who used overripe prose much as Greenwald uses hypberbole.) Think of a principled abolitionist such as Greenwald evaluating Lincoln on a case-by-case basis – frustrated at Lincoln’s reticence during the campaign – and his refusal to call for abolition; savaging the Emancipation Proclamation as too weak; furious at the violations of habeas corpus rights; castigating the incompetence of the war management. 

Yet it was stupid – and short-sighted – to judge Lincoln based on any of these events in isolation on a case-by-case basis. Many in his time did judge him in this light – and thought he was a poor president. That is, until they noticed that his steady leadership had brought America through a difficult time – that he had been pushing the country in a positive direction. 

Glenn Greenwald isn’t simplistic enough to believe his case-by-case rhetoric. But this example illustrates what bothers me about Greenwald – not just the overheating, but the way he pushes his points to ridiculousness if he isn’t careful. There is something fundamentally flawed about the way Greenwald proposes to judge politicians in this piece. It illustrates the extent to which Greenwald’s writing must be carefully calibrated so that outrage and exaggeration must reach a crescendo without becoming cacaphonous. Greenwald’s writing is a high-wire act – and if he succeeds in pulling it off, you’re thrilled and impressed. But if he screws up once, the act is over and it’s clear that he has failed.

This piece is clearly one of those failures.

The Dollar As a Negotiated Currency

Friday, March 27th, 2009

Daniel Drezner:

If [an international reserve currency] does happen, however, the United States will suffer a serious loss of standing and, oh yes, a much harder budget constraint.  And whatever happens, it would be difficult to call the dollar a top currency anymore.  I think we have clearly crossed some threshhold where the dollar is now a negotiated currency – and some of the negotiating partners are pretty hostile to U.S. hegemony. 

I don’t know enough about the relationship between reserve currencies, account deficits, government, and power – but I know enough to know that this would likely be a huge blow to America’s hegemony. The dollar’s privileged status is a major part of what allows us to finance our military and our debt. Drezner points out how unlikely it is that the dollar will be replaced – but with these high-level comments by the Russians and the Chinese, coupled with the fundamental uncertainty about the dollar going forward, and the increasing nonpolarity of world power, it suggests that the dollar may be losing it’s privileged status. It will not necessarily be overtaken by an international reserve currency for the reasons Drezner states, but it has become – at least in this moment of our weakness – a negotiated currency.