Tuesday, March 17, 2009

a prophet should be with honor on his own blog

Since I'm a firm believer that a prophet should be with honor on his own blog, I am reminded, given the recent AIG fuckup and the inability of Obama's establishment economics team to get out of the wreck of the financial system, that I should repeat the taunting posts I put up last November, when it was obvious what was going to happen and what these people were going to do.

You will notice that every souring of the public on the Obama administration originates with something that started with Summers and Geithner - those helpless boys who couldn't figure out how to stop those AIG payouts.

This is from November 25, 2008

In the cage: Obama's Team of Losers

Like any other liberal, I’m appalled by the rightwing tilt of Obama’s economics team. Any team that is hailed by libertarians and Bushites like Greg Mankiew is obviously not a team I want to play with.

And yet, in some ways, I’m indifferent.

When I use the term rightwing, some explanation needs to be put in place. The terms rightwing and leftwing are often used as markers of rhetoric. It is as if we should bracket the social context of these comments, and discuss them as “ideas”. Myself, I think that the rhetoric only makes sense when embedded in a robust sense of the sociology of a situation. Rhetoric is part of the way a society dreams itself, and like all dreams, should be subject to psychoanalysis – but psychoanalysis is no substitute for history. The history of the last thirty years was about the growing power of the parasitic Dixie model, in which heavy public investment elsewhere – in the Northeast U.S., say, or in Japan – produced an economic activity that could be successfully transported to the South by way of a government intervention – a tax break, say, along with laws preventing labor organization – which would be followed by the continued refusal to make public investments. Thus, in the Sunbelt, you have considerable industrial activity, little of it generated within the Sunbelt, plus an indigenous asset based sector – real estate – and the two together allowed for a regime that took on the accoutrements of the highly developed economy without making the necessary sacrifices to sustain one. This, and this only, is what is meant by small government. This economic form joined with a neo-liberal mindset that had three pillars – as I’ve said over and over. (Pause for breath)

What they are, these pillars, ahem, ahem, I outlined in this huffy reply to a post on Matt Yglesias’ blog. MY is very enthused about the murder of the American auto industry, which he shares with the libertarian young turks he knows, admires, and goes to whenever he has questions about the deeper passages in Atlas Shrugged. In this particular post, MY is psyched that a master such as Bruce Bartlett is giving the thumbs up to Obama’s economics team – Bruce Bartlett! Admittedly, this reply goes over things that I repeat like an organ grinder on this blog. But what can I do? Indignation does have a tendency to degenerate into Tourette’s, and that is what I have, political Tourette’s syndrome.

But here’s the latest version of my rant:

“I’m not sure of the point of this post. The point, I guess, should be that the neo-liberal establishment thinks that basically, nothing is happening here, and we are gonna move back to our open and free markets uber alles position that binds administration policies from Reagan to W in one big happy family. Minus the pesky automakers, which have to be thrown right out of the club, those scum! It is all creative destruction and how we like it.

Meanwhile, this is the week neo-liberalism died. All economies are political economies - they depend on a political pact that underlies any macro policy. The political pact underlying neo-liberalism was pretty simple: a. expanded credit for the masses; b. a robust shadow financial sector; and c., a continuing influx of money from household savings, in the form of 401(k)s, mutual funds, money markets, etc. These all worked together. The middle class did not bond with the investor class because they are “aspirational”, but because they saw their retirement accounts swelling and their assets becoming pricier. While their everyday economic life, which depends on labor income, became in one sense harder, as the rate of earnings increases decreased and then vanished, the increased credit patched over the spots in the lifestyle. And of course, b., allowed the creditor to take increased risks.

Well, a, b, and c are dead. It would not at all be surprising that the equities markets either stabilize at a low level and stay there for a decade, or keep sinking. That means, in essence, that the accumulated savings of those who went through the boom years from the eighties until now are seeing their future systematically destroyed. That was the future they were willing to trade slower income growth for. And meanwhile, good bye to the expanded credit sphere. You might patch your lifestyle gaps with 9 percent, but 19 percent, 29 percent - that is when we are talking about the pre-modern economy. That is interest that, in effect, retracts the elbow room given by credit. In the final month in which Obama pulled ahead, it was clearly the 401(k) effect. It wasn’t youth, it wasn’t change, it wasn’t hope - it was a vast fear. Which will be speaking out a lot more as it turns out that the fear was understated - things are a lot worse than they seem.
So the “brilliant” Larry Summers, missionary of neo-liberalism when the U.S. was the indispensible nation and architect, with Phil Gramm, of the deregulated marketplace that made the perverse Bush boom possible, is going to find that he simply can’t use the old nostrums. Because the old system is gone. Bartlett celebrating this is like one of Louis XVI’s courtiers assuring everybody that the Bishop of Autan, Tallyrand, being so powerful in the Assembly, everybody’s head is safe. It is a joke.

Of course, the last joke of the expiring neo-liberal imperium was the very funny one, which MY laughed at heartily, of course, along with other important young public intellectuals, of shooting GM in the head. Funny funny funny. Those people had the gall to ask for a loan of 25 billion - and sharpeyed Matt saw that could reach to 75 billion! Over the weekend, we decide that Citi needs 300 billion and - well, that’s all right then. It might not be a great deal, but shucks, they needed it and all.

Yes, neoliberalism is a corpse, but it will keep kicking for a while among the pundits.”

My hope, in this election, was that Obama saw the obvious. My disappointment with the appointment of that team of A level neo-libs is that he doesn’t. Yet the difference here is that the neo-libs have lost their tools. They have become State financed humpty dumpties, trying to glue together one cracked egg after another. It is funny, a ha ha joke, that the only industry bailout that ever worked was – surprise! – with the auto industry, namely the Chrysler loan of 1979. My working definition of worked is that Chrysler is still around, paid off the loan with interest, generated tons of profits for investors and paid wages that made life pleasant for thousands of employees, and even led the car design field – admittedly, in the disastrous direction of the SUV – in the early nineties. Manufacturing is one area in which government can actively intervene to good purpose, because the metrics are pretty clear.

Finance, on the other hand, has to be a market driven sector, and the government has to be a guardian of the institutions, even to the extent of coercing those institutions into being. When, in 1927, Coolidge unilaterally seized the radio airwaves for the government and then rented out space on them, he was creating an institution. On this model, the Fed should long ago have seized the peer-to-peer, OTC system by which derivatives are traded and forced it to become an open derivatives market, much like any other equities market, in which all products are transparent and all traders are known. Anything else is bullshit. That they still haven’t done that, and that the crewe brought together by Obama has a historic interest in continuing the sector in its dysfunctional ways is a bad, bad thing. But I think they will be forced to do what they don’t want to do, anyway. The question is, will they be forced to do it before the Treasure blows such a hole in the U.S. Government’s ability to respond that we have a crippled, Brazil like government. We’ll see.

Oh, and Yves Smith, my darling - she is definitely up in the pantheon as far as I am concerned - wrote an excellent little post about our collective cognitive capture by the financial hegemony model:

"There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated. Yet rather than trying to figure out what a new, slimmed down version of banking ought to look like, to ascertain which pieces should be preserved and which jettisoned, the authorities are instead reacting in a completely ad hoc fashion, rushing to put out the latest fire. And in the process, they keep trying to validate overly inflated asset values (a measure straight out of the failed Japan playbook) rather than try to ascertain what their real value might be so as to determine how much recapitalization might ultimately be needed (if you doubt me, Exhibit One is the pending Citi bailout, in which lousy assets will be guaranteed at phony values). Is this denial? Do the authorities fear that if they work up this analysis, it will leak out and the markets will panic? This seems to be the first, most important order of business, yet here we are more than a year into the crisis, still tip-toeing around one of the very biggest issues.

And why is that? Back to the cult issue. Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued? A GM bankruptcy would be at least as catastrophic as a Citi failure. but GM elicits attacks for the incompetence of its management and the supposedly unreasonable posture of the UAW (the same free market advocates recoil at a deal struck by consenting adults). The particular target for ire is the autoworker pensions and health plans, as well as their work rules. But the pension plans being underwater is the fault of GM management for not providing for them in the fat years; I personally have trouble with the idea that health care should vary by class; and for the work rules, German and Swedish automakers have strong unions and yet can compete. I see the UAW as having correctly seen GM management feeding at the trough and doing a good job at extracting their share.

And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days."

And this was Dec 3, 2008

Mr. Summers, let me refer you to Chapter 13: the whiteness of the whale

In the election of 1910, Democrats took control of the House of Representatives. The economy still hadn’t recovered from the bust of 1907. The original impetus for the progressive legislation that had received support and scorn in equal measure from Teddy Roosevelt – America’s most bipolar president – had not died out, which is why President Taft couldn’t block the amendment to the Constitution instituting a federal income tax. Unfortunately, the move to force corporations to incorporate federally, instead of in the states, failed.

There was, back in those days, a burning issue that has flamed out so much since that the very word brings an eery blank to the mind: overcapitalization. The reason this figured so heavily as a scare word among the progressives is that the era from the turn of the century to the establishment of the Interstate Commerce Commission, in 1914 – which is generally taken to bookend the progressive moment – saw the instantiation of what Lawrence Mitchell, in The Speculation Economy, claims is the founding moment of modern American capitalism: the subjugation of industry to finance. This was a moment that expressed itself on several fronts – for instance, the Courts finally cleared up the confusion about how property law applied to corporations – creating a new form of property, defined by John Commons this way: [the old common law definition] … is Property, the other is Business. The one is property in the sense of Things owned, the other is property in the sense of exchange-value of things. One is physical objects, the other is marketable assets.” [quoted by Sklar, page 50]

One of the results of this legal change, or rather, one of the reasons it came about, was that the notion of a corporation as a body issuing stock was changing. And that change brought up the charge of overcapitalization – that a corporation, instead of finding its raison d’etre in using its assets to produce a good or service on which it made a profit, was now an entity wrapped up entirely in the market for its stocks.

In 1911, a bill was voted through the House of Representatives and narrowly turned down in the Senate that would have smashed this legal structure. S. 232 built on legislative ideas already crafted during Roosevelt’s term (remember, Roosevelt was in the wings in 1911, and would run in 1912, thus ruining Taft’s chance at a second term). S. 232 would not only have required federal incorporation of all interstate businesses. Here’s Mitchell’s description of it:

“It would have replaced traditional state corporate finance law by preventing companies from issuing “new stock” for more than the cash value of their assets, addressing both traditional antitrust concerns and newer worries about the stability of the stock market by preventing overcapitalization. But it would have done much more.

S. 232 was designed to restore industry to its primary role in American business, subjugating finance to its service. It would have directed the proceeds of securities issues to industrial progress by preventing corporations from issuing stock except “for the purpose of enlarging or extending the business of such corporation or for improvements or betterments”, and only with the permission of the Secretary of Commerce and Labor. Corporations would only be permitted to issue stock to finance revenue-generating industrial activities rather than finance the ambitions of sellers and promoters. … S. 232 would have restored the industrial business model to American corporate capitalism and prevented the spread of the finance combination from continuing it dominance of American industry.” (137) In Sklar’s account of the Roosevelt era draft, ‘whenever the amount of outstanding stock should exceed the value of assets, the secretary would require the corporation to call in all staock and issue new stock in lieu thereof in an amount not exceeding the value of assets, and each stockholder would be required to surrender the old stock and receive the new issue in an amount proportionate to the old holdings.”

This may well be the most radical legislation every considered by Congress. Think of it – the stock market as we know it today simply wouldn’t exist. Instead of being a legal fiction, the stock holders would literally own the company, and their profits would be limited to the profits of the company. The price to earnings index would level out so that the stock price would only hover marginally above earnings.

Needless to say, America did not go down this path. In fact, this path of needles seems to have been so traumatic an adventure that it has been thoroughly forgotten. We accept the equities market as it is as an expression of American capitalism. It is really an expression of changes in the physiology of American capitalism that came about during this era – almost overnight, in Mitchell’s view.

The last couple of weeks have both deepened the desperate prospects for the economy and shortened the dimension of changes we are supposed to envision for that economy. Obama’s bright old things – the Geithner/Summers/Romer crewe – have every intellectual investment in how things used to be. Like, two years ago. Why not? They feel themselves to be at the very least master carpenters in the building of the Great Moderation. LI’s stand is that the system – the mangle of inequality – is collapsing, and our vision is that this collapse will be mortal – but this might just be the optimist in us, Jonah’s kindly side, looking forward to Ninevah’s conversion. We think that crewe would certainly resist the radical remedies of 1911. Roosevelt would now be considered somewhat left of Chomsky. However, we have to have broader vistas in order to think about what is happening here. This is one of the reasons that LI considers the strongest charge against Summers to be that he doesn’t read literary novels. He should be questioned on this. The whole board of Economic Advisors should stock up on the great novels – we’d suggest, among others, Moby Dick and J.R. It is the lack of imagination of the self-aggrandizer set that actually produced this mess. At the bottom of the deaths of so much over the last eight years – the death of Iraqis, the death of American money, etc. – is a mortal lack of poetry.

LI, doing our part, will end with another notice from Ludwig Hohl.

“The alteration of the object to be tested through the person, the appearance of the tester, is also very important in the investigation of human situations. One goes to visit the unhappy, the said, the lonely: the visit effects a change. The deepsea divers appears 900 meters below the surface of the sea with a lamp of a terrible intensity, in order to surprise life. But those that were there, flee the light, while those who weren’t there, come near to it. (In spite of all of which, here outer eyes have seen what is hardly given to inner eyes to see, dreams and fantasies).”


Anonymous said...

Great stuff, again, roger. News from the Zona just seems to "get it."

Roger Gathmann said...

Hey, the AIG bonuses and those excusing them seem to have suddenly shifted the country to my Jonah like cries about the system. We'll see how that goes. I do think it is funny - this is partly about people like Summers not, absolutely not, understanding literature, ie how the imagination figures in human societies. As an economist, he simply believes the myth: all human beings at all times want more stuff. This is of course a pitiful and stupid filter through which to look at human life, and has never been true for any society in history. So for him, for Geithner, for the Wall Street crewe, 120 million is much smaller than the potential trillions that the U.S. is on the hook for - at most, it will cause a tempest in a tea pot.

But humans will sacrifice a lot for what they think of as fairness. Accumulation is the dream of a teenage frat boy, and it actually drives a certain part of one's life, but then, for most people, other factors enter into the life. And one of those factors is upset at unfairness. People will accept an unfair system if it has been naturalized, if they have learned to think that it is ultimately just. But AIG crossed every line, in public. The kleptocracy committed a foul. And this isn't going away. Obama better be smart enough to realize that he is giving up political power for a group of people who wouldn't piss on him if he was on fire. Otherwise, absurdly, we will have schizo right populists advocating yanking the bailouts and at the same time keeping the de-regulated system.