On the Contrary

I have promised to write about what has happened to the economy.  I don’t pretend to think anyone but me is reading this, but writing is an interesting and useful exercise to focus, organize, and challenge my thoughts.  So with that caveat, here are some thoughts on how to think about what is going to be the greatest challenge of our lives, the looming depression.  Hope I am wrong by the way about this being a depression, but I think most people are in denial.

To my mind there are really two distinct issues, capitalism in general and its place in the modern world (I call this macro-economics), and what happened to bring down our economy in the specific case of the crisis we are facing (I call this micro-economics).  In the macro-economic discussion, the real issue is what does capitalism look like in the 21st century and can it be controlled.  I think the best book out there on this subject is Paul Krugman’s Depression Economics and the Crisis of 2008.  Although Professor Krugman focuses on the various crisis’s of economies throughout the world since the Great Depression, the whole trend of capitalism becomes much clearer and although he doesn’t offer any solutions, some are fairly self-evident.

On the micro-economic issue, most of us think that the problem came from the housing bubble and greed and that is true as far as it goes.  But this crisis really started back in the 80’s and with an attitude and psychology toward wealth formation and free markets when conservatives and their beliefs became co-opted by Democrats setting us on the road to disaster.  Here I am relying on several sources.

If you are going to read about what happened you have to become conversant in the various financial instruments and lingo of the markets.  Best way to understand the financial instruments in an unbiased view of them is through Frank J. Fabozzi’s Handbook of Financial Instruments (Derivatives, Hedge Funds, Futures, Collateralized Debt Obligations, Credit Default Swaps, puts, takes, long, short, arbitrage, moral hazard, etc.).  Once you are conversant in at least a basic understanding of how these financial instruments work, and the regulatory structure around them, then you are ready to start to understand what really happened in the micro-economic crisis.

But as I indicated above, you also have to understand the psychological environment in which these instruments were employed and that takes some understanding of the conservative revolution that took place beginning with Ronald Regan.  So along with some of the books I would recommend, I will throw in one on the psychology of conservative thinking, The Political Mind by George Lakoff.  In total these books/sources include:

• Depression Economics – Paul Krugman
• Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism – Kevin Phillips
• The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy – George Cooper
• The Handbook of Financial Instruments – Frank Fabozzi
• The Pedator State – James Galbraith
• Panic – Michael Lewis
• The Political Mind – George Lakoff
• The End of the Financial World as We Know It – Article by Michael Lewis and David Einhorn (New York Times)
• Six Errors on the Path to the Financial Crisis – Article by Alan Blinder (New York Times)

Yes I am a card carrying and charter member of the boring book club.  My wife often asks me if I ever read fiction and her point is that sometimes fiction gets more to the truth than non-fiction.  But I can’t help myself.

In the following weeks, I will lay the foundation for the following conclusions, but I thought you would like to know where I am going in case you don’t want to go there:

• Capitalism is still the best way to advance the world, create wealth for all, and spur innovation
• Capitalism as we knew it is over.  With the interconnected markets and complexity of financial instruments, capital’s ability to freely and rapidly flow from one market to another creates a volatility that greatly increases risk that has been underestimated in the past.  Capitalism is inherently an unstable system
• Tools that we have used to control the economy to smooth out normal cycles are no longer effective, may be counter productive, and the free market will have to be a lot less free if we want to reduce these cycles (requirements for minimum capitalization, limits on leverage, limits on currency speculation, limits on financial instruments)
• Flow down was a “free ride” theory of the conservatives that in operation has create large income gaps between the rich and poor with a shrinking middle class
• The philosophy of wealth creation as a measure of good is a bankrupt philosophy that encouraged greed as a worthy value that added wealth to everyone
• Governments around the world are going to have to cooperate more to stabilize the world economy and the reign of “government is the problem” is over
• Capitalism and venture capitalism needs to be nourished, but the focus of making money in the financial markets as opposed to investments in companies that create real goods and services other than debt service has to be redirected

Okay, it is a tall order.  But if we don’t learn from this crisis, push partisan dogma out of the way, and face the reality of world we live in, we will simply repeat these mistakes, as many including me would argue we are repeating the mistakes that lead to the Great Depression.   Ah, but only if the world was as simple as it was back then.  This is not going to be easy.

In case you haven’t figured it out, when conservative Republicans say they want bipartisanship they mean their way or your being partisan.  Democrats by their very nature want to find common ground and work (most of the time) to try to accommodate the other side.  The other side simply sees this as weakness and that is why they despise the Democrats.  See Democrats are immoral because they don’t stand up for their beliefs.  They give an inch and that is immoral.

Watching the negotiations on the economic bailout has been most instructive about these Republicans.  The Democrats (and to his credit, John McCain) laid out some basic guidelines.  In “negotiation speak” this is called the interests of the parties.  If you can establish each side’s real interests, instead of trying to negotiate hard terms first, you may be able to reach agreement by defining the terms of the agreement to satisfy those interests.  The trouble is there is a whole group of Republican conservatives in the House whose interest is to not have an agreement.  In their mind government has no role to play.  They presented a counter plan unknown to the negotiators to have private interests buy the bad paper with government insurance.  This is kind of like lobbing a grenade into peace negotiations.  I have not seen this plan in detail but if my initial assessment of the plan is correct, it simply allows the private sector to once again get rich if the economy comes back and if not, still leaves the tax payers holding the bag in the form of insurance.  As a taxpayer I think I would rather have an interest in this thing so if there is money to be made, the government and by extension we taxpayers, will benefit.

This whole thing started when businesses started to fail due to liquidity problems, credit started to dry up according to our government, and strong action was called for to keep the whole market from collapsing.  Now conservative Republicans are questioning this premise.   Some economists are arguing that the market must be left to self-correct.  Others are telling us to take action fast or the consequences could be far worse than the bitter medicine they are prescribing.  So whom do you believe?  Seen any responsible economists being interviewed on the cable news media?  Me either, but that is the nature of our media; they will focus more on the political implications of the issue than informing us on the economic basis for the plan.  But I digress.

Right now these conservative Republicans are working a populist agenda that is angry at Wall Street, and do not want to pay the bill for these evil doers while they (the populists) are suffering in the hinterlands.  It’s a lynch mob mentality.  So they will stand up for these folks even if the economy collapses.  Dogma is far more important than reality.  The bottom line is that these are people who brought you this disaster.  It is the same belief that government should stay out of the private sector that lead to this debacle.  Consider this:  Do you think those evil doer Wall Street Bankers are Democrats or Republicans?  It is their philosophy carried to its logical conclusion that has caused this crisis, and now it is their philosophy that will stymie any attempt to solve the problem by government.

Here is what I think:  Go ahead with the deal.  The paper we are buying does have value and if we can, in the next couple of years, get the economy back on track, we could actually recoup most of our investment.  The deal must allow the terms of the agreements to be managed to limit defaults.  Eventually these home prices will return and it is far less costly in the short term to reduce the mortgage payments, and by extension the return on investment on these agreements, than to foreclose, throw people out of their homes, and worsen our domestic economy.  Get over the punishment thing.  Right now we need to focus on saving the economy for all of us.  Typical of good conservative Republicans, driven by a system of obedience to authority and punishment, punishment is the first thing on their mind.  It is the most counter productive action we could take right now.  Some will benefit who don’t deserve to.  Get over it; life is not fair, but we need to do the right thing for the whole society, not focus on punishment for a few.  Democrats should not have to carry this water alone and Republicans need to support this bailout (with appropriate modifications) so that the nation can move forward in unison.  If they don’t, it won’t work.

Here are some things to think about:
•    John McCain parachuted into this fray without any power to do anything, disliked by conservative Republicans, and without the economic intellectual capital to lead anyone to a solution.  It was pure politics in its worst form and was hurtful to the process. So much for America First
•    Conservative Republicans do not believe, as demonstrated in this economic debate, in working in a bipartisan manner and never will.  This does not bode well for a country that is moving toward seeing the government as part of the solution as reflected in most polls
•    I don’t know whether this solution will work or not, but I think the chance that the economy will fail is not worth taking.  Carefully crafted, we might even benefit in the long run
•    As long as we keep electing fundamentalist conservative Republicans this country is going nowhere.  There is no hope for healthcare reform, energy investment, or rebuilding our infrastructure because their basic “religious” faith in the conservative Republican philosophy will not allow them to allow government to take a leading role

So if you really are unhappy with the direction of this country and you want to see government work togehter, maybe you ought to look at your own voting record.  Maybe you are the problem.