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"There is no playbook"

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Well, what we all suspected has now been made official. From the New York Times:

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

Why am I not surprised to see that what ought to be viewed as a failing is instead spun as a virtue?

I have mixed feelings about the article in which this juicy quote appears, “White House Philosophy Stoked Mortgage Bonfire.” While it does chronicle some of the ways that the Bush “ownership society” vision, which included raising the level of homeownership, it makes the Administration sound like a bunch of hapless innocents, who had good goals but failed to see that the implementation of their objectives left a great deal to be desired<

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

That is more than a bit of revisionist history. If you don’t believe in oversight, pray tell how are you going to assess the quality of decisions being made? The view, until so many investments came a cropper, was that any agreement freely entered into by two parties was OK (well, as long as it doesn’t involve illegal substances or copyright theft).

And the article never questions the thesis that homeownership is a good thing, merely that the envelope should not have been stretched to make it happen. We’ve questioned that view, and Felix Salmon has found some useful data (his latest is that “Homeownership Makes You Fat and Unhappy“).

But the article nevertheless has some quotes near and dear to our heart, such as:

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

Seidman unwittingly exposes the fundamental contraction at the root of the “free market” construct” for markets to work well enough for parties to deal with each other on a transactional basis (ie, no or limited pre-existing relationship), there HAS to be some level of regulation. And Madoff illustrates that dealing with a supposedly known party with long-established relationships isn’t safe).

And in an amusing bit of synchronicity, another New York Times story, a comment by Alan Blinder, takes on Paulson’s sorry record of TARP course-changes. While most of the arguments are familiar, Blinder dispatches them convincingly and colorfully. For instance:

So here we are, looking at an all-too-familiar story. The administration that brought you the Iraq war and the Katrina response is locking in another disaster before it leaves town. What to do?

You can read the piece here.

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59 comments

  1. Anonymous

    “So here we are, looking at an all-too-familiar story. The administration that brought you the Iraq war and the Katrina response is locking in another disaster before it leaves town. What to do?”

    Well i sit here laughing in my cave.

    Skippy

  2. Anonymous

    Seidman unwittingly exposes the fundamental contraction at the root of the “free market” construct” for markets to work well enough for parties to deal with each other on a transactional basis (ie, no or limited pre-existing relationship), there HAS to be some level of regulation.

    Or maybe not unwittingly. I’ve heard Seidman say similar things on bubblevision before. I think he “gets” this kind of regulation, even though he doesn’t like regulation out in the real world all that much. I think most other conservatives (and absolutely all libertoons) fail to understand that less trust means higher “friction” and thus a weaker economy.

  3. Anonymous

    “That is more than a bit of revisionist history. If you don’t believe in oversight, pray tell how are you going to assess the quality of decisions being made?”

    You know Doc, you’re over-analyzing again. I see only reflexive responses by the sedate, possibly unconscious Mr. Bush.

    I believe you own a dog, and likely (as with most dog owners) you’ve engaged in long, deliberative criticism and conversation with the beast over its habits.

    When it barks, do you attribute the sound to a reasonable, rational response? Or does the dog toss you the same answer every time? Does the dog really care?

  4. Fraud Guy

    As a dog owner, also, I firmly believe that I get a better, more rational, and more self-aware response from my dogs than from this administration.

  5. Anonymous

    I think it’s pretty kooky to blame this mess mostly on Bush, especially his “philosophy”. The policy of encouraging home ownership has existed for decades. Bush had nothing to do with the monetary policy of Greenspan, nor did he create Fannie and Freddie, or the ratings agency cartel. Nor did he oversee the repeal of Glass-steagal, another favourite cause-du-jour for the econostrologist-left; that was done on Clinton’s watch. Oh well, whatever, it’s fun to take pot shots at doofus on his way out the door – and don’t come back!

  6. Jim DeSantis

    Figures don’t lie but liars can figure.

    It’s human nature to cheat whether one is cheating in a suit or in blue jeans.

    This is a lesson that we must re-learn over and over no matter who is in the White House or on Wall Street or on the factory floor.

    Who is innocent among us?

    Jim DeSantis
    http://on-line-tribune-front-page.blogspot.com

  7. ndk

    I think it’s pretty kooky to blame this mess mostly on Bush, especially his “philosophy”. The policy of encouraging home ownership has existed for decades.

    And then some. I’m apolitical in our current goofy regime, but admit to a soft spot in my heart for many of America’s founders.

    Washington tried. Oh well.

    They serve to organize faction, to give it an artificial and extraordinary force; to put, in the place of the delegated will of the nation, the will of a party, often a small but artful and enterprising minority of the community; and, according to the alternate triumphs of different parties, to make the public administration the mirror of the ill-concerted and incongruous projects of faction, rather than the organ of consistent and wholesome plans digested by common counsels, and modified by mutual interests.

    Why am I not surprised to see that what ought to be viewed as a failing is instead spun as a virtue?

    I don’t see it as a failing at all. These are extraordinarily uncharted waters by any definition, and we have only bad theories by which to navigate. I’m far more concerned about the excellent playbooks some claim to have, those playbooks that indicate the perfect policy that will solve all our problems. Instead, this admission could be a step towards rational thought and creativity. Let’s see if we can get some of the strident Keynesians and quantitative easing fans to do the same.

    Seidman unwittingly exposes the fundamental contra[di]ction…

    I don’t believe it was unwitting for a moment. Seidman is quite savvy on all levels.

  8. Yves Smith

    ndk,

    I do think Seidman is smart, but anyone who invokes the term “free markets” is endorsing an intellectually bankrupt, oxymoronic construct. He lost cred by his very use of that phrase.

    Note I am NOT saying that there are not good uses for markets, merely that the idea of “free markets” falls apart under serious scrutiny.

    And I do fault Paulson for not having a playbook. He and Bernanke have been reactive. They have not attempted to address the fundamental problem, that we have too much debt and a way oversized finance sector as a result. Both need to shrink. But instead of figuring out how to do that, both are seekingto keep asset prices aloft and avoid price discovery (that was one, but not the only, motivation for the TARP). Similarly, Bernanke’s intervening in credit spreads is focusing on symptoms, not the underlying malady.

    Macro efforts without underlying microeconomic reforms (regulations, institutional arrangements) are likely to have either limited or distorted effects. Neither Paulson or Bernanke have focused much time or energy on this issue. Admittedly, they have been pretty busy, but that is the sort of thing that could have been delegated (to staff, outside consultants, perhaps several routes to get a range of recommendations).

    Roger Ehrenberg gives a mini-rant on short-termism.

  9. Anonymous

    What to do?

    Print money, spend money, cut rates, print money, spend money, cut rates………………….. And lie a lot.

  10. baychev

    Yves,
    free markets are not to blame here. you are confusing a rigged system infested with crooks and cronies and marketed as ‘laissez faire’ for the original.
    you would probably go about arguing that the USA is a democracy, although amongst the developed world it is the worst example of democratic society.

    how can you put the failure of the system on free markets?
    - are government entities like freddie/fannie free market entities?
    - is the fed a free market entity? why should the cost of credit be determined by a government?
    - is the creation of broker/dealers an example of free markets?
    i can go on and on. what has failed in my opinion is democracy: having laws and regulations that apply to all physical and legal entities.

  11. Anonymous

    There is a certain irony here that when Shrub took office the dot-bomb from the Clinton years blew up, in a way he’s just giving the ship back to the Democrats with a few more barnacles on it.

  12. mmckinl

    Was there a playbook for the crisis … of course not. But there surely was a playbook for favorite institutions.

    GS and MS get bank status within a week … ? Then get tens of billions from AIG … ?

    The whole game has been to protect Wall Street Banks while telling the rest of the country to bugger off …

    Paulson won’t tell you what his real motives are, but ownership in hundreds of millions worth of stock and dozens of co-workers in and at GS is a strong indicator. Fortunately he has immunity for his decisions.

  13. Yves Smith

    baychev,

    I wrote this for another purpose, but I think it will serve here:

    Since the 1980s, Americans increasingly subscribe to notion that so-called free markets are superior to government intervention. This false dichotomy has led to sloppy thinking and bad policy.

    “Free markets” is a fantasy every bit as removed from planet Earth as the 65 lemmas “everyone uses and knows everyone uses Taylor- Nash bargaining” construct discussed earlier.

    It’s impossible to have private ownership of any kind without protection of property rights; that alone presupposes a government. Indeed, development economists have found the lack of clearly defined, enforceable ownership, particularly of land, is a serious impediment to progress. Moreover, negotiating is not cost-free; one of the reasons organizations exist is to lower contracting expenses.

    Free market proponents have called for a wide-scale dismantling of regulation, asserting that private mechanisms are always better than public. Stripped to its core, the argument boils down to efficiency, that less intervention yields more profit.

    But the exhortations went further than that. Milton Friedman repeatedly evoked the idea of “free people, free markets,’ conflating libertarian thinking with the struggle for independence and the Wild West.

    But the Wild West was, well, wild and often ungoverned. As another bit of American iconography reminds us, black hats t roam freely until grizzled John-Wayne-type lawmen intercede.

    A market without rules looks a lot like a brawl. Power prevails. Consider: the stock market never would have come back in a meaningful fashion after the 1929 crash in the absence of sweeping federal regulation in 1933 and 1934. Investors realized only too late that the speculative bubble resulted from not just enthusiasm for new technology but also rampant market manipulation and false reporting. The new rules helped entice investors back by assuring timely and complete disclosure and barring trading practices that could operate to the public’s detriment.

    Moreover, this ideology has failed to deliver the goods….not only does the free market faith suffer from internal contradictions, but more important, the times it was put into practice, such as Chile, advocates claimed success when the experiments were a dismal failure. In fact, in Chile’s case, the economy got back on track only when Keynesian reforms (aka government spending, anathema to libertarians) were implemented.

    Now I have a simple thought experiment: how do you buy a computer in your “free markets” world? You do not have any of the present consumer protections. How can you verify that it is a good computer? You need to hire someone to test that it really functions as advertised, or be competent to run such tests yourself. What happens if the computer craps out in four weeks? Friedman posited that courts would be the method of enforcing property rights. You’d have to go to court every time something did not work as advertised. I can tell you from personal experience that litigation is time consuming and emotionally draining.

    Regulation facilitates commerce. It reduces the amount of negotiation, due diligence, and the cost of enforcement.

  14. ndk

    And I do fault Paulson for not having a playbook. He and Bernanke have been reactive. They have not attempted to address the fundamental problem, that we have too much debt and a way oversized finance sector as a result.

    Yves, I would very much like to see this fundamental problem addressed too, and I think Treasury and Fed are now quite aware of it. It’s much too late, and their earlier ignorance — nay, enablement — is unforgivable, but I bet if you caught Ben over a cold one, he’d have a lot to see about these things now.

    I don’t trust press releases or public statements further than I can spit. There are a lot of reasons why a plan couldn’t be publicly announced or described. Let’s do the thought experiment: imagine they might indeed have an unspeakable method to their madness. Debt-deflation spirals have very strong positive feedback loops imbedded in them, and they don’t unwind peacefully, so if stabilization fails, then interference in feedback loops and management of the cataclysm are the remaining choices. Cataclysm might be ruled out, because if intervention fails, you can always have a perfectly good cataclysm later. So what intervention would you do?

    Well, you might seek the best way to maintain the status quo in hopes things recover. Your peers, biggest influences, appointers, lenders, and overlords are all tangled in or part of the wealthiest echelons of the financial world. They would lose a lot of control with deleveraging and a reduction of the debt load on the economy. If you believe those interests are binding the policy response, then it’s arguable that our actions have tried to maintain balance with as little intervention and debt elimination as possible. In that situation, ad-hoc battles against the occasional random horrific explosion is apropos. You’re right to point out that that course of action don’t resolve much. It’s also a plan that can’t really be voiced publicly, because serfdom is not a popular campaign platform.

    On the other hand, if you believe they’re trying to retard the deflationary spiral by targeting yield spreads rather than inflation, useless a proposition though that is, then a lot of pieces also fall into place. A plausible case could be made that they’re trying to destroy debt as gracefully and slowly as possible. This aggressive intervention and lending alongside sterilization is arguably the closest you can get towards incremental, painfully slow deleveraging in a debt-deflationary environment. That playbook is less difficult to fess up to, though.

    Experiment aside, I will always prefer agility and reaction in an extremely fluid environment with a lot of external forces to a fixed plan. Reactive, with a goal in mind, is just fine by me.

  15. Yves Smith

    ndk,

    We may be using nomenclature differently, I do not think a general would ever say he had no playbook. They have an idea of the order of battle, how they’d like to see things happen, but they also recognize that any plan is invalidated with first contact with the enemy. There is considerable adaptation.

    I do not see any evidence of an approach like that here. I think there was a failure to admit (or diagnose, as I have harped on repeatedly) the depth of the problem. Even as late as June-July, I would hazard that they thought they had seen the worst. John Dizard’s chats with central bank staffers in the FT also showed wildly unrealistic thinking on some key axes.

    There was tremendous denial, which lead to poor problem definition. At least, that’s how it looks from here.

  16. ndk

    We may be using nomenclature differently, I do not think a general would ever say he had no playbook. They have an idea of the order of battle, how they’d like to see things happen, but they also recognize that any plan is invalidated with first contact with the enemy. There is considerable adaptation.

    Yeah, you’re right, probably terminology. I advocate what you describe here. But without knowing the sense in which “playbook” is intended in the original quote, this might or might not be a gotcha. I think we’ve demonstrated that either interpretation can be legitimately reached by reasonable people.

    There was tremendous denial, which lead to poor problem definition. At least, that’s how it looks from here.

    The denial looks bad from here too, particularly throughout 2007. I think a huge part of that was deliberate targeting(read: fluffing) of the expectations of the private sector and individuals.

    In that light, per my above comment, an admission that you’re allowing deflation to happen gradually is unthinkable within an expectations-based policy framework with inflation targeting. That particular goofy economic theory’s gotten tremendous play recently, with Krugman calling it the correct policy response. So the intention to allow deflation to play itself out probably wouldn’t be stated either, for fear the admission itself would make deflation worse.

    I continue to be distrustful of public pronouncements for obvious reasons. And, with groupthink, a knowledge that leaks happen, and the hierarchies of leadership that arise, I distrust even internal discussions and leaks to some extent. But you have far better connections than I ever hope to, so I take your word here above others, and call it a damn shame if indeed true.

  17. bg

    Paulson was a star football player at Dartmouth at a time when football was a really big deal there (I know, I was there).

    Playbook means to me a set of prearranged and preplanned coordinated actions that you can use on the field. It means to me preplanned tactics. Having no playbook can be a virtue when the structures of a playbook are too limited for the situations encountered.

    In other words having no playbook does not equate to having no plan.

    I am making a semantic argument here (which is consistent with my reading of the text). I am not defending their plan, or even stating that they have a plan. I am, however questioning whether this text is proof of your strongly held views.

  18. Richard Smith

    Yves,

    Persuasive analogy, your 2:41.

    Regulation is (or can be, when done well) a variety of intellectual property; a corporate memory of past scams and blow-ups that helps you avoid repeating old mistakes and falling for old tricks. Such a shame it was bypassed so nonchalantly in recent years….wasteful.

    Regulation is analogous to engineering good practice; only an idiot would claim that having no QA and QC whatsoever makes for better products. The equally absurd claim that financial markets function best unregulated still seems to be an article of faith. Pending its abandonment, mistrustful investors will presumably stay on strike. Since human psychology hasn’t changed much since the thirties, we could easily be contemplating another 5-year wait before meaningful regulation comes in. It won’t be a comfortable wait, will it?

  19. Anonymous

    WOW, can you not see it yet, for all the wild gyrations of all involved in power. It may take a number of years but this game is over, this is not the depression or some bubble which we think we can deflate at a minimal cost.

    The human vehicle that has brought us here to this point, has been run at to a high set of revolutions for to long and now its ceased up. We can not regard people as components of some theoretical engine to be subjugated by the whim of so called free/markets. Make more, buy more when the market demands, slow down when it suits.

    Efficiency to the wall and who pays, we are grossly over specialized to the point of nobody can see the horizon any more, but toil as small invested individuals/groups with out a clue to what the other parts of the body are up to on a global scale.

    This is a global crash/self in flicked wound, unprecedented in history bar a global natural event. I’ve said that the multipliers of this event are just off the scale, if you input the accelerating change environmentally (all of it plant, animal, climate etc.) multiply that by our intervention in that sphere(population increase) and squared by our economic activity’s/free market/ownership ideology’s were going to hit a wall IE Spanish flu event or just strip our houses like the poor to pay for food or drugs. Our arrogance has a big tab to pay and if not today it will come soon. Then how we will lament the chance to change it all. For all that we have accomplished, we still have much to learn and are close to forfiting the chance to become better than our selves.

    Skippy

  20. River

    How many times are Americans going to fall for this tired routine…’Bush “ownership society” vision, which included raising the level of homeownership, it makes the Administration sound like a bunch of hapless innocents, who had good goals but failed to see that the implementation of their objectives left a great deal to be desired’.

    The same bs excuses were used in the Korean War, the Viet Nam War, etc. ‘Oh, we meant well, we had the best of intentions, no one is to blame.’ BS, there has to be some responsibility somewhere inside the beltway. Untill some of these egomaniacs are put on trial for their crimes they will continue to pull one scam after another untill this country is reduced to a land of paupers…we are getting closer.

    I do not believe for one second that everyone involved in the mortgage-housing-credit debacle didn’t know exactly what the outcome would be from jump street.

  21. Jojo

    Speaking of home ownership and government intervention in such, this article is germane.
    =====================
    December 19, 2008
    The Reckoning
    Tax Break May Have Helped Cause Housing Bubble
    By VIKAS BAJAJ and DAVID LEONHARDT

    “Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”

    – President Bill Clinton, at the 1996 Democratic National Convention

    Ryan J. Wampler had never made much money selling his own homes.

    Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.

    And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.

    The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”

    By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.

    But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

    Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

    Full article
    ===========================

  22. ballyfager

    I’m struck by the presumption of the NYT to sit in judgment on anyone. It is a failing and increasingly irrelevant entity run by a posturing mediocrity who got his job through nepotism.

  23. fairEconomist

    Bernanke obviously *did* have a playbook. He had a complicated set of Fed interventions carefully designed to provide liquidity in almost unlimited amounts while keeping everything “properly” sterilized. Even as he provided record levels of loans to banks from March to October the money supply growth fell below trend. That’s not the kind of thing you come up with on the fly. He had been planning for that for months if not years.

    However, he was using the playbook for the wrong game. As has been said many times by many commenters in the blogosphere, his measures were aimed at a liquidity crisis and the underlying problem is a solvency crisis.

    Now when they got to the Lehman crisis the playbook became manifestly inadequate. But – Bernanke stuck to the playbook, using hypothetically creditworthy loans for the AIG mess and some additional increases in alphabet soup facilities. So although it was the playbook for the wrong game, Bernanke didn’t realize it. With the new hedge fund facility, I’m wondering if he *still* doesn’t realize it.

    Now when the playbook ran out in October they in a sense didn’t “have a playbook” and they’ve been going by ear since. Amusingly – in a sick way – the reason Treasury is crowing about having had no idea what they were doing is that they’re trying to convince people that they’re not just a bunch of crooks. But, although they didn’t plan the heist out in advance, they are crooks, as is plain from the TARP request and now the hedge fund facility. They’re just opportunistic crooks.

    My personal opinion is that Paulson is a crook and Bernanke is a dupe. Hard to be sure though.

  24. ballyfager

    I agree, Fair Economist. Although i would call Bernanke an academic rather than a dupe. It sounds better.

    But Paulsen is another matter. I’m not at all sure that the country’s best interest is his primary concern. Also, I’m surprised that he hasn’t been asked to resign.

  25. Anonymous

    fairEconomist comes closest to the mark in this string. As Yves laments, Paulson’s admission of ‘no playbook’ is an admission of cluelessness while, as fairEc writes, Bernanke did have a playbook — but for the wrong game.

    Bottom line: In the greatest economic crisis since the Depression, the US’s three most critical leaders (Bernanke, Paulson and, yes, Bush) were/are woefully not up to the task. They are way, way out of their league.

    And, sadly, the leaders in the financial and other sectors who might have stepped up to fill this vacuum instead continued the culture’s dominant trope of the ‘free market’ ideology of the past three decades: they took care of themselves through the ideology of shareholder value.

    In times of crisis, leaders sometimes put aside pure self interest and greed and come together for the common good.

    So far, this has not happened in this crisis. And, we’ll have to wait to see if such a thing arises after January 20th.

  26. Anonymous

    Sounds like Bush’s people are planting a lot of revisionist history during their final days. That’s to be expected, but certainly talking about housing bubble causes without mentioning the role of the regulatory environment and monetary policy is suspect from the start. Would be nice if reporters try to assemble the total picture rather than what is fed to them by the White House.

  27. Anonymous

    These people want us to believe they are freaked out believers of an ideology and shouldn’t be held accountable?

    I’ so glad I rarely buy the NyT anymore. I miss it though.

    They don’t give a sh** what anyone believes as long as they keep the power and the money and that means that you can’t have any.

    I noticed the headline, saw it was 6 pages long and clicked on NC.

    Happy to see it is being discussed. I will read everything after coffee.

    Enjoy the snow and stay away from airports.

  28. Michael Fiorillo

    In the absence of a specific plan, the default program becomes a reflexive response based on personal biases, class and personal interests, and ideology, magnified by the echo chamber produced by subordinates and enablers acting on the same basis.

    This would explain why so many of the decisions made seem intended to underpin the system that got us where we are today: over-reliance on debt and usury at the expense of wages and income based on productive investment and labor.

    The system became an inverted pyramid, with a shrinking productive base asked to support an ever-expanding rentier class and service proletariat (who foolishly misidentified themselves as middle class)who used debt to maintain living standards that could no longer be sustained by wages alone.

    If there is a solution to this mess it must include:

    – Shrinking the finance industry so that it is a smaller percentage of GDP, and re-establishing usury laws.

    – Re-regulating and re-configuring finance to achieve its ostensible purpose: facilitating useful and productive investment. Finance capital was allowed to become an omnivorous Id, and now needs the imposition of a counterbalancing Superego to keep it from destroying itself and everything else.

    – Democratizing the workplace and providing Labor with a bigger percentage of the national income. The trigger of the current crisis can be traced to the fact that more and more people used predatory debt vehicles to afford one of life’ necessities – housing – in the absence of real rising wages.

    This means- and I know some readers will cringe at this – a need for an increase in unionization.

    In fact, real collective bargaining – where employers are not given undue advantage, as has been the case for the past 30 years – is probably the closest thing to a “free market” solution that we could have.

  29. FairEconomist

    The hard part about getting reporters to look at the whole picture is that almost everybody in the game wants to disguise it. The fundamental problem is bad loans on overpriced assets – housing is a very big part but not all. The fundamental solution is to write off the debts and lower the price of the assets. However, the people who own most of those assets *and* most of the loans are the wealthier people who own the media companies, pay the advertising for the media, sit on the boards of assorted foundations, make most donations to academia, and have tremendous influence on politicians via lobbyists and campaign contributions – or, in many cases, *are* the politicians.

    This isn’t a mendacious giant conspiracy, it’s more along the lines of Upton Sinclair’s dictum that it virtually impossible to make somebody realize something when his livelihood depends on not knowing it. I recently ate dinner with a friend of my mother’s who has lost a lot of money in investments, on top of some other personal financial problems. When the subject of the economy came up she popped in with “I don’t want to talk about it. The stock market is going to go up next year and God is going to shower us with gifts to make up for this year.” She is simply not able to confront her losses and what the consequences will be for the rest of her life (it’s time for her to retire). And, basically, the country and almost all the power and communication centers are run by people in her situation. They don’t want to talk about it, they don’t want to hear about it, and they have the ability to make that happen.

  30. Anonymous

    revisionist history.

    I just had a vision. With this change of administration every ex-government employee, consultant, cabinet member, soldier, lawyer, lobbyist, prisoner has a voice and the real revision begins on the INTERNETS. Truth prevails.

  31. Clyde

    The largest portion of the bond market, mortgages, has been dislocated for 17 months, and those buyers were never coming back.

    “Kick the can down the road” is evidently in the administration’s playbook. Is the administration’s inaction a treasonable offense?

  32. kevin de bruxelles

    When politicians make statements, their intention is usually to cover their weaknesses or crimes. Paulson clearly did have a “playbook” going into this crisis. Why then would he be willing to take the hits associated with “admitting” to the lack of a playbook? Because those hits are much less damaging than having his legacy shrouded by his true playbook: the rather obvious strategy to take any steps necessary to further, not the genera interests of the United States, but the very narrow interests of his firm, Goldman Sachs.

  33. Blissex

    «anyone who invokes the term “free markets” is endorsing an intellectually bankrupt, oxymoronic construct.»
    «A market without rules looks a lot like a brawl. Power prevails.»

    But isn’t that exactly the purpose of the Republicans? To “free” the markets so that the biggest corporates can do as they please?

    The right frame is the idea of *competitive* market, just like those the biggest corporates want for labor supply.

    Dismantling rules and regulations means freeing the market power of the biggest. Once upon a time the USA had rules about keeping markets competitive by presuming that size and power make free markets less competitive. Then well paid economists came up with wonders like “contestable” markets and administration can be well funded to free the market from competition….

  34. curious-er

    Paulson may not have a playbook, but there is a playbook for the process that got us and the rest of the World into this mess. If everyone is encouraged to maximize his/her gains, quite possibly at the expense of others, if altruism is disdained and selfishness is encouraged, if all the base instincts of free-marketeers are given free reign, unobstructed by laws, rules, or regulations, then a crisis like the one we’re in now will be the inevitable result, every time. And this playbook was written by Ayn Rand, the darling Goddess of Wall Street.

  35. Anonymous

    Seidman unwittingly exposes the fundamental contraction at the root of the “free market” construct” for markets to work well enough for parties to deal with each other on a transactional basis (ie, no or limited pre-existing relationship), there HAS to be some level of regulation.

    Young pre-med college girls from Taiwan dream of working for Goldman Sachs.

    Just like tiny millionaires dreamed of investing with Bernie Maddoff.

    These guys are guilty of corrupting the youth. The guys featured in this article co opted the smartest graduates and turned them into potato heads. The 30-50 year-olds in the middle ranks of this system are worthless in the real economy and will suffer greatly for it.

    Mayor of NY Bloomberg exemplifies these characters when you hear him say, after winning his will over New York voters for limited terms, “gee (wilikers), I hope I did the right thing.”

    Proof enough that he doesn’t know right from wrong. Doesn’t have a principled bone in his body. That’s what characterizes the people featured in this article.

    They would have you believe they are economic dopes when they are moral dopes.
    They knew to get rid of Elliot Spitzer quickly enough; the only man willing to stand up to Wall Street.

    The Bernie Maddock crowd can take care of themselves. They make the laws. There are no innocents among them -they know a scam when they see it and a scammer –know how to calculate the risk of participation. Listen to the many who can live just fine with what they have left, thank you!

    There has to be a return to the “know your customer” rule in finance to bring back community banking, high quality experienced personal investment advise for everyone as a human right.

    There is no representation without financial representation in the modern world of finance.

    The registered representative/stock broker gave everyone a chance and acted as a conscience (good or bad) between the investor and the investment banking product.

  36. patrick neid

    There is an enormous gulf between necessary rules and regulations that free markets demand–IE, property rights–and government intervention in said free markets that so many here actively support through their Krugman groupiness and central belief in Keynesism.

    Any pretense of a free market ended with the New Deal. Since then it is strictly a Utopian dream that interventionists pretend exists so they can bash it when it suits their arguments. The housing bubble and current economic crisis are but the latest examples. Each is being used as a pretense to embolden larger government involvement in the marketplace. While these chirpers will lambaste the “Plan” they do so only because they think they have a better one.

    The thought of no plan, no invention is alien to their core beliefs because they don’t trust the marketplace as a starting point. Bush’s latest laughable quote actually applies to the people that most loathe him:

    “I’ve abandoned free market principles to save the free market system.”

    Next in line, the idiot savants, Obama and crew. They will be taking intervention to Everest heights as the crowd cheers.

  37. RegulateThis!

    For anyone who doubts the arguments in favor of A LOT more regulation—all one has to do is look to Europe.

    If the US had more regulation we would have been spared! Of this, there can be no doubt!

    Look at what the increased regulatory environment saved the Eurpeans from. They are completely unscathed in this mess.

    Sure the mess started in the US. Obviously, Bush was intimately involved all of it.

    Thankfully, though, the mess was not able to spread from our shores—except to the Brits—but otherwise consider this mess contained.

    And why were the Europeans spared?

    Because they have a more advanced regulatory environment. Every reasonable person knows this. [I bet they are breathing a big sigh of relief in Germany and Switzerland, huh?]

    And that little thing about Japan keeping rates at zero for years…and Swiss at 1%, etc., etc…this had nothing to do with the mortgage mess. Nor did China’s currency peg. These little imbalances were in a vacuum and completely isolated from the “complex global economy”. Irrelevant red herrings brought to you by Bush Incorporated.

    Oh yeah, and that one way carry trade–that many Europeans used as a home mortgage product? A myth, too! That heightened regulatory environment NEVER would have allowed Polish homeowners, for example, to borrow money from a bank and get a “Carry Trade Mortgage”. If you were to do a search on The European Carry Trade Mortgage Mess—do not believe the reports. They are all lies.

    The proof is right in front of your eyes. Wake-Up People!

    Have you gotten your “Regulate Me!” T-Shirt, yet?

  38. Eric L. Prentis

    Bush/Paulson/Bernanke/Summers/Geithner have no credibility on the economy whatsoever and should leave government service, ASAP.

  39. Lune

    Yves,
    What bugs me more than their passive, hapless, innocent, woe-is-me posturing is their complete and utter inability to take responsibility for their mistakes.

    I’m willing to forgive the fact that they didn’t foresee the current crisis (although lots of people were screaming about it months before). And I’m even willing to forgive the fact that they made bad decisions. But what I can’t forgive is that to this day, they won’t take responsibility for it and say “I messed up.”

    Whatever happened to Truman’s motto the buck stops here? If you want to be a “decider” then the flip side of that coin is that you must also be responsible for those decisions. I’m not calling for Samurai-style seppuku here. Just an admission that as leaders who were entrusted with the country’s financial well-being, they failed at their jobs. A true leader accepts that responsibility whether the outcome was strictly due to his own actions or not.

  40. DanyBoy

    Happy New World!

    Yes, no one has a playbook for when the walls come tumbling, the foundation cracks and the roof caves in and aliens land in your yard.

    There is certainly a tipping point after which the forces of change are too many, too big and too powerful. The playbook of incremental improvements, corrections and fixes gets overwhelemed. Knowing how to fix a stopped up sink, a blown fuse or a slight leak (using our house analogy) just won’t be of any use when the roof caves.

    Finally the old playbook just seems too absurd to even consult. A new one needs to be devised the old fashioned way: through trial and error.

    The entire mental construct of using the past to guide reactions and responses to future events is sadly ineffective, but sadly all too human. Just like Bernanke and Paulson trying to dust off the ole 1930s playbook spiced up with a few of Ben’s study hall insights from his academic days just won’t stand up to a real global financial tsunami.

    There’s a part of all of us that wishes otherwise: that the forces of reason and human brainpower could somehow trimph over the destructive, random, monstrus beast that is a global tsunami. But much like a real tsunami, best you can do is head for high ground and wait it out. Bernanke is our weatherman, plain and simple: he can describe the weather, maybe predict it, but he can’t change it.

  41. dc

    RegulateArachy: I don’t see the Europeans or Japanese spending $700b on rescuing insolvent industries either.

    You are mistaking or ignoring the importance of cause and effect. The world economy has caught a cold — but it came out of America’s flu. Unless America is suffering something worse than just a passing flu, and it is scarlet fever or pneumonia with lasting, debilitating, game changing damage. That’s why the money masters are panicking.

    If things go from bad to worse, history will determine if the wound is self-inflicted tunnel vision or just wrongheaded thinking, no less in error than Marxism, whose philosophy took 2 generations to collapse adherent nations.

  42. Waldo

    Very insightful and intellectual group producing this blogosphere.

    I have had an insight brewing now for about 7 years. I want to share it.

    [I posses an MBA from the most reputable finance department in the world (Midwest institution; windy city).]

    This is the insight:

    The behavior of the oil group specifically within the power base facilitated by the Presidency has performed the most historic heist of all times.

    There cannot be one intellectual reading this little blog comment who can defend the price of crude oil from $147 a barrel to $33 in less than 5 months this year. From a free market point of view – truly impossible. Supply and demand cannot produce this variance. Yet all of us cannot "see" or have the courage to voice our conscious to its origin.

    The non-market price of oil commencing a month before George W. Bush took office and peaking earlier this year was common market manipulation. This manipulation has created some profound distortions in our market (mis-information).

    Understand this about finance: it quantifies, it does not create. The finance market has been operationally cut off due to the rise of oil. The IPO market shut down basically 7 years ago. There was a void that was hard to see. Wall Street possesses the greatest concentration of capitalists in the world. This was created through natural forces over long periods of time. Without real IPO and M&A activity on a typically robust scale the expectational power of investors forced American finance firms foolishly into real estate. Do not discount to much the quality of Lehman Bros.. They were created around the Civil war and survived the Great Depression.

    The amount of stealing the oil businessmen has schemed is profound (on same theme as Enron [energy traders] just much larger and with the use of force). Add to it the Federal Government's consumption of tax dollars due to enhanced military activities (there is a correlation there as well; simply the value of Iraq's oil reserves and our occupation). This to me has been a plan that the finance industry has been a victim of. The frauds of Madoff and such must be criminally prosecuted and are a positive outcome of this heist – "When the tide goes down we will see who has their boxers on", but we must not loose the forest for the trees.

    Ralph Waldo Emerson penned an essay called "Compensation". This little essay is towering. It it truly on par with Adam Smith's "Wealth of Nations" and Milton Friedman's "Capitalism and Freedom". This essay is a must read for our very confused society. His words are clear and are true utterances of genius.

    Roughly stated from the literature "When a country behaves like inmates of a prison their currency will reflect that reality." Our currency has been sending signals of felony misbehavior within our society to the American citizen since the onset to this heist.

    Remove the lowering of the interest rate over the past three years and all things being equal – research the relationship between the increase in oil prices and the fall of the dollar. And any intellectual who thinks that oil follows the dollar is naive or worse. The dollar represents, it does not create or scheme.

    We have serious felonious behavior far above our finance industry and is being coveted by our most esteemed institution; the White House. This should not be to surprising but must be criminally prosecuted. The lesson for us all in this historic past seven years is the profound value vested in a free market by the force of justice.

    May we all lean more towards our character (moral strength) and find the courage to stop these madmen from allowing this to be hidden away for another generation to endure and clean-up. This is another chapter of maturation for our democracy.

  43. ndk

    [I posses an MBA from the most reputable finance department in the world (Midwest institution; windy city).]

    Hiya, Waldo. I’m a high school dropout. It’s great to make your acquaintance on the egalitarian Internet. :D

    … the price of crude oil from $147 a barrel to $33 in less than 5 months this year. From a free market point of view – truly impossible. Supply and demand cannot produce this variance.

    Sure it could, though it’s unlikely. You just need extremely inelastic supply and demand, which oil arguably has. You can also argue that it’s a finite resource reaching peak extraction rates, e.g. Peak Oil.

    In fact, that plausible case is a key element enabling speculative bubbles and manipulation. If no remotely canny explanation could be conceived, New market forces like pension funds “diversifying” and the Government regurgitating cooked numbers helped, too.

    Do I suspect a shadowy conspiracy of some sort, or secret government plans? Not at all, in that most extreme form. But there are all sorts of shades of grey between backroom cartels and old-fashioned pure collective tulipism. This situation probably lands somewhere in that grey area.

    Understand this about finance: it quantifies, it does not create.

    I deeply disagree with you there. There are a thousand transmission channels from the financial system to the real economy and back. We’ve gotten a tour-de-force demonstration of that on the upside and downside through the last fifteen years.

  44. ndk

    If no remotely canny explanation could be conceived, then there would be much less propensity for bubbles to form.

    Fingers faster brain.

  45. Waldo

    “I deeply disagree with you there. There are a thousand transmission channels from the financial system to the real economy and back. We’ve gotten a tour-de-force demonstration of that on the upside and downside through the last fifteen years.”

    Another way to view the dollar is to understand that it is simply a derivative instrument. This derivative is our medium of exchange. Of course it goes in and out of the economy. But its decline affects the creditability of the firm utilizing it as the exchange medium.

    Look at the other side of the coin. The Euro. It is 10 years old and does not represent an economy as mature as ours (infrastructure both electronic and capital structure) though it is valued above our currency. This again has occurred from 7 years past and such. Another point you need to try to digest. The enhanced value of gold follows the dollar’s decline as well.

    Very ironical. The very sophisticated American money managers who have defended their clients wealth by properly hedging away from the dollar into Euro’s and gold are the professionals who are sending the felonious signal to us.

    This same thing happens with an insurance policy when the policy holder becomes more risk-loving or felonious (breaking speed level consistently).

    Some of the best employees of my firm are high school drop-outs. Your comments do not reflect brute work ethic but it does reflect a quasi-ignorant educated American citizen. Another component of our problem.

  46. Sundar

    If I remember correctly there was a discussion in blogosphere that if Treasury bought the ‘Toxic assets’ (at fair price?)the Banks will have to bring them back on their sheet and their capital requirement goes up and back to square one! Plus the Mkt will know the quality of those assets b/c has Treasury will have to disclose that, although lately they are telling Bloomberg to F**K off!

  47. ndk

    Look at the other side of the coin. The Euro. It is 10 years old and does not represent an economy as mature as ours (infrastructure both electronic and capital structure) though it is valued above our currency. This again has occurred from 7 years past and such. Another point you need to try to digest.

    Currencies, and their mappings to optimal currency areas, are a very complex topic. There are a lot of theories about the relative valuation of currencies, but at least the current USD nominal valuation lines up well with its PPP-derived valuation. Could we see a significant break in confidence in the dollar? It’s plausible, but we haven’t seen it yet.

    The enhanced value of gold follows the dollar’s decline as well.

    An increase in the gold price as measured in dollars will occur when the dollar goes down, yes. It’s a bit of a tautology.

    Your comments do not reflect brute work ethic but it does reflect a quasi-ignorant educated American citizen. Another component of our problem.

    Do you consciously use such terms in casual discussion, or does it just happen naturally?

  48. Waldo

    “Do you consciously use such terms in casual discussion, or does it just happen naturally?”

    No. But utilizing the notion of “high school drop out” from your original criticism does not belong in such high quality platform as this. Understand I conditioned my original insight with the point of credibility about my education because I understand the caustic value of my insight.

    The analytical tool for the economics point of view is to simplify the chaos (“all things being equal”) then to analyze a specific portion of the machination. Simplicity is critical to understand the most basic economic phenomena.

    What is needed to see this generalization is not more complex educational jargon but more of a moral compass. Literature provides such framework to such an analytical mindset and debate. Good sources of literary insight are Shakespeare, Goethe, Emerson, Langston Hughes, and Frost (my experience).

    There is great discussion here about the pent up value in treasuries “sitting on the sidelines”. If there was a stronger understanding of the pent-up value globally vested in the Euro and Gold, then treasuries would be considered secondary . How much wealth does it take to increase the value of gold from $350 ounce to say $900? The tide has been going out for seven years. The treasuries pale in comparison to other flights to quality.

  49. S

    Bernanke clearly had a plan and he scripted it in 2002 for the world to see. He has followed it to the letter. Just this weekend the hedge fund complex got some carry money. And Japan floated the trial ballon this week of deploying $200 billion for an equities buying spree. That move is almost surely coming the a US theater near you soon. BErnanke most assuredly has a plan – he just thinks if he keeps at it it will eventually work. Damn the torpeados…

    Paulson had a much less academic plan – the banker approach: Extract as much flesh as possible in the shortest time possible. It is the PE model. More specifically, he had in mind saving the investment banks and begging China to open the market to the US banks (debt, grow or die). He succeeded in looting $700 billion so far and AIG/BS/JPM/WB are the poster children. Paulson ha done a heck of a job coordinating the bailouts and ensuring Blankfein got max ear time with Geithner in ensuring the AIG largess kept flowing.

    One more pet peeve – the LEH failure had nothing to do with the freezing the credit markets. That is an expost analysis with false causation. Leh was juts another lesion of the underlying rot. Period. Saving it would have aadded perhaps another $50 billion to the Fed’s balance sheet that you the tacxpayer would eventually have to make good on. Credit spreads widening and the money markets chokage of course accelerated in the wake of LEH, but was it becasue of LEH? Or was it becasue it was yet another data point on system insolvency. Saving LEH whatever that means would have done nothing to address the problem. So you either argue to liquidiate the debt via default and bankruptcy and clean the slate (asset reprice) for a resulting much smaller economy (allow GDP shrinkage) or you make believe there is a real $14 Trillion dollar economy. The gov’t for asthetic reasons prefer to make believe that what was never real ($14T GDP) is indeed an achievable bogey in a deleveraged world – actually I think the right terminology is a releveraged public balance sheet.

    I am also a high schooler and don’t know what that means windy city but I have a inkling its got neocon linkage and a nobel 3 time hedge fund failer

  50. Allen C

    The blame for Katrina goes far beyond Bush. Katrina exposed the unpleasant truth that many citizens are unable to support themselves.

    As I understand it, there are tens of thousands still on the Katrina dole.

  51. Aaron

    Yves,

    I must say I enjoy your blog but I disagree with your thoughts on regulation and free markets.

    Government intervention and regulation have since the beginning of time eventually become the problem and not the solution.

    I think the majority of people who support “free markets” don’t think that you would have a world free from regulations. They would just be different.

    i.e. they wouldn’t be comprised of a handful of ultra powerful federal agents.

    It would be hard to argue against the fact that creating these federal agencies makes it easier to target who to corrupt.

    I mean the Environmental Protection Agency has been trying to keep California from…get this Protecting the Environment.

    I guess they want to protect it too much.

    The government has been notorious at creating agencies that don’t do what they were intended to do.

    The road to hell is paved with…..

    The Department of Energy was created to help wean us off foreign oil. Hmmm.

    Ask any teacher if No Child Left Behind is good.

    Obviously, I could go on.

    If people knew that the government wasn’t ‘looking out’ for them, they would be more cautious.

    If there was no FDIC would you deposit money at a bank that made risky investments?

    Banks would have been much more careful in their investments because people would be very picky in choosing where to deposit their money.

    As it is now, here you go banker, do whatever you want ,Uncle Sam will give me all my money back if you screw up.

    It’s impossible to have private ownership of any kind without protection of property rights; that alone presupposes a government. Indeed, development economists have found the lack of clearly defined, enforceable ownership, particularly of land, is a serious impediment to progress. Moreover, negotiating is not cost-free; one of the reasons organizations exist is to lower contracting expenses.

    Completely agree here. You have to protect property rights, which are handled through State and local governments and the courts. Not the Federal government.

    Have been for a while.

    But the exhortations went further than that. Milton Friedman repeatedly evoked the idea of “free people, free markets,’ conflating libertarian thinking with the struggle for independence and the Wild West.

    But the Wild West was, well, wild and often ungoverned. As another bit of American iconography reminds us, black hats t roam freely until grizzled John-Wayne-type lawmen intercede.

    People can still get scammed with Federal Government oversight. See Madoff for a good example.

    When poeple know they have to look out for themselves, they tend to maintain the ‘buyer beware’ montra.

    Which is a good thing, unless human nature will suddenly change an no one will try to make tons of money.

    As long as people seek to make more money there will be people gaming the system. Just a fact of life.

    That’s why some people liked the idea of a Communist Utopia. Maybe they could live free of that.

    Greed and fear aren’t going anywhere though.

    Social Security and Madoff actually have a lot in common. As Peter Schiff points out here. Thank goodness for the government protection there.

    http://www.europac.net/archives.asp#

    A market without rules looks a lot like a brawl. Power prevails. Consider: the stock market never would have come back in a meaningful fashion after the 1929 crash in the absence of sweeping federal regulation in 1933 and 1934. Investors realized only too late that the speculative bubble resulted from not just enthusiasm for new technology but also rampant market manipulation and false reporting. The new rules helped entice investors back by assuring timely and complete disclosure and barring trading practices that could operate to the public’s detriment.

    I’m not sure you can say the market would never have come back without sweeping regulation. That is like how some people I know say ‘can you imagine if Gore was in office for 9/11, we’d be screwed’.

    Something that never happened is hard to debate.

    Plus all the new rules and disclosures still gave us Enron and WorldCom right?

    People thought that couldn’t happen because of ‘oversight’.

    I’m not sure, but I would bet a bunch of great new laws have been passed to prevent this from happening again.

    History repeating itself.

    Now I have a simple thought experiment: how do you buy a computer in your “free markets” world? You do not have any of the present consumer protections. How can you verify that it is a good computer? You need to hire someone to test that it really functions as advertised, or be competent to run such tests yourself. What happens if the computer craps out in four weeks? Friedman posited that courts would be the method of enforcing property rights. You’d have to go to court every time something did not work as advertised. I can tell you from personal experience that litigation is time consuming and emotionally draining.

    The answer to your computer question is already being acted out every day.

    Private companies provide warranties for faulty equipment.

    People have CNET and Consumer Reports to find good computers from good companies.

    If the company screws enough people over, you can bet they won’t be in business long. People go elsewhere.

    Unless the Keynesians bail them out of course.

    Regulation facilitates commerce. It reduces the amount of negotiation, due diligence, and the cost of enforcement.

    I think you’ve defined the problem here. Reduces due diligence, and leaves that job to the Government?

    The same people that looted your Social Security account and turned it into a Ponzi Scheme.

    I’ve got the warm and fuzzies already.

  52. Yves Smith

    Aaron,

    With all due respect, do you have any empirical basis for your views? The growth rate in the Reagan and later era in the US is lower than in previous decades, and that is before you back out the fact that a good deal of it was based on unsustainable leverage (just about all the growth post 2002 vanished if you take out consumption funded by home equity withdrawals, which is consumption of capital, not growth in the normal sense).

    I suggest you read Upton Sinclair’s The Jungle to see what a world with minimal/no regulation looks like.

    I worked in the securities industry when it was more heavily regulated than today. People still made quite a lot of money, and the industry delivered much better value to society than it does today.

    Canada is at the top of international surveys as having the best banks in the world. Canada did not jump on the deregulation bandwagon.

    As mentioned above, the times “free markets” experiments have been attempted, the results have been disastrous. Deregulation in Chile plunged the country into an economic black hole:

    In 1973, the year General Pinochet brutally seized the government, Chile’s unemployment rate was 4.3%. In 1983, after ten years of free-market modernization, unemployment reached 22%. Real wages declined by 40% under military rule.

    In 1970, 20% of Chile’s population lived in poverty. By 1990, the year “President” Pinochet left office, the number of destitute had doubled to 40%. Quite a miracle.

    Pinochet did not destroy Chile’s economy all alone. It took nine years of hard work by the most brilliant minds in world academia, a gaggle of Milton Friedman’s trainees, the Chicago Boys. Under the spell of their theories, the General abolished the minimum wage, outlawed trade union bargaining rights, privatized the pension system, abolished all taxes on wealth and on business profits, slashed public employment, privatized 212 state industries and 66 banks and ran a fiscal surplus.

    Freed of the dead hand of bureaucracy, taxes and union rules, the country took a giant leap forward … into bankruptcy and depression. After nine years of economics Chicago style, Chile’s industry keeled over and died. In 1982 and 1983, GDP dropped 19%. The free-market experiment was kaput, the test tubes shattered. Blood and glass littered the laboratory floor. Yet, with remarkable chutzpah, the mad scientists of Chicago declared success. In the US, President Ronald Reagan’s State Department issued a report concluding, “Chile is a casebook study in sound economic management.” Milton Friedman himself coined the phrase, “The Miracle of Chile.” Friedman’s sidekick, economist Art Laffer, preened that Pinochet’s Chile was, “a showcase of what supply-side economics can do.”

    It certainly was. More exactly, Chile was a showcase of de-regulation gone berserk.

    The Chicago Boys persuaded the junta that removing restrictions on the nation’s banks would free them to attract foreign capital to fund industrial expansion.

    Pinochet sold off the state banks – at a 40% discount from book value – and they quickly fell into the hands of two conglomerate empires controlled by speculators Javier Vial and Manuel Cruzat. From their captive banks, Vial and Cruzat siphoned cash to buy up manufacturers – then leveraged these assets with loans from foreign investors panting to get their piece of the state giveaways.

    The bank’s reserves filled with hollow securities from connected enterprises. Pinochet let the good times roll for the speculators. He was persuaded that Governments should not hinder the logic of the market.

    By 1982, the pyramid finance game was up. The Vial and Cruzat “Grupos” defaulted. Industry shut down, private pensions were worthless, the currency swooned. Riots and strikes by a population too hungry and desperate to fear bullets forced Pinochet to reverse course. He booted his beloved Chicago experimentalists. Reluctantly, the General restored the minimum wage and unions’ collective bargaining rights. Pinochet, who had previously decimated government ranks, authorized a program to create 500,000 jobs.

    In other words, Chile was pulled from depression by dull old Keynesian remedies, all Franklin Roosevelt, zero Reagan/Thatcher. New Deal tactics rescued Chile from the Panic of 1983, but the nation’s long-term recovery and growth since then is the result of – cover the children’s ears – a large dose of socialism.

    To save the nation’s pension system, Pinochet nationalized banks and industry on a scale unimagined by Socialist Allende. The General expropriated at will, offering little or no compensation. While most of these businesses were eventually re-privatized, the state retained ownership of one industry: copper.

    For nearly a century, copper has meant Chile and Chile copper. University of Montana metals expert Dr. Janet Finn notes, “It’s absurd to describe a nation as a miracle of free enterprise when the engine of the economy remains in government hands.” Copper has provided 30% to 70% of the nation’s export earnings. This is the hard currency which has built today’s Chile, the proceeds from the mines seized from Anaconda and Kennecott in 1973 – Allende’s posthumous gift to his nation.

    Agribusiness is the second locomotive of Chile’s economic growth. This also is a legacy of the Allende years. According to Professor Arturo Valenzuela of Georgetown University, Washington DC, Allende’s land reform, the break-up of feudal estates (which Pinochet could not fully reverse), created a new class of productive tiller-owners, along with corporate and cooperative operators, who now bring in a stream of export earnings to rival copper. “In order to have an economic miracle,” says Dr. Valenzuela, “maybe you need a socialist government first to commit agrarian reform.”

    So there we have it. Keynes and Marx, not Friedman, saved Chile.

  53. DanyBoy

    Perhaps when Paulson said
    “There is not any playbook”…

    He was making a self-agrandizing and pseudo-philosophical reference to the scene in The Matrix (Warner Brothers, 1999) when Neo (“The One”) learns how to use his mind’s power to bend a spoon while keeping it suspended in mid-air without physical contact:

    Spoon Boy: Do not try and bend the spoon. That’s impossible. Instead… only try to realize the truth.
    Neo: What truth?
    Spoon boy: There is no spoon.
    Neo: There is no spoon?
    Spoon boy: Then you’ll see, that it is not the spoon that bends, it is only yourself

    In this scenario, Paulson sees himself as Neo, the savior, learning how to free the world from evil anti-free market forces which have taken over from Republican forces and presently rule through mind control.

    There is more than a passing chance that his reference signals that we must have complete faith in him in his role as savior (As we should have when he requested $700Bricks from Congress without condition or oversight).

    My response to Mr Paulson:

    “This is your last chance. After this, there is no turning back. You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland and I show you how deep the rabbit-hole goes.”

    :-)
    Happy Holidays!

  54. Anonymous

    @Waldo,

    Oil the most coveted substance we know of does seem to attract and attach to its surface, those we would least like to have at our backs.

    The history of oil has many characters and is the one of the best studies i have found in social science. Macbeth doth protest in its reduction when compared.

    You insinuate that a person of note, housed in the highest office this country has to offer. Is duplicitous in the looting of his countryman and supporters, nay the entire world population. Could such a thing be done at the highest point in mankind’s history. In league with his faiths sworn enemy’s, cohort to the greatest hoodwinking to date.

    This would be a needle work of the finest quality and to undo it would require the best optics used to scan the universe, pointed upon it. I would recommend a starting point in the time line of just after WWII, in Americas the Wests dealings/influence with the Middle East. Now look at the American government and its little war with a certain Greek shipping magnate. Fast track to Reagen and his vision of the world, when did the dementia really set in. The Bush family, as G. Bush Jr put it “only in America” at a wedding reception of a Jewish couple “nice people, really nice people”. Now what was it, his grandfather the senator/banker was in hot water for at the onset of WWII. Daddy Bush the War hero set to right the might and strength that the American public so desperately need to get up and face the world everyday. Got his little War which was televised and commentated on like some sporting event. But like all sporting events no one likes a draw, only winners and losers in Americas vision.

    A new era, the good old boy Clinton, the soft hand and master global net worker. Insuring his place in the big picture of things long after his term of service is over. The royal oil family did let him give one of their misbehaving kids a little spanking for a show of toughness, didn’t want to look like a Carter.

    The best for last. Bush Jr the prodigal son who never got his fathers love or feeling of it. Sent to the best schools, preened to follow his fathers footsteps and bring wealth to the family, show those uppity east coasters who is boss. What a head job his first election was, to tell the American people he was cut from the bolt of cloth like them, yuk yuk. How many start up company’s did he run into the ground before being picked up as a face man to pull in capital for his new employer, they just made sure he could not get to the bank safe or combination to it. As a man of faith, having won the election, only one power could have intervened on his behalf and like all those before him, fell into the most diabolical of mind traps. divine intervention and all that I do is divine. Enron who, oh the guys that helped me get here, but i don’t feel like ponying up anymore, them’s the breaks. Thanks for your lovely X-Mas cards, usage of your private jets and law staff to stitch up this election glitch thingy in Florida. Ohh i forgot we have a draw, we need to fix that up now don’t we, the American people do keep score you know. Oh no we just got hit, hell get all our friendly royal oil buddy’s out of town now as some of the bad guys are from their town. Phew that was a close one, well time to get some payback now ummm how could we pin up as the fall guy, hay i know, how about are old friend in Iraq (still disappointed with his performance with Iran) one is good as the other. War won triumphantly, many gifts so be soon realized, it many not be Texas but damm an oil well is an oil well where ever you find one. At this time i bet the American people are so glad we got rid of that Adulterating morally bankrupt good old boy. What, are party lost the election, hell roll up the tents quick like boys were going fishing far far way, where people are like thinkers and will welcome us into their fold. Just was doing my job folks can’t hold that against a man now can you.

    The history of the faithful will read, in a turbulent time he did all that a man could do, the end.

    The library of Congress is the best book store in town and the freedom of information act is the best library card. Every large Army base has a vaulted room full of really good books too, you just have to sign up, get a high security clearance and hope you don’t die in some foreign country before you get out and have a chance at digesting it with further studies. Institutional Education is a big help, but not necessary. You just have to get up to speed with the lingo and build the biggest puzzle you can imagine.
    Oh and never look at the hand they show you, its always some where else.

    Skippy

  55. Anonymous

    If there was a stronger understanding of the pent-up value globally vested in the Euro and Gold

    There is no "pent-up value" in either commodity. The prices ascribed to both are speculative monetary prices created during a vast monetary and credit bubble. A precipitous decline in the prices of either would not result in one iota of freely transferable capital.

    My conservative rough estimate is about 90% of the population, including the commentariat on this blog and both Administrations' "economic advisors", are clueless about what constitutes genuine capital.

    Hint: it isn't the paper dispensed by Bernanke & Company and it isn't the phosphor dots that used to flash on Bernie Madoff's screens.

    I am also a high schooler

    You already have more common sense than most people commenting on this blog. Be careful in college. It took me awhile to unlearn the Keynesian quackary I was force fed in b-school, and that was in a top ten rated b-school. The bulk of tenured professors are no more authoritative than your mailman. They’re tenured, just like your mailman.

    and don’t know what that means windy city

    Chicago’s nickname.

  56. Waldo

    “There is no “pent-up value” in either commodity. The prices ascribed to both are speculative monetary prices created during a vast monetary and credit bubble. A precipitous decline in the prices of either would not result in one iota of freely transferable capital.”

    If it is thought that the housing bubble was well formed prior to 2004 than all robust economic activity is a “bubble”. If this is the case we are afraid of our shadows.

    The “pent-up” value in Gold and the Euro follow a very predictable path along oil’s path. Like physics, action-reaction. This provides enough proof of its existence and aggregation.

    We have consumed the misinformation for so long that it must be reality and “bubbles” are our problem. When a controller slowly steals capital from a firm the overall strategy of management and the firm’s behavior adjust accordingly. Does not mean it is reality, just reality taken into account enough to justify the constant stealing.

    The greatest destruction of value from this heist is the lost sense of intrinsic knowledge and competitive strategy best practices of the free market.

    From my point of view capital is best described as the monetarization of profit.

  57. baychev

    Yves,
    friedman seems a bit extremist in his thinking. i am almost fully subscribed to the ideology developed by the mises institute. and i do not confuse ‘anything goes’ capitalism with ‘free market’ capitalism.
    the notion behind free market is that people rather than the government should take risks and bear the consequences. this is the self enforcing discipline of the free market.

    in a previous article you pointed out the latest citi bailout was their 3rd since the 80ties. i will quote an infamous person: governor bush will not subsidize failure. this is from his presidential campaign in 2000. strange how things have turned around completely in 8 years.

    and of course hardly anyone would disagree that we need anti-trust, and regulatory framework that enforces level playing field.
    what you and me may agree upon is that the government should not provide backstops to favored companies.

    we saw with the bear and lehman bankruptcies 2 distinct scenarios:
    1. government intervention: the fed put at risk the taxpayer and jpm laid off almost the entire workforce from bear;
    2. no intervention: the lehman bankruptcy sent ripples through the markets but the bulk of the business was auctioned and most jobs are secure under the hat of other banks. and you mentioned the bureaucratic british courts that may hold hostages many hedgies until the european entity is wound down. this bureacracy as well hinders the market than aids it.

    the reasons for those failures are entirely attributable to the sec. you also pointed out in dismay quite a few times that the bank according to its regulators was well capitalized, yet when it filed for bankruptcy it had a 100 billion hole in its balance sheet. this sounds like a failure of the regulatory system, rather than a failure of the free market. in the free market the weak players wash out.

    and you are perfectly aware that vulture capital steps in when the returns on unlevered investments become attractive. what we are facing now is quite the opposite: government intervention aimed at impeding price discovery, keeping jobs under failing management, direct cost to all taxpayers in the form of bailouts, indirect cost through future inflation, bleaker employment opportunities, rising taxation.

    another example of this ‘free market’ oxymoron: waldo’s argument about the price of oil. there is nothing in the world that could lead to such gyrations… besides government intervention. you remember the time when the congress ‘ought to do something’ about the price of oil. elections were coming. so they caught 1 manipulator: a dutch owned cta. no political connections, easy to blame. they were accused of pushing the price of oil up on one occasion and 2 times down. how pathetic.
    at the same time there was an oil drilling company in ohio(whose name i dont recall anymore) that was loaded with 15 years of its own production in short positions. they lost about 3bn. that was okay, the cftc never had trouble with them. dont want to speculate who has been told to play the oil market only from one side, because the other is politically unacceptable. but this blatant example of market intervention is a clear example that the government is the root cause of all market problems, rather than enabler of price discovery.

    so i dare to say we have never seen free markets. the government takes enough in taxation, why should it compete against its citizenry by supporting favored businesses with tax money? this is a self defeating policy by itself leads to decreased taxation revenues and further trouble down the road. but it justifies the existence and expansion of the government and suppression of liberties.

  58. baychev

    Yves,
    i think you are looking at the world a bit too idealistically: you assume that every effort at anything is best effort. this i attribute to your personal virtues (this site is a great example of your exellence).
    i, on the other side, view every government effort as pure defense of special interests. the government, in my eyes, cannot and does not look for the people: all interests can almost never be protected, so only the special groups that give kickbacks are protected. this is how the world has been going since roman times, and i have no illusions that anything will change soon.

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