naked capitalism

fresno dan says:

How many times have I said that US=Japan? O yeah, about 1,238,839 times.
There just seems to be a philosophy of protect the debt, or more acucrately the concept of debt at all costs. Incomes and net worth are going down – a few years ago I was pretty confident about my retirement. Being a gubermnt weenie I still feel pretty secure about my actual pension, but the hit I have taken on my house simply means I do not have 100K to spend that I had prior to the GFC.

jest says:

Yves-

What I am struck by most by policy makers & economic establishment is their denial of the notion that the crisis did not cause our plight, but exposed our weaknesses & accelerated a decline that was inevitable.

I hate to take this view, but the US has not acted all that differently in the world economic stage than Bear or Lehman. Over-leveraged, belligerent, liberal use of off-balance sheet accounting (i.e. unfunded liabilities), a major beneficiary of income inequality, and extracting wealth from the rest of the globe like a “giant vampire squid.”

But due to entrenched academics, erroneously awarded Nobel Prizes, outdated economic ideology & jingoism that basically were propaganda for supporting the Cold War (I’m looking at you, Mr. Kudlow. It’s over.), and a perpetually perplexed public, I doubt this view will ever even be thought about. Especially since the “Investment-Bankinization” of the US was their wonderful idea.

But from that perspective, i.e. America-at-large being the same as Merrill Lynch, 25 years doesn’t seem *that* much of a reach. Hopefully, China’s Ken Lewis will buy us out at a premium. Maybe we’ll get a free toaster out of it.

David Habakkuk says:

Back in his ‘Quiet Coup’ article in The Atlantic Monthly in May, Simon Johnson remarked that if the IMF’s staff ‘could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.’

(See http://www.theatlantic.com/doc/200905/imf-advice.)

A central difficulty is that the power of this oligarchy, in the U.S. — as in my own country, Britain — has been sustained by a very wide acceptance of central parts of its view of the world. This acceptance has been radically called into question by the financial crisis. But an upsurge of hostility to Wall Street and the City is one thing — the mobilisation of public support in favour of measures which are anathema to the oligarchy, and construction of the kind of coalitions which could put these through, quite another.

Dave Raithel says:

This and the Lee Adler piece recalled to mind a point made by one of the Tyler Durdens a good while back – consumers owe banks/business as much as banks/business owe the Fed. The point was made sometime back when Buiter and Evans-Pritchard (I believe as well) were talking “Jubilee”. To reiterate my inference then from one of the Tyler Durdens observation: Well, let’s just cancel off all sides of the ledgers and start over …

constantnormal says:

I think that 25 years sounds low. The Japanese have been at it for about 20 years, and they are only about halfway to getting their debt overhang back to nominal levels. And I believe that we are starting with a total debt overhang (govt+corporate+personal) at a greater multiple of the GDP than the Japanese did.

But perhaps the debt reduction accelerates the closer it gets to rationality, as the economy can begin to breath again. Still, I don’t see Japan getting its debt-to-GDP back to nominal levels within the next 5 years …

If we don’t get serious about zeroing out the toxic debt and cutting government deficits, we will be struggling with this for 40-50 years. (that’s “we” in the national sense — everyone reading this will likely be dead before the debt overhang is gone)

DownSouth says:

David Habakkuk says: “But an upsurge of hostility to Wall Street and the City is one thing — the mobilisation of public support in favour of measures which are anathema to the oligarchy, and construction of the kind of coalitions which could put these through, quite another.”

Superb analysis. Before we can fix the economy, the polity must be repaired first.

The American left has completely eviscerated itself. It’s institutions–labor unions and a political party built from the grass roots up–have been dismantled in favor of a very different style of politics: a combination of elite-network and protest. In the place of union and ward organizers we have elites–moralists, sociologists, educators, economists, etc.–who, as Reinhold Niebur pointed out, “completely disregard the political neccesities in the stuggle for justice in human society by failing to recognize those elements in man’s collective behavior which belong to the order of nature and can never be brought completely under the dominion of reason or conscience. They do not reocognize that when collective power, whether in the form of imperialism or class domination, exploits weakness, it can never be dislodged unless power is raised against it.” Instead, as Niebuhr continues, they “imagine that the egoism of individuals is being progressively checked by the development of rationality or the growth of a religiously inspired goodwill and that nothing but the continuance of this process is necessary to establish social harmony between all the human societies and collectives.”

By far the best case study of elite-network and protest politics I’ve run across is that done by Peter Skerry in “Mexican Americans: The Ambivalent Minority.” In the book he disusses four styles of politics: Friends-and-Neighbors, organization, protest and elite-network. Tragically, he concludes, “the dominant thrust of Mexican-American politics will be that of the elite-network.” “As I have explained,” he continues, “this style of politics is dependent upon displays of angry protest… In essence, this approach is profoundly antipolitical. It teaches those without political power that it can and should be bestowed on them by elite benefactors, whether Anglo or Latino… In the name of politics, we now have a new source of discord–of antipolitics.”

I think we can generalize what has happened in Mexican-American poltics to the overall American polity.

I read articles like the one in today’s links by Robert Reich, “The Guns of August, and Why the Republican Right Was So Adept at Using Them on Health Care,” or the one by James K. Galbraith, “Financial and Monetary Issues as the Crisis Unfolds” (see Links 8/26/09), and I am completely dismayed. Reich and Galbraith see clearly what the problems are, but they are clueless as to how to bring about policy reform. If they weren’t so hobbled by their Enlightenment ideologies, they could learn a lot in short order from two of the 20th century’s greatest preachers, men who weren’t deluded into believing that social injustice can be resolved by moral and rational suasison alone:

•”History is the long and tragic story of the fact that privileged groups seldom give up their privileges voluntarily… We know through painful experience that freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.”–Martin Luther King, Jr.

•”[I]t is impossible to count on enough moral goodwill among those who possess irresponsible power to sacrifice it for the good of the whole, it must be destroyed by coercive methods…”–Reinhold Niebuhr

Toby Russell says:

I agree with posters calling for financial reform, and want to add that the other elephant (alongside the broken system) in the room is technological unemployment. The Economist recently had an article on this: http://www.economist.com/sciencetechnology/displayStory.cfm?story_id=14340666

Re-engineering and automation have been feared for over a century and yet the world moves on, economies everywhere employing people in sufficient numbers to keep purchasing power high enough to prevent systemic collapse. Yet there is evidence in terms of underemployment, part-time and low-pay work, decreasing work-weeks, shriveling union power etc, that labour is less and less in demand. While the fear of the ravages of technological displacement of human labour might have been too shrill in earlier decades, and while the dear hopes of futurists and technophiles might have been too dear, perhaps only their timing was off. We poor humans — sweaty, thirsty, hungry and sleepy — are less and less able to compete with our machine and (now) software counterparts. The End of Work (Rifkin, 1994), though old, has important things to say on this topic.

I believe we need a system reset and a new type of money. As I understand it, all money in a central bank fiat system is brought into existence as interest bearing debt. I cannot see how this is sustainable, even before considering the stress put on the environment by the system’s need for perpetual growth. The medium of exchange we have designed to enable economic activity is far too “centre stage” to be healthy. Money has become top dog, a symbol for success, for wealth, even for happiness. It pushes to distant second all other concerns, like dignity and the environment.

Can’t we come up with something better? And in doing so, must we wait for the great they to come up with it for us? Linux is a well functioning community effort and shows what can be done with a strong base idea and a lot of hard — volunteer — work. I believe money needs a stripping down, a demotion, a dose of KISS. We need to recognise it as an abstraction of value, not a store, since if we see it as a store of value the implication is that it has value in and of itself. I don’t think it does. It is merely an enabler of economic activity.

If a money-system could be designed that required little human-labour; that was automated; that did not need usury; whose supply could be dynamically adjusted via constant live assessments of the value of goods and services in the economy, where only one tax — a simple, unavoidable sales tax — were levied, which itself could be adjusted to control inflation/deflation; if this were doable via some software because the system had been simplified; maybe through such a system redesign money could be demoted to act as lowly enabler of trade, NOT a means to wealth in and of itself. Some sort of debt-free money, simple enough to administer with very low-overhead, perhaps even only electronic, might be the way to diminish money’s significance in the world. Thereafter, to cope with growing unemployment, we could seek to fully automate production of the essentials to provide them for free, enabling the economically redundant to live lives of dignity, while lessening their burden on the state. Instead of being afraid of automation, we ought to find a way of embracing it. We certainly can’t stop it.

No doubt this sounds inexpert and ill-considered. It is. It is a young set of ideas (mostly borrowed) in my head, a head which is untrained in the world of economics. And yet I’m prepared to take the risk of exposing it here with the view of contributing to a debate I think needs to be held. We face an historical challenge whose origins are the financial system itself, compounded by rampant technological development and environmental damage. Dealing with these problems sensibly requires solutions that address all of them as simultaneously as possible. Patchwork won’t work.

Jim B says:

Dave of Maryland makes a good point; The changes we are witnessing are not temporary – not even short to medium term. They are long term – almost epochal.

We expect things to get better soon – we argue about whether ’soon’ means a couple of months or a couple of years. But what if ’soon’ means half a century. What if the required changes require multi-generational modifications to human perspectives?

My grandparents lived through the depression. My grandfather hid behind packing cases at the end of the working day to avoid being caught – and laid off – by the supervisor. During the early fifties he still thought of a mortgage as a millstone around the neck of the working man.

These attitudes stayed with them during his working life and carried on to his children – my parents. They only softened during my lifetime – through the late sixties and seventies. The new attitudes led to the excesses of the seventies and beyond – forty or fifty years later.

Any thoughts that these changes of attitude will respond to short term government policies – or simply revert to recent historical norms on their own – are surely wildly mistaken.

We could well be facing the consequences of a half century long binge of debt in several decades time.

Don’t hold your breath

Anonymous Jones says:

DownSouth — Great quotes from MLK and Neibuhr. It is always heartening to hear experienced men confirm my instincts. There is something in the human condition that leads many to believe in ideals, to believe in the “morality” of no compromise, to strive for the paradigm, when it is clear not just from the evidence all around them but in fact all of history that these things are unattainable. There appears to be very little evidence that striving for the unattainable leaves one better off than striving for some attainable compromise in the first place.

When I was young, back in the 70s, I had ideals too. A communication and information revolution was happening all around me (culminating let’s say with CNN in 1980), and I dreamed of a world that would no longer be ignorant of the horror of wars, the disgusting idiocy of racism, the many injustices of wealth distribution. The dissemination of information was going to lead to a revolution of reason!

Instead, we ended up with the elite turning the networks and the papers into profitable channels of propaganda. Of course, the elite didn’t do it alone. No one forces anyone to turn on Fox News or visit some far leftist blog. Human brains have incredible defense mechanisms; they are virtually resistant to any new information that might jeopardize their world view. Of course, they are not completely resistant, which is probably why humans spend so much time listening to Limbaugh or some equivalent hack on the left who continues to help them massage new information in a way that digestion will not threaten their twisted world view for yet one more day.

I still talk to people every day who believe the vector of human society is toward more tolerance, toward more reason. I hope they are right, but I fear they are not (especially because human history does not necessarily support this idea). One thing I am pretty confident in, however, is that we won’t move in that direction because of idealists without pragmatism, whether they are of socialist, libertarian or any some other persuasion.

cougar_w says:

War on a massive scale is history’s way of erasing debt.

War accomplishes this by erasing a subset of debtors and creditors alike. You’ll get your Jubilee year — in blood.

cougar

john bougearel says:

CNBC’s Steve Liesman interviewed Dr. Feldstein at the American Economic Association (AEA) annual meeting in San Francisco on Friday Jan 2, 2009. In the interview at 2:47 Liesman comments that some folks claim that “it [fiscal stimulus] really hasn’t worked in the past. There are people who go back to the 1930’s and say FDR spent for a full decade and it was only World War II that got us out of it.”

Dr. Feldstein’s reply is priceless: “He [FDR] didn’t really spend very much. He did a variety of things, regulating wages, regulating prices. He did small spending programs but I don’t think it ever got to be more than an extra roughly 1% of GDP, in today’s terms that would be under $200 billion.”

ScottB says:

Yves, thanks, great post, and very thoughtful comments from my fellow readers.

psychohistorian says:

Another passionate posting for which many of us thirsting for evolution are thankful. It is good to read in the comments that the rabble are rousing.

DownSouth says:

Skippy said: “DownSouth can you help me with an example where the softer more gentile people actually rise up and do not repeat the mistakes of their oppressors…?”

My edition of Annah Arendt’s “On Revolution” has an introduction by Jonathan Schell, and in it he lists a number of revolutions that might meet your requirements, what he calls “the wave of democratic revolutions”:

“Its beginning should perhaps be dated from 1956 (Hungarian Revolution) rather than, as is usually done, the mid-1970s, when the series seemed to begin in southern Europe with the overthrow of the Greek junta in 1974, of the autocracy in Portugal that same year, and the transition to democracy in Spain in 1975. The long parade of revolutions that followed included, among others, the Solidarity movement in Poland in the 1980s, the ouster of the Argentenian junta in 1982, the fall of the military dictatoriship in neighboring Brazil in 1985, the expulsion of the dictator Fernando Marcos in the Phillipines in 1986, in the revolution by “people power,” the fall of the autocrat Chun Duo Hwan in South Korea, the collapse of the Soviet Union and its empire in the late 1980s and early ’90s, the replacement of the apartheid regime of South Africa with majority rule in the early nineties, the fall of Slobodan Milosevicz in 2003, the “Rose Revolution” in Georgia in 2003, and the “Orange Revolution” in Ukraine in 2005.”

Schell adds that the “great majority of these movements and revolutions exhibited a remarkable number of Arendentian characteristics. Most were aimed at establishing conditions of freedom rather than solving social quesitons. (In consequence these social questions were unfortunately left on the table in the new world of market globalization, which, having proved unable or unwilling to deal with them, now face a powerful backlash, in South America and elsewhere.)”

@Juan,
Glad to see you back. I haven’t seen any comments from you in quite a while so was wondering what happened to you.

Juan says:

reason, a bit of ‘deconstructing’ re. your response:

you are mistaking economic production for industrial production.

First of all, industrial production is a particular type of economic production. It is not a case of either/or but of determining sets of social relations of production and REproduction such as generalization of commodity production, the constellation of legally-politically enforced private property and transformation of subsistence labor into wage labor, with and from which an historically distinct method of producing, appropriating and distributing labor created surplus rises.

Secondly, I was not at all ‘confusing’ one type [pre-capitalist, pre-industrial capital] with what remains the dominant form of the capitalist mode of production, a form which somewhat more than two centuries ago had begun its subsuming of both loan and merchant capital and, through successive phases of ‘globalization’ has punched, shot, bought its way over the face of the entire planet, while at same time appropriating from [and recreating] areas of pre-capitalist social relations. This latter stands as an ongoing ‘primitive accumulation’ [evidenced in the modern sense as the globally expansive informal sector ranging from 'petty commodity producers' to slaves].

I actually agree with you about the “limits to growth”, but that is just a question of the correct structure of economies.

If ‘Limits to growth’ is understood only in terms of resource limitations there is once again the failure to grasp interaction of nature on one side and dominant social relations on the other. Which then allows many to pretend that an economic system driven not by production for needs but profit, accumulation and market expansion is unproblematic or might be perpetuated ad infinitum ‘if only’ it could be correctly structured rather than be what it has been/is.

‘Correctly structured’ relates to _lets pretend assumptions_ of equilibrium, rational agents and static models, not to the real world of capitalism but, rather, a type of idealism required to displace inherent systemic [endogenous] contradictions to ‘the outside’, to cast systemic failings in terms of ’shocks’ of all kinds but quite often as simplistic anti-govt/pro-’free market’ ideologies.
We should have progressed at least to the recognition that neither extreme is viable while the intermediates of mixed economy have become very much less so but has and has always had limits.

I repeat, overcapacity in a macro-sense is nonsense – what they really mean is structural imbalance.

‘Macro/micro’ is itself a nonsense rising from the development and mainstreaming of a utilitarian, marginalist economics that shifted emphasis from production to consumption but not merely consumption-in-general but to individual consumption. There are specific reasons why this shifting originated but, since most never bother with social and economic history, these remain essentially hidden from nearly a century of neoclassical ’schools’ and their ever more enhanced subjectivisms.

‘Structural imbalance’ is a misnomer for sectoral disproportionalities which, from a static perspective might be called ‘imbalance’ no matter that this latter _assumes_ the possibility, even necessity, of some inherent balance and lack of disproportion even though we’ve known for a very long time that sectoral profit [_not_ earnings] rates are variable, that this relates among other things to relative productivity on one hand and mass of capital on the other.

In a dynamic sense, overproduction and over-accumulation of capital in one and another sector has real, objective, basis and somewhat contrary to the misunderstandings of J.B Say’s misunderstanding, is not avoided through the tautology of supply=demand. Overproduction of the means of production and overproduction of consumer goods are related but not identities other than within a consumption centered set of self-referential theories perfectly unable to capture, much less learn from, real system dynamics.

No matter how blatantly on exhibit, the neoclassical bunch discards that which fails to agree, that which fails to transform the real into _its_ theories.

Try a quick search for ‘Global excess capacity’ or do some research on the long run expansion of the MASS of not-utilized industrial capacity in the U.S. — and since I would prefer to avoid writing a few hundred page ‘comment’ — then work on why a mere increase in effective demand cannot prevent such build, and why overaccumulation and disproportionalities are inter-related rather than monocausal.

Sorry to sound so pedantic but am relying on real world experience plus more decades of informal/formal research rather than what seems to have been an ideologically informed ‘off the cuff’ type of statement.