Recent Items

Martin Wolf is Very Gloomy, and With Good Reason

Posted on by

Martin Wolf, the Financial Times’ highly respected chief economics commentor, weighs in with a pretty pessimistic piece tonight. This makes for a companion to Peter Boone and Simon Johnson’s Doomsday cycle post from yesterday.

Let us cut to the chase of Wolf’s argument:

Now, after the implosion, we witness the extraordinary rescue efforts. So what happens next? We can identify two alternatives: success and failure.

By “success”, I mean reignition of the credit engine in high-income deficit countries. So private sector spending surges anew, fiscal deficits shrink and the economy appears to being going back to normal, at last. By “failure” I mean that the deleveraging continues, private spending fails to pick up with any real vigour and fiscal deficits remain far bigger, for far longer, than almost anybody now dares to imagine. This would be post-bubble Japan on a far wider scale.

Yves here. Notice he associates success and failure with polar options. But how can you “reignite the credit engine” when the financial system is undercapitalized even before allowing for the need to take further writedowns? The IMF has found the converse in its study of 124 banking crises, that purging bad debt is a painful but necessary precursor to growth. So I fail to understand how Wolf envisages that “skip Go, collect $200″ of releveraging quickly comes about. And in fact, it turns out that Wolf’s “success” is a straw man:

Unhappily, the result of what I call success would probably be a still bigger financial crisis in future, while the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer than worrywarts fear. Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. This, in turn, would surely result in defaults, probably via inflation. In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.

I can envisage two ways by which the world might grow out of its debt overhangs without such a collapse: a surge in private and public investment in the deficit countries or a surge in demand from the emerging countries. Under the former, higher future income would make today’s borrowing sustainable. Under the latter, the savings generated by the deleveraging private sectors of deficit countries would flow naturally into increased investment in emerging countries.

Yet exploiting such opportunities would involve radical rethinking. In countries like the UK and US, there would be high fiscal deficits over an extended period, but also a matching willingness to promote investment. Meanwhile, high-income countries would have to engage urgently with emerging countries, to discuss reforms to global finance aimed at facilitating a sustained net flow of funds from the former to the latter.

Yves here. Unfortunately, not only does it require “radical thinking” but also political consensus in a US that is badly divided, and not simply along party lines. Class warfare is in the air, and the idea of any large scale spending program will raise even more acute “But what about my share?” problems than usual.

We see a stark reminder of outcomes that will strike ordinary people, correctly, as unfair in the Wall Street Journal’s “Lending Falls at Epic Pace“:

U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry’s continued slide is making it harder for the economy to recover.

While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the Federal Deposit Insurance Corp. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.

Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010.

FDIC Chairman Sheila Bair said banks are “bumping along the bottom of the credit cycle” and that the number of bank failures in 2010 will likely eclipse the 140 recorded last year.

Yves here. There are a few problems with this picture. First, consider the throwaway “top tier banks are recovering faster” remark. Ahem, the 19 banks subjected to the stress tests hold 70% of deposits, which somewhat confounds the picture. However, it also fails to factor in the role of the implosion of the securitization market (although Freddie and Fannie have moved in a massive way as a stopgap on the housing front). So the actual contraction in credit extension, when the impact of the fall in securitization is factored in, is almost certain to make the picture even worse. And securitization, while it did include riskier corporate lending (collateralized loan obligations), the bulk of the volume was consumer and small business credit (recall that home equity and credit cards were a significant source of small business financing).

So the little guy is hit disportionately, and in cases, unfairly (I’ve heard stories of both very affluent people who used credit minimally who had credit lines cut, as well stories both in the press and recounted personally of people who were simply in the wrong zip codes, who were treated as credit risks due to the severity of area housing price declines even if they had largely or entirely paid of mortgages).

And of course, we have the elephant in the room, the seeming inability to come up with sensible mortgage modification programs (again, to a significant degree, due to the shift to securitization making it virtually impossible for the newfangled mortgage machinery to do anything on an individual basis, like assess creditworthiness, plus seemingly insurmountable intercreditor obstacles for borrowers who have second mortgages or HELOCs). The wee bit of bright light here appears to be that banks are getting more amenable to short sales.

Now the little guy versus big business distinction (where credit is more freely available) might be acceptable if there were evidence of shared sacrifice. But there is none. Wall Street bonuses are the most egregious offense, but there has been perilous little in the way of serious cuts in executive pay (John Mack’s zero bonus for three years running is a welcome and rare bit of symbolism, but even so, with the rest of the industry at the feeding trough, the austerity does not go very deep into the firm overall). And the financial press recounts on almost a daily basis the desperate efforts of banks to find new ways to fleece customersextract fees, which further stokes the resentment of an aggrieved public.

With the private sector debt overhang as great as it is, I doubt there is a way out of our mess that does not involve a period of debt restructuring and writeoffs. That process, no matter how adeptly handled, results in dislocation and has a chilling effect on bystanders (think of what it does to your mood to watch your neighbor’s house burn, even if you are unscathed. And mind you, I said neighbor, as in immediate neighbor, not the schadenfreude of seeing banksters or others seen as undeserving get their comeuppance).

Back to Wolf:

Unfortunately, nobody is seized of such a radical post-crisis agenda. Most people hope, instead, that the world will go back to being the way it was. It will not and should not. The essential ingredient of a successful exit is, instead, to use the huge surpluses of the private sector to fund higher investment, both public and private, across the world. China alone needs higher consumption.

Let us not repeat past errors. Let us not hope that a credit-fuelled consumption binge will save us. Let us invest in the future, instead.

I had a little e-mail chat with Swedish Lex, who offered his take:

The implicit conclusion of what Wolf and Johnson write is that we going forward need dirigiste economies and national and regional scale of types and magnitude that we have not seen before (or at least not in a very long time). In addition, the dirigisme would have to be closely co-ordinated globally.

I agreed with his reading of their views and noted:

I don’t see how we get close coordination. I had a talk with someone in from Hong Kong today, he is quite alarmed at China’s bullheadedness, wanting what it wants and devil take everyone else.

Plus we will not get dirigisme until the hold of the banking sector is broken. It will take a bigger bust to do that.

Swedish Lex interestingly sees another possible brake that may become operative prior to another bubble/bust cycle. He believes that the EU has much less tolerance for underwriting zombie banks than the US. The EuroBanks have written off less in the way of losses than their US peers, are also exposed to any EU sovereign debt defaults, and yet the biggest are still crucial parts of the international capital markets infrastructure (and therefore still tightly coupled to the very biggest US/UK firms). While any EU sovereign debt defaults could morph into a full blown crisis, the EU responses to the joint sovereign/bank debt overhang could lead to more radical changes in EU banking rules and practices that could blow back to the very biggest US banks in unexpected ways.

Print Friendly
Twitter0DiggReddit0StumbleUpon0Facebook11LinkedIn0Google+0bufferEmail

61 comments

  1. PhilK

    With regard to any bank or business entity which lends money, why not simply revoke their limited liability status. This would make shareholders and perhaps management liable for any losses and strongly encourage safer banking practices.
    Lloyds of London operate like this I believe. Might save the FDIC some money too.

  2. Ignim Brites

    So would we be better off by following Mellon’s advice? “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system.” Note there is nothing about liquidating the banks. One of the mysteries of capitalist economies is why liquefaction occurs so rapidly in the absence of government interference. We are hardly beyond the perception that this is driven by the animal spirit of fear. But isn’t this also driven by the economic judgment that in the future markets for many goods and services will be smaller and therefore these goods and services will be less liquid. The governments’ efforts so far have largely been directed to insuring that there will be a market for financial instruments. But isn’t part of the message of the meltdown, the global warming of the ice culture of finance, that the market for financial instruments was far too large, that these instruments should be far less liquid and should therefore be valued accordingly? So instead of trying to sustain the financial markets shouldn’t government assistance be directed toward sustaining say the housing market. Rather than a bailout of AIG wouldn’t it have made more sense to give a tax credit on mortgage interest? Instead of bailing out Goldman wouldn’t it have made more sense to suspend the SS payroll tax?

  3. Emma Saunders

    As usual, an interesting post. To be pedantic, though: Martin is our chief economics commentator, not editor. The editor is Chris Giles.

    Emma Saunders, FT
    Money Supply blog

  4. i on the ball patriot

    When your government is hijacked,
    Your credit is too,
    When your government is hijacked,
    Your cops don’t work for you …

    Nothing radical about Wolf, he’s a system scum bag mouth piece, as is the FT, and they both keep the debate neatly in the leverage vs de-leverage arena never really touching deeply on the real problem — that global credit is controlled by a cartel of wealthy ruling elite gangsters that have deceptively and corruptly bought and paid for government and they are using that ill gotten control right now to renege on social contracts of the past.

    We don’t need state controlled economies, we need democratically controlled states where the control of credit is in the hands of the people, not just a few scum bag ruling elite.

    Third scenario; the world goes Greece, tells all of these pussy elite fuckers to stuff it, overthrows them, and takes back control of their sold out governments.

    Deception is the strongest political force on the planet.

  5. DownSouth

    ► “He believes that the EU has much less tolerance for underwriting zombie banks than the US.”

    Well maybe the European rank and file have less appetite for bailing out corrupt and incompetent bankers, but I doubt seriously that sentiment extends to the European elite.

    I had lunch yesterday with a friend of mine who is a tour guide, but not your normal tour guide. He is German by birth, but his parents immigrated to Mexico when he was a young boy. He speaks German, English, Japanese and Spanish, and his clients are mostly wealthy Germans and Japanese, with a sprinkling of Americans, whom he accompanies on junkets of anywhere from a week to four weeks to tour the ancient ruins of Mexico. His services, needless to say, don’t come cheap.

    He claims his wealthy German clients are every bit as clueless as Americans as to the current situation. He defines our current economic event as the second, and last, crisis of capitalism, or more generally of liberalism. The first crisis of capitalism, true to Nietzsche’s foreboding, gave us WWI, the Great Depression and WWII. But from this chaos Nietzsche believed an elite race of supermen would evolve to a higher plane. This did not happen.

    The problem, my friend asserts, is that liberalism and its firstborn child, capitalism, are predicated on making nature conform to its construct. This is just the opposite of crafting a model that conforms to nature. Capitalism believes it can bend human nature, and indeed the entire biosphere, to its creed. This, my friend asserts, is not a sustainable model. And yet his German clients are as deeply indoctrinated into this dogma as are his American clients.

    1. i on the ball patriot

      Sick of the capitalism meme …

      One of the reasons that so many are so deeply indoctrinated in ‘capitalism’ is that ‘capitalism’ is a decoy mask for gangsterism. ‘Capitalism’ does not exist anywhere on the planet. What does exists is a pecking ordered system of vanilla greed crumbunism, quite natural in its own right, but now that system is way out of whack at the extremes due to the machinations of the few wealthy neo-con ruling elite who are working diligently to kick the rungs out of the middle of the crumbunist ladder globally so as to get to a state of pernicious greed crumbunism.

      That will be a simple two rung ladder with the ruled at the top, law enforcement on the bottom rung, and the seething masses at the bottom. Pitting the prudent against the not so prudent in a perpetual war (an effort that has been going on now for forty plus years), so as to strip them of their power and ability to make change, is a key part of their game.

      Those wealthy clients of your friend, on the upper rungs of the crumbunist ladder, would be less inclined to see the sea change that is in progress, nor talk about it if they did, stiff upper lip you know. But I can assure you that folks in scamerica, who no longer sit on a rung; have a very good idea of what a scam ‘capitalism’ is, see the ruse of decoy dishonest complexity in finance, and are fast learning the simple mechanics of what is going on.

      Key to positive change is to direct the anger towards the scum bag elite and their sell out minions rather than each other.

      Deception is the strongest political force on the planet.

    2. Siggy

      I’m intrigued by that last paragraph. I interpret your description of your friends occupation as being very class oriented. I say class where I mean it to mean income level and source; and, education level. Your friends central european cultural antecedents are interesting as well.

      It is my observation that your friends occupation exists at the margin and has certain inherent vulnerabilities to the general level of economic activity. Only the very wealthy can travel during times of economic duress. Consider Paris in the 1920′s. In dollar terms, things were cheap and a lot of Americans became expatriots. Post WWII, things got more expensive and a lot of expatiots moved elswhere.

      Capitalism is an ideology that is nowhere fully realized. State intervention is the norm. For the aware individual the task is to find a place and niche that is largely overlooked by the government. Your enemy is taxation and the welfare state that all governments are persuing. This pursuit is motivated out of an effort to control a largely thoughtless and ignorant populus.

      It continues to be a considerable consternation to me to observe young adults with huge unpaid student loans who have no clue as to the social and political orgins of the US. The more I see, the more I am convinced that the resolution of the current economic morass will not be achieved any time soon.

      It seems to me that the discussion is now in an area of class warfare where those of the financial industry are in the realm of being free game. It’s too easy to say bankster thief etc. It’s a bit more difficult to ask where did these people come from. What class structure is the basis of the orgin. Consider Lloyd Blankfein, lower middle class Brooklyn. Consider all of the players in Too Big To Fail. Not that many true blood bloods there. Consider the compensation standards of Wall Street.

      An important part of the, until now, American success has been class mobility. Get an education, its the basis of a better paying job. Create a small business, make it grow get a little real wealth, the ownership of an income producing enterprise. For those who understand the process, the money is a tool, a little bit of riches with which you buy the basis of wealth.

      Now it becomes very important that your money satisfy a critical function, that of being a store of value; i.e., preserved purchasing power. Along those lines the Federal Reserve System has failed and that is a major cause of the current distress. Moreover, given the global reserve currency status of the dollar the problem is global.

      Any system will work, if everyone agrees that the system shall work. One dissenter will destroy an inherently vulnerable system. In the case at hand the vulnerability is two part; a fiat currency and an addiction to fractional reserve based banking.

      Thank you for sharing your friends point of view. I find it very informative and helpful in understanding the theater at hand.

    3. Dan Duncan

      Not sure I follow this, so please accept the following questions.

      You write:

      “The problem, my friend asserts, is that liberalism and its firstborn child, capitalism, are predicated on making nature conform to its construct.”

      What’s the “construct”?

      Then:

      “This is just the opposite of crafting a model that conforms to nature.”

      Please give an example or some further description of a model that would “conform to nature”. And while at it, what’s meant by “nature”…is it “human nature”, “mother nature” or some other kind of nature?

      And sorry, just one more:

      You write: “Capitalism believes it can bend human nature, and indeed the entire biosphere, to its creed.”

      What’s the “creed of capitalism”?

      1. Siggy

        NitPicker!

        Nonetheless, valid points if you’re not benefited by a central european cultural background. If you do have that benefit, even then your points are well taken. On the other hand, the details of the inference are not the point. Labels like capitalism and liberalism have limited real meaning. What once was a liberal has becomne something else.

      2. DownSouth

        ► “What’s the (capitalist) ‘construct’?”

        The most basic construct of capitalism is homo economicus.

        ► “Please give an example or some further description of a model that would ‘conform to nature’.”

        There are none, especially when it comes to human nature. Human behavior is entirely too complex to model with any degree of reliability. We’ve come much closer to constructing models to describe and predict physical nature, but even those can be quite complex.

        ► “What’s the ‘creed of capitalism’?”

        In the words of Robert Heilbroner:

        Two great problems absorb Adam Smith’s attention. First, he is interested in laying bare the mechanism by which society hangs together. How is it possible for a community in which everyone is busily following his self-interest not to fly apart from sheer centrifugal force? What is it that guides each individual’s private business so that it conforms to the needs of the group? With no central planning authority or no steadying influence of age-old tradition, how does society manage to get those tasks done which are necessary for survival?

        These questions lead Smith to a formulation of the laws of the market. What he sought was “the invisible hand,” as he called it, whereby “the private interests and passions of men” are led in the direction “which is most agreeable to the interest of the whole society.”

        1. DownSouth

          In the tradition of Hellenistic thought which we inherited and to a large degree operate within, both capitalists and communists are stoics. They offer somewhat different solutions, but they are both equally convinced that they are the possessors of indubitable and veridical knowledge.

        2. Dan Duncan

          Thanks for the reply, DownSouth.

          I think it’s all a bit muddled….

          First, there is the lamentation that capitalism is not a sustainable model…

          Only to be followed up with the acknowledgment, “Hey, it’s impossible to construct a model, anyways, because humans are too complex.”

          So what then?

          No model? Hunt and gather?

          Your friend is using empty Leftist rhetoric and trying to clap with one hand…which, I assume of course, is his left one.

          1. DownSouth

            Dan Duncan,

            You say: “Your friend is using empty Leftist rhetoric and trying to clap with one hand…which, I assume of course, is his left one.”

            There’s where I believe you’re wrong. In the Hellenistic tradition, he’s very much a skeptic.

            Pretty much everything I hear from you, however, is stoic, even though you like to masquerade as a skeptic or an Epicurean.

    4. john bougearel

      DS,

      Your friend articulates the crisis of capitalism exceedingly well and is worth reiterating in its entirety here:

      The problem, my friend asserts, is that liberalism and its firstborn child, capitalism, are predicated on making nature conform to its construct. This is just the opposite of crafting a model that conforms to nature. Capitalism believes it can bend human nature, and indeed the entire biosphere, to its creed. This, my friend asserts, is not a sustainable model.

      What in short your friend is saying is that that the foundation for a new economic model must be ecologically based. Any economic model that exploits, manipulates, mechanizes the biosphere is not a sustainable model.

      A paradigm shift in our economic modeling is required of us living in developed countries. That can only be made possible as and when market forces overwhelm policymakers ability to thwart the negative consequences of the private and public debt overhangs from the last credit creation cycle that imploded in 2007-2009.

      Most of the resulting debt overhang from the private sector will have to be restructured in 2011-2014, as and when that takes place, thereby shrinking the private sector by say 30%. As and when that restructuring crisis happens, only then will I believe it possible for debtor nations to consider embracing alternative economic models that have an ecologically sound foundation.

      It is a dim hope that such a structural shift in our economic modeling is possible, but a hope nonetheless.

    5. EmilianoZ

      Of course this “elite race of supermen” materialized! Who do you think our modern alpha male financiers are? For pete’s sake show some respect to your masters! What happened to groveling and squirming like a worm?

  6. Mickey Marzick in Akron, Ohio

    Let’s see, Monsieur Wolf’s prescription would appear to consist of three pillars: [My comments are restricted to the United States only; if applicable elsewhere remains to be seen]

    1) Writedowns or as Yves stated the “purging of bad debt”? To the extent that it has not happened yet why will it now? It requires the ruling elite to sacrifice some of its own – the FIRE sectors – on whose back many a fortune has been made. It also presumes that this will unfreeze credit markets. But is there a need to borrow? How many firms have concluded that demand will remain “depressed” for years and slashed capacity to reflect such thinking? Likewise, consider that much of the deficit spending up to this point has been designed to maintain aggregate demand – consumption – in the hope of preventing deflation and the subsequent descent into an ACKOWLEDGED depression, bringing US to the second pillar;

    2) Additional deficit spending for a prolonged period, but for investment purposes this time rather than consumption? A second stimulus, if you will, for infrastructure and job creation projects in the hope of expanding aggregate demand… Deficit hysteria, whether justified or not to acknowledge MMT proponents, is on the minds of both policy makers and Main Street. It will be a hard sell, particularly as it is joined at the hip to the third pillar;

    3) DIRIGISME – a more pronounced role by the government in the economy? After 40 years of “government is the problem, not the solution” how feasible is this in the United States at the present time? Bailouts are one thing but the government “steering” the economy in a particular direction – green technology, energy infrastructure/independence for example – will reinforce complaints of “crony capitalism” even more. And there certainly will be more than a grain of truth to this. DARPA may have been this country’s de facto industrial policy for much of post-WW2 period but it was well “hidden”. Now, industrial policy would be front and center with who wins and who loses more transparent.

    But the biggest and most dangerous obstacle to such “dirigisme” is the risk it poses to the ruling elite’s ideological hegemony. For it would constitute a clear and unmistakable repudiation of the neoliberal supply-side economic policies that have steered the US/global economy for the past 40 years for which they are responsible. Spoon fed on laissez-faire, less regulation for more than two generations such repudiation will not be unwound/undone without risk and cost. It will signal a split among elites, particularly among segments of the Republican party. But the Democrats won’t fare much better. Likewise, it will fall hard on tenured faculty in business schools and economics departments who have spewed such swill and argued on its behalf. Now suddenly such thinking will the subject of ridicule and disparagement by undergraduates! It will cut across the “leadership” spectrum – political, business, academic, religious – leaving none untouched.

    A good deal of cognitive dissonance will be required to make this happen in this country between both the rulers and the ruled which is why Mr. Wolf’s proposals would appear to have been made in a vacuum devoid of its contemporary political/ideological realities.

    If ever there was a prescription for a “LEGITIMATION CRISIS” this is it. More astute members of this ruling elite are aware of such a possibility and will plan accordingly. That WE can count on!

    1. jake chase

      Of course you understand Hayek explained how and why all this would happen. Don’t blame capitalism, which has not existed since the 1870s. It is the collectivist, altruist, nanny government, the Federal Reserve swindle, the permanent war machine which now consumes half the national product and supports the continued industrial concentration and financial monopoly which cannot exist without hand in glove government support. To expect a solution from more government programs is to invite more croneyism, more demagogues, more fascism, ultimately an American fuhrer. Busting up the monopolies and the war machine, shrinking the financial sector, ending the globalization growth fantasy, restoring a self sufficient economy supporting an independent population engaged in productive work, that is the challenge and it is political. Or we can rely on doubletalking mice like Bernanke and a corrupt Congress and an impotent Executive capable of nothing more useful than blowing smoke.

      It’s time for a constitutional convention. Nothing else stands a chance.

      1. Mickey Marzick in Akron, Ohio

        Jake,

        No I don’t understand how Hayek foretold what you’re describing. If anything, Hayek missed the boat because he never considered the possibility that the modern global corporation might actually come to rival the state, if not surpass it. It’s the other elephant in the room that you Free-Market Utopian Anarchists [FMUA] refuse to see! The possibility that the large corporation could threaten freedom and liberty more than the “nanny state” escapes you. Why? Is such an entity bound by the Constitution of the United States? NO! When’s the last time you exercised free speech with your employer? Are your opinions even solicited? Or does private property preclude such democratic procedures. You know damn well it does!

        Do global corporations plan on a scale that requires the marshalling of resources, personnel etc that necessitate collectivist bureacratic organization on a comparable scale? And if two or three come to dominate a particular global industry who or what is going to restrain them from trampling you, the individual? The only right you have in such a corporation is to leave – employment at will – if and when push comes to shove. Or is freedom to starve inherent to your definitions of FREEDOM and LIBERTY?

        Ask yourself, what came first in this country, the large modern corporation – railroads – or large government? The New Deal only came in after 1932. By then the railroads had consolidated and were on the road to ruin. The New Deal was in response to the failure of the private sector much like today. The growth of the Federal governemnt is in direct response to two primary factors; 1) the failures of the private sector resulting in additional intervention and regulation and 2) war! As for the former, have you ever read Sinclair Lewis’s THE JUNGLE? Is child labor permissible? Even Hayek would be embarassed by your AHISTORICAL assertions. Yes, I’ve read the Road to Serfdom, have you? Hayek never said government did not have a role to play, did he? In some instances, he even conceded the need for government intervention, correct?

        Moreover, at the time Hayek was writing – 1940-41 – his historical referents were Nazi Germany and Stalinist Russia. Without “planning” could the Allies have defeated Nazi Germany?

        So, we should dismantle the federal government, say reducing it to the size and scope of 1870, but leave the global corporation intact, trusting it to do the right thing? Because markets are self-regulating, right? Talk about the other road to serfdom…

        And if Hayek and Von Mises got it so right, why doesn’t Austria even subscribe to their theories. Why? Because that’s just what they are – theories or models meant to approximate reality, but never fully explain it.

        Let me repeat myself: FUNDAMENTALISM of any kind – secular and/or religious – when taken to its logical conclusion is TOTALITARIAN! Put Hayek back up on the shelf with Ayn Rand!

      2. gordon

        I think Mickey and Jake have more common ground than perhaps they realise. Jake says: “To expect a solution from more government programs is to invite more croneyism, more demagogues, more fascism, ultimately an American fuhrer”. Now, Mickey might say that a solution from government programmes need not lead that way, but before wading into Jake he should pay attention to something else that Jake says: “Busting up the monopolies and the war machine, shrinking the financial sector, ending the globalization growth fantasy, restoring a self sufficient economy supporting an independent population engaged in productive work, that is the challenge and it is political”. I don’t see how all that can happen without some form of Govt. action; it is, as Jake says, political.

        So it looks to me as though the difference of opinion is more about what kind of Govt. action – and what kind of Govt. – than it is about any Govt. action. Or about Hayek, for that matter, who here again is fulfilling his historic role of red herring.

        1. Mickey Marzick in Akron, Ohio

          Gordon,

          Jake interjected Hayek into my response regarding Wolf’s blueprint for the mess we’re in which I said was so divorced from political/ideological realities in this country that it seemed more like wishful thinking than anything else. I don’t see where Hayek figures in this particularly when his ideas have been ascendant for much of the period in question. Government got out of the way and the result is… what? How does Hayek explain this? Blame the government! It’s the latter’s fault because the market failed because the government failed… a circuitous form of reasoning.

          Frankly, Hayek had nothing to do with the line of reasoning put forward. One could easily argue that Marx predicted this most recent crisis but does that really add anything to the debate? I can pull out THE ROAD to SERFDOM by Hayek or DAS KAPITAL by Marx anytime I want as they both sit on one of my bookshelves. But neither explains the role of the global corporation vis-a-vis the modern state or vice versa satisfactorily. Might as well bring God into the debate as punishment for our sins… It was prophesized in the good book, you know.

          In closing, I’m not really interested in what Marx or Hayek have to say on the matter insofar as that in itself does not validate either’s theory in its entirety. I’m much more interested in what other living human beings have to say – not what dead people have to say.

      3. Mickey Marzick in Akron, Ohio

        Jake,

        Just to follow up, when you state:

        “Busting up the monopolies and the war machine, shrinking the financial sector, ending the globalization growth fantasy, restoring a self sufficient economy supporting an independent population engaged in productive work, that is the challenge and it is political.”

        And how is this going to be achieved without more government, even if only temporarily? By waving the invisible hand perhaps? To the extent that the challenge is POLITICAL as you state then government is integral to your desired solution by definition, is it not? Or what do you mean by political if not the government? Syndicalism with trade unions and co-operatives perhaps? Perhaps you’re closer to my heart than I thought.

        Jake, you want to go back – RESTORING – to a simpler time when neither the state nor the corporation intruded in the individual’s life, something akin to the family farm or business largely confined to a locality or region circa 1820? – not the nation or world of 2010. For now I will characterize such a view as romantic … There are other words I could use.

        Wishing you well.

  7. Jim in MN

    You can mark the timing of this ‘crisis’ by the money that was made in the run-up. Take a long term chart of the Dow. Put it in linear, not logrithmic scale. Now just stare at it (I did this beginning in 1998 or so, it’s a very enlightening experience).

    The trend line neatly doubles in 1980–the Reagan Revolution, including the Gucci Gulch tax reforms and the birth of the IRA, combined with the death of the pension (not everyone was, ahem, informed of this).

    The trend line neatly doubles again in 1994–the Pinstripe Democrats or Wall Street Democrats AKA the DLC–Clinton, Rubin and Summers to name the main cast.

    The rest is instability, bubbles, crashes, and indeed history.

    This is the Big Show. The people at the top have succeeded in an unprecedented seizure of wealth and are now wrapping up the ‘commanding heights’ of the industrial economy, along with enough security apparatus to give the rest of us a run for our money (cough).

    This is like The Blob from a political economy/organization as organism perspective. Whatever happens, no matter how dire, nigh unto a civilization-ending series of events (this has all happened before you know), it will all be met with a concerned appearance but, inevitably, a very stiff arm.

    Default is the only lesson these dangerous nerds will ever understand. The common citizen can only withdraw, get anything of value as far from NY/DC or associated organizations as possible, and maintain a hyper-active form of involved political citizenship. We have yet to enter the next stage, with a very angry and possibly more aware polity facing off against an uppity elite. Much of this energy is being diverted into a witch hunt against public unions and benefits but this will not prove to be a big enough target.

    We need to find common ground around a way forward, involving some basic items like tax and spending reforms, but more importantly defanging the FIRE sector in a major way. Zero Hedge mentioned the transformation of banking into a public utility. That would be one smart move.

    Time to stop freaking out and start moving. We can use the power of the state to crush just about anything these days. It is Frankenstein’s monster. We just can’t let fear or greed blind us as it is blinding the elites.

    Their own monster can destroy them–the question is, will it be steered by the people in a conscious fashion, or will the blundering idiots that built it be driving as it smashes the entire town?

    “When the going gets weird, the weird turn pro”
    –Hunter S. Thompson

    “They call it THE EARTH
    Which is a dumb kinda name
    But they named it right
    ‘Cuz we behave the same”
    –Frank Zappa

    1. MyLessThanPrimeBeef

      I thought the saying was (and I made it up) when you are mad:

      Don’t get even,
      Get odd!
      Be strange.

      1. Jim in MN

        MLTPB:

        Very neat. My favorite ‘self-quote’ (well, OK, one of them) is:

        It takes all kinds to staff a planet.

        –Jim in MN

    2. gordon

      “Zero Hedge mentioned the transformation of banking into a public utility. That would be one smart move”.

      You may not be aware of Ellen Brown’s website, which seems to be dedicated to keeping the idea of public banking alive:

      http://www.webofdebt.com/articles/campaigning_state-owned_banks.php

      Of course, there was a brief flurry of discussion of public banking end 2008/early 2009, and I’m glad to see a slowly growing revival of interest.

  8. Mogden

    Calls for DIRIGISME are badly mistaken. How can anyone believe that our disastrously mismanaged and counterproductively incentivized government could handle an even bigger role in the economy than the gigantic role it has already bungled badly?

    1. reprobate

      I assume this is a trick question.

      Because our our disastrously mismanaged and counterproductively incentivized financial services sector just drove the global economy off the cliff.

  9. S

    The elites, read the bakers, will maintain the upper hand with bank holiday always an option which would see depositors line up in the quick turn liquidation process pro rata perhaps. Note the “bankruptcy” of CIT and how quickly it was turned out as a going concern. Such would be the model to keep the structure intact.

    As for sustaining something other than the financial products look no further than the GSEs, the auto companies and the auto supply chain, the steel companies etc. The problem is not supporting these industries per se rather it is supporting the stranded capacity in the ground as a mechanism to keep asset prices across the economy inflated above equilibrium to in turn support the bank balance sheets. It is that inflationary/reflationary cream that is skimmed by the complex. Consider the idea of buying a house for cash loan/values of say 20%. Think the CPI went negative last month?

    Wolf mimics the sophomoric “argument” that deficit spending can go on forever because the US (and surely he includes the UK in that definition) are simply too big to fail. Perhaps. However it is worthwhile to consider the opposing view which says that the incumbent structure that he seeks to perpetuate with such “solutions” is the sound of his one hand clapping. One need only look at the relative GDP per capita differentials and the pervasiveness of communications (catch the frontline last night on behind Taliban lines). Wolf speaks from an antiquated unipolar perspective that is a relic. Did not Russia rolling tanks into Georgia punctuate this point.

    Any such paradigm as he describes would have to be accompanied by painful geopolitical concessions which are as unpalatable to those clinging to empire. The Chinese central banker said it best when he concluded that there is simply not enough savings in the world to fund the US.

    At what point does the muddle through crowd simply throw in the towel. The actions by the fed show only one thing and that is the world is zero sum. those who mistake Fed benevolence for anything other than self preservation ought to take the rose colored glasses off. The outcome looks binary at this point: (1) deflationary collapse accompanied by debt jubilee, bank holiday etc. or (2) hyperinflationary outcome as the race to keep the nominal water mark steady accelerates the race to debase.

    Those focusing on the banks miss the bigger picture. This is about the remaining US industrial complex (read national security) and the relative inability of the globalization architecture (US, WTO, IMF, EWB) etc to penetrate the growth markets to a greater extent both for financial intermediation and even consumer goods. Credit bridging to more “natural” eastern consumption was the plan, but the assumptions were always way to ambitious. A massive goodwill write-down is in order but it would have serious geopolitical ramifications. To wit GDP grew $6T or so since 1999 vs. no job growth.

    What Wolf essentially describes is similar in may respects to the fallacious arguments that failing institutions make (read Citi) about keeping DTAs or other goodwill on their balance sheet as money good “assets”. You can always argue out years NPV to window dress, obscure and obfuscate especially with a constituency having a 30 minute attention span. Wolf makes a parallel argument about the US economy – only his is more flawed in that the entire framework he uses is built on some flimsy confidence argument and indispensability. But as De gualle said, the world graveyards are filled with the indispensable.

    Wolf’s failure outlook appears very rosy indeed.

  10. john bougearel

    Wolf opens the intro to his article “The World Economy Has No Easy Way Out” as indicating that “The conventional wisdom is that it will also be possible to manage a smooth exit. Nothing seems less likely So let us consider the endgame” with respect to fiscal and monetary stimulus.

    Martin adds that “if governments had tried to close fiscal deficits as they attempted to do in the 1930s, we would be in another Great Depression: So how do we exit?”

    Then Yves asks how can you “reignite the credit engine” when the financial system is undercapitalized?

    In my humble estimation, the implosion of the private sector has to come to its natural conclusion before fiscal and monetary stimulus can come to an end. The natural conclusion of the private sector implosion can not come to its end until the private sector has restructured the loans created during the credit creation cycle of 2004-2007. Specifically, most of the commercial real estate, residential real estate, LBO and M&A loans that were created in 2004-2007 will have to be restructured in the 2011-2014 window. When that restructuring cycle is completed, the private sector will have shrunk and be prepared to grow once again as it emerges leaner and meaner. That is the hope anyways.

    Once that restructuring cycle has completed, only then can the fiscal and monetary authorities begin to execute an exit strategy. Yes, as the global economy moves through the private sector restructuring, there will be rolling waves of sovereign debt crises.

    The rolling sovereign debt crises will be worsened by the predatory abuses of the private sector speculating through sovereign CDS vehicles on sovereign defaults. One of the worst outcomes of the financial reform of 2008-2009 was the failure of policymakers to rein in the speculative abuses of the private sector to worsen the private sector and sovereign/public debt crises.

    Can anything be done to stop the speculative abuses on the public and private sector debt crises between now and 2011-2014, at the very least, a stop has to be placed on speculative abuses of sovereign debt crises, like naked short selling, it just has to be stopped. Stop that, and the mounting sovereign debt crises will see less severe outcomes than the present trajectory we are now on.

  11. Charley

    Instead of calling it DIRIGISME, why not give it its popularly understood name: central planning. The problem with central planning is that it still does not touch on the underlying problem: hours of work must be reduced.

    When the Soviet Union resisted reducing hours, and instead went for neoliberal reform, the economy imploded. There is no logical reason not to think this will not be the case here as well.

    Here: http://tinyurl.com/yh4q38q

  12. Charley

    Wolf: If the US began producing goods, and China began consuming them, everything would improve.

    Okay, fine. Brilliant, in fact. I wonder why it didn’t happen before. Could it, perhaps, be that manufacturing was off-shored to employ low waged labor.

    Now, tell us how this process is reversed?

  13. MarcoPolo

    Lost my post, the essence of which was to say that neither of Mr. Wolf’s mechanisms for growing out of debt, increasing demand in the surplus countries or increased investment in the deficit countries is realistic.  The latter because the institutions for making good productive investments which might be used to amortize the debt do not exist and the formation of those institutions will be hindered by the existing rent-seeking anti-investment instutions which must be replaced and who will fight that replacement tooth & nail.  
    And if you think any of our political instutions are capable of dirigismeing another route I’ve got a bridge I’d like to sell you.

    It will fail.  Change has to come from within each of us individually. Call it class warfare if you like.  Though it isn’t so much about class and there is good reason not to be overly inflamitory.  I am optimistic there will be pockets of perparedness; the sense of community that globalization has displaced replaced by the necessity of acting in concert to move forward.  One thing that surprises me is that it is those very traders of the old paradigm who tell us how important it is to know when to cut our losses.        

           

    1. Mickey Marzick in Akron, Ohio

      MarcoPolo,

      I agree that change begins with each and everyone of us.

      If I have learned anything it’s that change directed from the top down is a recipe for authoritarianism as it requires coercion – spiritual and/or material – to maintain its grip over the population. Capitalism is no exception! And I suspect that this will be the case far into the future.

      But one day at a time, one person at a time on a long march – a never ending continuum. Say you want a revolution then you have to start with yourself. It begins in the mind and then involves a radical change of heart from which there is no turning back because its so deeply rooted in your soul.

      Like a drop of water that eventually becomes a tidal wave it must then bubble outwards and upwards. But once a tidal wave it sweeps all before it… as if the the tide of history had been foretold. Revolutions always take place in the mind /heart/soul way before they make it to the street. In fact, the former may render the latter unnecessary depending upon its breadth and scope.

      It took Christianity over three hundred years to conquer the Roman Empire but it eventually triumphed… It will be a long march.

  14. hereandnow

    Marco Polo, Your last sentence is intriguing to me. Please expand that thought if you feel so inclined. Thanks.

    1. MarcoPolo

      Uh, cutting losses?

      It’s not just about the mal-investment, the writedowns and restructuring. The money that’s already gone. It’s a systems failure. The old paradigm is one of too much money chasing too few investment opportunities. The number of those opportunities being limited to those on the S&P AAA lending list. We do not need more speculative mal-investment in already liquid securities anticipating a greater fool. I would have you believe that the short-term nature of that hot money is anti-investment. That it does nothing more than pillage future earnings by moving those flows forward – at a discount. 

      Cutting losses means throwing off that yoke too. Get it?  I’m maybe not much of a writer. It would take me ages to get this down in detail.  Couldn’t do what Yves does.

    1. Charley

      I don’t know who Swedish Lex is, but his ideas sound very similar to Dani Rodrik’s Capitalism 3.0.

      There are two big problems with his view:

      1. The US would have to give up its world reserve currency
      2. The US would have to give up its military budget

      Personally, I don’t see a crisis big enough to allow for that that does not also bring the entire global economy to a standstill. unfortunately.

  15. Mo

    Love reading all the anti-capitalist screed.

    When is the last time we had real laissez-faire capitalism and where is the evidence that government has helped failures of the market?

    FDR?

    Gosh, there was a deflationary recession in 1920-21, and some of us believe that in spite of the later-very-interventionist Herbert Hoover’s Unemployment Conference of that time, there was not a whole lot of govt interference in the economy, which managed to right itself in a relatively short time. Of course, the govt was a very tiny part of the economy relative to today anyway.

    And that came after the Fed was in place. Seems it didn’t quite stop that recession, nor the far worse Depression that came later, and gosh, some folks blame the length and depth of the Depression on the fascist or socialist (call it what you want; FDR and his minions admired facets of both Stalin’s Russia and Mussolini’s Italy)interventions, the constant tinkering and incessant changing of the rules, so businesses or individuals could not plan. Hmmm….biggest tax hike in history at that time, too, but that was Hoover’s in 1930 or ’31, and then there was that not-very-laissez-faire Smoot-Hawley Act, too, which some see as just a minor problem.

    Yes, Hayek felt, as I do, that there was a role for government, both as a true safety net for those truly unable to help themselves…and he was attacked for that, but it’s an arguable point…and as an entity that would guard against criminal depredations of businessmen; we need a framework of law, of property rights, and an effective way to police those. Obviously, the question is where to draw the line on how much the govt should do, and for many of us, we long ago crossed that line, where govt became a qausi-actor and faux-producer in the economy. And, instead of guarding AGAINST the bad guys, often SHIELDED the bad guys.

    That’s called crony capitalism, and we have it now in spades. But it’s not what most of us would call real free markets. The collusion of Big Govt and Big Business could also be labeled fascism, and is actually antithetical to capitalism. But just as liberalism came to have a bad name, having been co-opted by anti-liberal anti-market big govt types, instead of representing a more libertarian or freedom agenda, so has capitalism, which is now conflated with this insane “third way” NON-free market crony fascism.

    THis bullshit that the government is out to help us, will help regulate anything…even at that, which should be its role, it’s extraordinarily ineffective. It’s more akin to the police…great after the crime, but not necessarily going to prevent a home invasion the same way an alarm system, great locks on the door and perhaps a 9 millimeter handgun for self defense will!

    The failure of the world economies in 2007-present is NOT a failure of free-markets. That is just plainly ASININE. It was a failure of government more than it was of anything else. This all happened either with the collusion of government, the foundation of government and the aiding and abetting by government. Trillions spent across the world for failing welfare states. Moral hazards gone out the window. Fannie Mae and Freddie Mac. Community Reinvestment Act. (No, I dont’ blame the whole thing on housing nor on the CRNA, as some do, but it certainly didn’t help).

    When this all fails, let’s go to where we should have gone a long time ago. Truly competitive markets in almost everything, with the government being the referee, but not unfairly choosing which team to support. Get the government out of being a business itself, as it has no incentive to ever do the right thing.

    Give capitalism, real competitive capitalism, a real chance. We haven’t seen it in our lifetimes…or we have, but only in certain goods. High tech gear…I’m old enough to remember simple calculators, expensive as hell…now, give-away items. Computers. The myriad of food products at the supermarket. Fresh, huge, plump juicy blueberries at Trader Joe’s, in deep winter, from Chile.

    Was this all brought to you by dirigisme? BULLSHIT.

    Most of the good aspects of what we have and own were brought to you by competitive and greedy capitalism. Govt can be the cop to try to rein in some of the criminal acts that stem from greed…I don’t think anarchism and private courts WILL work for everything, and I think Hayek was correct in not going down the same path as say, a Rothbard. But we have given far too large a role to government and then blamed the wrong actors in the economic play.

    Finally, Big Corporations cannot take over the world without the backing and help of Big Govt. Monopolies can’t usually last or come into being without the aid of government. GET GOVT out of business (hey, btw, the NHTSA did such a good job with TOyota, didn’t they? We can blame Toyota all we want, and they might deserve it, but where the hell were the regulators? Wasting our money. Thank you govt!

    1. DownSouth

      Yes, of course. What we experienced during the past couple of years was most definitely not a crisis of capitalism, but a crisis of communism.

      Everybody knows it began with that socialist Reagan, and every president since has been successively more Marxist.

      Between the implosion of Soviet Russia and the Great Financial Crisis, how many more Marxist catostrophies do you need to prove that communism doesn’t work?

    2. Mickey Marzick in Akron, Ohio

      Mo,

      That’s a good question. Where in the hell were the regulators? Drawn from the very same industry that decried the need for regulation. Then when they failed to regulate the industry because they were all drinking from the same free market punchbowl laced with FINANCIAL DERIVATIVES of ECSTASY, it’s the government’s fault! Industry capture of the regulators. Ever hear of that concept? Say it ain’t so, Mo?

      The market did not fail because the government failed to regulate the market that didn’t need to be regulated in the first place… but that it crashed and burned anyways is the government’s fault. Maybe that’s it… the MARKET didn’t really crash and this is all a figment of the anti-capitalist screed imagination. Say it ain’t so, Mo!

      You lost me somewhere with your circular reasoning. Want to run that by us again?

    3. attempter

      Moral hazards gone out the window. Fannie Mae and Freddie Mac. Community Reinvestment Act. (No, I dont’ blame the whole thing on housing nor on the CRNA, as some do, but it certainly didn’t help).

      When I read this part I wasn’t sure whether or not you were joking. It would’ve helped if you’d added the mortgage deduction and all the other incentives and subsidies for suburban sprawl and the personal car.


      Give capitalism, real competitive capitalism, a real chance. We haven’t seen it in our lifetimes…or we have, but only in certain goods. High tech gear…I’m old enough to remember simple calculators, expensive as hell…now, give-away items. Computers. The myriad of food products at the supermarket. Fresh, huge, plump juicy blueberries at Trader Joe’s, in deep winter, from Chile.

      Was this all brought to you by dirigisme? BULLSHIT.

      Ah, neoliberal globalization. Heavily statist. Unless your tone there is meant to be severely sarcastic, now I KNOW you’re full of it.

      Someone like you probably shouldn’t mention Chile. It’s poor salesmanship.

      1. Ingolf

        John Kay (FT columnist and economics professor) in ” The Rationale of the Market Economy: a European Perspective”, makes many of the same points as Mo, albeit in a more nuanced fashion.

        Because the issues are so important (and controversial), and because most probably won’t get around to reading the whole essay, I’ll quote from it at some length. For anyone who can be bothered I think you’ll find it well worthwhile.

        “So what are the real strengths of the market economy? There are three components. Prices act as signals; the operation of the price mechanism is a better guide to resource allocation than central planning. Markets function as a process of discovery – the chaotic process of experimentation through which a market economy adapts to change. And markets yield benefits from the diffusion of political and economic power. Prosperity and growth require that entrepreneurial energy should be focussed on the creation of wealth rather than the appropriation of other people’s wealth. Decentralisation of authority and deconcentration of activity limit rent seeking.

        In what we teach, in what we say, in what we do, in our economic research and, most importantly, in the policies we adopt – we put too much emphasis on the first of these elements – prices as signals to guide resource allocation. We do this at the expense of the, possibly more important, second and third elements – markets as process of discovery, markets as mechanism for the diffusion of political and economic power. In consequence, both supporters and critics of the market economy often confuse policies that are pro-business with policies that are pro-market. This confusion has undermined the social and political legitimacy of the market economy. Serious policy errors have followed from mistaken, or at least incomplete, understanding of how a market economy really works.

        One central theme runs through all three strands of argument: that of disciplined pluralism. When prices act as signals, decentralised enterprises and decentralised information are brought together to create a coherent result. Markets as a process of discovery are based on freedom to experiment, combined with discipline: unsuccessful experiment is acknowledged and terminated. Markets as a means of decentralising power illustrate how political and economic pluralism are closely associated in the achievement of an open society.”

        Kay elaborates on the dangers of economic concentration with particular emphasis on the potentially lethal grip on political and economic power the financial sector has achieved.

        “The ability of a market economy to channel the desire for acquisition into channels that create wealth rather than extract it depends on a range of steps that both prevent the concentration of economic power and limit the terms of access to such concentration. Required are constraints on the economic power of the state, constraints on the concentration of economic power in large businesses, constant vigilance at the boundaries between the state and business, and a mixture of external supervision and internal restraint which prevents individuals who pull levers of economic power from using these levers to direct the revenues that arise to themselves.

        Because the last decades have confused a pro-business stance with a promarket stance, we have emphasised some of these conditions at the expense of others. Most European countries have constrained the economic role of the state, largely with an eye to an attack on one focus of rent-seeking, that by organised groups of public employees.

        Large businesses, or groups of large businesses, use the leverage that power gives to strengthen established positions and enhance the economic and political power still further. Financial services and intellectual property are the most important battlegrounds today. Common to both is the malign consequence of viewing the industry through the eyes of established firms.

        The current problems of the financial services sector are too familiar to require much elaboration. Governments of the world have pumped unimaginably large amounts of money into the system. Directly through recapitalisation and purchase or underwriting of so-called toxic assets, and more substantially if indirectly through wide-ranging implicit and explicit guarantees of liabilities. Even if these explicit guarantees expire, a ‘too big to fail’ doctrine has been established which means that implicit guarantees persist indefinitely. The criteria needed to qualify for these guarantees are, essentially, that the firm is large, well established, and unsuccessful commercially. It is difficult to think of a policy more directly contradictory to the central dynamic of the market economy.

        Behind that policy lies the central fact of modern political life – that the financial services industry, and particularly its investment banking arm, has become the most powerful political force in the United States and other countries. The reasons are clear enough: the rents available in the financial sector have attracted much of the ablest talent in the two countries and created a generation of financiers who are both smart and wealthy.”

        Finally, his concluding paragraphs.

        “Determining the future of any industry is a matter of perpetual small scale experiment, mostly unsuccessful, and we will all be surprised to discover which developments turn out to be seminal. It is almost axiomatic that committees of wise people from the industry, and consultations dominated by vested interests and their acolytes, will not include those who are likely to be the important players in the development of a rapidly changing industry. The job of government should not be to offer monopolies to encourage very large firms to invest, or to attempt to shape the industry, but to give maximum opportunity for the industry to shape itself.

        There are clear common elements in what is happening, and what should be happening, in both financial services and media. There is a need for policy, but policy aimed at supporting the market, not supporting the industry: policy towards breaking up the industry, not promoting concentration: policy towards facilitating entry, not conferring artificial advantages on established firms: policy towards removing distortions of competition, not creating them.

        What we too often miss in policy making is the wider dimensions of the power of markets. By focussing on the first pillar – prices as signals – competition policy underestimates the strength of markets as a process of discovery, and the vital political and economic role of markets in restraining concentrations of economic power. Markets are not a well-oiled machine: they more closely resemble a constantly changing, adaptive biological system. Pluralism is their motive force, their essence is chaotic, their development inherently uncertain. If we could predict the evolution of markets, we would not need markets in the first place.”

        1. Mickey Marzick in Akron, Ohio

          Ingolf,

          Good morning! Read your comment and must say that if I wanted to reread C. B. Macpherson on “Possessive Individualism” or Lindblom and Dahl’S “Politics and Markets” I would have. Nothing new here.

          Just one question can you provide an example of a pro-market decision that is not pro-business? And honestly, if breaking up the TBTF financial institutions is the target here, it clearly is government intervention on behalf of some other, I’m assuming, smaller financial firms, correct? But it’s still pro-business. Is this distinction between pro-market and pro-business useful or does it muddy the water?

          To be more HISTORICALLY specific, the repeal of Glass-Steagall was deeemed pro-market, wasn’t it – as financial reform to enhance innovation and blah, blah, blah…? The rest is history. It also happened to be pro-business in favor of already established commercial banks and investment banks. So which was it pro-market or pro-business, both, or none of the above? You would only know if a policy was pro-market but not necessarily pro-business in hindsight, correct? Like now when it’s too late. But that depends then on which sector of the business you’re talking about.

          Perhaps the larger question should be asked, why does the government have to be pro-market at all or pro-business – in the business of regulation to begin with? Can’t we just all get along? Fiscal dependency on the private market for its revenue to redress the externalities generated in the course of capital accumualtion, perhaps? Something in the market necessitates government regulation/intervention, why? What is the source of this “flaw”?

          It seems to me that it is incumbent on the posters making reference to laissez-faire capitalism and capitalism to provide a concrete historical example of such an idyllic market/business environment that can then be evaluated on its historical merits – not its purported theoretical merits. Otherwise, those of us a bit more skeptical of such claims have no way of challenging either – the historical or theoretical merits. In other words, where’s the historical beef?

          I suspect that the proponents of such an argument will not specify a historical example because of one or two reasons: 1) it does not exist; or 2) the example cited, England 1750-1830?, is fraught with the downside/adverse consequences of capitalist production – the Satanic Mill with 16-hour days and child labor, not to mention the environmental degradation that accompanied it. But these are externalities not to be discussed or to be dismissed lightly on the premise that we’re all better off as a result. That’s the beef! But where’s the historical beef?

          1. Skippy

            Will the northern Euro/American social memory ever get over the years from 1945 to 1969. Will we suffer it’s legacy until to late.

            Skippy…Victory does have it’s price…eh…sigh

          2. Ingolf

            Mickey, I don’t know that there’s a golden age to point to, whatever one’s political or economic leanings. Kay’s comment that markets “closely resemble a constantly changing, adaptive biological system” also applies, I think, to societal evolution more generally. We’re all making it up as we go along, ideally taking at least some note of what seems to work and what doesn’t. It’s still early days; metaphorically, I suspect we may still be somewhere around the early adolescent stage of development.

            Those critical of markets don’t all that often seem to offer up actual alternatives. It’s not easy, for me at least, to imagine how things would work in their absence. What matters, surely, is how their workings are regulated in order to maximise their usefulness to society at large. To suggest that the need for regulation and intervention points to some “fatal flaw” in the market and that we should all be able to “just get along” seems odd. No system will never be perfect and whatever the system, there’ll always be individuals and groups trying to game it to their advantage and against society’s.

            The point that Kay (and Mo, for that matter) were trying to make is that markets are a remarkably powerful force for organising and generating social cooperation. Those eager to throw them out surely have some obligation to suggest what might take their place.

            I also don’t understand why the pro-business/pro-markets distinction is so confusing. The ongoing debate about the financial system illustrates the distinction very clearly. The TBTF institutions have (as Kay suggests) become at least as involved in rent seeking as with performing any useful economic function. Breaking them up (and moving towards a more sensibly structured financial system) would benefit society generally, not just some smaller financial firms. The whole point of of the distinction is that regulation should have as its aim the constant encouragement of general competition in markets and the prevention and, where necessary, the breakup of concentrated power.

            These’ll never be easy goals to achieve. Much money (and power) awaits those who can harness the government to provide protection and subsidies for their business and so every effort will be made by many to do exactly that. Much of the frustration we probably all feel (I certainly do even from my distant outpost here in Australia) stems from the Obama administration having so grievously failed to honour both their mandate and commonsense. Instead, they’ve either condoned or even encouraged a continuation of the worst excesses.

            Still, this seems to me more a chastening reminder of how tight a grip some institutions (and attitudes) have acquired on government rather than a reason to abandon markets. At least with a market-based system there’s the constant possibility of balancing private economic power with that of government.

            For the financial system, unfortunately, fundamental changes in this balance may have to await yet more crises and the upwelling of grassroots anger that would probably follow. Having first sailed so far off course, it’s likely to be a difficult and dangerous transition, with no certainty of arriving at a safe harbour.

  16. purple

    I believe this is the same Martin Wolf who wrote the book “Why Globalization Works” ?

    Humpty Dumpty fell, and the poet-philosophers of his reign are still trying to put him back together.

  17. IJ

    “I had a talk with someone in from Hong Kong today, he is quite alarmed at China’s bullheadedness, wanting what it wants and devil take everyone else.”

    Don’t blame the Chinese… this problem is West’s own making. Besides, the West has taken what it wants for quite a long time and at one time in history from China. The West needs to come down from its high horses and share with the world and let other parts of the world to develop. In fact, countries like Germany and Australia are big beneficiaries of China’s current policy. So if Swedes can’t accept it then don’t do business with China…..

  18. kulicuu

    Some really flimsy conceptual philosophical stabs in the comments here. One gets the impression some people don’t really read the sources so much (or think about what they’ve read), but throw daubs around on comment sections.

    …but then professional economists (macro and poli-phi) aren’t much better.
    And hey, this is a step up from network television; so maybe there is some progression going on.

  19. kulicuu

    I have never seen a half-decent (and normative / shared) definition of ‘capitalism.’ Just smears of flimsy concept which remind me of nothing so much as bad finger-painting.

    What would the ‘half-decent’ definition look like? It would be a component of a formal ontological system capable of total expressive range over the relevant domain: social, psych, econ, etc…

    On a completely different subject, I think that no one should pretend to an authority on F-Nietzsche prior to exposure to Deleuze’s work there. Not that he is ‘right/authoritative’ but that his selective approach casts a glaring light on approaches which not only fail to scratch at the surface, but wind up perpetuating stupid cliches about what the whole corpus ‘represents.’
    I would have to add to the list of mandatory pre-reqs a thorough appreciation for the post-victorian natural science progressions, (esp evo-bio around now).,,, but no elaboration…

    …these comments I write make me cringe when I think about them later. Trying to condense. I think the point of this one was how imprecision in the language makes the propositional exchanges decohere. Eventually a bunch of people just babbling from a set of vocab (‘nationalism’, ‘capitalism’, ‘…’, etc) Smears of fingerpaint. Low resolution.

    Moving focal point again, I liked this post from Yves. I haven’t read Naked Capitalism in awhile. I do read the Financial Times; and although (like the comments) am regularly disgusted by the mind-set and agenda of the paper it does at least rise consistently above the level of saturated retardation, which the NYT seems to have trouble with. I mean I can usually read it without wanting to puke, which I can’t always do with the NYT anymore (I don’t even try). Maybe it’s that the NYT has more the sense of being dominated directly by American neocons, but still with the ‘liberal’-lite veneer–that combination (neo-con pretending cosmo-liberal) is just viscerally repellent in a way that the FT can’t match even in the most asinine editorials.
    And they do some really interesting informative reporting. (To be fair so does NYT, but I won’t wade the stench for it.)

    1. Jim in MN

      Have you tried The Society of the Spectacle by Guy Debord?

      Written in a terrifying burst of inspiration around the 1968 ‘near miss’ with deconstructing capitalism.

      http://library.nothingness.org/articles/SI/en/pub_contents/4

      “The development of productive forces has been the real unconscious history which built and modified the conditions of existence of human groups as conditions of survival, and extended those conditions: the economic basis of all their undertakings. In a primitive economy, the commodity sector represented a surplus of survival. The production of commodities, which implies the exchange of varied products among independent producers, could for a long time remain craft production, contained within a marginal economic function where its quantitative truth was still masked. However, where commodity production met the social conditions of large scale commerce and of the accumulation of capitals, it seized total domination over the economy. The entire economy then became what the commodity had shown itself to be in the course of this conquest: a process of quantitative development. This incessant expansion of economic power in the form of the commodity, which transformed human labor into commodity-labor, into wage-labor, cumulatively led to an abundance in which the primary question of survival is undoubtedly resolved, but in such a way that it is constantly rediscovered; it is continually posed again each time at a higher level. Economic growth frees societies from the natural pressure which required their direct struggle for survival, but at that point it is from their liberator that they are not liberated. The independence of the commodity is extended to the entire economy aver which it rules. The economy transforms the world, but transforms it only into a world of economy. The pseudo-nature within which human labor is alienated demands that it be served ad infinitum, and this service, being judged and absolved only by itself, in fact acquires the totality of socially permissible efforts and projects as its servants.”

    2. toby

      kulicuu, I think you expect too much. Comments under a blog posting can hardly rise to the level of detail you require. It’s probably best to see them as part of a larger process. I suspect all human effort can only fail to describe the workings of Universe, which have somehow given birth to our planet, us, and all we do. To detail this with a mind which is but the tiniest of specks in an impossibly enormous amount of information, which is always changing anyway, is impossible. It is fun trying though ;-)

      And I enjoyed your post. We need more humility now. “Capitalism,” whatever that is, is also just a component of a larger process. It will evolve or die.

  20. Richard

    This is not a crisis of capitalism. This is a crisis of the welfare state.

    Government is simply too large and expensive for the economy to support. The parasites have become so numerous and greedy that they are killing the host.

    Oh, and a whole bunch of the parasites are deliberately sabotaging the economy–like the ones in the EPA, who are working up carbon rules that will further burden the economy.

    To those who want to blame Reagan and the neo-liberals: Exactly which neo-liberals were responsible for the Eurozone’s crisis? Chirac? Schroeder? Zapatero?

    As to the banksters, I ask this: If a game gets out of control, whose fault is it? The players, or the refs? And if the refs show a serial inability to control games, is the solution more rules?

    Finally, dirigisme is just the polite term for fascism.

    Richard

Comments are closed.