23 December 2012

A Massachusetts Yankee in King Arthur's Court

Who to blame for the continuing mess we're in? How far back down (or up, depending on one's point of view) the breadcrumb trail do we go to say, "this is where it all started?" Or, how did Jason manage to find Nicky in crowded, serpentine Tangier streets when she, somehow, tore apart a cellphone with her bare hands, but dropped the fragments in the first few steps she took? Hmmm?

How far back should we look?

Could be the Israelis: the U.S.'s fawning support while they took over yet more territory from 1967 to 1972 pissed off the rest of the Middle East, until ...

Could be the other Middle Easterns (OPEC): because of the U.S./Israeli hegemony, they embargoed oil in 1973; sending the global economy into a fundamental shift with Bretton-Woods kicked to the curb and U.S. economic power with it.

Could be the Iranians (they're not Arabs): the embassy hostage taking led to ...

Could be Jimmy Carter: his handling of the embargo and the Iranians was (viewed) as inept enough to get him tossed out, which led to ...

Could be Ronnie Reagan, that dementia riddled half-wit: his (alleged) back-channel communication with Tehran led to the hostages being held through the election and thus his winning, and to his Voodoo Economics, starting with dismantling of PATCO; the blue-collar Reagan Democrats have still not figured out that Ronnie and His Friends had them as Prime Target.

Could be Arthur Laffer: creator of supply side economics (latter day tabernacle scripture) and the Laffer Curve, which was "proof" that Trickle Down Really Works if only we give the rich yet more moolah; they'll give back even more (yeah, right).

Could be Bush I: who continued Ronnie's assault on the non-financial middle class.

Could be Gramm, Leach, and Bliley: whose eponymous legislation killed off the last vestige of Glass-Steagell.

Could be Clinton: for signing Gramm-Leach-Bliley.

Could be Bush II: who shifted income and wealth dramatically to the 1% through tax policy (and other more subtle ways), thus killing off consumer demand.

Could be Alan Greenspan: who, being a goldbug at heart, would not countenance fiscal policy, thus instituted the continuing flood of moolah to banks and cratered interest rates which forced financial investments into equities in a mad rush for capital gain.

Could be Countrywide: that created the various non-conventional mortgages which could be securitized so that ...

Could be the Banksters: who were in need of "risk free" vehicles, since Treasuries had been put in the tank by Greenspan, packaged up those McMansion loans to McDonald's hamburger flippers as alternative to said Treasuries.

Could be private mortgage insurers: who wanted to reap high profit from "insuring" all those McMansion loans demanded more and more of them, which would never fail en masse, now would they?

Could be Fannie and Freddie: who saw market share erode to private insurers, and thus took on those McMansion loan packages in a big way.

Could be Bernanke: for continuing in Greenspan's footsteps, with trickle down monetary policy.

Could be Obama: for not having the gonads to tell the truth, it's demand that's collapsed, and no matter how large the flood of moolah to capitalists (certainly not the fiduciary sectors), they haven't, and won't, create more product (and hire bodies to make it) than they are now; you can't push a string.

So, this all brings us to Adam Davidson. While of NPR and the NY Times, where I see a short piece from him (nearly?) every Sunday in the Magazine, these musings of his have always sounded rather right wing-y. Not Boehner loony, but not progressive either. Today's essay is rather longer than usual, and given that it's an object lesson in many concerns of this endeavor, I offer quotes and discussion. For those that don't read the piece now, it's the tale of Adam Posen, an economist from Brookline, MA who was appointed to the Brits' equivalent of the Fed, and the fun and frolic which ensued. Yes, such an appointment hadn't been made before. I'd wager it won't happen again.

So, here we go.

Economics often appears to be an exercise in number-crunching, but it actually resembles storytelling more than mathematics. Before the members of the Monetary Policy Committee gather for their monthly meeting, they sit through a presentation from the Bank of England's economic staff.
Of course, it isn't; economics, especially as exercised by sovereigns, is about setting policy to reward one's allies and punish one's enemies. Until Samuelson wrote his first book, economics was still mostly Political Economics, which is to say an exercise in persuasive textualizing. This is not to say that more esoteric math and stats hadn't been used before Samuelson, but afterwards increasingly disconnected from reality math and stat presentation became the justification for all sorts of silliness. See: Laffer.

Economists on the right counter that paying off debt will actually inspire more confidence and prompt employers to hire.
This is a more technical (only a little) way to state Krugman's epithet: the Confidence Fairy is just waiting for a sign of subservience, and thence will wave her magic wand and make everybody so much better off. Poppycock, nevertheless. Throwing more moolah at those who have more than they can do anything with already? How many Twinkies can you stuff in your maw at once, anyway? Or hotdogs on Coney Island on July 4th.

Throughout the economy, people had to shift from highly profitable fields, like finance and real estate, into much less lucrative ones.
Here is where Davidson starts to drink the Kool-Aid, or perhaps Posen. This silliness that finance and real estate are, by definition, the most profitable sectors of an economy is a sure sign of disconnect. Think about it this way: of the occupations in the Service Economy, how many recently defined ones represent consumer purchases? Not damn many. Doctoring, lawyering, whoring have been around for millennia. Financial engineering? Not so much, and it's an overhead cost of producing something else, which may or may not be a consumer product. All those Wall Street folks? They were/are engaged in zero-sum gaming of financial instrument prices. Such activity is non-productive; it just sucks some percentage of the funds flowing from savers to borrowers.

Because politicians tend to think only as far ahead as the next election, central bankers are supposed to protect the long-term value of a nation's currency and, therefore, the stability of its economy. The modern-day hero of central banking is Paul Volcker who, as the chairman of the Federal Reserve, fearlessly raised interest rates high enough to stop inflation even if that meant hurtling the United States into a recession and arguably costing the man who appointed him, President Jimmy Carter, his job.
Worshipping at the feet of Volker has always impressed me as sycophants with a lower brain stem hard-on. The inflation was caused by the curtailed supply of oil, due to Israel-U.S.-OPEC shadow dance. It was a truly cowardly approach.

Posen quickly recognized that the data looked remarkably familiar. "I had this aha moment," he told me. Japan was not going through a unique and inevitable economic slowdown, Posen realized. The country was experiencing something that looked a lot like the Great Depression.
Bernanke has had the same moment, but he hasn't had the gonads to tell the truth. Then again, he can't just have his say and then toddle off to run some right wing-y consulting firm. He's scheduled to become head honcho in January.

Bridging that gap between the depressed economy and its potential required that the central bank create a lot more money and get it out into the economy.
This is the correct analysis. The problem is that the Greenspan/Bernanke method doesn't actually "get it out into the economy", but rather into the hands of banksters and stock traders. Trickle down, in other words. Needless to say, Cameron and his friends didn't take kindly to the analysis.

Then Posen's defense became more technical. He said the problem wasn't a sudden collapse in the capacity of workers and factories. The problem, more simply, was that there wasn't enough demand to support full production.
Again, he's gotten the correct diagnosis. But there is a problem, one that has been discussed before in the posts which constitute this endeavor. When in a recession/depression, there are two ways to get out. One is to re-employ folks back into the work they were doing before the crash. The other is to transform the economy to employ idle workforce in different, less toxic, endeavors. Obama/Bernanke haven't, so far as I can find, addressed this problem in public. To the extent they have, they've said things like, "the housing sector is key to recovery", and the like. WWII got us out of the Great Depression because the government demand for war materiel employed idle industrial capacity, and its labor force, in a simple minded way. The difference between making Model A's and tanks wasn't a large difficulty.

Today, with the de-industrialization performed by American capital, we've become dependent on ever more non-productive occupations; financial services is merely the most obvious. To put it another way: an economy which hasn't the idle capacity in goods bought by consumers won't return to full employment. It can't. Even if Obama dumped dollars in every household, they would spend it on Chinese made goods. There would be little increased demand for financial engineers and the like. The only answer is to transform the economy to a more self-sufficient structure and level income distribution. The .1%-ers, who can't wait for supreme deflation, won't permit it.

A series of 19th-century banking crises in England and the United States inspired policy makers to create the modern central bank. Then came the Great Depression, a period of economic misery that existing ideas could not explain.
An interesting factoid, in that the Austrians keep braying that only specie based banking, without government intervention, is Nirvana. They've clearly never read any economic history.

Earlier this year, in a remarkable joint statement, the I.M.F., along with the World Bank, World Trade Organization and eight other major economic institutions, warned that austerity was hurting global growth and raising unemployment.

Mervyn King hasn't entirely disowned his earlier pro-austerity views, but he is no longer the policy's enthusiastic booster.

The plan to shrink the size of government did not generate a sudden surge of private-sector confidence and investment.
None of this should be surprising, sort of. The I.M.F. has been blamed for all manner of 99% hardships over the years, in its dealings with countries that got themselves into trouble. It typically takes a Volker-esque tack of punishing the lower class while holding harmless the wealthy.

In sum, if one wishes to re-gain full employment, one must re-gain full demand. In order to do that, one has to decide whether to re-inflate the Zeppelin which incinerated us, or set out to build a more stable, consumer goods oriented, economy. One way will work over the long term. The other will fail soon enough.

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