21 January 2013

Money Matters, Part 1

This time, I've assumed the obvious, and numbered the First installment without having written the second. But money matters, although not in the way the Lunatic Right (Friedmanites, Austrians, .1%ers) generally do. The purpose of currency is to oil the wheels of commerce. Adam Smith wrote something like that.

Yesterday's Times brought us three pieces on money, all making points mused on here over the past times. Alan Blinder on 10 steps to recovery (or bill of the nation's rights?), Gretchen Morgenson on melting the bank behemoths, and Christina Romer on Fed policy. I recommend all of them.

But I'll only chew on the Blinder piece. To a certain extent, Blinder is a bit PollyAnna.

Unrepentant financiers whine about "excessive" regulation and pay lobbyists to battle every step toward reform. Conservatives bemoan "big government" and yearn to return to laissez-faire deregulation. Higher international standards for bank capital and liquidity have been delayed. I could go on.

And Phil Mickelson, who is given millions of dollars a year for playing a game, is crying poor mouth and apparently moving from California. This guy, along with the rest of professional sports, provide nothing useful to the economy or society. Their millions come from the discretionary incomes of the rest of us, either directly through tickets or funneled through the corporations that sponsor and advertise the tournaments. A few cents on the dollar spent on insurance and banking and such end up in Phil's pocket. You don't get to decide that Phil should get his millions. While I've not yet waded through the data, since the USofA has a bit more than twice the population as it did in 1950, the hollowed out middle class really hasn't been hollowed. What's happened is that the number of middle class households has plateaued in count, but dropping in proportion. Along with the increase in wealth/income concentration, the Phils of this world care about a diminishing proportion of us. All those luxury skyboxes sprouting up in stadiums isn't a coincidence: the Phils have to put the squeeze on the few left with any moolah. In other words: Phil is killing the goose that lays his golden eggs. But, as usual, he's too dumb to follow the breadcrumbs.

As the renegade economist Hyman Minsky knew, it is normal for speculative markets to go to extremes. A key reason, Minsky believed, is that, unlike elephants, people forget. When the good times roll, investors expect them to roll indefinitely. When bubbles burst, they are always surprised.

Again, the standard punditry is that The Great Recession was the result of a tulip bubble-like series of events. But it wasn't. People bought into tulips in a Ponzi-like way. It wasn't corruption, just stupidity. TGR was motivated by corruption: the creation and sale of bogus "assets". This is completely different from the dot-bomb bubble, too.

In the years before the crisis, too many directors forgot those responsibilities, and both their companies and the broader public suffered from the malign neglect. Will they now remember? Some will -- for a while. But sanctions on directors for poor performance are minimal.

Chief executives and corporate directors should "claw back" pay when putative gains turn into losses. If they don't, we may need the heavy hand of government to do it.

Here, Blinder puts on his rose colored glasses. Top corporate management, and boards, benefit at least as much from the fiddling. They're not going to claw back. The first board (member) who spanks one of these brats will find himself (not so much, her, of course) out of the sinecure of board membership. Circling the wagons, in spades.

Before the crisis, some banks took important financial activities off their balance sheets to hide how much leverage they had. But the joke was on them. The crisis revealed that some chief executives were only dimly aware of the off-balance-sheet entities their banks held. These "masters of the universe" hadn't mastered their own books.

Of course not. Years ago, some politically savvy comic noted that a sock puppet could do as well running corporations. In all, a sock puppet would be an upgrade.

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