Dienstag, März 31, 2009

Modernization and Conservativism, Or How Do We Get Out Of This Nightmare...

Shucks. Decided not to wait.

Toyota's February production numbers went down 56%. Honda is not far behind. We all know the daily stories of this cut back and that.

I read the FT every day as part of my job. There were two editorials in today's FT: one from Michael Skapinker, the other from Eric Dinallo.

First that from Skapinker, "Dangers In A World Of Disillusionment", link here.

Basically, Michael Skapinker says that at least during the last such crisis, there were alternatives: socialism and fascism (he doesn't use the latter word) were at least alternatives back in the 1930s. The utter and complete discreditment of socialism means that this is not a viable option, and of course fascism, the corporate statism kind at least, is even more thoroughly discredited. So what's the alternative?

Skapinker says this, basically: that given the need to rethink the social contract between government and the market, we also need a clear set of goals and a simple story. Instead, we are getting "casting around trying one thing and then another until we find what works", with a bit of die-hard cultural fear/antisemitism tossed, visible in the resentment against foreigners and migrant workers, as well as Jews.He says:

Replacing simple narratives with a pragmatic search for what works requires a grown-up approach. Let us hope we are up to it. The stakes are high.

This is a good turn of phrase: taking a grown-up approach. What does Skapinker really mean, even if he doesn't actually come out and say it?

It's time to return to tried and true methods of dealing with problems, of getting back to the Gods of the Copybook Headings. It's time to grow up.

Huh? Gods of the Copybook Headings?

Kipling, of course. Here.

Let's start at the beginning:

AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

He's not talking about markets, that simple, elegant and utterly ruthless mechanism, but rather to the phenomenon of ignoring fundamental truths in order to make a buck.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

This is the core of our problem, one that has been with us for a long time and, unfortunately, will continue to plague us: that there are those amongst us who desperately want things to be different. Rather than acknowledging the basic elements of logic and knowledge, they believe their fantasy world to be reality.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

In other words, you cannot ignore reality: there are inarguable facts and there are causal chains that always lead to ruin, no matter how many times people claim that this time things are going to be different. I'm expecting a neo-socialist movement, for instance, who will claim that the mixture of the internet and inventory control mechanisms will make control of the means of production feasible for the state...

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

Like I said: those who desperately want things to be different, not so much because things are so horrible and unjust, but really because to get anywhere, you really have to work at it. There are really no short cuts to wealth besides working yourself half to death and pushing consumption into the future: get-rich-quick schemes always work for those selling the books, but never for those who try the methods.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."

None of my pacifist friends would ever recognize this: that the price of liberty is the willingness to do violence to protect it.

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."

There are no short cuts to happiness with a partner besides working hard at the relationship and being faithful: the warning against hedonism - covet not thy neighbor's wife - is one of the 10 commandments.

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

If that isn't a clearer condemnation of the welfare system, both personal and corporate, then I don't know one. You can rant and rail against the laws of economics, against the laws of physics, but you can't ignore them: that way leads invariably to the funeral plain in one way or another.

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

Again: Kipling is not talking here of the idea of markets, but rather those who sold themselves off in the market.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

Bluntly, the Gods of the Copybook Headings are returning.

Eric Dinallo, the New York Insurance Superintendent, also wrote in th FT, link here.

Many compare this financial crisis to the stock market crash of 1929, but it is closer to the credit freeze and bank panic of 1907. We might have avoided the worst of the current troubles if we had not overturned laws adopted in response to earlier crises. We should have placed more value on the hard-earned lessons of the instability that comes from unregulated markets and gambling on securities prices.

The Gods of the Copybook Headings...can be placated by those who recognize what they are doing wrong and take actions to restore their place in the scheme of things.

There is hope for us yet: but at a cost:

Thus, one of the major causes of the financial crisis was not how lax our regulation, or how hard we enforced, but what we chose not to regulate.

Indeed, what we decided was old fashioned and in need of modernisation was, in fact, an effective check on an activity that for 100 years had been illegal, for good reason. As a result, we modernised ourselves into this ice age.

The fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money. We forgot that the biggest competitive advantage of the US financial system has always been safety, security and transparency. If we destroy that perception, the long-term cost to our society is incalculable.

What did we learn at the start of the last century that we then disregarded either through amnesia or hubris? What lessons, now learnt twice, can be gained from all this?

There are basically four ways people hand over money to financial institutions: 1. Bank deposit accounts. You deposit your money and the return of principal and interest is guaranteed. Banks are required to hold enough capital to deliver on that promise. 2. Insurance. If you suffer a loss, you are guaranteed recovery. Insurance companies are required to hold capital to meet that guarantee. 3. Gambling. If your bet wins, you are guaranteed your winnings. Casinos and racetracks are required to hold enough funds to ensure payouts. 4. Investment. There are no guarantees when you invest in a stock or a bond. You could lose everything. Appropriately, investment bank capital requirements are much lower. The first three categories contain guaranteed payments against future events; the fourth is merely aspirational.

We thought we could use alchemy to create a perfect fifth category that allowed guarantees supported by little or no capital, and that would produce hefty profits with no real risk. Instead, we re-created the old bucket shop gambling parlours on steroids and another credit crisis. Financial products should be seen as belonging in one or another of those four categories and regulated appropriately. If there is a guaranteed outcome, then the guarantor must hold sufficient capital to make good on that guarantee. A key lesson of this crisis is the danger of insufficient capital and the risks of alchemy.

And the risk of not listening to the Gods of the Copybook Headings.

In sum, if you offer a guarantee – no matter whether you call it a banking deposit, an insurance policy, or a bet – regulation should ensure you have the capital to deliver. If you offer investments, be transparent, but buyer beware. No one should ever again get to bet the store called the Entire American Economy. And certainly do not assume we are smarter than folks 100 years ago. As Mark Twain is supposed to have said, history may not always repeat itself, but it sure rhymes.

The question should be, rather, what measures must be taken to please the Gods of the Copybook Headings, to assuage their appetite for those who forget the lessons of the past in their delusions.

What both writers are pointing at is something that economists know will happen: a correction. Only that appeases the Gods of the Copybook Headings.

The correction will be a return to those old, staid, boring rules that the Gods of the Copybook Headings enforce so ruthlessly. Hard work trumps slick salesmanship every day. Age and guile will always trump youth and ambition. All those platitudes that get in the way of all the modern-day liberal fantasies will surround exactly those and banish them once again.

In other words, a return to classic values, a return to small-town banking and business practices, or to put more simply...a return to conservative values.

That's how we get out of this nightmare. Not by a magic bullet or some super-secret neato-keeno plan, but by simple hard work and investment, not spending money we don't have and buying things we don't need.

Death seed blind mans greed
Poets starving children bleed
Nothing hes got he really needs
Twenty first century schizoid man

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