Freitag, April 30, 2010

How Extraordinarily Tedious...

We all know the kind: the activists, the world-savers, those whose life becomes centered entirely on whatever horrible, devastating, let's-kick-your-emotional-reflexes topic that strikes their fancy, masochistic or not. Those who interpret the world according to how it impacts their pet topic, rather than being able to see the big picture.

Well, the White House is now so completely and totally partisan and political that they have now gone after philanthropists to get them to become political advocates. See here.

Let's be honest: politics is not the end-all and be-all of life. If it is, then you've got a problem, one that could be solved by perhaps getting out more.

Key quote:

If you thought that philanthropy's mission was simply to donate to areas in need, then you haven't been paying attention. As Gara LaMarche, president of Atlantic Philanthropies stated: "Charity is insufficient unless there's some alteration to underlying structures." Other panelists fleshed out the picture of a brave new world of "strategic philanthropy," in which goals such as "transformative change" and political advocacy, including work with the Obama administration, become essential components of philanthropic work.

In fact, Constance Rice, co-director of the Advancement Project-Los Angeles, recommended that foundations place themselves "well beyond advocacy" in a position of full-fledged activism. Deepak Bhargava, executive director of the Center for Community Change, cited "large scale protest" as a central requirement for philanthropic impact. Just what sort of impact are they seeking? Panelists cited migrant rights, income justice , reproductive justice and climate change.

Sigh. These are amongst the most tedious folks out there. This isn't philanthropy any more. More the shame for them.

This is the fundamental problem with the Obama Administration and the left in general. Conservatives just want to be left alone to live their lives as they chose - quelle Horreur! - but the Left want to run your lives for you. They can't leave well enough alone, and I dare say that more than one benefactor, more than one of the single-donor philanthropic foundations, would be horrified to see what is now being done in his or her name.

What's to be done? Not a lot: suffice to say that the American left is increasingly part of the structural problem, and not part of the solution.

Donnerstag, April 29, 2010

Here's Something To Read...

I wish I had written this essay, by Russel Roberts. It's about as good a synopsis of how screwed up things are: the crises we are facing aren't due to one or two evil overlords, but are endemic and systematic as things are right now.

Key quote:

The most culpable policy has been the systematic encouragement of imprudent borrowing and lending. That encouragement came not from capitalism or markets, but from crony capitalism, the mutual aid society where Washington takes care of Wall Street and Wall Street returns the favor. Over the last three decades, public policy has systematically reduced the risk of making bad loans to risky investors. Over the last three decades, when large financial institutions have gotten into trouble, the government has almost always rescued their bondholders and creditors. These policies have created incentives both to borrow and to lend recklessly.

It's an interesting take on the crisis, with a largely Austrian perspective. Lots of folks have problems with the Austrian school (largely because they haven't taken the time to actually read the works, relying instead on summaries which, especially on-line, tend to be negative), but that school certainly has some perspectives worth investigating.

And he points out, quite correctly, that Paul Krugman, despite having a Nobel in Economics, is a hack who actively denies empirical reality when it doesn't fit Krugman's story line.

Another key quote:

When the government implicitly backed Fannie and Freddie, it severed the usual feedback loops of a market system.

I've harped on this time and time again: markets are ruthless and don't care about politics. You can only rig the markets for so long: at some point markets correct themselves. Severing feedback loops of a market system makes market corrections catastrophic, rather than merely annoying.

The Austrian perspective emerges here:

Instead of trying to improve a system we only imperfectly understand, we would have better luck letting the natural restraints of capitalism reemerge. Rather than trying to turn this dial or push that lever the optimal amount (holding everything else constant, somehow), we should let natural feedback loops reemerge that encourage prudence as well as risk taking.

and here:

Rescuing people from the consequences of their decisions is bad for capitalism. It means that a distorted calculus of risk and reward allocates trillions of dollars of capital. The biggest mistake of the last decade of distorted incentives is that trillions of dollars poured into more and bigger houses instead of into better medical devices or new forms of entertainment or more efficient cars. It was a bad deal private decision-makers would never have made on their own. It was a bad deal that only took place because public policy distorted the incentives.

So true, so true: the fundamental problem facing us is that by ignoring the moral hazard issues and allowing the blow-up, all we've done at this point is to shift the problem, not solve it. The sovereign debt problem facing not only countries like Greece and Spain, but also the United States, is in many ways the culmination of a comedy of errors that has been propagated through the system.

It's just that it's not very funny any more.

Mittwoch, April 28, 2010

It's Starting...

Well, it's been a busy day.

Greece is now junk and has finally come clean about its debt: €135bn over the next three years is what they need to just service their debts, especially after interest rates went up 16%.

Spain was downgraded by S&P from AA+ to AA.

Watch for a shorts on Italy next.

This is something everyone should see. Peter Schiff has been pretty damn spot-on, but few have listened.

Why is this all of concern?

Because, at the end of the day, the US is in the exact same situation as Greece, as is the rest of Europe and Japan (for different reasons). This means that sovereign debt is the new bad boy, the 500-lb gorilla that will dominate financial markets.

Here's the problem: while the US can print all the money it wants - unlike Greece - this doesn't solve the problem, it is the same as digging the hole deeper. While this isn't the end of the dollar, it does mean that the dollar must go down: given that interest rate increases are out of the question for the Fed (because then the sovereign debt hole becomes the bottom of a mining shaft with no ladder headed up) and the Fed will keep inflation down, then the only thing left is to devalue the dollar.

You might think the economy is doing better, but it really isn't: debts of all kind continue to increase faster than economic growth. This is, to repeat a theme, a catastrophe brewing that is unprecedented.

What went wrong?

Simple (hah!): intervening in markets to postpone a reckoning (Greenspan's Folly, to coin a phrase) doesn't mean that the necessary corrections won't happen, but rather that they then accumulate. You see, markets go up and down according to supply and demand (and the Good Lord knows that I've mentioned how ruthless and disinterested markets are here enough times), and when supply and demand shift such that a negative correction is due, then it is always best to take the pain in small steps, rather than postponing it as long as possible. That latter choice is what policy choices have been, however, since Greenspan was head of the Fed, and Bernanke is no different.

The day of reckoning is coming: at some point you have to start paying back what you've borrowed, meaning that you can't consume. Given the western obsession with consumption, this means that there will be little growth.

What can you expect? Imagine the US economy with consumers saving at a rate like the Japanese or, even better, like the Chinese. Not the 2-5% of income, but rather 20% and more of income "saved," which in this case really means reducing consumption until the debt is paid.

Thank your Congress critter for the masses of US sovereign debt and the inability of politicians of all kinds to actually listen to economists who actually know what they are talking about.

Let me repeat what Kipling said:

As I pass through my incarnations in every age and race,
I make my proper protestations 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.

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.

We moved as the Spirit listed. They never altered their pace,
Being neither clued 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 ice field, or the lights had gone out in Rome.

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 worshiped the Gods of the Market Who promised these beautiful things.

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.'

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbor 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/'

In the Carboniferous Epoch we were promised abundance for all,
By robbing selective 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.'

The the Gods of the Market tumbled, and their smooth-tounged 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

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!

Jesus have sweet mercy. We will need it.

Here's A Tip...

If you want bipartisanship, if you want people to have serious discussions about the problems facing the US, if you want people to take you seriously in your stated intent to work out a problem, don't preface your appeal to this with a highly selective and biased view of how the problem developed, essentially blaming the other guy and then demand that he should buckle down and drink the Kool-Aid.

Yes, Representative Hoyer, I mean you.

This is an example of the "bipartisanship" approach of the Democrats since the days when "Tip" O'Neill declared the Reagan budgets to be dead on arrival before they were even submitted: whatever the Republicans do, believe in, or want, that is what is negotiable, but don't even contemplate asking the Democrats to reconsider their stand on anything.

That's not bipartisanship, that's bullying.

And Here I Thought...

...that Obama and the Democrats were the party of the little guy, the one who needs a helping hand when disaster strikes. After all, that's what government is there for, right?

Apparently not.

Read this.

Let's see if I have this right: the party that claims it is the champion of the common worker, advocate of minority rights, who wants to reign in the bankers, all that warm and fuzzy stuff, is actually the party that couldn't give a shit if a common worker loses his job as long as he's not union, fought hand-to-hand to prevent legislation protecting minority rights in the 1960s (when it counted), and is actually setting thing up for their banker friends so that they never have to worry about getting a bail-out ever again (see here).

So, I do have it right.

Ye gods. How can any Democrat look at themselves in a mirror and not feel ashamed?

The Obama Administration is one of the most corrupt out there (see this for yet another example: the Assistant Secretary for Energy has large investments in "green" technology companies that will benefit from any decision she way you can spin this that doesn't mean corruption: it's a clear conflict of interest that is being deliberately ignored and downplayed).

Let's not even talk about the monstrosity that is the health reform fiasco (because it is becoming more apparent, day by day, that it will not reduce costs and will make both insurance companies and pharmaceutical companies richer, while making doctors and other health workers poorer, while making insurance more expensive: nice work, there), but now of the attempt to rubber-stamp a financial "reform" bill that fails to reform anything, paying off nicely for the financial companies that supported the Democrats.

If anything, the financial reform bill makes things worse (in terms of consumer protection!) and not better.

But the decision to deny individual aid to storm victims - in Connecticut, no less! - just reeks of "Let them eat cake".

Imagine if this had happened under any Republican: the MSM would be frothing at the mouth about how horrible and mean it is to deny people in need.



Dienstag, April 27, 2010

And The Oppressed Should Thank His Oppressor...

This by Gideon Rachman in today's FT is, in a word, despicable.

He ends his arguments for Israel's more or less force acceptance of a peace treaty from without by saying:

Israelis may fear and even detest Mr. Obama - but the American President is actually doing them a favor.

What Israel is facing is not that the world is turning against it, but much more that the sort of trans-nationalist sentiment that empowers groups like Human Rights Watch to show appalling bias against Israel has now moved into the White House.

In other words, Israel no longer has a friend in the United States, not with this current administration.

The arguments that Rachman brings are pernicious:

First of all, there is no parallel between the Irish conflict and Israel's situation: the British in Northern Ireland did not face opponents who were proudly disclaiming that they wanted to eliminate the British, physically, from the face of Northern Ireland (if anything, the most radical of the Irish left wanted the British to remain to be as oppressed as they felt themselves to be, as revenge for the decades of repression). The Palestinians continue to make no secret of their ultimate goal: the elimination of the State of Israel. The problems in Northern Ireland were first and foremost demands for redistribution of power (and wealth): the problem in Israel goes far beyond that.

Second, there is an implicit assumption that it is all Israel's fault. It is never the Palestinians that need to get their house in order, never the Palestinians who need to change their policies: it is always Israel which is called on to make concessions, each and every one aimed at weakening Israel.

Mr. Rachman seems to feel that it is always Israel's fault that the Palestinians fail. In the analogy he uses, where the Palestinians negotiate on how to divide a pizza and Israel keeps on eating parts, he fails to understand that the onus lies on the Palestinians. If they do not want the pizza to become smaller, then they need to negotiate in earnest, rather than what they have done to date. Why should Israel give up the West Bank after they saw what happened to Gaza?

Rather, Mr. Rachman wants Israel to be maneuvered into a corner where it no longer has any choices, made into a pariah state, which, according to Mr. Rachman, would be a good place for Israel to be, so that it must accede to the demands that the "international community", aka the trans-nationalists who never met a bad Palestinian and truly believe that the only thing standing in the way of the millennium is, to use the phrase of the French ambassador to London, that shitty little country.

Sorry: just why, please, should Israel do this? The Israeli state and economy is virtually the only success story in the Middle East, and they've done despite of the Palestinians, not by exploiting them. But support is apparently growing for some sort of Middle East Peace Plan from the Obama Administration that is forced upon Israel for their own good, regardless of whether it is actually good for them or not (guess Mr. Obama is trying to justify that Nobel he got...).

Hence those about to be oppressed should thank their oppressor, he's just doing them a favor.

Ye gods.

Montag, April 26, 2010

Number of the Day Indeed...

This is indicative of exactly how the deep the hole is that has been dug.

The US housing market, right now, has 103 months of inventory to be sold before foreclosed homes are off their books.

What does this mean?

It means that anyone holding a foreclosed home, be it a bank, a fund, or whomever, cannot possibly afford to simply keep it off the books in the hope that that the market will recover. What does this mean?

First and foremost: if nothing else happens, then holders of mortgages in default will face non-performance of these loans until the house is sold for a price that can cover the costs (hence ending the mortgage), the mortgage is re-negotiated (meaning that the banks will have to report their fiscal losses on these loans), the mortgage holders become real estate owners (leading to reporting of losses in the transformation from a fiscal asset to a real asset with a cash stream), or something magical happens.

Right now, it looks like most mortgage holders are looking at the fourth solution as a way to get out of this trap of their own devising.

103 months of inventory.

So, what does the market look like?

Well, first and foremost: there is little or no addition to the housing inventory. In 2009 there were, all told, only ...0,046mn residency units added to the inventory, instead of the long-term trend of around 1.5mn units added to the inventory. That's right, 46 000 units were added in 2009. instead of the 1.5mn normally added to the inventory.

So demand is, basically, gone.

The sales ratio tells an interesting story: sales as a percentage of inventory increases has been up over the long-term trend since 1996, 13 years in a row, indicating that the real estate bubble was a long time building up.

With 103 months of inventory, supply is basically gone as well. No one with any foreclosed properties can afford to lend for new units until these are removed from the balance sheets.

No market works when both supply and demand are moribund with little or no chance of recovery.

So, what's to be done?

From an economics standpoint, the only real thing that will work is for mortgage holders to repossess their properties and become holders of rental units. The hope here is that the cash flow will serve to generate enough revenue to partially compensate for the losses of the mortgage cash streams that the non-performing loans are inflicting. In banking, cash flow is king: everything else follows.

Those that bought too much house? Who took out equity and are now under water? They lose all of what is left of their equity, lose title and ownership. Rents will be onerous to cover the costs, but given the fact that many made poor financial choice, it's an appropriate loss, as making poor financial choices must bring financial hardship. If they decide to move to smaller, less expensive quarters, so be it. The houses will be available, and the combination of rental units standing empty and not generating income along with increased demand for rental housing will bring a new rental market price equilibrium, different in each large neighborhood according to supply and demand. There may be neighborhoods where the prices have fallen so much that there is no business plan that will work: here bankruptcies on both sides will be necessary and serve to clear the market.

Anything else does not compute, unless you are expecting something magical to happen. Mortgage holders lose their lovely cash streams, but they've already lost those and this represents reality; people foreclosed against lose their equity (such that it was) and their ownership, with all the non-material losses thus implied.

But the losses are there, are real and the sooner they are dealt with, the better. Postponing this in the hope of magic unicorns descending from the heavens (the current plan, apparently) bearing large sums of cash doesn't solve the problem.

Samstag, April 24, 2010

Part of the Solution...

This is a nice video from the Republican Governors Association, and it indicates that there are at least some people out there that realize what the solution looks like to the problems that the Obama Administration has created for the United States.

Vote the Democrats out of office. It's the only safe thing you can do. Repeal Obama Care at the very least.

We Will Remember from Republican Governors Association on Vimeo.

Freitag, April 23, 2010

More Gloom and Doom...

Just in case you think I'm alone, read this.

Things are vastly worse than most are willing to believe: this financial crisis isn't about a cyclical up and down. We've reached limits, limits created by thieving and incompetency, we've been maneuvered into this dead end of a system by those who have made massive profits by directing traffic into the pile-up, aided by those who are happy to let them do that just as long as they then are in control.

...the primary economic policy of the U.S. government as well as many others around the world is an extend and pretend strategy that is economic suicide primarily in that it keeps the irresponsible in their assets and it makes the responsible shudder and shun productive investments.  Whether it be a homeowner that is subsidized to stay in a home that he cannot afford or a bank that doesn't want to come clean on the extent of its bad assets, the result is the same.  Complete economic inertia.

While I don't agree with much of what Mr. Krieger says in his article - I do not see the Fed as a socialist organization - there is a lot of insight into what he does say.

This is especially important:

...the banks or anyone else for that matter playing a spread by borrowing at near zero to buy long-term treasuries is doing irreparable harm to this nation.  They are complicit in the gross misallocation of capital to the government, capital that can then be doled out at will to favored interests.  So all we have today is essentially a creation of money and credit out of thin air that is allocated to two major constituents.  First, it has primarily been used to maintain the people of wealth, power and political connections (on both sides of the isle) before the crash entrenched in their socioeconomic roles.  Second, is to pay off political favors.  Those who supported the President in his campaign have been paid back handsomely and are today much more powerful and secure than before whether we are talking unions or the oligopoly banks.  If we wish to have any hope of a sustainable recovery preventing the inevitable social unrest to come from truly getting dangerous we must restore the free market and end the union of big business and government, which historically has presented an extremely dangerous situation.

To coin a phrase: the business of America is business.

Now, obviously, that's not from me, but rather from Calvin Coolidge, as explained here:

The real statement comes from a speech by Calvin Coolidge called "The Press Under a Free Government" which was given before the American Society of Newspaper Editors in Washington, D.C. on January 17, 1925. The quote is really: "After all, the chief business of the American people is business." However, Coolidge goes on to say that, "Of course the accumulation of wealth cannot be justified as the chief end of existence." He discusses journalism and the thought that the business interests of newspaper owners should not taint reporting. He continues, "American newspapers have seemed to me to be particularly representative of this practical idealism of our people."

That, in a nutshell, is what drives the economy: not the accumulation of wealth as the chief end of existence, but of business, of creating jobs, creating value, creating something tangible and real out of raw materials (including services).

It is also that which is quite clearly missing today:

For those that are in big business and think they have made a great move by joining forces with the state I suggest you go back and read your history.  You never will possess the ultimate power, you will be seduced into thinking you do and then when the time is right government can eliminate you and your fortune with the stroke of a pen.  Power is granted to you by this authority when you engage in this unholy union and it can be taken away on whim and your wealth confiscated.  Selling out freedom and your fellow citizens for some extra money or government contracts will come back to haunt you.  Your legacy to the United States will be a neo-feudalistic, gulag casino economy that has already begun.  Below is a link to an excellent interview with Bill Moyers on PBS about our financial oligarchy (I believe many industries here are becoming oligarchies but the financial one is the most powerful) and the need to stop its cancerous growth.

This is the legacy of the Chicago political machine, of sucking in businesses, who think they are getting in on the ground floor, that they have gamed the State, only to find that they now have parasites latched onto them that cannot be removed with out killing the patient.

All this said, while I am a small government person, I am no anarchist.  I think government can do a lot of good.  I merely think government must be used a tool, a complement to the freedom, independence and individuality.  Once the government becomes so big that is the primary driver of capital and investment we are in big trouble.  This is where the individual's economic creativity becomes stifled and things shut down.

Like I said, I don't always agree: but this is the core point that needs to be made again and again and again, as when the State becomes the economy, then the economy ceases to work. This is inevitable: the State follows its own reasons and goals, and they are never the goals of the common man or the even the people as a whole.

The important point also raised is this:

...the biggest wealth destruction in the next 1-2 years will be in my opinion without a doubt in the sovereign/municipal debt markets.  Whether it be through inflation or deflation this stuff can't possibly be paid back in real money or anything close to it.  The biggest fallacy I hear from people I know that own government or municipal paper is they say they are "comfortable just collecting the yield."  Ok, they may be comfortable with that now, but what if inflation escalates in a major way which is in my opinion a one of the more likely outcomes to all this.  It means that clipping 3.7% per year on a 10 year note will not be so comforting. 

People investing in sovereign debt are indeed setting themselves up for a fall, because there is no way for this to be paid back. Let's repeat that one more time.

Sovereign debt cannot be paid back. It will be either eliminated via default or via inflation. Sovereign debt, at this point, is unsustainable and as such deserves junk status, not the highest ratings status. This is yet another case where the standard rating system fails, as it fails to take into account the sheer levels of debt until that debt has already been accumulated. Ratings have to look forward for them to be of any real use to an investor: watching your investments get de-rated after they go tits-up is not much of a help at all.

The welfare state, the creation of a modern lumpenproletariat kept enthralled with food stamps and American Idol and deliberately dumbed-down to create dependent voting blocks that vote in the same thieves and frauds year in, year out, is at the core of the malaise. This dysfunctional aspect of the United States carries with it the seeds of its own destruction.

The solution? No one is going to like it: hard work, savings, poverty and despair for those unwilling to work. Charity for those actually unable to work. For those indulgent in their life styles, no further subsidies, no more billions spent on trying to find a cure for AIDS (ultimately a life-style disease, one with an easily controlled vector that is defeated by dark rooms and heavy promiscuity), and above all: putting adults in control.

Because they certainly are not in control right now.

Proof Of Insanity...

This is almost too good to be believed. Go read it and don't forget to pick up your jaw from the floor where it dropped.

It's good, but not good in the sense of "it's a good idea" but rather good in the sense of "perfect example of sheer insanity".

This is what happens when there is so much money flowing into government coffers (thanks to VAT and high levels of other taxation) that a few hundred million spent on what is basically a sop to voting groups with little money, but significant voting power (the poor and the elderly) is not automatically considered to be, and please pardon the vulgarity, absolute bat-shit-smoking insane.

Just wait for this idea to hit the US: all-expense paid visits to the Bronx and other tourism-disadvantaged areas.

Ye gods. This is clear and immediate proof of insanity.

Donnerstag, April 22, 2010

...a tale told by an idiot, full of sound and fury, signifying nothing...redux

Once again back to what is happening on Wall Street.

But this time not from a purely economic viewpoint, but rather contemplating what it means.

I've pointed out here on a number of occasions that President Obama is a product of the Chicago Machine of the Democratic Party, which is truly corrupt and deeply ingrained in the structure of that city: it lives off the people there, with corruption manifested as literally thousands of poorly done contracts that waste taxpayer money and puts it in the pockets of the carefully chosen; people with multiple jobs that don't show up for any of them except when it is politically needed; with deliberate over-staffing and political largess that prevents any real change to the system. Too many live too well, placed deep through the system, prevalent and able to nip any reforms either in the bud or able to thwart any real change.

It's the sad story of US corruption, but it's also what finances the Democratic Party in Chicago and has made it the de facto permanent party-in-power. That is all what drives the Democratic Party any more: no desire to actually help the economy and let people enjoy the fruit of their labors, but rather the virtually complete control of the economy for the benefit of the party. It's a sad, sad state of affairs for the Democrats, but one which the Party faithful have firmly committed themselves to. It didn't start with Obama - it's been this way, really, since the Reagan era led to the demise of the old-style Democrats - and the only way it can end with him is if the political commitment to routing out this most dangerous of corruptions wholesale, regardless of the costs (I estimate that you'd have to put around 2500 Chicagoans behind bars to even begin to clean up that city, at a minimum) both political and monetary.

Now, what is going on with the SEC, Goldman-Sachs and the White House?

Put simply, this is the game plan:

The only way that you can gain the kind of party loyalty needed to ensure that the game works is to make millionaires out of annointed Democratic Party activists. To this end, we can see a revolving door between carefully chosen Wall Street companies and the Party faithful; both Fannie Mae and Freddy Mac served this as well, and continue to do so, albeit on a smaller level. Rahm Emmanuel and other Party faithful made their millions by being appointed to the boards of these entities and making the policies that drove them into the ground.

Why are the financial companies willing to do this? Simple: access to information and being able to bend the rules with the complicity of oversight. The SEC has, obviously, been compromised severely, as you can see by the revolving door between the SEC and financial institutions.

Now, at some point the financial institutions think that they are in control, that they've bought and paid for their politicians, and that these need to pay attention to them right and proper. Of course, the politicians have their own agenda, especially Chicago politicians, and this is where it gets interesting.

You see, the Obama Administration needs a scapegoat for the SEC, and wants to remind Goldman Sachs who is wearing the pants in this relationship. Hence the move by the SEC on what is increasingly looking like a weak case against Goldman Sachs, ensuring that it actually does go into court, in order to point out to the world that current laws are inadequate and that the US government needs to be more firmly in control of the financial intermediation business.

Hence the case that the SEC is bringing will be largely fruitless, but will serve as leverage to pass legislation regulating Wall Street heavily: the goal is to tap into the Wall Street salaries and bonuses for the Party faithful, enriching them beyond their normal means and ensuring absolute political servitude for those who are tools, and simple enrichment for those who are pulling the political strings.

Read this and see how this fits. Then read this and understand more.

President Obama is presiding over the greatest fraud in US history: create a crisis, use it to get your tenterhooks into the money-making machine, and cream off the top while ignoring the common man. The goal is to get hundreds of millions for the the apparatchiks of the Democratic Party, to ensure that they have theirs and can therefore easily weather the probable wilderness that the Democratic Party will face after the mid-terms.

The public "outrage" of the Democratic Party towards Wall Street is nothing more than a tale told by an idiot, full of sound and fury, signifying absolutely nothing.

At some point you have to stop admiring the audacity and sheer corruption visible here and realize that this is the attempt to create the same kind of permanent money machine that drives Chicago politics, but this time on a national scale.

It remains corruption.

Mittwoch, April 21, 2010

Watch This Now...

While I don't think these folks have taken into account follow-on effects of their solution - dropping federal spending to 1990 per capita levels would create some holes in the space-time continuum of Washington, DC - their fundamental point is right: US government spending will bankrupt the country (if indeed it has not effectively done so alreadsy...)

Dienstag, April 20, 2010

Debt, Aging, Despair And...

This has been making the rounds of those who care about things like debt and sustainability. It's not a particularly hard thing to read, but it is a very depressing thing to read.

Not ecological sustainability, but economic sustainability. More on that later.

To summarize what is said: we all are in a world of hurt right now. The financial crisis - regardless of who you are, what you do, who you voted for, where you live (and yes, I'm including the Third World as well - is going to have real effects on the world's economy.

First and foremost: there is a fundamental weakness in all advanced economies.

Unfunded pensions with an aging demographic.

This is going to sound boring: it is anything but that.

The reason for long-term fiscal imbalances, imbalances that threaten the well-being of the world's financial system, is that there is rising and largely unfunded age-related spending that is driving government spending into a corner, slowly but surely. Why? Because systems of social security, including health insurance during the most expensive years of care, are unfunded and have to be paid out of current income.

It really is as simple as that.

While you can analyze all of this from a short-term perspective, the real problem is the long-term perspective. Ignore this at your peril: the paper linked to above tells the basic story.

For the US to meet the unfunded liabilities due to an aging population, it needs to improve their budget balance to a more or less permanent 7% surplus, instead of the 9% deficit that the US currently (2010) runs. I've rounded these numbers, as it makes no functional difference to the argument to do so.

That's right: for the US to cover future aging-related expenses, the budget deficit has to move no less than 16%, i.e. 1600 basis points: right now, it is expected to improve by 100 basis points (i.e. 1%) next year.

One might think that the US US is actually fairly well off, all things considered: the aging effects are fairly minimal over the next 30 years compared to countries like Japan, Germany, and even China. The problem for the US is that the aging population continues to expand, while Japan and Germany will see their aging populations shrink as their overall declining populations reduce the number of elderly significantly over time.

The effect that this has on government debt is devastating, and if left unchecked would be grounds for despair.

Why? Because the massive amounts of fiscal debt taken on in the wake of the financial crisis have brought up the day of reckoning that much closer to today. The dirty little secret of social security systems that are unfunded is that they all function today, but there is certainty that they cannot always function the same way. China will be particularly hard hit: with 4-2-1 in place (one-child policy, which results in four grandparents, two parents and one child) the Chinese will, sometime in the latter half of the 21st century, have to abandon its pension scheme for literally hundreds of millions of people, as you cannot expect tens of millions to support hundreds of millions without realizing that it doesn't make sense to work when the government takes it all away.

Hence the aftermath of the financial crisis is that it has brought structural imbalances forward into today, rather than leaving these problems to the next generation.

There are two ways of dealing with fiscal debt: becoming frugal and working at paying it off, or finding an accommodation with debt servicing that carries the debt forward in perpetuity. Fiscal restraint, as the authors of the BIS paper put it, delivers stable debt, but rarely debt reduction.

Right now, this is all fairly sustainable - here in the economic sense, of actually being a process that can be continued over very long periods of time - as long as interest rates remain low.

The problem is that the massive levels of debt acquired over the last several years is set to drive interest rates higher, rather than allowing them to remain low, setting up, effectively, the perfect storm for financial catastrophe.

It's popular to say that we are all Keynesians now, that we've all come to accept that the government sometimes needs to intervene in the economy to save us all from collapse, destruction and despair.

The problem? How to pay for it. Looking at the historical record, one thing comes out: three years after a typical banking crisis, the absolute level of public debt is around 86% higher, on average, than it was before the crisis. Countries hit hard by such crises tend to add more debt: in the current crisis, Ireland increased its debt by 98% and the UK by 111%, with the US posting an increase of 75% and Spain by 78%. These are structural increases, not cycle-related, and represent what would have otherwise been lost.

Because of these increases in debt, employment and growth will not be returning to pre-crisis levels: there is a permanent loss of potential output caused by the crisis, which will further lower government revenues and worsen the general picture.

Now, this, together with the effects of an unfunded social security system, means that long-term growth in the United States (and, of course, elsewhere with similar systems) is simply, as it is today, unsustainable.

What does unsustainable mean here?

It means that even without financial crisis, war, man-made and natural catastrophes, that at some point the economy will start to grow slower and slower because it is being choked by government spending on the aged and servicing the debt alone.

This will happen sooner, rather than later: the mere existence of the debt brings with it the seeds of doom. Right now, there is effectively a zero interest rate through most of the world, if not indeed, in real terms, negative interest rates. This is the only thing that is preventing a fairly huge sovereign debt melt-down. But the current situation is unstable: at some point, investors, those who buy the debt, will want higher returns as sovereign risks become apparent (the core risk, of course, is that a government will default on sovereign debt), which will then accelerate in a massive downward spiral for bond prices, effectively raising interest rates significantly and initiating what the Germans would call a GAU (größte anzunehmenden Unfall, aka worst conceivable accident, used by the anti-nuclear energy folks to insist that no nuclear plant can ever be safe unless it takes a core melt-down into account).

Basically, an increase of government debt by 100 basis points, empirically, results in a risk premium of between 120 and 160 basis points: this means increasing levels of government debt acts as a multiplier to any sort of upwards interest rates pressure. While central banks have, so far, avoided raising interest rates, it will become increasingly more difficult to place additional debt unless interest rates rise.

The GAU would be that sovereign debt would climb to levels that leave virtually no alternative to sustained and comprehensive defaults on sovereign debt, effectively ruining the world's bond markets and wiping out any government's ability to raise money outside of taxes. That would push the world's economy not into a severe recession, but into outright collapse.

We're talking here of unsustainable debt levels that would reach 300%, 400%, 600% and more of GDP, and not of some tin-hatted wacko dictatorship in the darkest corner of Africa, Asia or South America, but rather in the OECD countries.

That is how bad things are right now: this is not speculation, but rather go read that paper linked to above, from the Bank For International Settlements, the BIS, the central bank for central bankers.

Let's go back to what governments must do in order to get their finances in order: for the US, the average primary balance (i.e. government budget surplus), according to the BIS paper, needs to be +8% for the next five years, +4% for the next 10 years, and +2% for the next 20 years: right now, it's -7%.

That is how deep the hole is.

Now, raising taxes is one option, but, economically speaking, a poor one: taxes distort resource allocation, slowing growth, as investors act to reduce their tax burden (and yes, they are allowed to do that). Add to this the crowding-out effect of productive private capital, you can see how growth becomes slower: weakened investments, as the newest capital is always more productive than older capital, results in weaker growth.

It also ties the Keynesian hands of governments heading into the next crisis: we may have weathered this crisis, but there cupboards are bare and a hard, hard winter is coming.

Don't think this is a problem? Recent increases in risk premiums on long-term bond issues show that the markets do not consider sovereign debt to be low risk any more.

The authors of the BIS paper point out one fundamental fact: that regardless of what will be done, any program that fail to reduce future unfunded liabilities add to the problem, rather than helping solve the problem.

While the authors of the BIS paper do not offer advice how to solve the problems, I see no such constraint.

The solution is based on economic necessity and the cold, hard facts: government spending must be reduced drastically - basically eliminating all discretionary spending and instituting zero-based budgeting at a minimum in order to start generating the surpluses needed to stabilize and then slowly retire the debt - and taxes will have to go up. Government must become smaller (and hence more efficient) without any additional revenues, and the US savings rate will not only have to increase significantly - over 15% of disposable income - but will also have to be largely "invested" in US government bonds at virtually no interest (effectively giving the government a zero-interest loan), earmarked for paying off existing government debt that does generate interest.

Regardless of your political bent, this is unavoidable. Any other solution is economic folly.

Folks, the US government has dug us a huge hole that we can't otherwise get out of. I don't like this one bit, but pretending it can be otherwise is sheer folly.

Continuing to vote for those who got us into this is as much folly: any politician proposing unfunded future spending should be voted out of office and made to work for a living.

There is only one institution that is to blame: the US Congress. They are the only ones who can legally spend US government money.

There is no reason for despair: despair is a sin. But the longer the problem goes on, the worst the infestation.

Thanks to those who promised us the future, we've lost the present.

Freitag, April 16, 2010

Anti-Americanism From Within...

While there's been Anti-Americanism in Europe ever since the bloody colonials broke with Mother England, it took quite a few years for it to develop within.

Fred Siegel has a rather nice read here in Commentary Magazine on exactly this topic.

Read the whole thing, of course, but here is the final paragraph:

The rhetorical tropes fashioned in the 1920s, and restated repeatedly over the decades since, were reflections, DeVoto made clear, not so much of America as of a funhouse-mirror version of it, a distorted refraction based on aesthetic conceits and social pretensions. DeVoto died in 1955, so he never saw his fears realized by the rebirth of the anti-American intellectual in the 1960s. Today that spirit can be found in precincts both high and low—from the hallways of academe to late-night infotainment comics such as Jon Stewart and Stephen Colbert, who traffic in a knowing snarkiness that confers an unearned sense of superiority on their viewers. Now, as then, angered by the impertinence of the masses in their increasing rejection of the hope and change promised them in 2008, liberals, as in the title of a recent article in the online magazine Slate, raise themselves up by shouting, "Down with the People!"

While clearly not quote of the same caliber as the romantic-inspired Anti-Americanism of the Europeans, there remains a common thread, one that continues to cripple meaningful thought on the Left (such that the Left remains capable of such though): that of elitism, that the common man is to be despised and looked down upon.

As if the Left knew anything of the common man: their knowledge here is distorted at best. Superiority unearned leads to a sense of entitlement, combined with a fundamental knowledge that it is unearned and that they are hence actually unworthy: this contradiction gnaws at the conscience. But since you can create quit a career by riding this wave, most suppress this guilt and are happy to live with their consciences.

You can be an American and be quite Anti-American at the same time. The Democratic Party is living proof of this.

Mittwoch, April 14, 2010

Markets Are There To Serve Society...

The silly season has started up in the face of an election in the UK, but in this case it's not about something silly, but rather how absurdly badly politicians understand economics.

Which is very, very bad indeed.

Take a look at this at the Financial Times.

David Cameron of the Conservative Party, in this case my choice for the UK if I were to have one, despite what I will say here, because Brown is so utterly appalling, said this:

...that markets are a means to an end, and not an end in themselves. Markets are there to serve our society, not to suck the joy out of it or trample over its values.

Whoever wrote that has a rather serious case of wishful thinking, as well as an appalling understanding of what markets really are and what they do.

What is really going on?

First, read the Insight column by Russel Napier for the full story, but it boils down to this: governments, in their fervent - and highly misplaced - belief that everything is subservient to them, is after your savings. Mr. Napier's insight is indeed correct:

The roll back of the free market has already begun, driven by the necessity to support a fragile teetering tower of public debt. Commercial banks' new capital adequacy ratios already require banks to hold higher levels of government debt. In due course a transaction tax on financial instruments, apart from government debt, will come to pass. A 'Buffet Tax' which makes short termism expensive and forces owners to engage with managers will come to see as the natural solution to produce markets which 'serve our society'.

The ultimate weapon to force private savings to fund governments will be capital controls. To support public debt to GDP levels not seen since the second world war, we are likely to a see a return of similar forms of market constraints which were necessary in that era. The 'new normal' is not sub par economic growth. The new normal is the roll back of the free markets.

To coin a phrase, yikes.

What Mr. Napier is saying - quite correctly, too, I fear - is that government debt has, effectively, broken the markets.

And he is right. There is too much debt out there for the markets, if allowed to work, to do anything but heavily discount the debt in order to sell it.

This, of course, leads to catastrophe, as the Gods of the Copybook Headings are still there, waiting for their hour of sacrifice and penance.

For politicians to believe that markets are there to serve the state, to serve "society" (whatever that may mean), is the same as saying that the politicians disdain what the markets are telling them, that they believe the markets need to stop speaking truth to power, as it were: markets always do this. Markets are dull, devastating and ruthless: markets don't care if government debt of these almost biblical proportions is going to fund a politician's mistress (or master), to pay for actual improvements to infrastructure, or whatever; all that markets care about is supply and demand.

Right now, government debt is increasingly unattractive: low interest rates, increasing likelihood of sovereign default as the less inconvenient solution to government largess (less inconvenient for the politicians, to be sure), and bond prices that remain too high for the actual return, reflecting the mistaken belief of safe haven. In order to make the sales of bonds more attractive, then, as far as the politicians are concerned, then the bloody markets will just have to knuckle down and buy our bonds, since there is, for the politicians, no alternative.

The supply of political foolishness is virtually inexhaustible. The demand is nil.

The problem?

Taking control over the markets to ensure their political subservience to the whims of their masters. The governments of this world, the ones running up massive debts for anything but the most existential reasons (debt at these levels should never be seen outside of full-blown wars), will have to take your money - my money, her money, his money, the children's college savings - in order to service the debt.

That way lies the madness that always comes before the Gods of the Copybook Headings return.

Sonntag, April 11, 2010

Ill Fares The Left?

Tony Judt has a new book out.

The forward is published here.

And here is a fisking, because it deserves it. I'm not going to repeat it all, just the parts that need to be ... fisked.

Something is profoundly wrong with the way we live today. For thirty years we have made a virtue out of the pursuit of material self-interest: indeed, this very pursuit now constitutes whatever remains of our sense of collective purpose. We know what things cost but have no idea what they are worth. We no longer ask of a judicial ruling or a legislative act: Is it good? Is it fair? Is it just? Is it right? Will it help bring about a better society or a better world? Those used to be the political questions, even if they invited no easy answers. We must learn once again to pose them.

This very first sentence, that something is profoundly wrong with the way we live today, is the basis for the modern left. It is not that individual behavior is bad, or that institutions need patching, or that jobs need to be created, or any one of a number of discontents is crying to be resolved: rather, it is an all-encompassing, comprehensive criticism: further the criticism is not merely that Democrats don't like Republicans, but goes far beyond the pale, reflecting a fundamental problem, a profound problem. What is the problem? How we live today, how our very existences are constituted, that our very lives are false, wrong, incorrect, invalid. That's one heck of a critique: he is critiquing the very existence of modern society (and note that his "we" is clearly aimed at the West, not the developing countries or China).

Going back thirty years, we have 1980. That was the year that I first moved to Germany, that was the year that Reagan was elected, that was the year I consider to be the start of the end of the Soviet Union as it wrestled with Afghanistan and the strains of the folly of socialism was made increasingly clear to those living under it. It is also the point in time when China slowly started moving away from the suppression of the economic motive, it is still a time in South America of corruption and incompetence, it is still the time of proxy wars between East and West in Africa and the Middle East, and it was the point in time when the Islamicist beast of nihilistic terrorism was scarcely an inkling in the minds of Imams.

For Mr. Judt, those thirty years have been the time when we have made a virtue of material self-interest.

Think of that: to make a virtue of material self-interest. What does this mean, this material self-interest? Self-interest, of course, is homo oeconomicus, the rational economic actor of academia; self-interest is the basis of Adam Smith; self-interest is the basic driving force of human economic action. Material self-interest is, then, the great rising, of the transformation, literally, of millions from extreme poverty to the mundane and boring middle-class in nations like Brazil, China and India.

This pursuit is now what constitutes whatever remains of our sense of collective purpose?

What does Mr. Judt mean here? Collective purpose is the key here to understanding: collective purpose. The purpose of the collective, which I can only understand here as the purpose of the political collective, the state, as Hobbes would understand his Leviathan. Material self-interest is now the purpose of the state: in other words, the purpose of the state has become to better the material well-being, the material self-interest, of its citizens.

We know what things cost, but have no idea of what they are worth? Here we have the simple statement of the valuation problem, that there are things that cannot have their value expressed in terms of money. The inverse of this, of course, is that unless you can place a value on things, there is no way to determine if the money spent on these things is "worth" it.

Mr. Judt is looking for a rebirth of politics. He is looking for a resurrection of the primacy of politics, rather than the primacy of economics.

The materialistic and selfish quality of contemporary life is not inherent in the human condition. Much of what appears "natural" today dates from the 1980s: the obsession with wealth creation, the cult of privatization and the private sector, the growing disparities of rich and poor. And above all, the rhetoric that accompanies these: uncritical admiration for unfettered markets, disdain for the public sector, the delusion of endless growth.

Really? Not inherent in the human condition? What Mr. Judt is complaining about here is the fact that economics has indeed trumped politics, as it always will: the collapse of the socialist experiment, and it literally costs millions of lives before it collapsed, was first and foremost an economic collapse. To say that economics, or rather the acsension of modern capitalist economics, is not inherent in the human condition - please note not the political condition, but the human condition in and of itself - is to deny that humans are economic actors. The obsession with wealth creation, the "cult" of privatization and the private sector, growing disparities of rich and poor, are all not modern creations, but rather have been part and parcel of human history: without wealth creation there is no capital and you live the life of the economic brute of Hobbes; without private activity and the rule of law protecting private property, you have no civilization beyond the reach of the feudal lord; without disparities of rich and poor you have soul-crushing poverty for everyone, not riches for everyone.

Uncritical admiration for unfettered markets, disdain for the public sector, the delusion of endless growth: here we see the true colors emerging. These are all straw-man arguments, made by the modern Left to set up economics to be taken apart, but ignoring the fact that these things do not exist. Period. There is no uncritical admiration for unfettered markets amongst Chicago economists; any economist worth his profession does not disdain the public sector, and no economist has the delusion that growth is endless.

We cannot go on living like this. The little crash of 2008 was a reminder that unregulated capitalism is its own worst enemy: sooner or later it must fall prey to its own excesses and turn again to the state for rescue. But if we do no more than pick up the pieces and carry on as before, we can look forward to greater upheavals in years to come.

Here we start again: we cannot go on living like this/something is profoundly wrong. What Mr. Judt cannot abide is the fact that economic growth from day one has been a story of business cycles and their effects. The pig cycle existed when the first farmers started selling their pigs. This is not economic analysis or critique: this is the denial of economics, it is the call for the abolishment of economics.

And yet we seem unable to conceive of alternatives. This too is something new. Until quite recently, public life in liberal societies was conducted in the shadow of a debate between defenders of "capitalism" and its critics: usually identified with one or another form of "socialism." By the 1970s this debate had lost much of its meaning for both sides; all the same, the "left–right" distinction served a useful purpose. It provided a peg on which to hang critical commentary about contemporary affairs.

Aye, and there is the rub. The Left is unable to conceive of alternatives: there are none, and this, given the politics driving Mr. Judt and his colleagues, this is intolerable. There is no alternative to economics: the slow, shoddy, syphilitic collapse of socialism began in the 1970s, and the loss of meaning here is one way of saying that socialism lost: for the capitalistic West, the debate lost its meaning because we won: for the Left, it lost meaning because it was unmistakable that socialism was doomed to the trash-heap of history.

On the left, Marxism was attractive to generations of young people if only because it offered a way to take one's distance from the status quo. Much the same was true of classical conservatism: a well-grounded distaste for over-hasty change gave a home to those reluctant to abandon long-established routines. Today, neither left nor right can find their footing.

Here Mr. Judt is accurate: the driving force behind many people's interest in Marxism, especially in the 1960s, was that you could easily criticize the status quo and pretend to be radical: it's called radical chic, and underscored how little those of the 1960s really understood what they were doing. But he is inaccurate is contrasting classical conservatism with the Left: instead, part of the reason for the utter disenchantment of the vast majority for Leftist memes is the fact that the generations change, and the stultifying conformity of Leftist thinking is what younger generations reject. The modern Right won the Cold War: they never lost their footing.

If young people today are at a loss, it is not for want of targets. Any conversation with students or schoolchildren will produce a startling checklist of anxieties. Indeed, the rising generation is acutely worried about the world it is to inherit. But accompanying these fears there is a general sentiment of frustration: "we" know something is wrong and there are many things we don't like. But what can we believe in? What should we do?

Umm. no: there is the anxiety of failing to be the economic actors that they want to be. People are worried about jobs as many move to developing countries; people no longer worry about nuclear war - and should be happy for that - and instead have to face the mundane and terrifying prospects of actually having to work for a living. The "we" here is not all of us: rather, it is the "we" of the media, of academia, and the sense of foreboding, the sense that something is wrong, is the meme that the Left has been selling to the public for decades: for 30 years and more.

Here Mr. Judt is setting up another straw man: in this case, the claim that people feel that something is wrong, but in reality they have been told that there is something wrong for so long that this should come as no surprise: the basis of revolution is discontent, and at the end of the day, Mr. Judt and his colleagues desperately want the revolution, the one that will not be televised. They are, after all, facing an existentialist crisis. the one that has been brewing for 30 years as the slow collapse of socialism left those on the Left with...nothing in their lives.

This is projection on a grand scale and explains a lot.

This is an ironic reversal of the attitudes of an earlier age. Back in the era of self-assured radical dogma, young people were far from uncertain. The characteristic tone of the 1960s was that of overweening confidence: we knew just how to fix the world. It was this note of unmerited arrogance that partly accounts for the reactionary backlash that followed; if the left is to recover its fortunes, some modesty will be in order. All the same, you must be able to name a problem if you wish to solve it.

It is ironic, but not quite for the reasons that Mr. Judt indicates: the note of unmerited arrogance didn't account for a "reactionary" backlash, but rather the discovery that the modern Leftist Emperor, the stultifying meddling in the economy, wore no clothes. What Mr. Judt doesn't understand is that there is no way for the left to recover: the fact of the utter and complete collapse of socialism means that the Left is dead.

It refuses to believe this, it is in denial. Projection and denial, and that explains even more.

When journalists and commentators advocate public expenditure on social objectives, they are more likely to describe themselves—and be described by their critics—as "liberals." But this is confusing. "Liberal" is a venerable and respectable label and we should all be proud to wear it. But like a well-designed outer coat, it conceals more than it displays.

A liberal is someone who opposes interference in the affairs of others: who is tolerant of dissenting attitudes and unconventional behavior. Liberals have historically favored keeping other people out of our lives, leaving individuals the maximum space in which to live and flourish as they choose. In their extreme form, such attitudes are associated today with self-styled "libertarians," but the term is largely redundant. Most genuine liberals remain disposed to leave other people alone.

First, the automatic assumption that journalists are advocates is illuminating: it is part and parcel of the problem.

Mr. Judt's description of classic liberalism is accurate, but he fails to understand the irony of what has really happened: that it is the modern liberalist that is intolerant, vastly more intolerant than any of his conservative predecessors. Classic liberalism still exists, but you do not find it on the Left anymore: the transition is complete. You find it, instead, on the modern Right, in Reagan Republicans. Liberalism is the core of modern political economics as well: leave people well enough alone, and you will find that they work happily towards bettering themselves.

The intolerance of the Left is here especially ironic, given that Mr. Judt is explicitly and deliberately setting up liberalism in economics as the fall guy in his arguments.

We now see the path of the future for Mr. Judt and his colleagues:

Social democrats, on the other hand, are something of a hybrid. They share with liberals a commitment to cultural and religious tolerance. But in public policy social democrats believe in the possibility and virtue of collective action for the collective good. Like most liberals, social democrats favor progressive taxation in order to pay for public services and other social goods that individuals cannot provide themselves; but whereas many liberals might see such taxation or public provision as a necessary evil, a social democratic vision of the good society entails from the outset a greater role for the state and the public sector.

Social democracy was hated by the classic Left, as it suborned and replaced revolutionary elements and was, by them, considered nothing less than the suborning of the revolutionary process by the bourgeoisie in order to continue to exploit the proletariat: there were more deaths on Berlin streets in the 1920s and 1930s between the various Leftist groups than there was deaths in street fights between the Left and the Right.

Social democracy is what you end up with when bourgeois elements stop the revolutionary process to maintain their status and their ability to exploit the masses.

Which is exactly what Mr. Judt is basically arguing for: social democracy is the last desperate attempt by a class, enshrined in comfort and plenty, living off tax money, to continue to exploit the tax-paying class for their own selfish goals.

Now, that's ironic.

The state and the public sector as necessary for the the vision of the Good Society: I guess that one must set one's goals a tad lower when one looks back at the wreckage of the Great Society.

One of my goals is to suggest that government can play an enhanced role in our lives without threatening our liberties—and to argue that, since the state is going to be with us for the foreseeable future, we would do well to think about what sort of a state we want. In any case, much that was best in American legislation and social policy over the course of the twentieth century—and that we are now urged to dismantle in the name of efficiency and "less government"—corresponds in practice to what Europeans have called "social democracy." Our problem is not what to do; it is how to talk about it.

Here we see the core of the argument: the state is going to be with us for the foreseeable future (it certainly isn't going to wither away). The huge debt accumulated under President Obama's administration ensures this: if anything, it is part of the reason it is being accumulated, since these debt levels will effectively enshrine "progressive" policies until the debt can be retired. Taking on such massive debt means that future administrations, no matter what they look like, will have their hands tied, unless, of course, the debt is repudiated. The very fact that so much of this debt is being siphoned off into corrupt practices underscores this: the Democrats can have their cake and eat it to.

The idea that the government can play an enhanced role in our lives without threatening liberties is anathema to classic liberalism as Mr. Judt defines it.

Social democrats today are defensive and apologetic. Critics who claim that the European model is too expensive or economically inefficient have been allowed to pass unchallenged. And yet, the welfare state is as popular as ever with its beneficiaries: nowhere in Europe is there a constituency for abolishing public health services, ending free or subsidized education, or reducing public provision of transport and other essential services.

It is not the criticism that the European model is too expensive or economically inefficient - note that this is actually one criticism, not two - that is the problem: it is the fact that it is economically inefficient. If you have any intellectual honesty, this is not a claim, but a fact: it is, in that sense, unchallengeable. Of course the welfare state is popular with those who profit from it: that doesn't change the fact that it is unsustainable and leads first to lower growth and second to fiscal ruin.

In the early years of this century, the "Washington consensus" held the field. Everywhere you went there was an economist or "expert" expounding the virtues of deregulation, the minimal state, and low taxation. Anything, it seemed, that the public sector could do, private individuals could do better.

The Washington consensus remains correct: private entities, driven by the profit motive, can do a better job in most everything that the public sector does. There are exceptions, rightfully so, where the work becomes political: then vested interests and conflicts of interest forbid the use of private ventures. This is nothing but good governance.

The Washington doctrine was everywhere greeted by ideological cheerleaders: from the profiteers of the "Irish miracle" (the property-bubble boom of the "Celtic Tiger") to the doctrinaire ultra-capitalists of former Communist Europe. Even "old Europeans" were swept up in the wake. The EU's free- market project (the so-called "Lisbon agenda"); the enthusiastic privatization plans of the French and German governments: all bore witness to what its French critics described as the new " pensée unique."

You know why these were greeted so positively? Because it transformed moribund economies from statist, inefficient entities into rather more dynamic and successful economies. Should Ireland, in the wake of financial collapse, have not ventured at all instead? The quality of life in Ireland after the financial collapse, viewed as a whole, is vastly better than it was under the old life style that led not to domestic expansion, but rather emigration.

Today there has been a partial awakening. To avert national bankruptcies and wholesale banking collapse, governments and central bankers have performed remarkable policy reversals, liberally dispersing public money in pursuit of economic stability and taking failed companies into public control without a second thought. A striking number of free-market economists, worshipers at the feet of Milton Friedman and his Chicago colleagues, have lined up to don sackcloth and ashes and swear allegiance to the memory of John Maynard Keynes.

All born our of economic necessity after politicians thoroughly screwed things up: I cannot but repeat the point that without the creation of toxic instruments such as subprime mortgages, there would be no subprime crisis. It really is that simple. But this is not the triumph of Keynes, but rather prudent government intervention to prevent a greater breakdown: Keynes would be appalled at what is called Keynesian economic policy, which has little or nothing to do with what he wrote about. For Keynes, prudent economic policy was to create reserves during upswings so that one could support employment during downswings: what we see today is profligate acquisition of debt to prevent political partners - financiers and the unions, lucrative supporters of Democratic politicians - from bearing any damage. This is not Keynesian policies, these are corrupt and incompetent politicians bailing out their political supporters, doing exactly what they have been paid to do, and all profiting nicely at the cost of the US taxpayer.

If it is to be taken seriously again, the left must find its voice. There is much to be angry about: growing inequalities of wealth and opportunity; injustices of class and caste; economic exploitation at home and abroad; corruption and money and privilege occluding the arteries of democracy. But it will no longer suffice to identify the shortcomings of "the system" and then retreat, Pilate-like, indifferent to consequences. The irresponsible rhetorical grandstanding of decades past did not serve the left well.

Sorry: how can the Left, after the decades of vicious suppression of freedom and liberty, after the deaths, literally, of hundreds of millions of innocents sacrificed to the altar of state control of the means of production, how can the Left in any of its incarnations be taken seriously again, unless they repudiate the core of their own identity? There is indeed much to be angry about: the unrealized potentials of those hundreds of millions of dead, the injustices of Leftist politicians continue to show their faces in public and not to have their ill-gained assets seized (here I am talking of the follow-on parties of the SED, the East German communists, who have the audacity to re-enter politics after so many deaths).

And the ignorance of economic laws and the absolute and continuing indifference to consequences of Leftist policies is exactly what the Left must repudiate if they are to be taken at all seriously. No grandstanding can make up for this, and Mr. Judt is indeed accurate in that this has not served the Left well: we see this today in the collapse of the environmental catastrophe politics of the various watermelon parties (greed outside, red inside).

We have entered an age of insecurity—economic insecurity, physical insecurity, political insecurity. The fact that we are largely unaware of this is small comfort: few in 1914 predicted the utter collapse of their world and the economic and political catastrophes that followed. Insecurity breeds fear. And fear—fear of change, fear of decline, fear of strangers and an unfamiliar world—is corroding the trust and interdependence on which civil societies rest.

This fear is what everyone living in developing countries experience every day, and is indeed normal life: it is instructive that the instrumentalization of this transition to an age of insecurity as being one of fear -  rather than opportunity - is really addressing the core value of Leftist statism, of gaining control over all aspects of life to remove insecurity, but without realizing that it is exactly this insecurity which drives economic growth.

All change is disruptive. We have seen that the specter of terrorism is enough to cast stable democracies into turmoil. Climate change will have even more dramatic consequences. Men and women will be thrown back upon the resources of the state. They will look to their political leaders and representatives to protect them: open societies will once again be urged to close in upon themselves, sacrificing freedom for "security." The choice will no longer be between the state and the market, but between two sorts of state. It is thus incumbent upon us to reconceive the role of government. If we do not, others will.

The second-to-last sentence says everything: there can be no market, there is only the State. And this must be made in the image of Mr. Judt and his colleagues because otherwise someone else will do it.

Here we see the recurring meme: change must cease, the state must prevail over chaos, be it change ... but wait. What he is saying here is not change, but rather challenge: it is not that terrorism casts stable democracies into turmoil - indeed, no stable democracy has ever been so challenged by terrorism that it abandons democracy, despite the feverish hallucinations of the Left that President Bush's administration did that - but rather that we consistently face new challenges: changing to meet challenge is the core of human nature, it is what makes us, a species, successful.

Only the state can remove this by providing a safety blanket: in this case, though, the kind of safety blanket envisioned is one that smothers the infant in its crib. Change, creative destruction, is at the core of every successful economy: remove this, and you reconceive not the role of government, but of how the economy should work. In this case, the pathology of statism, with the suppression of that which brings change, the human spirit.

Now Mr. Judt comes to the core of the problem:

All around us, even in a recession, we see a level of individual wealth unequaled since the early years of the twentieth century. Conspicuous consumption of redundant consumer goods—houses, jewelry, cars, clothing, tech toys—has greatly expanded over the past generation. In the US, the UK, and a handful of other countries, financial transactions have largely displaced the production of goods or services as the source of private fortunes, distorting the value we place upon different kinds of economic activity. The wealthy, like the poor, have always been with us. But relative to everyone else, they are today wealthier and more conspicuous than at any time in living memory. Private privilege is easy to understand and describe. It is rather harder to convey the depths of public squalor into which we have fallen.

This is nothing other than the politics of envy, the politics of pitting those with against those without. Mr. Judt does speak one piece of truth: industrial activity, measured as a percentage of GDP, has fallen: this is, however, a function of the expansion of the financial sector, rather than, at least in the US (in the UK this is different), the decline of industry.

What Mr. Judt cannot stand - nor can the Left in general - is the freedom to do what you want with your money. The conspicuous consumption that Mr. Judt decries is the kind of consumption that the newly rich indulge themselves in. It is true: the wealthier are wealthier, despite heavily progressive tax structures, but this is per definition intolerable: this is the politics of envy, the politics of class struggle.

The irony here is that many of those who have become so obscenely rich are those who support the Left: George Soros, the Wall Street bankers who buy their Democratic politicians as insurance against government action against their interests. The Democratic Party, in an instance of supreme irony, continues to portray itself as the party of the working man, of the common man, whilst being run by those with supreme contempt for the working man (unless, of course, he is unionized) and financed by the very rich.

Poverty is an abstraction, even for the poor. But the symptoms of collective impoverishment are all about us. Broken highways, bankrupt cities, collapsing bridges, failed schools, the unemployed, the underpaid, and the uninsured: all suggest a collective failure of will. These shortcomings are so endemic that we no longer know how to talk about what is wrong, much less set about repairing it. And yet something is seriously amiss. Even as the US budgets tens of billions of dollars on a futile military campaign in Afghanistan, we fret nervously at the implications of any increase in public spending on social services or infrastructure.

Poverty for Mr. Judt is an abstraction because there is no real poverty in the US or in the industrialized West: it has been effectively eliminated. The problem that the US and other countries face in their infrastructure is not one of failure: it is one of corruption, of unionized thieves in collusion with their bought-and-paid-for politicians preventing, for instance, the proper care of levies outside of New Orleans, where environmentalists prevented work from being done. The collective failure of will does not exist: rather, there is a clear and specific governmental failure of corruption and inefficiency.

Here is the mythology of the Left:

To understand the depths to which we have fallen, we must first appreciate the scale of the changes that have overtaken us. From the late nineteenth century until the 1970s, the advanced societies of the West were all becoming less unequal. Thanks to progressive taxation, government subsidies for the poor, the provision of social services, and guarantees against acute misfortune, modern democracies were shedding extremes of wealth and poverty.

The problem is here two-fold: first, the economic sustainability of socialist spending and second, the failure of these policies.

To be sure, great differences remained. The essentially egalitarian countries of Scandinavia and the considerably more diverse societies of southern Europe remained distinctive; and the English-speaking lands of the Atlantic world and the British Empire continued to reflect long-standing class distinctions. But each in its own way was affected by the growing intolerance of immoderate inequality, initiating public provision to compensate for private inadequacy.

There it is: the key to understanding the folly and futility of the Left. Initiating public provision to compensate for private inadequacy. This is folly because of a fundamental fact, one that the Left consistently fails to understand: this is equalizing what is naturally unequal and which therefore can never be equalized. You can throw money at this problem, but it is never solved by throwing money at it: this is the greatest folly of public spending.

Over the past thirty years we have thrown all this away. To be sure, "we" varies with country. The greatest extremes of private privilege and public indifference have resurfaced in the US and the UK: epicenters of enthusiasm for deregulated market capitalism. Although countries as far apart as New Zealand and Denmark, France and Brazil have expressed periodic interest in deregulation, none has matched Britain or the United States in their unwavering thirty-year commitment to the unraveling of decades of social legislation and economic oversight.

Now we see the sour grapes: according to the progressives, their opponents are not allowed to change things back (which is why progressives hate change so much...). The commitment to economic sensibility after decades of economic incompetence was not one that happened magically: it was the result of voters deciding that enough was enough. New Zealand, by the way, did deregulate much of the economy and has done very well as a result, thank you.

There has been a collapse in intergenerational mobility: in contrast to their parents and grandparents, children today in the UK as in the US have very little expectation of improving upon the condition into which they were born. The poor stay poor. Economic disadvantage for the overwhelming majority translates into ill health, missed educational opportunity, and—increasingly—the familiar symptoms of depression: alcoholism, obesity, gambling, and minor criminality. The unemployed or underemployed lose such skills as they have acquired and become chronically superfluous to the economy. Anxiety and stress, not to mention illness and early death, frequently follow.

Here Mr. Judt confuses things: the lack of intergenerational mobility is not the result of increasing inequality, but rather because tax burdens are becoming so onerous (and public debt so stultifying) that chances for the children of today are objectively worse: it is because their parents have spent all their money and are presenting their children and grandchildren with the bill. This is tantamount to the murderer throwing himself on the mercy of the court for killing his parents because he is an orphan. The current generation has consumed the seed corn for the future.

But it gets better:

Income disparity exacerbates the problems. Thus the incidence of mental illness correlates closely to income in the US and the UK, whereas the two indices are quite unrelated in all continental European countries. Even trust, the faith we have in our fellow citizens, corresponds negatively with differences in income: between 1983 and 2001, mistrustfulness increased markedly in the US, the UK, and Ireland—three countries in which the dogma of unregulated individual self-interest was most assiduously applied to public policy. In no other country was a comparable increase in mutual mistrust to be found.

This is absurd: correlation is not causation, Mr. Judt, as much as you would like it to be. Trust has increased markedly as people in the US, the UK and Ireland realize how their taxes were being wasted.

Even within individual countries, inequality plays a crucial role in shaping peoples' lives. In the United States, for example, your chances of living a long and healthy life closely track your income: residents of wealthy districts can expect to live longer and better. Young women in poorer states of the US are more likely to become pregnant in their teenage years—and their babies are less likely to survive—than their peers in wealthier states. In the same way, a child from a disfavored district has a higher chance of dropping out of high school than if his parents have a steady mid-range income and live in a prosperous part of the country. As for the children of the poor who remain in school: they will do worse, achieve lower scores, and obtain less fulfilling and lower-paid employment.

Well, duh: those who are wealthier can afford the best care. Behavior changes prudently when more money is involved. What is more crucial is the behavior of people, either choosing high-risk life styles (sex, drugs, obesity, other risky behaviors) or choosing more prudent ones. This has everything to do with individual choices and little to do with a gini coefficient. You can live a very healthy life style with little money, but you have to choose to do so.

The wider the spread between the wealthy few and the impoverished many, the worse the social problems: a statement that appears to be true for rich and poor countries alike. What matters is not how affluent a country is but how unequal it is. Thus Sweden and Finland, two of the world's wealthiest countries by per capita income or GDP, have a very narrow gap separating their richest from their poorest citizens—and they consistently lead the world in indices of measurable well-being. Conversely, the United States, despite its huge aggregate wealth, always comes low on such measures. We spend vast sums on health care, but life expectancy in the US remains below Bosnia and just above Albania.

Sweden and Finland are two of the Left's favorite countries to hold up as examples, and two of the poorest comparisons: two very homogeneous countries with high incomes and a very strong work ethic. Compare this to the US: a strongly heterogeneous country with high incomes and a strong work ethic within the productive community, but which is indulgent in supporting those who don't want to work. The lowered US score reflects not the poor state of the US, but rather the large immigrant communities who are starting from a lower position and which of course lowers the overall US score as a result. Those are the facts.

Inequality is corrosive. It rots societies from within. The impact of material differences takes a while to show up: but in due course competition for status and goods increases; people feel a growing sense of superiority (or inferiority) based on their possessions; prejudice toward those on the lower rungs of the social ladder hardens; crime spikes and the pathologies of social disadvantage become ever more marked. The legacy of unregulated wealth creation is bitter indeed.

Inequality, Mr. Judt, is what drives the economy: it is what drives competition, not what destroys it.

As recently as the 1970s, the idea that the point of life was to get rich and that governments existed to facilitate this would have been ridiculed: not only by capitalism's traditional critics but also by many of its staunchest defenders. Relative indifference to wealth for its own sake was widespread in the postwar decades. In a survey of English schoolboys taken in 1949, it was discovered that the more intelligent the boy the more likely he was to choose an interesting career at a reasonable wage over a job that would merely pay well. Today's schoolchildren and college students can imagine little else but the search for a lucrative job.

Only on the Left can the myopia be so great: economic necessities have always driven people to find lucrative jobs. Anything else indicates that the writer knows less of economic history than anyone thought.

How should we begin to make amends for raising a generation obsessed with the pursuit of material wealth and indifferent to so much else? Perhaps we might start by reminding ourselves and our children that it wasn't always thus. Thinking "economistically," as we have done now for thirty years, is not intrinsic to humans. There was a time when we ordered our lives differently.

This is the guilt of the Left made naked: they have failed to conquer human nature and consistently fail to understand that they never will. The New Soviet Man was a myth. There was a time when we could be so indulgent as to afford the fantasies of Mr. Judt and the Left: their legacy is that we can no longer be so indulgent. That is intrinsic to humans.

There was a time when we ordered our lives differently, a time when we still understood the Gods of the Copybook Headings.

Mr. Judt never did, nor does the Left.

Samstag, April 10, 2010

The Core Of The Problem...

ShrinkWrapped has a way with words: this phrase struck me (from here):

As Heather McDonald points out, our Social Scientists and Social Engineers (Progressive Politicians) have not yet devised a way for society to address the internal deficits that keep people in poverty when opportunities abound.  Nonetheless, they will probably keep trying and spending a fortune of our money in their doomed efforts.

This is indeed the core of the problem: it is a deadly sin. It is the sin of misallocation of capital, of unwisely spending money. The progressive mindset is, at the core, fundamentally anti-economics, rejecting the idea that their activities are also subject to economic laws and results.

Spending money on something doomed is, literally, throwing it away. If it's my money, then it's my choice: I can spend all my money chasing a pipe dream, such as becoming a world-class classical ballet dancer (I'm 53, uncoordinated and at least a few pounds overweight), even though everything speaks against it.

But spending other people's money in such doomed endeavors is a cardinal sin.

Call me heartless and unfeeling, but if you're not spending your own money on utter waste and foolishness, then you shouldn't be spending it.

Of course, that would affect so many naive and foolish people that that would be, like, totally unfair.

Ye gods of the copybook headings: ignore them, and you have what we now have, a huge cohort of spendthrifts and wastrels, demanding subsidies for their life styles and demanding the repeal of the laws of economics.

I've said it before and I'll say it again: you cannot ignore the laws of economics, just as you cannot ignore the laws of physics. These laws are just as immutable as those of physics, just as permanent and unchanging. Oh, and I know that the laws of physics are changing all the time, but you must realize this: those changes are changes of nuance, not of fundamentals. Gravity still sucks regardless of why it works, and Newtonion physics remains valid for the vast majority of our dealings in the real world. The same is true for the laws of economics: markets in equilibrium move to a new equilibrium when disturbed and/or distorted, and unless you are generating value added in your work, then you are non-productive.

This is the core of the problem: spending billions on things and activities that, at the end of the day, make no difference whatsoever.

We have had a war on poverty for over 45 years now. I wish the progressives would finally realize that poverty won and that their campaigns have done nothing but entrench it further. Of course, if they were to do that, they wouldn't be progressives anymore.