Wednesday, February 25, 2009

It's been a long time coming...

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"We are in trouble today because we have allowed a culture of corruption and dishonesty to permeate our institutions and pollute our public discourse." Stephen M. Walt
Who would expect that such a noted "realist" in foreign affairs as Stephen Walt would say something so innocent. If only it were that simple. In reality the problem is systemic, not a result of individual or collective frailty.

As Daniel Gross wrote in Slate,
In the past few months, we've been riveted and disgusted by the exploits of scamsters like Bernard Madoff and Allen Stanford (characters who, if they didn't exist, would have to be invented by Tom Wolfe). It's both easy and convenient to hold them up as the ultimate symbols of the just-ended boom. But we shouldn't. While there was some crime in the mortgage industry, law-abiding, respectable, upstanding citizens caused the overwhelming majority of financial losses suffered thus far. Skeezy money managers and mobbed-up boiler rooms didn't create the economic catastrophe. It was visited on us by firms in the Dow Jones Industrial Average and S&P 500—companies that trace their origins back to the 1800s, run by graduates of Yale and Harvard. The people who blew up the system weren't anarchists.
That we are surprised and offended by the behavior of these supposedly "law-abiding, respectable, upstanding citizens" is itself a throwback to our pre-industrial past.

One of the most interesting insights of Eric Hobsbawm, perhaps the world's foremost living historian, is that early capitalism inherited from previous phases of civilization such as feudalism and the bourgeois revolution, a wealth of valuable social assets that were fundamental to its initial success.

Social and cultural assets such as thrift, the postponing of gratification, the importance of the family unit and even what the Bible calls "the fear of God" were fundamental in creating the "work ethic" that was essential to the early success of capitalism.

However important these values might have been to our capitalist system in its foundational moment, the system in itself is indifferent to them, for its only focus is on continuous and unlimited growth and profits.

When finally push comes to shove, if something cannot be qualified on a balance sheet it will be seen as irrelevant, often with great and wrenching regret for those involved in taking the decisions, for those among us who must decide are also inheritors of western civilization and its moral and ethical values... but the logic of the system is the master, not they: that logic must take precedence over their feelings of common humanity.

A created reality has become more real than flesh and blood.

If thrift, sacrifice, solidarity, the family or any other value comes into conflict with growth and profit, it is simply left to wither. That is how the lean and lanky, thin lipped, American puritan, with his calloused hands, was inflated to obesity and taught to shake his booty and shop till he dropped.

Thomas Frank's book,
"The Conquest of Cool" , will fill in some of the blanks in this process for my readers.

And unfortunately, the collapse we are living through right now, being systemic, an
organic crisis, has no easy remedy. Trying to stabilize an unstable system is just as likely to destabilize it further.

in complex systems without complete knowledge is extremely perilous. It would be wise to be skeptical of stimulus plans and other remedies; unless those who intervene have the skill and knowledge of brain surgeons - economists don't - the cure will often be worse than the disease.

Jeffery Sachs (yes, the same man who once
nearly destroyed Russia while "reforming" it) wrote this in The Scientific American :
The U.S. political-economic system gives evidence of a phenomenon known as “instrument instability.” Policy makers at the Federal Reserve and the White House are attempting to use highly imperfect monetary and fiscal policies to stabilize the national economy. The result, however, has been ever-more desperate swings in economic policies in the attempt to prevent recessions that cannot be fully eliminated. President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession. These policies may work in the short term but they threaten to produce still greater crises within a few years.(...) The lessons of the high inflation of the 1970s had supposedly chastened policy makers against trying to fine-tune the economy. The quest for never-ending full employment had contributed to high inflation in that decade, which required years of economic pain to wring out of the system. Monetary policies thereafter were supposed to be “steady as she goes,” not trying to smooth out every fluctuation and business cycle in the economy. During the decade from 1995 to 2005, then-Federal Reserve chairman Alan Greenspan over-reacted to several shocks to the economy. When financial turbulence hit in 1997 and 1998—the Asian crisis, the Russian ruble collapse and the failure of Long-Term Capital Management—the Fed increased liquidity and accidentally helped to set off the dot-com bubble. The Fed eased further in 1999 in anticipation of the Y2K computer threat, which of course proved to be a false alarm. When the Fed subsequently tightened credit in 2000 and the dot-com bubble burst, the Fed quickly turned around and lowered interest rates again. The liquidity expansion was greatly amplified following 9/11, when the Fed put interest rates down to 1 percent and thereby helped to set off the housing bubble, which has now collapsed. We need to avoid reckless short-term swings in policy.
Nobody is better qualified than Jeffery Sachs to know how tinkering can turn into tampering and how that tampering can destroy the lives and fortunes of millions.

What we are living today is perhaps history's most complete illustration of our "alienation": we are "strangers" to ourselves... every human being in the world has awakened at the same time to discover that everyone, everywhere lives in a system that we humans have created, but whose chaotic complexity has made it as uncontrollable as the weather and perhaps even less predictable.

Our economic system seems to be even more powerful than the weather, which it also seems to be destroying. It is certainly not our friend.

We are in no way its master, it is ours: we never have controlled it really, but this simultaneous, worldwide collapse brings that truth home and that is what is most unsettling about it. Our helplessness in the face of our "Frankenstein".

Like Gertrude Stein's, "a rose is a rose is rose", I would tell Professor Walt that, "We are in trouble today because we are in trouble today, because we are in trouble today".

That sense of helplessness is what is going to deepen and define this generation's sojourn: putting humanity back into the hands of humanity will be its challenge.


Ralph said...

Another great piece. Daniel Bell's Cultural Contradictions of Capitalism (from '76) hit many of the same ideas as E.H., in a more popular style. Some of us have been waiting for the sawdust to run out of the dolly for a long time. Its remarkable that the money boys & their "objectivist" handmaidens were able to keep the balls in the air as long as they did. To cite another critter of the '70's, "welcome to the monkey house."

Anonymous said...

Good article.

When it comes to the loss of useful social assets, we could not agree more, but we would disagree on the cause. The loss of social assets comes from a desire for freedom from responsibility which is peddled by the LEFT not the right. That seems to be the basis for every social democracy and it's welfare state, let the state handle it for you. In the 60's it was the left that said we should tune in, turn on, and drop out and led an assault on all things traditional. I ask you, how many nihilists vote Republican? Let's all return to values of thrift, postponing gratification, and family and vote Republican! Without trust in others capitilism and democracy do not work.

The system is indeed extraordinarily complex, which is a result of going off the gold standard which was championed by intellectuals like H.G. Wells who despised the "simple, honest stupidty" of the gold standard.

I feel I have to point out it's funny that you can complain about the industrial revolution while typing on a computer that was produced as direct result of industrialization.


bailey alexander said...

Haven’t hucksters been around forever, in many flavors. Maybe it’s your neighbor the insurance salesman or maybe it’s the Elmer Gantry’s of this world My mother grew up in San Fran with neighbors like the Bechtels; high finance isn’t dictated by the right or left, in that town, at least, but my point is, if you get out there and get to know these ‘men of authority’, you’d know how pathological many of them are, so why the surprise or am I simply reading this wrong.

Seattle, where I grew up, the local ‘mafia’ sorta ruled, until the world's fair, circa '63, inspiring their first cultural center. The defense industry and the cold war invested tons of funds into Boeing and R&D, which would naturally lend to Microsoft and the tech boom.

Our county’s rise was so sudden and stratospheric how could the denouement appear anything other than rapid and vicious and cruel. Maybe I’m not getting this, but it boggles my mind that people assume so many good intentions, it’s not just projection, it appears to be a lack of critical thinking on large scale. The world is paved with good intention, remember Glenda, you really think she was a good witch? Maybe that’s why I loved the book Wicked.

Forensic economist said...

On the causes of the current debacle -

I don't think we are having an outbreak of greed and immorality; I don't think people's characters have changed much at all. You can go back through American history and review the scandals and corruption starting with Alexander Hamilton's land deals.

Here is one of my favorites - how Leland Stanford moved the entire Sierra Nevada mountain range. When the cross country railroad started out in the 1870s, the Central Pacific was voted a low subsidy for laying track accross flat lands and a high subsidy for building the roadbed and laying track through the mountains. However, the company ran out of money quickly, before it got 10 miles out of Sacramento, in California's Delta country. So a tame geologist was sent to Washington to testify that the Sierra Nevada mountains began 10 miles out of Sacramento. The government duly agreed, and the money flowed. Not only was the railroad and government corrupt, a scientist was willing to testify falsely. And yes, that was the founding of the fortune that gave rise to one of our greatest universities.

So what is different this time? My view is that the primary difference is technology - the financial innovations that were invented and the ease of trading billions at the click of a button allowed the scandal to grow many more zeros than previous crises. You can't blame all of the crisis on the Bushites since a lot of the deregulation happened under Clinton. Neither can you blame it all on Greenspan and Ayn Rand -- neither Bush nor Greenspan had anything to do with Northern Rock and all of the European collapsing banks. This is a worldwide phenomenon.

On the change in corruption - at least Stanford left us with a railroad. Our current financial wizards are leaving us only with piles of paper.

Forensic economist said...

PS on the Bechtels- the Bechtel family got rich on government contracts, but they left a legacy of well built construction projects like the San Francisco Bay Bridge. I wouldn't at all call them pathological. On the other hand, having gone to high school with the current CEO of Bechtel Corp, (fourth generation from founder) I would say that the family is a very good argument for higher inheritance taxes.

Ralph said...

Wasn't there a rather triste folk number back in the day -- "Been a Long Time Comin', Gonna be a Long Time Gone"? Sounds like as good a characterization of our situation as any -- Best

Anonymous said...

Re the Bechtels, my mother never had a negative thing to say about them, luved the corporate world and revered it, also, I think I was citing San Fran as a unique city that doesn't highlight the difference btwn parties re high finance like other major cities.

I don’t view these types through the same lens, I've worked and socialized around too many sr exec types that are hired because they wear well on the golf course and are well connected. The high finance types, they have a different agenda altogether, which is part of their personality type and what draws them into that world.
Maybe it's the combination that's most destructive; the AIG bailout, rather insane, not only is the insurance gig a racket, but the fact they can't back their claims, can’t cover what they said they could makes it doubly fraudulent.

To blame it on technology is interesting. Technology certainly affords ease and scope but but it’s not a robot orchestrating the scam.

bailey alexander said...

Accidentally posted as anonymous, mi scusi, but my mother quite liked growing up with the Bechtels. Also, her father garnered many government contracts in San Fran as well, designing part of the Presidio. Even though I fail miserably at pythy comments, please don't take mine out of context.

forensic economist said...

My point on technology is not that is that it caused the crash but allowed it to get as big as it did. Greed has been with us forever, economists and other cranks justifying laissez faire have been with us a long time. But the markets didn't allow Jay Gould to screw up as badly as Prince at Citigroup.

Thanks for the nice words about our gentry in SF - I do think our upper crust has some style out here - eg billionaire Warren Hellman throwing an annual free bluegrass music festival, Gordon Getty writing an opera, etc.