Sunday, May 16, 2010

Rafting down shit creek under "Matthew's Rules"

Matthew's Rules:
"For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath." Matthew 3:12

"Them that's got shall get/Them that's not shall lose/So the Bible said and it still is news." Billie Holiday

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I'm always on the lookout for the right metaphor, the one that sums something up with one image, and "rafting" came to me as one that describes the economic, soon to be social, crisis we are all living through right now.

Rafting isn't like sailing a boat, where, taking into account the direction of the wind and ocean currents, you chart a a course and sail to it with the possibility of changing your mind and sailing back. In rafting, once you are in the river there is no turning back; all you can do is hold on tight and try to keep your boat from hitting rocks, or turning over. This can be exciting when led by an expert guide who makes the descent several times a week or even several times a day, but no fun at all when the river's depth, speed, approaching rocks or waterfalls are unknown.

That is the case of the crisis we are living through now, nobody really understands what is going on or what is waiting around the bend.

Matthew's Rules:

We may not know where we are going, but we do know where we have been. A tiny group of men and women (almost all of them men, really) have created a speculative bubble and burst it, and those who created the mess made enormous fortunes blowing the bubble up, made enormous fortunes betting against their own bubble, received enormous bailouts of taxpayer's money when the bubble burst and are making enormous fortunes while you read this. And all of this is something which is creating untold pain and hardship for most of the world's population and may be the beginning of a historical period as dark as the 1930s.

Here is how William Pfaff puts things into perspective:
A feature of modern capitalism, in which the United States seems currently the leader, is that the country where corporations are effectively headquartered have impoverished schools, rotting, rusting infrastructure, and third world social and health facilities, while billions are paid to corporate and banking executives. This is a moral scandal even though economic elites promoting the dominant economic theory prevailing until now in the leading free-market countries have identified morality as a source of market distortion and economic inefficiencies. Self-admittedly profligate Greece did not invent the world crisis, nor did Portugal, Spain nor Italy. The guilt lies with the United States, source of modern intellectual global leadership and exemplar of democracy. It did not even have a serious reason. Americans did it to make money gambling with other people’s money.
That's pretty cold stuff, but, as usual, Pfaff has nailed it. The frivolity of the whole thing adds insult to injury.

Perhaps the only bright spot in the whole mess is that the crisis has finally eviscerated what the French call neo-liberal "pensée unique", the intellectual structure of this particular chapter of capitalism, which Pfaff calls, "the Ronald Reagan, Alan Greenspan, Ayn Rand, School of Chicago fantasy".

With the Soviet Union's brand of "real existent socialism" and Milton Friedman's version of "real existent capitalism" both now in smoking ruins, maybe some serious new thinking may arise.

What is obvious, at least to me, is that things like human rights and financial regulation have to be packaged together so tightly that no daylight appears between them. I don't think this is going to happen in China, I'm sorry to say that I don't think it is going to happen in the USA, in any foreseeable future, either.

The historically unique crisis that is transpiring around the euro, may have the seeds of this human rights and multinational regulation model, that is surely the only path forward if globalization is going to be anything but a raft to hell. DS


byafi said...

That the United States had a major role in the current crisis is clear. But blaming the crash on corporations and greed is pretty much like blaming airplane crashes on gravity. You need to look further to see the problems coming from the Federal Reserve's policy of cheap money (low interest rates). Without that, none of this could have occurred.

Of course, I know that blaming government for our troubles is outside your version of reality, so please just ignore anything like

Forensic economist said...

Byafi - I completely agree that the government was a major cause of the bubble and crash. The federal government stopped state regulators from investigating mortgage fraud. The federal government refused to regulate credit default swaps. The SEC refused to investigate Madoff. The leader of the Federal Reserve was an acolyte of Ayn Rand believing that markets self regulate, so no regulation was needed. Greenspan has now admitted he was mistaken.

Low interest rates were a contributing cause but not the sole cause; nor were they even a necessary cause. There was a bubble in internet stocks in the late '90s without there being low interest rates.

The main cause was free money in the form of subprime loans. The money was available due to fraudulent underwriting, fraudulent credit ratings, financial institutions borrowing far more than was prudent, and a philosophy that all government is bad and no regulation was needed.

As Paul said, "For all men have sinned, for all men have missed the mark." Greed is a given in human nature. We have a government that was supposed to protect us from the more outrageous thefts that men will do if they can get away with it. To say that businessmen will behave in a moral manner without regulation in order to protect their reputation is belied by the history of the past century.

PS Keynes has not been repudiated. The Chicago school is being repudiated.

oldfatherwilliam said...

Thanks to FE. Greed is a constant, yes indeed like gravity. Democratic government is manipulable by the greedy and manipulation is also a constant. To claim then that the compulsion to behave well was inadequate is gloriously childish. How do these people manage to tie their shoelaces?