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Saturday, October 25, 2008

Born of Crisis, the Bailout State

The final days of the Bush regime have arrived!

In the course of the past two years, my blog has been completely vindicated. Excuse me while I gloat, even if the price of my schadenfreude is misery for millions of people across the globe.

The economy has been gutted. Unemployment is skyrocketing, every day I read of thousands more being fired--National City, yahoo!, etc.. Faced with inadequate access to capital, companies have scaled down.

The idea of starving the beast hasn't really worked, if this crisis were manufactured to weaken the Democrats' hold on those noxious "social programs." Social security's Cost-of-Living-Adjustment is going up more than 5% next year; this could be a bribe to voters from Congress, or represent an end to the self-imposed gag order on the chronic understated rate of inflation.

Yes, I do own some silver, so I can't help it if I complain if it's gone down in value. Silver is a hard asset, unlike paper-denominated instruments like bonds, stocks, and cash. Traditionally, silver and gold are good hedges in times of economic instability, called "safe havens." This economic cycle has seen a huge amount of bank reserves, loans, and stock values simply vanish. As that money goes, so too does the upward pressure on prices that the extra money can bring.

Oil has fallen dramatically--no surprise since it too is a hard asset, something real. Americans had grown quite accustomed to higher energy prices. As they come down, the Little People should have an easier go of it.

Food prices remain high. The cost of consumer goods will lag increases in energy prices, so current price reflects the higher costs of transportation and feed, fertilizer, etc. from last spring. Even if energy prices stay low, the price of consumer staples might not go down for some time, due to this delayed effect. So expect to pay more for groceries.

When this credit crisis first exploded last month, I'd been rightfully skeptical of the motives behind the bailout. Those suspicions have evolved into doubts about how effective the bailout will be, even as I grew more confident that yes, indeed, there had been a crisis.

In a more trusting age, back when government seemed to lie less, perhaps the public could have believed that Paulson's plan was the right thing to do. But in recent years the public has been lied to about a great number of things, including Iraq's fictitious WMD and ties to terrorism, as well as being misled about the benefits of deregulation.

While warranted criticism of what our government has failed to do consumes millions of pages, the reality is that an end of trusting government has come. The natural consequence is political, for people to gather into groups to pursue shared goals and protect their interests. Awareness though is the key. Those who believe that government acts in their best interest--still--will be less likely to see the need to act, to lobby, to participate. Meanwhile, insiders who've been playing this game for decades, will continue to get what they want at the expense of the group.

We saw the effect of this game being played in the financial markets. The CEO of now-bankrupt Lehman Brother pulled in over $4 million in bonuses in April, even as his company crept ever closer to the abyss. Who knows how many other insiders have been milking their companies of all they can, even as their gross irresponsibility makes their collapse inevitable. Even if the stock price reaches zero, corporate insiders will have pulled out millions long before the Little People figure out what's happening.

On Wednesday Alan Greenspan testified before House guru of oversight Waxman (D-Calif.) that capitalism might not be working as promised. [See an article on Greenspan's stunning testimony here.] Greenspan testified alongside SEC Chairman Chrisotpher Cox, who's leadership skills are the equivalent of Michael Brown "heckuva job Brownie," the FEMA director during Katrina. Cox, Bernanke, Paulson are all master apologists; lacking in their testimony is an admission that they ever saw it coming, despite fully predictable consequences of radical de-regulation. In the same way, Brown never admitted funding cuts (due to Iraq) contributed to a reduction in funding for canal/levee repair and construction in advance of the breaches.

Inadequate government leads to a crisis, and the officials responsible bemoan the ineffectiveness of government. The crisis becomes an opportunity to shower billions on the private sector. Disaster capitalism is standard operating procedure for the neo-conservatives--it masks unprecedented levels of crony capitalism--the awarding of lucrative, no-bid contract to politically connected insiders.

The bailout may be the extension of cronyism into the financial services sector. Writing in truthout.org, Michael Winship explains:
"...the executive pay limits in the legislation apparently have so many loopholes you could fly a fleet of Gulfstream corporate jets through them. Oregon Congressman Peter de Fazio caught at least seven, "that will protect their outrageous paychecks and golden parachutes..."

Forbes asserts that Secretary Paulson earned in excess of $700 million in compensation during his time at Goldman Sachs, a company at the middle of this maelstrom. Is Paulson helper for the Little People or is he in fact just using the Treasury to help his friends?

Either way, a lot of money has already changed hands. Winship cites an Bloomberg article which reported $239 billion in employee compensation for the Top Five former investment banks since 2004. Those at the top have made a great deal of money, regardless if their companies go under, or have already.

Contributory negligence by the media

For the millions with sub-standard schools, crime, rural poverty, and long-term unemployment, Greenspan admitted what they've known for years: the system is broken. It's only when economic deprivation touches the investor class that the scope of the problem gets exposed via the media.

The corporate media appears to have been shaken from its cocoon by the scale of the credit crisis. The time to have exposed the reckless course of financial modernization was before all this mayhem began, but post-9/11 we were told that our national security was more important. Maybe the fear quotient has been all used up, and the media can't scare the people any more.

The media did play a large role in minimizing the truth and understating the scope of Bush administration failures. Are they playing catch-up now, trying to do for Obama what they didn't do for Kerry in 2004?

The shift from national security to economic security has become part of the media's narrative. The nation's security was paramount and sacrosanct until the "me"--my livelihood, job security, wealth--overshadowed the "we." All of a sudden it's become quite acceptable to be afraid not of terrorists but of the immediacy of economic collapse, unemployment, foreclosure, poverty.

Could Americans discard "Country First" if they faced more immediate personal economic challenges? Most likely a military reaction to a terror attack would be swift in coming; the people could easily rally behind their leader as they did after 9/11. It's doubtful that patriotism which the use of military force invokes could serve as the unifier that it did back in 2001. Internationally, all our credibility has been used up.

We are a culture whose nerves have grown numb from constant shock and awe--fear-mongering gestures by National Security State hungry for more power, money, and control. It would take a catastrophe many times the size of 9/11 to re-create 9/11-style reaction. Like the boy who cried wolf, it will take ever bigger warning calls to stir fear, if the press could ever perform the function of warning the public at all, an essential duty that must be exercised to keep the powerful accountable. In a future period, if another terror attack were perpetuated, the people might react far less predictably.

The nexus between politics and terror has become far less useful to incumbents jerking the reins of the National Security State. In her recent article, Arianna Huffington thinks the "Spec market on dread" no longer works:
"Unfortunately for McCain, playing the Be Afraid game has gotten a lot more complicated than it was back in the good old days when all you had to say was 'Cipro' and 'duct tape' and the electorate would reach for its GOP security blanket."

She cites a recent paper paper on changes in Terror Management Theory, which Huffington explains could indicate "voter reactions to those kinds of threats may be changing -- and that terror warnings or the evocation of looming attacks may, in fact, have the opposite impact on McCain than they had on Bush..."

Terrorism may not be the mobilizing and unifying event once trumpets fade and people realize there's no state directly responsible. "Let's get 'em!" becomes "get who?"; "Get'r'done" becomes "get what done?"

A terror event is unlikely--which country would be foolish enough to grant refuge and comfort to terrorists planning such a strike? There's no state unwise enough to invite retaliation by the US under the Bush Doctrine. Any event would likely be a false flag operation meant to blame an innocent country or group of people.

Trapped in history

Does our government really serve the people? We can hide behind jingoism and military-loving ultranationalism, but government is more of an independent actor than an entity acting with the consent of the governed, on their behalf. Once the State reaches a certain critical mass it becomes sentient, self-aware like the computers that start the world of Terminator in the third movie.

Self-preservation is the first priority of any sentient being. The computers in Terminator recognize the threat posed by humans, which it then sets out to destroy. If the future victims of State power were to catch on to their growing disempowerment, the threat posed to the Little People could be anticipated and steps to limit the Federal entity undertaken. Instead, we are trapped in a recurring cycle of economic downturns coupled with intermittent spasms of patriotism that convert public discontent into action directed against the State's enemies.

War is the ultimate tool of Statism--it denies citizens their freedom, and even their lives, through conscription. The economic burdens of war convert useful private property (itself reward for fair labor involuntarily taken by the State in the form of taxes) into the destructive practice and frequently pointless waging of war. The wars need not be "hot"--the Wars on Terror and on Drugs have been used to gloss over the underlying expansion of government where billions are showered on un-winnable causes.

Wars aren't the only vehicle by which the State grows. Any crisis can be used by the State as an excuse to increase its taxes, and expand its control over the lives of citizens. This most recent financial crisis is but one potential justification for a larger role of government, accompanied of course by the bloated, inefficient bureaucracy, the American equivalent of a command and control economy active in all aspects of Americans' private lives, whether for the purpose of fighting terror, drugs, or whoever the day's designated boogeyman might be.

The enlargement of the State isn't a straight-line but rather a sequence of steps. Wars and economic crisis usher in "reforms" that become a methodology to further increase the size of government.

One characteristic of expanding government is the inability to ever go back to the way things were before the crisis. For example, at the end of World War Two, the average tax burden on Americans stood far higher than it did during the Depression. Nowadays, it's doubtful the Congress would see fit to simply restore the Enron loophole and go back to the way things were before changes in the law like Glass-Steagall made the unregulated speculation, and its corresponding collapse, possible. Instead Congress' mistake to de-regulate will incur all kinds of invasive new regulatory efforts--far beyond that needed to remedy the immediate crisis.

To protect the public ("the children") from the greed of a de-regualted system, more traditionally Democratic programs will need to be implemented. The bailout, initially at $700 billion quickly ballooned into a $850 billion bill with the addition of spending unrelated to the crisis.

The economic cycle would appear to go from excess growth to none, from boom times to depression. We are led to believe these cycles are natural, and the simple product of economic variables beyond anyone's control. In actuality, capitalism does have an inclination towards periodic episodes of creative destruction. This shouldn't glaze over the truth that excess demand doesn't have to run wild, and that much of the volatility and suffering could be alleviated through better regulatory practices.

The Depression came on the heels of the Roaring Twenties, a period during which many people grew absurdly rich. Wealth built up during the Clinton years and Bush-era taxation changes led to record imbalances in the distribution of wealth.

The situation we now have can't be equated with the Depression, but rest assured, the Democrats will inflate the size of government. If need be, they will find the justification to match the policy like the Republicans did in concocting false intelligence for the Iraq war. It surely wouldn't take much to show that our bridges are falling down, our schools underfunded, and medical system dysfunctional.

Look hard enough and one can find any number of crises in America: health care, obesity epidemic, diabetes, savings, college funding, debt--public and private, energy gluttony, education, on and on. The traditional Democratic response is to shower money on the problems, New Deal-like.

On a public perception level, the GOP sees itself as the counterweight to a Democratic approach to governance, as it must appear to be different. Yet their recent track record is one of regulatory abandonment, unnecessary foreign interventions, and overspending. In the last throes of his campaign, McCain is striving to distance himself from years of Bush-led fiscal promiscuity.

The notion of anyone in Washington changing the system is ludicrous, yet Barack Obama has positioned himself to be the source of change in the universe. With the credit crisis as a backdrop, of course change will sound good. Still, Barack's fixation on the bailout shows that the momentum in Washington is against changing the size of government. The knee-jerk response is to flood the private sector with more money, despite the ugly truth that the bailout money is apparently being hoarded by the banks, set aside to cover losses and unforeseen expenses.

Foreclosures continue. Government can't mandate that the banks lend or keep them from getting paid by delinquent borrowers (though it's attempted to slow foreclosures.) But as the ownership stakes in banks increase as specified in the bailout plan, more and more red tape and bureaucratic bloat will enter the banking industry. Banks will have to follow even more federal regulations, and will be less efficient at lending, though do it in a more politically correct way.

Now if nationalization of the banking system is the only way to protect it, then I'm all for it. But nationalization will end up making the banking system less efficient. The costs of running banks will explode, as government-run entities typically do a horrible job on trimming expenses. Instead, government-run entities thrive off inefficiency.

Am I sounding like Ayn Rand? Well I hope so. If the so-called conservatives were really doing their job, they would have accepted the need for regulatory reform on a preemptive basis, before the reaction was needed.

I will pose the thesis that the Republicans have been lead by fakes, social conservatives. Social conservatism is about stealing the libertarians' best stuff while abandoning the accompanying pain and effort of real change.

The social conservatives' inability to run government well--no surprise considering the contempt with which they hold it--may well usher in a new era of massive federal programs. In allowing "anything goes," this laissez faire approach may have seeded a New Deal here in the 21st century by overextending, then crushing, the financial markets.

Rather than cut spending, the so-called conservatives expanded it. Instead of paying for kids' health care, they've doubled the Pentagon's budget. Instead of controlling the banks and futures market, with a good deal of help from the Democrats, they let them degenerate, chanting some mantra about how all regulation is bad. Meanwhile levees sink, bridges collapse, and roads crumble, more casualties to an either/or set of budgetary decisions which put military spending and low taxes first.


The corporate media was content to let the Republicans pretend to be whoever they wanted to be. This Peter Pan-like world fit well into the dreamy state of affairs after 9/11. Americans were clearly led to believe they would be safer by bombing some random Muslim nation. Without knowing who really did 9/11, the American people were content to get their revenge on someone, never mind whether or not we had the evidence that the targets of our wrath actually did it.

Ultranationalism clearly blinded this nation. Americans grew to believe the Bush could lead them through the crisis. Instead we've traded crises, national security for economic. Maybe we now have both. And the next poor President will have to try and correct the mistakes of his predecessor.

The biggest problems in our near future will be fiscal. The next President will have dramatically less tax revenue flowing in, plus the added burden of interest payments on all the trillions that Bush borrowed. Add in the cost of a bailout that's already over $1 trillion, and you have a President who maybe can't do too much at all to help this nation.

Could this entire crisis be a debt bomb that went off to soon? With all that toxic debt out there, no one really disputes that this credit crisis would not have ever occurred. It was simply a question of when it all hit.

Had things not gotten so bad until after the election, then McCain would have been more likely to win. Obama is up in the polls largely because of economic issues. The economy has become the issue of the campaign simply because self-security trumps national security. Even the most ardent Bush/war supporters will admit that we can't have a strong defense without a strong economy.

Even if you stand beneath he expanding shadow of the National Security State, thankful for its shade from the imploding economy, you must still admit that our private economy must take precedence. Someone has to pay the taxes and actually make things. Without economic growth, there's no way to fuel the State, which exists like a parasite on the back of taxpayers. Trough-feeders need to be aware of how dependent the State is on the private sector--the hand that feeds them (although many corporations pay no taxes at all.)

The right to tax is the equivalent of Bond's "00" designation: the right to steal. The State makes nothing. It simply absorbs capital, resources, time, effort, and energy like some giant Black Hole. The more that it sucks in, the bigger it gets, the more demanding, and the more gluttonous. Unabated, it will increase until there's nothing left except the State, or its rejects, who will be left to fend for themselves in a YOYO (Your On Your Own) world.

The so-called conservatives have failed to stop the growth of the State. The Democrats have become too much a part of the Washington consensus to seek change from inside the system. While a message of change might be a successful rhetorical play, we will see in the near future what Obama is really about, and just what change he's really talking about.

We may be headed back to an era of big spending, although the size of the existing debt may limit this approach to governing, traditionally a Democratic bastion.

If the Conservatives meant to tie the hands of the Democrats, they've succeeded in bankrupting the Treasury. This will stall but not stop the Democratic spending spree which will soon begin. The Democrats can continue to borrow, but they are also likely to up taxes. Eat the rich, I say, as they've had an easy ride under Bush and need to pay their fair share.


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Thursday, October 16, 2008

Borrowing our way to bigger bailouts

We’re nearing the end of an eight-year process of government enlargement. Our federal deficit has doubled, going from about $5 trillion to over $10 trillion. Two very expensive wars have increased expenditures radically. Wars--particularly endless police actions-- are no tool of fiscal conservatism.

Talking before a New Hampshire crowd yesterday, Sarah Palin tried to differentiate herself and John McCain from the previous eight years. I would have thought for sure that Palin and McCain were running against a Democratic incumbent, had I not known that their agenda had been to distance themselves from Bush.

Fiscally, Bush has been more of a liberal than conservative. Neo-conservatives espouse a blend of “free market” capitalism, ultranationalism, and socially conservative values. Traditionally conservative political values like fiscal conservatism and small government have been abandoned.

Bush and crew have also become the ultimate Washington insiders. I’d define the insiders as those who profit from their closeness to the political hierarchy. Insiders are also distinguishable by the unerring adherence to what is known as the Washington consensus--a set of assumptions about how to govern a world that revolves around Washington, D.C..

Corporate control

As a result of incessant lobbying, the Washington culture has become thoroughly corrupt. The hubris of the insiders who run and/or profit by the political system has been fed by corporate donations which vie for influence over the legislative process and seek to influence the regulatory framework.

Nowhere has the corporatization of our society been more apparent than with the media. Under the direction of the FCC, media power has been consolidated since 9/11, which has crushed the independent voice of the media, democracy’s crucial fourth estate.

Bush’s legacy will be one far bigger than bad government, or larger government, or betrayal of his conservative credentials. Corporations have risen to control Washington’s authority.

Our federal government has strangled itself. The Founders did create our three party system of government in order to balance the interests of one group against the other. Since the birth of the Unitary Executive, the Presidency has become by far the more powerful, and the other branches weak sisters.

Lord Acton said absolute power corrupts absolutely. Taking that as our central thesis, we’ve seen the Bush Presidency grow fond of more power and control. In their wisdom, the Founders saw the need to give Congress the power of the purse, which should keep spending in check. Perhaps they didn’t anticipate the lengths to which corporations would go to secure federal contracts, or how eager Congress would be to respond to corporate advances in the form of donations and lobbying.

Eisenhower did anticipate the power of the military-industrial complex, which he forecast as a major threat after World War Two. Vested interests who sought to find new enemies for America emerged at the end of the Cold War. Vice President Dick Cheney wrote a 1992 Defense Planning Guidance laying out new strategies for confronting America’s enemies, whoever they were or needed to be in order to keep the war machine grinding on.

The Cold War had been good for business, and today’s Pentagon may be even better at doling out contracts to well-positioned businesses. Over 40% of all Pentagon spending flows to private contractors, skipping the role of an intermediary entirely. Some admirals and general complain about getting submarines and planes they don’t need nor ever asked for.

Borrow and spend

Economists like Milton Freidman certainly would find fault with how Federal money is spent through the military industrial complex. Freidman’s message was hijacked by neo-conservatives, who beat a drum of de-regulation so loud that it drowned out the whimpers calling for fiscal prudence. “We are at war, dammit!”

Abandoning fiscal conservatism, Friedman’s distaste of higher taxes ended up justifying big government spending policies sponsored by the New Conservatives. Private sector efficiencies that Friedman praised were abandoned. Massive amount of government spending, coupled with lower taxes, meant introducing bundles of new government debt. When the government borrows,it drains funds available for private investment, “crowding out” the riskier alternatives in private sector debt, particularly in times when the risk premium (or spread) is so high.

Adding liquidity is no solution to the crisis, especially when fiscal policy is so expansionary and the consequences of too much borrowing--manifesting themselves in the current crisis-- so destructive.

The huge influx of government money makes the credit markets less efficient. Rather than allow privately raised capital to choose between investment alternatives, huge floods of cash have entered the markets, essentially washing over good debt and bad. All manner of investments--regardless of their level of risk--have been washed over with a tide of federal money based on the same easy-come, easy-go monetary policies that created the real estate, then commodities bubble.

Rather than punish the companies that lent or borrowed foolishly, the inexhaustible largesse of the Fed coffers has given them a reprieve. Instead of reducing the pool of available credit--the logical result of any prolonged period of over-spending--the Fed has made more money available. Instead of allowing credit to dry up, the Fed has chosen to side with more politically acceptable response to borrow and spend more. Until the elections pass, politicians will do what they can to avoid a severe recession which would emerge as Americans’ access to credit dried up, a phenomena which has already begun to some degree.

To keep the economy chugging on for at least a few more months, the Fed and Treasury have elected to expand the money supply. Typically this results in overspending down the road, but this cycle appears to have undercut increases in worker pay to the point inflation is a non-factor, at least for now. Gas prices have fallen. Also, as cheap labor and goods come from China, prices are depressed. So perhaps the government feels as if it can avert inflation. The deflation of asset prices might be enough to forestall burgeoning inflation, which was running higher with the now-deflated commodities bubble.

At least until a commodity bubble began in 2007 or so, inflation was largely under control. The commodity bubble reflected the “chickens come home to roost” phenomena: all those dollars in circulation began to flow into commodities. Rules on commodity speculation had been eased in the de-regulatory flurry, and interest rates stayed ridiculously low, so little kept large financial companies from over-investing in the bull market for commodities.

It’s all relative

If the Federal Reserve were to give every American a million dollars, to ease our pain, it’d actually do very little good. Prices would simply rise, and the value of pensions and savings shrink in real terms. But when the Fed offers limitless amounts of money to banks, there are no real consequences for negative behaviors. They can lend and lend irresponsibly, knowing there will be always more, and that the Feds will bail them out if the need arises.

Money is essentially free. The only thing giving it any value is its desirability, its value as a medium of exchange. The truth that money is just green pieces of paper introduces a great deal of uncertainty to the credibility of our currency, on which our future standard of living, as well as our government’s power to tax and spend, is based.

If the dollar becomes over-abundant, it is less desired, and worth less. If diamonds could be found most anywhere, or man-made without great cost, they’d surely not be valuable. It’s the scarcity of a resource that gives it value.

Any number of dollars can produced costing no more than a penny per bill. And money can be distributed widely, as the fiscal stimulus bill has shown, earning Federal Reserve chairman Bernanke the dubious distinction “Helicopter Ben.” It’s as if money can rain down from above like mana from heaven, distributed freely in the downward rotor wash of a helicopter, where it falls into the hands of the poor masses huddled below. And they’re instantly rich--rich for just as long as it takes shop owners and companies to raise their prices.

During the Gold Rush, champagne and perfume from Paris could be found in mining towns deep in the Alaskan hinterland. Prices simply went up because everyone had more gold. Yet unlike the Gold Rush, which was based on gold, the Debt Crush is based purely on paper money. Prices will go up, but for staples like gasoline and bread, not just luxuries, which will become ultra-expensive and scarcer, because people have less real purchasing power.

Hyperinflation occurs when the government relies on printing limitless quantities of money and distributing them directly. The more money that’s needed to buy things, the more must be spent, and the more made. Money acts like a commodity--if gold appeared in everyone’s backyard, you’d need an awful lot of the stuff to be considered rich.

The Federal Reserve Board actually gives a mechanism for limiting the quantity of money that enters circulation. It forces the Treasury to give up bonds, promises to pay the borrower principal and interest based on the government’s implicit right to tax the future earnings of Americans.

In exchange for its “Federal Reserve Notes”--pieces of paper with no intrinsic value--we the people promise a private corporation, the Fed, which is made up of large banks, ownership of our bonds. We give bonds, they give the Treasury the cash. We pay interest, they collect interest. In this regard, the Fed wins by increasing the amount we owe. The more debt, the more of our present and future tax receipts they can stake claim. The Fed lending us an additional $700 billion means the Treasury must pay that much more interest--which our government is finding harder to do without borrowing more.

So indebted we have become that our tax payments now do nothing more than service the debt; I’ve read that checks made out to the Treasury are stamped as received by branches of the Federal Reserve. With so much debt, we can’t hope to pay down any principal, meaning the Federal Reserve maintains an exploitative relationship with the taxpayer.

Meanwhile banking profits belong to the banks. In their defense, consumer banks do encounter risks performing their chief function of lending. Yet in this crisis we see that the main cause of losses is the lending to hedge funds on margin and risky behavior investment banking divisions. Consumers might fail, but they do so not because of investment decisions, but rather broader economic conditions.

Consumer and small business loans are far more beneficial than IPOs and hedge fund lending, though they are less lucrative to the banks, and entail more risk, at least without the false security of Credit Default Swaps, insurance which was sold alongside the mortgage-backed securities.

Federal Reserve notes are brought into circulation through consumer lending are more valuable to the economy. The trickle up effect of new money being spent means real things are being bought and solid by real people, instead of shifting money from one pile to another.

Retail banking is where the risk and work of lending meet the free market; bad loans fail and hurt the bank that lent. Yet since a Savings and Loan crisis in the early eighties, one which could be attributed to inadequate regulation and disproportionate influence exerted on the so-called Keating Five (McCain was one), the federal government has taken on the role of insurer to the banks.

S&L repeat

The S&L crisis was the forerunner of today’s bailout. In both cases, the government failed to hold financial entities accountable. The creation of FDIC insurance, rather than reduce risk, has become a backstop by which banks can practice riskier lending and know government help will be forthcoming should market conditions get bad enough.

The combination of political gamesmanship and corporate influence contributed directly to the crisis we face today. Government wanted more houses built, and instructed Freddie and Fannie to lend more. Now some say that those entities were acting under a federal mandate when they made so many of their bad loans; others say the subprime mistakes were made on account of greed and poor management. Either excuse still fails to explain the role of moral hazard, which is the conditioning of typically risk-averse entities like banks to take on more risk, knowing that their losses would be covered by a “implicit guarantee,” a promise by government to bail them out.

Instead of seeking out the root of all the wrong-doing, the banks can defer to the “mortgage problems.” Instead of blaming unethical and greedy practices for the mistakes, failing banks have chosen to blame mortgage holders who are defaulting.
With so many millions in political donations from financial services companies circulating in Washington, we’re assured not to get any real accountability out of our political system, just a great deal of finger pointing and wrist wringing.

The focus on bad mortgages also focuses attention away from the real problem, in what’s become a standard operating procedure for Washington and its media. Far bigger than sub-prime are the credit default swaps and derivatives markets, which reach into dizzying amounts. These are essentially promises to buy based on some event or the passage of time. CDSs are agreements among financial entities to bail each other out if a lender fails.

Unfortunately, these structured investment vehicles (SIVs) made no allowance for market risk, which can be defined as the possibility of economic conditions and fiscal condition deteriorating to the point that the safety of no single investment or debt security can be assured. One default could trigger unforeseen consequences.

What was so truly remarkable was the unwillingness of so many to see the upcoming collapse. Or maybe, players within the system did see it coming, and tried to get their piece of the action before it all came crashing down.

One hallmark of American-style capitalism has been greed. If anyone out there doesn’t think that greed could have precipitated this crisis, then they surely don’t understand the American ethos. After seeing Enron’s collapse, who among us can believe that the fat cats haven’t stowed away their gains in some offshore account? The lesson of hyper-capitalism is clear: get what you can and get out!

Justly, the banks that practiced the least discretion in their lending and packaging of investment products and swaps have suffered the most. Some, like Citigroup and Bank of America, certainly now see themselves as too big to fail. Like Freddie and Fannie, they must see themselves as immune, too important a part of the system to ever be removed from it. Undoubtedly, this breed of implicit government guarantees will lead to more reckless decisions in the future.

Another huge potential negative is the ongoing interdependence of the Federal government and the large financial institutions. Already, banks have been forced to buy failing companies Merrill Lynch, Washington Mutual, and Bear Sterns. While no one may have mandated these buy-outs, I can hardly believe these actions were accomplished in a purely market-driven environment. If those companies had gone bankrupt, like Lehman Brothers, the contagion could have destabilized the markets even further, so at least the interventions were beneficial, and necessary, this time.

Can we trust government not to meddle in the markets in the future, perhaps when their actions aren’t necessarily imperative? Rather than maintain oversight, the government will use lenders to further political objectives. We saw the thrust towards unrealistic levels of home ownership precipitate over-lending to under-qualified buyers by Freddie/Fannie, which was a important contributor to the crisis (though by no means its most significant manifestation.)

With politicians in control of the banking industry, we can’t determine what dangers await us. We do know however that any command/control style approach to the political economy will actually increase risk, not diminish it. In trying to save the value of investment portfolios and keep the stream of lending going, we’ve set ourselves up for a bigger failure later when banks assume they’ll be bailed out whatever they do.

Pain of change

Growth slows because it needs to slow, in order to remove the excesses of the past. Change is not without pain. Unfortunately the politicians responsible for our fiscal and monetary policies have chosen to neglect the regulatory element, which is a vital and necessary function of government. This has made the pain of change even greater.

If something can’t go on forever it won’t. We see the Bush administration on its heels, leaving behind a toxic legacy of fiscal imprudence, foreign military interventions, and unsound monetary policies coupled with the consequences of inadequate regulation. From irresponsibility practiced on so wide a scale, the only consequences can emerge are negative.

Even if the the immediate pain of a recession can be forestalled, it can’t--or shouldn’t--be avoided. The alternative may be an economic catastrophe of an even higher magnitude, brought on by even bigger government interventions that will debase our currency and could lead to hyperinflation.

The death of laissez faire (anything goes), hyper-capitalism need not cripple the American economy. Regulatory standards need to be reinstated.

We can’t have sound financial markets without fiscal conservatism. As our nation’s borrowing increases, we’re seeing a boom and bust cycle emerge. Our money needs to be backed by restraint and moderation, which were abandoned by the faux conservative Bush.

The good news is that the self-destructive tendencies of naked and unrestrained capitalism have been revealed. The American people have been made aware of the consequences of unrestrained de-regulation and need to press their political representatives to re-regulate.

Throwing huge sums at the problem will do little more than delay the full impact of the financial transgressions, for which Republican-led government shares in the blame.

Spillover into the “real” economy is inevitable. We’ve built a “service economy” around pushing piles of cash around, and so ironically, the real economy might help stabilize the situation, especially as the asset bubble breaks. A weaker dollar will help exports, but we shouldn’t depend on financial maneuvers to revitalizing our manufacturing sector.

In the current credit crisis, the rest of the world might stand to lose even more than the U.S.. Iceland’s banks were nationalized in a collapse there. The scope of the problem is massive, magnified by interconnectedness of the world’s economy. Like the Great Depression, what happens here affects them over there, and vice versa.

Criteria for revolution

Back home, none of us can escape the consequences of sliding economic competitiveness. Nor can we disguise the consolidation of wealth in the hands of fewer and fewer people. I’ve noted several times here on this blog how societies tend to radicalize if too much wealth coalesces around too small a group.

In the New Feudalism brought on by a self-serving Bush and his cronies, it’s been all about getting the most for oneself, and discarding the importance of the common good. This collapse really represents the assertion of an elevated “me,” the ascent of the societal value elevating the accumulation of money over all other things.

As it turns out, only so many can have so much. There is a zero sum game being played, where the world’s wealthy in First World nations deprive the underclasses and Developing World of income, which could mean so much in their lives.

The Age of Greed has ended badly for all but those at the very top, who’ve seen incomes rise under tax policies created for their benefit.

This investor class needs to be cautious, to continue to lobby and keep their profits safe. In times of crisis, governments tend to take up a larger role in regulatory affairs. Taxes on the wealthy could rise. Income redistribution will be more likely and necessary.

Who bears responsibility for this crisis? By failing to regulate, government allowed the crisis to occur. But the irresponsible behavior of hedge funds and investment banks magnified the subprime problem. Mortgage-backed securities based on inaccurate appraisals should never have been offered to the public. Neither should have derivates trading been allowed to go unregulated. Unfortunately it will not be those who profited the most who will pay for the losses, but instead those who pay a larger proportion of their income to the government.

We can’t blame government alone for all the problems we now face. Nonetheless, government will be called on to provide solutions.

We seem incapable of realizing that we’re in a cycle of misery imposed by the crass pursuit of capital at any cost. Heads down, stuck in the rat race, I guess we’re all too busy trying to secure our future in an uncertain world.

The richer some of us get, the more the multitudes seem destined to have less. It’s not that the rich intend to deprive the less wealthy, that’s just what seems to invariably happen.

Just like the Great Depression, the excesses of previous period lead to inevitable decline. The nation’s poorest will likely bear the greatest economic burden, despite the fact they did the least to bring on the crisis.

With the turning of every economic cycle, the wealthy appear better able to weather the storm, and end up wealthier at the beginning of the next expansion. If this amalgamation of capital and political influence continues, American society could be radicalized, not unlike during the Great Depression, where Marxism, communism, and a host of political experiments were proposed to deal with the economic crisis.

The status quo is itself reactionary, and can’t deal with the speed and chaos of rapid changes. Still, at some point the powers that be, the Washington consensus, will realize that not enough is being done to maintain social equilibrium and will restrict the system’s more exploitative qualities.

The political system we have, while not perfect, should be able to reorder our society’s priorities so as to protect the economically disadvantaged. If not, it might be cast off, and replaced with something far less benign for the interests of corporations and the wealthy, who do seek to maintain some degree of normalcy if for no other reason than to continue exploiting their economic hegemony over the system.

A political reawakening could ensue that could shake the country’s political and investor class to the core. Faced with the possibility of radical political upheaval, corporations, the media, and politicians will relent, and try to stabilize the economic situation.

It’s truly a dangerous game that’s being played. No one knows how the credit crisis will unfold, so all the Fed and government can do is react. The political ramifications of the financial crisis could snowball as the economy worsens.

To make matters worse, large numbers of voters desperately need huge sums for medical expenses and social security, which will become harder to provide as the monetary base erodes due to over-borrowing. Sensitive to the values of their 401(k)s, Baby Boomers will likely vote their concerns over the economy. John McCain is hurting in the polls for this reason.

Schemes afoot?

Was a plan to starve the beast premature? I’ve talked about how radical Republicans have planned to sabotage the Democrats by de-funding social programs, a la Grover Norquist’s shrinking government “down to the size where we can drown it in the bathtub.”

Draining the public treasury would seem to be a destructive means of winning votes, so I’m not sure how viable this approach could be. In this vein, McCain promised to hold off on all new spending except that which is “essential,” a definition which I suppose will be up to McCain to determine after his election.

“Social programs” are a favorite target of spending cuts. Cutting war spending in Iraq and Afghanistan would presumably be off limits, at least according to the oft-voiced national security concerns that have been waved in our faces since 9/11 as an excuse to spy, torture, lie, and do God knows what else, beyond any scrutiny or accountability.

The Republicans have been caught between honoring the truly conservative value of fiscal restraint while accepting the need to deal with the financial crisis so they don’t alienate the middle class. This inner disharmony could well doom them in the upcoming election.

The Democrats have been eager to engineer an intervention, and don’t seem that bothered by the huge sums involved. They’ve never been known for their fiscal conservatism, but they are eager to look like they’re helping the less fortunate. I don’t know if any sum will be sufficiently large to deal with the effects of the credit crisis, so they are likely tossing trillions out without really gauging the bailout’s effectiveness.

Other sources

In an interview with OpEdNews.com’s Rob Kall, Naomi Klein talks about the “debt bombs” that companies are trading in for public Treasury debt under Secretary Paulson’s plan.

The Fed has opened less transparent, Congressionally unapproved method for federalizing the risk associated with risky debt out of the hands of Paulson’s investment banking cronies, who get U.S. Treasuries in a 1:1 tradeoff.

The shock of the credit implosion might be just another way to introduce changes that benefit the investor class at the expense of the public. Passing off of all that toxic debt as a “solution” to a wholly preventable crisis might well be part of the continued deception that has made insiders incredibly wealthy.

For an explanation on credit Default Swaps, see this article by David Vaughn.


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Wednesday, October 08, 2008

Bailout no solution for the credit crisis

We need to examine the most fundamental of questions: is there a crisis? Before trying to understand the craziness unfolding in Washington about what to do about the nation's credit crisis, it's worth affirming that there does indeed exist a crisis. In these days of a faux (or at least endless and unwinnable) War on Drugs, and War on Terror, it's well worth the effort to maintain a healthy dose of skepticism about any potential problem that the government feels it must resolve.

Yes, the crisis means that corporations have a harder time borrowing. Higher borrowing costs are a natural consequence of widespread defaults.

Interconnectedness is a concept at the heart of a credit crisis. It's like when word of a highly popular student getting a venereal disease spreads around school. All of a sudden those who've had relations with the star come forward, to tell partners about the past liason, and the need to get tested. Calling former sex partners is hardly an enviable task, but it is an important one that all those who've been with the affected person need to do, so they don't unknowingly pass on the Sexually Transmitted Disease.

The debt crisis is a communicable disease which is perhaps unknowingly spread by companies and investors in insurance companies and banks, as well as indirectly through hedge funds, mutual funds, and even money markets. Investor money may have gone into buying subprime mortgages or--worse--into Credit Default Swaps, the high school slut of financial derivates.

Dancing to the Dow

While the Dow's day-to-day swings don't accurately reflect the economic strength of the nation, they do serve as a barometer of general sentiment and level of investor confidence, looking forward about six months or so. In this regard stock performance tells us more about how the economy will do in the future. If someone is buying and selling based on today's events, they've missed the trends and the news that impacts the stock valuation six months or more in the future.

As a forecasting tool, a Dow decline signifies considerable weakness in the near future. In other words, $700 billion of Federal money sent to help flailing financial services firms won't stabilize the economy, or so conventional market wisdom has assumed.

Naturally, the response of many early advocates of the bill's passage is to lay the blame for a slumping Dow on the failure to get the bill passed quickly enough. Now if indeed investor confidence can be so easily shaken as to drive the Dow down so quickly, we really do have a problem.

The next question is how relevant the bailout bill is in resolving the crisis. We now have the benefit of hindsight in looking back on the bailout, which was passed by the House on Friday. Criticism of the plan has morphed into a critique of its effectiveness, a post facto summary of the effects of federal intervention.

The Dow fell hard Monday, at one point eclipsing the previous week's record 777 point loss. Somehow the resilient index bounced back to just under 10,000. In my last post, I'd talked about the shadowy President's Working Group on the Financial Markets, more commonly known as the Plunge Protection Team, which had been brought up in the original bailout bill of all places. Could they be active, propping up the Dow? We wouldn't know what they decide or what they do on a day-to-day basis, as the meetings are secret. If we can't trust government to clean up a mess their policies made inevitable, how can we trust a secretive group of political appointees to act in the public's best interest? Working beyond accountability to any outside body, the PPT is likely part of the same nexus of cronyism and political authority which has emanted for the past eight years and directly contributed to the crisis. Any solution elevating the role of the PPT will contribute to the problem, or constitute some exploitation of the solution, which the bailout might be.

Politicians typically measure the state of the economy by how well the stock market performs. The Dow is a mix of blue chip companies that represents a gauge of overall economic activity. It does not, however, measure the availability of credit, nor can it capture the impact of a trade deficit or inflation. Nonetheless, when the Dow goes down, politicians respond to the fear stimuli felt among their constituency, and when the Dow goes up, the crisis lessens, albeit on only a superficial and temporary basis.

Next steps

With a credit crisis apparent, the next question is whether or not the government can correct the situation. The libertarian perspective which I often hold in regard to government size is correct in assuming governmental meddling is the largest cause of the current crisis. Unlike the position espoused by adherents to the Chicago School of Economics, I don't believe that government regulation is the greatest inhibitor to economic growth. This case shows that--contrary to a pure ibertarian philosophy, some regulation is vital in order to keep the markets functioning.

The Milton Friedman solution might be to further de-regulate the markets, but the trickle down theory of wealth creation hasn't worked. Yes, taxation is an inherently destructive device, but politicians advocating Friedman's call to lower taxes have neglected the consequences of massive borrowing, a habit that Friedman would certainly have viewed as irresponsible and destructive economically in the long term.

Politicians attempting to make economic decisions doesn't make sense, but we Americans have grown accustomed to expected the government's help in a crisis. This has limited our independence.

The New Deal-style response to crisis--knee-jerking, swift response with financial assistance--has become a central political battlefield. Once politicized, the concept of smaller government has become a joke, preached though it is on the eve of the election by Republicans who've passed inflated budget after inflated budget, and by Democrats, who just ignore the Republican's hypocrisy in order to strap even more pork onto bills like the bailout.

Under the neo-liberal Clinton administration, we saw a general dismantling of large social programs. Revenues grew as the middle class invested and shared in the economic expansion. Under Bush, government expenditures have more than doubled and the deficit exploded. Alongside a massive increase in the money supply-the aftereffect of "adding liquidity"--we've seen incomes erode as inflation climbs. Now we can't blame Bush if Presidents aren't in charge of the economy, which they aren't, despite their constant calls for immediate action on the bailout, as if their responses would be the cure. Presidents can however set the tone and provide leadership for our economy, as well as pursue fiscal discretion--if they chose to.

Often the response to the threat or issue is far worse than the problem. Many open-ended massive entitlement programs have begun as temporary fixes. There could be more bailouts--if the bailout doesn't work and credit crisis continues, there will be at a minimum massive lobbying to get more public monies out to help teetering financial entities.

We Americans seem destined to demand more even as the deficits expand--like some glutton eating more and more, getting fatter and fatter, thus hungrier and hungrier. Nowhere is this more evident in our gluttonous use of energy. Now how we can afford health care in the future is anyone's guess.

The fundamental disconnect between what we're spending and what were taking in is just like any chronic overspender. Interesting it was in tonight's second Presidential debate to hear about the need for a strong economy, posed under the issue of just how strong we can remain militarily without a strong economy. Of course when the candidates refer to all their glorious plans for the future, "we" will do this, and achieve it together, despite the fact the government is an acting wholly independently of the people, and not limited or constrained by them, but rather imposing its will on the people as a master would a slave. We are simply to pay for the bailout, accept its wisdom, even as we see the Dow plummet and economic conditions deteriorate along with the tax base and our monetary credibility.

Administratively, our government has proven itself inept in handling large distributions of revenue. I was surprised to hear that the administrative bodies which were create to purchased homes during the Depression actually made money over time.

The bailout has been posed by both Presidential candidates as an opportunity to potentially earn some profits. Don't wait for the check in the mail-whatever is made will surely be spent, if not by the huge administrative costs likely associated with the bailout, then by other pressing needs which, if the candidates are serious about, would involve hundreds of billions more either in tax breaks or new spending. Meanwhile the massive interest costs will be left to future taxpayers, accompanied by unfulfilled dreams of profit.

The Fed has opened a number of new discount windows through which Federal Reserve member banks (and perhaps some others) may trade in mortgage-backed debt securities in exchange for US Treasuries. Certainly some degree of arbitrage goes on now, among actors buying worthless bonds and trading them in for AAA-rated public debt. We can only speculate how much bad debt financial companies will keep on, hoping to pawn off on the Treasury later.

Typical of a government intervention, the meddling has a unforeseen impact--potential relief from the bailout discourages the liquidation of bad debt. Debt which can't be sold is hoarded for later. With nothing to buy or sell, the market for debt (ravaged though it may be, these debt securities do have some value) dries up and none is bought, which of course further lowers the market value, which presents a big problem when financial institutions are required to "mark-to-market."

Safeguards inserted into the revised bailout bill may have made this practice less lucrative. One rule stipulates that companies which exchange over $300 million of debt must offer warrants or some level of ownership to the government. Still, until the holders of bad debt know how they'll be able to liquidate these "assets," wild gyrations in the debt markets will continue. Why would any purchaser of debt eat a loss by "marking to market" (an accounting change that cotnributed to the crisis) when they can just wait for a bailout and get perhaps 100 cents on the dollar?

As long as the Treasury is unconditionally dolling out good debt, the private sector is "crowded out." As a private investor, why take the risk on buying debt that could be worthless when you can buy Treasuries instead?

The main point with the lending windows is that banks can exploit the security of the US Treasury for private corporate profit, or at least to forestall massive losses. I'd been shocked to read that banks had exchanged over $140 billion of their bad debt for good PER DAY a few weeks ago. This is basically the equivalent of giving money to our banks because they lost so much--the exact opposite of letting the markets punish wrong-doers. The bailout may only be a distraction from the real plumb which is the exchange of bad debt for good at the Fed window, a process which could continue free of any monitoring, transparency, or oversight.

Cronyism in the Department of the Treasury means that Paulson has sheltered his pals on Wall Street from the consequences of their excesses, and greed. The average American will pay trillions in additional taxes as a result. The net transfer of private liabilities into public debt is an achievement of the highest order for the vested interests of the financial services market. Nonetheless, company shares have tumbled and the contagion effect will worsen the crisis to the point no bailout could be large enough to help.

Unfortunately the first-time, experimental nature of the intervention means that no one knows how long before the so-called "solution" will be implemented. The bureaucratic inertia alone could be enough to delay whatever response the government can muster in the near term. Of course, the plan supporters have exploited this aspect of typically ineffective government intervention in order to hurry the bill's passage and cry out for more aid. Giving Paulson unlimited discretion in how to distribute the funds was a notable failure in the initial bill, but expanding Congressional oversight can hardly be a expediter either, even if it is warranted.

Back to reality

We are seeing tons of market volatility. A one-day performance of the Dow shouldn't be used as a barometer of the economy. Last Tuesday, the Dow recovered half its losses from the preceding day, suffered as the House voted down the proposed bailout. The sky apparently hadn't been falling as we'd been led to believe by the bill's sponsors.

I'd gotten it right--that fear peddling wouldn't work, at least with the House of Representatives on the first run-through. Unlike the Senate, who serve six year terms, every Congressman must face the voters every two years. In this respect, the House is far more accountable to the American people.

The House leadership, both Republican and Democrat, supported the bill. This raises the question of whether or not the leadership of the parties is all that different.
Bottom line: the financial services company have "invested" a lot of political contributions to members of Congress. Now is the time to clean up. If indeed the Bush administration and industry insider Hank Paulson represent the best opportunity to subsidize the industry's losses, they needed their representatives in Washington to act before Bush leaves office.

The media cartel parrotted the need for action now, as if the crisis could be stopped by virtue of Washington willing it so. The media reflects a Washington consensus which overwhelms any notion of fiscal prudence with the need to act now, and do something--based on the haughty assumption that there are no limits to Washington's power.

Most networks did cover the point of view that states the bailout might not resolve the crisis, sandwiched between Stuart Little, the-sky-is-falling commentary from financial services employees, rattled investors, and panicky talk about the massive drop in the Dow, even if it had been mostly erased within a few days. This week we've seen the Dow collapse another one thousand points, so maybe the Dow's fall is not in reaction to Congressional action but rather reflects a deeper, more disturbing economic reality: we are no longer able to borrow in order to finance economic growth.

The media echo chamber glazed over any rational and deliberate reasoning to any attempt to resolve the problem. As is their habit, the media tries to squeeze all solutions into a thirty-second sound bite. What can't be easily sold isn't even proposed. We were told there is a crisis--yes, there is--and that Congress must do something, as if they could do something and it would automatically work. Well, the intervention, a one-time deal for now, hasn't and probably won't work, although I'm sure politicians will scartch and claw amongst themselves trying to retool and modify the bailout as it fails to work, even if progress isn't made proportional to the size of the bailout. No amount of pork and supplemental expenditures will be enough to fix the credit crisis.

No matter what the cause, there is a problem with credit, one which has been building and now only reached a crescendo when the government feels compelled to intervene, which of course sends a huge warning out to all markets and investors not to assume any risk. Meanwhile, huge job losses grow, for structural reasons perhaps not tied to the credit crisis, although arguably less consumer spending is driving down prices and sales: an event that was certain to happen anyway as we've tapped out all our credit.

The economic woes we face going forward may or may not be due to the scarcity of credit--overpriced homes fall in value in response to lower demand, a simple truth. Lower prices were inevitable, and that day has come. I guess you could argue that the decline in home prices has come because people haven't been able to borrow. Well, last time I checked, people with good credit are getting mortgages. Maybe some people with lower credit can't get credit, but maybe that's not such a bad thing. Maybe the best response to lending too much is to lend less! Profound in its simplicity is our capitalist system, at least the one that trusts in self-corrective remedies independent of the government and more taxation, which any bailout based on borrowing money really represents.

If indeed there's a rescue in pumping $700 billion into the financial credit markets, I suspect it will be transient. The larger problem is derivatives and credit defaults swaps, not subprime mortagges. As much as blaming Freddie and Fannie might make sense, it was the bundling of mortgages and securitization process, coupled with de-regulation and too much cheap credit, that's at the root of the crisis. At over $140 trillion, derivates present a far greater risk, and if the bailout doesn't prevent a worsening of credit, could lead to a blowout no amount of federal intervention could resolve--unless we want to use Federal Reserve Notes as wallpaper.

Excuse me, but I thought we were capitalists. Monetary capitalism is about letting free markets set prices, and corporations profit according to their efforts, which in the case of most financial services companies, has been appalling. They deserve punishment, but too much destruction and they'll cease to lend, which is their true value to society. Controlling the issuance of money as they do, we tolerate their profits simply because the alternative is even more overspending by Congress.

Political accountability was lacking in the Senate, which passed the bill last Wednesday. It's no coincidence that only one third of Senators are up for re-election next month. The bill received 25 no votes, and I'd venture that many of those came from Senators facing serious electoral challenges. Extraneous provisions were added to the Senate's bailout bill, including relief from taxes for certain arrow makers and a clause that would make mental illness treatable like any other disease.

Whether these items are worthy of passage or not, the fact that the Senate would add them to me indicates a failure to prioritize, if indeed the bailout needs to be accomplished now, as Paulson has complained. So why throw in irrelevant provisions, well-intentioned or not? The Senate should have constructed a bill focused exclusively on solving the crisis, this lack of focus shows the power of the corporate lobby and the open funnel of taxpayer money that Congress offers in return.

Unfortunately, Barack Obama has come out unconditionally in favor of the bailout. It's worth noting that financial services companies have donated over $25 million to his campaign. Last week, in a speech in LaCrosse, Wisconsin, he explained the situation as the neighbors--who smoke in bed a lot--whose house catches fire. We don't ask how it started--we put it out, he said. Good analogy but I don't think we'll be able to put it out, even with a $700 billion fire hose.

Essay on American happiness

This bi-polar manifestation to evaluating the state of the economy is perhaps the product of an America that wants to feel good at any cost. As a country whose state of mental health depends on its capital wealth, market declines signify a potential depressive episode. Market mavens typically respond by how rosy beaten down stock shares are in a bear, and extol the masses to stay positive. Meanwhile, when the market does go up, these cheerleaders fill up quite visibly with pride, and seem to overflow with child-like glee.

Perhaps these emotional responses to the market are a uniquely Americam affliction, something we can be proud of if not for their obsessive qualities than their uniqueness. No other society in the world is as keyed up about the state of its financial markets than Americans. We take pride in being number one; unfortunately, though, when things turn south, we take it to believe that there's something wrong, with us, collectively. Likewise when we do well financially, we tend to think all things are looking up and cast aside all our doubts. Our perspective on the rest of the world is like a prism bent and reflecting our moods. Our state of minds shapes how we see the world; if we're happy, everything's good. If we aren't happy everything is gloomy. With such a well-defined self-identity, we struggle with a definition of the world beyond our experiences. We want to shape our environment and feel helpless and depressed when we can't. Oh, gosh, I'm psycho-babbling.

Of course the antithesis of this hypersensitivity is the attitude that we need to maintain a stiff upper lip, like Churchill extolled of his fellow Englishmen during the Siege of Britain, or to have what the Japanese call "gaman." Gaman is the exercise of austerity or dispassion in the face of stress, harassment, or uncomfortable circumstances. So well elevated in the art of gaman are some Japanese that they seem able to endure any matter of discomfort for virtually endless period of time. Go no farther than a Tokyo subway during rush hour to know what it's like to exercise gaman, and how little of it you, the gaijin, have.

Rather than complaining, which most Americans have elevated to an art form, Japanese just deal with it. Another example of this might be in the popular Karate Kid movies, where the young American pupil was made to tolerate mundane activities like washing and waxing Mr. Miyagi's cars. Of course he complains, but later Mr. Miyagi will show him a circular arm block that he can use for his karate identical to the motion he used to wash and wax the cars. Every little bit of pain and tedium soaked up represents a lesson--learned at considerable cost--to the Japanese, and every little lesson represents a bit more knowledge which can be applied down the road, to solve future problems and challenges. Even the act of exercising gaman grants better self-control and self-discipline in overcoming one's environment (over which we really have very little control.)

In our need-it-now, don't-delay-gratification society, we forgo any future benefits for the immediacy of the present. Rather than see "denying the self" (in Zen terms) as a learning method through which we can build life skills, patience, and discipline, we take the slightest deprivations as infuriating issues worthy of our highest scorn, ugly episodes to be forgotten as soon as they mercifully end. By focusing on what we don't have, we get more easily aggravated by its absence.

We want to live as happily as possible, with as little as possible, which seems to commit Americans to a cycle of boom and bust, not only financially, in the collective, but psychologically as well, individually. By seeking endless happiness, we commit ourselves to even greater unhappiness when good times end, or at least when we can't be happy no matter how much we'd like to be.

Victor Frankl observed that most of Americans' greatest unhappiness emerges from being unhappy about being unhappy, rather than accepting our unhappiness and patiently waiting for it to end. Perhaps if Americans were better able to tolerate unhappiness, by accepting its inevitable appearance in our lives, we wouldn't be as terrified by the prospect of being unhappy.

Economically, we see this attitude manifest in our decisions of what to buy, and our sense of urgency in granting ourselves our every desire, no matter how financially unwise the purchase may be. This is in large part due to the hyper-commercialization of our culture. We can hardly get through an hour of every day without being barraged with messages to buy, to shop, to satisfy our wants, which are magnified into needs by the incessant consumer culture in which we live. To be truly happy, it seems we need to shop.

Owning what we buy gives us pleasure, yes, but it is a highly transient pleasure. Most of what we buy ends up in attics gathering dust, and the memories of the pleasure given us by material possessions tends to quickly fade. Looking at the Europeans, we see a people with lower incomes, which means they have less to buy. But are they less happier than we are? With a strong health care (delivering far mor value relative to overall expenditures) and retirement safety net, I'd argue that Europeans have far less to fear as they age than we do.

Tying our standard of living to volatile stock market accounts as so many Americans have means we rely on day-to-day swings in the performance of the stock market. With so much of our individual financial status dependent on the stock market, it should come as no surprise that we are hypersensitive to swings in the market.

The wealthy in the US do have more, but a remarkable Pew Center study showed that social mobility--the measure of how likely your standard of living is to surpass that of your parents--is actually higher in Europe than the US. As medical care insurance, college tuition, and costs of living rise, we are likely to see the children of many middle class people lose any ability to advance. Perhaps by slowing economic growth, a brighter future can be realized, but this entails bottoming out, and enduring considerable hardship.

We seem to deal with a potential economic downturn by attacking, charging ahead, and trying to work harder, longer hours, even if it means giving up time with family and less enjoyment of the wealth we do manage to accumulate and keep. Collectively, we Americans seem to grasp at some instinctual level the fact that we must consume more to grow more, that we must produce and buy more in order to have more. For a span of time not that long compared to other societies, Americans have been able to adopt an attitude of endless growth and limitless opportunity. Perhaps these periodic market calamities are what limits this naivete.

Our nation's economy must in time slow from an uninterrupted pattern of growth. We saw the first of these limitations in the twentieth century occur as the result of resource scarcity. The availability of undeveloped resources shrank and the economy contracted. Blessed though we are with greater resources than any other nation, we can't grow forever. We need to catch our breathe, to not grow, to perhaps focus more on the things we can't buy, produce, or sell. We need to enjoy the immaterial more and make the accumulation of material goods, and even monetary capital itself, not the end goal of our existence, but rather the means to an end.

If America as a culture is to mature, we are going to need to do a better job managing our expectations. Of course we need to avoid setting any limitations on what future generations can achieve, as often we have nothing to fear but fear itself, as FDR said in the wake of another crisis, the Great Depression. We jsut can't expect to offer an America that we always have without being willing to give up on some of our excesses. One of those chief excesses is clearly the belief that de-regulation is a pure good. Another is the concept that government can intervene and prevent market-based crises. Government does have a role to play in mending the damage, and forestalling it by limiting greed and the ability of ompanies to take on too much risk. Yet if we remove the downside, we ultimately are instituting communism and a command control economy. Yes, government can and should purchase failed financial institutions, and perhaps nationalize comapnies in times of extreme crissi like war, but we aren't there yet.

To expect preemptive moves by government this late into the crisis to actually forestall the effects of previous mistakes is a wholly unrealistic assumption. While most Americans want to see the worst unhappiness (defined as monetary deprivation) prevented, and politicians respond to that stimuli, the fact remains that we have chosen a system of government that transcends us, our time, and yes, even our pain.

We need to leave to future generations of Americans a system of government that transcends our generation. One key method to achieve this aim is to quit saddling Americans with more debt. The only way we can quit borrowing so much is to quit spending so much. And if a reduction is spending signifies a reduction in our present standard of living, then we need to accept the trade-off. We need to accept our responsibility to provide for future generations, and not spend now for our benefit at their expense.

Now in times of crises, with an eager chorus chanting "bailout," the temptation to spend our way out of the crisis may be too much. But we all need to understand that the economic cycle is part of living in a capitalist system (an unregulated system even more so.) If we are to give future generations the opportunities we had, we need to let the system cleanse itself. We need to refrain from overspending, curtail our borrowing, and let the excesses of the past purge themselves. Whatever the cost in the short-run, piling on more debt will simply delay and exacerbate the magnitude of the problems we are facing.


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