Sunday, April 05, 2009

Economics and the Avoidance of Armageddon

My open letter to the Anti-pundit, who sent references without any adjoining opinion or discussion.  I'll assume he wanted to solicit my opinion, so here it is.  I welcome a response and discussion.

Items in question:

I read the references that you sent.  Black is correct in maligning the marriage between Washington and Wall Street, but he acts like this is something new.  In fact, going all the way back to Alexander Hamilton, we've had corruption at the highest levels of finance and govt.  And I would say it's even worse in other types of govt models like Communism (Russia is the obvious example, but also we see it in Cuba) and monarchies (QE1 had a stranglehold on the financial system of the world; feudal lords were also an obvious example).

I'm not saying it's okay, just saying that money and power will always get married.  Greenwald implies that a new President can change the status quo in 90 days and that is unrealistic.  While I agree with the sentiment, I can appreciate the practicality of keeping the system intact for now.  There is also a marriage between the educational system and the financial world with the brightest students pursuing careers on Wall Street because that is where the money is.  Sure, there are exceptions like Krugman and Romer and Geithner, who are lifetime academics, but they are rare exceptions.  Romer is chair of Obama's CEA after all.  Geithner is a career govt official.

For the president to ignore Sunmers' and Rubins' input would be lunacy.  We also assume that Obama is blindly following the advice of one side of the debate which is not necessarily true. 

Black made the analogy of a plane wreck and bemoaned having the pilots who crashed the plane lead the investigation.  To use his analogy, I would say we are still cleaning up the debris on the runway and seeing if there are any survivors. Any investigation I have seen so far, such as with the Congressional hearings, has devolved into inane political posturing by the representatives.  I cannot figure out who is the dumber, Maxine Waters or Michelle Bachmann.  Even Barney Frank, who is hailed as the smartest guy on Finance in Washington, seems to have a very superficial understanding of the crisis for someone who has been involved with the issue for 2 decades.  

To wax philosophical for a moment, money is the property of the federal reserve-- they print it and control how much is in circulation.  We can accept it as a payment for the labor and goods we provide, but no law says you are required to do this.  The resolution of this crisis may require the devaluation of dollars at some point, but that point has not come yet, at least not in relationship to other currencies and commodities-- which is after all the only practical way of valuing a currency.   The federal reserve is a quasi private organization of banks and we can only loosely control its management.  Each of us has to make a determination of our value to society and we can choose to accept or reject the offer made.  (Ask John Galt.)   

Black and Greenwald and Moyers have a lot of bile for the status quo and the way it is being handled, and I can appreciate their skepticism and frustration.  But, they offer no alternative solutions.  In September, we approached the edge of the abyss and we successfully backed away.  Not everyone appreciates how close we were to financial Armageddon.  This is not to say that we should not or could not have seen it coming.  Economists like Taleb and Roubini and Ritholtz and many others have been railing about it for years (and reading Ritholtz since 2006 has likely saved me tens of thousands of dollars), although each one of them have intimated in various venues that they had no idea it would unwind so quickly.  Even a semi-coherent non-professional could figure out that lifestyles were out of hand:  entire subdivisions of $500,000 homes were built on speculation, total household debt is 100% of GDP, our trade imbalance is increasing exponentially, federal budget deficits are rising due to wasteful unnecessary war.  And so on.  It has taken us 25 years to reach this point.

I would also comment that as bad as this situation still is, look at the bright side.  It is being managed without bloodshed, revolution or massive dislocations in peoples' lifestyles (so far).  Just look to 40 years ago when a similar (I would even say less severe) crisis occurred in China.  What was the solution?  The Cultural Revolution orchestrated by the Party slaughtered 35 million people.  Or look to the Wiemar Republic in 1933.  After several years of crushing Depression, they elected Hitler as Chancellor whose solution was to exterminate a third of the population and start a world war where 50 million people died.  I hope we have learned from the past enough to avoid such extreme outcomes, but there is no guarantee.

Today we have safety nets: Medicare, Social Security, unemployment insurance, etc.  The crisis will not inundate everyone all at once. That is why we pay our taxes for 20 years and whine that it's not worth it, then all of a sudden, it is worth it.  That's the wisdom of FDR and Ike and like minded progressives.

Ritholtz points out that before AIG developed CDS', we had reinsurance.  I would add that we also had portfolio insurance, S&L shenanigans, internet bubbles, tulip bubbles, etc.  The financial industry has a long history of creating "products" that are designed to bilk us out of our hard-earned labor and the history likely goes back to the first Cro-magnon man selling ink to write on cave walls in France.  As dour as Ritholtz has been for the last several years, I think it's only fair to point out that he has recently called for people to get back into the market and invest in stocks.  I tend to agree with Ritholtz that someone at AIG intended to commit fraud; he's the lawyer and I'll defer to his professinal opinion.

So, bad economic conditions can have dire consequences and calling for a complete takedown of the status quo would have a plethora of unintended consequences, mostly bad.  The solution must be practical.  My opinion is that Obama is handling the greatest economic crisis in 80 years with unbelievable aplomb.  I have no idea if it will have a better or worse outcome than we had in the 1930's or 1917 or the 1870's, and neither does anyone else.  I do know that ignoring the problem, castigating individual banks, calling for massive large bankruptcies, allowing unemployment to reach 25%, being vindictive and wasting time putting the pilots on trial while the passengers are burning to death... all should be options that off the table.

Black and Moyers seem to think that we should dismantle the reserve banking system by 9:00 am next Tuesday.  Is that really in the best interest of the working man?  There will be plenty of time for Waters and Bachmann to make political hay, but let's clean up the runway first.


antipundit said...

My comment is that this is why I send you such materials without comment; I rely on your well-developed and critical thinking to deconstruct and re-synthesize. I'm just a hyper-educated (and of course that does not equate with hyper-intelligent) citizen who continues to make his way through this crisis with the intent to protect family and friends, and society, as best he can. So, thank you for the most excellent thinking.

Tony said...

Right. Now you're just poking me. You just show better restraint when faced with the prospect of pontificating on things you cannot know. I have no such restraint... that's my curse. BTW, thanks for the references (I had read the Greenwald and Ritholtz pieces, but no Moyers'.)

Eric said...

Black is crazy. Just to add my hyperbole to this discussion.

Moyers puts some people on that are... Speaking without understanding. I'm massively Pro Socialist, but there are some mistakes Like the idea that we can set interest rates or effectively manage interest rates.

Black approaches it like all the "toxic Assets" are worthless. That the 4 trillion in CDO's are on par with the Indimac loans. Which BTW the FDIC firesaled at .30 on the dollar. To say that all bank assets are on par with these ones, is laughable. but not to dismiss that the first loss Tranche on them is a horrible place to be. But the Yin to that Yang is that the back end should then be much more robust.

Maybe things are different in Kalamazoo, I hear things are bad. But here in Utah, there are maybe 4 foreclosures within a mile of me. There are only 17 homes for sale. It seems like "most people" are paying their bills. Assuming many of these loans were collateralized and in the CDO pools.
I think many of the people living in those homes would be surprised to hear that their mortgage is a "Toxic Asset".

I catch Bill moyers every week... it's always good. even though there can be some quacks.. but hell if I didn't listen to quacks... Who would i hear from.