Friday, September 19, 2008

Interesting Times

Spent a while on the phone with the Master Chief today talking about the current "financial crisis".

We both agreed on a couple of things:

1. That laying on a supply of pencils or apples isn't a priority. Governments made things worse in 1929 by either failing to act or acting in wierdly inappropriate (can you say "Hawley-Smoot"?) ways. We've learned a lot about macroeconomics since then, and the probability that the U.S. government will repeat the mistakes of the Hoover era is slim. The problems that took down Wall Street in '29 were not well understood at the time and deeply ingrained in the financial world of the day. The problems taking down Wall Street in 2008 are plain enough to see and were well known even before this mess. What was lacking was the willingness to stop the fiscal fiddling that was being used to generate short-term profit taking while setting up long term risk - here's Brad DeLong with a good summary of what has happened over the past year. The economic collapse we're seeing appears to be changing the laissiez faire (Republican for "fuck anyone but meeeeee!!!")approach to fiscal regulation. Finally.

2. The probability of some coming economic pain, though, is very likely in coming, and soon. And we both snarled about the illiberal way that this pain is going to be distributed. My comment was cribbed from a Napoleonic cartoon which has the insubordinate sailor sneering to his captain that he wishes that the roundshot will be distributed the same way the prize money will be: the greatest portion amongst the officers.

One interesting part of the recent tsuris has been the degree I see this as showing how far the U.S. Congress has fallen in terms of governance. The Master Chief disagrees. But my point is that the names you hear in the headlines are Secretary of the Treasury Paulson and Chairman of the Fed Bernanke. Where, you ask, is the Chairman of the House Financial Services Committee? Oh, you don't? Do you KNOW who's the Chairman of the House Finance Committee IS? Did you even know it was CALLED the "Financial Services Committee"? (Admission - I thought it was just the "Finance" committee...)

Or who runs the Banking, Housing and Urban Affairs Committee (Senate), Finance (Senate) or the Joint Economic Committee? One thing does seem obvious to me, though: the Congress is no longer primus inter pares. We no longer have three branches of government, seperate but coequal. We know this was true for war but now we can see that in peaceful matters the dominance of the Executive is clear. Perhaps the only remaining standard is in the Hearts of their Countrymen, and in that case, Nancy Pelosi is just a nose behind Dubya in a race for the bottom.

Over at Fabius Maximus the old Roman is waxing poetic on how this is the End of the Republic, how this is the first step towards economic and political caesarism, and that we will look back on the events of autumn 2008 as the last days of American republicanism. It's worth a look in - my man Fabius is always informative and always brings good arguments into the fray even when I disagree with his conclusions. For what it's worth, I agree with him - to a point...

Now you know how I feel about this; the game's been up for quite a while now. What we're seeing is just an open acknowledgement that government of the Rich, the Well-born, and the Able is going to govern for the Rich, the Well-born, and the Able. The Corporate Donor. The Military Contractor. The Friends of George (or John, or Sarah, or Barak...), Patriots, Rangers and all the other "players".

I'm not saying that you or I or Joe and Mary Lunchpail should just stop trying to pull the levers of power. But I will say that this should STFU the Randites and hardy free-marketeers over at Powerline and Instapundit and LGF. Yeah, you're all just economic proles like the rest of us wage-slaves, peckerheads. You and your crappy little house and your crappy little job mean bupkis to the wealthy people in the seats of power in this country. If destroying your job and foreclosing your house and putting your ass on the street will make AIG or Bank of America a nickel's profit, well, hellooooo homeless shelter! As DeLong says:
"...the market fundamentalists...will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency, and adverse selection problems crash spectacularly. Is this a situation in which we should move health care--also rife with moral hazard, agency, and adverse selection problems--toward a free market configuration? No. Market regulation needs to be smart. But first, market regulation needs to be."
I think we're in for a hard, cold autumn.


pluto said...

I've given the latest bailout some thought and have surprised myself by coming to the conclusion that the current plan has some chance for success and is even somewhat morally justifiable.

The US government (which includes we, the people) created this mess by holding interest rates too low for too long and deregulating everything in sight. Therefore the US government has the moral responsibility to clean up the mess. They also have the responsibility to punish those who got rich off of this.

Furthermore, the US government is the only institution in the world that MIGHT be big enough to buy the bad debt (at seriously reduced prices, of course) without sinking itself.

The only two flies in the ointment that I can see are:
1) Foreign investors are going to have to buy into the concept of sending good money after bad in a REAL big way. Bush and Paulson are talking about the US government spending about $1 trillion. That's a LOT of T-Bills especially considering how much of the debt is totally worthless and how long the investors are going to have to wait to get their money back (if they can get it back).

2) There is no way that the US government is going to buy the debt from the banks at full value. They will probably be talking about buying it at 25-30 cents on the dollar. The banks are going to have to eat the rest. That's asking a LOT from a banker who has been in denial about how bad the situation truly is.

3) A side-effect of this plan is that interest rates on T-Bills is going to have to go up dramatically (probably doubling and possibly tripling) in order for investors to feel like they are getting a good deal for their money. That's going to ripple through to what we call the "real world" in the form of economy-crippling interest rates.

1. McCain was stumping in Minnesota and Wisconsin yesterday with a speech that said that "people like Obama are playing the market rather than solving the problem."

That is the single least effective slur I've seen the Republicans throw at anybody in the last 20 years. Obviously the Republicans are really rattled by the crisis and Obama MIGHT win after all if he can capitalize on situation while looking Presidential.

2. Next crisis? The Credit Card bubble! Credit card balances are expanding at an annual pace of about 40% and since there is virtually NO regulation on credit cards, this is an opportunity for the forces of greed and chaos to go hog-wild. Watch this space for further details.

Lisa said...


I skimmed this the other night, and am I correct you had a photo of yourself ca. 1980 in which you teased you looked like a Lebanese taxi driver?!

Well, I just wanted to say that you are one of those fortunate men who grow more handsome with age, IMHO.

Lisa said...

p.s.: I do agree, "the Congress is no longer primus inter pares. We no longer have three branches of government, separate but coequal."

How did this happen? Tsuris all 'round, and it doesn't seem to mean bupkis to anyone. (Civics is no longer a required course in middle school.)

FDChief said...

Pluto: You're right, with the caveat that the Paulson plan requires that the UST "buy" these shitpile securities at the "lowest price that the holder will accept". That doesn't sound like Wall Street taking a bath. Chris Dodd has counterproposed some sensible restrictions to the original plan, and we'll just have to see if the loathesome Congressional Dems can hold their principled stand or get railroaded like they usually do.

And your primary point stands as critical - where the HELL is all this money coming from?

Lisa: I am deeply sensible of the compliment (you turn my head, you masher, you!) I only wish it were true. I'll post a younger picture to show that, alas, I am the victim of the whirligig of time bringing in its revenges.

And I would say that the fall of Congressional power may well turn out to be the big story of the last half of the 20th Century when historians get enough distance to see the forest from the trees. Our Congresscritters have been seduced by largesse and power into compliance, and the nation is the worse for it. Would that we could work up as much rage at the abdication of Constitutional power in the Legislative branch as we do the process of elemination on "Project Runway".

Lisa said...


I do not believe I am the masher, m'dear (!) I mean the compliment sincerely, though I shall await a photo of an earlier incarnation.

How such a powerful body as Congress has become largely de-fanged is stunning to me. As you say, the folks get pretty hot and heavy about who gets knocked off of what television competition and why. Like Chauncey Gardener in "Being There," t.v. is become real life.