Bits and pieces on the economy

Whilst at home the Obama administration seems to be getting a degree of centrist kudos for boffing a few CEOs on the head, things abroad are looking hairier and hairier.

Following the ouster of Rick Wagoner, the administration is sounding out the public (and presumably the Democratic party) on the implications of a managed bankruptcy of GM (see Washington Post and Wall Street Journal). This kind of heaviness is painted as a big risk by the WSJ, but the political risks of renewing the auto bailout without intervening dramatically are surely far greater. I was suspicious of the auto bailout from the start; but it's good to see at least there's some serious conditionality being applied to the money. Certainly, the Politico.com seems impressed, calling Obama "the nation's CEO" - which is, despite all that's happened in the past year, apparently still a term of praise.

Still, as Newsweek points out, Krugman remains the liberals' favourite Treasury Secretary in waiting and the new Geithner bank plan could fail in any number of ways. And, as Irwin Stelzer puts it in The Weekly Standard, Obama officials are trying to lower international expectations in equal proportion to Gordon Brown's efforts to raise them before the forthcoming London conference.

Are we going to see one of the big players storm out in a huff and blow the deal a mile high in order to win support at home? (Sweepstakes on Sarkozy, Merkel, or Lula...?) Dan Drezner at Newsweek certainly seems to be concerned that this is a last roll of the dice, that a deal on regulation might be on the cards but that fiscal conservatism in Europe will scupper any effort at a coordinated stimulus.

Underpinning this is the fact that the rising forces in the world see this crisis not so much as a crisis as an opportunity to rebalance global power away from the global hegemon. But this is a very dangerous game to play. The more pressure put on the US for spending itself out of this alone, the more likely that this will end up producing serious currency crisis in the medium term, and that could be dangerous for everyone.

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Sympathy or schadenfreude?

My indecisive gene is on overtime again, thanks to two articles in a recent New Yorker. The first, from Nancy Franklin, reported on Madoff's visit to court, replete with "a damnable smile ... language that betrayed even more lies, deceit, and pathological self-righteousness ... sweet-talking, disingenuous ..." and so on. The passive self-justification in Madoff's supposedly apologetic statement to the court is truly amazing, and the moment at the end of the account - when "two court officers approached Madoff, who stood silently and still, and then he moved his arms a little so that his hands were behind his back. And then there was a click" - is the closest this armchair liberal has come to glorifying in punishment in a pretty long time.

The second compared Madoff's Ponzi scheme to an example from the past, a guy called Ivar Kreugar. Here we see how greed comes on slowly, not all in a rush, that massive fraud builds first from cutting corners here and there, a desire to please and impress; and can only work its magic when it builds upon the greed of clients sucked in by the promise of magical returns. In this sense, the process of fraud seems more seduction than thievery.

To explain is not necessarily to permit, and the difficult bit about any such supercase like this is balancing the moral and the social. One way of looking at things it to focus on the collective delusion fostered by cheap credit, and stress how we were all in our own ways suckered in by dirty little promises of wealthy living beyond our means. Madoff, in this sense, was just the stand-out representative of an era of generalised inattention to the foundations of our economy. Moral respondents will rightly reply that, even under these conditions, Madoff need not have taken the choices he did. Other financiers, who knew how to, nevertheless avoided the temptation to engage in massive fraud. To stress systemic factors that draw attention away from Madoff's own moral responsibility as an individual runs the risk of invalidating their prudence and honesty.

I must admit, I'm very pleased to hear the click of those handcuffs.

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Business as usual

From WaPo, BBC News and The Grauniad (distorted by me):

Reporters to Biden: Any plans to revisit the Cuba embargo? It would be a major sign that things were really different under an Obama administration you know...

Biden: No. Obama and I think "that Cuban people should determine their own fate and they should be able to live in freedom." Oh, yeah, also, we need votes in Florida. Oh, yeah, and did I mention that there's a financial crisis going on and a major diplomatic problem with the Middle East and South Asia, so we're going to be damned if we waste any political capital on an issue that, whilst important to Latin Americans, really doesn't make the blindest bit of difference to us in DC? Er, did I say that last bit out loud?

... Meanwhile, in the Southern hemisphere ...

Reporters to Brown: Any plans to talk to Argentina about the Falkland Islands? You wouldn't have to concede the principle of territorial sovereignty, and it would be a major sign that things really were different under a New Labour administration you know...

Brown: No. "The essential principle has always been that the islanders should determine the issue of sovereignty for themselves. Let us be clear, our first priority will always be the needs and the wishes of the islanders." Besides, I'm about to get kicked out of office on the back of a populist backlash which has large swathes of Little Englander sentiment built into its core. Do you really think we'll waste any political capital on an issue that, whilst important to Latin Americans, really doesn't make the blindest bit of difference to us in London? Er, did I say that out loud?

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What's it all about, then?

Sometimes international conferences can be exciting because of what happens in the meeting halls. Sometimes it can be because of what happens outside them: Seattle, for instance, or more definitively the Chicago Democratic Convention in 1968.

At the moment, I'm afraid that the forthcoming G20 meeting is going to be neither. There seem to be too broad differences amongst political leaders to imagine anything concrete emerging from the meetings themselves; but I can't bring myself to be particularly interested in the protests outside, which began today with about 35,000 people on the streets of London.

Perhaps it's because I'm not there. Protests are meaningful really as personal experiences which people engage in to assert their loyalties and confirm their beliefs; they're not especially important as political action, and they don't tend to impress people via the TV screen. This, if evidence were needed, was demonstrated pretty graphically by the way in which Blair and Co. encouraged millions of protestors as part of the Gleneagles G8 meeting on global poverty and the world's most powerful swiftly neutralised them with a few bland promises that were subsequently not met. For better or worse, street power hasn't been a factor in politics for a long time, except when it descends into violence and is exploited by anti-reformers.

But it's also because, in truth, I don't really understand what these marchers are protesting about. The BBC website says "Speakers are calling on G20 leaders to pursue a new kind of global justice." Great. And they want "action on poverty, climate change and jobs." Great. But how? Do you want the G20 to agree a global co-ordinated effort to revive free global trade (and by extension capitalism)? Do you want to get rid of it and see a new era of protection? Do you want governments to devote more money to international assistance, perhaps through institutions like the World Bank and IMF - the architecture of the Washington Consensus? Do you want them to do something about Darfur? Do you just want a day out in London to make yourself feel morally superior to the bankers and the politicians? I don't mean to sound dismissive, but what, in the end, is this all about? No-one wants global warming. No-one wants poverty. But where's the shared sense of a policy approach to actually achieve something?

As a political act, marching against the war in Iraq made sense, at least in the sense that - for whatever reasons and motives - the people on the march shared a clear political goal. But, and I could be just being obtuse here, I just don't really get what these marchers are after. Perhaps someone might enlighten me?

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Those halcyon days

Reading Paul Krugman's latest evocation of the wonderful post-New Deal world of responsible banking got me thinking. In the 80s and 90s, we were trained to believe that flourishing commerce was contingent upon an enormous financial industry, on the grounds that innovation in finance produces a more rapid and responsive distribution of capital. Obviously, this seems to be a pretty idealistic view. Deregulation was a product of ebullient capitalism as much as it was its cause. But I'm still not sure there's any more inherent truth to the claim that a tightly regulated financial industry necessarily solves all our problems, since so much of this current crisis extends beyond just questions of regulation: a point that, it seems to me, is still not fully appreciated. This is a crisis based on fundamentals: credit-fuelled consumption was just a way of papering over the cracks, a way of pretending the world had not fundamentally changed between 1973 and the present. Regulatory issues are at most a necessary but insufficient part of the solution.

In this sense, evoking the New Deal order as a mythic past to be reconstructed seems as unconvincing as any other attempt to understand progress by glancing backwards. This led me to thinking about Krugman's observation that in the Reagan era, "finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich." True enough. Perhaps this suggests that one of the risks of modern capitalism is that all the talents focus on getting themselves rich rather than working in a socially useful manner, and then justify their actions by claiming that they're really helping grease the wheels of the world economy.

But is this really true? When I look at my friends and my students, many do seem to make the decision to follow the money rather than a sense of civic duty. When I look at the state of our current political leadership (in the UK), it's also tempting to conclude that the best and the brightest must be off somewhere else doing something else. But on the other hand, there's still a lot of talented people I know who do have social consciences, who do go into areas of work for reasons other than cold, hard cash. And it doesn't take a professional historian to figure out that the era from the New Deal to the Great Society had a fair share of unimpressive political figures as well, not least among the ranks of the people who were shouting most loudly about public service and civic virtue.

The idea of wondrous days in the past when everyone had a shared sense of civic responsibility smacks just a little bit too much of romanticising the past. Of course, this is not to say that reform isn't necessary: but it should be reform based on a sober analysis of where we are now and where we want to go, not an attempt to rebuild a society that passed into non-existence a long time ago - and, in truth, has many features we really wouldn't like to see reconstructed.

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And while I'm imagining conspiracies...

The EU is managing to embarrass itself once again. Perhaps this is shaping up for a repeat of the 1933 London Economic Conference, where rejecting the demands of foreign powers provided Roosevelt with some useful kudos points at home during the early days of his administration?

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A Shot Across the Bows?

A1 article on sustained links between the Pakistani ISI and Taliban in today's New York Times. Argues that the mid-level links are deeper than might be thought and that little has been done to challenge them since the Mumbai attacks. Is this a warning shot from the Obama administration? Certainly, more explicit and public attacks are likely only to weaken the Zardari government still further by fuelling anti-American sentiment: the paradox is that pursuing US foreign policy goals might turn out to be the best way to prevent them from happening...?

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Geithner-plan

Ok, I don't presume to fully understand all the details of the Geithner plan yet. But am I the only person who thinks this is an astonishingly good deal for Wall Street - all to the end of avoiding the appearance of nationalisation?

More thoughts anon...

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Bezzelicious!

Back in October, I posted about Galbraith’s idea of the Bezzle, and suggested that we should anticipate some major discoveries of fraud as part of the rapid contraction in the credit crisis. With Stanford and Madoff, it seems, this is exactly what has happened.

The MSM has now belatedly picked up on Galbraith’s idea. That’s right folks, you heard it here first (apart from in the book that was first published decades ago, heh heh!) Time, the New York Times, The Independent and the Financial Times are just the most major examples of credit crunch Bezzle-talk bubbling up since the crisis hit. Also, check out an interview done by Harvard Professor Richard Parker (who has written a biography of Galbraith), Canadian Business Online, the Daily Sprawl, Market Ticker, and many others in the SLMSM (slightly less mainstream media, that is).

In one sense, it’s impressive just enough to see the underlying logic of Galbraith’s observation play itself out. That easy money enables corruption and tight money enables its discovery is sufficiently logical that we’ll no doubt see Bezzles associated with this and every financial crisis to come.

But to me, what’s even more interesting is the point it raises about the link between mass psychology and economics. All too often, macroeconomic policy seems to operate on the basis of some fundamental belief in fixed relationships between interest rates, debt, inflation, government spending and so on – when in reality, all of this is mediated by public belief and action. Hence, the macroeconomic behaviour of the economy in a time of irrational ebullience (1994-2007, say) could well be completely different to that of a time of pessimism and nerves (2008-?).

The much-remarked tendency of Chinese people (perhaps having lived through the instabilities of the last fifty years) to save their money rather than consume is a classic example of how public psychology has to be included as part of economic analysis. But the Bezzle shows this as well – optimism produces laxity, which generates corruption. Then poor financial conditions produce a wave of fraud investigations which then reinforce public suspicion of free market activity, possibly exaggerating elements of the crisis (by forcing banks to behave too conservatively, for instance, or encouraging people not to spend). In this case, both the exuberance of the past generation and the pessimism of the current one mediate and reinforce and are reinforced by economic trends.

In a recent piece for the New York Review of Books, the great economist Amartya Sen argued that Keynes provides us only a limited set of tools for managing the current crisis, and has suggested people also look at the ideas of Arthur Cecil Pigou, who “was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now).” This seems eminently sensible – after all, FDR’s achievements were only latterly Keynesian, but from the get-go they were inspirational.

Another question the Bezzle theory raises is whether there’s an equivalent anti-Bezzle. To reinflate the economy, governments around the world are pumping money into the market at an unprecedented rate. This must surely provide similar opportunities for fraudulent behaviour as the massive expansion of private credit, which will then only be exposed when there’s an accompanying pressure later in the cycle to pull back government spending. Certainly, this happened in the 1930s – when the cries against government boondoggles grew substantially over the course of the decade.

So, at risk of more over-speculation than a highly-leveraged fund manager, I shall follow my original Bezzle prediction with an anti-Bezzle prediction. This will probably take quite a few years to play out, though, so I don’t have too many worries of being proved wrong in the short term!

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Back again!

A descent into work hell has rendered the blog dormant for the past few weeks, much longer than planned. But now things are clearing again, so ranting will now recommence. Thanks for waiting!

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