Dead-on-arrival solutions

Nassim Taleb, who wrote The Black Swan, proved to be one of the most prescient observers of our current unpleasantness. On Global Guerrillas, he offers ten rules for a more resilient financial system. Very worth reading. Among them:

What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

And

No socialization of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

Also, be sure to check out Kevin Phillips on Talking Points Memo, explaining the vast expansion of financial services as part of the overall economy, and how it poses a bigger risk than the Great Depression. Why is Obama sleep-walking into trouble with Geithner and Summers?

Comments

[soleri]

As nearly as I can tell, it's Obama's instinct for the power fulcrum that keeps him aligned with the Clinton/Rubin/Summers axis. They scored big on Wall Street so their allegiances are understandable. They own a big part of the Democratic Party. Rahm Emmanuel is their poster boy. By contrast, organized labor is weak and ineffectual.

It doesn't help that the white working class is now a major element in the GOP. What this does is split labor between social conservatives and economic liberals. As long as talk radio dominates the battle for Reality, this will continue to be the case.

Bill Moyer's Journal has been indispensable for keeping tabs on the ways our economic elite have of perpetuating their power and thievery. Most Americans really don't know this story. There are several scandals here, but until this story gets traction via a Lou Dobbs or Glenn Beck, no one will know it. The tragedy here is that populism actually provides an appropriate explanation. But what we're getting instead is the vile and stupid version.

[Buford]

While understanding and agreeing with his message, I have a quibble with Taleb's wording. It is not the 'evolution' of economic life that helps them fail. It is the counter-evolutionary human-directed processes that do so.

He is making the classic error equivalent to claiming that eugenics programs are the ultimate result of evolution. Evolution is what happens when humans do not stack the deck in order to enable a pre-determined end state.

End quibble.

[Emil Pulsifer]

Well, insofar as all of these institutions, both government and business, are political and economic constructs, I don't think we can talk about nature vs. nurture in ANY terms.

The individual sectors, as well as their economic and political symbiosis, ostensibly grow from ambition, greed, and ideological imperatives, as influential individuals, groups, and institutions jockey for power.

I recently saw an analogy in which the political-economic matrix was likened to an anthill: put something down in the middle of it, whether new legislation or new financial products such as complex derivatives, and the ants crawl all over it seeing what they can get from it.

Too often, legislation is presented to the public as an "inertial body" in Newtonian physics: moving through a vacuum, immune to the effects of the atmosphere and the gravitational bodies surrounding it, and travelling along some idealized "straight line" independent of the forces trying to affect it -- many of which are involved in crafting the details of the legislation from the beginning, as well as influencing the terms of its enforcement.

Another analogy involves water seeking its own level: plug a hole somewhere, and water flows through a different hole. Create a new hole, and water drains from somewhere else, leaving the old location high and dry. This is a problem for the fish.

The problem is exacerbated by the fact that most of the fish, most of the time, are oblivious to the very medium in which they are swimming. The idea of political economy, once taken for granted, seems to have passed out of vogue.

[koreyel]

Why is Obama sleep-walking into trouble with Geithner and Summers?

This is THE critical question. I've pondered it a lot lately.

First he is too smart not to know exactly what is being done in his name. So let's dismiss sleepwalking. He has willfully chosen this path. I can think of three possible reasons:

1) Didn't you have a post a while back Jon in which you poked in fun at a Wall Street conspiracy? Maybe there is another check on presidential power besides Congress and the Judiciary branch? Maybe Wall Street really can make things a lot worse if they don't get exactly what they want...

2) The country is hollowed out and far more broke than anyone knows. The only way to maintain American dollar hegemony is to restore confidence as fast as possible. For all we know, Geithner has hand selected the financial companies that can participate and will make this so... This path has been sold to Barack as the quickest most painless path back to a functioning heartbeat.

3) Because doing the right thing: Nationalizing, bankruptcy, receivership is completely unpalatable. The well of public discourse has been so poisoned against "socialism," and the critical thinking of Americans is so poor, that the capitalistic path of creative-destruction is untenable. It would be political suicide.

[Emil Pulsifer]

"Why is Obama sleep-walking into trouble with Geithner and Summers?"

Well, Obama has a background in law, not economics, so upon what basis would he choose his Treasury Secretary and the Director of the National Economic Council?

One possible basis is his own personal political phillosophy. Those who have watched Obama slide to the right not only during his campaign but since his election, may have difficulty defining this, since Obama might now be labeled a "pragmatist" more convincingly than a progressive.

Another possible basis is advice rendered by the leadership of the Democratic Party, whose cooperation is essential since they hold the reins of the majority party. Note, however, that the Democratic Party leadership scarcely constitutes the most progressive faction of that party.

Don't forget the evolution of that party leadership from the Reagan era onward, when "liberal" became a dirty word and candidates like Bill Clinton defined the pragmatic (rather than the ideological) extreme left end of the American political spectrum.

Less than 10 percent of the American workforce, excluding government workers, is now unionized. Thus, the lion's share of campaign financing, even for the Democratic Party, now comes from wealthy individuals and corporations. With the ascendency of the financial sector in the American economy, guess what that implies here?

So, Obama could have selected truly progressive candidates, whose opinions, advice, and suggested policies are not only outside the political mainstream (as defined by the Democratic Party leadership) but are also unpopular with Wall Street (perhaps a problem during a period when market psychology is supposedly a major factor in economic recovery), or else he could accept candidates which both the Democratic Party leadership and Wall Street found acceptable, advocating policies whose legislative embodiment would have a better chance of passing successfully through the gauntlet consisting of congressional votes and of the "public opinion" debate leading up to them (the terms of the latter being influenced not so much by the public as by the establishment pundits controlling the op-ed pages, these in turn being vulnerable to concerted media blitzes by Big Business and Big Finance proclaming that the sky is falling).

This is not to say that establishment choices, though the most politically pragmatic, are the most productive for the country. If you pick The Usual Suspects with their establishment connections and proclivities, you get "public servants" whose idea of public service is shaped both by cronyism and by notions of "capitalism in the public interest" in which the end justifies the means so long as short-term macroeconomic results are favorable. What happens in the longer term is another question.

Note that Summers, according to U.S. News & World Report, may have the most influence of any single individual on the direction of Obama's policy making:

"Despite the occasional ribbing, the president is actually quite deferential to the man he mostly calls "Professor Summers." He relies on Summers for advice on a huge portfolio of issues, including the budget, energy policy, healthcare reform, education, and international trade. "Larry coordinates all of the economic activity," says White House Press Secretary Robert Gibbs. "He's the in-house White House economic adviser. And one of his most important roles is he is the keeper of the president's daily economic briefing, where a number of decisions get made and the president gets updates on what's going on."

http://www.usnews.com/articles/news/obama/2009/03/24/larry-summers-obamas-designated-thinker-in-a-troubled-economy.html

[Emil Pulsifer]

Selected media excerpts on Messrs. Summers and Geithner:

* * *

"Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?”

That question caught the attention of my colleague Bill Moyers, who interviewed [MIT professor of global economics and management and former International Monetary Fund chief economist Simon] Johnson on the current edition of BILL MOYERS JOURNAL on public television.

The problem, Johnson told him, is that via millions spent for political contributions and lobbying efforts, the revolving door that sees elites shuttle between jobs in government and business, and by creating a situation in which technical knowledge is limited to a privileged few, the banking and financial services industry has become a kind of ruling oligarchy that stifles attempts to shake up the status quo and make the real change necessary to get us out of the current crisis. “Either you break the power,” Johnson said, “or we’re stuck for a long time with this arrangement…

“The policy that we seem to be pursuing, of being nice to the banks, is a mistake. Both from a technical/economic point of view, and from a deeper political point of view… [The banks] think that we’re going to pay out ten or 20 percent of GDP to basically make them whole. It’s astonishing.”

Johnson has written on The Baseline Scenario blog what he thinks needs to be done: "Reboot the financial system. Find out immediately which banks are insolvent using market prices. Allow private owners to fully recapitalize, if they can. Have the FDIC, the Federal Deposit Insurance Corporation, take over all banks that cannot raise enough private capital, and try to re-privatize those banks quickly, while making sure the taxpayer has strong participation in the upside."

Unfortunately, Johnson fears the oligarchy will prevail. “My intuition is that this is going to get a lot worse,” he told Moyers. “It’s going to cost us a lot more money. And we are going down a long, dark, blind alley…

“Eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money and they will cash out…. We and our children will be paying higher taxes so those people could have those bonuses. That’s not fair. It’s not acceptable. It’s not even good economics.”

http://www.pbs.org/moyers/journal/blog/2009/02/michael_winship_the_oligarchys.html

* * *

"Financial Industry Paid Millions to Obama Aide" (NYT, April 3, 2009)

http://www.nytimes.com/2009/04/04/us/politics/04disclose.html?_r=1

* * *

And here's a more general bonus article, on the machinations of the lobbying industry:

Big Firms Save $100 billion from lobbying effort for "tax holidays"

http://wtop.com/?nid=111&sid=1645810