Monthly Archives: June 2012

Mitt and Friends

All the Republicans screeching about ‘ObamaCare’…They adamantly refuse to go along with the Medicare expansion…good…they can keep their current Medicaid with most states covering folks up to 50% of the poverty line and the Federal Government reimbursing them, on average, 50% of their expenditures or they can have, under the expanded Medicare provision of the Health Care Reform Act, folks covered up to 133% of the poverty line with the Federal Government paying 100% for three years and 95% afterward. They can cover less people for more money or more people for less money…sure it is optional. They can hate Obama more than they care about their constituents. When folks start leaving these idiotic states and voting the radical elitists out, they will come around. It will be funny to see all these self-righteous Obama haters groveling up to the bar…eating crow…looking more and more like their two-faced presidential candidate.

Oh, call it a tax or call it making folks responsible for their own health care…getting the free-loaders out of the system…I thought that was a Republican ideal? Not only will folks already with insurance NOT pay a tax, they will find their premiums going down when it goes into effect due to larger insurance pooling. The whole idea is a simple business idea that even Mitt should get – the larger the market the more the production and overhead costs come down. Mitt even defended the mandatory requirement of “RomneyCare” with this line of reasoning before he found his latest religion on the matter – hypocrite. God forbid that we tax the free-loaders…is that a Republican ideal? In any case, the lie of the Republican elite will be everyone will be taxed. Conveniently, they cannot seem to make fine distinctions. I suppose this has to do with orders from the top – Grover Norquist.

Why is it so hard to find consistency in Republican ideology these days? Even the academic elites in conservatism run from debates when empirical facts that cannot be spun are involved. This is so unlike the Republicans of old…the ones that made Justice Roberts what he is…

An ideology is bankrupt when it is reduced to sophistry and fanaticism.

The Appeaser-In-Dictator

Here is more proof the current batch of Republicans practice sophistry. Lately, they have been fond of talking about how President Obama is a dictator. Rush Limbaugh recently stated that President Obama’s immigration policy is a “dictator’s wet dream”. They think President Obama is circumventing the constitution with health care. They think that fast and furious is President Obama’s plan to snatch their guns from their cold, dead fingers. Funny, just a few months ago Rush and Santorum were calling President Obama an appeaser. Are appeaser’s dictators? Are dictators appeasers? I actually thought he was trying way to hard the first few years of his presidency to compromise with the Republicans to get things accomplished. They only turned any attempt to compromise into yet another reason to attack him. He was not leading. He was appeasing. Appeasers do not lead, they try to compromise. Well, now that he is leading, he is a dictator. President Obama should have figured out a long time ago that folks that hate you will not compromise with you. Hate is irrational and compromise is rational. If you try to lead them they will call you a dictator. It is an un-winnable situation. The best thing President Obama can do IS lead by circumventing the haters as much as possible. Most folks do not have that kind of hate for President Obama. His biggest strength is to show them up for what they are by leading. They will screech and foam at the mouth, too bad so sad. They will put a spectacle on that turn the vast majority of Americans against the Republicans. President’s Obama’s best political asset is that folks like him. When someone throws a temper tantrum against a person an observer likes, the observer feels sympathy for the person they like and dislikes the brute. President Obama should not let haters set the agenda for his initiatives. He should let the people that got him there set the agenda and we want him to lead until the Republicans are screaming like the zombies in “Invasion of the Body Snatchers”.

Simpson-Bowles Revisited

The Simpson-Bowles proposal was a good start in the direction to fiscal responsibility. There are three main aspects to the plan: cut spending, increase revenue through tax reform and stimulate growth. I believe that we will have to do all three to keep the country from spiraling into economic disaster. One of the report’s major concerns is the rising cost of health care. The report even goes so far as to suggest that we move “toward some type of all-payer system”. What we really need to understand is that we already have a very inefficient all-payer system. Under the Emergency Medical Treatment & Labor Act (EMTALA) enacted in 1986 under Ronald Reagan, any Medicare participating hospital cannot deny emergency medical care. Because this law exists, mandatory health care already exists. More specifically, all U.S. citizens are on the hook to pay health care costs. As far as I know there were no interstate commerce issues brought up under the Reagan administration or Supreme Court challenges by Republican attorneys generals. Yet, those of us with health care are required to pay for those that do not have health care. Apparently, since the requirement stems from a ‘free market’ mandate required by law that is deemed exempt from the disdain of a ‘government mandate’.

In any case, the rising cost of health care is due to the mandatory health care law long before President Obama and the increase in longevity. Since we already have to pay, no matter what the Supreme Court’s decision on Thursday, we should try to find a way to reduce the ever increasing cost of health care consistent with the laws we have or change EMTALA. This is one example of the way we are all paying more by the mandatory requirement that comes with citizenship. There are many ways that we end up paying more for the unfunded plight of others including large corporation bail outs, lower property values due to mortgage defaults, obesity and unhealthy eating (including not eating broccoli). This argument, made by Justice Scalia, is a slippery slope argument. He is basically saying that if we start down the broccoli path, where do we draw the line? What this argument misses is the bottom line. If we knew that not eating broccoli would result in each one of us having to pay twice as much per capita for health care as any other country and we would pay $1,100 more in premiums per year because others were not eating their broccoli, then I think not eating broccoli would hit much closer to home. The fact is that we know that we all pay more for uninsured health care. Emergency room health care is very expensive. The slippery slope argument misses that fact that not all possible cases of an argument are equally important. Thus, the slippery slope argument loses a sense of proportion in its abstractions; it loses the forest for the trees.

I like many of the ideas in the Simpson-Bowles proposal including tying the retirement age to longevity statistics. In any case, I take it as a given that we have no choice but to do all three recommendations of Simpson-Bowles. We will have to cut spending, increase revenues and stimulate growth. Simpson-Bowles advocates serious tax reform to achieve a net revenue increase. It also advocates lowering the corporate tax rate to bring companies back into the U.S. and spur growth. I would even go for lower corporate tax rates than Simpson-Bowles recommends. The bottom line is we will not be able to prevent economic catastrophe with spending cuts alone. We also need to understand that money out of pocket is money out of pocket no matter if it is from paying taxes or paying increased health care premiums for others lack of health care insurance. Simpson-Bowles does advocate the progressive tax system that we have in this country but some hard decisions need to be made. If we have less net revenue from reducing corporate taxes we will have to make up the difference and more from other means. Since you cannot squeeze blood out of turnip, taxing the poor is a non-starter. The middle class could absorb some tax hits if the net difference was less than what they are paying now after other costs are reduced (like higher health insurance premiums) but there is only so much there before we cut into the bone of the middle class. This leaves making up the difference with the wealthy. In this discussion I showed the huge increase in wealth CEO compensation over the last several decades. This trend has also been shown for the upper quintuple of income earners according to the U.S. Census Bureau.

Link

This, in spite of these changes in taxation:

Link

For most Americans that are not in the top 1% this would indicate that the last decade has been very good to the top 1%. According to the Republicans, these are the job creators. However, most Americans believe that the last decade was not very kind to them with regard to job creation. With all their current talk about President Obama being the job killer, a few important facts should finally put an end to this:

From this data by the Bureau of Labor Statistics, the absolute definitive source for unemployment statistics, it is obvious that unemployment peaked a few months into President Obama’s administration and has been coming down ever since. It is currently at 8.2%. The economy does not turn on a dime and the impact of the recession and the middle class decline became apparent as President Obama took office on January 20, 2009:

Link

To blame this on President Obama has to go down as one of the greatest hoaxes of all time.

From these charts it is apparent that any real revenue increase will have to come from the wealthiest. With the needed reduction on corporate taxes it is also apparent that the top 1% will not cover the additional revenue gap.

My suggestion is that we need to calculate how far the tax increases need to go down the income bracket to make up corporate tax loses and actually increase revenues. I would suspect the levels would be no lower than singles making $250,000/year and couples making $500,000/year. However, all this should be done with the other net gains from tax reform and loophole reductions that Simpson-Bowles discussed. I think it is also inevitable that entitlements will take some hits and defense. If the growth predicted by Simpson-Bowles takes place some of these cuts could be reduced in the future. Personally, I have no problem increasing the marginal tax rates on the income levels just mentioned over and above those amounts increasingly to a very high percentage of income at the top; possibly as high as 80% over $10,000,000/year. Please note that this is not 80% of $10,000,000 but taxed at a rate of 80% over $10,000,000. I would favor executives be given a vested interest in their companies with more stock options that could be taken out over multiple years at capital gains rates. I also favor capital gains reductions based that are income adjusted down as low as zero for the bottom income brackets. However, I think that rates would need to be raised for higher capital gains income brackets.

The criticism Republicans make about such a notion is that the ‘job creators’ would take their marbles and go away. As these charts have shown, it is not apparent that increasing the job creator’s wealth has created jobs. They seem to indicate the contrary that jobs have been severely lost while their incomes were severely increasing. Additionally, increasing the stake a CEO has in a company by primarily rewarding them with stocks has seemed to work well in Japan. There is no need to think it would not work well in this country. From my perspective, there is way too much noise about giving a helping hand to the wealthy and way too little noise about helping the middle class which is responsible for the lion’s share of the 2/3 of the economy that consumers represent. If we can bail out companies too big to fail why can’t we bail out the folks that make up most of our economy?

One more point with regard to too big to fail. We have financial regulations that were greatly strengthened by the Dodd–Frank Wall Street Reform and Consumer Protection Act which prohibit financial institutions from using federally insured depository accounts for risky investments without reserve requirements. This regulation and its predecessors protect us, the tax payer, from having to bail out financial institutions that go under with our tax dollars. Bail outs cost us money just as health care consumers without insurance. I think too big to fail should also require regulations that require certain organizational structures in huge corporations that isolate and limit the damage if one part of the company goes under. We know how to do this with federal depository institutions. Just as regulation protect us from massive bank failures requiring taxpayer bailouts, companies that are too big to fail should be set up structurally by law so they limit the exposure of the taxpayer. I know there is some dispute among the free marketers that they should just be allowed to fail. I think that should be true in most cases. However, there obviously is some point where huge multinational corporations could hurt the rest of the economy if they went under and I would not want to test the limits of where that would be with ‘liberal’ limits and regulatory safeguards. When we saw Paulson and Bush, two adamant free market advocates, with fear in their faces tell us we had to take action to keep certain companies from going under, we all should have received a wakeup call. Pure free market advocates appear willing to take any chance that comes along. However, I think assuming the economy could absorb any size hit without significant ramifications is a bit like playing Russian roulette with our economy. I would think that the prudent and conservative thing to do would be to protect ourselves as much as possible before we test the limits.

 

 

 

 

If I Were King for a Day…

In a rather involved discussion here, Jeff asked me,

If you were king for a day, how would you modify the way extra-market interventions are done in the U.S.? What changes would you make? And how well do you think government would do at those? (Or do you think the extra-market intervention needs to be something other than government?).

So, if I were king for a day…

First, I would get the money out of politics.

As far back as Plato’s Republic, Plato recognized that the problem with democracy was its susceptibility to manipulation by the tyrant (could be a tyrannical group as well). It is a brute reality that marketing counts on the fact that people are easily manipulated. If the goal of a political organization is to manipulate in order to achieve more power, then money is the way to get the job done. To the degree that it is possible, I would like to see politics out of the spotlight, off the stage, off television (with the exception of perhaps candidate debates), mass mailings and robo-calls. I would also like to see campaign finance reform so only individuals could contribute up to a fixed amount (like $2,500). I think it would be acceptable to have parties and candidates post their planks and positions on line (with references to research data preferably). I think folks should vote because they are actively interested and not passively manipulated into voting. An informed electorate is what makes democracy work. Being informed takes work and time. To the degree that manipulation is taken out of politics and educated voters are encouraged is to the same degree that I think democracy works.

Second, I would take the ‘lawyerly’ approach out of politics and put the engineering approach into politics. Lawyers, as Socrates would agree, are about the art of persuasion, sophistry. When governing becomes a product of rhetoric it loses. In particular, I would make a constitutional requirement that any government programs that exist and get incorporated into law have charters. The charters would clearly lay out the purpose of the program, the criteria for its continued existence in the form of how the success of the program is to be measured and by law continued and the end of life requirements. Some programs might be into perpetuity like Children’s Health Insurance Program, programs for the elderly, severely disabled folks etc. However, even those programs should have time bound charters that need updating and renewing on a periodic basis including cost reductions and efficiency requirements that are measured and invoke certain legal consequences if they are not met. Other programs should be designed so that they encourage transition to the private sector. One program that worked well in this regard was the Federal program that paid the tuition cost of migrant workers children and produced much more in new tax revenues and private business creation than the government paid for the program. Government programs of this type should not institutionalize recipients but make it possible for transition to more lucrative, private (non-government subsidized) enterprise. If folks are on the public payroll I do not think that having them have to perform something in return to the public sector is too much to ask in many cases. I think the private market does many things well but it has also not performed well historically in other areas such as health care (insurance company cheery picking, barriers to entry or pushing riskier customers out) and I think it is a bit simplistic to blame it all on the government for non-performance. When profit is the goal, certain endeavors should not be optional or put off for decades. They have to be addressed by an organizational system where profit is not the sole criteria. Adam Smith would agree with this. However, all this has to be a healthy balance between private and public sectors where the private sector is the preferred vehicle if possible. Additionally, I am not against block grants. In a perfect world I would love for Republicans to have 10 years at demonstrating their ideology and the Democrats have a 10 year shot at it. Since that will not happen, I think that if states and localities administered programs with block grants, over time, we would see which states folks migrated from and which states they migrated to. I think this would shed light on the viability of various ideologies. In some ways, I regret that Obama won the last election because I would have preferred to have the wizards of Republican economics continue their foray until voters could make a clear distinction of where that path leads.

Third, I would have the government involved in more long term R&D that could be handed off to private businesses in the form of patent free technology. We are doing this already in the areas such as health care and defense and it has worked well. Other countries, China comes to mind, are doing this reaping huge rewards in the national economy. To compete globally we will have to do this in the future. Long term private market R&D is costly and risky and therefore, makes a lucrative business model rarer and harder to achieve without this kind of public sector support.

Forth, with regard to government intervention here are my tentative ideas (as I know that I am not as well informed on these areas):

Government bonds to finance public debt – I think this has proven itself over time to be not only a good way to finance public debt but also to exercise a stable and alternate investment strategy to equities and commodities over time. I know there are pros and cons for callable public sector bonds but it would be a way for the government to ‘re-finance’ its debt to a lower service amount. I know the Fed can already to this to some extent by buying and selling government securities but that is really not their primary mission. I think callable bonds may have more pros than cons but I do not know for certain. The problem with public debt as an absolute number is that effective debt can rise or fall precipitously with economic stagnation or economic growth. I think this is one reason Keynes saw debt as more of a relative trade-off between private debt and public debt. When the private sector is accumulating more debt he thought it was ok at a certain critical point for the public sector to intervene and take on more public debt thereby exercising a ‘governing’ effect to keep the private sector from imploding. He also saw that when the private sector was growing, the boost in the economy meant more tax revenue and therefore an opportunity for the government to off-load public debt; in effect, due to the strength of the private sector. Of course, this depends on fiscal responsibility in good economic times and fair and consistent taxation. I do not think that the service obligation on public debt is something that lends itself to snapshot analysis due to its variability over time but this kind of analytic problem is not something alien to science and mathematics and should be rigorously monitored and on the average kept as low as possible to real GDP over time.

Monetary interventions (the Fed) – Let me preface this by focusing the perspective on international realities. Whether we like it or not, believe it is ‘free-market’ or not, the reality is that almost all other countries (and the Euro conglomerate) manipulate their currencies. They subsidize businesses and whole market segments to their advantage. If we cannot or will not play that game we will lose. We live in a world economy where such historical and simpler models such as the gold standard would put us at a huge disadvantage relative to the rest of the world. If you are playing with dirty poker players you better be up on your dirty game or you will lose the majority of the time. For this reason we need a Federal Reserve that can devalue our currency relative to other large economic powers such as the Euro and Chinese Renminbi. This makes our exports more attractive and stimulates growth in our country. The Fed has multiple functions historically but some of these like overnight deposits for local banks are not as important as they used to be and others like the ‘elasticity’ of money, the money supply available at a given time in the economy, are much more important than they used to be. The Fed has to strike a balance between putting too much money into circulation and increasing inflation or not putting enough in and driving the cost money up with higher interest rates thereby making credit harder to come by and growth slower. The flip side of putting more money in circulation is that our currency gets devalued relative to the rest of the world and our exports are stimulated. The Fed achieves the elasticity of money through buying and selling U.S. securities from the Treasury department (which is the agency actually responsible for ‘printing’ money). If we got rid of the Fed our currency would be at the mercy of the rest of the world economic powers. Therefore, we can control our monetary destiny or hand it to over to other powerful economies. This is where the real debate over the Fed needs to be centered. For this reason, I believe we need the Fed and our central banking system. Also, let’s not forget that the Fed is responsible for setting the reserve amounts that depository institutions (i.e., banks) must keep on hand so they do not over leverage themselves and set us up for a ‘run on the banks’ that we, the taxpayer, would have to cover through federally insured deposits (FDIC). They also give more assurance to the consistency and lowest possible rate that banks get charged when they borrow money from the Fed Bank (the discount rate). For those that would get rid of the Fed in favor of the unfettered ‘free market’ they would be sacrificing the elasticity of our money supply relative to other country’s un-free market like behavior, allowing banks and financial institutions to over leverage themselves (as has happened in recent history) and be at the mercy of inconsistent and regional, highest loan rates banks can get – do you really want to bet it would be lower than the discount rate (currently at 0.75%). If banks pay higher to borrow money where do you think that cost will ultimately reside and what do you think the effect will be?

private company bail outs – historically includes many companies and industries including railroads, Lockheed, banks, savings and loans, auto industry, financial institutions and insurance corporations to name a few. Generally, I am not in favor of this. Neither am I in favor of government loans to private companies as many presidents (and would-be presidents) have done. As I mentioned before, I prefer the government be involved in long term R&D over this kind of direct assistance.

regulations (including anti-piracy, monopolies, environmental, etc.) – this is an absolute must. Adam Smith took over a hundred pages in “An Inquiry into the Nature and Causes of the Wealth of Nations”) to recommend banking regulations. He knew the problems with over regulation but he also knew what could happen with under-regulation of the private market. For me, regulations are a no-brainer but good regulations actually involve a massive amount of gray matter.

market subsidies – In a perfect world I would be against this but as I previously discussed, we would be at a serious disadvantage relative to the rest of the world if we gave this up. One example is farming. If we did not subsidize our farmers as China does, farming products would chiefly be an import. We can see how well that has worked with the oil industry. We used to have puppet governments in the rest of the world to assure that we had cheap energy but that is no longer a viable method for us. Subsidizing certain industries is not an option in a world economy that will not play by our rules (or the rules of the ‘free market’).

If there were a one world ‘Fed’ of some type that may facilitate how all payers play by the same rules but it would also usher in a whole new set of problems. Would we really be able to fully trust the ‘free market’ that would result from such an organization? – I doubt it. In any case, it could be argued that the IMF, consolidations like the Euro, the UN and World Court could be taking us in that direction. I believe Gorge Bush Senior coined the term – new world order.

 

To conclude, I would also add that I think there is no such thing as a ‘pure’ free market if by ‘pure’ you mean only certain kinds of interventions are deemed ‘pure’ and other kinds are deemed ‘corrupt’. For me, the notion of a ‘pure’ free market is a residue of what we philosophers call metaphysics. We live in a world where these kinds of artificial designations have outlived their usefulness and we have learned that it is better to let the “order [get] defined in the process of its emergence.” If we pay attention to how things are without imputing an other-worldly, God-like, meta-language to them our rationality and systems can be organized according to the ‘things themselves’ (as phenomenology would suggest or the scientific method attempts). I see the parochial idea of a ‘pure’ free-market similar to a belief in God in that we impose our idea of what the free-market should be in opposition to what it is.

Yes, we should strive to make it better but from what ‘it is’ and not what it should be according to a micro-economic perspective (if indeed that perspective canonizes certain unfettered free market truths and demonizes certain free market corruptors in advance). What ‘it is’ is a way of organizing human commerce, economy, limited resources to our advantage; -the key word being ‘our’. Is ‘our’ the few or the many? If rewarding the few will trickle down to the many then by all means we should do it. However, if the few reap more and more rewards and the many sow less and less rewards and reap more and more hardships then we are ultimately faced with a value decision…and that has a lot to do with what group you actually belong to (not what group you aspire to belong). The ‘free market’ will get rigged one way or another. My determination (as king) is if we do nothing to rig the system for the many then the rich and powerful will rig the system in a way that benefits them. There is no ‘pure’ in this sense. Yes, competition is good for equal competitors but what do you think the Vegas odds would be on a best out of x number of David and Goliath match ups?

 

An Inquiry into Austrian Economics and Steven Horwitz

With regard to the paper, “the Microeconomic Foundations of Macroeconomic Disorder: An Austrian Perspective on the Great Recession of 2008” by Steven Horwitz at this link he states:

It is true that the problematic loans that were at the bottom of all the current recession were generated by banks and mortgage companies and not Fannie and Freddie. However, their presence as “Big Players” in the mortgage market dramatically distorted the incentives facing those truly private actors. Their willingness and ability to buy up mortgages originated by others made private actors far more willing to make risky loans, knowing they could quickly package them up and sell them off to Fannie, Freddie, and others. Fannie and Freddie had both various Government privileges and the implicit promise of tax dollars if need be. This combination enabled them to act without the normal private sector concerns about risk and reward, and profit and loss. Their relative immunity from genuine market profit and loss sent distorting ripple effects through the rest of the mortgage industry, allowing the excess loanable funds coming from the Fed to be turned into a large number of mortgages that probably never should have been written.

Other regulatory elements played into this story. Fannie and Freddie were under significant political pressure to keep housing increasingly affordable (while at the same time promoting instruments that depended on the constantly rising price of housing) and extending opportunities to historically “under-served” minority groups. Many of the new no/low downpayment mortgages (especially those associated with Countrywide Mortgage) were designed as responses to this pressure. Throw in the marginal effects of the Community Investment Act, which required lenders to serve those under-served groups, and zoning and land-use laws that pushed housing into limited space in the suburbs and exurbs and driving up prices in the process, and you have the ingredients of a credit-fueled and regulatory-directed housing boom and bust. This variety of government policies and regulations was responsible for steering this particular boom in the direction of the housing market. Unlike past booms where the excess of loanable funds ended up as credit to producers, this set of unique events that accompanied this boom was responsible for channeling those funds into housing.

I think it is important to quantify or at least draw perspective from some statistical data how much the “Big Players” contributed to the recession of 2008.

From my own research, previously I this material from the Center for American Progress and the Atlantic which sided with the Federal Government’s commission findings that multiple issues contributed to the outset of the recession. These groups cast significant doubts on some of the early data propagated by the American Enterprise Institute (AEI), a conservative think tank, specifically in papers written by Peter Wallison and Edward Pinto. The Federal Crisis Inquiry Commission (FCIC), a equally partisan commission set up by the U.S. Government, cited many different conditions for the crisis. AEI started down a path long before the report came out that tried to substantiate claims that the Federal Government was the primary cause of the recession not the private market or international markets. Wallison was one of the dissenters on the commission’s final report. Here are some statistical anomalies the Center for American Progress pointed out:

Pinto’s controversial conclusion that federal housing policies were responsible for 19 million high-risk mortgages is based on radically revised definitions for the two main categories of high-risk mortgages, subprime loans and so-called Alt-A mortgages, which refer to loans with low documentation of income and wealth. Importantly, these revised definitions are not consistent with how the terms subprime and Alt-A are used for data collection.

As a result of his dramatically expanded new definitions that are not used by other leading scholars, Pinto’s findings on the extent of subprime and Alt-A exposure are extreme outliers among mortgage market analysts. Pinto’s claim that there were 26.7 million subprime and Alt-A loans outstanding (out of roughly 55 million total) as of June 30, 2008, is exponentially higher than other estimates. In a 2010 report, the nonpartisan Government Accountability Office, the research arm of Congress, found there were only 4.58 million subprime and Alt-A mortgages outstanding at the end of 2009, less than one-fifth of Pinto’s estimate.

Similarly, Pinto’s claim that 19 million, or 72 percent of all “subprime” and “Alt-A” mortgages were attributable to federal affordable housing policies is far afield of the conclusions of other analysts. The claim is also difficult to reconcile with the actual data, which indicate the entire federal government (including Fannie and Freddie) owned or guaranteed only 32 percent of seriously delinquent loans despite holding 67 percent of all mortgages. Pinto’s claim that Fannie and Freddie were the primary driver of high-risk mortgages does not stand when the evidence is weighed accurately.

Because of Pinto’s anomalous findings, Wallison largely elides over the role of so-called “private-label” mortgage-backed securities in causing the crisis despite the large amount of attention these financial instruments received elsewhere, including in the FCIC majority’s report. This private mortgage financing channel, which does not involve the federal government at all and was policed only minimally, generated only 13 percent of outstanding loans but was responsible for 42 percent of serious delinquencies.

Pinto makes numerous other serious errors in his analysis. Case in point: In analyzing the influence of the Community Reinvestment Act, a 1977 antidiscrimination law that simply requires regulated banks and thrifts to lend nondiscriminatorily to low- and moderate-income borrowers and communities within the immediate geographic areas surrounding branch offices of a deposit-taking institution, Pinto includes a large quantity of loans that were not required by CRA or any other equivalent law or regulation. This mistake, coupled with some unsupported assumptions about the riskiness of CRA loans, produces a shockingly high estimate of 2.24 million “subprime” and “high-risk” loans attributable to CRA. This compares to a finding of 378,000 CRA-eligible loans originated during the housing bubble by other leading researchers.

Pinto also wrongly blames the affordable housing goals of Fannie and Freddie for the origination of Alt-A loans, which under his analysis account for 65% of the “high risk” mortgages attributable to Fannie and Freddie. In fact, these Alt-A loans (either according to the normal usage of “Alt-A” or Pinto’s newly invented definition of “Alt-A”) would not have qualified for the affordable housing goals.

In my research data, there are many more charts and reports from conservative, moderate and non-partisan groups such as the GAO. There is also data on the later SEC lawsuit. In any case, the data below illustrates Congressional Budget Office (CBO) data for mortgage backed securities (MBS) before and during the crisis years.

Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market, December 2010, Link Chapter 1, page 7, page 27 in pdf

Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market, December 2010, Link Chapter 1, page 11, page 31 in pdf

This data clearly shows that the private market issued a substantially higher percentage of MBS from previous years from 2004 to 2007.

Additionally, the FCIC final report stated:

“The number of suspicious activity reports—reports of possible financial crimes filed by depository banks and their affiliates—related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at 112 billion.” (report, page xxii)

The argument Steven Horwitz makes is that this amount of holdings by the GSEs distorted the normal checks and balances of the market to the point where, in addition to Greenspan’s driving up the money supply and driving down the interest rates, resulted in his conclusion:

From an Austrian perspective, the eventual collapse of this house of cards built on inflation represents not a failure of capitalism, but a largely predictable failure of central banking and other forms of government intervention.

The conclusion of the FCIC report states that, “Nearly 11 trillion in household wealth has vanished, with retirement accounts and life savings swept away.” Worldwide the bubble resulted in investor loses conservatively from 30 trillion dollars to estimates over 100 trillion dollars all from an annual several trillion dollar U.S. housing market during the crisis years (see this data for more details-please note that my positions have changed over the years I have been researching this). One of the dissenters to the final report stated that,

Starting in the late 1990s, China, other large developing countries, and the big oil-producing nations built up large capital surpluses. They loaned these savings to the United States and Europe, causing interest rates to fall. Credit spreads narrowed, meaning that the cost of borrowing to finance risky investments declined. A credit bubble formed in the United States and Europe, the most notable manifestation of which was increased investment in high-risk mortgages. U.S. monetary policy may have contributed to the credit bubble but did not cause it.

From all these various data sources it is hard to see how U.S. Government intervention in the U.S. market could lead to all the international consequences without postulating some sort of massive amplification mechanism. The proportions from the documented GSE’s market share to the private U.S. mortgage market share totals to the financial crisis investor loss totals worldwide seem to make it an uphill climb to pin it all or primarily on the U.S. Government. Additionally, the cause and effect appears hard to establish with the worldwide timing of the recession. This makes me inclined to believe the FCIC’s conclusion more which listed multiple causes for the recession including the private market’s proportionally, vastly larger financial products contribution to the recession over the smaller mortgage backed securities created by the GSE’s.(1.) In order to believe Steven Horwitz we would have to buy a couple premises:

  1. The bust of a recession can be much larger than the boom and even uncorrelated as a one on one relationship (although it seems to have higher correlation when the government is involved).
  2. The effects of the recession can primarily start in one place (i.e., the U.S. Federal Government) and simultaneously bust out in countries all over the world (especially when the U.S. Government is involved).
  3. A priming effect (i.e., the distortion of market risk by government intervention) can spill over into many different private market segments such as private market, financial products and reap havoc on investors (again, the U.S. Government seems to do this particularly well compared to private industry).
  4. The effect can lead the cause as “the housing bubble occurred during a period when Fannie and Freddie’s market share dropped precipitously” (see note (1.) below)

On one hand, the free market advocates want to make the claim that the market is robust and self-correcting. However, a certain kind of ‘over sensitivity’ seems to apply when the government has anything to do with the market. I assume some further distinctions need to be made with different types of government interventions such as government bonds, monetary interventions, private company bail outs, regulations (including anti-piracy, monopolies, environmental,…), market subsidies, etc. Internationally, we know that large countries recently (and historically) have regularly propped up their economies by devaluing their currencies or subsidizing industries and whole market segments that would never make it in a real free market but the U.S. Government seems to be really good at mucking the rest of the world up relative to its interventions according to Steven Horwitz. There is also the issue of large, private U.S. companies that effectively operate with the same vices as the U.S. Government such as de facto private market regulation that prohibit competition, buying and destroying companies for market share, monopolizing resources that prevented competition, etc. (see this). The companies can be multinational corporations and yet still seemingly have relatively normative free market consequences that poses no threat or much less of a threat than the U.S. Government.

Actually, I am in sympathy with much of the microeconomic direction of the Austrian school of economics that he advocates. I also really like the idea he states that,

Austrians have been very critical of the equilibrium orientation of modern economics and have, instead, tried to understand markets as open-ended evolutionary systems. There’s no objectively correct pattern of resource allocation out there. Rather, as James Buchanan put it, “order is defined in the process of its emergence.” Just as biological evolution doesn’t produce the “perfect squirrel” but one well-adapted to its environment, the same is true of markets.

This fits very nicely into post modernism I think. I have always liked the small scale, community based systems of organization such as idealized in Marx, distributivism and agrarian economics, etc. but I find one troubling dilemma in thinking of these in macroeconomic terms, -they seem to be utopist and not reflective of reality.

One example is the way in which capital in the form of wages and salaries is so out of proportion from laborers to CEOs, hedge fund managers, financial industry managers, etc.

See this link

Steven Horwitz describes his view of wages from a couple economists, Hutt and Say. In this quote he illustrates how idleness (i.e., unions) could artificially intervene in the normative market process using coercive means to artificially inflate wages against normative market price support.

Although Hutt (1977 [1939]) distinguishes among a number of different forms of idleness, in general they break down into three categories: (1) preferred idleness, (2) pseudo-idleness, and (3) price-driven idleness. The first category is straightforward: Some people simply have a strong preference for leisure and are willing to exercise it. The second category refers to workers or assets which appear to be idle but are actually producing something. One example is an “unemployed” worker who is actively engaged in a job search. Such searches are productive activity, “prospecting” as Hutt calls it, and the worker is therefore not truly idle. Other examples are balances of money or stocks of inventory. Both are “idle” in some physical sense, yet both produce the service of “availability.” That is, both are there waiting to be used when needed. We would not, analogously, wish to call a fire truck waiting in a fire station “idle.” Rather it is doing its job – being available when needed. The third category is the one of great theoretical and policy concern. This category lumps together a number of Hutt’s own categories, but what it generally is referring to is the idleness created when some or all of the factors of production are able to coercively maintain wages or prices above market-clearing levels. By forcing producers to pay all workers hired a wage greater than what would obtain in a competitive market, labor creates idleness both in those workers in the given industry who are not hired at the higher wage and in those workers in other industries who are let go because of the contraction of the wages and income flows which result. It is this last form of idleness which concerns Hutt the most.

Labor Market Coordination and Monetary, Equilibrium: W H. Hutt’s Place in “Pre-Keynesian” Macro, STEVEN HORWITZ, St. Lawrence University, Canton, NY 13617, Page 211

Here he describes Say’s fundamental ‘Law of Markets’ as concisely stated, “Production is the source of demand.”

“My ability to demand food, clothing, and shelter derives from the productivity of my labor or my non-labor assets. The lower (higher) that productivity, the lower (higher) is my power to demand. Hutt (1975, p. 27) states this as” “All power to demand is derived from production and supply” (IBID, page 213)

Here is Hutt’s explanation for how entrepreneurs determine workers wages:

If the entrepreneurial pessimism is justified, then the proper result is a decline in wages. Resisting those wage reductions is ultimately a mistake for workers since idleness will result and the total wages flow will fall, reducing demand and wages and/or employment in noncompeting markets. If the pessimism was mistaken, markets contain a built-in correction mechanism which will kick in if workers accept the wage cuts. As entrepreneurs discover that their pessimism was unwarranted, the larger than expected demand for their product will put upward pressure on prices and The entrepreneur pays wages based on market expectations and his calculation wages, driving wage rates back to the appropriate level. Once again, resisting the original wage cuts, even if entrepreneurs are mistaken, only creates more problems than accepting them. Although entrepreneurs may be in error, there is likely no one else in a better position to form accurate expectations of the future? The ultimate source of idleness is not deficient aggregate demand, but barriers to coordination through market pricing. (IBID, page 215 – 216)

From this we can see that workers wages are, in a pure free market, determined solely by their ‘production’ or their “non-labor assets”. Since “non-labor assets” are typically not very high for the average worker, their ability to demand is mostly a function of their ability to produce. However, when we think about recent examples of highly paid executives that can not only not produce but lose billions and still get huge bonuses and salaries for the ‘production’, it appears that there is a different mechanism at work. I have not found Steven Horwitz explanation of this mechanism yet but I assume it would go something like this…the market is imperfect and messy and over time will correct these ‘anomalies’. However, it does seem that these ‘anomalies’ happen more often for those with the highest wealth than those with the lowest wealth.

Additionally, I wonder if he would suggest that the wealthy have huge “non-labor assets” that is not idle, abstract capital but heterogeneously committed capital. I wonder if he would suggest that this wealth is not sitting idly in passbook savings accounts or overseas accounts but invested in job creation. Therefore, since they produce more they can demand more. This all seems logical but inconsistent in view of how when they win, they win and when they lose, they also win at least in some well publicized cases and recent decades of historical data on the how the wealthy have increased their wealth dramatically in spite of the recession.

 

See this link

Apparently, the mechanism that explains the demand and production for the wealthy needs some further work or explanation.

In any case, I do not see how the free market, self correcting and regulating mechanisms, work to provide some modicum of equality over the range from the bottom to the top. At some point it seems that wealth tends to get distributed upward in capitalism without any real restraint that the hyperbole of capitalism’s proponents would like to bring to the fore. Where are the checks and balances here or is this yet another case of government intervention mucking up things? Why isn’t the malformation of reward in the free market considered a ‘bubble’ of sorts…because it is permanent perhaps? It appears that many economists barely mention this phenomenon or just excuse it as a kind of unlimited upside of free market, entrepreneurial success. If capitalism is evolution then we should see the laborer ‘species’ die off and the manager species take off genetically. However, the manger species seems to need the laborer species to hang around…perhaps as moss needs a tree. In any case, at some point this symbiotic condition appears more like slavery than evolution. Some economists even seem to go so far as to suggest that the laborer creates real value in capitalism but they always stop short in explaining why the systems cannot or will not reward real value. Why are athletes rewarded more than teachers? Is the teacher species going away and we can watch football in its place? This direction of questions is aimed at understanding how capitalism correctly (in the long run) dispenses value (or the Austrian school’s notion of heterogeneous capital). If capital is not abstract but real, tied to specific investments and labor, how is it that astronomical numbers for one person’s salary are much more than most people can ever comprehend?

I understand that they willingly admit that the system is imperfect, sluggish, wrong at times, etc. but somehow they come up with an overall justification for its continued existence and merit. In the long run they seem to have faith that inequities will get straightened out without any extra-market intervention so I suppose in the long run teachers will get more than athletes or CEOs but it is hard to see a scenario in which that could happen. I suppose I would wonder what does ‘straighten out’ mean? Does this mean that unbelievably high salaries will continue to go exponentially out of the stratosphere as it has for some time now? Does it mean that the plumber will be the highest paid worker in the U.S. in a few hundred years? I suppose in evolution there are times in a species evolution where they disappear, is this how it will get straightened out? Or perhaps, the same old way it has always gotten straightened out, a revolution? In Austrian economics it seems we can avoid boom and bust cycles to a large degree by getting rid of government interventions (of all types…government bonds, monetary interventions, private company bail outs, regulations (including anti-piracy, monopolies, environmental,…), market subsidies, etc…or of some types?). However, it appears that equity gets redefined as what simple happens that gets deemed and endued as the right outcome or simply a line in a CEO’s profit and loss statement. Who are we to question or muck with evolution? The prescription is the description but really it cannot be prescriptive at all as the ‘process of emergence produces the order’ and who are we to want to change it with an alien influence like government? Have you ever seen a tree wind and accommodate its rhizome around a chain fence? In evolution it seems that adaptation to alien influences does not hinder survival but actually can enhance it and make it stronger. However, when it comes to the free market and government intervention, evolution has met its match and can find no way to adapt or incorporate its environment…or could it be that in Austrian economics a meta-language that pre-ordains and determines inevitable outcomes has found a convenient (for some) and privileged rank? It would seem that the “order [that] is defined in the process of its emergence” has some ancillary determinations as well.

************************

 

 

  1. This point has been dealt with in more detail in links cited but here is some additional information:

     

    “The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool’s gold. They purchased the highest rated non-GSE mortgage-backed securities and their participation in this market added helium to the housing balloon, but their purchases never represented a majority of the market. Those purchases represented 10.5% of non-GSE subprime mortgage-backed securities in 2001, with the share rising to 40% in 2004, and falling back to 28% by 2008.” (FCIC Conclusion, page xxvi)

    “The Commission concludes the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.” (FCIC Conclusion, page xxvii; see also this and this)

    “2. TIMING IS EVERYTHING

    Second, Wallison fails to inform his readers that Wall Street’s “private-label securitization” of mortgages, which objective analysts identify as the primary source of most subprime and other high-risk loans, experienced a dramatic increase in market share that was exactly contemporaneous with the housing bubble, rising from about 10 percent market share in 2003 to nearly 40 percent by 2006. Overall, loans originated for private-label securitization have defaulted at about six times the rate of Fannie and Freddie loans. Indeed, Wallison does not explain–cannot convincingly explain–why the housing bubble occurred during a period when Fannie and Freddie’s market share dropped precipitously. Wallison’s answer to this central problem with his thesis is simply to claim that the housing bubble began in the early 1990s (Gretchen Morgenson and Joshua Rosner, who advance a similar argument about the central role of Fannie and Freddie’s affordable housing goals in the housing bubble in their book Reckless Endangerment, deal with this problem in a different, but equally anemic way–claiming that Fannie and Freddie created a “cultural” shift in mortgage banking, teaching Wall Street that lobbying and increased risk-taking could lead to greater profits).” (The Atlantic)

Hegel: Force and Excess, Capital and Labor (Update 6/18/12)

In my opinion, Hegel’s project can only be successful by the implicit conversion of nothingness into negation. A universalizing idealism must set out certain absolute categories that allow no unaccounted for excess. Thus, immediacy and mediation must be found to negate each other, essentially depend on each other and ultimately establish each other in an apodictic transformation. However, negation itself is a transformation. If Being and nothingness are juxtaposed, nothingness must retain the essential characteristics of negation. That is, in order to maintain categorical exclusivity aspects that move toward non-relational or non-relevancy must be deemphasized. In so doing, the force of the Logic is brought to the fore and the categorical ambivalences are subsumed as accidental, nonsensical or irrelevant. Pure Being for Hegel is empty. To merely think that something ‘is’ is absolutely indeterminate, featureless, empty and vacant; thus, the move from Being to its antithesis, nothing. If Being and nothingness and Being and not-Being are equivocal, differences must be relegated to a wasteland of irrelevancy. The Hegelian deduction from Being to nothingness is the transition from thesis to antithesis, the categorical negation of Being. The tour de jour that thrusts itself forward in any historical paradigm will undermine its own accounting of Error.

In Newtonian physics the evident predictability of its model downplayed the known errors and failures of the theory and favored its accomplishments for centuries. However, the implicit errors are what drove Einstein to discover the relativity of time and space and fundamentally overturn classical physics. In any Logic, or categorical classification the success of the category and its imperative are measured by its categorical specificity and uniqueness. To the degree that categorical characteristics are blurred by its members, errors come to the fore and the certainty of the categorical distinction is weakened. Error is the unaccounted for excess that the System cannot overcome.

With regard to Being and not-Being the ‘not’ of Being is simply the category of all that is not contained in the category of Being, its logical negation. The category of Being essentially implies it’s negation because any category, as bounded and determined, excludes all the members not brought under its Law. Justice then measures appropriateness and properness relative to Law, the categorical requirement. However, courts apply jurisprudence to determine violations of individual members. When errors are made that confuse categorical determinants the system of absolutes, categorical determinates, are brought into question – the force of Law is dispersed and categorical relevancy becomes a movement of concern. However, if the categories of Being and nothingness remain absolute then justice is meaningless with regard to these categories. These categories cannot be justified but only canonized; errors cannot be allowed and presuppositions rendered irrelevant – this move is violence. It can only be sustained by force and repetition.

For Hegel, the dialectic seems at many points to deny and prohibit the possibility for categorical error or at least attempt to postpone its deductive proofs by subsuming it in further progressions that retroactively are thought to sustain the originating categories. In so doing, the universal categories of Being and nothingness are thought to be concretized; presuppositions and criticism dismissed or thought to be already accounted for by later movements. This destination can only be arrived at from a recurring empirical force that recapitulates the universal likeness of members to its category and pushes the dissimilarities to the antithetical, the logical negation of its category. In this way, justice can be deemed universal and Law established as concrete not vis-à-vis the justice of the categories themselves but as decreed Truth.

Nothingness as antithetical to Being is nominalized as the logical case of the negation of Being. However, the logical case must sacrifice certain important dissimilarities in the notion of nothingness. Nothingness does not depend on Being as its negation. There is a kind of ‘prior to’ or better, non-relational significance that is thought with nothingness. Any attempt to delineate nothingness viz. negation of Being, can only be done in ‘bad faith’; making nothing something antithetical to Being and Being as ‘pure’. In this case, ‘pure’ is an absolutely empty concept and an analogous comparison is made to nothingness as if to exhaust further distinctions.

Descartes points out that the notion of infinity always overflows itself, the notion of nothingness always eludes the concept of itself, absolute purity or abstraction. Its being or non-being are indeterminate not at odds with Being. This is perhaps similar to Hesiod’s notion of chaos. Nothingness does not negate Being or deductively follow from Being as nothingness is absolutely irrelevant and non-relational with Being. Relations always necessarily imply ‘somethings’. To found a relation, an absolute deduction, from Being to nothingness is a bit of sleight of hand and trickery to equivocate pure abstraction with nothingness.

Hegelianism seems to push categories vis-à-vis idealism, the ideal form of an empirically denuded category. Already encapsulated in idealism is the vaccine from accountability and justice. Even the particular for Hegel seems to be an ideal particular and thus plays into the ideal universal. While denying the pure abstract forms of Kant, a more concrete form of idealism is touted. The concrete form is the logical deduction, the supposed tautological certainty that is acquired when justice is suspended. A certain kind of reciprocity of categories, the movement from nothingness back to Being as given in the vacuum of pure abstraction prohibits ambivalence, the out of phase with itself that Levinas thinks with ipseity; the identity of the self as accusative not nominative. Specific beings as Being are not redacted into an identity but diffused and blurred across beings and Being, self and other, individual and community. Beings do not exist as monadic constitutes of ideal categories that afford no excess, no categorical ambivalence, no Error. Idealism is just as much a reduction as materialism. The mechanism at work depletes, abstracts and refuses justice. Its Law is proclaimed not justified. The third other is only another case of the ideal not a reason for deliberation and justice. Moreover, justice is itself subsumed into its own abstract category; denuded of substitution, the imperative to answer for the other. Ethics is yet another idealization that consists in itself, in self-determination. Even more, other determination of self is inverted and reciprocated into self determination of other. The self and other are master becoming slave and slave becoming master so they can complete themselves in one another which preserves their distinction while at the same time announcing self-consciousness.

The reciprocating movement from Being to nothingness and nothingness to Being is movement, becoming. The reciprocating movement of self and other is self-consciousness. There is no residue unaccounted for in these idealizations, no erosion of the eternal categories and no place for Error. The force of light is obliteration of Spirit. That is, Spirit obliterates justice, the necessity to account for oneself, to give place to Error. Light, as the Error of the eye, of sight, deems Truth as what is seen, as what presents itself in presence. Its purity is thought together with the proper. The proper is given carte blanche, tacit acceptance as the real and conversely the unseen is subsumed by the hinterland, the other than real, the negation of proper and thus, the improper. In this vein, Foucault would indict the contingency of civilization on the necessity for madness, the implicit requirement for the proper too be what it is on the basis of the improper. This dialectic forces an essential categorical imperative on itself that can only continually re-affirm itself through force and repetition. This move in its ‘purest’ form is logical. The Logic accounts for all excess and ultimately, can only re-affirm itself, for Hegel, as the concrete universal. Error has been accounted for, dismissed and deemed accidental. Parmenides has won the Aristotelian day albeit taken from the problematic arena of ontology to the more sure footed stage of logic. Aristotle’s proclamation against Parmenides,

“What is cannot come to be (since it already is), while nothing can come to be from what is not”

has been discounted in the Hegelian edict that nothing does come from ‘what is not’ and also from what is in the absolute emptiness of pure Being. In this way nothingness resolves in essence, it no longer exceeds the thought of itself but has found place in categorical certitude. How could nothingness not be what it ‘is’ in the vacuity of Being and the ‘not’ of ‘is’? How could there be Error in this thought? How could sense be made of any excessiveness to the Hegelian edict? Wouldn’t this excess be non-sensible, improper, accidental; a mere faux pas of Error? How could the ‘reality’ of Error be posed without only re-affirming the inevitable outcome of the categorical imperative? A certain kind of circularity, a singularity, a hermeneutic circle would result that would have to be dismissed out of hand. After all, the proof of such a lunacy could only be made from the Logic that would immediately discount any basis for its assertion. In this then the reduction that can never achieve an exteriority, it can only forever repeat itself.

As the Logic is complete within itself, labor must absolve itself in finality. Labor achieves itself in its telos, the result of its effort. Labor is merely the means to capital. Its end justifies it means. What is endued with meaning is not the effort of labor but the outcome of labor, capital. In this way, Marx would want to think the notion of alienation. The Error, what is alienated, left behind, discounted, taken account of is what it takes to produce an outcome, the means of production. The means of production is justified by capital. Is it any wonder that acquiring capital would make short thrift of what it takes to produce it? The production is an afterthought; labor has value only by its ideal completion in capital. Thus, those that live by profit (viz. Adam Smith) have short-circuited the means to capital to only acquire the end and in Smith’s thinking:

“But the rate of profit does not, like rent and wages, rise with prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two (219 Wealth of Nations).

Thus the interests of the third class run contrary to the interests of the other two; expansion actually raises the cost of labor and rent and increases competition, thereby lowering profits, so much so that the ruination of a country is actually in the best interests of the third class.” (see link cited above)

From this then, the excess of capital is labor. The excess has been accounted for in its completion, capital. Even more so, in modern markets, derivatives of derivatives and risk of capital depletion are abstracted into packages of mathematical ‘certainties’; labor has been relegated to the universal emptiness of abstraction. Capital beyond any mere laborers possible dreams has been, by many orders of magnitude, severed from any realistic possibility for a laborer. The outcome has been severely restrained from labor and reserved for those that live by profit. From this then, the particular has only been shown to be an example of the universal – without excess to its categorical relationship. The Logic has once again been affirmed in its correctness and universal claim.

Thus, justice has been resolved in its end not its means. The only needs that remain is to convince the laborers that the capital they are denied justifies their existence and satiates their concerns for equity. The System has founded and given meaning to their completion and their gratitude should be for the ‘job creators’ and dispensers of the capital that justifies their existence and makes meaning (the opposite of alienation) possible. The laborer’s meaning is not given by their work but by the entrepreneurs of capital, those that make capital possible.

This then is what has made post modernism possible.

Bigotry and Pomocons

…just a few comments with regard to this:

As has been already pointed out regarding the Stephens-Davidowitz’s study, the Google data may be already tilted towards the internet crowd which may not be representative of the US population in general. However, the study does make a good point here:

Google data, evidence suggests, are unlikely to suffer from major social censoring: Google searchers are online and likely alone, both of which make it easier to express socially taboo thoughts (Kreuter et al., 2009). Furthermore, individuals say they are forthcoming with Google (Conti and Sobiesk, 2007). The large number of searches for pornography and sensitive health information adds additional evidence that Google searchers express interests not easily elicited by other means.

As a Southerner, I do not think that the net 3 to 5 points in voter loss is excessive. The data sorted by US states certainly showed a higher propensity to bigotry (“racial animus”) south of the Mason-Dixon Line which seems plausible. Additionally, I would not automatically assume that the new 3 to 5 point loss would have been recovered as Obama votes had the 4 to 6 point bigotry loss been erased. The negation of a vote against a candidate does not necessarily imply a vote for a candidate, there is the option for not voting at all.

There may be some liberals that would take the bigotry percentage as an indicator of “all Republicans or conservatives” but that position would not be supported by that low of a percentage and I think, untenable. Just as some conservatives suggest that “all Democrats are socialists or communists or even fascists (viz. Goldberg)”, the folks that take that position are on the fringe right and not mainstream Republicans I would think.

On another topic, I agreed with your discussion of pomocons (post modern conservatives) albeit probably coming from a different perspective. I have a few discussions of my own on this topic:

http://mixermuse.com/blog/2012/01/02/what-is-a-postmodern-conservative/

http://mixermuse.com/blog/2012/02/01/postmodern-rationalism/

I even found a post modern Mormonism web site if you can believe that:

http://mixermuse.com/blog/2012/02/11/postmodern-mormonism/

While post modernism (viz. Foucault) could allow for pockets of rationalism (via archaeology and genealogy), and thus escape extreme skepticism, the meta-language that is imputed to these pockets is denied by post modernism – probably correctly in my opinion. It is just as humorous to find pomocons that take their leave from Darwin and Machiavelli as it is to find liberals that bask in the will to power of Nietzsche. I certainly can appreciate the anti-totalitarian push in post modernism and the destruction of the ‘natural’ hegemony of the Enlightenment; I think that the canon, the logocentrism of the text, cannot be so easily and vapidly dismissed without committing a greater crime of psychological and sociological denial and repression (thus perhaps an ‘eternal reoccurrence’ of the same). The work of deconstructing the zeitgeist is not merely ‘subjective’. Perhaps the Renaissance may be thought of as a kind of beginning deconstruction of Latin domination and the Enlightenment itself as the final blow to a deprecated form of Hellenism. If so, post modernism would be a thrust against the notion of essence and origin, of “Truth” whether textualized as scientific, religious, idealism, humanism, etc. but in so doing run the risk of nihilism…perhaps Nietzsche was right that nihilism would be the triumphant going under of man and the arrival of the Übermensch… perhaps simply the silent release of Buddhism…perhaps a Heideggerian second beginning. In any case, in whatever form post modernism cloaks itself (pluralism, egalitarianism, anarchism, Darwinian elitism, etc.) it is here to stay, the Great Babylon has fallen (with great confusion) we will all live in the pieces of humpty-dumpty. Conservatism as re-instituting the past will inevitably have to resort to the force and repetition it ascribes to its nemesis. Its claim on virtue is just as soiled as its nemesis; as an unbearable weight of the past. I think we live in Nietzsche’s prophecy of the death of God and now we are beset with the hard work of hearing for the first time or dying in reactionary radicalism and disparate, meaningless acts of reconstitution.

Fundamentalism in Market Economy: The Austrian School and Regulation

This is the next part in a series on the Austrian school of economics. The previous parts were here and here.

On regulation Jonathan Catalan states:

In the United States, for example, anti-branching laws and growing restrictions on note-issuing, such as taxes on certain banks’ notes, made it increasingly difficult to respond to information runs caused by inflationary episodes also stimulated by government intervention: namely, the circulation of greenbacks between 1862–71, issued to pay for the American Civil War and the resulting debt, and later fiduciary over-issue encouraged by allowing national banks to issue notes backed by government bonds and the manipulation of the exchange value of gold and silver. Eventually, runs and consequent panics, especially that of 1907, led to the formation of the Federal Reserve System. This did little to constrain banks and actually intensified fiduciary over-expansion, ultimately leading to the Great Depression and the creation of deposit insurance.

So restrictions on note-issuing “made it increasingly difficult to respond to information runs caused by inflationary episodes also stimulated by government intervention”. It is hard to tell from this whether Catalan is in favor of local banks issuing notes but it does appear as if he is not in favor of restrictions on note-issuing. I would wonder, if he is in favor of unrestricted noted issuing by local banks, if he would also favor a reserve requirement on these notes. It would seem that anything less than a 100% reserve requirement would constitute a kind of money creation and thereby allow local banks to loan money they do not have.

However, it would seem that Catalan is not in favor of any reserve requirement regulations when he states:

Also popular are capital controls, which are intended to force banks to hold a certain volume of their own capital against their investments. This is what the three Basel frameworks are, in part, intended to do; in the United States, prior to the 2010 adoption of a framework based on Basel III, these efforts were mimicked by the recourse rule. Different assets were rated against their perceived market risks and then organized into buckets and tranches. Ideally, the riskier the asset the more capital banks have to hold against it. In the event of the liquidation of an investment the bank can partially patch the loss with the reserve.

These regulations have not passed the test.

In any case, the loaned money would not come from ‘savings’ but would constitute an “an artificial increase in loanable funds” by the local bank (see this). The artificial increase in loanable funds would have nothing to do with a central bank. The question that arises is why this artificial increase, originated from a local bank, would have different effect on the cost of capital goods for production and the decision process made be entrepreneurs than the artificial increase made by government owned central banks. Wouldn’t the entrepreneurs still be lulled into a false sense of security from the availability of loanable funds regardless of whether it came from local banks or central banks? It seems this specific dynamic would not be affected by the source of the funds. However, the argument could be made that the local banker would be more discretionary about lending if the banker’s created funds were not covered from a lower interest rate loan from the central bank system. The reasoning would be that if the local bankers risk rested solely on his lending decisions then he would be much less likely to make ill-informed loans.

It is interesting that in view of putting the sole risk for the investment decision on the local banker, Catalan would also appear to favor pulling restrictions on bank branching. When banks branch they are owned and operated from a central, corporate agency. They relinquish sole local control of banking decisions with more or less degrees to their corporate owners. The effect of this is to offset risk to the corporate owners, the central bank. At this point we are faced with the question of why the corporate owners of local banks would have a different effect on the dynamic of local bank investment decisions than a government controlled central bank. Perhaps the argument would be made that the government controlled central bank would exercise orders of magnitude more of the de-localized effect on investment banking than the corporate owned central bank. However, if there are no regulations on how large a corporate owned bank could be as the Austrians would certainly favor, the free market ‘faith’ in competition would be the only limiting factor on corporate owned, centralized banks. One problem with this ‘faith’ is the monopoly dynamics that I previously point out in this series. However, another problem rests on a mathematical assumption. If the government controlled central bank is assumed to be much larger than the corporate owned bank then, it is assumed, that the risk off-load by more centralizing is also linear correlated to the absolute size of the central bank. However, it may be that the relationship is not linear at all. It may be that there are discrete jumps in failed risk assessments on the part of bankers in a privately owned corporate bank that make absolute size differences in the government owned central bank and the corporate owned central bank inconsequential.

Another assumption is that the scope of the malinvestment decisions will have a random distribution pattern over the entire market so that bad individual decisions will have a minimum effect on the whole economy. I will reiterate the pointed I made here:

Additionally, institutional investors do not invest equally and randomly over the entire breadth of the market. Institutional investors invest more heavily in businesses and market segments with proven track records. This has a congealing effect on capital investments in less risky, more certain returns on investment. To the degree that this occurs larger businesses with larger capital resources become the instrument of new business start ups and venture capital gets diverted from unaffiliated [with larger corporations] start ups to market conglomeration dynamics. This natural pocketing of capital resists the notion that a randomized investment pattern offsets risks/loses in the market and therefore exercises the least possible negative effects on individual parts of the market making booms and busts not likely [or less likely] to occur. It is quite possible that because of market conglomeration and even more, market monopolizing, that apart from central banking concerns, booms and busts would still occur and their impact might not be mediated by the idealized, random effects of the pure free market, the fundamentalist’s dream.

These issues cannot just go away by Austrian economists wishing them away. The only way to really resolve them would be with empirical data.

Catalan goes on to state:

Deposit insurance takes the place of market processes that accomplish much of the same thing, but by externalizing the burden of failure to the taxpayer. Deposit insurance, much like last resort lending without ex ante restrictions, causes problems of its own. It eliminates the need for market discipline, or constraints placed upon banks by its clients and investors, because these people are essentially insured against the loss of their deposits. Banks are given leeway to make what are perceived to be riskier investments, and regulators soon saw the need to step in to guard against excessive risk-taking by these regulated financial institutions.

This is an astonishing claim. What this claim fails to recognize is that the individual depositor has no role in that actual investment decision the bank makes. If the banker makes the wrong decision and the depositor losses all his deposit, the banker may learn a free market lesson but the banker has learned the lesson at the cost of the depositor not at the bankers own personal cost. Yes, you could say that the depositor has also learned a free market lesson, not to use that bank. However, the lesson the depositor has learned has come at the cost of his entire deposit so he could make a better decision next time if only he had any money to learn it with. The banker could lose his business if he makes many such bad decisions but he has made a good salary and bonuses in the meantime. The free market lesson the depositor has learned has come at a much higher real cost than the free market lesson the banker has learned. It is an equivocation to make all ‘lessons’ equal by virtue of the free market. The difference in these ‘lessons’ was recognized by the creators of the Federal Deposit Insurance Corporation. They also recognized that when masses of depositors called consumers ‘learn the lesson’ in this fashion the economy tanks.

Finally, Catalan states:

Financial entrepreneurs, however, enjoy a crucial advantage over regulators — they are constrained by the market process. The world is replete with people looking to make a profit, as such there is no shortage of potential bankers. Those who make bad decisions suffer losses and are forced off the market; profits, on the other hand, reward good results. The phenomenon of profit and loss is an essential market process that continuously redistributes capital to those who best use it. This is the “market discipline” that early interventions did so well to marginalize.

Here, the free market ‘faith’ of the fundamentalist is most apparent. This is why I started this series highlighting the guiding philosophy of the Austrian economist rather than merely dealing with specific problems. It is assumed here that the financial entrepreneurs learn their lessons and are forced out by “market discipline”. I wonder if Catalan would acknowledge the possibility that the financial entrepreneurs might learn another free market lesson. Perhaps they will learn that if at first they do not succeed in making a 10 million dollar bonus, only of a 5 million dollar bonus, try, try again. To hope that the bad financial entrepreneurs will get redistributed out of the market without any access to capital may happen at times but it may also be that other factors such as the good old boy network may exert a stronger influence on job security. Even if the bad financial entrepreneur is forced out, the sheer size of his bonuses and salaries relative to other free market laborers may not have the same equivalent affect as other laborers that lose all their depository funds with no other financial recourse. The bad financial entrepreneur has no need of insurance against loss because his loss is only a dip in net personal gain whereas the consumer that deposits all their savings in a depository account and had no role in the bad financial entrepreneur’s investment decisions has only his next paycheck (if there is one) to bank on. There is an inequity in loss here that is ignored and ‘believed’ away by the fundamentalist. When the depositors in the Great Depression lost their faith they did not continue to consume they quit consuming and the deflation that resulted took ten years to recover from. Do the Austrians really want us to try it again to see if it works this time? Not all of us have that much faith.

Note: There is a pattern of continual deferral in this fundamentalist thinking that validates the entire free market process by the ongoing deferral itself. The process itself is thought to be a randomized, distribution that is self-correcting. For example, the free market lesson learned by the manufacturing entrepreneur is passed on to the financial entrepreneur. The financial entrepreneur’s lesson is passed on to the bankers. The banker’s lesson is passed on to the depositor and consumer. The consumer’s lesson is passed on to the manufacturing entrepreneur in terms of consumption and thus, a repetitive singularity occurs that is ‘believed’ to be self-correcting. In other forms of science a singularity in calculations is bad science but I suppose in Austrian economics the singularity is deemed as the self-correcting success of the system. This process is purely abstract in that it thinks losses as lessons and self-correction. It fails to take into account or even allow failures in the system as legitimate, proper failures of the system itself and defers the failures to illegitimate, improper interventions in the system. Thus, it rightly achieves the title of ‘fundamentalism’.