No Rich People were harmed in making this recession

We got a federvention last night. Wages bad? Wish the recession shorter, the way the NBER did. Inflation takes off – simply ignore the parts you don’t like and call the rest “core” inflation. But a stock market correction that threatens to unravel the lives of thousands of future Republican donors and the arabs they will work for…

Panic!

In 2001 I told everyone that Bernanke was going to be the next Chairman of the Fed. Unlike most people, it seems, I and whoever is in charge in the White House had actually read Bernanke’s papers – he basically writes about how a conservative Fed could have bailed out the conservative political order in 1930, and how conservatives can hamstring liberal monetary policy with all kinds of fake devices that magically evaporate whenever conservatives are in control. Given his writings, I said “there is Bush’s conservative inflationist.”

Now conservatives have been anti-inflation for about 200 years in the West, that’s a long time. However, historically, conservative inflationists are rather normal. Once upon a time when a king needed money, he printed more of it, or debased the coinage and coined more of it, or looted someone and coined more of it.

We are just going back to the historical norm.

The other lesson here is that economics isn’t what it thinks it is. It wants to be the physics of social sciences. Instead, it is the study of games. The key thing to remember is that games have players, and when players think they are going to be obliterated, they stop playing, or they stand around like victims at a massacre. Either way, something changes dramatically. This makes the study of disequilibrium in economics one of the single most important topics, because – and this wisdom is lost on economics as a whole – it is the points of disequilibrium which shift people from being “rational economic actors” into other things. Large and small, disequilibrium is where the action really is.

This is the correction we should have had a couple of months ago, but there is a bi-partisan consensus in Washington to dump the recession on the next President and next Congress. Hence Nancy and Harry bailed Bush out, and will do so again next year. But next year it won’t work, because Cousin Ben is bailing out the markets this year.

Either Ben is going to have to throttle the economy back to precisely the tune of what Bush is pumping into the economy – meaning that all Nancy and Harry are doing is voting a subsidy for Republican donors to dump into the system to elect Republicans – or he is going to have to allow energy inflation to kick into high gear.

Early this week global models made Erin a danger to oil and Dean a fish spinner – those are Atlantic tropical storms. But events unfolded differently, and Erin formed way too far north to get going, but Dean is now on track to play ten pins across the Gulf of Mexico. If not Dean, then some other storm could do it at any time.

This, combined with the foolish bail out of an inflationary economic cycle by Harry, Ben, George and Nancy, could lead to that long awaited day when oil is one hundred bush bucks a barrel.

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Stirling Newberry

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  • Too many of the conservative financial chatterati keep talking about how consumer has managed to absorb the increase in crude oil prices to the $70 per barrel band without much decrease in consumption (a sentiment I personally don’t share). With the US dollar now doing a wingover and hurtling earthward, what sort of effect will $100 per barrel crude oil have on the economy in general. Wouldn’t that translate into about $5 per gallon gasoline, not to mention $6 per gallon diesel and $3 per gallon fuel oil? Lots of folks are going to get around the heating problem by burning their soon-to-be-foreclosed home around them piece by piece in their livings rooms. Bernancke has clearly chosen to follow the Reichsbank’s policies in the mid-1920s.

  • the global financial institutions, such as Goldman, USB, etc., and simply rewarded them for untenable risks, encouraging them to get back on the merry-go-round and kick off another round! Big victory for the spivs and wide-boys in The City and Wall Street.


    “les Etats-unis, c’est le seul pays à être passé de la préhistoire à la décadence sans jamais connaitre la civilisation…”…Georges Clemenceau

  • Price inflation is of minimum concern to the wealthy. Their concern is asset deflation. So they are fine with price inflation to get asset inflation. In fact, the wealthy actually prefer price inflation, as is shown by their willingness to overpay for products and services simply for the exclusivity. They wouldn’t mind at all if they were the only ones who could afford to drive. Not only fewer vehicles on the road, but there’s the added benefit of being one of the few.

    Owing to the economics of politics, the US is a representative democracy in name only. It is actually a plutocratic oligarchy, bought and paid for by the ultra-rich. Without eliminating legalized bribery through lobbying, politicians will have to be on the take to compete. And without real campaign finance reform through public financing of elections and severe restrictions of the influence of special interests, as well as trust-busting of the monopoly of corporate media, the electoral process will continue to be framed in favor of capital at the expense of labor, i.e., those who work for a living.

    Solutions only arrive when a tipping point is past and a turning point reached. In the past, this has resulted from a catastrophic events for the much more numerous “little guys,” whose strength is only in numbers. If the central banks are able to negotiate the Scylla of inflation and the Charybdis of deflation, the status quo will get another chance to continue and do it yet again. If not, then either a populist demagogue will arise on the right, as did Hitler, or another champion of the people, like FDR.

    We are also seeing another disturbing trend arising simultaneously in the ability of the ruling elite to use specious reasoning to justify a unitary executive, executive orders to implement it, and the putting in place of surveillance technology in order to suppress dissent.

  • There is too much class chatter here – rich vs. poor. What Bernanke is trying to contain is not protection of the wealthy out there, but the mortgages and ability to sell/buy homes by average folk. Without the infusion there would be a lot of bankruptcies out there – not by the wealthy but by you and I. From the standpoint of the rich what is presently happening is relatively negligible. The subprime issue has bled over into the mortgage banking segment – true, and losses are anticipated to reach $100 billion. But consider, this is a $13 trillion dollar economy with most cylinders firing. Among the wealthy, this is not huge. But as far as mortgages go, their ability to fund a house closing is huge to the middle class trying to buy or sell a house. What are they supposed to do, let the whole thing come crashing down because of a small unregulated segment of banking. What good would that possibly do. All the Fed did was lower the discount rate in the face of weakness and provide some focused liquidity to banks.

    As far as hedge funds go, their issues are not being protected, except to the extent the fed provides some liquidity so people seeking their money can get it out. That is a neutral event, and the people losing their shirts are the wealthy, and there is no bailout there. Just liquitity to facilitate the taking of losses.

    As far as the price of oil at $70 or $100, there is a very real commodity price constraint and I frankly am amazed at how resilient the system has been. The system is extremely dynamic, and I’m not saying there could not be a real shock to the system because of how fast prices are rising, but the ability of the system to adapt. To invest in alternative forms of energy (now the fastest growing venture capital investment in the US) is a testament this system where capital goes where it is needed. I would venture to say that should the need truly arise, our ability to adapt to $150 oil will be astounding. One could see the electrification of the rail system and the movement of all freight transport to rail in the next five years (think that might be why Warren Buffet bought such huge stakes in rail), and then the development of all the various alternative energy sources, the plug in hybrid (Volt – GM, Prius – Toyota, Civic – Honda, Escape – Ford, etc.). Wind energy developed by GE, solar energy solutions, geothermal home heating development, nuclear power options, hydrothermal, coal gasification, ethanol, bio-diesel.

    I guess I see an amazingly resilient system working to protect my 401k, my mortgage, my ability to sell my home. Sorry I don’t add to the doom and gloom of this site.

  • A little sunshine as shown in Financial Times

    “The US government is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon, the country’s top government inspector has warned.

    David Walker, comptroller general of the US, issued the unusually downbeat assessment of his country’s future in a report that lays out what he called ‘chilling long-term simulations.’

    These include “dramatic” tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of US debt.”

  • “but the mortgages and ability to sell/buy homes by average folk.”

    I’d critique this but I can’t spell “pthhhtp”. If it were a mortgage bail out you wanted, then it would have happened over a year ago, and it would have involved the treasury changing the mix of bonds sold, and made other reforms in Fannie and Freddie. That this was not done means that mortgages aren’t on any one’s mind.

    The mortgage market has been carnage for over a year now.

    This was 100% about hedge funds and other vehicles up to their orifices in credit exposure.

    Hank’s invisibility is key, because the yield curve is under his, not Bernanke’s, direction.

  • Over spending is the cause, regardless of the source of the belief that I deserve that TV even if I get a 2nd morgage to buy it. Temporary relief is the right thing to do, even if it is just a bandaid. This is not about rich or poor it is about a lot of people getting hurt throughout the World, we are the epicenter.

  • SpiegelOnline – Press excerpts:
    …The leftist Berliner Zeitung writes:

    “The current mini-crash is a painful sign of what the companies constructed of air and the extremely convoluted financial constructions are capable of. Whether this gambling pays off will all depend on more down-to-earth economics: If Joe Average in the USA can’t pay his mortgage, we’re all screwed.”

    The Financial Times Deutschland writes:

    “How this debacle turns out is still an open question. But, at least according to the popular reading, the guilty party is known without a doubt: ex-guru Alan Greenspan. According to this theory, the former chairman of the US Federal Reserve’s use of low interest rates and reassuring rescue missions led banks and homebuilders to be irresponsibly loosey-goosey with their money since 2001 and caused the financial world — just like the economy — to now fall into the abyss, while the gamblers have come out of the mess scot-free.”

    “Well, that sounds good, but on closer examination it’s specious. Greenspan & Co. were never really deceptive to the point that they would prop up by force a frail economy (even if the low interest rates did help accelerate the run of the US real estate market). The alternative probably would have been a complete disaster. But that doesn’t mean that America needs to be rash and bring back low interest rates.”…


    “George Washington did not cross the Delaware for Capitalism,” Shmuley Boteach

  • Usually needed change. By alleviating the pain this way, the change is being put off even longer and the system gets even closer to the cliff’s edge.

    It would be one thing if this bandaid was just one step among many in lessening the pain AND fixing the problem. But it looks like its just lessening the pain and letting the problem continue to grow.

  • To colonize the Moon or Mars. Seriously. In the past, as local systems reached a saturation level, civilizations simply expanded to new places on earth, and the process was repeated. Now, there is no possibility of expansion, we’ve reached the global point. The old system cannot work anymore. Unless we colonize the Moon or Mars.

  • The inability to determine the value of assets that span the globe is the problem. Until a market price of these morgage related securities is determined fear will reign. Therefore a stop gap action by the Fed is warrented. In first aid make sure he is breathing, then stop the bleeding, and then imobolize the damaged limb.

  • The reason we are in this is the ruling elite have argued for “free” markets, trade and capital flows, meaning no regulation. When no regulation leads to the inevitable excess, then they scream for the Fed to come in and rescue the markets. The idea of markets in a capitalistic society is that the market reward prudent risk-takers and teach imprudent one’s a lesson. Without this integral component of markets, the idea of capitalism and free markets is a joke. It’s welfare for those “too big to fail.” Rescuing little guys is “socialism,” but rescuing “markets” from excess is economic prudence. Who would have thought it?

    Oh, and as Stirling says, this is not about mortgages but derivatives.

    HEDGE FUNDS NEED TRIMMING By Peter Morici
    Asia Times Online, August 14, 1007

    The recent market meltdown had much less to do with bad subprime loans than advertised. It was caused more fundamentally by excesses at hedge and private-equity funds.

    Those contraptions, invented by the sinfully wealthy barons of Wall Street, have lied to themselves and their investors about the efficacy of their schemes. Now they are quiet in their sins as bad home loans take the rap for a global meltdown the US housing market is not large enough to cause.

    In essence, hedge funds have been pairing put and call options
    with borrowed money from banks. Derivatives may have fancy drapings, but most of what goes on boils down to complicated buy-sell pairing.

    Those pairings are based on computer models and the like, which establish patterns of stocks moving in opposite directions. That can work for one or a few investors, with a very small share of market capitalization, betting against the market. But when hedge funds multiply, they in essence bet against one another and require one another to validate their bets. So betting on borrowed money endangers commercial banks stupid enough to believe the Brahmans that peddle their paper.

    more

  • This isn’t a band-aid. It’s the equivalent of giving the patient a hit of morphine so it can keep working with that bleeding ulcer. Sometimes the patient needs some bed rest.

    These jerks were way over-leveraged on very dubious paper. They need to take thier losses to clear it away, not to be bailed out.

  • that is exactly what happened, and we predicted it at the time. But it took more than Bush, it took action by Treasury (completely fucking with yield curves) and Bush crashing tax rates for the rich as well.

  • the system. Look up Industrial Ecology and cradle-to-cradle manufacturing–these, among other fields/ideas, are forging ahead to change the very way we make and do things. And they’re not advocating a “return to primitivism” either. Very exciting stuff.

    Humans are the most adaptable species in the world. I think we’re making the necessary changes–I’m just not sure if we’re making them fast enough.

  • right. If a system has swung drastically out of equilibrium into unstable and unsustainable territory, you don’t continue to perform the same actions that got you there in the first place–doing so generates positive feedback, pushing the system further along until even that feedback can’t stop it from violently snapping back toward equilibrium (and then probably flying well past it in another direction). What we want is negative feedback. It doesn’t have to be a drastic, sharp recession, but something has to happen in that direction.

    The better analogy would be the following scenario: A drug addict’s habit is killing him, so his friend gives him more drugs. And, in my analogy, you’re saying this is the first step toward curing him.

  • This would be the event that signals the end, or near end, of a cycle, if it were. But in any case, Stirling’s article says that he thinks the recession will happen next year, not this one because Congress + President have kept the fiscal stimulus going.

  • …where Stewart Brand and the Whole Earth crew left it 35 years ago. “Appropriate Technology” was their term, now apparently owned by MIT (and I don’t mean that as disparagement to MIT). But I will not feel satisfied until some fucking Rightie has to admit in public that “Jimmy Carter was right”.

  • …of a previous Stirlingism:

    It would be as if a man who had been poisoned, rather than reaching for the emetic, reaches for another dose of the poison.

    [I believe in that case he was talking about our insatiable appetite for oil, and how that appetite feeds off itself.]

  • to value these assets. We are reaching a point in a very long term cycle where an entire class of assets, namely the equity that information technology produces, cannot be valued in a money supply limited by the physical commodity that drives the old economy, in our case oil.

    So what happens is that information assets are incredibly misvalued, either very very very pricey if they happen to impinge on the oil economy, or practically worthless if they don’t. This is sending the wrong signals about allocation of effort. No matter how many times you pyramid assets based on a limited quantity, the total that they can value remains limited. If the new class of assets are growing faster than the old – and in our case they are – then it simply leads to repetitions of the cycle, a few wars and increasing financial instability that both drives, and is exacerbated by cyclical risk and war.

  • and people didn’t listen, because no one wants to be the next Herbert Hoover or James Earl Carter.

    They bet, correctly, that if “00” came up, the casino would refund their money.

  • But they could keep this afloat for any length of time since there is no physics in economics, as Stirling points out.

    “The other lesson here is that economics isn’t what it thinks it is. It wants to be the physics of social sciences. Instead, it is the study of games. The key thing to remember is that games have players, and when players think they are going to be obliterated, they stop playing, or they stand around like victims at a massacre. Either way, something changes dramatically. This makes the study of disequilibrium in economics one of the single most important topics, because – and this wisdom is lost on economics as a whole – it is the points of disequilibrium which shift people from being “rational economic actors” into other things. Large and small, disequilibrium is where the action really is.”

    If economics is the study of games, it does not have a model for my taking the football home and ending the game, just because I say so.

    A whole lot of people do the equivalent in a meltdown. That is the “disequilibrium where the action really is.”

    http://mauberly.blogspot.com/

  • I don’t think Stirling would take it that far. The academic discipline of economics may be about game theory, but the real world is still constrained by real resource limitations. You can’t flood the world with liquidity forever without real consequences.

  • As a result, it is not just the banker types or hedge fund managers at risk, it is the old lady next door, your mail carrier, and your boss who
    are participating in the losses. This was not a Fed fund rate cut, but rather a precise adjustment to the money supply for the purpose of confidence renewal. Stabalize the patient prior to surgery.

  • You can borrow money from the Beast, but you still must feed it something at the end of the day. Without securing the oil in Iraq, America has backed itself into a terrible corner where the limits of the debt game are becoming more clear.

    In other words, no more oil = no more foreign countries willing to lend the USA money. Who wants to back an expensive losing horse?

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