In praise of free markets

The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street's follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether.

It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the "Great Contraction" of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe's fledgling democracies: fascism.

Yeah, right - the only policy decision of note after 1929 was Smoot-Hawley. Not the regulation of banking and the New Deal. Interesting vision of history...

Consider the Washington rescue package first. Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return? Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system. The answer is "yes". The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer. A successful rescue would prevent that and there is even a small chance that it would be profitable in its own right. That is the justification for the rescue. Congress was right to scrutinise it - especially its lack of oversight - but has become distracted by a desire to clip Wall Street's wings.

Yes, let's focus on the short term: it's true that Wall street can take down Main St with it. That would seem like an additional argument for clipping Wall St's wings, not a mitigating factor - but hey, what do I know?

The case for more effective regulation is nevertheless undeniable. It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises - the dotcom crash and the current banking disaster - in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.

The current crisis is routinely described as a symptom of deregulation, but it is equally the child of earlier, ill-fated interventions. Subprime mortgages grew because the prime mortgage sector was dominated by Fannie Mae and Freddie Mac, two institutions founded, regulated and effectively underwritten by the government. Securitisation was an effort to sidestep capital requirements. But it also created instruments that few could understand and, in Warren Buffett's prophetic words, really were "financial weapons of mass destruction".

Deregulation = bad regulation = government sucks

The chutzpah is quite amazing, really. They pretty much got all the deregulation they wanted, and all the downside protection the financial sector wanted, and now the government is to be blamed because it obyed the financial sector's every wish?

Capital markets clearly need better regulation but policymakers should guard against unintended consequences. Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.

Isn't the point we're at today pretty much that failure is NOT BEING PUNISHED????

This is a difficult time to defend free markets. Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.

Matchless indeed:

Market freedom is not a "fundamentalist religion". It is a mechanism, not an ideology, and one that has proved its value again and again over the past 200 years. The Financial Times is proud to defend it - even today.

The only silver lining is that, for the first time in a long time, they sound a tad defensive to me...If they feel the need to argue they are not a "fundamentalist religion", we're finaly making progress. yey!


In the long run, we're all dead. John Maynard Keynes

Arguments about growth need to be dismissed by a reference to the "full cycle", ie the prosperity of the recent past can only be accepted as real if it wasn't a capture of the prosperity of today and the near future.

This is a key point, because the view of the full cycle is exactly what is lost when the current quarter's profits become the main criterion of a company's performance.

Had such a mentality obtained in the 1950s and 1960s, the blue chip companies of that period either would have been dumped by shareholders, or else Xerox and IBM and BellTel would have been forced to ignore their own long-term planning.

I was watching an interview with a Columbia Business School professor, whose name I did not catch, who challenged this point.

According to him, the bail-out will be paid for by federal taxes (as opposed to state/local taxes and social security taxes), on corporations and individuals.

Although I cannot remember the exact figures he gave, he claimed the vast bulk of these federal taxes would be paid by people making $150,000 or more per year.

Looking this up, I could only find the following figures for 2006 from the "Tax Foundation" (in turn based on IRS figures) for "Federal Individual Income Tax Data, 2006":

• 70.79% of all federal individual income tax was paid by people making $108,904 or more (i.e. the top 10%)

• 86.27% was paid by people making $64,702 or more (i.e. the top 25%)

Figuring in corporate taxes, the relative tax contributions of the those making under $65K will be even smaller.

Thus, I am not sure if it is accurate that this will be a "transfer from poor to rich".

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

It's difficult though and goes back to my questions from last night.  

No the actions of Congress are not encouraging. But for argument's sake let's assume the best, that McCain won't win and that an Obama administration would have the will and the actual leadership ability to be able to change things and institute a new New Deal. That we can have, in the end, a peaceful democratic revolution.  

If we agree that we need a democratic revolution in the US and we need a new New Deal but we also agree that  Wall Street has the ability to bring down Main Street and that we are in a crisis where Wall Street may be bringing down Main Street - then we have a dilemma of timing.

I know many people would argue that it would only be possible to pass a new New Deal if Wall Street has destroyed Main Street as during the Great Depression.  I consider those people idealogues who care only for theory and not for flesh and blood people.  As a practical matter and as a matter of common decency it would be easier on the average person if the new New Deal could be passed before Wall Street has destroyed Main Street. So that should imo be our goal.

There is no possible way that a new New Deal can be passed in less than 4 months when the new Congress and new Administration take office and that is just a possibility and not reality. In reality it is going to take much longer.

So even a good intentioned Congressperson TODAY who cares nothing for financial elites and would pass a new New Deal as soon as possible has to think about doing something to stop Wall Street from destroying Main Street in the interim.

To me, that is how we are going to have to evaluate whatever this very flawed package turns out to be.

Because despite the idea that Congresspeople only work for elites - they also work for average constituents and they DO know that (at least on the House side).  If by doing nothing the majority party in Congress is seen as throwing us into another Great Depression, their constituents will throw them out. Deservedly so. It is inconceivable to me that the majority party would be able to do nothing in this situation once the administration threw out the idea of another Great Depression unless they were positive that the adminsitration is wrong.  So in the end they will pass legislation that they will justify as helping the have-nots by averting a Great Depression (which it might) but will help the haves more.

If it is possible and probable to have frozen credit markets for the next 6-9 months and not destroy Main Street then they should have done nothing.  If that isn't possible then they needed to do something NOW.  You say the credit markets can't get any worse but this isn't sustainable over the long run.  I ask what is the long run.  It is what every Congressperson is asking. How long is the present situation sustainable.

If it isn't sustainable for 6-9 months then all this talk about alternative plans that should be considered right now seems ridiculously idealistic to me.  The only practical question right now is how many good changes they managed to get into the administration's plan and how hard it is going to be for the next administration to come up with a new New Deal with this plan in place.

then it is a rotten deal. Typically, one that should be a "no deal".
It should never be stock warrants. It should be shares, full stop.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

Can anyone help me?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

Quite frankly, the alternative now, just like in the 30s, is either a full break from the past (a new "New Deal") or a move towards fascism and war - the latter being our current elites' only chance of holding onto power.

That's it.

First, most of the economists in important universities and academia are completely on our side... or at least not on the other side.. ten years ago there were no economists favoring fair trade, strong regualtion, and so on in big U.. now everybody agrees.. Krugman is not alone anymore..

Do not understimate the importance of being in Princeton, Berkeley, etc.. and have these center-left ideas... within five years economists will be like climatologists, people Republicans will have to fight against... and as you may notice the narrative to fight us is very very difficult to create even in the US.

The second thing to notice is that the media meta-narrative (as talkinpoints' boss calls it) has changed in our favour in the US..the cotnrol of the media by right-wing idiotic forces which go uncostested does not exist anymore...

In other words, the advance is clear... the US left should have started earlier to movilize but still..even most of the commentariat in the FT goes against their own editorials...

So,a green economic transition seems possible.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

If those links don't work, here is a link to a draft of the 106 page bill.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

They will not leave without a fight, even if reality is overwhelmingly against them, and I expect obfuscation, distraction and worse to be used to deny or avoid that reality. Quite frankly, the alternative now, just like in the 30s, is either a full break from the past (a new "New Deal") or a move towards fascism and war - the latter being our current elites' only chance of holding onto power.

I've worked this seam before.
I think the pistol wavers would really like to gin up a war, but
1) Their cred is so low these days that all the likely candidates are more likely to become martyrs instead of villains, so it may take a while.
Hugo? Ivo Morales?
2) Whoever the next victim is, -even if they just stick to losing their ass in Iraq and Afghanistan, they need dough.

We've discussed a bit the question of where the next infusion of money for the "Hard Power" empire might come from. Now we know.
To my recollection, no one ever thought of this.
Fucking genius-level con?

Think of the economy as a vast puzzle of plumbing pipes with money flowing in them. The Hard Power players have a thousand petcocks, drains, taps on the pipes, but for the dough to keep flowing, the system has to be reasonably full and pumping. It was getting awfully leaky, and low.

They just filled it up again!

The wall street boys just won their battle,---if my reading of the "plan" is even close.

-They get bailed out, and "regulation" was hardly mentioned.
-Equity ownership has become warrants--in some cases. A right to buy or sell shares at an agreed-upon price aint much. Poof. Shares you MIGHT buy don't give you a seat on the board, a dime of income or much influence.
-Congressional "oversight" board is balanced by another oversight board that can probably neuter  or checkmate the first, and with administration participation. "Oversight" looks thin at best.
-Main street?  Mom and Pop mortgage holder can just eat cake.
It goes on. The real needs were mostly bargained away, it seems.

In other words: nothing short of a revolution will do. Can it still be a peaceful, democratic one?

There will be no revolution, democratic or otherwise, against the amporphous, ill-defined financial plunder artists. Not yet.
Revolution against--who? Harvey Wall Street? Where's he live?
Another problem with revolution today is that the values of the financial predators that just ripped off main street --are the values of main street. As long as shared values say that greed is just human nature, that life is a zero-sum game, --why, the boyz from Wall street (or chicago) just acted the way we would,--they just got theirs first.
Nope. Gotta get a lot worse if any action is to happen.
Echoes of the Marxian "Necessary Preconditions" idea here.

--the main argument to give financial markets a free hand - that they have created so much growth and prosperity - needs to be called for what it is: a lie. Not only the so-called prosperity of the past years was highy unequally shared (see the next point), but it was not even real,---

You know that. I know that. But those whose reality is shaped by the MSM would passionately disagree, I think. When I tell people that the U.S. working man's real hourly wage peaked around 1974, and has slipped almost 50% since then, they think I'm nuts. I suspect Marx never had Rupert Murdoch or Foxwits to deal with.

Angst, editorial froth and recriminations, scapegoating and posturing, pompous academic pronouncements--but no action yet.
Best thing that could happen (if you want real change)would be a crash of cosmic proportions.

But what does this mean in the real world? Most of us have no idea.

Studs Terkel wrote a wonderful book called "Hard Times", filled with interviews from people who lived through the crash of '29 and the subsequent decade- everyone from several members of Roosevelt's brain trust, to mothers who scratched to feed their kids, community street meals with whatever you had to contribute in the pot, fathers who ran away and rode the rails to hide their shame because they could not provide even shelter and food. A sometimes heartbreaking document, yet one filled with a strange light- the light of hope.
The theme that recurs over and over is the theme of a return of the ability to stand in the shoes of others--and share whatever you had as a result.

The guys who engineered the "New Deal" made it plain, in this book and in others, that their success in that incredible endeavor was in large part due to their ability to ride this sense of -- community, of solidarity born of shared misery, of a resurgence of compassion, of the resolve to PERSONALLY do whatever you could for others, without waiting for government to act.

Then the government could act.

Government reflects the people. Not perfectly, not exactly, but in the central values that exist at the heart. This government -all of it,- reflects the people.

It has so far acted accordingly.

When we change, ---it will follow.  

Capitalism searches out the darkest corners of human potential, and mainlines them.

  Please see: Jacques Généreux,

 Économie politique (3 vol.)
Coll. Les Fondamentaux, Hachette.

• Économie politique. 1. Introduction à l'analyse économique. 4e éd., 2004.
  
• Économie politique. 2. Microéconomie. 4e ed., 2004.
  
• Économie politique. 3. Macroéconomie. 4e ed., 2004.

Introduction à la politique économique
Coll. Points-économie, Seuil, 3e éd., 1999.

Chiffres clés de l'économie mondiale
Coll. Points-économie, Seuil, 1993.

Chiffres clés de l'économie française
Coll. Points-économie, Seuil, 1993.

Droite, Gauche, Droite
Plon, 1995, épuisé.

L'économie politique. Analyse économique des choix publics et de la vie politique
Larousse, 1996, épuisé.

Les politiques économiques
Coll. Mémo, Seuil, 1996.

Une raison d'espérer. L'horreur n'est pas économique, elle est politique
Plon, 1997, Pocket, 2000, épuisé.

Les Vraies Lois de l'économie, tome 1
Seuil-France Culture, 2001.

Les Vraies Lois de l'économie, tome 2
Seuil-France Culture, 2002.

Quel Renouveau socialiste?
Entretien avec Philippe Petit, coll. Conversations pour demain, Textuel, 2003.

Chroniques d'un autre monde
Seuil, 2003.

Manuel critique du parfait Européen. Les bonnes raisons de dire "non" à la Constitution
Seuil, mars 2005.

  --- passim.

  Briefly, the "financial world" is always under the more-or-less competent (these days, it's the obscenely incompetent) control of the politico-economic élite.  Therefore, what you urge constitutes a nonsense, non sequitur, a thing outside the realm of human possibility at this point (there being, as yet, no such thing as a meaningfully functioning "democratically-run" society).

   The markets are in turmoil, yes.  But it isn't because they've been "left to their own devices."  It's because, rather, they're under the control of the class of director-managers which always runs them---and that happens to have been doing a supremely stupid and inept job of it for since Reagan's and Thatcher's reign.

  A "débat" including Jacques Généreux ran in the pages of Libération in the past two weeks; don't recall the exact date.  Try his books. A healthy tonic for the prevailing idiocy.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge