Mr. Krugman's Science, Part 8: A Little More Stockmania

Probably the most interesting chapters of David Stockman's "The Great Deformation" concern what he calls the "BlackBerry Panic" of 2008, when Lehman Brothers went belly up and Hank Paulson was manipulating Congress with his warnings about "tanks in the street" unless his buddies (and former co-workers) received massive inputs of Federal cash.  Using a lot of data, Stockman puts on a pretty convincing argument that Wall Street's woes were its own; there were no broader implications for the Main Street economy where you and I live.  Rather, it was the relentless hype by Treasury Secretary Paulson, aided and abetted by his sidekick, Ben Bernanke, who wanted to preside over his very own Great Depression II (having literally written the book on the first one), that convinced the American people that we faced Armageddon unless we allowed the government to make good on all the reckless gambling carried on by the Wall Street Gaming Commission (Goldman Sachs, JP Morgan Chase, Merrill Lynch, Bear Stearns, AIG, et al, everyone except the sacrificial lamb itself, Lehman Bros.).

Stockman's provocative point is that it was completely unnecessary to bail all these casinos out.  The crash of Lehman Brothers (you might think of it as maybe the Flamingo, as opposed to JP Morgan Chase's MGM Grand and Goldman's Bellagio), a mid-sized gambling hall which made all the same stupid bets as its larger Mob Brethren, was simply another bankruptcy.  The Wall Street meltdown was self-contained.  It would have burned itself out "in the canyons of Wall Street," as Stockman puts it.

This viewpoint is not part of the official Manufactured Consent, of course.  Yet it holds up well under scrutiny.  The detonations on the Strip in southern Manhattan mainly concerned the lousy deals ("shitty deals," as Senator Carl Levin called them in Senate hearings when he grilled Goldman execs) put together as subprime mortgage-backed securities (MBS).  These, however, were a fairly small part of the overall mortgage market, the "private label" MBS that were too flaky even for Fannie and Freddie to underwrite as GSE-backed loans.  Since Goldman and the other gaming establishments were so highly leveraged (at about thirty to one), even a small decline in the value of these shitty deals spelled doom, funded as they tended to be with "hot money" (short-duration overnight loans from the shadow banking system - yes, it's a labyrinth, America's Underworld of arcane finance).  If you've seen the movie "Margin Call," you get a sense of how all of this works. Outside investors such as the preternaturally brilliant Michael Burry (lionized in Michael Lewis's The Big Short), Kyle Bass and John Paulson made fortunes betting against the stupid bets made by the likes of Bear Stearns and others.  AIG's "Financial Products" division allowed the casinos to hedge their bets with side deals (CDS, or credit default swaps) on the mistaken premise that housing prices (the collateral for all those subprime loans) could only go up and never down.  Thus, when AIG-FP failed, Treasury Sec Paulson kindly directed a ton of money to AIG which it could use to pay off the CDS "insurance" to Goldman, the BofA, Wells Fargo and the rest of the bankster-roulette players.  This was the infamous "backdoor bailout."  All in all, the whole fiasco was an Inside Job.

The effects on the broader economy in America were derivative; the failure of subprime mortgages caused a lot of houses to sink beneath their loan levels (go underwater), and the distressed properties in overbuilt America, suddenly released onto the real estate market, exerted downward pressure on prices, reversing some of the meteoric rise of prices during the Bubble Years (180% between 1996 and 2007).  There were heavy casualties in the housing industry, of course, both in finance and construction, and particularly in industries related to housing, massive job losses began in late 2008 and continued to the spring of 2009.  And then, by June, 2009, the recession was declared officially over.

The knock-on effects of the deflating housing bubble mainly arose from the end of the House-As-ATM era, the "mortgage equity extraction" process which had dumped about an extra $1 trillion per year into the American economy between the turn of the Millenium and 2006, when the Bubble reached its apogee.  Since America is primarily a "service" and "consumer" economy, the effects on manufacturing, agriculture and mining were not significant.  It's just that the Planning & Tanning Economy took a massive hit in the chops, as Americans once again faced the tough question in America: what the hell do I do now? And where do I get the money to do it?

Looked at this way, the BlackBerry Panic was simply a round trip.  As noted yesterday, the country's economic fortunes have been on a gradual decline for about 40 years, except for that sliver of aristocrats who can leverage world trade or dominate one of America's monopolies.  For the Booboisie who must compete with the world's labor market, it's a different story.  Occasionally, the fecund American mind conceives of a way to break the monotony by producing Bubbles:  Internet IPO offerings (Dot.Com) followed by the housing bubble.  These are enabled, as Stockman notes, through a combination of (a) ultra-low interest rates by the Fed married to (b) the dollar as the world's reserve currency, which supports, for now, our periodic indulgences in faux-wealth creation.  The actually wealthy, the Dons of Wall Street, can meanwhile manipulate the federal government (and American public opinion) and convince us that their setbacks are our own.

Viewed in this way, we can see that Ben Bernanke's main "policy corrective" of Quantitative Easing, buying up, among other things, a lot of MBS and Treasury bonds with hallucinated money (almost all of which winds up on bankster ledgers as "excess reserves") is just more of the same.  It supports "asset prices," stocks, bonds and, to an extent, housing.  Pew Research has demonstrated that since this money-printing began in 2009 the top 7% of America's pyramid of wealth have seen their portfolios increase about 28%; the Booboisie (the rest of us at lower sedimentary layers), the leftover 93%, have lost about 4% of our net worth.  Same, that is, as it ever was.

Who cares if it don't work (to quote Lamont Shadowskeedeboomboom in Mad Magazine)?  Ben Bernanke works for a banking cartel, and he's nursed the survivors from the 2008 Putsch back to opulent wealth.  The rest of us can go screw ourselves, as we are wont to do.  Noted New York Times columnist, and Chief Carnival Barker for the Status Quo, Paul Krugman, runs cover for his Princeton colleague. Krugman likes our Bubbles (he famously called for one in the early 2000's as a means of recovering from the Dot.Com bubble - Krugman is the Lawrence Welk of public intellectuals).  Look, Paul, why don't we just thank our lucky stars we're out of the recession, we're bumping along, and let it go at that?  Stop the QE and let the stock markets and the Casino Managers take a hit, for once.  Join us down here on the abbatoir floor, where the fun is.

Mr. Krugman's Science, Part 7

On Monday the 29th of April the good professor (Mr. Krugman) laid it out:

So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused. 

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity. 

Essentially, this is The Krugman's Weltanschauung:  he writes many columns, many blogs (an unglaublich number, in fact), and essentially this is what they all say.  Along with saying that he's right about everything, as often as he can.  Mr. Krugman is comically insecure about his ego; his relentless self-promotion alone makes it fun to read along.

Yet I'm grateful for this summation by Mr. Krugman, Scientist.  Mr. Krugman, by referring to a "once-in-three-generations financial crisis," must mean, of course, that our present predicament is like the Great Depression of the 1930's.  Therefore, if we use tools such as those employed to lift the United States out of the Great Depression (specifically, starting a world war), or, more humanely and conducive to international esprit-de-corps (and more fun), preparing for an alien space invasion, we could end this silly downturn and return to prosperity.  "For the economy isn't always like this."

When I read Mr. Krugman's Science, my impression is that he views an economy as a sort of econometric abstraction.  Real people live in it and try to derive a livelihood from it, and in a way it's part of the natural world (you know, Earth), but the idea of "cycles" implies that whatever this abstraction is, it behaves over time in more or less predictable ways, and it can be fine-tuned and modulated by human intervention so that it performs optimally, producing 2% inflation, unemployment at 5% honestly calculated, and a generally rising standard of living with a strong middle class, right here at home.  That's the thesis. 

In 1930, three generations ago, the Earth's human population was about 2.07 billion people.  India was a British colony and essentially medieval, as was China.  Agrarian, rural, subsisting in villages and poor urban centers.  Certainly these countries were no threat to the United States or Europe as economic powers.  Latin America, Africa and the Soviet Union were either extremely undeveloped or mired in unworkable Communism.  The United States was energy independent and the world's industrial powerhouse.  It seems very likely that the Great Depression can be characterized, given all this, as a self-inflicted wound.  The means to recovery were always at hand: plenty of land, plenty of fresh water, plenty of manpower, plenty of energy, plenty of all natural resources, plenty of everything, and no significant international competition which threatened any of these things.  Thus, when the United States, still gripped by the effects of the Great Depression, mobilized to meet the challenges of Fascism, the veil fell from our eyes and we realized we had had the means to become rich all along.  There followed thirty years of prosperity such as the world had never seen.  I personally came of age during that era, and I must say: damn, it was nice.

Today there are 7 billion people in the world.  The CO2 concentration in the atmosphere has risen to about 385 parts per million, or .04% of the air we breathe (up from its historic, CRC-listed level of .03 - think about that).  There are those who argue cogently that we face near-term extinction as the result of our destruction of the atmosphere and oceans.  What might save us from this fate is the economic collapse that seems built into the interlocking system of international fiat currencies and mutually-dependent economies.  Door One or Door Two?

Brazil, Russia, India and China (the BRICs) are rising economic powers, competing mightily with the United States in world trade and utilization of natural resources, especially oil.  Our once-vaunted middle class has been hollowed out by offshoring of labor and dependence on cheap labor markets for our daily goods. Automation threatens many of the remaining manufacturing, "value-added" jobs.  The Big Box revolution has destroyed the Main Street mercantile businesses. Big Ag eliminated the family farm and the agrarian life that employed 20% of the United States in 1930. 

On Monday night I attended a lecture at the Jewish Community Center in San Francisco (what, you gotta problem with that?) where Eliot Spitzer gave an impassioned, highly cerebral talk on the American economy and the general state of our democracy (one can see why The Powers That Be needed to lay this man low - how could the oligarchs get on with Fraud As Our Business Model with this guy in the way?).   Mr. Spitzer, an authentic liberal Jewish New York intellectual, laid particular emphasis on this chart:

We all got rich together until about 1975; then the middle class began to lose ground, as the effects of globalization began to kick in, as jobs left for cheaper labor markets, as a relentless surge of mergers & acquisitions created larger and larger monopolies which could "leverage" the global trade and access the cheap labor markets, turning Americans into menial "consumers" who could not keep up with the general increase in wealth, which was in turn concentrated in fewer and fewer hands.

 

Thus, Mr. Krugman, is it really cyclical?  Or are you part of the Cargo Cult which stands on the shore and waits for the masts of the distant ships of prosperity to appear over the horizon?

 

More on this gripping tale in the days to come.