Radicalism: How to Do Effective Politics

Here is a lecture by Lawrence Lessig:

Europe as the Apocalypse

Here is a doom-and-gloom view of the world from the Wall Street Journal. They look at the problems in Europe and spin a tale of imminent calamity for the whole world. I, however, see the WSJ as a Cassandra:



The WSJ is like those prophets in mid 1940 wrote off England and proclaimed the end of the world as we know it and the start of a new age of barbarism. On the other hand, I believe in "muddle through". The Brits muddled, Hitler over-reached in Russia, and finally America joined the fray and the world managed to find a way to avoid the obvious bleak tragedy that all the experts foretold.

Third Time is a Charm... maybe

Here is a bit from a NY Times op-ed piece by Paul Krugman:

Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.

Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now.

I’ve been reluctant to weigh in on the Chinese situation, in part because it’s so hard to know what’s really happening. All economic statistics are best seen as a peculiarly boring form of science fiction, but China’s numbers are more fictional than most. I’d turn to real China experts for guidance, but no two experts seem to be telling the same story.

Still, even the official data are troubling — and recent news is sufficiently dramatic to ring alarm bells.

The world doesn't need more bad news. But sadly the world is indifferent to humans, their needs, their wants. While Krugman worries about the effect of China on the world, Kim Jong-il has died in Korea creating an unstable mess that could easily spin out of control.

When I was a kid I heard the so-called "Chinese" curse of "may you live in interesting times". All I knew is that I desperately wanted to live in boring times, but sadly my whole life has been lived in the maelstrom of "interesting" events bringing misery and chaos. That is how the world works. Complete indifference to humans needs or wants.

Social Protest

Here is a good overview of the protests that are shaking the world and a prediction of more to come. The interview is with Gerald Celente.

My favourite phrase:

When the money on the top stops flowing down to the man on the street, the blood starts flowing in the streets.

While I don't agree with his specific "predictions" (he is no better than most other prognosticators), I do think he has the zeitgeist of the time correct: we are in an era of social upheaval because of a failing economic system with the root cause being a growing economic inequality and a growing marginalization of the bottom 50%.

The Credo of a Pro-99% Person

I enjoy following many blogs. One of this is Myrmecos by Alex Wild. It specializes in ants and photography and insects. But today he posted a bit of musing on the political future of the US. This is well worth reading:

Why I support the 99% movement

by myrmecos

Paraguay is the second poorest country in South America. You’d never know it from visiting some neighborhoods in the capital city of Asunción, though. Shiny new SUVs cruise the streets between the golf course and the yacht club. Boutique malls sell the latest in European fashion. Not a bad country for enjoying the good life.

I lived in Paraguay for a time in the late 1990s, but not anywhere near the country club. I was a Peace Corps volunteer in a dusty frontier community 100 miles off the paved road. With a government salary of $220/month I was the wealthiest person on my street. My neighbors, for comparison, had 11 children and somehow made do on about $400/year they made selling tobacco to a local distributor and onions in the nearby village. Many small farmers subsisted in the short term on bank credit, a sort of debt servitude that, carried out over years, funneled resources out of the community and upward to the elite. In the long term, some eventually lost their land and migrated to the city where I lost track of them. The slums were always growing around Asunción’s outskirts.

Most of the land was owned by only 350 people, according to a newspaper article in 1998. This statistic startled me, and explained a great deal of Paraguay’s dysfunction. 350 was half the size of my high school graduating class! The country was being run by an exclusive club of millionaires that all knew each other and, for the most part, didn’t pay much attention to the poor folks.

Paraguay was ostensibly a democracy, a 1989 coup having deposed a long-standing dictator. But the elections remained theater. A few rival millionaires would emerge from their mansions long enough to film TV spots featuring them bravely clearing brush at the ranch riding about on horseback looking folksy. To remove any remaining doubt about their populist roots, they would then toss a few bribes to the voters the week of the election. My community at the forest’s edge got free chainsaws. Thanks, General Oviedo!

In spite of the country’s political corruption, I am fond of Paraguay. The people are friendly, the natural history is rich, and the climate warm and forgiving. After my tour was up, I considered starting up a beekeeping operation and staying in country. After all, I calculated that I only needed about 30 hives to sustain a basic campo lifestyle.

In the end, though, I decided against it. The crime rate was phenomenally high, the ambient poverty depressing, and as an outsider the pervasive corruption certainly didn’t work in my favor. The society simply did not function well, and although it contained great charm it was too often punctuated by avoidable tragedy.

Mostly, I never had the security I felt in the middle class in the United States. In fact, Paraguay didn’t have much of a middle class. The wealthy were wealthy, the poor were poor, and any social mobility tended to be downwards.

Paraguay has natural resources: fertile soil, navigable rivers, and a pair of world-class hydroelectric projects. But the wealth never spreads beyond the aristocracy. The powerful have little incentive to run the country to benefit anyone but themselves. Income inequality was not just a problem, it was the single biggest obstacle to any sort of improvement to the lives of the populace.

It didn’t matter if you wanted to implement a liberal program, or a conservative program, or to regulate, or to deregulate. Ideology didn’t even really matter. If the aristocrats could make money, it would happen. If it would cost them money, it wouldn’t. Unless their family was involved. They’d fire competent staff to replace them with a nephew. If you knew the right people you wouldn’t have to work hard; if you didn’t you were basically stuck. If the powers that be didn’t like a new law, it’d never be enforced. If, heaven forbid, a rivalry among the aristocrats escalated, someone got killed. Paraguayan government was corruption in near-textbook purity, and the scam was all possible because the immense resource gap between the rich and the masses meant no one from within the system could challenge it.

Now, back to the United States.

I am not enjoying watching my own country develop the same internal dynamic that corroded the heart of Paraguayan society. As power and wealth concentrate upwards, the ability of a democracy to function in the interests of its people falters. Forget free markets, or single-payer health care, or whatever your hobby horse happens to be. None of it- left, right, or center- will happen once corruption becomes endemic. And corruption is a major product of wealth disparity.

This is why I support the 99% & Occupy movements. At long last they’ve gotten Americans talking about our nascent Aristocracy. I love Paraguay, but if I wanted to live in that sort of system I’d rather move back there than grow a banana republic at home.

I love the snide put-down of Bush and is "brush clearing" preoccupation while president of the US. He and all the multi-millionaire rulers of America have created the problem by letting the middle class collapse in favour of their billionaire buddies.

Oil and Technology Opening the Door to Energy Self-Sufficiency for the US

Here is a bit from a press release by the American Chemical Society:

New technology that combines production of electricity with capture of carbon dioxide could make billions of barrels of oil shale — now regarded as off-limits because of the huge amounts of carbon dioxide released in its production — available as an energy source. That’s the topic of the latest episode in the American Chemical Society’s (ACS) award-winning “Global Challenges/Chemistry Solutions” podcast series.

Adam Brandt, Ph.D., notes in the podcast that almost 3 trillion barrels of oil are trapped in the world’s deposits of oil-shale, a dark-colored rock laden with petroleum-like material. Brandt and colleague Hiren Mulchandani are at Stanford University.

The United States has by far the world’s largest deposits in the Green River Formation, which covers parts of Colorado, Utah and Wyoming. The domestic oil shale resource could provide 1.2 trillion to 1.8 trillion barrels. But concerns over the large amounts of greenhouse gases — mainly carbon dioxide — released by current methods prevent many companies from trying to extract oil from shale.

Brandt’s answer is EPICC — a self-fueled method that generates electricity, as well as the heat needed to produce that electricity from shale. The report, which appears in ACS’ journal Energy & Fuels, describes how EPICC could generate large amounts of electricity without releasing into the atmosphere carbon dioxide from burning the shale. That carbon would be captured and stored underground as part of the production process.

The new podcast is available without charge at iTunes and from www.acs.org/globalchallenges.

The gloom & doom crowd is going to be seriously disappointed. It reminds me of those in the 15th century gnashing their teeth about the disappearance of old oak forest just as Britain was rising to be the world's sea power. Or those doom & gloomsters who have been rushing about for the last 50 years warning about "peak oil". It is always very popular to linearly extrapolate from the past and discover doom awaits us. But their requires a steadfast ignorance about human ingenuity and technological change. The doom & gloom crowd always ignore "the ultimate resource" as they weave their tales of resource shortages and the doom that awaits us.

What the Republicans Have Wrought

It is amazing how effective the right wing politicians in the US have been in wrecking their own economy. They are doing this to plump up their chances of election because they reason that making things bad will cause the public to turn on the party that talk about sharing wealth and building up the economy. With enough despair they expect the public to turn to the party that talks about keeping your wealth and giving more to those very rich "job creators" in the hopes that you can bribe them into creating more jobs.

Here are some bits from an article by Robert Shiller in The Project Syndicate:

It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic.

We now have a daily index for the US, the Gallup Economic Confidence Index, so we can pinpoint changes in confidence over time. The Gallup Index dropped sharply between the first week of July and the first week of August – the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting on August 2. The story played out in the news media every day. August 2 came and went, with no default, but, three days later, a Friday, Standard & Poor’s lowered its rating on long-term US debt from AAA to AA+. The following Monday, the S&P 500 dropped almost 7%.

Apparently, the specter of government deadlock causing a humiliating default suddenly made the US resemble the European countries that really are teetering on the brink. Europe’s story became America’s story.

Changes in public confidence are built upon such narratives, because the human mind is very receptive to them, particularly human-interest stories. The story of a possible US default is resonant in precisely this way, implicating as it does America’s sense of pride, fragile world dominance, and political upheavals.

...

The timing and substance of these consumer-survey results suggest that our fundamental outlook about the economy, at the level of the average person, is closely bound up with stories of excessive borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. That kind of loss of confidence may well last for years.

That said, the economic outlook can never be fully analyzed with conventional statistical models, for it may hinge on something that such models do not include: our finding some way to replace one narrative – currently a tale of out-of-control debt – with a more inspiring story.

Not since the Germans elected the Nazi party because of their promise to revive the economy and remove the stain of losing WWI has a political party so cynically lied to an electorate to gain power. The Nazis willing wrecked the German state in their mad bid to become rulers of the world. The Republicans are willing to wreck their own economy in order to toss out the Democrats and "rule" over America. I would have thought the disaster of Hoover in the early 1930s or the more recent disaster of George Bush in the early 2000s would have disqualified the Republicans from ruling anything more than a cesspit.

America in Now Truly Orwell's Oceania

Obama has just signed an extension of the 9/11 "national emergency" for its 11th year. America is truly into the perpetual state of war that George Orwell foresaw as the organizing principle of the state:

Because the terrorist threat continues, the national emergency declared on September 14, 2001, and the powers and authorities adopted to deal with that emergency must continue in effect beyond September 14, 2011. Therefore, I am continuing in effect for an additional year the national emergency that was declared on September 14, 2001, with respect to the terrorist threat.

This is plain nutty. The US has now "fought" a war nearly three times as long as WWII against a ragtag enemy of a few hundred fanatics. This isn't a war. It is a police issue. The US has turned it into "nation building" and occupation of countries. The US has the look and feel of Orwell's 1984 where Oceania was constantly at war with Eurasia. Why? To maintain the grip of the state. There was no real war. It was ideological and it was the cover for a police state.

Earth to Obama: there will always be some kind of terrorism somewhere on earth. You can't "defeat" terrorism. You can only destroy specific groups and contain them or eliminate them. But that doesn't have to be presented as a "war". When the US went after Al Capone or Bonnie & Clyde or the Mafia, they didn't declare war. They beefed up police forces and went after them.

Trouble Right Here in River City

The Music Man sang about trouble in middle America. But there is now big trouble all across America in its higher educational institutions. Here is a bit from a post by Frederick Sheehan in Barry Ritholtz's The Big Picture blog:

The Atlantic magazine has illustrated the unsustainable growth of student debt in the chart below. In David Indiviglio’s August, 18, 2011, article, “Student Loans Have Grown 511% Since 1999,” the author notes: “Obviously the number of students didn’t grow by 511%. So why are education loans growing so rapidly? One reason could be availability. The government’s backing lets credit to students flow very freely…. [U]niversities are raising tuition aggressively since students are willing to pay more through those loans.”

Click to Enlarge
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The number of colleges will plummet. This is due to the loss of nerve, confidence, substance, direction, integrity – will that do? – of teaching in America. Just look at that chart: what a picture of insatiable greediness and self-indulgence among the colleges. No thought to the unbearable debt deposited on their students.

... In another Atlantic article, “The Debt Crisis at American Colleges,” authors Andrew Hacker and Claudia Dreifus write: “[C]olleges have embraced a host of extraneous activities – from obscure sports to overseas centers – and tacked most or all of their tabs onto students’ bills. Unlike businesses, which cut losing operations, colleges simply hike their tuitions.” Will former Harvard Professor Elizabeth Warren’s ill-defined federal agency, watchdog over slatternly marketing hoaxes by financial institutions, apply the same standards to deceptive, college sales practices?

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Gloom, Boom & Doom Report, Marc Faber quoted a study from the Goldwater Institute that found between “1993 and 2007, the number of full-time administrators per 100 students at America’s leading universities grew by 39 percent, while the number of employees engaged in teaching, research, or service only grew by 18 percent.”

With unemployment sky high entry into the job market for new graduates is especially hard. So the diploma that was bought with all those big bucks is actually worth less today than it was 5 years ago. Prices up, but value down. That is a recipe for a product that is going to implode.

A Worrisome Fact about the Financial State of US Companies

Brett Arends is a financial journalist with good credentials. He is raising a hue and cry against the common belief that US companies are is sound financial shape. This comes as a surprise to me but Arends is a credible source.

Here are some bits from an article in Yahoo! News:

American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

Does that sound a little odd to you?

A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.

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Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data "underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers, who's also the author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers," and chairman of Smithers & Co. in London.

"While this is generally recognized for households," he said, "it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials' corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."

...

But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.

Journalists, for example, seek safety in numbers; there's a herd mentality. Once a line starts to get repeated, others just assume it's correct and join in.

Wall Street? It's a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?

You can also blame our partisan age too. Right now, people on the right have a vested interest in claiming businesses are in healthy shape. That makes the saintly private sector look good, and demonizes President Barack Obama and Big Government for scaring away investment. Vote Republican! Meanwhile, people on the left have an interest in making businesses sound really healthy too: If greedy companies are hoarding cash instead of hiring people, they can cry "Shame on them! Vote Democratic!"

As ever, the truth is someone else's problem and no one's responsibility.

I sure hope the above article is wrong, but I fear Brett Arends is the one journalist out shaking the bushes for the real story while the rest of the media is standing around repeating the "good news" stories put out by press releases and political spin doctors.

Simon Johnson & James Kwak's "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown"

This is an excellent readable review of the Wall Street bank panic of 2008. It carefully reviews what led up to it and provides a summary overview and explanation of the meltdown without getting bogged down in personalities and specific banks. It then reviews the sad lack of performance of Obama in seizing this opportunity to re-regulate the banks like FDR did. They explain why the reform impulse died, smothered under the ideology of deregulation, bank lobbying, and the fact that Obama relied on the same cast of characters who created the financial meltdown to manage his regulation "reform". This book will make you fully conversant with the disaster and the sad fact that we are set up for a future meltdown.

Here is a sample of the writing style and level of detail:

In the October 13 meeting at Treasury that opened this chapter, $125 billion of TARP money was committed to nine major banks. In addition to investments in smaller banks, another $40 billion was invested in Citigroup and Bank of America, two of the original nine banks, in later rescue operations; more TARP money was used to finance Federal Reserve guarantees of toxic assets held by those two banks; and $70 billion was invested in AIG to allow it to pay down its credit line from the Fed. In addition, the FDIC promised to insure up to $1.5 trillion of new bank debt, and the Federal Reserve committed trillions of dollars to an ever-expanding list of liquidity programs intended to provide cheap money to the financial system: the Term Auction Facility, the Term Asset-Backed Securities Loan Facility, the Money Market Investor Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and so on.

Never before has so much taxpayer money been dedicated to save an industry from the consequences of its own mistakes. In the ultimate irony, it went to an industry that had insisted for decades that it had no use for the government and would be better off regulating itself -- and it was overseen by group of policymakers who agreed that government should play little role in the financial sector.

...

Over the course of the financial crisis, the principal economic policymakers -- first Paulson, Bernanke, and Geithner, then Geithner (as treasury secretary), Bernanke, and Summers (as director of the National Economic Council) -- devised an impressive range of schemes to shore up the banking system. Their hard work and creativity cannot be doubted. But the common feature of these schemes was that they attempted to fill the gaping hole in bank balance sheets with government subsidies, more or less crudely obscured.

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The total cost of all those blank checks is virtually incalculable, spread across the more or less direct subsidy programs (preferred stock purchases, asset guarantees, and so on) and the emergency liquidity and insurance programs to unfreeze the markets for commercial paper, asset-backed securities, or bank debt. It is incalculable because the different types of support -- lending commitments, asset guarantees, preferred stock purchases, and such -- cannot simply be added up. At the upper end of the relevant ballpark, the special inspector general for TARP estimated a total potential support package of $23.7 trillion, or over 150 percent of the U.S. GDP. This represents the theoretical potential liabilities of the government; the net cost will be far lower, since not all lending commitments will be used up, most loans will be paid back, most preferred shares will be bought back, most of the assets the government has guaranteed will not become worthless, and so on.

The book tells an incredible tale. If you had told me in 2007 or even in August 2008 that this catastrophe would happen, I would not have believed you.

For me, the most troubling aspect of this whole mess is the fact that Obama has not used this catastrophe to re-regulate the big banks. Instead he has papered things over with incredible sums of taxpayer money and allowed the "to big to fail" banks to get even bigger. The worries of Johnson and Kwak about the "next financial meltdown" have me truly worried. This book is very unsettling.

Update 2011aug29: Here is an interview of Johnson and Kwak by PBS's Bill Moyers.

BILL MOYERS: Let me get to the blunt conclusion you reach in your book. You say that two years after the devastating financial crisis of '08 our country is still at the mercy of an oligarchy that is bigger, more profitable, and more resistant to regulation than ever. Correct?

SIMON JOHNSON: Absolutely correct, Bill. The big banks became stronger as a result of the bailout. That may seem extraordinary, but it's really true. They're turning that increased economic clout into more political power. And they're using that political power to go out and take the same sort of risks that got us into disaster in September 2008.

BILL MOYERS: And your definition of oligarchy is?

SIMON JOHNSON: Oligarchy is just- it's a very simple, straightforward idea from Aristotle. It's political power based on economic power. And it's the rise of the banks in economic terms, which we document at length, that it'd turn into political power. And they then feed that back into more deregulation, more opportunities to go out and take reckless risks and-- and capture huge amounts of money.

BILL MOYERS: And you say that these this oligarchy consists of six megabanks. What are the six banks?

JAMES KWAK: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.

BILL MOYERS: And you write that they control 60 percent of our gross national product?

JAMES KWAK: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.

BILL MOYERS: And what's the threat from an oligarchy of this size and scale?

SIMON JOHNSON: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.

BILL MOYERS: So, you're not kidding when you say it's an oligarchy?

JAMES KWAK: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.

SIMON JOHNSON: I know people react a little negatively when you use this term for the United States. But it means political power derived from economic power. That's what we're looking at here. It's disproportionate, it's unfair, it is very unproductive, by the way. Undermines business in this society. And it's an oligarchy like we see in other countries.

BILL MOYERS: And you say they continue to hold the global economy hostage?

JAMES KWAK: Exactly. Because what's happened- what we learned in 2008 were certain institutions are so big and so interconnected that if they were to fail, they would cause systemic shocks throughout the economy. That's essentially what happened in September 2008 when Lehman Brothers collapsed. And what's remarkable, and I think what essentially proves the point of our book is that almost two years later, nothing has changed.

Or the only thing that has changed is that these banks have gotten larger, more powerful, both economically and politically. And they've been flexing their muscles in Washington for the last year and a half. So Neal Wolin, the Deputy Treasury Secretary gave a blistering speech to the U.S. Chamber of Commerce in which he said, look, the financial sector has been spending more than one million dollars per day lobbying against the reforms we need to fix the financial system. Now, Simon and I think those reforms that the Administration has proposed do not go far enough. But we think they're certainly better than nothing. What Wall Street wants is they want nothing. They want to stop this in its tracks and go back to where we were five years ago.

SIMON JOHNSON: It's amazing, Bill. But this is this is politics and this is money. And you know, there's a ground game, which is campaign contributions, which are surging in. I'm sure on both sides of the aisle. And there's also the ideological space. It's amazing. The Chamber of Commerce that claims to represent the broad cross section of American business is siding with six big banks, who favor policies that are directly contrary to the interests of most of the membership of the Chamber of Commerce. And that's just not just me saying that. That's Neal Wolin. That's Treasury. That's the White House saying that now. Calling fortunately, they've come to the point where they're willing to call the Chamber of Commerce on that. But I don't know if that message is getting through to people.

JAMES KWAK: You see what the bankers have done is they have taken a basic principle which is more or less true. Which is that free financial markets do enable money to go to the places where people need it. But on top of that, they've erected a system that is indescribably complex. And gives many opportunities to make money at the expense of their customers, at the expense of their counterparties. Even at the expense of their own employers. So, one of the things that has happened has been that Wall Street finance has become so complex and the internal systems of Wall Street banks has become so complex that if you are a smart banker, who is out to maximize your own income, you can find the loopholes in the system and you can exploit them, even if it means taking money from your own-- from your own company

And this:

BILL MOYERS: You mean the collapse of 2008? All of this? What- was-

JAMES KWAK: Exactly.

BILL MOYERS: An accident?

JAMES KWAK: Yes, an accident in the sense that-

BILL MOYERS: Natural disaster?

JAMES KWAK: As we heard Chuck Prince say and Robert Rubin say, we couldn't see it coming. These were, there were risks that build up in the system, and our models didn't account for it. We're sorry that it happened. Not even, we're sorry that we did it. We're sorry that it happened.

And I think that this is, I mean, it's unfortunate if they really believe this. Because again, if we just take a very small example, one of the things that clearly went wrong is these banks were not able to manage their own risk. They did not know what positions they had. They did not know what market forces they were exposed to. You would think that should be the first job of a bank. And I don't think this was an innocent mistake. And I say that for this reason. It was in the bank's short term financial interest to underestimate their risk. Because if they had estimated their risk accurately, they should have had to set more capital aside, they would have been less profitable.

So, yes, it's possible that the CEOs of these banks honestly did not understand their risk positions. But that mistake-- there was an incentive behind that mistake. You know, banks never overestimate their risk. These mistakes always only go in one direction. Because that's the direction they have an incentive to make the mistake in.

BILL MOYERS: What do you mean they have an incentive to make a mistake?

JAMES KWAK: So, in the short term, a bank's profitability is going to depend on how much capital it has to set aside. So, in banking, if I have a certain position, I have to set aside a certain amount of capital to protect myself from that position going bad. If I think the position is less risky than it actually is, I'm going to set aside less capital to cover that position, and that's going to give me a higher profit margin.

If I'm the head of this bank, that means that in the short term, I'm going to have higher profits, higher stock price, more money for me, but I'm underestimating the risk of something blowing up several years down the line. But we know that the, essentially, the incentive systems within these banks favor short term profits over long term solvency.

SIMON JOHNSON: The most profound thing, observation, on this structure, inadvertent, I would say, observation, was by Chuck Prince, the former head of Citigroup. In July 2007, right before the whole structure began to crumble. He said, "As long as the music is playing, you've got to get up and dance." And that's a statement about the incentive structure. Saying, well, everybody's doing it. That's how we all make money. We've got to do it, too. I'm just a bank doing what all the other banks are doing. That's absolutely the heart of the problem. I would also say and tell you, and emphasize, these people will not come out and debate with us. The heads of these companies or their representatives, they will not come out. They're afraid. They don't have the substance. They don't have the arguments. We have the evidence. They have the lobbyists. And that's all they have.

BILL MOYERS: They've got the power, the muscle, the money.

SIMON JOHNSON: They have money.

BILL MOYERS: You just have the arguments. You just have the facts. On your side.

SIMON JOHNSON: Absolutely. That's exactly what it comes down to.

Visions of the Future

Here is one perspective on where the political right in the US is heading. This is from a post on the Washington's Blog:

"Shrinking government" in American political discourse has, for decades now, meant the following. We enlarge the government's budget through taxation and penalties on working people and through borrowing and printing money. We not only tax the wealthy and corporations less, but we massively subsidize them with public funds. We move away from taxes and fees meant to limit the damage greed can do to the world, and we defund regulation of and law enforcement against the oligarchy. We transfer an ever greater share of the budget to the military. We expand the domestic and international surveillance-police states while merging the two. This, again, we call "shrinking government."

"Shrinking government" means a larger and more oppressive but less representative and less useful government. The military gets the money and gets privatized (employs non-competitive corporations working exclusively for the government). Education and public services get slashed and get privatized. Vote counting gets privatized. The privatized money gets to flow into election campaigns. The districts are re-gerrymandered with the latest modern technology. The media conglomerates get a monopoly and the monopoly limits electoral possibilities. "Shrinking government" means shrinking popular influence on government while government grows. But it grows in its ability to wage wars, occupy territories, and subsidize coal, oil, nuclear, and gas. It shrinks in its ability to give people anything in return for their taxes and fees. If this process continues it must result in ever greater repression or in revolt.

... a good portion of this movement wants to shrink everything except the military-police state, which is the most difficult thing to shrink. And the Republican politicians who co-opt this movement want to enlarge the military and police.

That's an awfully dyspeptic dystopia, but from my perspective it seems pretty accurate in triangulating where the US is headed.

Debt Growing in Canada

The US during the first ten years of this century were the wastrels and debt hogs, but Canadians have quickly decided to step into American shoes.

From a Bank of Montreal economic research report, Focus, here is the current situation:

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This is not a good situation. The Bank of Canada needs to be stepping on the break to slow consumer debt growth. If and when interest rates rise, a lot of people may suddenly discover they can't carry the debt load they've acquired. This level of debt isn't prudent.

Government policy should be focused on educating Canadians that debt burdens can blow up in your face and use the Americans as the example of what bad things can happen if Canada continues down this path.

Here is the BMO economic & banking policy forecast:

On the economic front, we expect that a return to 2½%-plus (above-potential) sequential GDP growth next year and the prospective closing of the output gap before the end of 2012 should shift the Bank back into tightening gear around the middle of next year—despite persistent headwinds (e.g., a lofty loonie, global fiscal consolidation)—when U.S.
economic performance no longer acts as a domestic policy constraint (we expect U.S. growth will top 3% in 2012 H2).

Asking the Hard Question: Is This Another Great Depression?

Here are some key bits from a post by Simon Johnson on the Economix blog at the NY Times:

With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?

The easy answer is “no” — the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction.

The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007.

First, output dropped sharply after 1929, by over 25 percent in real terms in the United States ... In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked. ...

Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent ...

Third, in the 1930s the credit system shrank sharply. In large part this is because banks failed in an uncontrolled manner — largely in panics that led retail depositors to take out their funds. The creation of the Federal Deposit Insurance Corporation put an end to that kind of run and, despite everything, the agency has continued to play a calming role. ...

...

In the 19th century the agricultural sector, particularly in the West, favored higher prices and effectively looser monetary policy. This was the background for William Jennings Bryan’s famous “Cross of Gold” speech in 1896; the “gold” to which he referred was the gold standard, the bastion of hard money — and tendency toward deflation — favored by the East Coast financial establishment.

Populism in the 19th century was, broadly speaking, from the left. But now the rising populists are from the right of the political spectrum, and they seem intent on intimidating monetary policy makers into inaction. We see this push both on the campaign trail and on Capitol Hill — for example, in interactions between the House Financial Services Committee, where Representative Ron Paul of Texas is chairman of the monetary policy subcommittee, and the Federal Reserve.

...

But to accuse Mr. Bernanke of treason for worrying about deflation is worse than dangerous politics. It risks returning us to the long slump of the late 1870s.

The US has a serious economic AND political problem. The criminals has infiltrated the financial industry and destroyed trillions in assets and the fanatics have infiltrated the political heart, Washington, and have cause problem-solving to freeze up and pragmatism to be treated as a crime. I see dire days ahead for America.

Robert Reich Paints a Picture of the Political Crisis

Here is a bit from a post by Robert Reich on his blog. This pretty well captures the insanity of the political squabble, a fiddling while Rome burns, that the Republicans has pushed onto America:

Imagine your house is burning. You call the fire department but your call isn’t answered because every fire fighter in town is debating whether there will be enough water to fight fires over the next ten years, even though water is plentiful right now. (Yes, there’s a long-term problem.) One faction won’t even allow the fire trucks out of the garage unless everyone agrees to cut water use. An agency that rates fire departments has just issued a downgrade, causing everyone to hoard water.

While all this squabbling continues, your house burns to the ground and the fire has now spread to your neighbors’ homes. But because everyone is preoccupied with the wrong question (the long-term water supply) and the wrong solution (saving water now), there’s no response. In the end, the town comes up with a plan for the water supply over the next decade, but it’s irrelevant because the whole town has been turned to ashes.

Okay, I exaggerate a bit, but you get the point. The American economy is on the verge of another recession. Most Americans haven’t even emerged from the last one. Consumers (70 percent of the economy) won’t or can’t spend because their major asset is worth a third less than it was five years ago, they can’t borrow as before, and they’re justifiably worried about their jobs and wages. And without customers, businesses won’t expand and hire. So we’re trapped in a vicious cycle that’s getting worse.

But the government won’t come to the rescue by spending more and cutting most peoples’ taxes because it’s obsessed by a so-called “debt crisis” based on budget projections over the next ten years. That obsession – which serves the ideological purposes of right-wing Republicans who really want to shrink government — has even spread to the eat-your-spinach media, deficit hawks in the Democratic Party, and a major (and thoroughly irresponsible) credit-rating agency that’s neither standard nor poor.

The Republicans remind me of another political faction, the America First group, who in 1940 looked at war in Europe and decided to firmly plant their head in the sand and pretend if they didn't see it, it wouldn't come and get them. But it did. War came when Japan bombed Pearl Harbor in 1941. Republicans today have decided to plant their heads in the sand and ignore high unemployment, the large number of home foreclosures, and the failed "recovery" from the 2008 crash. They hope that if they don't peek, the economy will revive. But it won't. No more that the America First true believers who carefully refused to peek failed to stop war coming to the US.

Failure of Leadership

From The Economist magazine:

Leaders in America and Europe are dallying with failure on an epic scale. They are constrained by dysfunctional institutions, it's true. In Europe, the architecture of the currency union is far too underdeveloped to weather a crisis of the current magnitude. In America, the creaking machinery of the legislature is ill suited to settlement of big questions on a short time frame amid divided government. But it's no longer sufficient to blame inadequate policy responses on institutions alone. America and Europe are flailing because their leaders are failing. They seem to be too small for the tasks at hand, too petty, and too myopic.

The challenges facing Europe and America are big, but they're not mysterious. In Europe, the issues are sovereign debt, vulnerable banks, and a poorly designed currency area. It's not tricky to see what must be done. Peripheral debts should be addressed through austerity, sure. But unsustainable debt loads need to be written down. Banks should be recapitalised to prevent trouble in financial markets. Emergency funds should be bolstered to fight sovereign and banking contagion. And substantial fiscal integration must take place, including fiscal transfers to support peripheral economies while they get their budgets in order. The central bank should also stop fighting the phantom of accelerating inflation.

European leaders know what they need to do. They have been slow to do it for two reasons. First, the magnitude of the commitment necessary to save the union is uncertain, and they don't want to pay a penny more than is necessary. And second, the distribution of the costs of the commitment is uncertain, and no individual entity wants to pay a penny more than is necessary.

...

In America, the situation is more ridiculous still. The economy is vulnerable. New data continue to reveal just how weak growth was in the second quarter. The economy may scarcely have expanded at a 1% annual pace. Unsurprisingly, job growth was too slow to keep up with a growing labour force, and the unemployment rate began rising again.

...

Washington seems practically excited to stamp out optimism. Congress has spent the first month of the third quarter dangling the prospect of a full blown fiscal crisis over the heads of American firms and households. Markets are retreating, and businesses are building up cash reserves as insurance against the worst. After two years of pitifully slow recovery, while tens of millions of workers are un- or underemployed and wages flat, the government is doing its absolute best to kill the latest growth rebound in its crib. It is shocking.

Again, it's not like the correct policy path is incredibly complicated. Here, I'll sum it up in three quick steps:

1. Don't cause a major crisis.


2. Do spend more and tax less for the next year or so.


3. Do spend less and tax more after that.

See? That's really easy! If you wanted to move up to more complicated ideas, you could talk about using the opportunity of record low borrowing costs to make needed, long-overdue investments in critical American infrastructure. Instead, Congress seems determined to convince the world that America shouldn't be allowed to borrow at all, except at highly punitive rates. It might also be a good idea to confirm appointees to the Federal Reserve board who know a thing or two about how labour markets work. Instead, Congress is blocking nominees for sport, citing debasement of the currency while 10-year inflation expectations are under 2%. And while the very same legislators muse publicly about how an American debt default might not be so bad after all.

It's inexcusable. And it is a direct result of a leadership in Washington that is too small-minded to see the danger it's courting by recklessly pursuing a foolish ideological agenda.

...

One wants to shout at them: stop screwing around! Lives and livelihoods are on the line! Nothing good will come of a return to recession, to saying nothing of a new financial meltdown. And yet, the trifling continues. Sometimes history gives us individuals equal to troubling circumstances. Sometimes it doesn't, and the world suffers. Maybe everything will turn out all right. Shame on the leaders of Europe and America for working so diligently to ensure that it doesn't.

In an interconnected world simultaneous failures are really disasterous. The world is looking very shaky because Japan is still faltering, and China appears to be ready to explode with a credit bubble. We appear to be heading back into a mini-2008 meltdown.

You can thank the idiots in the Republican party and the paralyzed and inadequate "leadership" of Obama for this crash.

Why Humans are Suckers for Doomsday Beliefs

Here's a bit from an essay by Michael Shermer in the New Scientist magazine:

Emotionally, the end of the world is actually a renewal, a transition to a new beginning and a better life to come. In religious narratives, God smites sinners and resurrects the virtuous. For secularists, the sins of humanity are atoned through a change in our political, economic or ideological system. Environmental prognostications of calamity are usually followed with reproaches and recommendations for how we can save the planet. Marxists projected communism as the liberating climax of a multistage process that requires the collapse of capitalism. Proponents of liberal democracy proclaimed the end of history when the cold war was won by democracy and liberty.

Most recently, the US Tea Party's messiah is John Galt, one of the heroes of Ayn Rand's apocalyptic novel Atlas Shrugged (recently adapted into a movie) who leads a strike by the men of the mind, forcing civilisation to collapse into anarchy - only for the heroes to resurrect an "Atlantis" on Earth. As Galt and co-hero Dagny Taggart fly over the shattered ruins of a once-great civilisation now darkened into a charred landscape, Taggart proclaims, "It's the end." No, Galt rejoins, "It's the beginning."

Cognitively, there are several processes at work, starting with the fact that our brains are pattern-seeking belief engines. Consider this evolutionary thought experiment. You are a hominid on the plains of Africa 3 million years ago. You hear a rustle in the grass. Is it just the wind or is it a dangerous predator? If you assume it is a predator but it turns out that it is just the wind, you have made what is called a type I error in cognition, also known as a false positive, or believing something is real when it is not. You connected A, the rustle in the grass, to B, a dangerous predator, but no harm. On the other hand, if you assume that the rustle in the grass is just the wind but it turns out that it is a dangerous predator, you have made a type II error in cognition, also known as a false negative, or believing something is not real when it is. You failed to connect A to B, and in this case you're lunch.

The problem is that assessing the difference between a type I and type II error is highly problematic in the split second that often determined the difference between life and death in our ancestral environments, so the default position is to assume that all patterns are real; in other words, assume that all rustles in the grass are predators. Thus, there was a natural selection for the cognitive process of assuming that all patterns are real.

Apocalypse thinking is a form of pattern-seeking based on our cognitive percepts of time passing.

Go read the whole article.

Here's Shermer's bottom line:

Apocalyptic visions also help us make sense of an often seemingly senseless world. In the face of confusion and annihilation we need restitution and reassurance. We want to feel that no matter how chaotic, oppressive or evil the world is, all will be made right in the end. The apocalypse as history's end is made acceptable with the belief that there will be a new beginning.

I think he has got it right. I never cease to be amazed by easily people are suckered into thinking that some trend heralds "the end", a big crash, doom, annihilation, etc. I guess I'm an oddball. My approach to life is a muddling middle of the road approach. I think the truth is generally in the grey between stark black or white views of things. I expect tomorrow will most likely be like today. I look at the long stretch of history and see that peoples have been some horrendous history, so I'm expecting we will survive the latest calamity. This makes me boring. But it means I'm not subject to joining cults or suddenly selling everything and running for the hills with the latest survivalist fad.

I even remember the late 1960s "back to the earth" movement and thought it ridiculous because two generations in my past were farmers and I knew how hard it was to scratch a living "off the land". But a fair number of hippies decided that the world wasn't going to blossom into the expected "Age of Aquarius" so they packed up and moved into communes for a few years, starving, wretched, until they had enough and snuck back to the towns and cities.

I watch religion being package and sold by a preacher in my family. He was good. He could have been a Hollywood actor, great drama in his voice, ability to let the tears flow. Women loved him. Men admired him. He was a bit of a star and was used by the church to go into areas to build up congregations. But I watched and saw how religion was a "business". I caught on that there are a lot of people who love hell fire and damnation preaching. They loved that "anger of the Lord" stuff. They loved the "end of days" preaching. While I watched that I learned to become cynical.

I think you are better off assuming that tomorrow will be a lot like today with some veering toward better or worse. But don't get sold into doomsday scenarios:

• Zero population growth and "the population bomb" in the 60s telling us we were doomed and there would be mass starvation.


• Modern Malthusians like Paul Ehrlich were selling droughts and the inability to grow more food and predicting great famines by the 1980s.


• The Club of Rome published "Limits to Growth" and showed impressive "models" that clearly predicted we would run out of resources and civilization would collapse before the end of the millennium.


• The rise of oil prices convinced many that oil was a disappearing resource and by the end of the millennium all cars would be banned and our technological fossil fuel based economy would collapse.


• The 1980s were famous for predictions of a nuclear winter because of nuclear weapons. That had a positive benefit in getting arms reduction talks going, but later studies showed that the "winter" was oversold by Carl Sagan because the "models" were wonky.


• The 1970s and 1980s ran hot with fears of emergent diseases. That has caused a number of panics including the "swine flu", SARS, the bird flu, ebola, and other emergent hemorrhagic fevers.


• The year 2000 was notable because the Y2K bug was supposed to cause all computers to fail and civilization to collapse. This was very popular with survivalists.


• With the rise of right wing politics and tragic events like the Waco attack by ATF as well as the Ruby Ridge attack by ATF, crazy "militias" were spawned all over the US convinced there was a left wing conspiracy to invoke UN-domination of the US.


• With Al Qaeda and the 2001 attack the right wing militias were again stirred up and a lot of people were convinced that there were "secret Muslims" in America that were running the government and trying to bring Sharia law to America

That's just an "off the top of my head" list of doomsday craziness. It doesn't even consider the religious doomsday cults like Jim Jones' Peoples Temple, the Heaven's Gate cult, and the recent Harold Camping prediction of "end times".

Comparing Greece and the US Subprime Crisis

The two disasters are similar in that the elites are blaming the victims and forcing the general public to pay the cost of sleazy and/or criminal activities by elites.

Here's Barry Ritholtz's take in his The Big Picture blog:

I’ve noticed something intriguing about the debate regarding the Greek default/restructuring/bailout: There is a familiar odor to the “Blame the profligate Greeks” meme now circulating. It is little more than a brilliant marketing ploy. This distraction ignores the simple reality that lending to insolvent people, institutions and countries is first and foremost the fault of the lenders.

Let us start first with the Greeks, who lied their way into the EU (with the help Goldman Sach’s financial engineers). The ridiculous pay and vacation structure, the absurdly generous pension plan, the excessive spending by Athens. They are a nation that can honestly be described as tax scofflaws. Yes, Greece is a mess.

Which begs the question: WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE?

None of these factors were well-hidden. Everything about Greece is well known to any casual visitor, from its Welfare state to its deficits. Even the shenanigans Greece went through to join the Union European were not unknown. Rather than confront their obvious lack of qualifications, the EU turned a blind eye to it, in order to form their more perfect union.

Which brings us back to the lenders. What is their role, if not to exercise expert judgment? If they cannot independently determine who is credit worthy and who is not, than why do they even exist at all? We might as well leave piles of money around and ask borrowers to self-regulate their appropriate credit limits.

Back to that “familiar odor.” There was a meme attempted during the US housing collapse to place the blame upon the home buyers and borrowers who exercised poor judgment and got in over their heads. It manifested itself in numerous ways. It was an intellectual failure, for the simple reason that it is the lenders job to assign credit, to determine who has the ability to service the debt and who is a bad risk. Indeed, lenders have legal and fiduciary duties to their shareholders, capital sources and regulators. Eejit home buyers who went wild during the era of free money have no such obligations.

Michael White, formerly of CountryWide’s Subprime Unit, had complained bitterly about the increased probability of defaults to his bosses when they decided to drop income verification in mortgage lending. “Eliminate the verification of income for a mortgage borrower, and you eliminate your ability to predict the likelihood of repayment or default” he told them, and was roundly ignored.

We need to better understand the term “Loan Origination Fraud,” when lenders willingly make bad loans, consequences be damned.

As we noted yesterday, bailouts go to the incompetent bankers. Whether bankers are foolishly giving credit to home buyers (and ignoring their lack of incomes), or making loans to Greece (and ignoring their broken financial structures), it is the LENDERS who are making these awful decisions. The LENDERS should be forced to suffer the consequences of their own incompetence and not the taxpayers.

And that means defaults, rather than bailouts . . .

The political system is broken. The politicians are acting as enablers for this con job and crime. They are facilitating by passing legislation to make "the little people" pay for the crimes of the ultra-rich as they do financial rape and pillage in broad daylight.

Going Green and the Hand Wringing Apologists

There is a lot of brow-beating of people in the developed world about their "guilt". Guilt for a "colonial" past. Guilt about outrageously self-indulgent lifestyles. Guilt about greedily seizing resources and living the underdeveloped world desperate and without.

Well... I was never a colonialist. I don't live an indulgent lifestyle. And I've never hogged resources. Sure, colonialism was rampant 300 years ago. But if you go back 2000 years you find Romans, Chinese, Persians, Indians, etc. as the great colonialists. Why don't be beat Iranians, Chinese, Indians, etc. about the ears for having "empires". My ancestors were running around half naked in the northern fringe woodlands 2000 years ago.

As for using an "unfair" share of resources:

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The above graph is from a post on energy by Ed Yardini in his blog Dr. Ed's Blog.

As the graph makes clear, the rising standard of living in China and India (and more generally in southeast Asia) means that resource consumption there has rapidly surpassed the "developed" world. Sure, the per-capita resource use is still low, but the graph shows the trend. In 30-50 years the overwhelming about of resource consumption will be with the billion+ populations of China and India.

Oil consumption is falling in the "developed" world while it is strongly rising in the "undeveloped" world. But all the anti-technology, "green", guilt-ridden propaganda used to make people in the developed world feel guilty is out-dated. It doesn't reflect the world we now live in. But it always takes time for people to throw off out-dated mental shackles.

A Krugman Book Review

Here are the opening paragraphs of Paul Krugman's review of the book Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick:

Suppose we describe the following situation: major US financial institutions have badly overreached. They created and sold new financial instruments without understanding the risk. They poured money into dubious loans in pursuit of short-term profits, dismissing clear warnings that the borrowers might not be able to repay those loans. When things went bad, they turned to the government for help, relying on emergency aid and federal guarantees—thereby putting large amounts of taxpayer money at risk—in order to get by. And then, once the crisis was past, they went right back to denouncing big government, and resumed the very practices that created the crisis.

What year are we talking about?

We could, of course, be talking about 2008–2009, when Citigroup, Bank of America, and other institutions teetered on the brink of collapse, and were saved only by huge infusions of taxpayer cash. The bankers have repaid that support by declaring piously that it’s time to stop “banker-bashing,” and complaining that President Obama’s (very) occasional mentions of Wall Street’s role in the crisis are hurting their feelings.

But we could also be talking about 1991, when the consequences of vast, loan-financed overbuilding of commercial real estate in the 1980s came home to roost, helping to cause the collapse of the junk-bond market and putting many banks—Citibank, in particular—at risk. Only the fact that bank deposits were federally insured averted a major crisis. Or we could be talking about 1982–1983, when reckless lending to Latin America ended in a severe debt crisis that put major banks such as, well, Citibank at risk, and only huge official lending to Mexico, Brazil, and other debtors held an even deeper crisis at bay. Or we could be talking about the near crisis caused by the bankruptcy of Penn Central in 1970, which put its lead banker, First National City—later renamed Citibank—on the edge; only emergency lending from the Federal Reserve averted disaster.

You get the picture. The great financial crisis of 2008–2009, whose consequences still blight our economy, is sometimes portrayed as a “black swan” or a “100-year flood”—that is, as an extraordinary event that nobody could have predicted. But it was, in fact, just the most recent installment in a recurrent pattern of financial overreach, taxpayer bailout, and subsequent Wall Street ingratitude. And all indications are that the pattern is set to continue.

Jeff Madrick’s Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present is an attempt to chronicle the emergence and persistence of this pattern.

If you read this review you will learn some history, an understanding of how banking and regulation has changed, and get a better grasp of the role of politics in setting the US up for a series of financial bubbles and crashes.

I like this bit:

While we believe that there were deeper reasons for Reagan’s rise, Madrick is right that the economic malaise of the 1970s gave Reagan his big opening. As Madrick describes, Reagan’s enormous capacity for doublethink and convenient untruths enabled him, the front man for business interests, to convince a credulous public that “government had become the principal obstacle to their personal fulfillment.” In possibly the best chapter of the book, Madrick recounts the irony of how Reagan, the great moralizer, made unchecked greed and runaway individualism not only acceptable, but lauded, in the American psyche.

Madrick also does an especially persuasive job of demythologizing Milton Friedman, who provided intellectual heft for the antigovernment movement. As Madrick points out, although Friedman offered some important economic insights, he often shoehorned real-life data to fit into a one-sided narrative, gaining his theories wider acceptance than was ultimately justified. And Friedman, like Reagan, preferred “overly simple assertions of free market claims,” discarding the caveats.

In Friedman’s worldview, free markets were the solution to practically every problem—health care, product safety, bank regulation, financial speculation, and so on. And Friedman squarely blamed government for the Great Depression, a view that is at odds with the data.

At some point the public will turn on the philosophy of "greed is good" and "lifestyles of the rich and famous" and return to the values of hard work, careful husbanding of resources, and giving a generous helping hand to those caught in "hard times". But for 40 years the philosophy of "me first" and worshiping at the feet of great wealth has held reign. Its time is coming to an end.

That's my optimism. Krugman is more pessimistic:

Whatever the deeper story, however, Madrick’s subtitle gets it right: what we have experienced is, in a very real sense, the triumph of Wall Street and the decline of America. Despite what some academics (primarily in business schools) claimed, the vast sums of money channeled through Wall Street did not improve America’s productive capacity by “efficiently allocating capital to its best use.” Instead, it diminished the country’s productivity by directing capital on the basis of financial chicanery, outrageous compensation packages, and bubble-infected stock price valuations.

And what has happened in the aftermath of the 2008–2009 crisis is still worse: all the evidence suggests that the United States is on track to spending the better part of a decade experiencing high unemployment and sub-par growth blighting millions of lives—particularly the old, the young, and the economically vulnerable.

Yet even now we don’t seem to have learned the lesson that unregulated greed, especially in the financial sector, is destructive. True, most Democrats are now in favor of stronger financial regulation—although not as strongly as is required by the continuing manipulations by large financial institutions. But today’s Republicans remain firmly attached to greedism. In their view, it’s still government that’s the problem.

I hope Krugman is wrong. But he is almost always right. That is a depressing thought.

The Age of Greed is a fascinating and deeply disturbing tale of hypocrisy, corruption, and insatiable greed. But more than that, it’s a much-needed reminder of just how we got into the mess we’re in—a reminder that is greatly needed when we are still being told that greed is good.