Economic Bankstering Explained: Austerity and Deficit Hawks Say, “Let Them Eat Cake,” The People Will Say, “Off With Their Heads”

Now here's some economic (bankstering) dissection that you can lap up and rate easily. Funny how little of this there seems to be outside of Krugman, Reich, Baker and Warren, isn't it? (And for very good reasons.)

[Desperately seeking donations (even as little as $5.00, please) for gas for this blog's continuation!]

Who Are This ‘We’ Of Which You Speak, Tyler Cowen? Tyler Cowen has a tag line he’s been using for a while. Here’s the latest example:

Just to review briefly, I find the most plausible structural interpretations of the recent downturn to be based in the “we thought we were wealthier than we were” mechanism, leading to excess enthusiasm, excess leverage, and an eventual series of painful contractions, both AS and AD-driven, to correct the previous mistakes. I view this hypothesis as the intersection of Fischer Black, Hyman Minsky, and Michael Mandel.

In what sense is it true that “we thought we were wealthier than we were”? It is not obvious, for example, that we have encountered some unexpected scarcity in real factors that has forced us to downgrade our perception of our collective wealth. I don’t think that is what Cowen claims has happened, exactly. So what does he mean? We get some clues from his list of names. Fisher Black, as Cowen has interpreted him, suggests that since investors’ views over the short-term are not independent of one another, patterns of aggregate investment can be systematically mistaken for a while in ways that seem surprisingly obvious in retrospect. Hyman Minsky famously argued that the dynamics of financial capitalism encourage and even require ever more fragile and optimistic means of finance, leading inexorably to crisis. Michael Mandel claims that US productivity measures exaggerate domestic capabilities by failing to distinguish between domestic production efficiencies and gains due to outsourcing and production efficiencies elsewhere.

I’d like to add another name to the list, for Cowen’s consideration. Here’s John Kenneth Galbraith (grateful ht to commenter groucho, long ago):

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country’s businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always people who need more. Under the circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. The bezzle shrinks.

In any case, a common thread behind all of these stories is that our “overestimate” of wealth is not a random phenomenon. We did not just have a collective “oops!”. In Galbraith’s version, it is outright embezzlers who contrive to keep our accounts inflated. In Mandel’s, it is well-meaning but mistaken government economists (as well as those who unskeptically rely upon them). In Minsky, it is the interplay of competitive dynamics and financing arrangements. The Black/Cowen account is the least specific, but requires some common signal that causes investors’ judgments to be correlated, so their errors do not cancel.

What has been our actual, lived experience of the past decade or so? What were the common signals that rendered investors decisions to be both correlated and mistaken?

I don’t wish to denigrate Mandel’s work, which I consider useful and insightful. Certainly overestimates of domestic productivity contributed to a general sense of optimism, and as Mandel has argued, probably contributed to policy errors during the crisis as apparent high productivity helped policymakers to mistake a chronic economic crisis for a transient distortion in response to a financial shock. Robust apparent productivity growth might well have helped rationalize consumer and housing credit decisions that now seem questionable.

But I think we know something about the investors of the last decade. There was, as This American Life / Planet Money famously put it a “giant pool of money”, specifically sovereign and institutional money, that was seeking out ultra-safe, “Triple A” investment, and sometimes agitating for yield within that category. We really don’t need to look for subtle information cascades in order to explain investors’ “errors”. The investors in question weren’t, in fact, investors at all in an informational sense. To a first approximation, they paid no attention at all to the real projects in which they were investing. They were simply trying to put money in the bank, and competitively shopping for good rates on investments they could defend as broadly equivalent to a savings account.

But how did this “giant pool of money” come to be? The overestimate of wealth occurred prior to as well as during the investment process, a fact which can’t readily be explained by the Black/Cowen story. There was too much income to be invested, income which took the form not of speculative securities but of money, visible flows of central bank reserves and bank deposits. When ordinary investors make mistakes, however correlated, what we observe is a mere overpricing of questionable securities. Under current institutional arrangements, there is only one kind of investor who can convert investors’ mistakes into cash income growth (holding “velocity”, the reciprocal of peoples’ desire to hold income as cash or bank deposits, roughly constant). Only mistakes by banks can explain the increase of money income. (Note that the relevant income here, for the US, is not NGDP, but US dollar income worldwide, including e.g. income generated from exports by China and oil producers.)

It would be plausible to argue that banks were not at the vanguard of the error, that they were only caught up in a general zeitgeist of malinvestment, if other classes of investors were making the same misjudgment. That roughly describes what happened during the dot-com boom. But during second boom, other classes of investors were, to a first approximation, making no judgments at all. Institutional investors were simply buying the securities that banks were willing to treat as “money good” and reaching nihilistically for yield without a care in the world about how it might be generated.

Even the most careful and independent population of investors is likely to have its aggregate expectation disappointed if those investors’ incomes correspond to a lower quality of real resources than is suggested by the number of dollars that alight in their bank accounts.

And any rational investor will choose to forego direct participation in risky real projects if intermediaries offer sufficient yield on securities that banks are willing to monetize at will. The primary mistake of non-bank investors was to fail to foresee that banks would change their willingness to accept as “money good” securities that core institutions were designing for precisely that acceptance. The “overestimate” of wealth from which we are now suffering occurred first as an exaggeration of value within the core financial system and then as a willingness of institutional investors to take values given by core financial intermediaries as durably sound.

“We” did not decide we were wealthier than we are. Two groups of people whose economic role is precisely to evaluate the quality of our wealth misjudged, one directly by neglecting risk, the other indirectly by trusting the first when it should have known better. The broad public or taxpayers or the polity erred only and precisely by trusting these professionals.

Why were banks so easily persuaded that, via the magicks of tranching and diversification, lending into obviously questionable real projects was so safe that any downside risk could safely be socialized? The banking sector’s job is to convert a portfolio of real investment into money that is ultimately backed by the state, and its responsibility is to do so in a manner such that the likelihood realized values will in aggregate undershoot funds advanced is negligible, without recourse, directly or indirectly, to any heroic government stabilization.

“Mistake” is not a remotely sufficient characterization of what occurred. There were discernible incentives behind the banking sector’s misbehavior. Throughout the securitization chain, conservative valuation practices were entirely inconsistent with maximizing employee and shareholder wealth. And why did institutional money trust bank and rating agency valuations when money managers were not too stupid to understand that high yield and low risk make for a fishy combination? Again, the answer is not some kind of sunspot. Agents were well paid not to question “money center banks”, for whose misjudgments and misrepresentations they could never reasonably be blamed.

The broad public did err, by accepting an absurdly and dangerously arranged financial system. If we want to prevent a recurrence going forward, if (qua Black/Cowen) we want to enter a world where it would even be possible for investors’ judgments to be reasonably independent, we have to undo a financial system designed around the delegation of investment decisions from the broad public through several tiers of professionals to a semi-socialized “money center” core.

Yes, we also have to attend to the public sector’s role in generating “money good” securities not-necessarily-backed by reliable value. But that’s an implausible account of the lead-up to 2008, and we should be cognizant of the fact that, absent debt-ceiling own goals, public sector securities fail more gracefully than bank advances against private assets. (The costs of public sector over-issue would be experienced either as inflation or economic depression due to tight monetary policy required to avoid inflation even in the face of underemployment and not, at least initially, as a banking crisis.)

Despite all these errors, we have no reason to believe that, in real terms, we are unable to consume or produce today at levels suggested by the pre-2008 trendline. Yes, we’ve recently experienced price spikes that might suggest scarcity of some commodities. But we experienced large spikes prior to the crisis and kept on growing. Over the longer haul, we may be able to grow around emerging scarcities via technological ingenuity or we might have to redefine growth so that we value less resource-intensive consumption more highly in order to sustain the almighty trendline. But at this moment, we are not discouraged by a physical bottleneck, but by increased uncertainty about the future value of our resources, skills, organizations, and political arrangements. The only coherent way to understand Cowen’s tag line is that we currently believe the future to be less bright than we believed it to be in 2007, and this change in collective expectation has altered our behavior.

We are not, today, forced to produce or consume less than we expected to in 2007. We are choosing to do so, perhaps pathologically as a Keynesian output gap, perhaps wisely in order to conserve and regroup given diminished expectations going forward. (Even if you buy the latter story, conservation of human resources implies providing education or employment. No true Austrian would characterize involuntary idleness, misery, and decay as desirable no matter how badly we discover we have malinvested.)

If Cowen is right, it has caused us a great deal of misery that “we thought we were wealthier than we were”. We should attend very carefully to the details of how we came to think what we thought, of who told us we were wealthy when we weren’t. (Shades of Galbraith…) More importantly, if we cannot evaluate the quality of our wealth going forward, we are unlikely to make decisions conducive to sustaining and expanding that wealth. There is something in the tone of Cowen’s tagline that suggests an “oops!”, a shrug of the shoulders. Whether he intends that or not, it’s precisely the wrong response to the events of the last decade. “Our” misjudgments were not some random perturbation spiraled out of control. They were the result of a set of arrangements that systematically bribed gatekeepers to make and accept incautious estimates, and to circumvent control systems intended to keep valuations in check. As of this writing, those arrangements remain largely in place.

Comment:

Ted K writes:

It’s very important to note that Mercatus Center (closely affiliated with George Mason University) is a Koch Brothers operation. A “non-profit” think thank. Tyler Cowen is a “General Director” at Mercatus.

I wonder what Tyler Cowen’s “non-profit” salary is??? Kids, can you say “bought and paid for mouthpiece”????

August 2nd, 2011

And if you don't believe him, check the history of just two weeks ago:

Austerity and Deficit Hawks Say, “Let Them Eat Cake,” The People Will Say, “Off With Their Heads” July 21, 2011 Comments David DeGraw AmpedStatus Report The vultures are circling above the debt ceiling, along with the austerity and deficit hawks, ready to pounce on what little remains. Before I get into the tragic comedy that is the deficit debate, I must say that it is both fascinating and horrifying to watch the global financial elite incrementally destroy the United States. The American people remain passive while enduring a slow death by a thousand cuts. Each year brings another step down in living standards. The efficiency of the Neo-Feudal Technocratic-Fascists is impressive. They always seem to know just how much they can get away with without causing “civil unrest.” They bribe 45 million people with food stamps, 10 million with unemployment checks. They give you just enough ^[3] to keep you passive and weak, so they can continue their plunder.

They’re masters of slow economically-induced death. They’re like vampires, sucking our blood slowly, turning us into beaten down zombies. You wake up one day and realize that you are thousands of dollars in debt, working harder for much less money, while everything costs more. You’re struggling to get by and make ends meet. Your future prospects are increasingly dire and you don’t have the ability to retire without living in poverty. So you jump on prescription meds or turn to alcohol or other drugs to deal with all the stress and anxiety. You try to escape by watching increasingly trivial and absurd “reality” TV for hours daily, you need to get your soma and delude yourself some more. Next thing you know, you have failing health and can’t afford treatment. At this point, every penny of your Social Security and Medicare counts, but now, as billionaire Charlie Munger recently said, sorry, you’re going to have to “suck it in and cope ^[4].”

Yeah, he’s talking to you.

As if a collapsing economy, skyrocketing costs of living and reduced pay weren’t making life hard enough, now vital social programs are getting cut. Social Security and Medicare cuts are going to be very painful for millions of Americans who are already hanging by a thread. As are cuts to food and housing assistance programs. Paid off politicians are using deficit hysteria to implement an austerity program; an attack on social safety nets that would have been unthinkable just a few years ago. It is a shame that we squandered trillions of tax dollars on Wall Street, wars and tax breaks for multi-millionaires and billionaires.

No matter how technocratically skilled the ruling class is, at some point soon 250 million Americans are going to become aware that they have been completely screwed and thrown overboard. The naïve propagandized masses are headed for a nasty wake up call. They will finally come to the brutal realization of how depraved, greedy and power-addicted our ruling class truly is.

Wake up Dorothy, you’re not in Kansas anymore. The American Dream is O-V-E-R.

The Obama Illusion, Act II: Countdown to Collapse…

When it comes to the economy, the Obama Administration and their global banking benefactors have been kicking the can down the road by hiding trillions of dollars in losses, “extending and pretending” that things are fine. Recovery is just around the corner. Pay no attention to the man behind the curtain. The economic stimulus and quantitative easing programs were never serious attempts to revive the economy, they were a way of prolonging the charade and papering over reality, to buy more time while pumping even more money into the global banks so they could continue their pillage and set the conditions for the next phase of their assault on the existence of a middle class and democracy worldwide.

The Obama Administration injected a mild stimulus, just enough to keep the dying body from convulsing. They temporarily extended unemployment benefits, food stamp and other “anti-poverty” programs, just enough to keep a suffering population pacified a little bit longer. Just enough to keep our society from rioting, to keep the torches and pitchforks at bay a little while longer, so they can complete their plunder.

Given the way they have played it thus far, you would expect another half-ass stimulus to kick the can a little further down the road to get us closer to the 2012 election without all-out disaster, perhaps. But the vultures are now circling above the debt ceiling, along with the austerity and deficit hawks, ready to pounce on what little remains.

Austerity and Deficit Hawks Say, “Let Them Eat Cake”

Do you know why the deficit hawks want to cut and privatize your Social Security?

It’s because these people flat out stole the money ^[5] you spent your entire working life putting aside into the system. Excuse me for not being “civilized” enough, apologies, they didn’t “steal” it, they just “borrowed” it and are refusing to pay it back.

It astounds me how people constantly debate the fiscal condition of Social Security but they never seem to notice or mention that the Social Security Trust Fund has been looted. Guess what? Between Wall Street, wars and tax breaks for multi-millionaires and billionaires, the $2.5 trillion surplus ^[5] that was supposed to be used for your retirement has already been used. Forgive me for being blunt, but one-tenth of one percent of the population is giving you the finger and telling you to “suck it in and cope.”

The looting of the Social Security Trust Fund is about as funny as Wall Street executives crashing the economy and then using trillions of our tax dollars to give themselves all-time record-breaking bonuses.

Speaking of the joke being on us, the late great comedian George Carlin once prophetically warned:

“You know what they want? They want obedient workers… Obedient workers, people who are just smart enough to run the machines and do the paperwork. And just dumb enough to passively accept all these increasingly shittier jobs with the lower pay, the longer hours, the reduced benefits, the end of overtime and vanishing pension that disappears the minute you go to collect it. And now they’re coming for your Social Security money. They want your f#ckin’ retirement money. They want it back so they can give it to their criminal friends on Wall Street. And you know something? They’ll get it… they’ll get it all from you sooner or later cause they own this f#ckin’ place.

It’s a big club, and you ain’t in it.

You and I… are not in The big club.”

When you hear all these talking heads and politicians saying that they want to cut “entitlement” programs that we have already paid into, they are literally saying that they do not intend to payback money that they owe. While they cry about the national deficit that they created and demand austerity measures to cut back on vital social services, they have the audacity to demand debt increasing tax cuts for themselves and their corporations.

Tax breaks for the rich and budget cuts for the rest of us.

That’s what I call a recipe for revolution.

Austerity and deficit hawks say, “Let them eat cake.” The people will eventually say, “Off with their heads!”

One-tenth of one percent of the population is drunk with arrogance and blinded by shortsighted greed. Instead of providing affordable healthcare to hardworking Americans; instead of creating employment programs and improving our educational system; instead of building vital infrastructure, our tax dollars have ended up in the obscenely bloated pockets of the richest people to ever walk the face of this planet.

Deficit Hawks Vs. Keynesian Stimulus Supporters – They’re Both Wrong!

The debate between those who are calling for deficit cuts (austerity) and those who are calling for stimulus spending (debt) is yet another perfect example of how the mainstream media sets the agenda and controls public opinion by limiting the range of acceptable debate and reducing the “spectrum of thinkable thought.” This is a bullshit debate that exposes the sham that is the Democrat Vs. Republican dynamic. Both of these choices will not fix our economic crisis and will only reinforce the status quo dominance of the ruling class.

The debate boils down to this: How should we make the working class pay for the crimes of the ruling class?

Should we:

A) Cut vital life-sustaining social programs that keep society functioning.

or

B) Keep the programs in place and pour more money (debt) into them, which will ultimately have to be paid for by the working class through rising taxes.

Call me crazy, but both of these choices screw hardworking Americans and will only make our problems worse.

While the media endlessly debates between deficit cuts and spending, how come we are not discussing a third and much better option? How about we seize the assets of the criminals who stole our money and stop all the enormous subsidies that we are giving away to the most profitable corporations and obscenely wealthy individuals?

We have such a huge national deficit because the economic top one-tenth of one percent of the population has made off with trillions of dollars in national wealth, and the looting continues, unabated.

How about we tell the paid-off puppet politicians, “economists,” and “regulators” to step aside and bring in criminal investigators?

At the root, this is not an economic crisis, this the breakdown of law and order. We are in this mess because global bankers have rigged the system with an organized criminal racket that has robbed trillions of dollars from the American working class.

If you are serious about fixing the economy, first and foremost, we need to stop the ongoing looting and seize the assets of the organized criminal class who have robbed us. Until that’s done, this crisis will never be solved.

Now, just to be clear, I know it is an extraordinarily difficult task to purge a system that is, at its core, hardwired into organized criminal activity without causing further damage, but it must be done. You can talk about financial reform and economic theory all you want, but anything less than taking the vampire’s fangs out of the neck of the global economy is an absolute waste of time.

Until the criminals are held accountable for their actions, removed from positions of power, have their assets seized and their companies placed under temporary receivership until they are efficiently unwound, our economic crisis will never be solved.

The Federal Reserve board must also be held accountable and broken up just like the “too big to fail” banks. The International Monetary Fund, World Bank, and Bank of International Settlements must be dealt with in a similar fashion. How can anyone claim a free-market based on fair competition when it is obvious that the system is rigged to serve this global banking cartel?

Let’s also restore Glass-Stegall and rework the markets to eliminate dark pools, shadow banking, casino gambling, high frequency trading, front-running, accounting gimmicks and any other tricks ^[6] that cause market rigging, economic instability and suck the lifeblood out of the real economy.

Until we restore the rule of law and take these steps, the stock market and global economy will continue to increasingly serve the interests of the few, at the devastating expense of everyone else, and will eventually crash again, sometime soon – no matter how much the Fed, Treasury, CIA ^[7] and the plunge protection team ^[8] artificially prop it up.

Countdown to Rebellion…

The jig is up. The global Ponzi has been exposed for all to see. Either we dismantle it and start anew, or we all drink the Kool-Aid and go lay down.

Clearly, the paid off politicians and bankers are willing to throw us all to the wolves to keep the scam rolling. For those of you out of the loop, global bankers used financial derivatives to turn the global economy into an elaborate Ponzi scheme. They created a bogus economy ten times the size of the entire global economy. No matter how audacious, complex and complicated their Ponzi was, eventually reality was going to catch up with it. When the derivative Ponzi began to collapse in 2007, law enforcement and politicians should have held the Ponzi players accountable.

Instead, the Bush and Obama Administrations have doubled down on the side of the criminals. Allowing them to not only get away with it, but to make even more money while throwing tens of millions of people into poverty. For anyone paying attention, it is obvious that we now live in a banana republic run by a global banking cartel, or a financial terrorism network, whichever term you prefer.

To sum this all up, a bold fact, that cannot be argued, is that our tax dollars have been funneled into the pockets of the very people who caused this crisis. The money that we need to live a secure and healthy lifestyle has been looted. The people responsible for this crisis must be held responsible for their actions. No one, no matter how much money they have, and no matter how politically-connected they are, should be above the rule of law.

Either we have a nation of justice and law, or we have a nation of chaos and war.

A very wise man once made this point clear when he said, as long as “justice remains the tool of a few powerful interests; legal interpretations will continue to be made to suit the convenience of the oppressor powers…. When forces of oppression come to maintain themselves in power against established law, peace is considered already broken.”

That’s a quote from a man who knew something about taking on the global financial elite, his name was Che Guevara.

Viva la revolution!

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- David DeGraw is the founder and editor of AmpedStatus.com ^[9]. His long awaited book, The Road Through 2012: Revolution or World War III ^[10], will finally be released on September 28th. He can be emailed at David[@]AmpedStatus.com

I know I'd choose some finance/economics heavy enforcer like Bill Black to take over the investigations if I were in charge of such. After all, he's got a lot of prior experience from investigating the S&L frauds and is one very serious guy to have in charge. (He's my definition of a Very Serious Person.) We'd get some action (and some money back!) then! (Also justice.) ________________________