This is excellent. Brew up a coffee, give yourself a break, and read the whole thing.
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A must-read item on the financial crisisFebruary 4th, 2009 |
 40 comments to A must-read item on the financial crisis |
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Absolutely Jonathan – I’m a big fan of Chris Sciabarra and that piece is excellent, though I recall that it was written some months ago now. He also wrote a fascinating book on Ayn Rand which I just had returned to me from a friend.
No Jonathan, it isn’t excellent, it’s adolescent.
Ok, he describes the mess that CRA, and Fannie and Freddie, wrought reasonably well and points out that the financial sector came to be willing partners in the debacle since it offered them the prospect of wealth.
He also points to the ‘state-banking’ nexus. Well, the state-banking nexus has existed long before there was anything that called itself a state, or anything that could be described as banking. The wealth is where the power is and those that seek wealth and power congregate to those who have it. It’s been this way since the first human tribes got together. Indeed, it’s that way now in baboon or chimpanzee society, even though the currency is picking a flea off the alpha male’s hide and not getting a clip round the ear for your troubles.
Socialists believe that they can change human behavior by rules and regulations. Libertarians, (of this particular stripe anyway), seem to believe that they can change human behavior by having fewer rules and regulations. This belief is adolescent.
Humans will behave like the tribal animals they are, sometimes as a pack and sometimes as a herd, but always trying to gain what advantage they can for themselves, their close kin and their tribe. The ways they seek advantage will vary depending on the degree and nature of the tribal rules and regulations, but they will always seek it, and those who have the wealth and power will always seek to maintain it by force. The rest of us must find our level in the pecking order.
Yes, we can try to devise ways in which the powerful are limited in their dealings with us peasants, but we can’t change the nature of the beast.
Ok, this is not very well thought through, but I blame Sciabarra. Once he started banging on about the ‘military industrial complex’, he lost me.
Now I’m as much a conspiracy theorist as the next man, (mention Soros and my BP shoots up), but CS seems to believe that ther really is some vast conspiracy aiming to start wars so they can get rich.
Like I said, adolescent.
“Socialists believe that they can change human behavior by rules and regulations. Libertarians, (of this particular stripe anyway), seem to believe that they can change human behavior by having fewer rules and regulations. This belief is adolescent.”
Look here you:
The purpose of a rule is to alter human behaviour.
A libertarian wants less rules. Get that straight.
So what, Kevin? Sciabarra is describing the situation as it has existed for the past 100 years or so; he’s not so naive to imagine that no such connections existed before. He is pointing out that the modern incarnation of this nexus has been disastrous. As it has been.
I fail to see how this has anything to do with the article or its wise points about the derangement of inflationary finance. As for what I think of as my level in the “pecking order”, I could not care less.
He did not “bang on about it”; he chose to leave that subject to one side.
And if you read CS’s article, he does not talk about a sort of mass conspiracy; rather, he argues that a lot of the banking establishment in the US – and quite possibly elsewhere – are enthusiasts for state bailouts and have been eagerly pressing for that, with some exceptions. Did you actually read the article all the way through?
So the author provides a link to President Eisenhower’s Military-Industrial Complex speech. Obviously the sign of some maniac that believes in UFOs and lizard overlords!
Whatever.
Jonathon, I got the distinct impression from the article that CS was not just deprecating the current manifestation of the ‘state-banking nexus’, but stating that this was a ‘bad thing’. My point is that it is neither a good thing nor a bad thing, it is simply the way things are.
As to the military industrial complex, yes he says:
(Of course, the funding itself benefits certain interests too, but we’ll leave our sermon on the “military-industrial complex” for another day.)
But the final few paragraphs contain this sort of thing:
Indeed, the “ultimate decision-makers” of U.S. political economy have a host of new battlefields on which to wage war, both literally and figuratively, in their efforts to stabilize the ship of state. None of the choices being offered will challenge their hegemony or topple them from their positions of power.
And he slyly interjects this:
[Ah… one way to keep those funds flowing for the Iraq war… –CS]
Into a quoted piece from Horowitz.
So yes, I did read the piece from beginning to end, (though I didn’t click on all the links), and I certainly agree that the banking establishment are supporting bailouts for them and their pals though perhaps the second para. of my original comment doesn’t make that explicit.
No, my argument is that the whole piece, while pointing out the problems with the current system, has the kind of smug assumption that “If only they did everything my way we’d be fine.” Well, I beg to differ.
I think he is saying that we should base banking and the money supply on actual free market principles, rather than the mishmash we have now. If you differ from that, you have got some explaining to do.
I also do not see anything remotely “smug” about the article. So CS is confident of his views. How terribly arrogant of him.
That is the nub of the problem. This is the reason power needs to be decentralized, and largely returned to the states. It’s not so much that the politicians in Washington will make bad decisions (although, in large measure, they will), or that powerful people will use their influence to shape governmental policies in ways that advance their own interests (which they always have and always will), it’s that the wide dispersal of power tends to minimize the problems which its (inevitable) misapplication creates.
This issue is larger than the “state-banking nexus”; this is merely one manifestation of it.
Kevin B writes:
“Humans will behave like the tribal animals they are, sometimes as a pack and sometimes as a herd, but always trying to gain what advantage they can for themselves, their close kin and their tribe.”
Jonathan Pearce responds:
“I fail to see how this has anything to do with the article.”
That’s because Kevin B obliquely touches on very basic issues that aren’t usually brought to light. What lurks beneath Kevin’s phrasing is a metaphysical question as to the distinguishing (essential) features in the nature of a human being.
Kevin claims that we are merely tribal animals – and little else besides it would seem. Hence, on this view, a society whose institutions maintained fidelity to the political value of individual freedom could not exist since such institutions would be continually subverted by our ‘tribal nature’.
Of course, collectivist impulses are one feature of human nature. Yet they are not the only feature – and this is why he is wrong.
“No, my argument is that the whole piece, while pointing out the problems with the current system, has the kind of smug assumption that “If only they did everything my way we’d be fine.” Well, I beg to differ.”
Then until you have a proper counter-argument to sell, by all means beg all you like.
Ok, let me try to explain what I mean.
The ‘free market’ is a chimera.
The idea that the financial system can somehow be compartmentalised away from political interference is a pipe dream.
Power and wealth go together, and there has never been a human society in which this was not true.
As the blame game for the current recession is developing we get the socialists blaming ‘laisez faire captalism’ and the capitalists blaming government intervention. Many libertarians and conservatives go as far as to suggest that true laisez faire capitalism has never been tried. This argument is akin to socialists arguing that true communism has never been tried.
Of course they haven’t been tried! They’re impossible. They are ideals that stem from a fundamental misreading of the nature of human society.
By all means criticise the politicians and bankers, (and voters and customers), who have contributed to the current mess, but don’t be so naive as to think that there is some system which can prevent this kind of thing from happening. And don’t imagine that this putative system can separate political power from financial power.
Any attempt at reform to the current political-economic system must recognise that the state will always have an interest – even a compulsion – in interfering in the markets, just as the markets will always have an interest in influencing the state.
To try to limit these symbiotic relationships will require rules and regulations – even laws. Whatever the market that emerges, it will not be free.
The smugness, arrogance if you like, that I detected in the piece may stem from an instinctive reaction to people who use the phrase ‘military-industrial complex’ un-ironically so I can see how others who don’t have that reaction may not read it in the same way, but having read the article again, I still get the impression that CS knows how to run the world perfectly, and again, I beg to differ.
So? The point is that by cutting the political realm down to size – as Laird says – we have a chance of reducing the potentially toxic love-ins between corporations and their government counterparts. Just because we cannot get the state out of our lives completely is no reason for not making the case for it and showing its effects.
I know of no cast-iron system to prevent such things. Neither does Mr Sciabarra, nor does he claim to do so.
It is no more misleading than your claim that we are like a bunch of monkeys in a tribe. In fact the ability and willingness of humans to trade with strangers, acquire property etc, shows that many of the features of laissez faire are in fact very much part of human nature.
I also tend to be twitchy about people who keep going on about humans as if we are little better than packs of dogs or monkeys. I usually find that such views tend to be associated with a sort of craven acceptance of brute power politics.
I’m not sure what this dispute is about; you seem to be arguing at cross-purposes. Kevin B is making perfectly valid points about the nature of human beings in society; CS (and Johnathan) are talking about specific defects in the current governmental/regulatory scheme. You’re all correct.
Anyway, I think the time has come to quote Kipling (somebody had to do it):
Not really. Kevin B took exception to the allegedly “adolescent” tone of CS’s piece, and I have responded.
The broader point here is well made by Sciabarra: we are seeing what happens when banking, and the financial system, becomes enmeshed in the political realm and where the issuance of money falls prey to delusional economic theories.
Kipling would have understood this only too well.
We are quite a bit better than dogs or monkeys, but we are still apes.
Evolution doesn’t always throw things away, and we can still have that instant lizard reaction to sudden surprises that says do we Fight or Flee, Fornicate or Feed. On top of that we can have the reaction to the other that asks is it one of us or one of them.
We have developed intelligence and with it language and the ability to imagine and plan for various futures and these have expanded our opportunities.
Our technology and sophistication enables us to seek relationships outside our immediate group, but even here tribal behaviour is discernible whether it is in political parties, religions, sporting fan clubs, facebook communities or blogs.
I’m sure those who seek power and wealth do so only for our own good, but from the outside it can look awfully like beta males trying to climb the slippery pole to alphaville. Perhaps there are some anthropologists who would describe Gordon’s behaviour towards the blessed Tone, (Give us go Tony! Go on! It’s my turn!), as classic primate behaviour.
As to whether I’d ‘cravenly accept’ brute power politics, I hope not; and I fervently hope I don’t get the chance to find out. However, a look round the world and a glance at history shows that brute power, strongman, politics is never that far away.
I beg to differ. The book was no good, just trivial blah.. blah. Mostly wrong. It was a good many years ago, I don’t remember specifics, only the dubious notion of “dialectics” the whole book was full of.
“Adolescent” sounds about correct to me.
I started his article, but I abandoned it very fast. He talks indeed from an adolescent point of view, purely from books, no real world experience, neither in economics, nor in banking or business or politics. I’m tired of this detached kind speech.
As to the current crisis – there is blame enough for all. Freddy and Fanny were important players, run by politicians, but the rest of the “private” bankers performed in the most dumb and idiotic manner, and the government didn’t force them to act this way.
There is at least one significant factual error I can find on a quick read.
“it’s not as if the banks were dragged kicking and screaming into lending those mortgages”
Sorry, the Feds threatened to prosecute those banks (and bankers) who did not comply with CRA. I don’t absolve the bankers completely, but staying out of jail is a reasonable rationale for compliance.
‘Sought after’ relationships are most absolutely not ‘tribal’ relationships. ‘Tribalism’ is in the political context a scale of government, ‘band’ – ‘tribe’ – ‘state’. It is a death penalty to be caught out apart from your tribe and often a death penalty to fail to live up to your tribe’s demands. It is one of the most common errors in discussing human relationships to confuse ‘collective’ with ‘cooperative’. ‘Collective’, as its name suggests, is imposed – collecting is a higher domain acting on a lesser one. “I collect books, the collective body of works brings me pleasure.” ‘Cooperative’, as its name implies, is voluntary – it is two or more entities within the same domain level, neither authoritative or submissive.
Conflating these two disparate relationships is a rather extreme category error. Voluntary personal activities including all of the ones you name are not a part of government and are not even at the level of government. The individual choices of social behavior are not ‘tribal’ behavior until they gain the power of governance over non consenting individuals. At that point it ceases to be ‘social activity’ and becomes political power. Even political parties are voluntary until they gain the controls of government; at that point they cease to be voluntary and become force based. They can themselves, in fact, become ‘government’ when, as in the UK, the parties control the members who control the government.
You appear in this paragraph to be equating bribing and coercing the political process with activity of ‘banking’. They may exist together but in no way is banking necessary for bribery and coercion to exist. You try to explain your self by saying:
The first statement sounds oddly like an ad hominem.
The second statement presumes that anything else can “be compartmentalised away from political interference”. I suggest that nothing can. Even poor people have votes that are of value.
The third statement is a non-sequitur and in no way relies on the existence of ‘banking’ for its truth.
To claim that banking cannot exist without government involvement is to presume in advance that banking must be the government’s business. But government only needs to be involved in banking if forcible government participation in financial transactions is presumed as a necessity of government. I see absolutely no reason why it should be at the federal level. What claims the federation as a whole lays upon the individual states are (Constitutionally) required to be paid only in gold and silver coin.
States are not permitted to coin money, the Federal government is instructed to ‘coin’ (standardized) money. That money must include gold and silver coin, obviously. Important, this part – Coining money is not banking. The US Mint started in the State Department, was made independent in 1799 and was not even merged into the Treasury department until 1873, by which point it was ~80 years old. Historically, coining money was a service provided to holders of gold and silver bullion or other coins, not an adjunct to printing paper money. This is why there are mints in San Francisco and Denver, where the unassayed metals were being brought into the market.
Coining money has nothing to do with banking.
The Federal Reserve Bank in the US serves only one purpose and that is to facilitate and consolidate the national government’s usurpation of free trade between individuals by participating in the market and levying tax on wealth and contracts. Without the (starting in 1913) Federal Reserve Bank’s participation in all transactions and savings by virtue of its monopoly on money, individuals would interact with each other by means of their own choosing and be required only to pay their government fees in gold and silver coin. But then, the government couldn’t evaluate private transactions in order to tax them. The government had to have a monopoly on money in order to control trade among individuals. The government had to have a monopoly on money in order to redistribute the wealth of individuals. The government had to have a monopoly on money in order to implement socialism.
Incidentally, the banking problems of the nineteenth century that are so often used for pro-regulatory arguments were in virtually all cases rent seeking (modern usage) by interest groups seeking through government authority that which is not the government’s to give.
“I beg to differ. The book was no good, just trivial blah…”
That’s nonsense. “Ayn Rand: The Russian Radical” is the most comprehensive look at her and her philosophy that you can get in a single volume, and that includes all of her corpus.
I cannot recommend it highly enough.
Mid:
Do you have some links?
Mr Pearce, an excellent article spot. Thanks for putting me onto it.
You may have read it already, but if you passed it by, there’s also a surprisingly candid interview available with Fannie Mae’s long-term credit controller, Edward Pinto, that I thought you might be interested in. If you’ve got time for another coffee and you want to find out exactly how Fannie Mae got us all into this mess, then this really is the smoking gun:
=> The True Scope of the Housing Bust
I don’t know whether Miss Hermione Granger drugged Mr Pinto with Veritaserum, but he really lifts the lid on exactly what went on behind the scenes, to deliver us into this long-term Keynesian nightmare.
Jacob comes up with an absolute classic:
Yeah, all those guys at Citi, Merrill, Bank of America, Wells Fargo, Wachovia, AIG, the Fed, Freddie Mac, Fannnie Mae, Dexia, Fortis, Royal Bank of Scotland, Northern Trust, Bradford & Bingley, not to mention such geniuses such as Gordon Brown, Alan Greenspan, etc, they all had “experience” of the “real world”.
And what a total clusterfuck they have presided over. Some thinking through based on principles, of the sort CSciabarra refers to, would have been valuable.
As for Kevin B, I think Midwesterner has fairly nicely taken his nonsense apart, which anyway had nothing much to do with the subject at hand.
Both sides have a point. The article is pretty adolescent; theory really does only get you so far; economic relations always have and always will be un-disassociable from power relations backed and maintained by force; injustice is a basic fact of human existence deriving from the Fall; the perfectly free market is a chimera as much as perfect communism; the absolute distinction between co-operative and collective does not map very well to the facts of human existence; tribal behaviour is a part of contemporary human experience and not just at the level of government etc.
On the other hand things can and have been much better than they are now; the level of corruption and fraud in the state matrix over the past 20 years is not acceptable; central banking policy has been disastrous and scewed by bribes as well as by ignorance and stupidity; interest rates really have been too low for way too long; we don’t need central banks and we certainly don’t need the sort of central banks we have today etc.
Look how sweetly reaonable I am.
I am not aware that a belief in the nutty religious doctrine of Original Sin is necessary to understand the power-lust of people who want what they cannot earn fair and square in the market.
Actually, I think the American Founding Fathers had a pretty solid handle on the temptations of power that would arise with things such as central banks and the rest, although Alexander Hamilton was as near as we get to the “Dark Knight” of the founding with his bad ideas about a centralised treasury.
Hamilton was correct on many points where his opponents were dead wrong. Washington knew that. In a very real sense the American project ended with the suppression of the whisky rebellion, but in another very real sense it didn’t. (My I’m being oblique today.)
P.S. It’s not nutty, it’s one of the articles of our established church, but, in any case, I only put it in as a rhetorical flourish. The depravity of man is an observable fact, with or without theology appended to it.
Gabriel, we are drifting off topic but if you really believe that Hamilton got the issues right most of the time, then I recommend this book (Link)to correct that idea.
“Look how sweetly reasonable I am.”
Well, in this…
“In a very real sense the American project ended with the suppression of the whisky rebellion…”
…. you’re only about five years off the mark.
I didn’t say that. I don’t know what it is about my comments that inspires such consistent misprision. Suffice to say I’m familiar with diLorenzo and other purveyors of these arguments and, well … I actually have quite a high regard for Lincoln too.
One of the things Libertarians have in common with other ideological types is this deep conviction that the only reason people could ever disagree with them is because they haven’t read enough hack books or haven’t had Libertarian ideology explained enough times, slowly and, if necessary, AT THE TOP OF ONE’S VOICE.
But, yes, this is off topic. Turns out what I wanted to say, Laird already said (and better) at 4:53.
I agree with Gabriel (I can be reasonable, too!); both sides have a point, which is basically what I said way back above when I was quoting Kipling.
BTW, if anyone hasn’t yet read the link provided by Jack Maturin, it’s definitely worth a look. Thanks for posting it, Jack.
I happen to think I am right about the opinions I hold and that people who want to argue for whatever statist disaster is on offer are wrong. So that makes me arrogant. Well, tough, deal with it.
Not arrogance; I’m a great deal more arrogant than you I’ll wager. No, the phenomenon I’m describing is closer to naivity, though I suspect there’s no exact word for it. It would simply never occur to me to think “this person disagrees with me, therefore he must be a poor benighted fool. I’ll refer him to a book regurgitating long-established arguments and/or listing easily available facts”.* However, for lots of other people this seems to be more or less an automatic response. (Perhaps, for the average university graduate, this is actually correct.)
Its closely related, I think, to another phenomenon common to various ideological types, namely, the ability to derive apparently inexhaustible pleasure from reading things which you already believe in mediocre prose.
*I usually think something more like “GFY”.
Since we seem to head-butt each other a lot on these threads, and I have no desire to hoover up more bandwidth about this in future, allow me to clarify a few things:
It is not your arrogance I have a problem with since it depends whether you have something to be arrogant about with a track record of accurate comments on X or Y, for example. Context matters.
I can entirely deal with other people disagreeing with me and my not thinking them to be stupid or evil. This obviously applies to where I know I am ignorant or partly ignorant of the facts, such as aspects of chemistry, physics, biology, languages, certain parts of history, etc. The amount of things I am ignorant of is vast. That is what makes life interesting.
But….if I argue with people about moral issues, and I think that I am right, then naturally I am going to think my opponent might be daft or wicked if they persist in holding to a view I regard as immoral, such as their support for policies etc that damage lives in some way and where the evidence for such damage is considerable. That is why, for example, politics/economics can never be a purely practical, managerial issue where we can all be sweetly fair minded and not think any the worse of the other side in an argument. When I argue with a socialist, for instance, or a fascist or religious fanatic, I am certain that my opponents are profoundly wrong, and if they persist in their errors, I think the less of them as a person and even consider them to be thinking in bad faith.
“The depravity of man is an observable fact, with or without theology appended to it.”
That’s wrong. The depravity of men is an observable fact, but that is no warrant for the generalization, and there are good men. That is a fact, too.
“Adolescent” perhaps isn’t a very accurate term.
What I meant is – I don’t need an academic philosopher to explain to me the financial crisis. I’m much of a philosopher (amateur) myself. I know the theory, I know in advance all that Cris Sc. can say, I’m not saying he is wrong, I’m saying he’s redundant, as far as I’m concerned.
I’m much more interested in hearing the tales of people actually involved in the financial industry, I’m interested in hearing facts, not moral philosophy. I found Nassim Taleb’s(Link) book “Fooled by Randomness” fascinating.
Billy Beck,
Chris S.’s book tried to explain Ayn Rand’s ideas using academic jargon, and tries to compare her or put her in context by relating her to other philosophers, notably Hegel.
Ayn Rand’s ideas are clearly enough expressed by herself (albeit not in one volume, you have to read her essays). The academic jargon doesn’t add anything, on the contrary – it’s just tedious. The comparison or alleged “influence” of Hegel is plain nonsense.
Jacob, I appreciate your response. Adolescent is a rude term for a is a very smart guy. And I think that laying out the underlying fundamentals is not a waste of time. For sure, in our intellectual circle – if I can use that term – the arguments from classical liberals about the insanity of state monopoly money might be pretty familiar, but you would be not surprised to know that for a lot of people, the current disaster is held up as proof of “unregulated capitalism” going awry. It cannot be stressed too often how mistaken that is.
As for reading about folk who work in the markets for a living or report on them, this is fine as far as it goes; the trouble is that such folk – such as Goldman Sachs derivatives deal – only get to see part of the picture. They may be very smart about some of the mechanics of modern finance, but it is economists who see the whole thing unfold that I prefer to read.
Michael Lewis, the journalist, recently wrote a brilliant summation of the crisis for Portfolio magazine. He wrote for a non-specialist audience and used lots of colourful examples. A quick Google will bring it up. Recommended.
I read Michael Lewis’ essay, he isn’t a journalist, no need to insult him, he actually worked for an investment bank (Solomon brothers). Good essay. Nassim Taleb, who is a securities trader and also a mathematician says the same as Michael Lewis: the people in the financial sector are totally clueless – they have no idea what they are doing. (Both write from personal experience).
From a philosophical point of view it would be interesting to contemplate how it happened that the investment banks (no government body) were, and are, run by idiots ?
If you need any more proof that financial executives are idiots – read this account of the merger of Meryl Lynch with Bank of America.(Link)
Jacob, to your last question, I think the point where investment banks ran off the rails (became “run by idiots”, in your colorful if not totally accurate phrase) was when they went public. In the “old days” they were partnerships, and much of the money they were investing was their own. They were much more careful then, and didn’t lightly give 28-year-olds the power to speculate with billions. Today they are just hired guns, with all of the upside (multimillion dollar bonuses) if things go well but no real downside (loss of job, maybe, but only after pocketing those millions and probably just moving to another firm down the street) if they don’t.
That’s essentially what Michael Lewis said: for example – Solomon Brothers. As long as it was run by the family not as a limited liability corporation – the managers-owners took pride in the house’s reputation and took extreme pains to preserve it – i.e. their goal was the longevity of their enterprise.
Once it became a corporation, run by hired guns (managers) – the incentives changed – the quarterly results (and bonuses) becoming the main driving force, with disregard for long range stability.
It’s not only the managers who acted dumb (or rather used short term logic), it’s also the depositors and customers. They should have perceived the change an run for their lives instead of waiting for the inevitable outcome.
Gabriel.
When some people (me – for example) produce examples of times and places where neither government money supply policy or banking were like what they are now, we are accused of “living in the past” or being “stuck in the mud unwilling to change” (that charge was made against some Swiss bankers, and fractional reserve bankers at that, when they resisted going along with the latest absurdites – they were forced out of some leading Swiss banks and the “Economist” cheered the “modernization” of Swiss banking).
I am not saying that you use these tactics – but they are common.
So we can not win.
When we argue from theory we are denounced as lacking in real world experience.
And when we argue from real world experience we are denounced as backward looking reactionaries.
The bottom line is always the same.
Long live “lower interest rates”, “less restricted credit”, “a new age of prosperity”, “financial innovation” (and so on and so on).
It was an old game even when Ludwig Von Mises denounced back in 1912 (Theory of Money and Credit) or when Martin Van Buren (and the others) denounced it in the early 19th century.
David Hume denounced it in the early 1700’s.
But the game has not declined over time – it has got wilder and wilder.
This time it looks like it is going to bring everything down.
For better or worse the insane reaction to the bust (both on the monetary side and on the fiscal side) have made the collapse of this financial system (which would NOT have happened with just a credit money bust) almost certain now.