Bankers and other technicians

[Will]

The companion argument that holds a lot of traction is this: "taking away our freedoms is bad."  The economic elite can spin any limitations on their behavior into an attack on freedom, and then even blue-collar workers will vote against it.

Limiting banker's bonuses = "attack on our freedom" --> therefore must be opposed.
Government regulation of finance = "attack on our freedom" --> therefore must be opposed.

When "attack on our freedom" conflicts with what's in our economic best interest, "attack on our freedom" wins because it's the most emotionally salient argument.  I suspect the rationalization goes like this:  "I don't want enhanced workplace safety regulation, even if it would make me safer, because it's an 'attack on our freedom,' and if we allow that, then we will become a socialist country where nobody has any freedom."

[Jeroen Hoppenbrouwers]

Well yes, it's hard to discuss against this kind of arguments.

If freedom is explained as the freedom to be really stupid and suffer, and the freedom to have bad luck and suffer, and the freedom to fall ill and suffer, where "suffer" is considerably worse than a civilised society should tolerate, it all stops.

As you probably know, "freedom of speech" is increasingly used to defend that needlessly insulting people and groups of people is an entitlement. If you have an opinion, voicing it unmoderated without thinking of the consequences becomes a right. "I know it is true, so I have the right to tell you that you are XXXX, and if you don't accept that, you violate my most fundamental rights." What happened to ratio?


Jeroen

[Will]

I've seen a shift in political discourse in the USA over the last 20 years.  Political discussion used to be more civil, and often took place in print.  Now most people get their politics from commercial TV and radio, which has to be increasingly dramatic to capture and maintain market share.  The result is that the "other side" is frequently portrayed as "enemies of America," and politics is described in terms of a winner-takes-all fight for the basic survival of our country.  Angry people tune in to TV and radio to see their anger mirrored.  Voices of moderation and calm are either ignored or (increasingly) ridiculed.  

This trend started long before the current economic troubles, and it's not limited to the right or left.  However, what does seem to have changed is that the political center of the populist movement has drifted significantly farther right than in past years.

(Edit: fixed a typo.)

[Jeroen Hoppenbrouwers]

I tend to believe that current politics favour ruthless simplification over accepting that some issues in life and society are fundamentally complex. Complex issues need careful thought, and often study, so handling these issues is best left to specialists. This is in contrast with the "populist" thinking that all politics should be handled by John Doe in the street. I am not in favour of an elitist government, but I'd rather have trained pilots at the helm than just somebody. And no, politicians are not necessarily trained specialists in their field of power.

People's representatives should not just reflect the people's opinion. It is their duty to also add specialist insight to the opinion, and function as enlightened representatives of a part of society -- not of individual people.

In a true democracy, there would be no taxes and no regulations, as nobody would vote directly for anything that wasn't in his/her immediate interest today.


Jeroen

[Will]

I agree about the "ruthless simplification," and in fact, that's a great quote.  I don't think the current politics demand it, although they certainly leverage it.  Who demands it is the commercial media, who sell more advertising when the political shows are full of partisan rancor and us-versus-the-enemy vitriol.  This is really only possible when the issues are reduced to simple ideas and slogans.  Any channel that switches to showing the complexity of the situation will lose viewers in droves... or worse, find itself accused of an elitist bias, which in America is toxic.

[Phil Bunch]

Maybe somebody can leak interesting internal documents from the financial world? That could shed some light on the situation.

The US Congress had some hearings involving Goldman Sachs, among others.  They legally obtained a large number of their internal documents, including emails and other documents.  The day-long testimony of some key leaders of Goldman Sachs was quite remarkable, as were the internal documents I read, which even included performance appraisal input forms each testifying person had created in recent years.  

A French national, Fabrice Fourre, goes by the presumably American-generated nickname of "Fabulous Fab", is so far the only person at Goldman Sachs to be charged for things related to the financial crisis.  My very limited legal understanding is that they are trying to prosecute him and perhaps Goldman Sachs for failing to reveal that they (allegedly) conspired with a hedge fund owner with whom they worked to create a derivatives-based way to bet on the rise of the housing mortgage market, while simultaneously betting against this huge financial instrument with their own funds (they knew the housing bubble was about to crash, based on other internal records).

http://topics.nytimes.com/top/reference/timestopics/people/t/fabrice_tourre/index.html?scp=1-spot&sq=Fabrice%20Tourre&st=cse

On this page are links to some good summaries of the associated Congressional testimony.  It's probably still available at the C-Span web site at cspan.org.  C-Span is a web site that archives and streams video of the televised Congressional hearings in the US.  It was riveting testimony, and of interest on many levels from the soap opera level to the "they ought to be in prison" indignation level.  

This whole financial crisis is difficult for the non-expert (such as myself) to untangle. I have the strong impression that non-ideological experts are in much the same boat and also have no clear ideas how to proceed.   After doing a fair amount of amateur reading, I am personally but non-expertly convinced that the financial crisis was not an accident but a gross excess of greed backed by unlimited government bailout funds to be obtained from the taxpayers.  Socialized risk, privatized profits.  There ought to be some laws.

[Phil Bunch]

A new editorial by Paul Krugman today, NY Times, this time on the pending and presumably inevitable crisis slated for Spain and their EU bailout sources:

http://www.nytimes.com/2010/11/29/opinion/29krugman.html?ref=todayspaper&pagewanted=print

[Phil Bunch]

And another set of interesting articles, mostly from the NY Times, on this general set of topics.  It seems that the financial crisis has quite a few years to run its course, at a minimum, as has been the case in all the other historical major banking crises over the centuries.  The last major banking crisis, in the 1930s was only ended by WWII...

http://www.nytimes.com/2010/11/29/business/29views.html?ref=todayspaper&pagewanted=print

and

http://www.nytimes.com/2010/11/29/business/global/29euro.html?ref=todayspaper&pagewanted=all

with an interesting analysis here:

http://baselinescenario.com/2010/11/28/the-eurozone-endgame-four-scenarios/

book summary here:

http://13bankers.com/  (about a book by an MIT economics professor, Simon Johnson)

Excerpt from this page:

    Simon Johnson and James Kwak provide the best explanation yet for how the smart guys on Wall Street led us to the brink of collapse. In the process, they demystify our financial system, stripping it down to expose the ruthless power grab that lies at its center. If you want to understand how Wall Street captured Washington and how it tenaciously hangs on to that power, read 13 Bankers.

    Elizabeth Warren, Professor of Law at Harvard Law School and
    Chairwoman of the TARP Congressional Oversight Panel

[Will]

Actually, I just ordered "13 Bankers."  The hardcover edition was pretty cheap on Amazon.  Give me a week or two and I'll tell you what I think.

I still think, in line with my previous posts, that the main way the bankers can get away with this is a combination of (1) special interests with extreme amounts of money and political influence, and (2) a populace that isn't terribly informed beyond sound-bites and slogans, and who looks at nuanced reporting with suspicion (elitism!).

[Phil Bunch]

Interesting that a reviewer of the "13 Bankers" book, written by an MIT professor, also uses the airliner safety analogy:
---------------------------
http://13bankers.com/

    Over the last 50 years, the FAA, the airline manufacturers, and the airlines worked together to make a highly complex air travel system more efficient and much safer. If you've ever wondered why, in contrast, our financial regulators and banks made our financial system less efficient and much more dangerous, you should read this book.

    Paul Romer, Senior Fellow at the Stanford Center for International Development and the Stanford Institute for Economic Policy Research

[Will]

Here's another NYT article, this time from the president of the Federal Reserve Bank of Kansas City.  It's a short but necessary read, talking about the skewed influence that extreme money has in guiding national policy:

http://www.nytimes.com/2010/12/02/opinion/02hoenig.html?hp

[Phil Bunch]

Here's another NYT article, this time from the president of the Federal Reserve Bank of Kansas City.  It's a short but necessary read, talking about the skewed influence that extreme money has in guiding national policy:

http://www.nytimes.com/2010/12/02/opinion/02hoenig.html?hp

Thanks for the link.  I thought this article was one of the most credible and on-target articles I've read on this general subject.  

I've also just bought the "13 Bankers" book, and am enjoying reading its  very helpful and informative analyses.  Without such a summary, it's impossibly hard for me to untangle the available news reports and political commentaries.  

Surprisingly, the faculty, etc, of leading universities/economics/business departments are seemingly without an understanding or recommendations.  It seems as if they had been and are still living in an fantasy world where their ideologically-based business markets theories were almost universally accepted.  Now that the financial services institutions and markets have catastrophically failed and been shown to be very corrupt, they seem to be in an "emperor has no clothes" situation.  I have listened to most of the London School of Economics podcasts for the past few years, and our academic and business leaders just don't seem to be usefully converging.

It must be weird to be a student in a graduate business or economics program these days.  Do they still teach the "efficient markets hypothesis" or the theory that we must have almost completely deregulated banks and financial markets?  If not, what do they teach?  Yet we have such a clear example of how to maintain a health and stable banking system in the case of Canada; why are most commentators ignoring this data point and example?

What, if anything, are our political, government and regulatory institutions going to do to address the ongoing financial crisis?  There now seems to be no significant leadership or direction, especially with the US partisan-based political paralysis and gridlock.  I cynically assume this is because the too powerful banking institutions want things this way so they can finish looting the world's economy...they really don't much care if things really collapse since they can make tons of money out of such an event.  Longer-term survival and stability are of little if any apparent interest.

[Will]

It's like nobody's ever read "the Prince" before.  Perhaps capitalism itself, devoid of human emotion, can flourish in an unregulated environment with excellent efficiency.  But there is more to man than markets.  People behave unpredictably, irrationally.  Also, social power and money are interconnected (!), which efficient markets ignore, right?

[Phil Bunch]

It's like nobody's ever read "the Prince" before.  Perhaps capitalism itself, devoid of human emotion, can flourish in an unregulated environment with excellent efficiency.  But there is more to man than markets.  People behave unpredictably, irrationally.  Also, social power and money are interconnected (!), which efficient markets ignore, right?

Interestingly enough, my wife just downloaded a (free) e-book version of "The Prince" for re-reading, and your comment combines with this to inspire me to take a fresh look at it.

As best I can tell, especially in the USA, the financial services crowd is surely among the world's most dedicated in terms of maximizing their personal profits at the expense of all other interests.  

The sequel to "Wall Street" movie by Oliver Stone, starring Michael Douglas, is summarized on Wikipedia.  It's to become available on DVD at the end of December, 2010.

http://en.wikipedia.org/wiki/Wall_Street:_Money_Never_Sleeps

I am personally very much in favor of people and institutions earning large profits, and support the associated freedoms required to do so.  What I am not in favor of is unearned profits and profits obtained by systematically looting the public through manipulation and exploitation of the political and legal systems.  "Too big to fail" means too big to exist, IMO.

[Will]

"13 Bankers" is a scary book.  The financial "industry" got massive bailouts, with the cost transferred to taxpayers.  The states are next (see the NYT); they are too big to fail, so they're going to need super-massive bailouts as well.  Pension plans are politically too big to fail, so they will need bailouts.  

Fine.  Bailouts it is.  

But (1) we give the financial sector a total pass on any responsibility, and (2) the new Republican house majority refuses to ever consider a tax increase for the wealthy.  Or a tax increase ever, for that matter.

But a tax increase is inevitable if America isn't going to default on our bond obligations.  And that of course means thousands of extra tax dollars per year from the "middle class" to pay for all of this mess, both through tax increases and service cuts.  This can't help the recovery at all: you take the people in America who generate the most activity in the real economy, and you tax them like crazy to pay for the Great Recession.  That's a recipe for deflation and another Great Depression.

[John Golin]

And the funny thing is it's not a tax increase, it's the non-extension of the tax cuts that were set to expire precisely because they can't be afforded.

Crazy stuff over there - the higest income tax rate is 35%, and that only kicks in at $373,651+ ?

No wonder the US can't afford healthcare.

Our top tax rate is 45% and it kicks in at $180,001. It's 37% from $80k to $180k too...

But then we ARE a bunch of socialist commie facists down here...

[Jeroen Hoppenbrouwers]

More Marxist stuff: here are the Dutch income taxes for 2011.

Up to EUR 18,628:  33%

To EUR 55,694: 42%

Above that: 52%

[Will]

We could afford our low tax rates when our "real economy" was booming, and when the country was a world leader in innovation and manufacturing.  Now, the only sector that's booming is finance, and we've decided as a nation that that sector will not contribute ever to the cost of our government.  I hope Chinese isn't as hard to learn as it looks.

[Phil Bunch]

We could afford our low tax rates when our "real economy" was booming, and when the country was a world leader in innovation and manufacturing.  Now, the only sector that's booming is finance, and we've decided as a nation that that sector will not contribute ever to the cost of our government.  I hope Chinese isn't as hard to learn as it looks.

All of this mess is pretty much being paid by "loans" from the Chinese through their purchases of government bonds, as best I can understand it.

Once they own the US through this and related processes, which seems pretty much guaranteed now, what do they plan to do with it?  We have some natural resources, but as best I can tell, they mostly need water and oil and maybe food.

Perhaps they just plan to loot the world, with the aid of the banksters, and leave us for dead, which is pretty much where we are unavoidably headed.  It's seemingly impossible to construct a happy ending scenario for this situation.  The last time things got this messed up was between WWI and WWII, and accompanied by hyperinflation in Germany we got out of the associated 1930s Great Depression/banking crisis through the catastrophic destruction brought about by WWII.

Based only on my interactions with a few Chinese scientists during my work on some ISO standards committees, I have the impression that they really haven't adequately congealed as a government and a society to assume the responsibilities of being the world's most powerful and wealthy country.  Time and events may soon prove this impression to be very wrong.

What is especially badly needed right now is for the Euro to become stable and for the highly contagious European government debt situation to be somehow stabilized.  Yet everything I read or listen to via documentary podcasts seems to say that the collapse of the Euro is inevitable.

I think what we are seeing is that when the financial services industry is permitted to run out of control with trillions of dollars of unstable loans and other financial instruments, the money has to eventually come from things that are real.  It isn't enough to just (in effect) print more money and declare the banks to be whole and solvent.  It is bizarre to me that this money printing is not actually printed, but is only a digital record on some central bank's hard drive!  Is virtual money real???  Is anything in financial services real?

What a depressing situation.  No wonder the predominant emotion in the USA these days is anger.  Unfortunately, it's undirected anger, with no clear target or relief.

I think I am most distressed by the unlimited ability of the USA masses to know or understand what's happening.  At least in parts of Europe there is an occasional strike or two.  Nothing over here.

Most people with income above about $200,000 per year begin to successfully avoid taxes through various means.  Thus, the true effective tax rate is much lower than the nominal tax rate at a given income level, but only for the rich, who can become involved with various legal tax avoidance schemes.  With our commercialized political system, wealthy people and corporation scan easily buy as many politicians as needed through campaign contributions.  The Supreme Court recently ruled that this was a free speech right, and it is now all but impossible to reform this corrupt system without a (very hard to obtain) Constitutional Amendment.

[Jeroen Hoppenbrouwers]

Since I encountered the financial system long ago, I always had the impression that it was a virtual world, invented and shaped to be as close as possible to the virtual, theoretical world of classical economics. Since (virtual) financial reality matches economic theory nicely, people believe in the correctness of the theory and start using it for predictions. Which nearly all come true.

We've seen another attempt to implement an economic theory in practice before, but then they could not yet create a virtual world, and the theories of Marx and Engels were never really corroborated, only by false play (totalitarian state to enforce certain variables).

Pity that such interesting scientific experiments get so much out of hand...


Jeroen