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Also Sprach Tea Partiers October 14, 2010

Posted by Dwight and Lynn Furrow in Dwight Furrow's Posts, Philosophy, politics.
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Berkeley economist Brad Delong laments
Somehow I Am Now Wishing I Had Read More Nietszche When I Was Younger…

I’m not sure if Delong wishes he had read Nietzsche’s discussion of “ressentiment” in the Genealogy of Morals (where Nietzche claims roughly that the weak and frustrated create a moral code that absolves them of responsibility for their frustration) or the end of the Gay Science where the madman warns of impending catastrophe and he is treated as a fool. But this conversation between Delong and standard issue right-wing crazies is hilarious.

If you are looking for evidence that no real debate can be had with these people, here it is.

Last week I spent some time with a group of people I don’t usually spend much time talking to. They were not rich–by which I don’t mean that they had overstretched themselves by buying a seven-figure principal residence but rather that they weren’t rich: their household income was in the five or, for some of them, perhaps the very low six figures. And (which is unusual for Berkeley) they were not lefties, neither cultural nor sociological. They were deeply concerned with the future of our country. And they were desperate to figure out how to engage in effective political action–but had few illusions that the politicians they would vote for in November were their kind of people with their interests at heart.

I suppose that in a previous era, back when there were private-sector unions, they might have been union stewards. But now we have no private-sector unions.

And so they are activists from the California Tea Party.

So I went through my standard spiel. Housing bubble. 5 million excess houses built in the desert between Los Angeles and Albuquerque, and on all of them the least $100K of mortgage debt will not be repaid. A $500B loss in an $80T world economy. Shouldn’t have been a problem—securitization exists to spread risks. But the banks pretended that the AAA MBS issued by other banks were high-quality Basel capital even though they knew full well the dreck that they were issuing. A financial multiplier of 40. A flight to safety. A big shift away from spending on currently-produced goods and services and on currently-employed labor as people tried to build up their stocks of safe assets. A multiplier as people who lost their jobs stopped spending, and the situation snowballed.

It could have been worse, I said. Without all of the rescue policies we would probably now have an unemployment rate of 16 percent rather than 10 percent.

But they question is what to do now with the economy. The idea is not to go to socialism—not to nationalize large chunks of the economy and have everybody work for the government—but to conduct strategic interventions in financial markets. Relieve the excess demand for safe high-quality assets and you remove the pressure on people to spend less than they earn as they try to build up their stocks of safe assets, and you get a virtuous circle of strong recovery.

So, I said, the right thing to do is the Bagehot rule: lend freely at a penalty rate. The government should throw huge amounts of money at the financial markets and in the process take a large chunk of the upside in equities and options.

SOCIALISM, they said. We don’t want SOCIALISM.

But it’s not socialism, I said. It’s an attempt to avoid socialism—it’s an attempt to conduct a strategic intervention into the market economy so that it can rebalance itself.

SOCIALISM, they said.

Well, I said, how about lending freely to the financial sector but forget Bagehot’s “penalty rate” stuff?

BAILOUT, they said. BAILOUT OF CORRUPT FINANCIERS WITH WASHINGTON CONNECTIONS, they said. WE LIKE THAT EVEN LESS.

Well, I said, how about pushing off taxes into the future, bringing forward infrastructure spending we know that we will want to do, and financing it by issuing more government debt? The spending should put some people to work, and the extra government bonds we print up will increase the supply of safe assets, decrease the excess demand, and so remove some of the downward pressure that is inducing people to spend less than they earn/

DEFICIT, they said. DEFICIT BAD. MUST REDUCE THE DEFICIT. GOVERNMENT MUST LIVE WITHIN ITS MEANS.

But, I said, the U.S. government now can borrow at unbelievable terms. If you could borrow at such terms, you would bust out the top of your house and add a second story immediately.

GOVERNMENT MUST LIVE WITHIN ITS MEANS.

OK, I said. How about having the federal government aid the states. We want to keep our police and our fire and our road maintenance and our schools running at their efficient levels, don’t we? It’s stupid to cut back on the long-term foundations of our economy and its growth because of recession, isn’t it. How about a large program of federal aid to the states so that teachers, sewer workers, police officers, and firefighters can keep their jobs, keep protecting us—and keep spending and so provide employment for the rest of us?

ARE YOU KIDDING? THEY HAVE KEPT THEIR UNIONS. WE HAVE LOST OUR UNIONS. WE HAVE LOST OUR JOBS. THEY HAVE GONE TO CHINA. THEY HAVE VANISHED. WE ARE UNEMPLOYED. IF WE ARE EMPLOYED WE HAVE NO BARGAINING POWER WITH OUR BOSSES. IT IS NOT FAIR FOR STATE WORKERS TO NOT ONLY HAVE UNIONS, BARGAINING POWER, AND PENSIONS, BUT FOR THEM TO HAVE THEIR JOBS TOO. SINCE WE ARE LOSING OUR JOBS THEY SHOULD LOSE THEIR JOBS TOO. IT IS NOT FAIR.

Oh.

EVERYTHING YOU PROPOSE TAKES OUR HARD-EARNED MONEY, TAXES IT AWAY FROM US, AND GIVES IT TO SOMEBODY ELSE.

Oh.

BERKELEY SOCIALIST.

So what do you think we should do?

GET US JOBS!

But you have just rejected every idea I have for boosting employment—short of nationalizing the means of production and employing everybody by the government, that is. What are your ideas?

CUT TAXES. ABOLISH THE EPA. REPEAL HEALTH CARE REFORM. KEEP GOVERNMENT’S HANDS OFF OF MEDICARE. RAISE SOCIAL SECURITY PAYMENTS. CUT THE DEFICIT.

To call this incoherent doesn’t quite capture the utter diabolical ignorance.

book-section-book-cover2 Dwight Furrow is author of

Reviving the Left: The Need to Restore Liberal Values in America

For political commentary by Dwight Furrow visit: www.revivingliberalism.com

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Comments»

1. John Anngeister - October 15, 2010

Thanks for attracting attention to the Delong post and for the link to his site. This article makes the emotional side of the problem excruciatingly clear.

I have an hypothesis about the economic source of the current recession which reframes the Bush-era tax cuts in a way which seems worthy of researching but I have no idea how to go about it.

The argument is:

While most of the cuts refunded to the poor and middle class after 2001 were so small in gross as to probably flow directly into the economy, it seems fair to describe the higher-end bulk of those cuts as probably flowing into ‘savings’ – creating a massive new pool of capital.

By 2002, the question dominating the capital markets must have been increasingly, Where on earth was all of this gigantic new incoming pool of cash to safely rest and do work for its masters without driving down our interest rates?

If so, doesn’t it seem at least possible that the highly questionable ‘mortgages for everyone’ legislation could not have survived committee dicussion on Capitol Hill unless the money brokers had heard tell of it and given the GOP leadership the green light?

What is your estimate of the worth of my hypothesis? Who has run the numbers and checked the Congressional record?

How would you suggest I find help on the question, “Was the high-end tax cut after 2001 the money-source of events leading to the legislation which created the grounds for the housing bubble?”

Maybe I’m asking, do you think my question is worthy of the attention of someone like Delong? Sadly, I realize that, even if it contained a truth, it would make no difference in the education of the electorate in our current environment (ref the gist of Delonng’s lament).

Dwight Furrow - October 15, 2010

John,

Good question but I think the explanation is more complex than your hypothesis suggests. By the way, I’m not an economist; what I know comes from reading Delong, Krugman, Madrick, etc.

The Bush tax cuts, which capped a 30 year process of transferring money from the middle class to the investor class, probably created more capital for investment. But I think a bigger factor was the growth of China, India, European integration, high oil prices and the globalization of capital all of which created wealth that wants to be invested–and it found its way into real estate derivatives.

There was some minor legislation encouraging government support for home ownership because it was thought that home ownership improved communities, schools, reduced crime, etc. But this legislation did not encourage giving loans to people who couldn’t afford them. That came about because of perverse incentives built into the real estate markets and legislation that deregulated the banks so regulators could no longer do anything about the perverse incentives. The most important deregulation was the repeal of Glass Steagall, in 1999.

The main factor of the real estate collapse was the creation of investment vehicles that consisted of slicing up mortgage loans, packaging them into investments to be sold, along with a secondary insurance market to insure investors against loss. Since the loans were being packaged and sold, banks had no incentive to qualify buyers properly–they were selling the problem to someone else. The bond rating agencies were being paid by the investors so they had no incentive to honestly report the value of these investments. And the investment managers had no incentive to look closely at what was going on because their bonuses were tied to short term profits, not the long term health of the firm. Once housing prices stalled, the whole scheme came crashing down.

And everyone thought this system was OK because they believed housing prices would always rise, but more importantly, they believed the free market always prices assets and risk properly and thus bubbles could not occur.

This latter assumption was the biggest flaw.Ideology is terribly important in all of this.

You can find out about this stuff by reading article by Paul Krugman, some of Delong’s blog posts, and articles by Jeff Madrick in the New York Review of Books.

John Anngeister - October 16, 2010

Thanks for the full response. My knowledge of ‘the main factors of the real estate collapse’ and the ‘perverse incentives’ squares perfectly with yours.

Good point about a longer period for the heat-up of the capital markets, but 30 years sounds excessive – If I’m talking about disturbances caused by windfalls of excess capital (specifically, via shifted tax burdens) I will need to go back to Reagan’s cuts (a 20-year frame).

And yes, the near-term legislative funny-business ought to extend back at least as far as the forces at work in the stripping of Glass-Steagal.

Thanks for the cautionary ‘brake’ on my enthusiasm. I downloaded the necessary Fed Reserve data last night and am prepared to settle down with the facts.

I realize my capital market analysis suffers amateurish confusion because I am only interested in determining the effect of the high-end tax windfall. But I realize I need to know who exactly is the buyer and who the seller of all that excess capital, and when.

I know the big picture is more complex, but I’m going to discount your view of the role of foreign capital for now (after a look at the Fed data). I’m not in search of the answer to everything, only a clearer view of the effects of regressive taxation on the capital markets. I need look at the entire domestic food-chain implied by my little hypothesis, from (1) tax windfall to (2) suddenly-flush banks, investment groups, and mortgage brokers to (3) questionable mortgages to (4) bundled ‘assets’ to (5) toxic assets.

I’m using your comment bandwidth to work out these ideas – sorry for that, but thanks for your patient response, I’m not demanding a reply for now (but of course would be fine with any additional help).

Nice blog, by the way.


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