It's the Economists, Stupid!
If you want to read it, you can go to the link, but really, I thought, what's so hard to understand? The economy we have, with all its volatility, is exactly the economy any sane person would have predicted after the wholesale decline of regulation, as both a reality and an idea, in the eighties and nineties. And who has kept up the drumbeat for deregulation, not only here but everywhere, if not those screwy, and tenured, free-market economists? Their whole job for the last thirty years has been to prop up the egomania and greed of corporate CEOs by making that greed and ego-mania look both positive and unavoidable. As a result, the gambling side of capitalism has driven every other side away, to a chorus of bleats from the left that, Gosh, something big and bad was bound to happen, and an accompanying chorus from the right that even saying such a thing was treason.
Let's review. At the end of the 1970s, it was decided by some people that they weren't getting rich enough fast enough, and that they were tragically hampered in their efforts by government regulations that dictated, for example, that foods called by some generally understood name, such as "milk" actually had to be milk--not a milk-like product, not a milk-containing product, but truly milk, from cows. We had "stagflation" I remember it well. It might have gone away, or the shock of oil prices at the time might have induced "entrepreneurs", as they called themselves, to invent something new, but they went whining to the Republicans and the Republicans installed that phoney, Ronald Reagan, who installed another bunch of phonies in various offices of the regulatory agencies, and those phonies said that businesses were perfectly capable of reglating themselves, which everyone knew was a crock, since they had never regulated themselves and were openly getting rid of regulations so that they wouldn't have to regulate themselves or be regulated by anyone. Yes, capitalism is a shell game and all salesmen have a little of the snake-oil in them, which is what makes it fun and profitable, but also makes it persistently unscrupulous. The apologists for the "Reagan Devolution" were "Free Market" economists, whose idea of a human being, based on their experience of themselves, was a perfectly rational and isolated male who always acts in his own selfish interest. In addition to themselves, they were, of course, describing people with sociopathic personality disorder. These economists did what was in their selfish best interests to do -- they promoted and excused all the aspects of human nature that Jesus himself had found abhorrent and they made the world we have today.
The managers of our businesses learned what they know from these guys in their business schools, and guess what, that's why they can't manage their way out of a paper bag, because they're unregulated! The purpose of regulations is three-fold. 1. They prevent the "failure of the commons", a concept that describes why unregulated markets become more and more criminal -- if the unscrupulous run things, then the scrupulous have to give up some of their scruples just to save themselves, and so the whole system gets more and more criminal. 2. They give customers assurance that the things they spend their money on are more or less reliable. and 3. They keep the system relatively simpler than it is when there are no regulations, so the system is easier to understand and manage. What was it they said about the subprime mess? Oh, yeah, neither the buyers or the sellers of sliced and diced mortgage-backed securities knew what they were buying or selling. And they were the experts!
I don't hate capitalism. Capitalism has enabled the printing of lots of good books that had been out of print for a long time and also the spread of redleaf lettuce and those delicious blue potatoes that I like so much. But unregulated Capitalism has done a wonderful job of certain other things, too -- consolidating the ruling class, increasing the class divide in our country and around the world, destabilizing lots of third-world governments, and accelerating the pollution of the natural world, climate change, and population growth, while worsening the physical health of almost everyone. It has also provided us with a lots of cheap entertainments and goods that we didn't know we needed (Bratz dolls, anyone?). But the failure of economists to understand human nature, especially the complexity of relationships and the interplay of self-interest and morality, has enabled them to fatally simplify our world and exalt such dopey ideas as "creative destruction". They have led the government down the dead-end path of thinking that the government serves the economy rather than vice versa.
When I read about rightwing jerks attacking Rev. Wright for telling the truth when they themselves have created the mess we are in (huge expensive war, nose-diving economy, rotting infrastructure, climate change dead ahead, Constitution in shambles, White House occupied by delusional idiot) I know we have entered, not the golden age that the shallow, ignorant economists predicted, but a true iron age of conflict, death, and destruction.
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It's the Deregulation, Stupid!
It's the Shock Doctrine, Dumbkopf! Naomi Klein's theory has come to America! Just the way the neo-cons planned it.
Anytime Bush has a meeting on a Sunday, when he could be out cutting brush, well, we got trouble my friends...
Agreed.
Love those Naomi's. See Naomi Klein on steps to close an open society.
Damn, that's a book I keep meaning to buy! But from what I've read in her articles, I must agree. But still, if I understand the premise correctly, the Shock Doctrine is more of a logistical combination of corporatists, economists & warmongers collectively working together to strip an economy and transfer the wealth to the 1%.
And I think you're right that the SD is in play during Katrina, but the Friedmanite economists have been laying the ground work on their own since the days of Ronny Raygun....
If there's an upside to the financial meltdown we appear to be facing, it's that we aren't hearing any more nonsense about the need to privatize social security. 'Course there's no guarantee that McCain won't suddenly see it as a wonderful idea---along with occupying Iraq for 100 years or perserving the Bush tax cuts.
When Reagan shut down the National Mortgage Approval Agency in 1981, any half wit could have predicted the subprime mortgage crisis that we have today. How could anyone have thought that home prices and mortgage rates could safely be determined without the strict control of the NMAA?
I'm not familiar with the NMAA, but I believe the securitization of mortgages via MBS's (Mortgage-Backed Securities) came much later.
Securitization of mortgages allowed their value to get beat up -- or more precisely, beat down -- by market forces.
So let me get this straight. We must hold all republicans and and banks accountable for their "corrupt" actions yet we don't need to hold homeowners accountable for signing loan papers to buy a house they knew they couldn't afford? OK got it.
Ms. Smiley, good post. Huffpo has many good business section bloggers(who predicted much of this), too bad they are overlooked/ignored for the gossip section and politics. The only way Americans will wake up to the mess we're in is if they are hit in the wallet, which they are about to be, hit very HARD.
You are correct, Dan. Even then, most people won't wake up to the true cause.
I love you, jane.yes.yes. yes.
I have never had the pleasure of cashing a government paycheck. I have lived the last 30 years owning and running my own business. So I too believe in the market. But you're right, there really is no such thing as a free market. Our goal should not be a free market, but a fair market.
Regulation provides a floor for ethical business men and women. (an oxymoron? not really)
The Emperor's New Universe (excerpt)
Whenever I think of the flow of wealth in a healthy economy the first thing that comes to my mind is that the total amount of mass and energy (money and labor) is constant. Even if it is an expanding universe (population and economy) the distribution overall should remain the same. The flow is much like an elaborate water fountain in the town square. We have this pool of water at the base, which is where most of the wealth accumulates among the vast majority of people. Like water, money lubricates the machinery of commerce. As people consume goods and services that money works its way up into the hands of a few, who then splurge on high end products and services and the money showers the community. If you imagine such a fountain it will have tiers, each one a little smaller than the one below. Each tier can only hold so much water (money) before it spills over into the tier below. Of course, this is only a simplified representation, but I hope it gets the point across. The problem we have today is that most people do not even have clear representation of how a healthy economy is supposed to work. It all seems clear until someone starts asking questions. Our "system" suffers from the misconception that it takes care of itself without human intervention and accountability. That, however, is not a system. That is Chaos cloaked in the veneer of Cosmos, where the sheep are merely defined by their naive desire to own stuff and the wolves are defined by their desire to own sheep.
Though not in complete agreement with everything said I love the title. I want that on a T-shirt and bumper sticker!
Wanted to explain slice and dice mortgages just in case anyone was curious...
One way to reduce risk is to diversify. That is, instead of buying one company (lets use Enron for example), you buy more than one company (So we buy Bear Sterns and Delta). Now if something unexpected happens to one of the companies, you won't lose everything because you have the others. Your Enron stock is now toilet paper, but at least you have your Bear Sterns and Delta shares. However, if all your stock picks are lousy, this still doesn't protect you. You paid $80 for Enron, Delta, and Bear Sterns, and got 83 cents for Enron, $2 for Bear Sterns, and sold your Delta for a buck.
Likewise the slice and dice mortgages are a way of reducing risk. You take a whole bunch of mortgages all over the country, and make one big mortgage "pool," then sell chunks of that pool, each chunk contains a piece of every mortgage in the pool, so if one person doesn't pay the mortgage you lose less than if you owned the mortgag outright.
However, this is a wise way to reduce risk if you don't change the underlying activity. It reduces the risk of a given failure hurting you more than the average default rate. If industry wide forclosures are 1%, and you use this system, it makes sure you don't run a default rate of 5% by fluke or bad luck. It doesn't actually protect you from a higher industry default rate.
The acceptable risks were based on making sure that you didn't default, and were based on both the risk of a high outlyer default rate taking out a bank, and the risk of a high industry average default rate taking out a bank. As this new instrument decreased the outlyer risk, industry bankers accepted higher risk loans because they had lowered their risks.
But they NEVER ACTUALLY LOWERED THEIR RISK OF HIGH INDUSTRY AVERAGE DEFAULT. They got so lost in the numbers they forgot what the numbers meant.
Oh, and yes, if they had been regulated they probably wouldn't have been able to pull this crap.
Great post!
I'm so scared....what's going to happen when the meltdown is total...and it's us who have to work for a dollar a day....16 hours a day.....?
It's the Economists, Stupid!------
Two economists walking down a road. Presently they came upon a dog-sh!t. The older economist told the younger, "I'll give you $20,000 if you eat that."
After weighing the variables, the younger decided he would be better-off if he would eat it, and so he did.
Proceeding further down the road... they happened-upon another dog-sh!t. The younger told the elder, "I'll give you $20,000 if you eat that."
Naturally.... he did.
As they journeyed farther the younger started thinking, and asked, "How is it that we have both eaten sh!t, and neither of us is any better off financially?"
The elder replied, "You have missed a very important detail. We have been involved in $40,000 worth of transactions."
If y ou laid all the economists in the world, end to end,....
most people would think that's a good thing.
yes start laying them in to end in the middle of the Dead Sea.
The biggest problem with US is ignorance. For years the government is shaping a population with no interest in politics and economy, population totally oblivious to what is important in they daily live. There is more people interested in stupid affairs of Britney Spires live then economy and politics, there is more people watching an American Idiot – ups I think the show title is Idol then PBS. For years people believe that we are “the best” and nobody ever questions an authority, even the highly educated people are still ignorant to daily affairs of their government. The Media is feeding them with what the government wants and the public is swallowing the BS. Majority of people doesn’t even know how to think for themselves, and that’s why we have what we deserve. Any time when I hear people taking that they will vote not for, but against some candidate, I wonder why they won’t stay home instate. No, they won’t because they think, they are the only one on earth to have a “right to vote” – so they will exercise that right even if they will vote against they believes. Nobody thinks that “right to vote” is nothing without a “power of vote”… yes, there is a difference between those two and our votes have no power… If you only take time and study a Constitution, Bill of Rights and electoral system of US, you’ll know that this is the most undemocratic system in a world, and your votes don’t count. How that could be, that every state has a different primaries, some have open, some close primaries, some have caucuses instate of primaries. In a democratic election you don’t need a middleman (delegates) to stay between your votes and results. Please, don’t tell me that this makes sense because we are republic not democracy …. That’s the BS that you believe in for at least 100 years to long.
And ofcourse, we love to forget abut our history .... and this is the biggest problem that Obama is facing now with Rev. Wright - honestly everything this man said is true, truth that we were sweeping under the rug for too long...
Wow, reading that actually hurt my eyes.
Another brilliant piece by the best of the bloggers. Thank you for your clear view of the economic situation that we all must suffer through because of the greedy and the corrupt.
Thats it in a nut shell. Good work Jane.
Ahhhh ....
At the beginning of the 1970s, we had 'asset securitization' courtesy of the Department of Housing and Urban Development. That seed grew into the derivates problem of this decade.
Really, when you parrot the 'deregulation' theme, you need to ask why those wonderful GSEs, Fannie Mae and Freddie Mac already had their hands in the toxic cookie jar? The figures were there in black and white (or should that be black and red?) on a Credit Suisse diagram last July.
Money market funds were delimited to low-risk investments and there was supposed to be oversight. So who was minding the store?
What happened to the SEC investigation of Mozilo, even as $51.1 billion was pumped into Countrywide last September. And they were supposed to be bought out by Bank of America for only $4 billion? Eh?
Remember how Enron was still rated as 'buy' two weeks before they sank beneath the waves? Remember how the SEC approved the bizarre accounting practices of Arthur Anderson accounting firm?
Remember how on May 21, we were told "the subprime problem is largely contained" ???
Remember how the Fed stopped publishing the M3 and most people said "so what" ?
Remember how Bernanke needed a tutorial on derivatives, which he never learned about 'in the day'?
"It's the derivatives, stupid!"
But hey, now he has got his paws on some, that mysterious, unknowk paper no one on Wall St. trusts, he could assign his minions to deconstructing one CDO at a time. Sell each mortgage BACK to the bank who originated it, put the funds in an escrow account for that CDO in the unlikely event he has to give it back ... this is probably the only way to arrive at a market value of the 'slice-and-dice' process.
Sweet,baby Jane, you nailed every single issue, that ails the human condition in the US of A. A most honest post, fearless and to the point. When one filters all the crap that's been piled onto us by the main-stream media, it's so sweet to read a post that best describes the state of the nation as it really is.
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