| Blue Ridge Journal
|BRJ Front Page||See all Essays||Send a Comment|
"Needed: A Public Stock Exchange"
A New Economics
The need for an evolutionary alternative
December 2008Two to three months have passed since average Americans first learned of the depth and pervasiveness of the immoral deception that has been perpetrated on them over several years by the nation's financial institutions. The banks and investment firms that we have relied on and trusted have for years colluded among themselves, with the passive (?) approval of our political leaders and supposed financial regulators, to steal us blind. Greed led the banks to push excessive mortgage loans on un-creditworthy buyers, loans literally designed to fail; then to package these bad loans in various forms, including as bonds, which Moody's and other rating firms apparently in on the game would give a AAA rating, thus tricking normally conservative mega-investors like pension funds into buying them. Savvy hedge fund managers would short sell these instruments, counting on the crash that eventually came. In the end though we're not yet at the end many billionaires have made further billions on these dastardly transactions, while you and I will foot the bill.Abstract:
The American "competition" social model has created vast innovation and enterprise, while leaving too many poor behind. The European "welfare" model supports the unfortunate, but a burgeoning bureaucracy stifles innovation. A new synthesis is needed, a New Economics that achieves the benefits of each system without its drawbacks.
Could it be that our nation's financial managers really didn't understand that they were digging the grave not only of their own firms, but of our entire economy? Hard to believe, perhaps, but in the current issue of Portfolio.com, Michael Lewis (author of "Liar's Poker") brilliantly exposes the incompetence, carelessness, and the profit-at-any-cost attitude of the captains of our financial industries. Here are a few telling quotes:"In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds."Finally, Wall Street went so far as to bundle the short bets on subprime mortgage bonds into new derivative financial products, inviting bets on bets four levels removed from the original mortgage. With leveraging at each level, the investments at risk at this point wound up to be hundreds of times greater than the sum of the original loans. A giant house of cards had been built of smoke and mirrors yes, it's a mixed metaphor, but the situation deserves one and it could have no future other than collapse. (See a recent BRJ recommendation for a publicly run stock exchange limited to actual investment in listed corporations speculators not invited.)
"The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater. The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L."
"Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000."
"... big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA."
And quoting the iconoclastic hedge fund manager Steve Eisman:
That Wall Street has gone down because of this is justice, ... They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.
The players in this Monopoly game with the nation's finances combined greed (and the failure of conscience that it breeds) with an astounding incompetence and lack of critical thought. Even CEOs of banks and investment funds typically had little understanding of either the nature, the risks, or the consequences of the chain of bad loans, toxic bonds, derivative trades, and side bet short sales they were involved in. Of course, their ignorance about their business in no way diminishes their malfeasance, and we can only hope that the Obama Justice Department will secure lengthy prison terms for a good number of these criminals. They have ruined an untold number of lives. There are small time crooks in jail now for having made off with a few hundreds, or thousands. Let them out to make cell space for those who have swindled us out of billions.
Karl Marx was about right in his analysis of unregulated capitalism: As we have now experienced several times, but have evidently not yet learned, building an economy on unbridled greed is a recipe for social disaster. Marx's error lay not in this insight, but in his solution, a prescription for a "worker state", a paradise where the proletariat would flex their muscle and do to the capitalists what had been done to them. The silliness of this delusion (which taken seriously proved deadly to tens of millions of Marx's workers) has now also been historically demonstrated, and the time may finally have come where some new creative thought may lead to a New Economics, a system (or, at least, a working blueprint) that will fairly reward both the industrious worker and the enterprising risk-taker.
There will be some who maintain that such a system is already on the boards, practiced by some of the moderately "socialist" welfare-state economies of western Europe. It is true that in these societies more attention (lip-service, at any rate) is given publicly to the welfare of the masses, or rather to government mass-welfare programs, than in the United States, where a common idea of the meaning of "society" is merely a collection of rugged individualists competing against one another in the same space. But western European socialist thought, which grew out of the socialist labor movement's internal ideological battles at the turn of the 19th20th centuries, has been cobbled together as a patchwork of old and now rather tired ideas. Based on the core idea of greater rights and better pay and working conditions for "workers", while avoiding the violently revolutionary leanings of their communist compatriots, their ideas grudgingly allowed for some tightly controlled private enterprise while looking to the state as the favored owner of the means of production, and as the guarantor not only of individuals' rights, but also of their livelihood.
The "social-democratic" (as they are known in Europe) political labor parties did gain power through the ballot box in many countries in the early 20th century, and achieved many of their egalitarian aims: Workers' rights, pay, working conditions, and thereby living conditions were dramatically improved. Yet, achieving these goals through the means of ever-growing governmental programs carried with it a dark side: The growth of the State as a monolithic and controlling power in people's lives; the growth of unresponsive bureaucracy, of needed permissions and forms, and the gradual disempowerment of the individual vis-à-vis the State. Guaranteed incomes and benefits tend to produce indifferent work enthusiasm and quality; rather than investing the worker with a sense of ownership (mass ownership is neither satisfying nor motivating) and pride in one's work, a state enterprise tends rather to invest bureaucrats with disinterestedness and pride in their power. It's well known that bureaucracies carry within them the lust to grow, and in socialist economies there's little to stop them.
The common appellations, "New World" and "Old World" for America and Europe, respectively, may be applied to more than the age of their cultures. Throughout the past century, while much of Europe stagnated in their bureaucracy, statism, socialism, and efforts at egalitarianism, Europe's brightest sons and daughters headed west, to a land that valued and rewarded individual initiative and distinctiveness. The result of America's love of enterprise has been a century of unequalled creativity and industry. I speak not so much of the U.S. dominance in commerce or in military matters, but in new ideas, whether scientific, practical, or intellectual. Inventions and ideas have flowed from the U.S. at a rate that has invited both unbounded admiration and inevitable surly opposition. It's hard to image what the world would be like today without just the material creations from the U.S., while Europe's inventiveness has been decidedly modest. Even after the past eight years of unfortunate leadership, the U.S. is the target of choice for potential immigrants who can reach our shores, not, as in Europe, in search of state benefits and hand-outs, for they barely exist here, but in search of opportunity.
We have seen the admirable idea that motivated European socialism run its course toward statism and bureaucracy. Its future course appears headed for more of the same: more government dole, more state guarantees, more rules (check the BRJ note on the European Union bureaucracy), less variety and individualism. It is true that Europeans have grasped, better than Americans, that individualism, while of great value, is not the end-all and be-all of social policy, and that the society as a whole is the unit that advances or fails. As a biologist I will confirm from the study of evolution of species that it is the group, not the individual that needs to survive, adapt, and improve, or else fail. That's the nature of biological evolution, and undoubtedly also of societies. Yet it's equally true in evolution that the new genetic idea that permits the group to adapt and to improve develops first in an individual. Success of the group depends both on new ideas arising in individuals and on their passing to and sharing with the group. Without either of these elements the group the society is doomed to stasis and/or extinction.
While European states have flirted with emphasizing group welfare at the expense of individualism, the American experience clearly associated with our recent frontier conditions has been rooted in suspicion of government, limitation of the powers of the state, and glorification of the individual. Group-welfare concern is of fairly recent vintage in the U.S., and "socialism" is still a dirty word. Fear of statist authoritarianism was only strengthened with the experience of the "Cold War", which demonstrated the evils inherent in state-enforced collectivism with its suppression of individual dissent or iconoclastic behavior and thought. But the recent American concern for welfare of the less-fortunate in society has arisen, not out of coherent social theory, but simply from a growing sense of national shame. Shame that a "third-world" level of poverty can exist in the country that likes to consider itself a model for the rest of the world. Shame that promises and hopes embodied in our national Constitution remain out of reach for a substantial portion of our citizenry. Our market-based society has placed practically no value on mutualism or cooperation, except for the limited purpose of making a profit. Such feelings have inspired in many Americans the frightfully un-American idea that perhaps competition alone is not a sufficient basis for building a stable and successful society.
In the months since this fall's financial crisis hit the headlines, political-economic reporters and pundits have filled the airways (in the U.S.) with nearly ceaseless chatter about the latest details of the "bail-out", congressional vote counts, the Treasury Secretary's latest words, new appointments, and similar news of the day. Occasionally, there has been reference to some specific regulation whose enforcement should be tightened. Of course this level of discussion is no surprise; it's the sort of thing we expect from our News Media. But notably though not surprisingly not a word of discussion has been heard (by your reporter, at any rate) about the fundamental oppositions in our system that give some men (as Michael Lewis points out, "they" are nearly all men) the power, means, and motivation to destroy the lives of millions of random and innocent victims. It is surely past time to rectify this power imbalance that is a blot on our democracy, by applying our capacity for creative thought to formulate new economic goals and ideas, indeed a "New Economics" that draws upon the experience of both the old and the new worlds.
With fresh thought soon arriving in Washington, and with the recent example of egregious irresponsibility and greed by our financial fiduciaries fresh in our minds, the time is now to assess anew the historical European and American experiences, and to bring genuinely new thought to an economic-societal synthesis that will guide us through the rest of the 21st century, and that will provide for an improved mix of individual and societal liberties, rights, duties, and protections. What will it look like, this New Economics, this innovative structure that will preserve and reward America's love of individualism, invention, and enterprise, while striving for social stability and fairness and giving to Everyman a guarantee of opportunity, all this without creating the super State that intrudes on the lives of the citizen? We can't know yet, but it ought to have these characteristics:
- It is evolutionary; i.e., flexible, adaptable, and non-doctrinaire.
- Its economics provides inducement and rewards equally for competition and for cooperative efforts and service.
- It recognizes the need both for individual creativity and for ensuring the welfare of the society, and seeks solutions that provide for both.
- It holds that rights guaranteed to citizens by the society are balanced by obligations of citizens to the society, a concept hitherto much neglegted in the U.S.
- It recognizes the danger of unchecked individual economic power, and has meaningful measures to protect its citizens against such. Corollary is the rule that greater wealth must mean greater social obligation.
- It includes an honest, simple, and transparent tax system, where citizens know clearly how much taxes they are paying. This implies cessation of the deceptive system of corporate taxation, where corporations in effect collect taxes from customers and remit them to the government in the form of corporate taxes. (The payer of these additional taxes is the customer, unawares see this BRJ note.)
- It sees government as the servant of the citizens, with a primary mission of providing its services in a quick, simple, and streamlined fashion. Good government considers excess bureaucracy a cancer to be excised.
Many questions will arise in the formulation of such a societal sea change, including such fundamentals as: Is there a difference between the hallowed "profit motive" and the "greed motive"? To what degree are we responsible for the effects of decisions that we make? And most important: Is this country, which has long prided itself on liberated thought, ready to invite genuinely new thought about societal economic goals and principles? Perhaps our new "Change!" President will have what it takes to initiate such a revolutionary discussion, which might match the revolutionary formulations of the Founding Fathers in its impact on our nation and on the world. We can hope, and we can prod.
© 2008 H. Paul Lillebo
BRJ Front Page See all Essays Send a Comment