Friday, October 15, 2010

Making Real Things For Real People (tm)

Three years into the crisis we can say that the world did not come to an end, the economy did not fly off the cliff and markets are operating in "safe" mode.  Not to mention that Wall Street is smugly preparing to pay huge bonuses once again.  Credit must go to the Fed and Mr. Bernanke personally for making so much, well, credit available to everyone who asked for it and even to some who didn't.  

But is it, in fact, credit that we must give the Fed? 

During the past three years the Federal Reserve has assumed a role never envisaged by its founders or anyone who ever worked there - Mr. Greenspan included, I'm sure.  Despite his "heli-Ben" moniker, I even doubt if Mr. Bernanke himself ever truly believed that the Fed would have to go as far as it has under his guidance. 

Because it's one thing for the Fed to respond to challenging economic conditions by lowering interest rates down to ZIRP.  But it's quite another, a quantum leap (of faith?), to become the major shaping force of the economy by inundating it with so much money as to reverse the natural ebb and flow of capitalism, to forestall what Joseph Schumpeter called creative destruction.

They say that the road to hell is paved with good intentions, and I am afraid that we have all of us allowed Mr. Bernanke to lead us a merry journey that may end in a very hot place, indeed.  He has good intentions, undoubtedly: to "save us" from a financial meltdown which could have resulted in another Great Depression.  He has used monetary policy to an incredible extent, encouraged, it must be admitted, by an executive branch that was so intertwined with Wall Street as to be practically indistinguishable.

So, monetary and fiscal policy both opened up fire on the Great Recession using the only big guns they could bring to bear: money and government borrowing /spending.  They fired so many rounds of such heavy gauge that the "enemy" was stunned and is - at the moment - still dizzy from all the noise and smoke.

But the enemy is definitely not dead, because money-for-nothing and government spending are to him as effective as flash-bang grenades.  Lots of smoke, lots of noise - but no damage.

  • Point: The real enemy is widening income inequality.  The vast majority of people have seen their real income remain stagnant for 40 years and had to burden themselves with ever-increasing debt to make ends meet.  
Massive debt is, therefore, but the proximate cause of the crisis.  It's actually a resulting effect of the ultimate cause, which is high income disparity (see chart below).

Chart: FRB Survey of Consumer Finances

Obviously, easier credit (more debt) and government deficit spending (even more debt) do nothing to solve the income inequality problem, which can be summarized thus: lower and middle income people spend a far greater percentage of their income than the rich, who amass wealth instead. Therefore, it is imperative for the former to have growing income to maintain their spending out of earnings and keep the economy healthy.

The obvious solution, most will say, is as as old as Robin Hood: take from the rich and give to the poor.  Really?  While the egregious favoritism shown to the rich in previous tax laws must definitely be rolled back, taxation alone cannot do the job of repairing decades of yawning income inequalities.  Instead, we should pay great attention to the most fundamental economic concept of all: adding value through peoples' work.

What I am trying to say is that real incremental wealth, and the social "fairness" that results from its more equitable distribution, cannot come about from re-distribution, but only from the creation of new useful real assets that generate added value for society at large.  For example, an upgraded electric grid that reduces losses and permits two-way power flow;  such an "asset" can be put to work immediately and will generate profits (added value) for all, i.e. it's useful to the vast majority of people.  Its design, construction and maintenance will create tens, even hundreds of thousands of new, skilled jobs that will command high wages, precisely because of the grid's profitability.  That's how income gaps get smaller (think Ford, Model T, etc.).

Contrast this with trading CDS's.  While there is a small theoretical benefit to society at large from such an activity (I could argue that it's actually a cost, but that's another discussion), the benefits that accrue are not real but purely actuarial or monetary, i.e. virtual.  Furthermore, because of the nature of the financial industry itself, those benefits end up in the hands of a tiny part of the population which is already super-rich.

In conclusion: we have reached, nay surpassed, the limits of monetary and fiscal policy in dealing with this Great Recession.  What we urgently need now is -gasp- an Industrial Policy.  Yes, that's making real things for real people (tm).

P.S.  There is at least one guy who "gets it".  Robert Reich was Labor Secretary under Bill Clinton and has just come out with a book about exactly this matter.  Aftershock: The Next Economy and America's Future is well written, well argued, brief and to the point.  It also includes several workable ideas on how to close the income gap.


  1. You've let your prejudices slip.

    There is nothing wrong with CDS's. For the same reason there is nothing wrong with insurance. There is nothing wrong with shorting a bond as a hedge. There is nothing wrong with buying a bank share, which is the same as buying treasuries and a CDO^n. They are all insurance and they are all things that involve various aspects of taking or laying off credit risk.

    Likewise, there is nothing wrong with naked short selling, (just who is doing the buying).

    However, on the debts, there is a problem. If an individual gets into debt, they do so knowingly.

    However, if governments get into debt they invariably do it secretly and in a way where people don't know that they have done so.

    If we take the UK, the official debt figure is 1,050 billion. The unofficial (accrued) is 5,000 billion plus. The difference is off balance sheet accounting. The effective debt figure is 15,000 billion plus. So many people have no savings that when old they will need to be bailed out. The current bailout cost is 13,000 GBP a year.

    The UK bank bailout where the government nationalised banks is running at a loss of 23 billion. Compare that to 5,000 billion. Who's really at fault?

  2. Tss, tsss, Lord Blagger... you're letting YOUR prejudices show.
    Why use that nasty no no word in our CURRENT society, that "prejudice" word ? That nasty word that EVERYBODY now shuns like the pest, for fear of appearing a bigot in some form or another ?
    Hellasious is talking about WHAT HE BELIEVES (IN) (although Hellasious, what the hell is that "tm" sign after your post ? Does it mean trade mark ? Are you REALLY trying to claim ownership of something here ? Geez... I hope that this is just my... PREJUDICE AND IGNORANCE showing through here.
    Lord Blagger, if you push the shouldering of responsibility so far... why not TAKE IT TO THE LIMIT, and say that there is nothing wrong with all that debt too ? WHO SAYS THERE'S ANYTHING WRONG WITH IT, using your reasoning ? And if YOU say so... isn't that... YOUR PREJUDICE showing through, there ? (Ooops, I meant to say.. YOUR BELIEFS.)
    I like your take on things Hellasious. But.. I DO NOT like the INDUSTRIAL part of it at all.
    I am increasingly becoming.. a Luddite.
    The more I see the way things hang together, the more I think that there are some things in this world that we just CAN'T AFFORD TO DO.
    What we're REALLY interested in behind all this debacle is TOTAL CONTROL (of the economy, of nature, of our world), and we are ready to take it to the limit to try to prove to ourselves that TOTAL CONTROL of our world is possible.
    The more of this world we control, the more we WANT TO CONTROL.
    We are also interested in destroying the last vestiges of belief in what made our ancestors live : Biblical knowledge about the world.
    How about that..; Eagles song, was it, Okie ?
    "Take it to the Limit One More Time" ?

  3. Hi Hell, Hi Debra.

    Rem that query about Behavioural Econ I had? Well it turns out to be a real interesting subject - explains the behaviours of so many useless'worthys'

    Them rich folk: Are real loss averse (esp. for small stuff) but have little positive feeling for substantial gains - which they see as their rightful endownment anyhow - hence if they do not get those gains, thats a relative loss, and they get awfully cross! They will engage in increasingly riskier behaviours to ensure no further 'negative-gains'.

    Us poor folk? Our 'gain' will have to be in Paradise - but we have to suffer first! Truely wonderful!

    Read up on Prospect Theory! Texts are a bit heavy, so you may have to trawl through the peer-reviewed journals.

    Brian P

  4. Re: (tm)

    Indeed it stands for trademark. But only as a joke, of course. Make that sarcasm, actually. As if I was "the only" or "the first" one to think of such patently obvious stuff...


  5. In these days of buying and selling everything, you never know...
    If we COULD trademark it and effectively police the PROPERTY of it by sticking virtual fences around it, we WOULD..
    Brian, I hope that you have not forked out mucho filthy lucre for those slants on the behavior of the rich, cause.. that ole GOSPEL could have told you THAT, and for NO FILTHY LUCRE besides..

  6. Hell,

    Still a deflationist?

    I know, it is becoming a boring question.

    Also boring the usual comment: you are discounting the importance of politics and the disappearance of trust. Trust is more important than Trillions of debt.

    Though I am starting to believe that if 50 Trillion of credit is your problem, Ben Bernanke is en route to provide them in a couple of years ;)

  7. How dare that poor lady down the hall that cleans my toilet expect ME to provide her a pot to piss in in her old age!

    After all me and my mates are God's blessed creations for creating wealth out thin air with our secret alphabet soup concoctions, and with such a piddling of help from the government.

    These peasants should kiss our feet, for we are the real engines of the new virtual economy.

    We like to call it creative creation, and we'll keep on creating as long as the government gives us that wee, little, minuscule helping hand from time to time.

  8. Debra,

    Thanks for the support!

    Third-level tuition is almost free here in Ireland (you have to pay Student Union reg fee - approx 1200 USD). Non-EU students have to pay full-fees.

    Most reading material can be got from library or a PDF download. Principal cost is your PC, a printer and paper. Time too of course!

    Brian P

  9. Hellasious, I have a BIG FAVOR to ask you (as humbly as I can.. ;-))
    Would you arrange for me to have a blog spinning off of here, like SuddenDebt's Spawn Off, way back when ?
    I would like to HAVE THE CONTROL of my own blog but in a convivial place AROUND HERE, where other people would be free to come post too. (The more the merrier, I say...)
    But.. I WANT THE CONTROL of the blog. I'm tired of getting kicked out of places where OTHER PEOPLE have the control. It's getting old... (no insult intended to anyone here, please understand)
    What do you say ? (pretty please with sugar and cream...)

  10. Debra:

    Just go to and start your own blog.

  11. "The obvious solution, most will say, is as as old as Robin Hood: take from the rich and give to the poor."

    Always worth remembering the "real" story of Robin Hood -- he stole tax collections from the authorities and returned them to the people who had paid the taxes (which was why they were poor). Robin Hood was a direct-action Tea Partier!

    To my surprise, I find myself in almost complete agreement with Hellasious -- yes, we in the West need a (Re-)Industrialization Policy. The only part I would disagree with H. is on his touching concern about widening income inequality.

    England started the Industrial Revolution at a time when the poor were horribly poor and the rich were stupefyingly rich. But that income disparity did not prevent the investment of capital in real wealth-creating advances. Similarly in the US in the Robber Baron era.

    The real issue is excessive modern regulation. The number of environmental laws has exploded since President Nixon founded the EPA in 1970, which has driven many US industries overseas. Much environmental good has been done by all of those laws & regulations, but much economic harm also. And the unemployed poor are the ones who are paying the price for environmental benefits which warm hearts on the wine-and-brie circuit.

    A real (Re-)Industrialization Policy will require a careful re-evaluation of excessive environmental regulation.

  12. Um, Lord B, If I may oversimplify to make a point, the problem with a number of the items you list is that they are, in effect, in too many circumstances, nothing more than instruments for achieving something for jack shit (aka nothing).


    The Federal Reserve, which controls America's monetary policy, says it is trying to invigorate job creation in our country by slashing interest rates to the bone. This move allows big corporations to borrow money for next to nothing, so they can expand and start hiring again.

    Great goal! How's it working out?

    Well, the first step has gone splendidly, with such giants as DuPont, Hertz, IBM, Microsoft, and PepsiCo rushing to grab the windfall. They've borrowed hundreds of billions of dollars at interest rates of less than one percent. However, there's been quite a stumble on step two of the Fed's plan. Rather than putting this enormous stash of cash to work for America, the corporations are simply squirreling it away for their own enrichment, refusing to spend it on the job expansion that our economy desperately needs.

    For example, Microsoft – one of the richest corporations on Earth – amassed nearly $5 billion under this "opportunistic borrowing" scheme, yet has put none of the cheap money into job creation. Instead, it is using a big chunk of it to buy back stock from its own shareholders – a move that merely profits the handful of rich elites who control Microsoft.

    Worse, such corporate powers as Hertz and PepsiCo are using the funds to take over competitors. These consolidations will actually cut jobs, while reducing consumer choices and raising our prices. Indeed, there's no provision in the Fed's program to keep the giants from investing the money in foreign expansion, thus offshoring more American Jobs.

    This is Jim Hightower saying... And there's the rub in nearly all of Washington's indirect job creation efforts – officials blithely dole out billions and even trillions to corporations and banks, with no strings attached. So the big shots and bastards gleefully grab the money and run.

  14. Debt is a real problem at every level of society. The problem ultimately has some simple solutions. Debt results from having more expenses than income and insufficient reserves to deal with emergencies. When a person, a company or a government is in debt the only ways out are:
    1. Raise Income
    2. Cut expenses significantly so debt can be paid back and reserves can be built.
    3. Pay off debt
    4. Build cash reserves

    Until someone takes these actions and makes them stick our populations and our governments are going to be heavily in debt.

    There's no magic pill for it either. It doesn't matter whether Mr. Jones or Mrs. Jones is handling the family finances. It doesn't matter whether the government is run by liberals or conservatives. It doesn't matter if your discussing a mom & pop shop or a huge corporation. The above steps have to be done in order to eliminate debt. It will be painful to take some of those steps.

  15. We have reached a point where people can't take control over their own finances. People should seek out consumer credit counseling in order to get advice on how to handle their finances.

  16. What I htink is funny is how the government is using the very things that got us all into this mess. Borrow Borrow Borrow. Spend Spend Spend. When does the cycle end?