Tuesday, December 6, 2016

Did the System Work?

What went wrong? As Western nations are rejecting what seem to be liberal democratic institutions in favor of populism, more than a few people are asking what went wrong?

Of course, the analysis assumes that the peasants with pitchforks are rebelling against democracies. It might well be, as Bret Stephens suggests this morning, that they are rebelling against the elites who have been running the international banking systems. That is, against those who supposedly saved us from disaster after 2008.

According to Stephens, the system did not work.  In the aftermath of the 2008 financial crisis institutions of “economic global governance” took over from the markets. They narcotized the problem… disguising, but not solving it. It’s like maxing out your credit card and then taking out a few more credit cards to pay off the first one. Ad infinitum.

Would the market have done better? We do not know. Many serious thinkers—James Grant comes to mind—suggested that we would have done better to let the market deal with the problem. It would have produced some considerable short term pain, but it would have set the world banking system on firmer ground.

Populism, by Stephens’ reading, is a reaction to rule by certain elites, by a guardian class that believes it knows better than the markets. The economic recovery engineered by the guardians looks good on paper but does not feel so good for those who have been left behind. One understands that the profligate Obama administration could not have borrowed all the money it did if the Federal Reserve and other banking institutions did not conspire to keep interest rates artificially low.

In Stephens’ words:

What happened? In 2014, Daniel Drezner, a professor at Tufts, published a book extolling the International Monetary Fund and other institutions of “economic global governance” for putting out the fires of the 2008 financial crisis. The global economy had been teetering on the brink of another Great Depression, but it didn’t fall in. Ergo, success.

The book was called “The System Worked.” Except it didn’t.  The system did more to mask problems than it did to solve them.

Government statistics can show a drop in the unemployment rate, but they give scant indication of whether the jobs available now have the status or pay of the jobs available previously. Giving unlimited credit to a panicked patient will always have a narcotic effect; it can also have an addictive one. Near-zero (or sub-zero) interest rates will goose stock markets to the delight of sophisticated investors—and the dismay of savers. Bank bailouts may make “systemic” sense. But they divorce behavior from consequence. Pushing economic management from elected officials into the hands of unelected central bankers and regulators flatters the vanity of the intelligentsia while offending the normal person’s sense that his vote should count toward his own livelihood.

What does Stephens mean when he suggests that the bankers helped divorce behavior from consequence? I understand him to be saying that when you borrow too much you ought to suffer the consequences. Profligacy should not be rewarded. Yet, the guardian class printed so much money that people got the sense that they could spend what they wanted and that the day of reckoning could be put off forever. In their hearts they know that something was wrong. But they do not know what and do not know how to fix it.

15 comments:

  1. Enough of us concluded that our government was shucking and jiving, and liejng to us. Additionally, our major media was a deeply involved part of that act. The Tea Party stood up in 2009 or 2010, and were lied about unmercifully.

    One could say that the system worked...for itself, and NOT for We the People.

    Hence, Trump, with great wailing of terrible wails and gnashing of terrible teeth resulting.

    YMMV. I know Ares' will.

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  2. "What went wrong?"

    Nothing.

    Stephens is angry and bitter because voters picked a guy he doesn't like. In fact, he recently wrote a column worrying about Trumpism ushering in a a new wave of anti-Semitism because Breitbart or something, which, for the WSJ, is the equivalent of Godwin's Law for Bob's Blog.

    He'll either get over it or he won't. Who cares?

    At any rate, people started warning about moral hazard when Clinton (ie, taxpayers) and the IMF (ie, taxpayers) bailed out the Mexican peso in '94-5. That was followed a decade later by another Clinton-engineered financial boondoggle, the mortgage crisis, which was promptly bailed out again.

    Now we're seeing a repeat of the moral hazard problem with Obama's student loan bailout, where working taxpayers will bail out the Womyn's Studies majors from Radcliffe who are currently employed as baristas.

    No, nothing went wrong.

    https://en.m.wikipedia.org/wiki/Moral_hazard

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  3. Mr, Olympus, come to the white courtesy telephone, please. We miss you.

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  4. New-Media vs MSM

    https://www.youtube.com/watch?v=071E-sPcemw

    https://www.youtube.com/watch?v=2CKqan61Mmg

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  5. I fail to understand how clearly delineated voter ID laws are discriminatory. Especially when most all states allow for free ID cards. Sounds like phony condescension.,. that the African-American cannot possibly figure out how to follow the proper procedure to vote with a FREE state ID card, and -- even if he/she shall have not procured said ID card in time -- he/she can cast a provisional ballot, subject to verification.

    My, what disenfranchisement. My, how cruel.

    Barf.

    And, amidst this lunacy, we have "sanctuary cities."

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  7. Stuart: What does Stephens mean when he suggests that the bankers helped divorce behavior from consequence? I understand him to be saying that when you borrow too much you ought to suffer the consequences. Profligacy should not be rewarded. Yet, the guardian class printed so much money that people got the sense that they could spend what they wanted and that the day of reckoning could be put off forever. In their hearts they know that something was wrong. But they do not know what and do not know how to fix it.

    Banks don't "borrow" money, they lend it. It is true the U.S. Government has somewhat over doubled the national debt under Obama's "recovery." But things like liar loans were part of the problem from the bankers - lending money to people whose income is far insufficient to repay it, and doing so because those mortgages could be sliced and diced by wall street into fake AAA rated bonds.

    So when Obama took office, and failed to demand any accounting from the bankers or Wall Street or Rating agencies THAT was a FAILURE of epic proportions, perhaps because Obama was elected he was far over his head, and with millions of jobs being lost MONTHLY it was no time to play blame games, or risk looking how deep the corruption went. Instead things had to be covered up with unlimited amount of money, so investors and savers would stop panicking and risk pulling all their money out of the system. So Obama succeeded in saving the economy, but at a cost of rewarding all those risk takers who helped get us into the mess in the first place.

    And whatever fraction of that activity was LEGAL, clearly a lot of ILLEGAL, and so clearly some banks SHOULD have gone under, been sued and fined until they didn't exist any more, because anything else would just encourage things to continue.

    For perspective, in 2008 American "net household wealth" stood at like $68 trillion, so that's assets minus debts, and it fell to like $52 trillion, and it surely would have fell much lower if we let more corruption be exposed, although that's the problem with "net wealth", debt is fixed unless defaulted, while assets are variable, and they're value are only set when things sell, and when everyone sells at the same time, values go down. So people who borrow too much against asset collateral will be forced to sell at the bottom, which is bad for them, although good for any billionaires sitting on cash looking for bargains. But we did save it from going lower, and saved more bankruptcies from occurring, some of which are honest, since every business has to take risks when they borrow money for future income.

    And now the "net household wealth" has risen to $88 trillion dollars, largely from appreciated asset values, stocks and real estate, just like our new record highs in the Dow and S&P500.

    But what we don't know is how much more debt is in the system, compared to 2008, and the next crisis when "net wealth" falls to $52 trillion that's $36 trillion in asset values lost, and perhaps some retires have some of that, and they'll pull their money out of the system a little too late, but who is going to stop them next time? And don't forget all the underperforming pensions and 401ks moving into riskier investment for still shitty yields, all at risk.

    Can we really trust the U.S. government and Federal reserve will promise unlimited bailout money for the next crisis, due between 2015-2018? Sure, they'll do something, but it can't possibly be enough.

    Meanwhile as best I can the republican are right back on track to "privatize everything", including SS and Medicare if they can, anything they can, and then Wall Street will have even more money to play with.

    So none of this ends well, and we're all gamblers, and no one can afford to see what's real any more, and at best a President Trump can say mean things and cause a market panic (or market manic), and claim innocence when people react.

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  8. p.s. My quick commentary above might be largely similar to David Stockman's and now he has a new prediction of January chaos after this "sucker rally" pulls in a last set of fools before plunging the system which will force new stimulus input to pull it back up again.

    Such games are all beyond me, but worse, one almost starts to believe voices like Martin Armstrong who sees war as the great distractor, and if Trump can be lead to believe in an external threat, no number of trillions of dollars of stimulus is too big to sign on for, to avoid whatever boxcutter wielding enemies that find us exposed.

    To be fair I'm sure Clinton would be at least half as hysterical or maniacal as Trump will be when all the disasters that Trump has been warning us about start falling again. Maybe cool, calm and collected ex-President Obama might stick around with some suggestions, like how not to be sucked by the banker extortions?

    https://dailyreckoning.com/wall-streets-calling-sheep-slaughter/
    ---
    believe the shock of Donald Trump’s election will soon be vastly exceeded by an even more shocking shutdown of Washington governance within days of the inauguration.

    For the first time since the 1930s there will be a crash on Wall Street and a recession on main street, but the Imperial City will be powerless to remedy either.

    That’s because financial history is not circular; it’s cumulative and all the fiscal and monetary artifices, expedients and frauds that can be deployed by the state to maintain the illusion of prosperity and soaring financial asset prices will have finally been exhausted.

    Donald Trump won the election against all odds, and that he did so on the back of a populist uprising that is unmitigated bad news for Wall Street. Brandishing whatever the present day equivalent of torches and pitchforks might be, the people will surely descend en masse on the Eccles Building if the Fed even hints at the possibility of imposing negative rates on savers and retirees.

    The idea of a massive Trump stimulus was literally invented on the spot late on election night by Wall Street operators in order to attract gullible homegamers into the casino one last time.

    But the smart money will soon be done selling and the unvarnished Washington disaster looming dead ahead will come screaming back into view. Even if Donald Trump had a semi-coherent economic program, which he clearly doesn’t, there is not a chance that he could get it through the Congress.

    And it’s also before another near certainty. Namely, when the stock market crashes in response to a breakdown of governance in the Imperial City and the disappearance of the massive stimulus story, the U.S. economy will slide into full-fledged recession. Then the deficit will be back into the trillion dollar plus category in a heartbeat.

    As I said, there is a fiscal bloodbath coming soon.
    ---

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    1. Ares: "But the smart money will soon be done selling and the unvarnished Washington disaster looming dead ahead will come screaming back into view."

      Yes, methinks lots of "concerns" are going to come screaming back into view after 8 years of hero-worship amongst America's Big Media. It's always humorous how media figures get their dark side back in during a Republican administration. That's what "objective reporting" is all about!

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  9. "Banks don't 'borrow' money, they lend it. "

    Your understanding of banking is obviously... profound.

    "The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility..."

    https://www.federalreserve.gov/monetarypolicy/discountrate.htm

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  10. Ares, your understanding of economic issues is very... deep. Continue enjoying David Stockman's theories. He was Reagan's OMB guy in the early 1980s. That was a long time ago. He's been talking doomsday for 35 years. I'm sure you enjoy that kind of thing, being that you're quite the doomsdayer yourself. Trump may bring us to economic Armageddon, but perhaps not. Your President Obama certainly didn't help anything.

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  11. IAC, what do you think future President Trump will do when unemployment hits 20%? Do you think he'll be the next FDR and start the new CCC so young men can rebuild our national parks or something?

    Trump wants to be a jobs president, and I believe him, but I expect they're going to be government jobs, just like any socialist does.

    But of course the Republicans will block him and spend the next 4 years selling off federal assets like park lands to the highest bidder, to reduce the federal debt by 5% for a couple years.

    Really Trump's thinking is virtually a Democrat, always interested in spending someone else's money to make people happy.

    I wonder how all that turns out? Surely the electoral college will fix things by blocking Trump's 270, and installing Mike Pence. Mike Pence is surely a better team player.

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  12. Trigger Warning said..."Banks don't 'borrow' money, they lend it. " Your understanding of banking is obviously... profound. ... "The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility..."

    Yes, I understand money is "created" by the federal reserve and borrowed into existence. And we're in a real pickle right now.

    The U.S. primary virtue is being the world currency of exchange, so our inflation can be exported to the entire world, and there's a high demand for dollar exports, as long as we're the best of the worst. So we can export much chaos to the rest of the world before getting hit ourselves. It also means we can afford a crazy military budget to police the world if we want.

    And I understand the Federal Funds Rate has been set crazy low since 2009, and the lower it is, the more money that is available for consumer borrowing, and the lower interest rates are. So that's about 0.4% right now, compared to 0.3% a year ago, compared to a high of 5.3% during 2006 while they were trying to slow down a overactive market.
    https://apps.newyorkfed.org/markets/autorates/fed%20funds

    It does seem like this way of controlling the economic activity has ended, even if they're looking at negative interest rates in the next recession, to force more borrowing and get more money into the system.

    I have to imagine something "new" is coming, some new way of creating money of out nothing, with bailouts as the obvious answer (Federal reserve buying trillions more in assets?), but surely when the official unemployment rate is 20%, there will be mad actions for money creation. Democrats would probably just give $10,000 to every American, to pay down debt, or various loan forgiveness plans, which create money, and give it to the banks who loaned the money out, so their savings holders can keep a good fraction of their savings.

    You really have to believe that inflation will eat our collective wealth in the end, but in the shorter run, deflation, in a seller's market, will be the bigger factor, and the inflation comes after, because the death spiral of deflation makes all debt unpayable.

    James Howard Kunstler labeled the period between 2005 and 2030 as the "Long Emergency" because all the existing systems can't handle the new circumstances. If we looked to the end, we've be shocked, but each little crisis we'll all be doing what has to be done, and wonder why we complained by what we had before.

    You could almost project Asimov's Psychohistory on the future, when the numbers don't work, you know crises will come up, and there will be better and worse decisions in each one, worse ones like wasting resources on war, better investing in lower the cost of living in the future when we have less resources.

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  13. "You could almost project Asimov's Psychohistory on the future, when the numbers don't work, you know crises will come up... [etc, etc]"

    You're babbling, Ares. Seldon's psychohistory has nothing to do with economic cycles.

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