Crash Course

No posting after today until March 11, most likely, as I'll be on vacation.

In the meantime, keep yourself busy reading Chris Martenson's crash course on the unsustainability of our economic, environmental and energy systems.

Sustainability has kind of been corrupted into meaning replacing your light bulbs, but we need to remember that it means things that can't be sustained won't be sustained and start figuring out how the core systems that keep our society functioning can be moved to a sustainable footing, because they're very far from one right now.

Close That Barn Door

A decent article in Macleans on the housing industry, other than it is about 1-2 years too late.

Some quotes,

"Kassam is just one of thousands of people getting buried in the rubble of Vancouver’s collapsing prices; a dream market has turned into a nightmare, faster than anyone thought possible.

...

"economists are warily backing away from their sunny predictions, and grappling with a question no one has posed for 20 years: how bad is it going to get? It's becoming increasingly likely that the answer to that question will be 'even worse than you imagined.'

...

"'No one even came close to realizing the impact of this crisis,' Kassam says. Back when he signed the pre-sale agreement, he was following the news, and 'they said the real estate market was slowing down, but they were only predicting maybe a one or two per cent drop in property values—nothing to this extent.' But Kassam has learned that you shouldn't always believe what you read in the papers and what the economists say on TV."

The article, (and I meant it, it is a good article, by media standards), goes on to set up American economist Robert Shiller and a housing futures market as the ultimate sources of wisdom on the fate of the housing market. And while these are certainly sources to take into consideration, personally, I think it might have been worth nothing some of the local folks who did see all this coming.

Bad News

A little more John Ralston Saul today, this time, from his Doubter's Companion (A Dictionary of Aggressive Common Sense) - the definition of Bad News:

Those who have power always complain that journalists are only interested in bad news. "But if the newspapers in a country are full of good news, the jails are full of good people."

Elsewhere, bad news comes as light relief from the unrelenting rightness of those with expertise and power. They insist that they are applying the correct and therefore inevitable solution to each problem. And when it fails they avoid self-doubt or a public examination of what went wrong by quickly moving on the next right answer. Bad news is the citizen's only available substitute for public debate

All the News That's Fit to Print (2)

(Part 1 here)

A little more fodder for the post I will write someday on whether the decline of the newspaper industry is a good or a bad thing. Warren Kinsella notes that the National Post wouldn't run his column because, "We're not in the business of praising the likes of Rick Salutin, tremonti, etc."

Will it really be so sad when they're not in any business any more?

Stephen Gordon has more on the valuable services provided to our nation by the news media.

The Home Ownership Scam

Worth repeating, Willem Buiter on the social benefits of home ownership:

Home Loans in the U.S. the Biggest Racket Since Al Capone:

...Why do politicians of all political colours and parties get their knickers so twisted about people losing their homes? In the case of the Tories in the UK and the Republicans in the US, the answer is obvious. Both parties believe that home owners are conservative. Not it the sense that people who are inherently conservative are more likely to become homeowners (although they may believe that as well). This is not a selection story but an osmosis story. Home ownership makes people more conservative. So both Tories and Republicans do everything they can to encourage home ownership. But so do (New) Labour in the UK and the Democrats in the US, so it’s no longer a left-right thing.

The one argument for encouraging home ownership that makes sense is that owner-occupiers look better after their property and its immediate surroundings than would a tenant. This is a simple principal-agent story where it is costly for the principal (the owner) to monitor the care and attention the agent (the tenant) bestows on his property. Add some neighbourhood externalities (I don’t want to live next door to a place where they don’t mow the lawn or paint the exterior of the house), and you have an argument for encouraging owner-occupancy, say by subsidising it.

But a subsidy for owner-occupancy is something completely different from subsidising borrowing using residential real estate as collateral. If they exist, the benefits from owner-occupancy are there regardless of whether the owner-occupier has a mortgage or not. It doesn’t matter whether she borrowed to buy the house, paid in cash, stole it, inherited it from her parents, or built it with sweat equity on land won in a raffle. The US does not encourage owner-occupancy directly, say by paying each head of household who is an owner-occupier, a given amount of cash each year. Instead it encourages and subsidises a particular form of borrowing, regardless of what that borrowing is spent on. Funds, after all, are fungible. I can withdraw equity from my house by taking out a first or second mortgage against it, or by increasing the size of an existing mortgage, and spend the proceeds on Cuban cigars.

All this is rather insane. Through the deductibility of mortgage interest from taxable income, the US tax payer gives vast subsidies to borrowing secured against a particular type of collateral - residential real estate. What so special about this borrowing and this collateral? Fortunately, the UK has abolished this boondoggle. In the US, other forms of preferential treatment for home ownership are piled on top of the mortgage interest-deductibility. Over half the stock of home loans, and virtually all new home lending in the US are heavily subsidized by the lending and guarantees of Fannie Mae, Freddie Mac, Ginnie Mae and assorted smaller smaller government agencies. The direct interventions of the Fed and the Treasury in the market for residential mortgage-backed securities, announced as part of the credit-easing policies of the Fed represent further quasi-fiscal subsidies to housing finance.

This is on top of the creation by the Fed of at least a dozen facilities that accept RMBS as collateral for Fed loans in the earlier stages of the financial crisis. All these quasi-fiscal interventions by the GSEs and the Fed are deeply non-transparent as regards the magnitude of the subsidies involved. They also evade the normal scrutiny and accountability to Congress that is associated with explicit subsidies by the Treasury. The only priviliged treatment of residential housing that makes a modicum of sense from the perspective of encouraging owner-occupancy (as opposed to borrowing to fund whatever expenditures using residential housing as collateral), is the ability to postpone capital gains taxation on the sale of one’s principal residence, and to have one capital-gains-tax-free realisation during one’s lifetime (taken generally when people size down on retirement or when the kids have flown from the nest).

The extreme fiscal largesse bestowed on residential housing, directly and indirectly through mortgage interest deductibility, has led to a massive misallocation of investment in the US. There has been overinvestment in the private residential housing stock and underinvestment in just about every other form of fixed capital: infrastructure, public amenities of all kinds (sports facilities, public recreational facilities, parks etc.), commercial structures, plant and equipment. It is time to correct the distorted incentives that are at the root of this misallocation. The easiest way to do this, in the current tax system, is to end the deductibility of mortgage interest in the personal income tax, close down Fannie and Freddie and end the role of the US government in the provision of residential mortgages. A focused social housing program is of course a legitimate activity of the Federal government. It should be on-budget, that is, fiscal rather than quasi-fiscal.

...

But really, you should read the whole thing...

Buiter does a great job exposing the madness behind out-of-hand government promotion of home ownership, but he doesn't really get into the question of why governments act this way.

And it's not just the U.S. - Canada has gone down the same road with CMHC and a host of other incentives.

And over here, Steve Keen catalogues the extensive list of government interventions in Australia and again has little explanation for the magnitude of the government intervention in this particular area.

I do have a theory on why governments find this area particularly irresistible, but I'll have to save it for a few weeks until I've developed the appropriate background material first.

Things I Don't Understand

Why is ground turkey/chicken so much less plentiful on grocery store shelves as compared to ground beef?

Demeaning the Discourse

One of the things that always struck me about the U.S. was the ability of people, particularly on the right, to basically say whatever stupid blatant self serving lies they wanted without suffering any penalty or really being called on it. A key turning point in the last U.S. election was when that started to change, for example Phil Gramm being forced to step down after calling the U.S. a nation of whiners.

So it was discouraging to see Harper get away with all the blatant, obvious to anyone with a functioning brain, easily verifiable lies about the carbon tax in the last election (its not revenue neutral, it will destroy the economy, it will break up the country, it will eat your children while they sleep, etc.

Having been allowed to just fabricate whatever stories he likes during the campaign no matter how absurd, it is not surprising to see Harper keep lying after the election.

"[Harper] saved his strongest criticism for what went on before Mr. Obama, suggesting at one point that Canada really couldn't get on with much on climate change until Mr. Obama got to office. He conveniently avoided mentioning that his government joined Mr. Bush's in actively opposing aggressive climate-change policies."

If it wasn't for that nasty George Bush, Canada would be a leader in fighting climate change. It was George Bush that made Harper argue that a carbon tax would break up the country and destroy the economy, even though George Bush's reign was drawing to a certain close as Harper made those statements.

A primary objective of those who don't want to see Canada go down the same dead end streets the U.S. has gone down, should be building up a noise machine loud enough to make folks like Harper pay when they insult our intelligence with nonsense like this.

Conservatives Will Screw Us Over, As They Always Do

Via pogge, a story on how the Conservative government is likely to sell off government assets, no doubt figuring that a global crash in asset prices is a great time to unload them. Not that selling things like the Mint or Canada Post is ever a good idea. Sigh.

It's bad enough that we have a major political party whose main goal is, apparently, to screw up the country, the fact that so many people regularly vote for them is just depressing.

B.C. Budget 2009

You can read the budget here.

I don't really have a lot to say about it. It's pretty much status quo and under the circumstances it seems reasonable. I'd be very surprised if the deficits don't turn out a lot larger than forecast, but that is more a function of the incorrect economic models that underpin the economic forecasts (and is the mirror of how the surplus always comes in larger than expected during boom years).

As always, I'd like to see greater priority for income redistribution / measures to reduce poverty, reduction of debt levels, better planning for the future including expanded renewable energy generation, and preparation for a network of electricity rather than hydrogen powered gas stations, and more for transit, less for roads and so on. But given that we're talking about a right wing government here, we should just be happy they didn't decide to match Harper and company's billions for granite countertops program.

No Hobgoblins Here

A week after affirming the bank's policy of paying people to borrow and taking money from those who (try to) save, Bank of Canada chief Mark Carney worries about household's high and rising debt levels.

I like how he says he's not worried about a U.S. style banking crisis here because in Canada the risky mortgages are *already* all guaranteed by the government, whereas in the U.S. they're only getting around to that now.

So we might see the same price drops and foreclosures as the U.S., and greater costs to the taxpayer than in the U.S., but the situation will be better because we won't see the same losses incurred by banks as in the U.S. Gives you some sense of how warped our priorities have become.

Granite Countertop Watch

Part of our continuing series on things deemed less important than subsidizing home renovations: Research on what causes mental illness in children.

Ideology

One of the primary problems with having politicians, such as Stephen Harper and the federal Conservatives, that are driven by ideology rather than by careful consideration of each situation is that inevitably they make serious errors trying to make things fit their ideology that just don't fit.

One example was their move to increase competition in the market for providing mortgages to people who can't afford houses. While in many situations, increased competition is a good thing, in this case, not so much, as the government and CMHC will learn to its dismay as the Canadian housing market continues to unravel.

Another example of the same blind adherence to a 'more competition is good' ideology is the attitude of the Conservatives towards the Canadian Wheat Board. While competition between farmers will help lower prices for their products, allowing Canadian farmers the freedom to compete with each other by undercutting the prices they sell their products to foreigners for will not benefit Canadians at all, and will only end up hurting those same farmers who are currently protected from their 'tragedy of the commons' predicament (many small sellers all with the incentives to undercut each others pricing) by the single desk wheat marketing board.

Dave, at Galloping Beaver has more on how, when it comes to ideology, the Conservatives refuse to take success for an answer, and will insist on ideologically pure failure, much like the Soviet communists, instead.

Thoughts on the economic crisis

I thought I’d post some updated thoughts on my views on the current global economic crisis. To be honest not much has changed since I wrote this post a couple of months ago, other than my confidence in my conclusions has increased.

Note that if you haven't already read Stoneleigh's must-read summary of the financial crisis (written almost a year and a half ago, now) you should read that rather than reading this post. (abridged version here)

Some other posts you'd be better off reading before reading my thoughts are as follows:

Steve Keen's Roving Cavaliers of Credit

Martin Wolf, Why Dealing with the Huge Debt Overhang is so Hard

Naked Capitalism, Irving Fisher's Debt Deflation Theory (and read the comments, too)

Mish, Wealth Does not pass three generations

Update: Another good post, 'Recession? No, it's a D-process, and it will be long', from an interview with Ray Dalio in Barron's (via Automatic Earth)
Before I begin it's worth noting the ideologically (from a left vs. right point of view) scattered nature of the people linked above, a group united more in its outsider status vs. the establishment status quo than in any left vs. right political views.
---

Here are 5 culprits in the crisis, moving from ultimate towards proximate causes:

Human Nature
Bad Regulation (fractional reserve banking, monetary policy to lower interest rates, etc.)
Inequality
Financial System Leverage
Debt

Basically what we have seen is a debt/credit bubble. There are two forces that drive the creation and then destruction of the credit bubble:

1) Increasing financial system leverage along with an increasing ratio of credit money to fiat/currency/non-debt bearing money
2) Increasing inequality as debtors enrich creditors via exponentially rising interest payments.


In more detail:

1) We start with a healthy economy.
2) This healthy economy is growing due to improved productivity, population growth, etc., or maybe because interest rates have fallen.
3) Optimistic and impatient people take on debt believing either that they can earn a great enough return on the borrowed money to repay with interest or that consuming now instead of later is worth the interest payments.
4) Borrowing expands the supply of credit money in the system and this expansion is self-reinforcing in that the optimistic expansion of borrowing creates the money needed to pay back the original loans
5) The self reinforcing dynamic keeps the default rate on loans low.
6) Some of the newly created money starts to go into speculation on asset prices
7) This is again self-reinforcing as rising asset prices collateralize greater lending (think ‘taking equity out of your house’ and prevent losses on defaults (rather than default on your house, sell your house and pocket the profits due to appreciation)
8) The good times allow people to repay their loans which leads to greater inequality, since the rich lend to the poor, if loans are repaid with interest the rich get richer vs. the poor (except in cases where the return on borrowed money above the interest rate exceeds the rate of interest, but this is the exception rather than the rule)
9) The rising asset prices also increase inequality since the wealthy own more assets than the poor.
10) The proportion of the economy devoted to the financial sector grows as the volume of credit expands relative to the size of the economy.

There are four things which can limit this self-reinforcing credit bubble dynamic:
1) People choose to stop borrowing money out of a moral aversion to taking on more debt
2) Regulation prevents further lending (via reserve requirements, capital requirements, leverage constraints, or other restrictions)
3) Lenders choose not to lend any more money due to the increased risk
4) People’s debt to income ratios rise so high (due to the expansion of debt and the rising inequality) that they simply can’t afford to borrow any more money but they do it anyway and begin to default.

If 1,2 and 3 fail, as they have failed us in this latest crisis, then sooner or later 4 will take hold.

There is one way to forestall point 4) and that is to have the government lower interest rates. Since the early 1980’s when interest rates hit 20%, interest rates have fallen. Lower interest rates support higher asset prices (you can buy more house if the mortgage rate is lower) and they lower the burden of accumulated debt levels by reducing the interest payments. In 2001 when it looked like the expansion of the credit/debt bubble was at risk, central banks dramatically lowered interest rates and succeeded in triggering another 5-6 years of credit/debt bubble expansion along the lines described above.

What happens if point 4) happens and interest rates are already pretty much at 0% you ask? You reach our present situation.

What we see now is that (almost) everything that happened on the way up goes into reverse.

A) Without new credit expansion to support rising asset prices, asset prices begin to fall
B) Once people default on loans that are no longer fully collateralized due to falling asset prices, banks start to take losses.
C) Once speculators realize the game is up, they start trying to pull their money out of their speculative investments, aggravating the decline.
D) The bank losses quickly wipe out the capital of over-leveraged financial institutions making it impossible for them to lend money, further accelerating the destruction of the credit/debt bubble
E) Even if you give the banks money to lend, they won’t do it, because without the promise of the ever expanding credit/debt bubble, nobody is credit-worthy since they either have too much debt or they just defaulted on their debt.
F) Even if the banks want to lend, few people want to borrow because they are afraid of deflation making their debts harder to pay because…
G) Deflation means that real interest rates are high even though nominal interest rates are 0 because…
H) The one thing that isn’t shrinking is the size of the debts owing since your mortgage doesn’t shrink just because you got a 10% pay cut. So the deflation makes it impossible even for those people who originally borrowed at reasonable levels to repay their now massive and growing debts. This further aggravates the downward spiral.
I) As people default on their debts, the balance between rich and poor is restored as rich creditors lose money to poor debtors. Falling asset prices have the same effect.
J) Only when enough of the debt has been defaulted upon so that the ratio of debt/credit money in the economy to actual debt-free currency is restored to a low enough value and the debtors are no longer being crushed under the weight of their debts can people once again start lending and rebuilding the economy.

So 2 questions arise:

1)How do we get out of the current mess?
2)How do we avoid getting into this mess in the future?


1)How do we get out of the current mess?

We can’t get out by repaying the loans since repayment of the loans will just make poor debtors even poorer. Also, deflation will make repayment extremely difficult.

One way out is through inflation. However, it is unclear that central banks have the will to print the truly massive amounts of money that would be needed to cause inflation in the midst of deflation of a credit/debt bubble. History suggests they don’t as far as I know (although I’m open to corrections, aside from the Weimar Republic which I know about).

Also, using inflation is a bit like stopping a free fall by using rocket thrusters. It will work but you have to be extremely careful not to apply so much force that you fly off into space (hyperinflation).

The best way out, to my mind, is to wipe out the debts in as orderly a fashion as possible. I don’t say this lightly since I have no debts and I would find it galling to see all the people who irresponsibly piled up debts and enjoyed themselves with this spending spree now getting bailed out because collectively all the debtors were too big to fail but I’ll settle for getting screwed over to having a depression which won’t be any barrel of laughs either. Society’s preferred method for discharging debt is via bankruptcy and I believe the government should be trying to encourage a widespread outbreak of bankruptcy to reduce the overall debt levels.

In a nutshell we need to rebalance the amount of currency (money not created as debt) with the amount of debt/credit. We can attack this from two sides, both by printing more currency and by encouraging/allowing defaults on the debt. Once this balance is restored things can start growing again, but we are so far, far from being in balance that it is inevitably going to be painful getting from here to there.

Measures to try and preserve the existing ratio (e.g. forcing banks to lend at gunpoint, negative real interest rates that punish savers and reward borrowers) will either cause another run-up in the bubble leading to even greater pain next time the bubble pops (as happened from 2001-2007, but I suspect we are too far gone to have happen again), or freeze things in place allowing us to limp along Japan style for year after year without ever really getting out of stagnation.

Having government take on debts as private sector debt collapses will help, but only in the sense that raising the flaps helps you land a plane that has run out of gas. It acts as a brake on the collapse in credit money but can only slow it down since moving risk from one holder to another doesn't really change the underlying dynamics.

2)How do we avoid getting into this mess in the future?

If the great depression only scared us straight for a couple of generations (see the post by Mish linked above), it seems unlikely that we can make any permanent fixes here either. Still, I have a few suggestions:

1) 100% reserve requirements for financial institutions – Preventing lenders and central bankers from working together to supply an infinite amount of credit at zero cost will mean that in future, if people want to borrow, they have to find someone willing to lend their actual money, not just give them made up money. In this scenario, although the central bank may want to lower interest rates, doing so will be constrained by the limited supply of people willing to lend out their money at these low interest rates. 100% reserve requirements won’t prevent credit bubbles, because they won’t change human nature (the enduring belief that it’s different this time, it’s different here, the fundamentals don’t matter, etc.), but it will remove one enabling element that supports the growth of credit bubbles, and that’s a start.

2) Fixed and conservative margin requirements for asset purchases (say, a minimum 25% down payment for a residential mortgage, 50% for stocks and maybe a few other asset classes, and 100% for everything else, including cars and sofas). This will help prevent the self-reinforcing cycle of rising asset prices and expanded credit from getting out of hand.

This list from Karl Denninger wouldn’t be a bad way to start either:

I picked out a few of his suggestions that I liked the best, but they almost all make sense in the American context (the Canadian banking picture is a little different than the U.S. one, in particular we have the appropriate history and culture to manage a more concentrated banking sector than the Americans do).

3. Repeal the "Bankruptcy Reform" law. Consumers must have the same right to go bankrupt and discharge debts that corporations have. Banks and others who grant loans must have this Sword of Damocles over their head - you make a bad loan and the borrower can file Chapter 7 and stick you with it, without exception. This will immediately collapse the outrageously overpriced bubbles that remain and are credit-driven, including post-secondary education.

[Ed: We didn't have this 'reform' in Canada, but in general loosening our bankruptcy laws to match the more debtor friendly American laws would help]

4. Remove the obscure little change made in the EESA/TARP legislation that allows Bernanke to set the reserve ratio to ZERO for banks, and set it statutorily to 8%. Enhance the law by declaring that ALL funds taken in by a bank irrespective of their source are subject to the 8% reserve requirement (thereby removing the "sweeps" exemption that started this mess.) This will force leverage in the regulated banking system to no more than approximately 12:1.

[Canada has no official reserve rates. Leverage is constrained instead by regulatory capital requirements but the principle remains the same, constrain financial industry leverage to a set ratio - and *enforce* this limit.

5. Set the lawful leverage limit to 12:1 for all investment banks and other entities including hedge funds. Any firm that wishes to be domiciled or operate in the United States must comply. Period. I know what the counter-argument is - "they'll go somewhere else." Fine! Go blow up some other nation's economy. We've had enough of it.

6. Said 12:1 leverage limits must apply to all assets. Yes, even US Treasuries. If you hold it at most (for the safest assets) you can gear it at 12:1. Period.

7. Ban all off-balance-sheet vehicles; no exceptions of any sort. If you have control of it or are responsible for it in any form or fashion you must consolidate it on your balance sheet. "Shell corporations" set up to evade this requirement that have no capital or assets of their own are deemed a fraudulent shell company. Close the SIV loopholes.

9. Bar the trading of derivatives contracts by commercial banks except where those contracts are backed by or insure a hard asset (e.g. a CDS on an actual bond or mortgage) and they are exchange-traded with a central clearing counterparty and thus guaranteed "good". If some Hedge Fund wishes to write or hold naked CDS and immolate themselves that's fine, but they cannot blow regulated financial firms (including insurance companies) to pieces nor can they distort share and debt-pricing mechanisms in the public, regulated markets.

11. All derivatives traded by regulated financial entities must be cleared and traded through a public exchange with a central counterparty, nightly margin supervision and published bid/ask/open interest.

12. Extend bank fraud statutes to explicitly cover actions taken by The Fed or any banking or financial institution in violation of statutory limits and name the members of the board of any such institution as personally responsible for violations. This stops the game-playing where institutions feel free to be "fast and loose" because all they will get is a slap on the wrist by FINRA or the SEC. With these offenses being federal criminal offenses the calculus changes immediately on what someone will and will not attempt.

14. Stop trying to prop up asset (especially house!) prices. Instead, preach the truth - affordable housing means no more than 28% of your income goes toward all housing expenses, you should put 20% down, and you should not take anything more aggressive than a 30 year fixed-rate loan. For many areas this means median home prices must still contract. A house is shelter, not a speculative vehicle.

Good News for a Change

I was up on Burnaby Mountain for the first time, a few weeks ago, a day during the great fog-in of '09 when it was 14 degrees and sunny on the mountain, while near 0 and very damp and chilly in the fog below.

Winding our way up the mountain (which for those not familiar with Vancouver, is basically a large hill about half an hour east of downtown Vancouver in the suburb of Burnaby which has a university on top - Simon Fraser), I wondered if it could really be more efficient to run buses up and down the mountain all day long instead of installing some sort of gondola or funiculaire type system.

And now, via Stephen Rees, I see that such a plan is being considered, and is, as I suspected, a far more efficient option. Why do I suspect that our various right wing governments will plead that they can't afford the $70 million to make transportation faster, cheaper, more environmentally friendly, safer and more reliable in Vancouver, having chosen instead to spend over a billion dollars subsidizing granite countertops.

Elephant in the Room

The head of the Bank of Canada, Mark Carney, gave a speech on the economy today in the House of Commons. The word 'debt' did not appear in his speech, although he did note that current Bank policy is to pay people to borrow money and take money from those who save.

A Long Time Coming

I was reading something recently that did a good job describing the sources of our current economic troubles. Here are a few quotes I pulled out...

"Just as our structures and elites prefer corporate manipulation to real production, so financial manipulation comes more naturally to them than the creation of new capital"

"We run virtually uncontrolled money markets within our own borders. We permit highly leveraged buyouts. We allow takeovers to be financed by the privately initiated printing of money against the value of the target company's assets. We allow the uncontrolled printing of money through such devices as credit cards."

"Consciously or unconsciously, we began to lift restrictions and to lower standards throughout the financial sector, thus freeing the profound forces of inflation. Of course, no one was permitted to play directly with the traditional governmental inflationary tool - money supply. This and the area of wage and price increases were roped off, so to speak, and kept under obsessive public scrutiny ...
Meanwhile, every other potential inflationary area was gradually opened up to marketplace manipulation. General economic activity was drawn towards the financial sector by this explosion in ever-less regulated activities. Inventiveness concentrated itself on the creation of new, immeasurable financial abstractions - abstractions built upon abstractions - forms and levels of leverage which made the standards of 1929 seem tame by comparison"

"In this context, the traditional definitions of bank leverage no longer mean very much. ... the American merchant bank Lehman Brothers had a capital base of $270 million. It had a daily exposure of $10 billion."

"The whole process was fed by minor finance companies, which under stricter regulations would be considered marginal, if not criminal. With deregulation they became banks. And the large deposit banks, seeing the enormous paper profits made by these little speculators, leaped down into the gutter to play the same game. The overall picture is what Keynes would have called a Casino society."

"Contemporary monetarism, despite its narrow obsession with money supply and classic inflation, has produced the greatest debt levels of modern history, accompanied by onerous or impossible burdens of interest. Odder still, while the monetarists remain obsessed with the state's indebtedness, they are indifferent to unprecedented corporate and personal debt levels."

"One indication of how far things have gone is the desire of business to see government intervene each time the situation gets out of hand. The willingness of governments to do so, despite a supposed devotion to market forces, shows that they realize how dangerous the current system is. The irony of deregulation is that the more freedom business is given, the more dependent it becomes upon government as the saviour of last resort.
Financial marketplaces have never been capable of self-regulation except through catastrophe. One of our accomplishments was to regulate most of these explosions out of existence. Financial deregulation has reintroduced them."

"The current situation, in which government stands as the saviours of last resort - having abandoned many of their intermediate powers of guidance - actually breed irresponsibility. And while government intervention late in the day prevents general calamities, it also maintains the fiction that the system is healthy."

All the above quotes are from chapter 17, 'The Miracle of the Loaves' in John Ralston Saul's 'Voltaire's Bastards' - written in 1992.

But yeah, no doubt our current problems are all due to 'excess' saving by peasants in China...

I don't know about you, but I find it pretty damn depressing to realize how clearly Saul laid it all out, almost two decades ago, and here we are as clueless as ever.

---
Re-reading that chapter by Saul (prompted by my frustrations with the narrow technocratic mindset exhibited by all the powers that be in the face of the current situation) reminded me also that it was also the source for my recollection of Solon's reforms in clearing away the debt burden that was plaguing Athens prior to his rule.

All the News That's Fit to Print

Some fodder for the post I'm eventually going to write about whether we're better off with or without the print media - a little seetype from Garth ' No Greater Fool' Turner,

"A year ago, as I related in my recent book, the real estate editor of a major newspaper who gave “Greater Fool” a full-page review (critical, but interesting) told me months later that was the kiss of death. After advertisers complained, he ended up on the overnight layout desk. The new real estate editor writes about funky paint colours and throw cushions.

But the sponsors left anyway. They smelled the smoke."

Discourse in Wonderland

Imagine three groups of astronomers who have differing models of how fast a distant galaxy is expected to grow.

Group 1 predicts growth of 20% over the coming year.
Group 2 predicts growth of 30% over the coming year
Group 3 predicts the galaxy will shrink by 10% over the year.

So a year passes, the galaxy shrinks by 10% and a leading newspaper runs a story about astronomers predicting galaxy sizes. Does the story tell us that:

A) Groups 1 and 2 are meeting with group 3 to better understand how group 3 predicted what they missed so they can adjust their models accordingly.

OR

B) Group 3 has made their prediction of next year's growth of the galaxy (10% more shrinkage) which is considered newsworthy given the accuracy of their last prediction.

OR

C) Groups 1 and 2 are meeting with each other over a dispute between them because Group 1 is predicting the galaxy will grow 25% for the coming year, while Group 2 is predicting the galaxy will grow by 40% over the coming year. Neither has changed their model since last year and Group 3 is not mentioned.

If you picked C) then you understand how our public discourse works.

Take a story in today's Globe and Mail, for example:

"At a meeting likely to last five hours at the central bank's headquarters in Ottawa, the economists are expected to spend the first 30 minutes duking it out with central bank officials over their divergent views of Canada's prospects.

Following opening remarks by deputy governor John Murray, the first item on the agenda is a discussion on "forecast comparisons and issues arising" from the Bank of Canada's latest policy update and "chief economists' forecasts," according to a copy of the agenda obtained by The Globe and Mail.

Present will be senior policy makers and chief economists from at least 11 of Canada's biggest lenders.

The issue is Mr. Carney's prediction last month that the recession will begin to recede by the end of the year, followed by a sharp rebound of growth averaging 3.8 per cent in 2010. While Bay Street accepts the premise of a recovery next year, the bank analysts expect growth at only about half that pace."

A few comments:

1) First of all, everybody knows that all of these economic forecasts are worthless, so the entire thing is just a big hoax. Not a deliberate hoax as much as everyone just playing along in a game they know is meaningless. Disagree? Then why doesn't the story even mention the accuracy of past forecasts by the two groups? Because they know that the accuracy of the forecasts is irrelevant, that's why.

One of the interesting things about moving from doing math in elementary school and high school to doing it at university was the transition from a world where every year you learn more about all the things we know about math (elementary/high school) to a world (university) where every year you learn more about what we don’t know, what we can’t know and how we know that we can’t know it. Complexity theory, chaos theory, Incompleteness theorems – these concepts have the names they do for a reason.

Sadly, predicting the total value of transactions involving money that we will make in 2010 (i.e. GDP) is one of those things that has proven itself to be not particularly amenable to being modelled mathematically. So far, applying the lessons of history (big debt bubbles cause trouble when they burst) and thinking things through has been much more fruitful as a method of analysis and prediction (for example, see here).

2) Is it just me, or is there something crazy in that the Bank of Canada is meeting with economists from 11 other banks to talk about this. Are there no economists in Canada who don't work for a bank? What about the provincial governments, large (non-financial) corporations, the universities – all of these must have economists on staff, right? I find the dominance of 'bank' economists in Canada very puzzling.

3) As Stephen Gordon points out, there’s not much difference between the two groups anyway.

4) As the first comment on Stephen’s post points out, given that so far both groups have consistently erred on the high side since the downturn hit, continuing to believe they are too optimistic seems reasonable at this point.

5) This is all symptomatic of our accountability free media world where getting heard depends on whose interests you serve, and being right about things is irrelevant. And no matter how wrong you are, or how often, there's zero consequences.

Anger

I read a lot of American blogs including lots of comments, and the mood there is as dark as I've ever seen it. Of course, it stands to reason, given the economic conditions, but still. The level of government legitimacy seems dangerously low, especially considering Obama just took power a couple of weeks ago. Not that people, Americans in particular, don't have reason to be angry with the kleptocracy that's been running their country for the last decade or two, but still, there seems to be a lot of anger out there - on all sides of the political spectrum.

I don't really have much of a point, it's just worrying that's all.