Thursday, March 20, 2008

Market Regulators Available, Absolutely No Specifics Required (JM)

A New New Deal

This column isn’t terrible, but there’s just something like a title like this that screams bad, generic, economic advice.

By Harold Meyerson
Thursday, March 20, 2008; A15

Putting together everything we've learned over the past 10 days about high finance in Manhattan, one thing is clear: If Eliot Spitzer had saved all the money he apparently paid"Kristen" and her co-workers at the Emperors Club, he could have bought Bear Stearns.

This is what we in the “biz” like to call hyperbole. Also new rule, if your only column lede is a bad joke about Eliot Spitzer and your column is not about Eliot Spitzer then just stop, just stop. Also we can probably have a moratorium on columns about Spitzer for some time, there’s really not much to say anymore.

Manhattan's culture of conspicuous consumption and conspicuous collapse has been on display in recent days as it has not since 1929. Now, as then, an edifice of shaky credit is toppling. Now, as then, what we took to be prosperity turns out to have been a bubble.

I am not really sure that Manhattan has a “culture of conspicuous consumption and conspicuous collapse”. In fact, I am not sure how that’s a cultural phenomenon at all. So far two paragraphs, one relevant sentence, “What we took to be prosperity turns out to have been a bubble.” Aces.

The key lesson Americans need to learn from today's troubles is how to distinguish faux prosperity from the genuine article. Over the past hundred years, we've experienced both. In the three decades after World War II we had the real thing. Led by our manufacturing sector, productivity increased at a rapid clip and median family incomes rose at a virtually identical rate. The value of the American work product grew significantly and that value was shared with American workers.

I am feeling about 70 percent prosperous right now, but I am pretty sure there’s a healthy degree of faux prosperity in there as well. Individuals are notoriously bad at assessing this kind of risk, in fact it’s nearly impossible on the individual level. Maybe economists, pundits and politicians need to be better, perhaps we ought to be a more risk adverse society, but also there may be nothing we can do to avoid these occasional problems.

But we've had other periods of apparent prosperity that were based not on broad increases in personal income but on the inflation of assets. So it was with stocks in the late 1920s, a time when most Americans lacked substantial purchasing power. So it was with the dot-com bubble of the late '90s. And so it was with the rising value of American homes in recent years.

In the broadest sense, the American economy over the past three decades has been powered by ever more ingenious extensions of credit to a people whose incomes were going nowhere, unless they were in the wealthiest 10 percent of the population. There were some limits, as a result of New Deal regulations, on how old-line banks could extend credit, but investment banks and other institutions not legally obliged to keep a certain amount of cash in reserve operated under no such constraints. The risk was that one day, burdened by debt and static incomes, American homeowners would have trouble making their payments and the house of cards would come tumbling down. But what were the odds of that?

I agree with this, this was a problem, but I actually think it was less of an economic problem and more of a cultural issue. Conspicuous consumption has always been one of the major demarcations of success and status in our society. Home ownership was a key aspect of the so-called “American dream”. Our culture has created a standard of normality that is anything but normal and anything but within the means of most individuals in our society. The consequences of this are necessarily tragic.

Pretty good, it turns out. And out of this debacle emerge two paramount lessons for our highest-ranking policymakers: Regulate the American financial sector, which is now turning to the government for a bailout. And commit the government to doing all in its power to generate broad-based prosperity, through laws enabling workers to bargain collectively, through a massive public commitment to projects "greening" the economy, through provision of universal health coverage and affordable college educations.

Okay, see here’s the issue. Regulate the financial sector means absolutely nothing. It’s a word that could imply over infinity different actions. I agree that the market needs some semblance of regulation (particularly transparency when it comes to incredibly complex credit deals and financial structuring), but I am not sure this solves the underlying problem. If people want something the market is going to create a way to sell it to them, even if the long-term consequences are bad.

I would like to know more about these specific collective bargaining laws to which he referring. For the most part collective bargaining and unionization is allowed, and would need to know what specific proposals would be implimented, but either way their effect would be negligible. “Green jobs” is something I really, really don’t get. I mean I am totally for them, I like jobs and I like the environment, but maybe I am missing something on the impact here, but politicians seems to be pushing these as a panacea for American job loss and that seems to me like quite the exaggeration. Thumbs up universal health coverage and affordable college education too, but neither of these really hits the heart of the problem.

People want stuff, not just because they want it, but because it is indicative of status and strength in society. Yes, consumption displays itself differently in the various segments of our society, but still there are many key trends like home and car ownership (along with trends specific to specific communities). The truly pernicious factor here is that one of the key reasons this cultural narrative will never change is that the corporate complex has every interest in marketing life that way, encouraging people to consume. The narrative of the American dream is one enhanced and perpetuated by television, books, commercials, movies and all other forms of media.

These are themes that should be central to the candidacies of Barack Obama and Hillary Clinton. If the Democrats are to win this year and then govern effectively, they need to offer a new New Deal to the American people. John McCain is at a distinct disadvantage in such a discussion: As the self-proclaimed heir to Ronald Reagan's legacy, he's no friend of the original New Deal, much less a new one.

First of all these themes are only tangentially involved in the New Deal, but I agree economics should be the centerpiece of all the campaigns. But Americans need more, they need be convinced that there are great priorities than personal prosperity. That everyone deserves basic needs, like education, food, housing and other things that are template for a satisfying life.

On the regulatory front, now that the Federal Reserve is extending credit to the 20 largest dealers in securities -- affording them the same advantages it had hitherto extended only to regulated commercial banks -- it's only proper that those firms be subjected to regulations similar to those under which banks operate (which themselves need strengthening). Otherwise, the government is assuming risks incurred by the wildest operators on the Street.

Sure, but securities deals are by their very nature different entities, it seems weird to write articles about generic regulations with no specificity.

Which, of course, is exactly what the Fed did in agreeing to take $30 billion of Bear Stearns's riskiest securities off J.P. Morgan's hands as a condition of its purchase of Bear. The Fed justifies these extensions of credit and assumptions of risk as necessary to prevent a financial meltdown, and the Fed is probably right. But what about the issue of equity, in both senses of that word -- ownership and fairness?

I honestly have no clue what he is complaining about here. Yes, it sucks that we had to pick up all this toxic risk from Bear Stearns, especially since the advantage is just going straight in to J.P. Morgan’s pocket. However, I have no clue what type of equity he would prefer in exchange. This isn’t as bad as Maureen trying to write about complex finance, but it is bad in that it riles people up who are then interested in bizarre generic solutions. Now, any time a politician says we will regulate the banks people can be like, “Yippie! That’s exactly what they need, some good old regulation…”

Specifically, if the Fed's role in the Bear buyout is a model for its dealings in future Wall Street failures, it could well pay good money for warehouses of worthless paper while future J.P. Morgans make off with the money-making sides of the beleaguered banks. This solution doesn't look to be a great deal for the American public. It looks even worse when we recall that other governments -- including those of China, Abu Dhabi and Kuwait -- have also been bailing out our banks, through sovereign wealth funds, while getting shares in those companies in return.

Yes, this is why the Fed bailout is better than foreign buyouts. The real question here is what is your alternative to the Fed intervening in this case. Should they have let Bear Stearns go under? There’s an argument there, but I would think the horrendous consequences of that decision outweigh the future moral hazard of a buyout, but either way it’s not like there’s alternatives being provided in this column.

Can't the American people get as good a deal as the Chinese when our government bails out a major American bank? At minimum, some public representation on the bank's board? Reshaping the U.S. economy, now part of the global economy, so that it actually benefits Americans won't be easy. But it must be done. Bring on the new New Deal.

Won’t be easy, how about nigh unto impossible. Seriously, governments cannot corral or manage economies. Unless you want to go all the way and create a planned economy, which would be an entirely different and perfectly reasonable debate, there is very little we can do work the economy. A government representative on the board of J.P. Morgan would be the height of insanity. I mean could you imagine a board room debate about well anything and then out of the corner comes a little:

“Hem, hem…”

“Err, yes?”

“Quite sorry to bother you, but that’s not how we do finance over at the Ministry of Magic.”


The point is, the Ministry shouldn’t interfere at Hogwarts, nor should the government interfere too terribly much at J.P. Morgan.

I am all for sound regulations of the market, mostly on the level of transparency, I am also for all sort of government programs to help level the playing field. Put this sort of “here’s a problem, therefore solution” is both counterproductive and occasionally dangerous. Crafting sound economic policy is a matter of both detail and a long discussion of what is fair and right. This article eschews the former, while assuming the latter, and to me that’s a problem.

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