Summary: a look at what our leaders are saying today, where we are going (with an ominous comparison with the past), what we can expect to hear from them in the future if America’s citizens continue to slide along, and a (not the) solution.
After 12 years of obscure gibberish from Chairman Greenspan and two years of happy-talk by Chairman Bernanke, listen closely and you can hear a faint note of reality from our leaders about the US economy. This is progress in tiny steps, but a change in direction from a government addicted to lies.
Chairman Ben S. Bernanke’s Semiannual Monetary Policy Report to the Congress (27 February 2008):
Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve’s Monetary Policy Report to the Congress. In my testimony this morning I will briefly review the economic situation and outlook, beginning with developments in real activity and inflation, then turn to monetary policy. I will conclude with a quick update on the Federal Reserve’s recent actions to help protect consumers in their financial dealings.
The economic situation has become distinctly less favorable since the time of our July report. …
As understatements go, this is far from the record set by Emperor Hirohito of Japan in his first radio broadcast (15 August 1945), with ” the war situation has developed not necessarily to Japan’s advantage.” But this economic downturn has just begun, and we might yet hear Bernanke or our President say that we have worked hard, that unexpected and undeserved events have occurred, and therefore shocking and extraordinary measures must be taken.
While few are aware of the cataracts ahead, they are clearly visible. Already major figures are calling for reactivating Depression-era measures, such as large-scale government purchases of home mortgages. What will they be advocating in 2009?
- Senator Chris Dodd advocates creation of a Federal Homeownership Preservation Corporation as part of a large economic stimulus package (22 January 2008)
- “Reestablish the Home Owners’ Loan Corporation”, Representative Mark Kirk (R- IL), Press Release (23 January 2008)
- “From the New Deal, a Way Out of a Mess“, Alan S. Blinder, New York Times (24 February 2008)
- Others, like the Office of Thrift Supervision and former Treasury Secretary Lawrence Summers, advocate radical changes to our home finance and bankruptcy laws.
Hedge fund manager Bill Fleckenstein goes to the heart of matters when describing our situation (27 February 2008):
In any case, the determination to suppress the destructive downside of capitalism and insure permanent prosperity will not work. Permanent prosperity, after all, is what socialism was supposed to be about, and we’ve all learned that that doesn’t work. I continue to find it a sad irony that Wall Street — the alleged bastion of capitalism — would cling so dearly to the hope of socialism.
Of course, that’s exactly what the Fed is all about. Its central planners think they can pick the right interest rate with which to run the world, even as the evidence indicates that what their efforts over the last 20 years have produced are two epic bubbles. This story would strike any sane person as the stuff of nightmare. Sadly, it’s our waking reality.
A full analysis of our situation is beyond the scope of this little note, but here some highlights.
- Politicos will describe the bubble in home prices (and consequent over-building) – like that of commercial real estate in the late 1980’s and stock in the late 1990’s – as resulting from insufficient government regulation. This is clearly false. In all three cases there were large regulatory organizations (many!), with adequate power.
- The regulators failed to act because too much money was being made by politically powerful groups. The regulators were “captured” by their subjects. Anyone familiar with the Department of Defense and its contractors knows how this works.
- This fits nicely into a Marxist analysis (as so many things do, if one throws away Marx’s theory and “cures”). In a society run by capitalists (a plutocracy, in classic terms), it does not help to give capitalists’ minions governmental power in addition to their economic power (no help, that is, to the wider society).
- There are solutions to this problem, but they are not the kind of policy changes and programs so loved by technocrats. This is speculative, but I effective reform requires changing the relationship of citizens to the regime. That is, changes in how we think and act, seeing ourselves as citizens, not consumers.
- Not only might technocratic fixes not work, they might exacerbate the underlying problem. For I suspect we are sliding in the other direction – from citizens to subjects. For a look at where that might go, I recommend Christian Meier’s “Caesar”. He describes how by late Republic times the Roman people had lost the will to govern themselves. As always, volunteers appeared to take on the job.
A look at the past in order to see a possible future for America
To our good and loyal subjects:
After pondering deeply on the general trend of the world and the actual conditions pertaining to our Empire today, we have decided to effect a settlement of the present situation by resorting to an extraordinary measure.
Although the best has been done by everyone — the gallant fighting of the military and naval forces, the diligence and assiduity of our servants of the state, and the devoted service of our hundred million people — the war situation has developed not necessarily to Japan’s advantage, while the general trends of the world have all turned against her interests.
Emperor Hirohito of Japan speaking to his people for the first time (15 August 1945)
Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information about this subject
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A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
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The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
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We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
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Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
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Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession? (18 March 208) — More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
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The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.
The series of tax cuts enacted by Bush II has served to entrench the power of the holders of capital (the plutocracy). If the creative power of America is to be harnessed then these tax cuts should be reversed and the benefits spread more evenly between the suppliers of capital and the suppliers of labor. At the extreme, it was the same kind of inequality, nurtured in the 1920s, that led to the rise of Nazi Germany in the 1930s.
The tax cuts were tiny, and their simulative effect clearly helped pull us out of the recession. The tax system is already highly progressive (income taxes very much so, offset by regressive FICA and sales taxes). Shifting taxes more to the rich on a scale that affects income/wealth distributions will likely have severe side-effects.
To name just one, the bottom quintile (1/5 by income) of US households already pays almost no taxes. The next quintile pays very little. The system changes, I suspect, when large numbers (even a majority) of citizens do not pay for the government. Will they see it as a source of “bread and circuses?” Will they see themselves as citizens or clients?
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The concentration of wealth and income is the real problem (this is a global phenomenon, ocurring in many different kinds of societies). Using income tax policy to solve this is like fixing a car engine with just a hammer (and has seldom worked, except in small homogeneous nations). There are solutions, but complex and slow — and almost any such is opposed by politically powerful interests. Such as education reform, kindergarten to college — to which the teachers unions and professoriate have near-total opposition. Since they are one of the three top guilds supporting the Democratic Party, nothing will happen.
Substantial reforms might have substantial effects on social mobility and income distribution, especially if accompanied by increased funding for low-income areas. But it cannot happen under current circumstances.
A form of tax policy that might be effective, if not used on too great a scale (so that evading it becomes profitable), is taxing inheritances of the very rich. We have not taxed these for decades (the recent changes mostly ended the charade).
FM, I agree with you that concentration of wealth is the one of the major problems/issues. However, if you look at the tax cuts, you notice they weren’t all related to income taxes. The estate tax, which would only affect some 4400 people in this country, was the biggest weapon against wealth concentration in the government’s arsenal, and is now gone. I see nothing but rich Waltons and Cheneys until the end of days….
Also, you comment on what people pay – when my family crawled from that fifth quintile you mention into the fourth (we live in a “rural” area, so a few $ goes further), every extra $1000 my wife made at her new job cost us $300 in tax refund compared to last year (unsurprisingly, like most of America, I didn’t get a raise this year). Correct me if my math is wrong, but that sounds like a 30% tax rate, more than any oligarch is paying, I can guarantee you.
Even still, I would gladly pay more income tax (and give back any of these foolish rebates) if they would raise taxes on those making obscene profits; for instance, the venture capital firms that can buy out entire auto companies but only pay 15% because they’re “partnerships”, as if they were some lowly mom-and-pop business…
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Fabius Maximus replies: I agree with you about estate taxes (as stated above), a potentially effective (on a modest scale) tool for wealth redistribution. Also, I agree with the taxation of hedge funds and VC’s as income not pure capital gains. As for your family, I was talking about tax rates — you are talking about marginal rates. Any progressive tax scheme will inherently have high marginal rates for lower brackets, as one moves from zero to average rates there “rate of increase” in the tax rate will be high.
“I effective reform requires changing the relationship of citizens to the regime. That is, changes in how we think and act, seeing ourselves as citizens, not consumers.”
You’ve read Putnam’s _Bowling Alone_, of course. Westerners, including Americans, don’t feel a lot of loyalty to the state any more. A twenty-something woman, for example, might be passionate about her feminism and animal-rights activism. She might be willing to break the law in order to shut down a biology lab that kills test animals. But that doesn’t mean she can become a loyal American or Canadian or Australian.
Consider the new “Minutemen” on the Mexican-American border. They are within an ace of becoming taser-bait. Even if they do see themselves as citizens, the boundary of their loyalty obviously excludes some elements within America. Even if that situation gets resolved, there will have to be losers. Either the Minutemen will lose and the Mexican-plutocrat alliance wins, or the status quo loses and the Minutemen win, or both sides lose.
Without ethnic and cultural homogeneity, citizenship is imperial, not republican. However, trying to go backward into a 1950’s-style “Father-Knows-Best” white male dominance situation seems doomed to failure.
What looks most likely to me is a slow continuation of the decay. The USA will grow to resemble Brazil more and more. It’s tempting to think that there will be a sudden crisis and suddenly people will realize how bad things are. I fear that long decades will pass with people telling each other that everything is great, TV is fascinating, and ketchup is a vegetable.
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Fabius Maximus replies: “Bowling alone” is interesting, describing decay of the non-governmental links which hold our society together — and represent a large fraction of America’s special energy and resiliance. The shift in loyalty is the core element of Martin van Creveld’s “decline of the state” theory. I do not understand your comments about the Minutemen on the border.
The US might grow the resemble Latin America; this ties to Cam Hui comment about increasing concentration of wealth. Parts of the US Southwest already seem to be evolving into a “client-Patron” structure.
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I do not understand your comment about a “Father-knows-best” (FKB) cuture. The 1950’s had all the elements of the 1960’s, in early form. Beatnics/hippie. Civil rights movemetn. Alientation of university culture from broder US society (began in the McCarthy period). Even your example suggests the opposite, as the title of FNB was largely ironic. If you watch shows of that era, like FKB and “Leave it to Beaver”, they were already moving towards the “Dad as fun figure” and “Earth-Mother-Goddess-Wife” model which dominates our culture today.
FM – the issue wasn’t about the size of the tax cuts but how they were distributed. You could have gotten a better direct and more immediate stimulative effect if you had directed them at, say payroll taxes, rather than capital gains and dividends.
Many years ago a socialist who I didn’t agree with said something that I thought was very wise: “If you don’t give people something, they’ll eventually come and take it away from you in a way that you may not like.”
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Fabius Maximus replies: I agree with you that the tax cuts could have had more impact if better directed. However, as I said, they had little effect on overall distribution of income in those years — it was a small issue vs. the larger question of continuing concentrating wealth and income. As for your socialist friend, he appears to speak from the typical leftist view of people as clients to be ruled (“give them something). (This is, of course, equally common on the right — who want to reign. Democracy is only highly popular with the masses in the middle.)
Perhaps “Father Knows Best” isn’t precise enough — I just know the phrase, I never saw the TV show. Let’s point to a more readily available text, written by a favorite war guru, W.S.Lind: “Militant Musings: From Nightmare 1995 to My Utopian 2050“, Washignton Post (30 April 1995)
“But it was what happened on the cultural front that really made the difference for us. The Retroculture Movement had been growing quietly since the mid-1990s. It wasn’t political, just individuals and families deciding to live again in the old ways.”
The whole stroy is a great read, of course. What I mean to say is: the Retroculture movement is weak and divided. Its greatest ideals have been smeared by association with insincere Christians who truly worship their own egotism but loudly protest that they worship God. I fear that Retroculture as it exists now is doomed to failure. It would be a bright hope, if it could be made to work.
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Fabius Maximus replies: cultural analysis from someone who chats with his boss, Kaiser Wilhelm II? I believe there is a “Retroculture” movement of any substantial size in America. Never was. Looking back like that is not in our cultural DNA, imo. Before even thinking about it I would want real evidence. I suggest watching some 1950’s TV, which illustrates the dynamic and evolutionary nature of the 1950’s — far different from the popular image (which is the result of heavy propaganda).
Understatement can be a form of courage? I thought Greenspan’s 1/2rate cut in Nov 2002 and the 1/4 rate in June 2003 were a form of Overstatement/mental retardation. In June 2003 anyone with a brain knew the bear was dead, and Greenspan’s “deflation” BS was BS. I thought Greenspan was mentally retarded. Back then gold was below 300/oz. Rotflmao.
Next 9 month cycle low is due in Oct/2008. Anyone with a brain is gonna bet the farm on the next bear market V shaped panic selling crater. Coinciding with Q3 earning season. Next 4 year cycle low? Due in Oct/2010. Long live the Bush Bear.
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Fabius Maximus: Please post this comments on market-related boards, not here. Anyone capable of moderately accurate forecasts of either the economy or markets must be very rich, so please do not mock Greenspan or the rest of us. In fact, the investment industry exists because such forecasting cannot be reliably done with current tools — just as the gambling industry requires that neither astrology nor telekinesis work.
Technical analysis provides a useful language to describe market movements — but little predictive ability. From a psychological perspective it serves the same need as astrology. The first powerful proofs of this were in the 1950’s, showing that technicians could not distinguish between charts of actual security prices and series of random numbers. The most recent work was by behavior finance researchers (finance + psychology) in the 1990’s. For example, Meir Statman of Santa Clara U showed that many charts of “leading indicators” were actually lagging indicators (the human eye cannot determine relationships between variables shown on a graph).
Future comments on these things will be snipped. The focus of this blog is geopolitics. References to history are relevant, those to literature and philosophy give it some tone, but stock market discussions are too far off-topic.