Everything written about the economic crisis overlooks its true nature

Summary:   This site opened in November 2007 with three posts about this crisis, describing it as End of the post-WWII geopolitical regime.  Until we and our leaders understand this, we can neither appropriately respond to events nor prepare for future problems.  While the title overstates the situation (there are many who understand), it captures the key mental barrier we must cross in order to cope.  These are just guesses, but they have proven fairly accurate during the past 16 months.

Contents

  1. Introduction
  2. The true nature of the crisis
  3. A quick summary of the situation
  4. Missed opportunities to mitigate the damage
  5. What comes next?
  6. Cohesion will be the key to success
  7. Perspective on these events

This post is a follow-up to This financial crisis is the transition to a new world; like birth, it is painful, 11 February.

(1)  Introduction

Most analysis of this financial crisis describes this as a cyclical event within our current financial regime.  So they see the unexpected “breaking” of institutions as an indicator of magnitude or unexpectedness (it’s a “black swan”).   

  • bankruptcy of the US mortgage brokers in 2007,
  • banks and brokers in 2008, and
  • large non-financial corporations and even nations in 2009. 

These things are neither unexpected nor oddities.  They were predicted in general terms for many years (see here for examples) and represent the very essence of the process:  the ending of the post-WII global financial system, and its evolution into another form.  If the change is sufficiently large, which I expect they will, this will be the end of the post-WWII geopolitical regime.

To prepare we must first understand.  Hence this series, the purpose of  which was perfectly stated by Milton Friedman in the Preface to his book Capitalism and Freedom (1962):

What then is the role of books such as this? Twofold, in my opinion. First, to provide subject matter for bull sessions. As we wrote in the Preface to Free to Choose: “The only person who can truly persuade you is yourself. You must turn the issues over in your mind at leisure, consider the many arguments, let them simmer, and after a long time turn your preferences into convictions.”

Second, and more basic, to keep options open until circumstances make change necessary. There is enormous inertia tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

(2)  The true nature of the crisis

The post-WWII global financial system has brought unprecedented prosperity to the world, unlike the 1815-1914 cycle, which benefited mostly the West.  However it quickly evolved serious imbalances.

  • First manifested by the late 1960’s decay of the Bretton Woods system,
  • which ended in 1971, when President Nixon ended the US dollar’s convertibility into gold,
  • followed by increasingly frequent financial crises around the world,
  • resulting in the last stages with the development of obviously unsustainable massive deficits and surpluses in current accounts and
  • massive growth in foreign debts and credits (national reserves and foreign debts).

That our leaders do not understand the larger process at work explains their otherwise incredible failure to adequately respond.  Experts like Henry Paulson and Ben Bernanke — the latter one of the world’s leading experts on the last such transition (aka the Great Depression) have acted with slow incremental steps — each responding to the previous phase of the crisis, not the one looming ahead.  This shows the failure of the “orientation” aspect of their Observation-Orientation-Decisison-Action (OODA) loop.

The result is a situation like the early stages of the Great Depression.  No nation could recover until it went off the gold standard, breaking their “golden fetters“.  Nations made that leap into the future at different times, accounting for much of the difference between those who recovered quickly– and slowly.  Today governments burn their vital resources –time and money — fruitlessly attempting to save the post-WWII regime, an era that has already passed away.  Instead we must look ahead, building a new foundation for the American and global economies.

(3)  A quick summary of the situation

The crisis can be thought of as stress on the global economic machine which results in a “snapping” of links or components.  The breaking of each component increases stress on the others, leading to more damage.  Consumer demand and corporate investment decline, which in turn creates more stress leading to more snapping.

We can think of this in geophysical terms, as if God was putting torque on the world economy.  The fault line runs from

  • Asia — China, Japan, Korea
  • through North America — US, Mexico
  • to Europe — Eastern Europe and the PIIGS (Portugal, Ireland, Italy, Greece, Spain).

Each of these nations is under different forms of stress. 

  • China from the need for growth to maintain social stability. 
  • Japan from its aging population, massive governmental debt, and weakness following two decades of fighting deflation,
  • Korea from its massive external debts and collapsing exports,
  • the US from debt deflation, massive foreign debts (fortunately in US dollars) and coming collapse of consumer spending and export income,
  • Mexico from a losing war with organized crime and the coming collapse in oil revenue,
  • Eastern Europe from its massive foreign debts (worse, they’re denominated in foreign currencies),
  • and the PIIGS from a combination of the above.

The effect of other nations on the fault line cannot be reliably predicted, but offer great potential for unpleasant surprises.  To mention just one of the major unknowns, Can the European Monetary Union survive the next recession? 

(4)  Missed opportunities to mitigate the damage

The opportunities to avoid the crisis lie in the past two or more decades.  At some level we knew that we must save more and borrow less, that our ever-growing trade deficits were a threat to future prosperity, etc.  We put those concerns aside, instead indulging in an orgy of consumer spending.  Larger houses, more cars per household, granite counter-tops, insane government spending for every politically powerful group — from insane defense spending to bountiful agricultural subsidies.

Now the party ends and the hang-over begins.  We fumbled our time as world hegemon and the world turns to something else — as yet unknown.

The fabric of our financial system began ripping in December 2006, as sub-prime mortgage defaults spiked up and the mortgage brokers went bust.  During the next 12 months the applied a series of bank-aids to the growing tear.  In September and October the global economy suffered a cardiac arrest, a brief but clear warning of what was to come.   Readers of the FM site had a ring-side seat:

  1. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008 — We’re in the “golden hour”
  2. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
  3. A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
  4. Status report on the financial crisis: we’re at a critical point in time, 10 October 2008
  5. The economy is in shock. The effects of this will soon become visible, 11 October 2008
  6. Damage Reports from home and abroad, 12 October 2008
  7. The coming collapse in business spending – made visible today, 15 October 2008
  8. Miscelaneous news and thoughts about the financial crisis, 16 October 2008
  9. More reasons why the government will be taking over allocation of America’s capital, 27 October 2008
  10. The US economy must go to Defcon 1, 13 November 2008

November was the last opportunity for the government to “get in front” of the crisis — taking bold proactive steps to slow the decline.  I described the measures necessary on 25 September 2008 in A solution to our financial crisis, with details in 3 subsequent posts.  These needed to be done in November immediately after the election.

We missed that exit.  The government took some (not all) of these steps during the following 4 months, in a too-small and uncoordinated manner.  The last measure, the stimulus bill and closing down of the OTC derivatives markets will take effect during the next few quarters.  The former is too late; the latter might be too late.  For more on this, see Everything you need to know about government stimulus programs (read this – it’s about your money).

(5)  What comes next?

To use another bad analogy, the crisis has been traveling  during the past two years through the virtual space of “Wall Street” — the financial markets.  That has caused severe damage.  During the 4th quarter it made landfall at Main Street.  Now it travels through the real economy, leaving behind a trail of unemployed people and wrecked businesses.  Bankruptcies, poverty, and ruined hopes.

(a)  Government Policy

Governments incomes collapse, their expenses skyrocket.  Unemployment insurance, food stamps, medicaid.  People over 62 lose their jobs and draw Social Security and Medicare.

Both people and government of America have lived in a dreamland during the past two months.  Quarrelling and bickering about trivial while ignoring the storm about to descend.  As the depression descends upon the world, there will be scramble for large-scale government action.  Employ the unemployed, take massive steps to keep the economy alive until it recovers.   When we finally nationalize most of the major banks it will be page 3 news.  Unemployment and bankruptices — and government programs to fight these — will be on page one; instability abroad will dominate page two.

(b)  American politics

Hopefully people will forget the “do nothing and hope” recommendations of the Republican Party.  Otherwise it might face near-extermination in November 2010.

Any President would have looked bad in 1930.  Anyone taking office in 1932 — at the trough of the Great Depression — had the wind at his back, making it relatively easy to be a star.  President Obama will find that he was elected at a bad point in the cycle, in the equivalent of 1930 not 1932.   Obama must become the most difficult kind of healer, performing triage on the wounded. 

  • Who gets aid?
  • Who is left to suffer, fighting their own path to survival?
  • Who is doomed, and so gets no aid?
  • From whom are necessary funds requisitioned to pay for all this?

If Obama succeeds even modestly, history might place him among our greatest Presidents.

(6)  Cohesion will be the key to success

Getting through this with a minimum of damage will require cohesion, both domestic and international.  Maintaining cohesion is responsibility of us all, but especially our the world’s leaders.

  1. The US maintained a high degree of social cohesion during the 1930’s.  No great increase in crime, no waves of rioting, no armed revolts.  Much has changed in American since then.  Much depends on doing so well again.
  2. Germany maintained cohesion (of a kind) by electing making Hitler its Fuhrer.  Let’s hope no major nation takes that option.
  3.  National monetary, currency, and trade policies must be coordinated and cooperative.  The consequences of widespread “beggar thy neighbor” policies might be disastrous.
  4. The IMF will need a massive transfusion of money, as many developed and emerging nations face the equivalent of bankruptcy. 

(7)  Perspective on these events

How will this play out?  The end of this era will be like a singularity in astrophysics, where the rules break down.  We cannot see beyond it because we do not understand the choices that will determine our fate – let alone how we will choose.  It also resembles a singularity in that what lies on the other side is unimportant until (or unless) one survives the passage through it.

I am confident that America will come through this, hopefully learning what we need do to build a better world.  It’s a matter of faith.

But we must realize that political and economic regimes come, and they go.  The post-WWII has brought incredible freedom and prosperity to America, but that does not make it eternal. As Queen Gertrude says to Hamlet (Act I, scene 2):

Good Hamlet, cast thy nighted colour off,
And let thine eye look like a friend on Denmark.
Do not for ever with thy veiled lids
Seek for thy noble father in the dust:
Thou know’st ’tis common;
all that lives must die,
Passing through nature to eternity.

** The movie “The Matrix” prominently featured a version of this: “All that lives must die.”

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

About the causes of the crisis:

  1. The post-WWII geopolitical regime is dying, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  2. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  3. Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  4. Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
  5. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  6. A picture of the post-WWII debt supercycle, 26 September 2008
  7. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  8. Causes of the financial crisis (no, its not the usual list), 29 October 2008
  9. Government policy errors and the Great Depession, 1 November 2008
  10. Economics is not a morality tale, 14 January 2009

59 thoughts on “Everything written about the economic crisis overlooks its true nature

  1. FM:”To mention just one of the major unknowns, Can the European Monetary Union survive the next recession?”

    I think it will. Why would anyone leave the Euro right now? Ireland without the EURO would be Poland or Iceland, and that’s not such a great place to be. If the correct policy right now is deficits and fiscal stimulus, then the worst place to be is living under one of the weaker secondary currencies because your debts end up denominated in dollars. It’s not by chance that our debt is in dollars, it’s because of US bigness. It’s not by chance that the USA is turning the screws on the Swiss banks now — being in a bigger currency has advantages.

    Survival isn’t guaranteed of course. The first real test will come soon — we’ll see if the EURO is up to it.

    FM:”From whom are necessary funds requisitioned to pay for all this?”

    Yeah, well, in a Herbert Hoover moment, Obama is suddenly worried about deficits. This is not out of the Keynesian playbook. Is it 1932 Hoover tax increases all over again? Common Keynesian wisdom is that the 1997 tax increases put the Japanese economy back into recession.

    Me, I sort of suspect maybe Obama got ‘a call’ — you know. One problem — America’s creditors are Japanese and Chinese, and East Asia has a cultural aversion to debt. The mutual assured destruction argument only goes so far.
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    Fabius Maximus replies: I suggest that you actually read the articles by those experts before forecasting the fate of the Euro. It’s not a simple situation, esp if the depression deepens and the EMU neither losens policy or provides aid to the PIIGS.

    Nor is the US budgetary situation so simple. In hindsight we know what Hoover and FDR did wrong. But that does not provide clear advice to us, as the US situation is opposite to that of 1930 in many key respects (net debtor vs. net saver; net foreign debts vs credits; current account deficit vs. surplus; large government debt vs. light; etc). And about to run massive deficits vs. small ones. Assuming these matters are simple is the greatest error.

  2. As the fiscal crisis metastasizes to embrace more and more, we are being made aware of the extraordinary array of underfunded liabilities being carried by all of the states. I assume after the meltdown of credit cards which is coming shortly the real states crisis will start to be revealed. There has already been a good deal written about underfunded pensions, excessive holidays for government workers etc., decline of infrastructure etc. It would be worthwhile FM if you propose a series of topics enquiring into the origins and development of this disastrous condition. I have no doubt its origins are to be found in the Great Society programs created by LBJ which effectively institutionalized the Democratic party across the country — one of the funner bits I once investigated was to discover how many campaign staff were parked in state worker retraining programs. This was chump change of course, just a couple of hundred million in the 70s, by now it must be several billion. Just a suggestion to help stimulate the debate we need to have if we are going to use this debacle constructively to put our country back on the rails it left many decades ago.

  3. The Great Depression was a cultural as well as economic event. It was the great era of the comedy: the Marx Brothers, W. C. Fields, Mae West, Laurel and Hardy. This was a safety valve that eased tension and allowed people, with good humor, to challenge the way things were.

  4. The economic system is always about investment decisions (to satisfy physical needs) and distribution (political needs). It seems, one society is the West, an other is World less West (WLW). Prominently WLW is not based (yet?) on retirement financing. WLW is on the rise.

    About the West: Again, WLW is on the rise! The West is a market economy. Talking about capital market is IMHO false. It is an investment market (allocating high-yield, secure-yield investment to capital). This is a new situation, since about 1980!. The main contenders are retirement investment vehicles(RIV), and super-rich(SR), both from the West, and others, new from the WLW(who as yet miss almost completely the good investments) . RIV by their nature are stabilizing, the SR destabilizing(the communism was a particular embodiment of RIV, now gone), WLW being not yet well characterized. Investment by the SR got the overhand, hence the financial crisis. This can be solved only by first recognizing the nature of the investment market, second, giving RIV a privileged position in investment market, introducing RIV to the WLW.
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    Fabius Maximus replies: I suggest that you look at the article listed on the FM Reference Page about Demography – studies & reports. The demographic transition to a “retirement society” is most advanced in Japan. Russia and Eastern Europe are following fast. Due to its “one child” policy, China is a decade away. The “age wave” is a global event.

  5. Great article FM.

    My only quibble is that while society DID manage to generally keep a lid on things during the Depression, there was a LOT of talk (much of it was about the perceived benefits and pitfalls of anarchy, Fascism, and Communism), some bomb-throwing, and a spike in property crimes of all sorts.

    By our current standards the actual quantities of social unrest were very small, but by the standards of the era the quantities were huge and threatened society. Be prepared for considerable social unrest even if everybody plays well together in the end.

  6. High social cohesion during the 1930s? Little social unrest? What history books did you read?

    The history books I read showed pictures of bonus marchers getting ridden down by U.S. army cavalry with swords drawn. Henry Ford set up machine gun emplacements at the River Rouge plant, and the footage of police firing on and murdering strikers in 1937 was so horrific that the newsreels didn’t show it. Food riots occurred routinely but were not printed in the newspapers for fear of a complete breakdown in society.

    During the 1930s, lawyers who tried to foreclose on farms were routinely shot. A cabal of America’s wealthiest plutocrats tried to enlist General Smedley Butler in a plot to overthrow FDR and install a military dictatorship. Social cohesion? What on earth are you talking about????
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    Fabius Maximus replies: The Great Depression was an economic event without precedent in US history. Social unrest was not proportionate to the event. There was violence, but not on an scale unknown in US history.

    To give just one of many comparisons, consider this List of race riots in the US. During the late 1960’s many inner cities burned, and were occupied by the National Guard to maintain order — violence met with military force on a scale beyond anything needed during the 1930’s.

    Do you have anything to support “lawyers who tried foreclose on farms were routinely shot.” It happened, but “routinely”?

    The level of labor-company violence during the 1930’s has happened both before and since in the US, and would be considered just a wild weekend in many countries. If you believe this is a break-down of social cohesion, I suggest you re-calibrate your metrics. The next few years might bring the real thing.

    The Remington-Rand strike of 1936-37 was worse than average. Per Wikipedia:

    The Remington Rand strike was a particularly violent strike. Although no one died during the strike, both sides engaged in beatings with fists and clubs, rock and brick throwing, vandalism, threats and physical intimidation.

    There were more violent clashes, but these were rare (IMO, astonishingly so). Some examples:
    * The 1931 UMW strike in Harlan Country, a gunfight in which 3 deputies and 1 miner died.
    * “Bloody Thursday” in the 1934 West Coast waterfront strike, 2 strikers killed.
    * Memorial Day massacre of 1937 — Chicago Police killed 10 demonstrators during a US Steel strike.

  7. “What on earth are you talking about????”

    The story of Seabiscuit illustrates both the conflict and the cohesion of the 1930’s. The conflict was between working class Seabiscuit and Wall Street War Admiral. The cohesion was the shared belief that this race somehow mattered.

  8. Somehow, social cohesion seems less likely today than in the thirties. There is no organized left, while there is an organized right (and the right has the guns.) The state and the media have much greater power today, and the people appear to be more apathetic and atomized. The collapse of the economy will obviously be a factor for instability, but it’s hard to predict which way a threatened middle class will go. A leader like Obama may be able to make repressive social policies palatable, but overtly reactionary moves by the state could engender resistance.

    More than anything, I fear the possibility of solving domestic problems by war.

    1. ^^ This.

      When the middle class finally becomes involved, the end is nigh. We’re used to the smelly hippies running around protesting the cause of the day. We’re not ready to see Ma & Pa Kettle out in the front of the federal courthouse.

  9. I got a depression story. My mother’s side grandparents were part of a Finnish community here in Berkeley California back in the 30’s. Finns were violently divided into the Communists and the Christians — my relatives were all on the pro-Communist side. I did some research on these groups, and they were always at each other. There were protests and strikes; they burned building downs and rioted. It looks bad when you add it all up, but there weren’t really that many incidents — most days must have been peaceful. Anyway, among them was one family, many children, very poor, and always about to get their house foreclosed. What happened was that they had regular protests about this. I’m not sure what happened to the family in the end, but this one house was a cause for the community, and they’d all protest when the bankers/government showed up. I don’t know if these events were violent or not, but you know — I can do the math. I don’t believe it was a matter of kindly protesting, people were more physical those days.

    My grandparents must have been spooked by this because the worry of having too many children and not being able to afford them did leave a mark. Later in life my grandmother revealed to me that she had three abortions in the 30’s. The world was a scary place at the time and she mentioned political events, though this was probably late grandfather talking through her here — my take is that she didn’t want to be a burden on their community either, like this one family. She did mourn those abortions later on.

    Looking back at all this now, um, what my Finnish-side ancestors felt was social cohesion linked to their small subdivision of their small ethnic community. They did feel American, but the American-ness was a bit more abstract, and in terms of people helping each other out, this came from Finnish-ness.

    This story now, of people getting together and protesting a foreclosure feels like it’s from another world — it’s hard to see us anyone doing this point now. Maybe the right-wing Christians do have this kind of cohesion? These days, I did spend a few weekends looking for a bit of the ‘ethnic equity’ and searching out the remains of the Finnish and Japanese groups. There is a Finnish group still hanging on, and the Japanese group has quite a large Buddhist church around here. Me, I’m sort of like them, my story is interesting to them, but I’m not quite one of them — at least I never fit into their dating scene.
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    Fabius Maximus replies: Thank you for this story!

    My favorite example of social cohesion during the 1930’s is that of “penny auctions”. These were extra-legal community actions, in the long (and checkered) tradition of American vigilantism. Auctions of farmers’ land and equipment at which the neighbors forcibly prevented competing bids. See this description, along with its famous photo.

    Strong communities find their own ways to cope. That most financial institutions are national — not local — will make these measures even easier today (local institutions often having more local knowledge and legitimacy than national institutions).

  10. Another excellent post/thread, FM.

    This is not a criticism, but in reading through this an a couple of the related (earlier) pieces I find myself, not for the first time, wishing for more coverage delving into the underlying cultural, ethical and historical systemics. I believe you have been right all along that this is more than a cyclical problem – and indeed Bernanke’s testimony today echoes this view in that they are projecting recovery in 2010 basically – but rather a deep, systemic crisis.

    But if so, what is the nature of the system, what lessons about it is the crisis delivering? Understanding the nature of the cause will provide us with better understanding of not only the effect in terms of the current crisis, but also the means to begin to evaluate and formulate intelligent solutions. Because as in all affairs/processes, accurately perceiving the fruition is a function of clearly understanding the underlying ground and process that produced it and in so doing appreciating the ‘true nature’ of what is actually going on. Once that is mastered, crafting new courses can be undertaken with real intelligence versus blundering around storm-tossed ‘twixt hope and fear.
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    Fabius Maximus replies: All good questions. No answers here, limited by the severe time constraints under which these posts are written. And sometime in the future lies my new hobby — building ships in bottles.

  11. Of all places, Berkeley is the likeliest to have some kind of resistance/protest. Ach! And that will create massive counter-resistance in Fremont, Walnut Creek, Vallejo, etc.

    But Cathryn makes a good point. Cohesion is more apt to come from ethnic identity than economic class (as Lakoff says, voters “vote their identity, not their interests.”) But identity is so much more fragmented these days.

    On the other hand, we can be fairly certain that the threatened middle class (all those still with homes) will react defensively, supporting repressive measures against the unruly, opposing new taxes and any social rescue programs.

  12. All those still with homes? More than 90% are paying their mortgages I read. It may get worse, it may get way worse, but we are in the first stage. You know, you have a lump under your arm, we need to take a look.

    This is what I mean about America is going to discover real politics again. The old politics of unions, special interests, ethnic groups diffused without exactly disappearing. We still have Oscars but who really cares? Columbus Day? eh. “Something” is going to replace these and it will not be gay rights, abortion rights, the right to get drunk and act like President Clinton when you are 14 etc. What it is none of us knows and the anxiety but not the anticipation and excitement is reflected in these columns. It’s going to happen so get into enjoying the prospect and see how you can contribute — and I do not mean money. We may have the chance to help refashion this grand Republic. Lord knows, it needs it.
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    Fabius Maximus replies: A depression is an opportunity to recollect who we are, and rediscover our true loyalties — or reinvent them.

    On a larger scale, this will test Martin van Creveld’s theory — as discussed in Does this economic crisis make the State stronger – or is it another step in the decline of the state?

  13. Jonathan: I can’t tell exactly where you’re coming, and don’t worry, that’s one of the civil rights of the internet — anonymity. I don’t know what’s coming down the line either, and I’m not even sure I want to go through it, even if it goes the right way. I find myself attracted to the idea of a general dissolution of institutional authority, so that localities and affinity groups can rebuild according to their own interests and resources. Thom Hartmann, in Dying of the Ancient Sunlight, imagined a “new tribalism”, in which hundreds of distinct communities/economies co-existed in a mutually tolerant way.
    In effect, this means dropping out of the current global economy and its standard of living, which may be a utopian idea for the majority (especially the city-dwellers). But unless we break into smaller parts, it seems we’re condemned to big goverment with a more and more totalitarian flavor (which will make both traditional left and right irrelevant.)

  14. “But unless we break into smaller parts, it seems we’re condemned to big goverment with a more and more totalitarian flavor (which will make both traditional left and right irrelevant.)”

    This sentence might well encapsulate what transpires in the next phase as the old order is increasingly perceived as dysfunctional. This global/local business, in other words, is a key dynamic. It’s out of whack now all over the world in many ways, whether it’s how people in rich countries find it increasingly hard to buy a decent egg or vegetable, or how people in so-called ‘third world’ countries are born into virtual slavery providing ‘us’ with cheap sugar, coffee, chocolate, spices and so forth. And of course all this could be described politically, economically, culturally and so forth as well.

    1. Although this post is cloaked in sarcasm, this is the best description of the “fix” to America’s problems that I have seen. We are long on opinion and short on data collection, analysis and understanding here in America. Our base assumptions (axioms if you like) determine our conclusions. If you think the earth is flat as a premise, then your conclusions about your environment will spill out from that base assumption.

      We need to know the leaders base assumptions then we can all predict his conclusions. If the base assumptions are not supported by evidence, the liklihood of the conclusion being right is a matter of luck. If you think America is the problem, your conclusions are pre-determined. Pray that the “elected guesser” makes the best guess because he sure is not working from the same base assumptions I am.

      Supply and demand and price equilibrium is the immutable law in economics. So is self-interest. When the proposed solution fails to recognize these two rules (like ignoring gravitational effects) the outcome will not be as planned. This is why the Soviet Union failed (spectacularly, the greatest failure in human history actually), why welfare does not work, and why these bailouts won’t work either. But self-interest sure does explain our Congress.

  15. Lies all lies. Ppl like obama and gore and other dems understand far more complex things such as weather and climate in their vast knowledge of global warming. Clearly their understanding of “its all American’s and/or capitalist fault” clearly applies to this and well everything. For everything wrong with the world is American’s fault and the lord and savor(obama) will fix everything by changing American into a better country…likely using kenya his homeland as a model.

  16. I agree with your premise that government actors were ill-equiped to respond to this crisis for a number of reasons. Beyond that, much of your analysis strays from helpful analytical points.

    Prescription without diagnosis is malpractice, and that is the real source of our problems.

    This is not about going off the gold standard or a grand schism in the international financial system. This crisis was about ~$2Trillion of fraudulently-identified securities, whose returns did not reflect the underlying risks. These “AAA” securities were mislabeled because of (a) failure of 3 statutory (aka government mandated) rating agencies, (b) the presence of shaky mortgage insurance, and (c) the ready market provided by the GSEs, who dove head long in to purchasing “AAA” sub-prime concoctions in 2002-2006. The presence of these fraudulent securities artificially inflated home values in 7 or 8 states and led to a real estate bubble.

    That problem was a bad problem, but it could have been solved if it was properly diagnosed and intelligent solutions applied early on. The over-leveraging that became a clear problem when the fraudulent securities and housing bubble broke could have been (and was being handled) at multiple levels in the system.

    Instead, with a volatile election afoot, the government, which was partially to blame for the situation, sought to deflect ANY criticism of its action and launched a full-scale verbal and fiscal assault on the private sector, destroying business confidence and subsequently consumer confidence.

    What do we do from here? I’ll leave that for another post, but blathering on about gold standards and Breton Woods is an unhelpful exercise.
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    Fabius Maximus replies: That is far too simplistic and narrow an analysis, ignoring the crisis’ deep historical roots. Single-factor explanations seldom work for complex global events. What you mention was part of the spark, but the global economic imbalances would have inevibably produced a global depression, sometime. Experts have been warning of this for a decade at least; this post lists a tiny fraction of these.

    “Prescription without diagnosis is malpractice”

    Perhaps you should have used the links at the end before throwing around such accusations. Each post is in effect one chapter in a larger work. On the FM Reference Page “Financial crisis – what’s happening? how will this end?” you would have found these posts discussing causes:

    (1) The post-WWII geopolitical regime is dying, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
    (2) Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
    (3) Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
    (4) Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
    (5) A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
    (6) A picture of the post-WWII debt supercycle, 26 September 2008
    (7) Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
    (8) Causes of the financial crisis (no, its not the usual list), 29 October 2008
    (9) Government policy errors and the Great Depession, 1 November 2008
    (10) Economics is not a morality tale, 14 January 2009

    1. Alas, as Shakespeare wrote, “neither a borrower nor a lender be, for loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” Thank you Polonius.

      So, yes, we agree that over-leveraging was a major culprit, and I will grant you that fiat currency and other machinations of a politicized central banking / currency system are an enabler, if not root cause, of the conundrum. I do not believe, however, that tying a currency to a specific material commodity (aka Gold) in a addition to relying off of the effectiveness of your fisc is a cure all. Lenders of last resort, sovereignty, trade flows, etc. are all things that people need to think about and work with somehow, someway.

      Factually, this was a very odd crisis that only time will get to the bottom of. Corporate america was in fact under-leveraged on a historical basis. The highly leveraged transaction boom had long since gone away. Even the worst LBOs in this cycle were levered at maybe 5x EBITDA (or 20% coverage), hardly something your Ivy League finance professor would have gotten wound up about. Consumer debt had really been declining since 2006 when the GSE sub-prime and second mortgage market was getting the squeeze, and the housing “bubble” was not that crazy by historical standards. Remember, Japan was being driven by 2% 100 year mortgages and corporate reallocation of funds. Nothing like that was happening here. It was all about some dislocation in the residential housing market in a handful of states.

      The best micro-level solution I have followed is Luigi Zingales, from the U of Chicago (and pal of Postrel, so no slouch), who suggested a revision of the bankruptcy code to provide for some creative debt-equity swaps.
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      Fabius Maximus replies: Did you read this post? It says the exact opposite of “tying a currency to a specific material commodity (aka Gold) in a addition to relying off of the effectiveness of your fisc is a cure all.”
      * The gold standard was an obstacle to recovery in the 1930, and irrelevant today.
      * I repeatedly state in this series that fiscal policy is a necessary pallative, not a cure.

  17. I love this discussion. What an awesome post. As a political conservative my priorities begin with personal responsibility and continue with supporting a government hemmed in with constitutional limits and perpetually distrusted – and as important, the recognition that economies will ebb and flow (I don’t call this cyclical, but rather a reflection of our abuses). Any conceit that controlled economies will result in more freedom and less suffering is tragically false. Ultimately the definitions we apply to the standards we hold will reveal the path to solvency, but not until then.

    It’s popular to trivialize the idealism that undergird individual freedom, and so convenient to forget the savagery that compels the collective to bend the individual. My hope is that with study (like reading this fine site) and a renewed appreciation for quaint notions of self-responsibility and capitalism, we’ll be better stewards of our economy, and our freedoms.
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    Fabius Maximus replies: You might find the posts listed here of interest – America – how can we reform it?

  18. I’m sorry, but in all that did you say something? Because, I’m struggling to find what it was you actually said or where intending to say.

    Could you perhaps move past big generalities and into something specific?

    I agree that it was debt that got us into this mess. After that, I lost track. It seems like if I’m understanding you currectly, you think the solution to this is to go deeper in debt and to stoke another liquidity bubble?
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    Fabius Maximus replies: I am always glad to help a beginner. Perhaps you need to practice in the shallow end first. I suggest starting with “A lesson about markets: “I will buy your monkeys”. The go to Financial crisis – what’s happening? how will this end? and read thru these sequentially, by section.

    “Could you perhaps move past big generalities and into something specific?”

    This is an overview post, putting a series of other posts together into a broader context. The blue underlined text are called “links” — they go to posts providing detail. There are 25 of them. For example, to see details about solutions you “click on” the A solution to our financial crisis. That in turn has “links” to posts providing still more details (under recommendations you will see #1, #2, and #3).

    “and to stoke another liquidity bubble?”

    That is exactly wrong, the opposite of what I say. At the end of the post you will see “About the causes of the crisis.” I suggest reading #3, 5, an d7. But just reading the titles will tell you that too much debt is the problem, or one aspect of it. The government spending for capital investments and welfare mitigates the damage — trauma maintainence — while the private sector burns off its excess debt.

  19. This is patently false: “Hopefully people will forget the “do nothing and hope” recommendations of the Republican Party.” Point to a single quote where someone said (in quotes, like you have it) “do nothing and hope”. The rest of your analysis is vague and uninsightful, but at least not openly partisan like that line.

    P.S. OODA is not an appropriate metaphor for long deliberation and analysis. Did you just want to find a way to work it in there?
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    Fabius Maximus replies: (1) I love people who write 78 word comments saying that 2000 word articles — that link to 25 other posts providing more detail — are vague. Help us out with a specific example of what you find “vague”?

    (2) The quotation marks do not reference a specific statement, but indicate irony (see the Wikipedia entry on use of quotation marks).

    (3) The Republican Party vote against the stimulus bill — without offering effective alternatives — was de facto recommending do nothing and hope for recovery. No House Republicans voted for the bill; in the Senate 3 voted for and 38 against (Wikipedia).

    (4) Why is an OODA loop “not an appropriate metaphor for long deliberation and analysis”? It applies to both fast battlefield action and long-term strategic maneuvers. That’s a key to its conceptual power. From the Wikipedia entry: “The OODA loop that focuses on strategic military requirements was adapted for business and public sector operational continuity planning.”

    1. My PS is snarky and wrong–sorry. I guess some people apply OODA to long-scale decision-making. None that I know! In any cae, I don’t see our leaders doing any kind of ordered thinking like this. My point about your cheap shot at Republicans stands though.

    2. I think the correct Republican response should be: Tax Cuts NOW, and only Tax Cuts, until growth starts again.
      Obama ran on a ‘95% of the people will get a tax cut’ campaign promise, which now looks like about $10 a week, starting in April (so he’s not really a liar, is he?)

      The Reps are not cohesive — far too many are Big Gov’t ‘compassionate conservatives’, sort of like McCain, who is also willing to blame greed and the free market for prior gov’t failures to set good rules.

      b — I’d love you to be correct that the Reps are not proposing FM’s “do nothing and hope”, but I notice you don’t link to the prominent alternative Rep proposal. I don’t yet know of one, please let us know if have one.

  20. You lost me with this statement: “Hopefully people will forget the “do nothing and hope” recommendations of the Republican Party. Otherwise it might face near-extermination in November 2010.”

    Either I slept through the part of recent history where the Republican Party made recommendations to “do nothing and hope” — or else it does appear that your train of analysis left the tracks and crashed.

    But if you’re saying that “if” the Democrats can convince people that the Republicans proposed merely “do nothing but hope” — now that is something entirely different since it bases your predictions for our future on propaganda. I believe that truth will prevail in the end.

    Interesting reading, though.
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    Fabius Maximus replies; As Tom Grey asks in his reply to comment #21, can you point to an alternative proposal by a major Republican leader? The Republican Party vote against the stimulus bill — without offering effective alternatives — was de facto recommending do nothing and hope for recovery. Esp voting against a bill in which 38% was tax cuts and 18% desperately needed state and local aid. No House Republicans voted for the bill; in the Senate 3 voted for and 38 against (Wikipedia).

    If my forecast is correct, the Republicans will be voting as a block in favor of several more almost identical spending bills — larger and without the tax cuts — as the economy spirals down. That might make their vote against this bill difficult to explain.

    1. Re your statement that: “The Republican Party vote against the stimulus bill — without offering effective alternatives — was de facto recommending do nothing and hope for recovery.”

      Nope, not at all accurate if you only recall that the House Republicans did propose an alternative bill — a far more effective bill IMHO than what the Democrats were floating. A characterization of those two bills as either “effective” or “not effective” amounts at worst to a partisan judgment and at best to a judgement based on opposing idealogical values.

      So, guess it would be just as valid to say that the Democrat’s supposed stimulus bill will not in fact effectively stimulate the economy, and thus the the Democrat’s bill is “doing nothing but throwing money at pet social projects while hoping” that the economy will get better as the result of that profligacy.

      Re your statement: “Esp voting against a bill in which 38% was tax cuts and 18% desperately needed state and local aid.”

      Have to ask: What are the Democrats (and you) counting to be a “tax cut” to make up (pun intended) that 38% figure?

      Please identify the “tax cuts” found in the stimulus bill after first setting aside the total amount that will only temporarily deflect the AMT’s impact upon “middle class” tax payers since that is “tax relief” (tax “cut” is a misnomer since just about everyone agrees the AMT was never intended to hit those middle class taxpayers in the first place) the AMT tax relief was to be enacted regardless of the supposed stimulus bill; and also put aside that tired old fiction that giving money to folks who don’t pay income tax in the first place is a “tax cut” that can be included in the 38% without first crossing your fingers and tossing a broad wind at the truth.

      And so, as they used to say about beef in a hamburger, where’s the real tax “cuts” for real taxpayers in the stimulus bill?
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      Fabius Maximus replies: The tax cuts were spelled out. The Wikipedia version matches what I have seen in the NYT and WSJ, although I have spent little time on this (I suspect the bill is too small to do more than slightly buffer the decline): tax cuts are $228 billion, of which only $70B is the AMT part.

    2. Ok, we’re making some progress. Subtracting $70B frin $228B leaves $158B — which appears to be about 20% of the approximate $750B “stimulus” bill total, give or take fifteen or twenty billion dollars.

      So it’s actually 20% versus the advertised 38%, and even that 20% is reached by generously including in the calculation all of those non-tax “tax” cuts that democrats like to pretend are something they really aren’t. But never mind politician lies, nothing new about that. Let’s just check out the end result of that whopping tax cut: $13 per week!! Wheee!

      But this “tax cut” business is all a distraction and tired old dicredited ideology that detracts from what really matters. Which is: The absolute power of the purse to perpetuate power. Expect that circuses for the masses will be coming soon to a stadium near you. Probably highlighting lions vs bankers. So drag out those Denver columns from the backlot at Universal.

    3. To supplement, the coming circuses will feature as a theme song the following from Fleetwood Mac:

      If you wake up and don’t want to smile,
      If it takes just a little while,
      Open your eyes and look at the day,
      You’ll see things in a different way.

      Don’t stop, thinking about tomorrow,
      Don’t stop, it’ll soon be here,
      It’ll be, better than before,
      Yesterday’s gone, yesterday’s gone.

      Why not think about times to come,
      And not about the things that you’ve done,
      If your life was bad to you,
      Just think what tomorrow will do.

      Don’t stop, thinking about tomorrow,
      Don’t stop, it’ll soon be here,
      It’ll be, better than before,
      Yesterday’s gone, yesterday’s gone.

      All I want is to see you smile,
      If it takes just a little while,
      I know you don’t believe that it’s true,
      I never meant any harm to you.

      Don’t stop, thinking about tomorrow,
      Don’t stop, it’ll soon be here,
      It’ll be, better than before,
      Yesterday’s gone, yesterday’s gone.

      Don’t you look back,
      Don’t you look back

      It’s a New World! And yesterday’s gone!!

      Based on Hope! . . . For what?
      And Change! . . . To what?
      New Ideology: Hope and change for the sake of . . . who knows.
      Now let us pray. Or whatever you do if you don’t believe.

      And console yourself with this assurance from the new Power:
      “I know you don’t believe that it’s true,
      “I never meant any harm to you.”

      Destruction with the best of intentions. How nice.

  21. I’m with poster #20, celebrim. This is my first visit to this site, so perhaps there’s a learning curve. But if you are advocating Keynesian solutions to this so-called “crisis”, then I think the present “crisis” will pale by comparison to what is coming when Obama and his minions get done fixing things with “stimuli”.

  22. We can put all this stuff in complicated language i think, but really it comes down to: we exploit what’s around us too much. If we would just think and conserve a bit more at least, we would be a lot better off

  23. Great overview of your “end of post-WW II regime” thesis.

    But let’s say there is a big Super table, with 4 legs that are also part of the tabletop. And now two of those legs are broken, with big cracks in the top as well. And the repair people are trying to fix one leg, and replace the other leg, including changing part of the table top … would that be the ‘end of Super table’? I don’t quite think so, tho it might be called that.

    The wealth production capacity of factories all over the world still exists (ok, maybe not Zimbabwe anymore). But the Financial System of Big Banks is certainly broken — how necessary are these Big (zombie now?) Banks to continued and future production? I don’t think they are nearly as important today as banking was in the 30s.

    So I don’t quite see the breakup, because so many of the powerful (and rich) will be frantically trying to keep most of it intact. But the very rich in Finance are in the most broken area, and THEY will not be able to stay intact — yet much of Obama (and Bush) pork-u-lus action is to save (some of) the rich in Finance.

    The difference between pre- and post- WW II in global terms was truly huge in terms of real changes: people killed and wounded, goverments changed, factories destroyed. The difference between pre- and post- “CDS-derivative Finance meltdown” will NOT be nearly so huge: almost nobody killed, almost no factories destroyed. Yes, lots of business plans resulting in loss instead of profit; lots of different owners of houses / factories. Lots or older folks instead of younger folks (a trend far more important and obvious and tracked than global warming hot air).

    And the obvious non-destruction differences mean the rich of the old regime will try to use their power to maintain it — there is no US+ally “victor”. Only interests. (A change more like menopause than like birth.)

  24. Can you take another step or two back in the analysis? Building upon the metaphor in the “I will buy your monkeys” post, the villagers seem increasingly content to set up monkey-management bureaucracies. And the next village has the same pattern, and the national monkey-managers are gathering with the international monkey-management plutocrats to centralize further all the monkey-business.

    So it seems to me that the fundamental problem is not so much that economics is as chaotic as the weather. Rather, attempts to build bureaucratic solutions above the village level for managing monkeys have the counter-intuitive result of breeding King Kong. Time to quit before some primate chews my hands off.

  25. Let’s also note the dual points of inflection happening. First, energy returned on energy invested (EROEI) has fallen considerably the last few years. Hence, keeping an industrial economy going will require huge investments of capital into the energy producton system. As Ghawar and other supergiants are drained, there are few or none to replace them anywhere on the planet. Going to oil sands, heavy oil, coal-to-liquids, LNG, all need at least twice the capital per barrel. Continued opposition to nuclear power both for electricity and process heat (then to transport fuels) blocks our second best choice after finding more supergiants.

    Second, the internet/computerization/communications productivity boom is petering out. Increasingly, new applications are pushed, not pulled, into use. Need another word processor? Is Internet TV any big productive improvement over broadcast analog TV?

    One could also put the demographic transitions into the same productivity dampening bucket. Without floods of young and eager new workers, labor productivity as a whole will fall due to fewer young and able supporting more old and unable.

    Times, they are a’ changin’!

  26. One small question: was Hitler elected? I know he lost to von Hindenburg. And he was later appointed Chancellor. And the NSDAP won large(st) share of seats in multiple elections. But was he -himself- ever elected?
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    Fabius Maximus replies: That’s an error, now fixed. Hitler ran for President and lost. His tyrannical powers as Chancellor (originally a weak office) were given him though votes in parliament.

  27. The guy who wrote this is describing PROCESS. FINE, it is nice to view process; it tells us where we are going. Well, we may be able to see the end! So what? How does that help to fix things; well, we do surmise something has to be done, the innovative ideas of the moment to try and fix things will be tried in a trial and error attempt. However, what I say is, why not provide full visibility to the CAUSE, so at least we know what the ‘innovative idea’ to fix the problem really is, and start to head in that direction.

    DOWN AND DIRTY PROBLEM: We, the world, has lost control of the world economies. WHY: Because the “CONTROL DIVICE” for the economic system was the Gold Standard; and Nixon abandoned the Gold Standard in 1971. Hence, what happens to any system without a control device? It becomes completely Unstable and self destructs. We are now witnessing this mode, the destruction mode; gone to far to stop? Maybe!

    And Now The Greenspan Paradox {The world’s sacrificial lamb} GREENSPAN IS QUOTED BELOW WITH REFERENCE SITE.

    “Some mechanism has got to be in place that restricts the amount of money which is produced – either a gold standard, a currency board, or something of that nature because, unless you do that, all of history suggests that inflation will take hold with very deleterious effects on economic activity.”
    “There are number of us, myself included, who strongly believe that we did very well in the 1870s to the 1914 period with the international gold standard.”

    To be sure we are on the same page, deleterious means: HARMFUL, TOXIC, POISONOUS, DEADLY, LETHAL, VENOMOUS, AND INJURIOUS. And now the Greenspan Paradox Assume:
    Greenspan knows we need a gold standard, or equivalent.
    Without a standard, deleterious effects will impact our nation, our lives.
    Obtaining cooperation to return to a gold standard is impossible-
    WITHOUT AN UNAMBIGIOUS THREAT TO OUR LIVES AND FUTURE.
    Conclusion, he wants it to fail in order to chance a return to the gold standard.

    EVIDENCE WHY HAS NO CONGRESSMAN OR SENATOR BE ABLE TO GET A GOLD INVENTORY OF FORT KNOX AND BULLION BANKS FOR 26 YEARS? WHY WAS OUR U. S. GOLD BEEN LEASED TO GOLD MINING COMPANIES FOR LESS THAN ONE PERCENT PER YEAR SO THEY COULD SELL IT ON THE OPEN MARKET, THEREBY DEPRESSING THE PRICE. {The loan of gold to mining companies was guaranteed by proven reserves in the ground, but would take years to mine it at high prices.} DEPRESSING THE PRICE OF GOLD HAS THE IMPACT OF HOLDING INFLATION IN CHECK.

    My point is, Greenspan has let the children play in the candy store, knowing there is no money left to build the lifestyle desired unless a crash of gigantic proportions [like WWI] must occur to force compliance with the world changing back to a Gold Standard.

  28. You know FM, I read your links and found them pretty substanceless. Of course, those links led to more links, some of which were just long lists of links.

    For example, I went to your link “A lesson about markets: “I will buy your monkeys”. It contained without much comment little more than a parable. You didn’t bother to explain the meaning of the parable, and you certainly didn’t connect the parable to some present event. Now, I could probably invent some connection between the parable and present events, like for example the dangers of investing in commodities that are arbitrarily valued (for example, stocks that don’t pay dividends in companies that have never made a profit), or the dangers of investing your money with someone you suspect or know to be dishonest (as many of Madoff’s investors suspected but invested anyway).

    But nothing about the parable really informs me how you think we get out of the mess.

    When I go investigating how you think we get out of this mess, I find you seem to favor things like nationalization of industries, socialization of the debt, welfare expansion, and so forth. For some reason that never seems to work for other countries when they try it, what makes you think its the right solution for us? Now, if you don’t favor such solutions and you merely think that those are the most likely to be adopted (in that you may be right), it would be good to know what you did favor.

    Finally, you don’t have to send me to read parables about monkeys to teach me how to recognize a con artist. I know quite abit about cons and how to carry them off. I know for example that con artists are prone to talking big, presenting themselves as authorities, and hitting you with such huge amounts of information that they hope you’ll be unable to digest it.
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    Fabius Maximus replies: (1) There were 25 links in this post, to posts providing increasing detail. And you mention as “an example” a post not even mentioned, a fun little story. That’s what I meant by suggesting that you “start at the shallow end” (with the monkey story) and work through the posts about this crisis. Your 2 brief comments suggested (perhaps incorrectly) little familarity with these issues.

    (2) “You didn’t bother to explain the meaning of the parable, and you certainly didn’t connect the parable to some present event.”

    Anyone who needed explanation of this little story, or did not understand its current relevance. is on the wrong site. This is too basic for discussion here.

    (3) “you seem to favor things like nationalization of industries, socialization of the debt, welfare expansion”

    As I have explained several times, such as The US economy must go to Defcon 1, our situation requires mobilization of America’s resources on a scale previously seen only in wartime. Think of what we did during WWII, and attempt to apply such measures to our current situation.

    The “welfare” you refer to is providing shelter and food to families that lack them, as unemployment skyrockets. You might oppose such things — there are people with such extreme views — but they will fortunately be ignored by most Americans during this crisis. (if I am correct about its duration and magnitude)

    (4) “… teach me how to recognize a con artist. I know quite abit about cons and how to carry them off.”

    You obviously do not understand what a “con” is. There is no benefit to me from your reading this site, and hence no possible “con.” You have paid nothing, nor are there any solicitations of any kind (not even to a specific political party).

  29. I agree with your core observation that the government’s OODA loop has failed (we have a study group on Boyd’s principles if interested at the Science of Strategy Institute), however, your diagnosis of the situation only recognizes a couple of the five key elements that define a strategic situation.

    There is a larger shift going on, from a world in which top-down organization was the primary driver of systems to a world where individual competitive skills have become more important. Such a world is, by it nature, more dynamic and highly destructive to institutions that try to control the rules of the competition. A local banking system would have adapted. A national banking system, directed by the federal government to make mortgages affordable (CRA) with quasi-governmental organizations (Fanny, Freddy) buying the resulting loans to make them “safe” for lenders and investors, was doomed.

  30. You don’t much care for your commenters, do you? I can see why you question their value to a blog. Who needs differing views? Not Fabulous Fabius. One brain at the top for our Cunctator! I’m surprised you feel the need for an audience.

    I personalize this because as W. S. Burroughs wrote, you are the type who wants to jump down into your own stomach and tell it how to digest the food. It will be interesting to see you tell me how to criticize you. Maybe you can suggest what to read, look at, or understand in order to better do so. You tiresome pompous git.

    PS Posting from my Treo so word count is infeasible. So sorry, Caesar Imperator!
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    Fabius Maximus replies: I do not understand what you are saying. Cricial comments abound here — often with fierce but civil debate. What is your objection? Could you provide a specific example?

  31. The focus on a singularity makes for interesting prose, but also exposes the blindness many have to how capitalism works. Think “creative destructionism” by Schumpter. Our system moves, usually forward, in many small “destructive” steps.

    Government response to this crisis has been to resist change. Essentially turning back the clock. You can also see this in the “global warming” hysteria – keep the climate exactly as it is today. How foolish of our society to expend all its resources keeping temperatures exactly the same, when in fact the drivers are completely out of our control (sorry to all you faith-based believers in anthropogenic warming). Ditto for the economy.

    All government interventions ultimately lead to a worse economic outcome, just as government policies sowed the very seeds for this crisis. The policies will fail AND the energy expended trying to stop history will leave the US and other economies exhausted. Look at Japan for an example.

    Not until the energy of a bottom-up economic recovery starts will we begin see better economic times. By releasing the mass of citizens to produce and take responsibility for themselves – without the excessive government/legal fetters – the US and the world will move forward again. I’m concerned, however, that the changes necessary will be effected more on the model of Rumania/Coucescu than the Magna Carta. But if it’s OK with Thomase Jefferson, then I guess it’s OK with me. Good luck all.

  32. I would say that America’s ability to be resourceful and overcome obstacles should still leave it in good shape. Providing we take care of those most in need and prevent a huge rise in crime.
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    Fabius Maximus replies: Agreed, the basis of my posts in the series Good news about America!

  33. “FM: As I have explained several times, such as The US economy must go to Defcon 1, our situation requires mobilization of America’s resources on a scale previously seen only in wartime. Think of what we did during WWII, and attempt to apply such measures to our current situation.”

    Sure, I read that link too. But let me digress just a little bit on the subject of ‘thinking of what we did during WWII’. I don’t know how many times I’ve been talking to some earnest, well meaning, intelligent person about some problem or technical challenge that we have, and they tell me that we should have a ‘Manhattan Project’ to solve whatever it is, be it global warming, fusion power, building a space elevator, or building a car that runs on water. There seems to be this idea that we had this nebulous idea how to build an atomic bomb, and so we threw all the money at it until the scientists came up with a way to build a bomb. If that were the case, then we could just have a ‘Manhattan Project’ on any subject and probably come up with an answer.

    But that is actually a very false understanding of the ‘Manhattan Project’. What actually happened is that we had a very solid understanding of how to build the bomb, but no understanding of how to do it cheaply or efficiently so we attempted a brute force solution to the problem. However, in almost all the cases where I’ve heard people favor a ‘Manhattan Project’ approach, the problem they want solved is one where we have a very vague understanding of the problem, and very nebulous ideas of what the solution might be. In that case, throwing money at the problem is not at all gauranteed to achieve any kind of results. In general, I favor having a very good plan, and then throwing money at it over throwing money at something and hoping a very good plan develops.

    So it’s all very well and good to say, ‘mobelize America’s resources the way we did in WWII’, but what does it mean and will it be effective?

    The answer is, if you are looking for WWII for inspiration, probably not. The WWII situation was rather unique in that at the time, most of the world’s economy was agrarian in nature and this was largely true of the United States as well. What this meant is that even in the United States, there was vast across the board underemployment by men working low skilled agrarian jobs and women staying at home as homemakers. What WWII caused in the United States was a vast moblization of labor from low productivity professions into high productivity industrial jobs. This is why average incomes improved over the course of the war. And this was particularly successful because at the time and for a couple decades thereafter, all the other industrial economies of the world were being blown to bits or else recovering from being blown to bits. No such comparable situation exists at present, which means any analogy to WWII is rather dubious from the start.

    I followed your link again, this time to ‘The US economy must go to Defcon 1’ and you still show no signs of promoting anything like a concrete plan of action. Instead, I find a text filled with generalities and hyperbolic language and yet another long list of links. So, you can throw up all the links you want, but that’s not a denial of your claim that your plan is nationalization of industries, socialization of debt, etc., nor is it a successful justification for same.

    “The “welfare” you refer to is providing shelter and food to families that lack them, as unemployment skyrockets.”

    Yes, well, that is what ‘welfare’ is, isn’t it? I certainly by welfare didn’t think you meant anything else. But frankly, the existing non-emergency safety net is already much more extensive than the emergency safety net that was implemented in the wake of the the 1930 depression. But extensive or not, there is simply no way that welfare is going to fix the problem. It didn’t fix the problem then, and won’t fix the problem now. It might make life in the US a little more tolerable for some until we get through this, but it isn’t a solution and in fact it is a potential impediment to recovery just as it was in the 1930’s. In particular, it seems to me like it might be an even worse impediment than normal because to fund any massive increase in state welfare will require going more deeply into debt, and I think we are in general agreement that it is America’s debt burden from the individual consumer all the way up to the Federal government that is the cause of the crisis.

    As for whether you get any benefit from having this blog, I certainly agree you get no economic benefit to speak of. But I for one disagree with the assertion that humans are motivated solely by economic concerns.
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    Fabius Maximus replies: (1) This is your 3rd comment (#20 and #33), all of which I find “pretty substanceless.” You don’t provide quotes to support your mis-characterizations of my text, and ignore my answers to your questions. Two suggestions:
    (a) Use quotes to refer to what I say. I usually do so, and it works well.
    (b) Don’t speak vaguely about me being vague. While quite hilarious, this makes it difficult to take you seriously. If there is something about which you would like more detail, pls ask. In most cases I can refer you to a post discussing it.

    (2) “So it’s all very well and good to say, ‘mobelize America’s resources the way we did in WWII’, but what does it mean and will it be effective?”

    The “Defcon One” post was a reply to a specific question (#3 here) you asked about the need for strong measures. Now your repeat a question raised in your first post; my reply to which directed you to A solution to our financial crisis. That in turn has links to posts providing still more details (under recommendations you will see #1, #2, and #3). These are complex matters, and each post deals with a specific sliver of the issue.

    (3) “But I for one disagree with the assertion that humans are motivated solely by economic concerns.”

    Please give a quote in which I said such a thing. I have often said the exact opposite, such as “Economic determinism fails as an explanation for human behavior, unless you consider “people are idiots because they do not think like me” an explanation.” (said here) A large fraction of the posts on the FM site discuss non-economic factors, including all about America – how can we reform it?

    (4) The Manhattan Project is not just a digression, but irrelevant to my point about mobilizing resources as we did in WWII. The Manhattan Project was the second largest individual project in WWII (many sources say the design and construction of B-29’s was the largest), but just a dot in the overall war. As to your specifics about the Project, I have said similar things (see comment #41).

    (5) “The WWII situation was rather unique in that at the time, most of the world’s economy was agrarian in nature and this was largely true of the United States as well.”

    No. I don’t have the data handy, but around WWII ag was aprox 1/4 of the labor force — and the manufacturing work force peaked as a fraction of the work force just after WWII.

    (6) “WWII caused in the United States was a vast moblization of labor from low productivity professions into high productivity industrial jobs.”

    I doubt that. The primary effect of WWII was taking us from the massive unemployment and low capacity utilization of the 1938 recession to more than full employment and near 100% utilization.

  34. Yes, analysis should precede prescription but there is still no agreement on what caused the tulip bubble and even if there is “agreement” there is no possibility of demonstrating that it is anything but that — agreement. Agreement is nice until it is not — our current situation is evidence of this, no. In 1975 Sen. Moynihan said we were engaged in a great experiment to see whether it is possible to have an economy that makes nothing. Well, the US is not Switzerland. As long as the “threat” of the S.U. existed we had a ready market for our paper. Instead of recognizing the altered circumstances of the world, we had a party and helped loot the Soviet Union. Thank you Clinton. And by the way, what papers was Mr. Berger stealing from the National Archive, which we, the owners, are not permitted to know? The corrupt and scurrilous behavior on all hands from regulators, to bond agencies, to wizards of capitalism, impresses even this cynic. Let’s just agree we overplayed our hand terribly.
    We cannot restore what was and we do not know what will replace it. Obama is getting ready to continue the war in A.? Why? Habit I guess unless it is part of a ploy to negotiate a deal with Iran. Good luck.
    Meanwhile we have something much more important to do. The immense wealth we accumulated from winning ww2 has destroyed our federal system of government. Who wants to blame Lincoln? If we do not restore it or create some new mechanisms that encourage short chains of responsibility, we are doomed to Empire. We cannot manage reasonable grazing and wood harvesting policies on federal lands because we attempt unitary rule-making in Washington when each valley and mountainside has qualities that resist rationalizing lawyers. And those are easy problems compared with attempting to educate America from Congress. That is an obscene cartoon. I am out of space but will return for more. Again, FM, congratulations for attracting literate curmudgeons. This is fun.

  35. You were doing fine until you suggested that Obama has any chance of getting us out of this mess. He has no experience, discredited ideas and he has surrounded himself with the same rancid gang of crooks who got us into this. We were doomed once McCain and Obama got their respective nominations. From that moment on, we were screwed either way. Game over.
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    Fabius Maximus replies: Extremes — always, never, certain, none — have no place in discussions about such things. Unlikely people become great leaders — the history of western monarchies proves that. Sometimes apparently well-qualified people are failures.

    Obama comes to the Presidency with little prior experience, as I said in this post from February 2008:

    Barack Obama has amazing rhetorical gifts and the potential for greatness, but becomes President with his skills immature, his vision on major questions of public policy unformed, and no executive experience. His brief career and campaign of empty rhetoric — appealing to the best of America’s history and aspirations — tell us little about the course he will chart for America, or how he will respond to the terrible choices that lie in our future. He provides a frame into which his followers project their dreams — a virtual reality candidate. (Candidates’ white papers, like party platforms, have historically proved poor guides to their actions)

    This is our failing, not his. High office in America goes to those with both drive and hunger for fame and power. That Obama goes along with our childlike dreams says much about us, but nothing bad about him. However the election might result in weak leadership for our national government during tough times, unless he grows in office (which would be wonderful, but not something we can rely upon).

    Now we can only hope that Obama grows in office. You prefer to guess at inevitable disaster; I prefer to hope.

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