I Love Reading Economists When They Write Like Journalists
Translation? If we don’t bail out consumers, all hell breaks loose. The trickle-down theory that informs anti-Keynesian, supply-side economic theory, not to mention tax cuts for the rich, is thus renounced by the Whited Sepulchre itself.
Put it another way. The causative vector of growth hitherto drawn by the Bush administration, among other centers of power, is thus reversed, so that consumers, not investors, become the agents of future growth. Not only that, they—that would be us consumers—now become the bearers of financial stability, and, consequently, price stability.
Why don’t the economists? Am I so much smarter than they are? Not a chance. No, it’s because they learned too much in graduate school. They can’t acknowledge new realities—“novel facts,” as William James called them—because their theories exclude them. And they won’t be able to acknowledge these new realities until we witness the kind of paradigm shift that reinstates Keynes.
Try reading the pompous Tyler Cowen, for example, in yesterday’s Sunday Business Section of the New York Times (9/9/07), and you will want to sentence him to a sabbatical of researching grocery store tabloids, where bracing morality tales for us moderns abide.
Or try reading Lawrence Summers, Gillian Tett, Tim Bond, Barry Eichengreen, Paul Krugman, and the top of the heap, Martin Wolf, all in the Financial Times except Paulie (“The Hitman”) Krugman. Everybody’s got an angle, and nobody’s making sense.
Let’s start with Cowen, the author of a suspiciously popular book called Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist. I’m not making this up. Not even the market-driven Gary Becker—he’s the guy who puts a price on anything, including motherhood—could make this up, although he probably would like to. He must be Cowen’s dissertation advisor.
Cowen is a Fed watcher, and he wants you to know that monetary policy is “largely technical.” It is therefore resistant to narrative as such, but particularly to the kind of “simple moral narratives” that journalists and their constituents among the benighted American people tend to favor when faced with economic crisis. You see, Americans untrained in the “arcane field of central banking” are liable to cram this crisis into the sort of “emotion-laden stories that human beings apply to everyday life.” We can’t have that, because “the American public has a hard enough time understanding a relatively simple issue like the benefits of free trade, much less the Fed or monetary policy.”
So there is no moral issue or problem—no “moral hazard”—here at the financial headquarters of the economy, according to the learned Dr. Cowen. As I understand it, he has two ways of validating this inane argument. First, it ain’t a simple story: “the zigs and zags of daily profit and loss defy simple categorization in terms of moral precepts.” Second, the American people and their proxies among journalists or politicians are too ignorant or uneducated to be entrusted with the control of monetary policy. The proof of this ancient argument is our adherence to narrative as the cure for what ails us.
Except that there is a moral to the story Cowen tells. It goes like this. “Both President Bush and Congress are preparing plans to assist homeowners facing foreclosure. Many of these proposals are political pandering, designed to win votes by easing the pain of homeowners. Yet someone else is paying the bill, so protecting people from their mistakes in this way does not promote the general welfare.”
I guess we have to ask the nutty professor where that general welfare resides. If its address is a free market in which the problem of “moral hazard” can’t arise because there are no decisions to be made about its inexplicable outcomes, as he seems to believe, our efforts in protecting people from their mistakes is, by definition, immoral, perhaps criminal.
But you’ll need more than a good GPS system to find your way to that place, even if the Cato Institute gives you the hard copy map. Nobody believes in the market as an anonymous externality anymore—not anywhere. That is why exempting it from moral questions, narratives, and problems is impossible. Human intentions, social purposes, political programs, now penetrate and irrevocably shape it, and there’s no going back to a moment when the market was synonymous with the “private sector.” It’s all a matter of public policy, and—this is not a paradox—that is why moral questions, narratives, and problems get foregrounded in a financial crisis like the one we’re watching.
All the other economists cum journalists I cited earlier understand this better than the pathetic Cowen. But that’s not an advertisement. Summers wants us to mobilize Fannie Mae and Freddie Mac to make sure borrowers aren’t penalized more than lenders, and (like Barney Frank and Barack Obama) to reinvigorate a regulatory apparatus that has been asleep at the wheel (FT 8/27/07). OK, how?
Tett gives us an acute analysis of securitized assets and a usable historical study of the crisis of 1907, suggesting that surplus capital will find a way to disrupt any system, no matter how well regulated. (FT 8/27/07, 9/5/07) But can we use the banking system to manage crisis if securitized assets are the place to load your hedge fund? How to intrude on private equity?
Bond, of Barclays (where liquidity has become a real issue), falls back on an ersatz Darwin to claim that in “the context of moral hazard, these primate instincts [flight or fight] are key.” I’m rooting for nurture just now, but the naturalization of credit expansion—“the real foundation was the environment of real zero short [term] rates”—and the inevitable crisis foretold in Bond’s argument appeal to me on grounds that Donna Haraway would appreciate. (FT 9/5/07)
Eichengreen (FT 9/4/07) wants us to sell dollars because while private investors have been diversifying away from dollar-denominated assets, governments have not. But soon they will have no choice because as US consumers spend less here due to tightening credit, markets overseas will become more important to US producers, and the dollar will have to fall to make export prices affordable—this is a reprise and amplification of Martin Wolf’s argument in the Financial Times of 8/21/07 as I outlined it in late August. Consumers are now responsible for exchange rates, too!
When the dollar falls vis a vis the euro and the yen, however, foreign governments will start diversifying away from dollar-denominated assets, and the sh*t hits the fan—to put it more politely, the current account deficit has then to be refinanced in the absence of American consumers and foreign governments. But, again, how? Are we looking at a financial crisis that spreads to the world as a more general economic crisis because we can’t re-finance real estate in the USA?
And speaking of fecal matter, as Freud so delicately put it, the Wolf Man has crapped out on us. Martin Wolf is the most consistently interesting and insightful economist on my map, but he has retreated from his bold analysis of August 21st and offered up opinions we might expect from the tiresome Professor Cowen.
True, on 9/5/07, he did say that the “classic function” of central banks in providing liquidity in times of crisis may have been radically redefined by securitized markets in which mortgages—that is, consumer spending—are a key element. “A possible definition [of providing liquidity to banks starved for funds needed by clients] in securitised markets, however, is to act as buyer of last resort, thereby guaranteeing liquidity in markets at all times.”
Meanwhile, Wolf complains about bailing out the big spenders and the bad guys, as if our moral compasses hold steady these days. C’mon, Martin, pitch in here, get back to the macro/global stuff and help us think it through.
But my biggest disappointment is Paulie (“The Hitman”) Krugman, who writes this in his New York Times column of 9/10/07: “As far as I can tell, America has never before experienced a disconnect between overall economic performance and the fortunes of workers as complete as that of the last four years.”
You’re kidding me, right? How about 1926-1929? More to follow on why we need to understand the 1920s, and why we don’t need to fear another Great Depression. And how Martin Wolf might redeem himself.
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Jason Blake Keuter - 9/20/2007
consumers are the engines of economic growth. Investors attempt to anticipate consumer demand. That guides their investment decisions. Economic growth can be stifled when irrational, anti-capitalist hostility taxes and regulates the free flow of capital.
Thus, if investors beleive there is a crisis in consumer confidence (excessive personal debt, for example), then they are less likely to invest, or, more accurately, they will take their money out of whatever industries they think relies on that consumer confidence and transfer it to something that they think would profit from the new consumer mood.
Government action to boost consumer confidence is generally a bad idea. Hence, the narrative of Obama's middle class tax cut is built on flasehood. First, the tax burden of the "middle class" is greatest at the state and local level; second, at the national level, social security and medicaid comprise the bulk of the tax burden for both the middle and lower classes; and third, the token and paltry gains a middle class tax cut would give the consumer would be offset by the tax hikes he proposes for investors (capital gains and "the wealthy")
Investors will see that the middle class has a little bit more money to spend, but at the same time, they will hesitate to invest in any industry that could capture some of that money because they know that the profits from that industry will be taken by the government. It is at this point, that the simpletons step in with their moralizing statements about greed and the need for the common good. If economists are using narratives to make their points, they're just trying to offset the nonsense of counter-factual demagogues whose policies stunt economic growth and stability....well, they do provide stability...stagnant things tend to be stable. As do dead and moribund things.