Those Big Greedy Bankers

Are bankers greedy?  Are they too big to fail?  Is it a mistake to allow banks to combine deposit and investment banking?  Yes, yes, and yes.  That's the conventional wisdom today.  And maybe the conventioneers have a point.

But all these cliches miss the main point.  After all, why was it that in the Crash of 1907 the biggest, greediest banker of them all, J.P. Morgan, ran the bailout and used his own money to bail out faltering corporations?  While in the Crash of 2008 it was the big bankers that needed bailouts with the government's TARP program?

Was Morgan greedier than the banker CEOs of 2008?  Were Chase Manhattan and J.P. Morgan bigger, relative to the market, in 2008 than in 1907?  And what about Morgan?  He was all over the place in investment banking as the chap that cleaned up the many railroad bankruptcies of the late 19th century.  And did the government's Federal Reserve System do any better in 2008 than Morgan in 1907 in righting the financial ship?

This is what we need to keep in mind when we evaluate, e.g., Warren Stephens' article in the Wall Street Journal about too-big-to-fail: "How Big Banks Threaten Our Economy."  Warren Stephens comes from the Stephens banking family of Little Rock, AR. You'll remember the name from the Clinton era.  Says he:

Five institutions control 50% of the deposits in this country. They are definitely too big to fail. In a capitalist economy, there should be no such entity. We should promote competition and innovation in the financial industry, not protect an oligopoly.

 He wants to limit banks to 5% of deposits, and break up banks currently over the 5% limit, keep $250,000 deposit insurance, and separate investment and deposit banking.  And no more bailouts.  Mr. Conventional Wisdom.

But Stephens is, in my view, missing the point.  The reason that banks went belly up in 2008 was that the government was forcing them to goose their real estate loans.  Not to mention that the inflationary anti-recessionary policy of the early 2000s encouraged borrowers to over-leverage.  The activities of Fannie Mae and Freddie Mac created a whole class of mortgages issued to people that couldn't afford any decline in asset prices.  Government was behind that, and a big-time political hack, James A. Johnson, campaign manager of the Mondale presidential campaign.

If we compare 2008 and 1907 we notice an important factor.  In 1907 Morgan regarded himself as the man in charge of saving the financial system.  He reckoned it was his job to fix the crash, and his job to bail out the firms teetering on the edge of bankruptcy.  In 2008 it was the government's job to do the bailout.  The result of the 1907 bailout was a restoration of the gold standard at the old parity of $20.67 per ounce.  The result of the 2008 bailout has been a significant devaluation of the dollar that may not yet be finished.

The big problem with finance is not greedy bankers and too big to fail.  The problem is that government has taken over the financial system and has ruthlessly exploited it.  With government in control the credit system is much more leveraged than in the old days.  Big banks understand that it is government that runs the system, government that sets the rules, and government that owns it.

If we want to get a financial system that is solid and stable we need to get the government out of it.  Well, not entirely because we still need the government to be able to borrow big time when we have a big time war.  But the lesson of the 20th century is that government is lousy at guarding the financial system, because it cannot resist using the financial system as a piggy-bank.

There has to be a better way.

Krugman and the Austerians

Paul Krugman, Keynesian extraordinaire, is crowing over the failure of "austerity" in Europe to reverse the economic decline.  He writes of "austerity" policies:

According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

He means, of course, the Keynesian textbooks preferred by chaps like him.  The basic idea is to keep borrowing to maintain government handouts and to print money to accommodate the borrowing.  Sooner or later the resulting inflation lifts all asset values and the credit system starts to work again.

In the alternative universe, the recession is the natural result of an inflationary boom; it is the period of adjustment after the failures of the malinvestments of the previous boom.  You can do your adjustment any way you want, by liquidating malinvestments or by printing money.  But the underwater debt has to be cleared one way or another.

The problem is that, in the European Union, the single currency has prevented the bad actors, Greece, Spain, and Ireland, from devaluing their currencies and refloating the credit system and its underwater debt.  So they have cut their budgets a little and raised taxes a little, but not enough to make it look as if they can start to lower their government debt to GDP ratio.  Markets are not stupid; they know that a rising national debt leads to default, sooner or later.

Keynesianism is not, and never has been, an economic doctrine.  It is a political doctrine, a way for the government pitcher to get out of a jam when the bases are loaded with sovereign debt.  It rewards the recipients of government benefits and debtors with the money of creditors.  How?  Debt default and inflation hit the creditor class, people with money in government debt or securities denominated in government money like dollars.

It is important to realize what a financial crash and associated recession means.  It means that the bet that a lot of people made against the future has failed.  In the case of the Crash of 2008 the bet was made by homeowners that assumed they would have the money to service their loans and cash them out at higher home resale values.  They were wrong.  Another bet was made by politicians in expanding their budgets when the good times rolled.  Well, they were wrong, too.  So now politically connected people need to cinch their belts.

The whole point of being a politically connected person, whether you are a crony capitalist or a welfare beneficiary or a senior like me getting Social Security and Medicare benefits is that you "can't" cinch your belt.  You are a victim on a fixed income: it's heat or eat.  As for the crony capitalists, they are contributing to the future with vital services like green energy and they have paid to play.  How can they be asked to contribute?

But somebody has to pay.  That is what happens in a recession.  Profits go down, wages go down.  People turn to government to help them out and reduce their losses.  But government just takes money from other people, and usually government takes money from useful activities, where people pay for products and services and spends it on less useful activities, like cutting checks for people who do nothing in return.

The politicians don't care.  They have tame economists to justify whatever they do, whether it is "austerity" or inflation or "retrenchment" or "sound money."  People like Paul Krugman.

Keynes a Symptom, not a Cause

The current wails about "austerity" signal the real problem with the big-government welfare state.  The Wall Street Journal properly points out that the Keynesian notion of austerity vs. growth is what Candidate Obama used to call a "false choice."

Spend more and you're for growth, even if a country raises taxes to pay for the spending. But dare to cut spending as the Germans suggest, and you're for austerity and thus opposed to growth.

This is a nonsense debate that misconstrues the real sources of economic prosperity and helps explain Europe's current mess. The real debate ought to be over which policies best produce growth.

And government spending doesn't increase prosperity.  How could it?  Government spending forces one set of people to pay for the goodies of another set.  What good could possibly come from that?

The bigger issue is the unsustainability of the welfare state model.  It is analogous to a homeowner up to his ears in debt.

When you ring up a lot of debt you are anticipating your future income.  You are assuming that you will have income in the future to service your debt.  But what if things go wrong?  What if you don't get the promotion, or your workplace closes?  Then you are in a world of hurt and if millions of people have overborrowed like you then it will endanger the health of the whole economy.  As Bagehot pointed out in the 19th century, the economy depends on "sound" people managing their money with prudence.

The welfare state is the same.  It sets up a high level of government spending assuming that the good times will always roll.  People sign up for the government programs and the free stuff and reduce their work effort to match.  When there's a recession the government revenues fall off and the programs that looked affordable in the good times cause the national debt to soar.  And of course the last people on earth to think that maybe government spending should be cut are the beneficiaries of all the free stuff.  That is called "balancing the budget on the backs of the poor."

Even if we say that welfare state spending is, overall, a good thing there is still the question of how much of a good thing the nation can afford.  A century of the welfare state shows it is almost impossible to adjust the size of the welfare state until there's a crisis.  The only time that government tightens its belt is when there's a looming sovereign debt crisis or galloping inflation.  This is surely not the best way to run a railroad.

In fact, of course, the social needs that government dominates--pensions, health care, education, and welfare--are not necessarily activities that must be performed by government.  They are social needs, for sure, but the clumsy force-centered model of government is surely not the way to meet such needs, which are not best met with one-size-fits-all government.

In fact the opposite is true.  The relief of the poor should not be a responsibility shuffled off on the government.  It should be the responsibility of each of us, as individuals and as groups joined into social service organizations.  Education is the same.  We are all called to raise up and educate our children, and to be there to help with our neighbor's children, and it is monstrous to shuffle it off on government functionaries who, like government workers since the dawn of time, think only of their emoluments and pensions.

Moreover, these social tasks are particularly the interest of women.  You can tell that just by listening to the conversation of women.  Yet our society encourages women in "careers," which were originally a brilliant notion to cure men of soldiering and divert their attention to fighting for dominance in organizations for the production of products and services rather than organizations for the securing of loot and plunder.  This is what we want for women?  Did anyone ask women what they wanted for themselves?

Keynesianism is not an economic system, it is a tactic for getting government out of a jam.  In the modern economy the government's demands upon the economic system have a depressive effect.  That's because it is all waste.  But this depressive effect becomes really serious in an economic downturn.  The Keynesian tactic solves this by continuing the government programs at their pre-recessionary levels, borrowing the money that's needed to continue its handouts, and inflating the currency to create an artificial stimulus.  Usually it works, at the cost of a 20-30 percent decline in the value of money.  But in a big downturn, like the aftermath of the 2008 credit crisis, some nations will be in danger of sovereign debt default before the economy recovers.

The solution is to radically reduce the size of government.  That will have two benefits.

First, it will reduce the weight of government spending and debt on the economy and enable government to respond with huge expenditures if there ever is a real catastrophe needing government help: think major earthquake or war.

Second, it will reduce the amount of freeloading and put the freeloaders to work helping their fellow citizens by producing products and services and by neighborly volunteer effort working to solve social problems.  This will benefit the freeloaders, and help them live happier, more productive lives, and also deliver more prosperity to society as a whole.

Liberals Out of Touch

In the New York Times review of Charles Murray's Coming Apart, Nicholas Confessore tells us a little more than he intends about liberal denial.  Writes he:

You will learn about working-class laziness, but you will find little discussion of the decline of trade unions or the rise of a service economy built on part-time work without benefits.

Murray's thesis is that the welfare state has led to a breakdown in white working class culture, the bottom 30 percent of white America: a decline in marriage, a decline of civic culture, and a decline in men working.  Meanwhile things are peachy keen up in the top 20 percent.  Marriage is doing fine, and divorce is even declining.  People work like mad.

Murray argues that the welfare state has hollowed out the bottom 30 percent.  But Confessore grumbles that things would be fine if only unions were still strong and benefits were still robust.

So let us give Michael Barone a word.  He was raised in Detroit, and there is something he wants you to know about those good union jobs for good wages and benefits.

I don't know how many times I've seen liberal commentators look back with nostalgia to the days when a young man fresh out of high school or military service could get a well-paying job on an assembly line at a unionized auto factory that could carry him through to a comfortable retirement.

As it happens, I grew up in Detroit and for a time lived next door to factory workers. And I know something that has eluded the liberal nostalgiacs. Which is that people hated those jobs.

That's one of the reasons why the unions ended up killing the automakers.  They insisted on "30 years and out" for the workers that hated their jobs, and then they insisted on health benefits for their retirees.  It was a bridge too far for the automakers.

One of the things that advanced lefty thinkers have been pondering for the last half century is that big, rationally-designed bureaucratic organizations are inherently oppressive and exploitive.  They necessarily treat humans as merely a means to an end, a labor resource, whether the big organizations are corporate or governmental.  Of course they have ended by tying themselves in knots over this because they can't let go of the idea politics is everything and that that enlightened thinkers ought to be organizing the lives of the workers.  They can't let go and let the workers organize their lives like any social animal.  They have to butt in and save the workers from themselves.

So we have the rank-and-file New York Times reader in denial about the 1950s and the philsophers in denial about the limits of politics.

I just took a quick look at Wikipedia's stages-of-grief article.  Did you know that there are critics that say the Kübler-Ross model is rubbish?  It is perhaps more accurate to term the denial-anger-bargaining-depression-acceptance progression is not a healthy, but a victim response to life challenges.  Since our liberal friends don't believe in adaption in a societal context (because it is social Darwinism, darling) they regard unfavorable trends as an insult to their self-esteem.  Thus they respond to change with disfunctional denial and rage.

We are called all our lives to adapt to changing circumstances.  The liberal model of the bureaucratic welfare state just doesn't work.  We are never going to have an economy again with "good union jobs at good wages" where we can sit back like bumps on a log and extract monopoly wages from our fellow citizens.  It was a fantasy back in the 1950s and it owed everything then and now to liberal political power.  Do liberals want to lead their followers out of a dead end, and encourage them to compete in the new world economy, or do they want to exploit their victim-denial response until the whole system collapses as in Greece?

Romney Team Comes to Play

The name of the game in politics is defining what people are allowed to say.  You can talk all you like about the First Amendment, but the truth is that there are a lot of things that you aren't allowed to say, not if you want to keep out of trouble.  We all understand this instinctively; it's part of who we are as social animals.

What is going on here?  It is simple.  If government is force, politics is intimidation.  The whole point of politics is to intimidate the other side into silence or meaningless babbling.  You want to be able to laugh off their proposals as so far out of the mainstream that they have left America; you want to be able to cast them as unpatriotic--liberals hate being on the receiving end of this.  And you want to be able to cast the other side as racist, sexist homophobes--conservatives hate being on the receiving end of this.

In normal times, in between elections, conservatives are at a disadvantage in the intimidation wars, because the mainstream media, from which most Americans get their news, tends to parrot Democratic talking points.  It's true that Fox News provides some push-back, but not a lot.  Put it this way.  The charge of racism sticks to conservatives and can be a career-ender.  But nobody dares to read the racist Reverend Al Sharpton out of polite society.

Everyone knew, during the Republican primaries, that as soon as the party had chosen a nominee the Obama campaign would launch a monster campaign of intimidation, and Republicans feared that Mitt Romney wouldn't be up to the challenge.

Well, forget that one.  The last couple of weeks, with the "never did a day's work in her life" flap and the Dog issue, demonstrate that the Romney campaign is ready to play rapid-reaction politics.  The campaign jumped on the Ann Romney attack with Twitter, and demolished the "war on women" meme.  Now with the discovery that Barack Obama claims to have eaten dog meat, according to the first of his autobiographies, the "dog-on-the-roof" meme is neutralized.

That's important.  My liberal friends love to bring up the story of the Romney dog on the car roof.  But hey, what about dogs in the back of pickup trucks?

Oh, and by the way, if you are worried about Mormon polygamy, what about Obama's dad?

All these side issues are, of course, "distractions."  But they are part of a campaign because they are attempts to intimidate the opposition, or counter attempts to intimidate.  It's good that the Romney campaign seems to be ready to play the intimidation game and win.

The question is: Can the Obamis take it?  The Obama people are from the one-party city of Chicago, where intimidation rules, and anyone that isn't a Democrat knows that you have to pay to play, and lay your tribute at the feet of the politicians.  But can they deal with their own dust being kicked up into their eyes?

Stay tuned.

Liberal Media Bias: Has Fox News Made It Worse

Back in the old days, the liberal media at least used to pretend it was neutral and objective.  But now that there is Fox News, the liberal media feel that since there's a conservative alternative they can put the pedal to the metal on their liberal bias.

That's the argument of Robert Stacy McCain at the American Spectator.

The very existence of a conservative-friendly TV news alternative, however, relieves liberals at other networks of any twinge of conscience about bias in their programming. They may well reckon, "If conservatives don't like it, let 'em go watch Fox." And given how liberals have demonized Fox -- portraying it as an all-powerful evil force in media -- some reporters may even feel the need to slant their coverage more stridently leftward, so as to counteract the exaggerated right-wing news menace.

He's probably right.  The trouble is that conservatives get the worst of the exchange, because there about 24 million nightly viewers of the network news versus 3 million for Bill O'Reilly on Fox News.

On the other hand conservatives need to stop whining about this and stand back for a moment.  We need to appreciate the enormity of what we are trying to do.  The yellow press grew up in the 19th century servicing the rising working class, dishing out scandal, afflicting the comfortable and comforting the afflicted.  For two hundred years there has been a bigger audience for corporate scandals than for government failure.  That's not just because of liberal media bias, it's because a lot of people experience themselves as victims of powerful forces, and buy the idea that government and journalists protect them from those powerful forces.

The destiny of the modern conservative movement is to change this culture, the culture of the working man railing against his boss, the victim railing against the Man.  It is a profoundly middle-class movement, based on the idea that if you want to change something, you get together with your neighbors and change it.  You do not wait around moaning about exploitation until some community organizer in a radical suit turns up to lead you.

In the United States there is a political party that represents people that prefer the "get-together-with-your-neighbors" model of society.  It is called the Republican Party.  There is also a political party that represents the "moaning about exploitation" model of society.  It is the over-under coalition of educated elite and suffering victims we call the Democratic Party.  Liberal media or no liberal media, there is no doubt about where to go if you are a Tocquevillian American that believes in forming voluntary  associations to do public work.  And there is no doubt where to go if you feel that you are a victim of powerful forces.

The point is that, for nearly a century, the majority of Americans have clearly felt that they benefited from a government that ran social programs like Social Security and Medicare.  So long as a majority believes this, the current system will continue.

If you want to change this status quo then you have to start a movement.  Obviously such a movement will experience resistance from the present elite and from the present beneficiaries of the status quo.  It is right and proper, therefore, that we should have a liberal media that defends the status quo, and ridicules the conservative movement that wants to change it.

But if the status quo should be seen to fail, or if its major proposals for change are experienced as negative change (Obamacare) then all bets are off.  That is the situation right now for the liberal media and the educated elite that backs President Obama and the Democratic Party.  Its programs are running out of money.  There is a danger of "austerity" or a collapse of the current patronage/clientage system in a sovereign default.  ("Austerity" means minor cuts in government programs that are experienced as life-changing by people that have adjusted their lives to rely on government programs for basic necessities).

When "austerity" bites, or default happens, then all bets will be off.  Then, and only then, people will be looking for a new political home, and they will be looking for a new media home.  All of a sudden the Democratic Party will find that it must adapt or die, and the media will find that it needs to change its politics or die.

There is no doubt that the Democrats would not have done as well as they did in 2006 and 2008 without the assistance of the mainstream media.  But what good did it do them?  They recklessly pushed through Obamacare, and then suffered the worst reverse in a mid-term in half a century--even though the Tea Party, vehicle of the reverse, was roundly denounced by all establishment opinion makers.

All in all, it is best to think of the media as a trailing indicator, like the unemployment rate, rather than a leading indicator, like stock prices.  When the welfare state collapses--as it will, because government always runs out of other peoples' money--the liberal media will shrivel up and slink away.  And nobody will give it a second thought.

But politics will not change.  People will still be out looking for free stuff from the government.

The "Out-of-touch" Stakes

The Democratic Party, everyone knows, is the up-to-the-minute, modern, hip, intellectual party.  The Republican Party, on the other hand is old-fashioned, turn-back-the-clock, anti-intellectual party--and out of touch.

That's all very well, but if you are running a presidential campaign you can't afford to be sitting around in a big room telling each other how hip you are and how out of touch the other guys are.  You need, at least, to get out more and listen to those out-of-touch people.  Because in a few short months they are going to be entering the voting booths and making decisions.

So the verdict on Week One of the presidential campaign has exposed a dangerous out-of-touchness in the operatives of the Obama campaign.  Let's just list the things that are going wrong.

1. The Trayvon Martin case.  Someone messed up on the due diligence when it turned out that George Zimmerman is half-Hispanic.  It is no secret that Hispanics don't like blacks, and think they are lazy.  (Whites, on the other hand have been carefully taught.)  I have a feeling that while the Trayvon case may raise black turnout, it will send Hispanics into the arms of the Republicans.
2. The Buffett Rule.  Maybe it seemed like a cool idea to gin up a gimmicky idea to make Mitt Romney look like an out-of-touch under-taxed rich guy.  But if this complicated idea only raises $5 billion a year, what's the point?  And then there is the dirty little secret that high tax rates don't really hit the rich.  They hit the people trying to get rich, all the way down the food chain to Joe the Plumber.
3. The Ann Romney Flap.  It's telling that the Romney campaign was ready to execute on a moment's notice on this one.  No sooner had liberal-feminist doofus Hilary Rosen delivered her "never had a job in her life" line that the Romney folks ginned up a Twitter account and were ready with a 1,000-gun artillery barrage.
4. The Social Darwinist Budget.  Democrats have raised Cain for 50 years every time Republicans have raised the question of entitlements.  Of course, Republicans have been right.  The sooner we get the government out of managing pensions, health care, etc., the better for the American people.  But the Republicans have never been able to get the voters to agree.  It's easy to see why.  The voters are right, from a selfish point of view, in agreeing with the Democrats.  The current generation of seniors will always be dead before the entitlements run out of money.  Only not this generation of seniors.  This may be the year when you can get Americans worried not about cutting their benefits but about not "doing something" about the budget.

The Obama guys are smart.  Even now they are reviewing the messes of the last month and making course corrections.  The question is whether they are smart enough to make strategic course corrections.

Because it is just possible that the Obamis are preparing to fight the wrong election.  That would really be "out of touch."