This weekend, the Republican federal government will nationalize the financial system by taking over Fannie Mae and Freddy Mac. Richard Nixon once famously said, "We are all Keynesians now." Scratch that: We are all fascists now.
Last fall, when I wrote about the developing financial crisis, all of my instincts told me we'd end up here. But it's not something I really wanted to believe. The implications were too worrisome. But here we are. Believe it: The U.S. has taken a gigantic leap toward fascism by putting a right-wing government in charge of the biggest component of our financial system.
Some people would argue that we've been fascist since 1913, when Woodrow Wilson created the Federal Reserve System, which essentially ceded control over the coinage of money to the banks. But for most of its history, the Fed has been a hands-off player, confining itself to accommodating economic growth and contraction by managing the money supply.
That began to change in 1987, when Alan Greenspan created a so-called "plunge protection team" to rescue the stock market from that year's crash. For the last 20 years, the "PPT" has operated in the background, keeping financial markets stable during crises, including the 1998 bailout of the wildly misnamed hedge fund known as Long Term Capital Management, the NASDAQ crash of 2000-2002, and the aftermath of the attacks of Sept. 11, 2001.
In those situations and others the "news" media hasn't told us about, the Fed stepped in not just with liquidity -- its historic role -- but to manipulate markets and arrange bailouts. Not of individuals, but of corporate entities.
That's the difference between socialism and fascism. Socialists act on behalf of individuals against the interests of corporations; fascists act on behalf of corporations threatened by the actions or interests of individuals. In the end, the two approaches wind up looking similar to each other, but it's always worth remembering their differing roots.
Bailout: The mask is removed
Now, the federal government will directly control the mortgage finance system. Fannie and Freddie are bankrupt, so Uncle Sucker will guarantee their debts and take over the management. Not that the 9-figure bonuses -- to the left of the decimal point -- paid to their CEOs when those entities were "private" will be recovered.
That would be socialist, and this isn't a socialist government. The bonuses will remain in the hands of those who took them. We have a fascist government, and that is what fascists do. If Barack Obama should happen to win the November election, the fascists will prevent his government from seizing the loot. Just wait. You'll see.
The news media, such as it is, reports that the bailout will cost tens of billions of dollars. They are off by a factor of roughly 100. The direct cost will be several trillion dollars. The indirect cost will be yet higher: In case anyone hasn't noticed, the collapse of the residential real estate bubble is rapidly spreading, as I predicted last fall when I wrote about a pessimistic disaster scenario.
Home values are down an average of about 20% from the peak, which means that people can no longer use their home equity to fund consumption. The Fed's attempt to paper all of this over (more on that in a bit), has killed the dollar, which in turn has ignited inflation, especially in energy and food.
Other consumption is falling, which is causing unemployment to lift off the launch pad. State and local governments, historically a counterweight to economic swings, are in trouble. California's government is in an outright crisis, and we all know where America's trends start.
My own cycles of optimism and pessimism
Before I go further, I'd like to tell everyone that, in the early 1990s, I was an optimist about the economy. At the time, I thought that inflation was tamer than generally realized, leaving plenty of room for interest rate reductions. The technology sector was in the early stages of a boom.
When Bill Clinton took office in 1993 and unveiled his economic plan that included a small tax increase on the wealthiest earners, I became extremely optimistic. Plenty of people thought I was a little crazy, but I predicted that federal surpluses would be so large that, at some point, the prospect of the complete retirement of the federal debt might become a challenge to the Federal Reserve's ability to perform its traditional functions.
I say all of that not so much to crow about having made a good call back then, but to point out that I've been an optimist. I'm not one of these people who's always been a pessimist about the economy. I was pessimistic in the 1970s, increasingly optimistic in the 1980s, and unboundedly optimistic by the mid-'90s. I started changing my tune in 1999, and by mid-2001 I was once again a pessimist.
As I've grown older, and more educated about the financial system and the economy, I've tended to be earlier on my calls. Hence, my 1999 pessimism was very much out of line with prevailing wisdom, and I missed the chance to cash in on the real estate mania of the first half of this decade. I was waiting for the bubble to burst.
Just how bad is this going to get?
May God help the next president. We're in for the worst times since the 1930s. Unemployment will be above 10%. Banks will fail -- big ones -- and at least one of the American automakers will go out of business. Retailing is going to shrink, and in some places it will collapse. You'll see people living in their cars. There will be another several million foreclosures. The resilient service sector will shrink.
Crime rates are going to rise in a major way. Not so much because of the direct impact of the economy, but because state governments won't be able to afford to keep criminals locked up. And get ready for an escalation of the drug problem; governments aren't going to have the resources to go after your friendly neighborhood meth dealer.
Obama, temper your promises on health care, because the next crisis to hit the federal government is going to be Medicare. Regardless of who's elected we'll be lucky to keep what we've got, let alone expand anything. Restoring Clinton's tax rates won't even begin to pay for what you want to do. McCain, if you really think you're going to restrain federal spending in the storm that's about to land, you're even more senile than I think. Palin, if McCain dies then you'd better set up the mother of all prayer chains.
For those who remain employed, be prepared for a lower standard of living. Your compensation is going to be inflated away, and unlike in the 1960s and 1970s, hardly anyone has a union contract and its cost-of-living adjustments to keep that wolf from the door. And hope that you don't have to sell your house. Bid a fond farewell to newspapers. They're on their last legs anyway, and the retail crash will kill them off. But movies and books will get better, because hard times always make for much more interesting literary output.
How long will it last?
We will start to recover in 2018, or thereabouts. Between now and then, it'll be like living in a washing machine. On average, these boom/bust cycles last for 17 years. There was a bust from 1929 through 1942. There was a boom from 1943 through 1969. There was a bust from 1970 through 1982. There was a boom from 1983 through 1999. There was a bust from 2000 through ... through ... 2017.
The federal government will work like hell to keep it from turning into the 1930s all over again, but don't kid yourself. There is only so much they can do. The Federal Reserve, for example, can create all kinds of banking reserves to be lent out, but it cannot create the ability to service the loans. In financial-speak, we have a solvency crisis, not a liquidity crisis. In people-speak, we're broke, busted, and soon to be disgusted.
Saturday, September 6, 2008
Have We Always Been Financial Facists?
Have we ever been anything but financial fascists? Let's have a look.
We might hear the F-word or the S-word in a lot more places these days, but not in our politics. Call someone a "fascist" or a "socialist," and most thinking people will regard you as a kook with an axe to grind. But actually, in our "mixed economy" we've got quite a bit of both elements.
"National Socialism" In A Mixed Economy
Social Security is a flatly socialist, government-operated savings institution. The military-industrial complex is fascist. Big Agriculture is mostly fascist with some freedom around the edges. Big Healthcare is Yugoslavia. Everyone knows it's going to be completely nationalized; the only question is whether it'll be on a fascist model or a socialist one. In both systems, the government exercises managerial control, either de facto or de jure, as the Latin buffs would put it.
In a socialist system, the formal ownership of an enterprise, hence disposition of output and dividends, including reinvestment, is directly a government decision. In a fascist system, the structure of private ownership is left in place, but government socializes risks and has a great deal to say about management. The private "ownership" might be nominal, as with Germany's Krupp steel works by 1944, or not, as with Archer Daniels Midland, the agribusiness giant that, along with Monsanto and Cargill, pretty much dictates American agricultural policy.
In the Fannie and Freddy bailouts, these organizations will be placed in government "receivership." The details are yet to be sketched in, but I expect a period of close government control, followed by a loosening. Once the organizations return to profitability, the government will let them loose on us once again. Fascist, if you ask me. If it were a socialist model, the government would claw back the big bonuses from yesteryear under threat of prosecution, take permanent ownership, and defend the resulting monopoly with a return to interest rate controls and all the rest.
It would be like, say, the city streets, the Hoover Dam, or Seattle City Light, our municipally-owned power distributor. I lean to the Left, so if we're going to have government control of the mortgage business I want it to be socialistic rather than fascistic. But I'm also a free-market Democrat, so I do want to ask whether it's appropriate to nationalize that business to begin with.
Is Mortgage Finance A Utility?
In my view, the only assets that should be on the list for government control are those that economists would call "natural monopolies," meaning facilities whose duplication would cause more harm than good.
Streets are a prime example. This or that gated community aside, do you really want a private company having control of the streets to the point of physical ownership? Notwithstanding this or that private tollroad in Texas or California -- projects that I am deeply skeptical of, by the way -- I think streets belong in government hands. They are a public utility, and you can only have one network of streets.
Electric distribution grids are another. You only get one of those in an area. One way or the other, these grids are under socialist management, as in Seattle, or fascist management -- in private hands, closely regulated by government -- as in most other places. Frankly, after seeing what happened with Enron, I'd lean toward more socialism in that realm.
And then there is the telecommunications grid. Anyone who's ever gotten up close and personal with the companies that own and operate our telephone, cable, and wireless access facilites, and their feeder and transport links, knows that it's often hard to tell where the companies end and where various government entities begin.
I have no wish to bore you with 100 pages on this subject, so let's call telecom another Yugoslavia: Mostly fascist with a pinch of freedom around the edges, owing to most of the system being comprised of natural monopolies or dupolies. The only reason it works better than health care is that the telecom grid is essentially one big computer, and the economies of silicon chips and fiber transmission cover a multitude of management sins. Let the growth of traffic slow down or stop, or technology improvement hit a wall, and we'll all find out just how brilliant these people are not.
But what about mortgage finance? Is there really only one way to skin that cat?
Here's A Thought: Maybe Debt Finance Has Been A Fascist System For A Long Time!
In my other essay on this topic, "We Are All Fascists Now," I greeted the government bailout of Fannie Mae and Freddy Mac as the rise of financial fascism. However, if you examine the background of these entities, there has always been an implicit government guarantee for their bonds. Could it be that this was never anything more than an example of badly managed fascism, now gone awry?
As I mentioned in that essay, you could argue that the U.S. financial system instituted a major fascist element, called the Federal Reserve, nearly a century ago, and that the searing experience of the Great Depression of the 1930s, and the desire not to repeat it, ensured financial fascism's continuation.
To the average citizen, the wild gyrations of the stock market seem about as free as markets get. Notwithstanding the mechanisms of regulation around the edges, there's a lot of truth in that impression. However, equity finance has always been the tail of the dog. When it comes to the world of debt and lending, government has always been a huge, and some would say dominant, player.
Heads You Win, Tails We Lose
I'm not going to launch into an Internet history of the financial system in great detail, but suffice to say that the supply of credit has been government controlled since the Fed was formed in 1913. Most U.S. interest rates were directly set by the government for roughly 35 years between World War II and the late 1970s. There was a lot of socialism involved; in many and sundry ways, government prevented wild risk taking, and attenuated the rewards available to those who worked in finance.
For reasons I explained in an essay here last fall, the floating of interest rates since the late 1970s led to the formation of a hybrid system. Private entities were given ever-greater freedom to make big gambles, while taxpayers continued to assume the risk if those gambles failed. Socialism gave way to fascism; if the cost of socialism is inefficiency and stagnation, the cost of fascism is moral hazard and insider trading.
So, here we are, soon to be left with the detrius of a fascist meltdown. The government will now impose discipline, but perhaps it's all for show. Once the "receivers" (of risk) go away, we'll be right back where we started, with private entities free to take enormous gambles with our money -- claims on our labor -- secure in the knowledge that they will reap the rewards and we will rescue them from their failure, because we have no choice.
We might hear the F-word or the S-word in a lot more places these days, but not in our politics. Call someone a "fascist" or a "socialist," and most thinking people will regard you as a kook with an axe to grind. But actually, in our "mixed economy" we've got quite a bit of both elements.
"National Socialism" In A Mixed Economy
Social Security is a flatly socialist, government-operated savings institution. The military-industrial complex is fascist. Big Agriculture is mostly fascist with some freedom around the edges. Big Healthcare is Yugoslavia. Everyone knows it's going to be completely nationalized; the only question is whether it'll be on a fascist model or a socialist one. In both systems, the government exercises managerial control, either de facto or de jure, as the Latin buffs would put it.
In a socialist system, the formal ownership of an enterprise, hence disposition of output and dividends, including reinvestment, is directly a government decision. In a fascist system, the structure of private ownership is left in place, but government socializes risks and has a great deal to say about management. The private "ownership" might be nominal, as with Germany's Krupp steel works by 1944, or not, as with Archer Daniels Midland, the agribusiness giant that, along with Monsanto and Cargill, pretty much dictates American agricultural policy.
In the Fannie and Freddy bailouts, these organizations will be placed in government "receivership." The details are yet to be sketched in, but I expect a period of close government control, followed by a loosening. Once the organizations return to profitability, the government will let them loose on us once again. Fascist, if you ask me. If it were a socialist model, the government would claw back the big bonuses from yesteryear under threat of prosecution, take permanent ownership, and defend the resulting monopoly with a return to interest rate controls and all the rest.
It would be like, say, the city streets, the Hoover Dam, or Seattle City Light, our municipally-owned power distributor. I lean to the Left, so if we're going to have government control of the mortgage business I want it to be socialistic rather than fascistic. But I'm also a free-market Democrat, so I do want to ask whether it's appropriate to nationalize that business to begin with.
Is Mortgage Finance A Utility?
In my view, the only assets that should be on the list for government control are those that economists would call "natural monopolies," meaning facilities whose duplication would cause more harm than good.
Streets are a prime example. This or that gated community aside, do you really want a private company having control of the streets to the point of physical ownership? Notwithstanding this or that private tollroad in Texas or California -- projects that I am deeply skeptical of, by the way -- I think streets belong in government hands. They are a public utility, and you can only have one network of streets.
Electric distribution grids are another. You only get one of those in an area. One way or the other, these grids are under socialist management, as in Seattle, or fascist management -- in private hands, closely regulated by government -- as in most other places. Frankly, after seeing what happened with Enron, I'd lean toward more socialism in that realm.
And then there is the telecommunications grid. Anyone who's ever gotten up close and personal with the companies that own and operate our telephone, cable, and wireless access facilites, and their feeder and transport links, knows that it's often hard to tell where the companies end and where various government entities begin.
I have no wish to bore you with 100 pages on this subject, so let's call telecom another Yugoslavia: Mostly fascist with a pinch of freedom around the edges, owing to most of the system being comprised of natural monopolies or dupolies. The only reason it works better than health care is that the telecom grid is essentially one big computer, and the economies of silicon chips and fiber transmission cover a multitude of management sins. Let the growth of traffic slow down or stop, or technology improvement hit a wall, and we'll all find out just how brilliant these people are not.
But what about mortgage finance? Is there really only one way to skin that cat?
Here's A Thought: Maybe Debt Finance Has Been A Fascist System For A Long Time!
In my other essay on this topic, "We Are All Fascists Now," I greeted the government bailout of Fannie Mae and Freddy Mac as the rise of financial fascism. However, if you examine the background of these entities, there has always been an implicit government guarantee for their bonds. Could it be that this was never anything more than an example of badly managed fascism, now gone awry?
As I mentioned in that essay, you could argue that the U.S. financial system instituted a major fascist element, called the Federal Reserve, nearly a century ago, and that the searing experience of the Great Depression of the 1930s, and the desire not to repeat it, ensured financial fascism's continuation.
To the average citizen, the wild gyrations of the stock market seem about as free as markets get. Notwithstanding the mechanisms of regulation around the edges, there's a lot of truth in that impression. However, equity finance has always been the tail of the dog. When it comes to the world of debt and lending, government has always been a huge, and some would say dominant, player.
Heads You Win, Tails We Lose
I'm not going to launch into an Internet history of the financial system in great detail, but suffice to say that the supply of credit has been government controlled since the Fed was formed in 1913. Most U.S. interest rates were directly set by the government for roughly 35 years between World War II and the late 1970s. There was a lot of socialism involved; in many and sundry ways, government prevented wild risk taking, and attenuated the rewards available to those who worked in finance.
For reasons I explained in an essay here last fall, the floating of interest rates since the late 1970s led to the formation of a hybrid system. Private entities were given ever-greater freedom to make big gambles, while taxpayers continued to assume the risk if those gambles failed. Socialism gave way to fascism; if the cost of socialism is inefficiency and stagnation, the cost of fascism is moral hazard and insider trading.
So, here we are, soon to be left with the detrius of a fascist meltdown. The government will now impose discipline, but perhaps it's all for show. Once the "receivers" (of risk) go away, we'll be right back where we started, with private entities free to take enormous gambles with our money -- claims on our labor -- secure in the knowledge that they will reap the rewards and we will rescue them from their failure, because we have no choice.
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