Tuesday, November 18, 2008

Norbert Elias and System Collapse

As part of my studies toward my Masters' degree in history, I had to read excerpts from The Civilizing Process by Norbert Elias. This reading is part of a seminar on historiographical methods and analysis, focusing on different social theories and the way they affect the work of historians in trying to explain the past.

I found Elias's work to be quite fascinating. Basically, it theorizes that the process of "civilization" is largely the result of people subordinating their impulsive drives -- the repression of the id by the ego and superego, in Freud's terminology -- as their social organization changes over time. Elias says that this process is mutually reinforcing and not entirely rational. People demonstrate greater self-restraint as their social organization becomes more complex and interdependent. Likewise, increased levels of self-restraint propel a greater level of complexity and interdependence. Central to Elias's notion of "progress" along the scale of impulsiveness to self-restraint is the level of security under which people live. In societies that do not provide a high level of physical or material security, the impulsiveness of the id reigns. For those that achieve a high level of security, the restraint of the ego and superego keep the id in check.

To support this idea, Elias cites the changes in human behavior as Western Europe changed from a feudal society of warrior-nobles and knights into the court society of absolutist kings and aristocratic nobles. In the former, the use of violence was highly decentralized. Most people did not have adequate levels of security -- especially physical security. To venture on the roads outside of town was to invite the certain predations of highwaymen or rival soldiers. Disputes between individuals (particularly nobles) were settled by violent confrontation. By contrast, in the society of absolutist kings, the use of violence was monopolized by the monarch. Nobles could no longer settle their disputes through violence, so the court society (with its emphasis on manners, fashion, elaborate titles and intrigue) evolved instead as a forum for noble competition and a means of differentiating the aristocracy from the commoners. The latter was also a much more complex and interdependent society than the former. Finally, the former had a general world view largely characterized by fear and emotion (superstition and religion), while the move toward "civilization" appealed increasingly to empirical rationalism (observation and science).

As far as historical reference goes, Elias provides a decidedly Marxist superstructure for his theories. Basically, his history begins in medieval Europe and proposes a rather linear view of civilization's development, as well as describing Western Europe as the vanguard of civilization's progress. I wonder how Elias would describe the notion of a society moving away from "civilization" -- from a highly complex, centralized, interdependent society to one that is decidedly less so.

Central to any analysis of collapse through Elias's lens is the loss of material or physical security. Also, the relationship between changing social organization and the loss of security must be viewed as a mutually reinforcing process. I believe that if Elias had gone back a little further, he could have found an excellent model for this process-in-reverse: the Roman Empire.

The collapse of the Roman Empire was certainly predicated by internal problems -- declining harvests, political intrigue, etc. However, these internal problems greatly contributed to the rolling back of the frontier by Germanic barbarians. When the highly complex society of Rome lost steam, it lost its cohesive force among its populace. Where the citizens of Rome once were willing to sacrifice for her, now they concerned themselves with the circuses of the Colosseum even as the empire crumbled around them. A substantial internal proletariat -- people who lived within Roman borders but felt no affinity or allegiance to Roman ideals -- swelled in number. A fine example of this proletariat is offered by the rapid spread of Christianity through Rome, in spite of its initial criminalization by the Roman authorities. (Arnold Toynbee, A Study of History)

So, the short version is that eventually complexity imploded, the "barbarian" conquered the "civilized," and Europe plunged into the Dark Ages. However, traces of the "civilized" still remained after 476 A.D. -- namely the Catholic Church. It is strange that what initially was a proletarian movement within Rome (Christianity) became its vehicle for the preservation of classical culture as society became less complex, less secure, less rational and more violent. What this demonstrates, however, is that the move either forward or backward on the scale of "civilization" is often a process of negotiation between the old and the new, the more and less "civilized." Even as Rome fell, it planted the seeds of what would eventually bloom after the Dark Ages had passed. Many ideas of the Renaissance, scientific revolution and Enlightenment found their genesis in the work of classical Greek and Roman scholars.

Fast-forward now to the present. Currently, we face a wide range of predicaments -- climate change, peak "everything," overpopulation, unsustainable debt, etc. The unprecedented complexity and interdependence of our social organization is largely the result (and cause) of increased material and physical security. What happens if these predicaments cause this security to deteriorate? Will we become stuck in a downward spiral like Western Europe after the fall of Rome, unable to regroup until after we hit rock bottom? Or will we be able to adjust our organization to meet new realities? Will the negotiation between complex and decentralized take place in a more rational manner this time around, or is a lack of rational forethought a fait accompli of this process?

Sunday, November 2, 2008

Marx, McCain and Health Care

Back in the second Presidential debate, a question was asked of the candidates which I found very penetrating and revealing. A woman asked, "Do you believe that health care should be treated as a commodity?" Barack Obama's answer was standard, nondescript fare, and I really can't remember a whole lot from it so I won't bother discussing it.

McCain gave a long-winded answer about consumer choice and a national medical records database and the like. However, his answer could have been a lot simpler and to the point if he had simply replied, "yes." I say that because basically his answer revealed that he thinks health care should be treated like a commodity.

Thus, the title of this post.

Karl Marx wrote extensively on the nature of "commodities" in Das Kapital, even dedicating an entire chapter to them (The Fetishism of Commodities). The subject of Marx also recently came up in email exchanges I had with a friend of mine in reference to Barack Obama (whom he does not trust as a candidate). I certainly can come up with many criticisms of Obama's economic plans, but calling it "Marxist" is nowhere near the truth -- it is a bugaboo paraded around by the right wing to scare and divide people that we are moving toward some kind of dictatorship of the proletariat, as if a candidate backed by significant Wall Street interests is somehow surreptitiously leading that charge.

Let me be clear -- I do not believe that Karl Marx provided a realistic template for social or economic change. However, I do believe that he provided one of the best critiques of industrial capitalism that was ever written. The tendency of capitalism to commodify all areas of life is central to this critique, and I think it is one that deserves further attention.

On the surface, Marx's criticism of commodities focuses on the way in which the purchasers of "commodities" (anything that is a manufactured good and has labor-added value is defined by Marx as a "commodity") are insulated from exploitation at every step along the way of the process. At first glance, this may appear that Marx is simply outlining the way in which people should be aware that exploitation exists in the supply and manufacturing chain, and try to avoid supporting such behaviors in pursuit of profit. However, historical perspective is necessary in truly analyzing what is being said here.

Marx developed these ideas in the midst of the industrial revolution, and although he wrote extensively about the industrial proletariat, he traveled in circles of craft artisans. It was this class with whom he most identified. Therefore, it is imperative to consider the plight of craft artisanry during the industrial revolution in order to unpack what Marx is really saying here.

Prior to the industrial revolution, anything that could be considered a "commodity" was produced by artisans. These artisans were members of guilds that set prices and maintained standards for quality and production. Typically, they labored in small shops and created goods from start to finish. Artisans made up the backbone of a growing middle class -- not the middle class of literacy and bureaucracy that we recognize today, but one of skilled labor that produced manufactured goods. In this sense, Marx was probably expressing a somewhat narrowed class interest that he and his contemporaries criticized in the bourgeoisie.

The industrial revolution eviscerated the artisan class. Goods that previously had to be made by hand, from start to finish, were instead manufactured by unskilled workers and industrial machinery in piecemeal fashion. Perhaps most distressing in this turn of events to Marx, however, was the destruction of the social fabric.

When goods were made by artisans, economic exchange for those goods had an added social dimension. The artisan was, at most, one step removed from the economic exchange if he was a journeyman laboring for wages in a master's shop. Since prices were largely set by the guilds, the practice of different shops undercutting each other by better exploiting their labor force was not really an option. Sure, goods were much more expensive and there were less of them -- but the social dynamic at play ensured that all parties involved were not subject to the whims of the market.

As Marxist historian and philosopher Juergen Habermas pointed out, the development of bourgeois capitalism was based upon two primary assumptions that were a reaction against the feudal system it eventually replaced. The first of these was the notion of free competition -- the idea that all commodities were exchanged according to their "value." The second one -- and perhaps more important one -- was that all producers would have equal access to the means of production. This assumption in itself implies an economy based upon small producers -- the artisan's shop.

By Marx's time, it was painfully apparent that at least the second one of these presumptions was no longer valid. A journeyman artisan could reasonably gain access to the old means of production -- tools -- because they did not require a great capital outlay. However, the vast majority of artisans could not afford to buy their own factory, and as the industrial revolution took hold, this is what was required in order to have equal access to the means of production.

Where Marx focuses his critique, however, is not so much upon the change in control over the means of production, but rather on the effect of this transformation upon social relationships. To reference Habermas again, the development of bourgeois capitalism meant that even these social relationships themselves were transformed into commodities. I believe that this is to what Marx is referring when he outlines the layers of exploitation inherent in industrial capitalist production. At every step of the process, what previously was an economic exchange with a social foundation is transformed into a narrow focus on leveraging economic advantage devoid of any social consideration. I am not saying that the old world of artisans did not have exploitation, nor that economic advantage was ignored in these exchanges. I am simply saying that there was an attendant dynamic at play in these exchanges that highlighted broader social considerations.

Back to McCain and health care. The basic relationship in health care should be between a doctor and a patient. This is primarily a social relationship. The patient has a vested interest in seeing that the doctor is not taken advantage of, otherwise he or she could no longer continue to practice. Likewise, the doctor has an interest in providing quality treatment, otherwise he or she will lose his or her client base. However, the introduction of health insurance for profit has no concern over these relationships. It is removed from the level of social interaction and instead interested only in maximizing its profit from the patient while minimizing the payment to the doctor. If the patient suffers due to lack of coverage or the doctor's care degrades in quality due to being squeezed by the insurer, it matters not. What matters is profit, pure and simple.

Customer "choice" has nothing to do with helping customers, because the entire exchange is devoid of social utility. The providing of health insurance is treated purely as a commodity -- except in this instance it is a labor-added service that has "value" only in the sense that people in modern society need health care, and the insurers have exploited a niche in which they can turn a buck.

The question I inevitably come back to in this consideration is, "Is this really the best way we can do things?" I readily admit that I am a fan of a government-administered, single payer system for a few reasons. The first is purely economical -- it actually costs less to administer a single-payer plan because the government is interested in breaking even, not turning a profit. The second, however, is social. The removal of insurer profit from the system pushes it more in a social direction. The focus of the system can once again be on doctors and patients, and the expression of their mutually-beneficial self-interest.

Blind faith in "market solutions" assumes that capitalism always provides the best way for doing things. In the arena of health care -- a sector of economic activity more concerned with social interaction than the manufacture of goods -- I'm not certain that is the case.

Thursday, October 30, 2008

IEA predicts oil decline

The Financial Times (UK) has leaked an International Energy Agency (IEA) report that predicts global oil prediction annual declines of between 6.4% and 9.1%. Since the IEA is a truly international organization, and also is not given to pessimistic scenarios, this is indeed alarming.

World will struggle to meet oil demand

By Carola Hoyos and Javier Blas

Published: October 29 2008 02:00 | Last updated: October 29 2008 02:00

Output from the world's oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de-mand. The effort will become even more acute as prices fall and investment decisions are delayed.

The IEA, the oil watchdog, forecasts that China, India and other developing countries' demand will require investments of $360bn (£230bn) each year until 2030. The agency says even with investment, the annual rate of output decline is 6.4 per cent.

The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.....


It should be noted that this kind of decline means that the world needs to discover a new Saudi Arabia every few years just to keep up. Given that global oil discoveries peaked in the mid-to-late 1960s, I find it hard to believe that this will happen. What the IEA is essentially saying here is that the age of cheap, readily available petroleum is likely coming to an end.

Also, given the way that industrial economies -- especially the United States -- are highly dependent upon ready supplies of cheap petroleum, it seems that a transitory phase of human civilization is rapidly approaching. Personally, I find it hard to imagine that many of the highly centralized and specialized institutions we have come to take for granted will survive the end of cheap oil. As Chris Martenson says in his "crash course" on economics, energy and the environment, "The next twenty years will be very different from the last twenty years."

It seems the debate over peak oil has largely ended. The new debate has to be one of preparedness and adjustment. I guess I fall on the side of the "pessimists" who do not believe that technology will save us -- after all, technology and energy are actually two different things, in spite of beliefs to the contrary prevalent in our society -- and that our future will be much more localized and offer much less in the way of material comfort.

Thursday, October 16, 2008

The Myths of Historical Positivism

We Americans have a rather short collective memory. As I watch the current incarnation of the quadrennial charade we refer to as a Presidential election, I cannot help but be overwhelmed by the way that historical positivism completely overwhelms our cultural narrative -- to the point that it blinds us to the realities that are all around us.

Perhaps some explanation is in order here. When I refer to "positivism," I am referring to the philosophy that grew out of the Enlightenment that discounted metaphysical or spiritual explanations for phenomena of the natural world. Instead, followers of positivism believed that knowledge could only come from sensory experience and the empirical measurement or classification of that experience. While this mode of thought certainly spurred great advances in human society -- the scientific method perhaps greatest among them -- it also later created controversy.

The controversy really took off when social scientists began to apply positivism to their own approaches. It is out of the philosophy of positivism that we gained the myth of "rational actors" so prevalent in classical economics. It also helped spawn Marxism and its dialectical, linear view of history. Essentially, positivists tend to believe that just because certain things have worked out a certain way in the (recent) past, that they will continue to progress that way in the future.

The attitudes of most Americans toward technology provides an excellent example of how this positivist view can distort and even blind us to reality. Technological advancement is a central part of the American story. For all our lives, and those of the preceeding generations, technology has advanced at a dizzying pace, making our lives easier in countless ways. And because this narrative of technology is central to our cultural narrative as Americans, we tend to believe that technological advancement will continue apace well into the future, solving our myriad problems as they pop up before us.

Climate change? Green technology will save us. Peak oil? Renewable energy sources harnessed by new technology will save us. Rapidly growing population and reduced topsoil? Genetically-modified crops and new agricultural technologies will save us. Global war on terror? New military technologies will save us.

However, I believe this represents a very shortsighted and misguided view of the reality of our current situation. History is not linear -- it is more cyclical. I am certain that people living in ancient Rome thought that they had reached the pinnacle of civilization, and the glory that was Rome would continue on forever. Except it didn't. When Rome's complex, centralized organizational structures -- political, economic and military -- began to crack and groan under the weight of its empire, it only took waves of hungry barbarians to bring it to its knees and usher in the Dark Ages. In most ways -- politically, economically, culturally -- Western Europe returned to a state that more closely resembled that before the Roman Empire. Things showed themselves to be much more cyclical than linear.

Of course, nothing I'm saying here is really all that new. Arnold Toynbee advanced these ideas in his magnum opus, A Study of History. The critical theorists of the Frankfurt School (Max Horkheimer, Theodor Adorno, etc.) had similar views of Western culture and society. But these views are decidedly out of the mainstream, especially in American society. To acknowledge their possible veracity would be to call into question the entire narrative of American progress, to suggest that it might not go on forever, to pull the rug out from under the accompanying myth of American exceptionalism -- the idea that America is different and the rules of history do not apply to us.

These ideas, as I stated previously, have always been at the heart of the American narrative. However, they took on additional energy in the period following World War II. At the conclusion of that war, Europe and Japan were literally bombed-out shells of their former selves. However, the United States emerged from the war with its infrastructure completely unscathed and over 50% of the entire world's industrial capacity (and a seemingly bottomless supply of oil). This imbalanced state of affairs provided an engine that was used to create more wealth than the world had ever seen before. However, it couldn't last forever -- as Europe and Japan were rebuilt, they gradually began to take some of this share of global production away from the United States.

The only problem with this re-emergence of Europe and Japan was that the historical abberation that was the United States after WWII was seen by many Americans as proof of our exceptionalism. When our share of global industrial production began to decline through the 1960s and 1970s, and we passed our peak of oil production in 1970, we refused to acknowledge these new realities. Instead, in 1980 we turned toward Ronald Reagan's promises of "morning in America. We pushed our economy increasingly toward the financial sector, continued to pump ever-increasing sums of money into our military leviathan, and took an ever-increasing standard of living as our American birthright. Profligacy, not prudence, became the American way. Debt and deficits soared as we effectively charged our future to American Express on every level -- household, municipal and federal -- with a diminishing hope of ever paying it back. As Dick Cheney famously said, "The American way of life is non-negotiable."

The only problem with this kind of outlook is that it completely ignores reality. It ignores the political, economic and ecological limits to our expansion. It ignores the lessons learned from past empires that eventually were ground down by the costs of simply maintaining the status quo. It puts off the inevitable for the next generation to deal with. Many aspects of this Presidential campaign provide stark examples of this phenomenon at work.

One striking area in which this ignorance of reality reveals itself is energy. Both candidates seem to cling to the belief that we can become "energy independent" (the new buzzword of the political season) within 10 years, and neither one of them mentions the word "conservation" in how we are to achieve this aim. Nor do they address the difficulties in maintaining current levels of global oil production. Nor do they address the role of increasing oil consumption by China, India and the rest of the developing world. Nor do they address the inherent predicaments posed by other forms of energy such as reduced energy return on energy invested (ERoEI), storage issues or portability -- all areas in which oil has significant advantages over all other energy sources. It's as if they believe that by simply saying it, they can bring it into being -- just like in Genesis Chapter 1. The writer James Howard Kunstler calls this the "Jiminy Cricket syndrome" -- the idea that if you just wish upon a star, all your dreams will come true.

Another striking area in which this phenomenon reveals itself is military spending and its impact on the federal budget. Neither candidate acknowledges how it is hopeless to balance the federal budget while keeping military spending at it current ridiculously high levels -- estimated at $623 billion for FY 2008, more that the rest of the world combined. This spending, if we include the costs of past wars like long-term veterans' care and interest on the debt, accounts for 41% of the federal budget. For either major-party candidate to pretend that they will somehow balance the budget and reduce the national debt while leaving military spending sacrosanct is patently absurd. Of course, military spending has become the sacred cow of Americanism, in spite of Dwight Eisenhower's warnings about the military-industrial complex (he wanted to call it the military-industrial-congressional complex, but dropped the "congressional") in his farewell address almost 48 years ago, and the fact that our federal government is collapsing under its weight.

I could go on, but I'll stop here before the argument spins any further out of control and instead bring it back together. Let's review a few of these myths of positivism that affect our collective cultural outlook:
- To be an American is to have an ever-increasing standard of living indefinitely into the future, because that's what it has happened in the past.
- Since technological complexity has always increased throughout America's history, it will continue to increase indefinitely into the future (and has no dependence upon energy availability).
- America has always been the world's guarantor of liberty, and does not act in strategic self-interest as other nations do, so we must continue to spend increasing sums on our military and project it to every corner of the globe.
- We have always enjoyed increasing amounts of energy available for our use, so we can expect this situation to continue into the future.
- The Green Revolution in petroleum and chemical-intensive farming staved off the gloomy predictions of Thomas Malthus, so we can expect to continue to feed an ever-growing population without serious difficulty.

What happens when you begin to question these assertions? What happens when you try to look at the deeper reality beneath them? Do they remain prima fascie perceptions of reality? Or do they begin to call into question the most basic assumptions upon which we have constructed our cultural narrative?

I know what my answer is. You can draw your own conclusions.

Tuesday, October 7, 2008

Comments on the Second Presidential Debate

I avoided watching either the first Presidential debate or the VP debate. I have come to view such things as primarily political theater that is not meant to seriously inform me about the candidates beyond what I already have come to know. However, I did turn in to tonight's debate. Despite the risk to my future sanity, I'm glad I did -- but probably not for the reasons that more traditional political observers might suspect.

First, I confirmed my suspicions surrounding the debates being little more than political theater. If this debate is to serve as a good picture of the people from whom we have to choose on November 4th, then we're pretty much screwed as a country. On the one hand, we have a charismatic, relatively young candidate who offers next-to-nothing in the way of specifics. On the other hand, we have a candidate from an earlier generation who seems to still have both feet and his gaze firmly planted there, oblivious to the changes in the world around him. Of course, the talking heads will gush about the "exchanges" between the candidates -- but I found the performance to leave me with more questions than before I watched.

The first question of the debate surrounded the financial meltdown of the United States -- the unraveling of the "wealth" created over the past many years that has turned out to be little more than slips of paper without any real value behind them. Obama's answer first blamed the Bush administration, and then talked about the need for "accountability" and "regulation" while completely avoiding any specifics. McCain, however, did go into specifics. The only problem was that when I did the math required of those specifics, I swear I ended up with an imaginary number!

First, McCain spoke of the need for government intervention in the mortgage crisis and stop the downward pressure on real estate values. His proposal was to have the government buy up all of the "bad" mortgages from the holders, and then to renegotiate those mortgages at current market value, which would enable those homeowners to remain in their homes. This proposal would make the U.S. government the #1 mortgage holder in the United States. Since the government would be renegotiating all of these mortgages at a lower cost than what they paid for them, by how much would this be increasing the federal deficit in a short amount of time? Five trillion dollars? Eight trillion? Ten trillion?

In response to that same question, McCain mentioned the crushing deficit that we are passing on to the next generations, and that we must do something about it. Finally, he read directly from the Republican ideological script and proposed across-the-board tax cuts.

To summarize, it is wrong to pass on such a large deficit to our future generations. So, in order to deal with the current financial crisis -- the roots of which lay in the fact that we are a debtor nation on every level -- the government is going to take on trillions more in mortgage debt AND reduce government revenues by cutting taxes. It reminds me of the old "GOTO" function in BASIC programming, with the result being an ever-increasing deficit. The only problem is that this one is not an endless loop -- it has a nasty fall at the end.

But there's an even bigger problem that I have with this approach. It is the investment of the government into private wealth. I'm not against government investment into the economy. However, I'm against government investment or intervention in areas that do not demonstrate a significant common benefit. It demonstrates to me the fruition of John Kenneth Galbraith's assertion in the 1950s that we were a nation of private affluence and public squalor. Every year the American Society of Civil Engineers grades our infrastructure. I can't remember the last year it was higher than a "D". If we're going to invest hundreds of billions (or trillions) of taxpayer dollars, wouldn't it be more prudent to invest it in revitalizing our infrastructure? It would not only create jobs, but provide us with a lasting product with long-term benefits. This approach was used once before -- by FDR with agencies like the Works Progress Administration and the Tennessee Valley Authority. I'm not saying we should copy this effort wholesale, nor that we will necessarily have the capital for it in the future given the current economic outlook, but if we ARE going to spend taxpayer dollars it should be on something that will benefit that great mass of taxpayers.

Barack Obama claimed that we can reduce foreign oil imports within 10 years. For support in this argument, he cited JFK's call to put a man on the moon within that same time frame. He said that at the time of that speech, nobody knew how we would do it, but that we were able to do it. Ipso, facto, this time we should be able to do the same.

What Obama's "argument" (if you want to call it that) fails to acknowledge is that during JFK's time, the United States had two things in abundance that it does not have today -- cheap energy and capital. Also significant, Obama did not once mention the word conservation in any of his statements regarding energy. Finally, his plan demonstrated either an ignorance or an avoidance of the scale upon which any of these new technologies would have to take hold in order to replace fossil fuels. McCain was not any better than Obama in addressing these realities.

Finally, both of these candidates espouse a foreign policy that supposes that the United States is an exception to history (McCain twice referred to us as "the greatest force for good in the history of the world") and still a global hyperpower. Neither is true, based upon the evidence that I have gathered over my studies. The United States intervenes militarily based upon its strategic and economic interest, not its concern for "spreading freedom." Also, the United States is a declining power in almost every sense of the term -- especially on the military and economic fronts.

My personal belief is that we will try to sustain our global "empire" at all costs, to the expense of all else. The imperial beast will devour our treasury and economy. It will tear our "liberties" asunder. It will chew up our current and future generations of young people. But, at some point, it will end as all empires do. Kevin Phillips sees us adjusting to a role much like that of Great Britain after the Second World War. That is a much more attractive option than the other end of the spectrum -- the collapse of the Roman Empire in Western Europe and the beginning of the Dark Ages. If the collapse is ONLY the American Empire, then Phillips may be close to the mark. However, if we are in the midst of a epochal civilization falling -- that of "Western" civilization since the Renaissance, and its accompanying importance of the individual -- then I see much darker times ahead.

Regardless of the long-term problems and predicaments we face, what I saw tonight was two men who seem very ill-equipped to deal with them. They are products of our political intertia, a view into the looking-glass of our national psyche. That inertia presently has us moving further and further away from facing up to and dealing with reality before it deals with us.

Wednesday, September 24, 2008

Unbridled Arrogance - Paulson and Bernanke go calling on Capitol Hill

Henry Paulson and Ben Bernanke went calling on Capitol Hill yesterday, seeking $700 billion to "stabilize" the financial markets -- in effect, to bail out the industry they both represent. I managed to see some of it while I was eating lunch. Granted, I only got to watch if for about 20 minutes, but there was one exchange between Sen. Sherrod Brown of Ohio and Ben Bernanke that really summed it up for me.

Brown asked Bernanke if we should start demanding that banks issuing a mortgage actually be required to hold on to a percentage of that mortgage. This might mean they actually have a stake in seeing the mortgage repaid, and will therefore abide by more traditional lending practices. Therefore, they wouldn't be anywhere near as likely to issue questionable loans with less-than-reasonable expectation of repayment. Given the manner in which Wall Street's arcane financial mechanisms and flawed debt-benefit analyses did large part to get us into this mess, it did not seem like an unreasonable demand.

Instead, Bernanke completely denigrated the issue. He said something along the lines of, "That's a peripheral issue, and we need instead to concentrate on the main issue right now, which is stabilizing the financial markets [by infusing Wall Street with $700 billion of liquidity, added to the already-stratospheric national debt].

That comment, above all others, highlighted to me the general attitude of the financial industry and their representatives within government. Please note that this does in no way mean I resolve the Congress of their complicity in this mess. To see many of the same Senators who went along with (or championed) the deregulation of the banking industry now standing upon their soapboxes and wagging their finger at Wall Street is nauseating. However, to watch these two men come to Congress and demand they be given full control over $700 billion with no conditions or questions asked is beyond the pale. It is unbridled arrogance.

I was listening to Dr. Alan Chartock of WAMC (NY NPR) yesterday regarding this matter, and he brought up an interesting point of this crisis: the timing. Paulson and Bernanke could have laid out a worse-case scenario for some time now, going all the way back to the Bear Stearns collapse. Signs have been evident for months that a crisis was brewing. Yet, they did nothing. At every step, they assured us that the housing issue could be "contained." Now, only 6 weeks before the election and 1 week before Congress is to recess until after those elections, they came demanding a bailout on their terms. They're literally trying to shove unprecedented powers over the U.S. treasury down Congress' throat. I can't decide if it means that these guys are utterly incompetent, nefariously manipulative or some combination of the two, but those seem to be the choices. Neither gives me a good feeling when it comes to Congress issuing a bailout package under control of the same jokers who screwed things up in the first place.

I also can't help but feel that the only way out of this crisis requires that we actually "back up" a good bit before choosing alternate economic arrangements more in touch with reality and actual value than our current house-of-cards designed by the financial services industry. Our money seems to be based upon little more than debt right now. Taking on more debt will only make that money worth less (or, eventually worthless) and pushing the reckoning a little further into the horizon. Much of this debt, I believe, is the result of our failing to make difficult choices over the past 25 years. World War II left the U.S. as the unquestioned global economic engine, with roughly half of the world's manufacturing capacity. Europe and Japan were in ruins, and the U.S. got rich selling and lending to the rest of the world. However, this arrangement was a blip on the screen, and it was inevitable for more "balanced" conditions to develop. In order for Europe and Japan to gain a greater share of world output, in meant the U.S. share had to be reduced. This, along with passing the peak of U.S. oil production in 1970, resulted in the economic uncertainty of the 1970s.

Rather than face reality, we chose "morning in America." Rather than voluntarily adjust our material expectations, we embraced the philosophy of Ronald Reagan -- a man that Andrew Bacevich has referred to as the "modern prophet of profligacy." This way meant that business was given a freer hand, especially the financial services industry. Our economic growth became less about making and selling things than making and selling money. As a result, the money supply (and national debt) have turned the exponential corner and are increasing at breakneck speed. Adding so much more debt to a system that is already overextended, especially in a scenario in which nothing of utility is actually produced by that credit, cannot be the answer.

I am well aware that this "backing up" will cause pain across all elements of society. However, I think that the longer we push things off, the harder the fall at the end. And eventually all of this will fall. I feel it is irresponsible to try and push off these kinds of adjustments to my daughter and future generations without making adjustments myself. There's also an element of Schadenfreude at work here -- I think that those same Wall Street cowboys who championed the virtues of the free market over all else when things were looking good for them should be forced to take the same medicine they were always willing to prescribe everyone else. I think that if we're going to be responsible people, we have to be willing to bear some sacrifice in the nearer term. There's no such thing as a free lunch, and wishing won't make this predicament go away.

Dmitry Orlov had an interesting article about the current crisis as well: http://cluborlov.blogspot.com/2008/09/adieu-stage-1-collapse.html. As usual, Dmitry cuts to the quick in trying to look at long-term effects of the crisis as it is unfolding. One observation of special note is the way in which our creditors now may be driving our central banking policy. For so many years, the U.S. was the one making demands of other nations through the World Bank and IMF. Now, it seems that we are on the receiving end of those demands. I remember Allan Sloane of Fortune Magazine saying something to the same effect on the Charlie Rose show a short time back.

No matter how we slice this thing, it all stinks. I just think that the architects of it should end up with more of that stink splattered on them than those who can least afford to deal with it.

Thursday, September 18, 2008

Modern Hoovervilles?

From Yahoo! News:

In hard times, tent cities rise across the country
By EVELYN NIEVES, Associated Press Writer Thu Sep 18, 1:03 PM ET

RENO, Nev. - A few tents cropped up hard by the railroad tracks, pitched by men left with nowhere to go once the emergency winter shelter closed for the summer.

Then others appeared — people who had lost their jobs to the ailing economy, or newcomers who had moved to Reno for work and discovered no one was hiring.

Within weeks, more than 150 people were living in tents big and small, barely a foot apart in a patch of dirt slated to be a parking lot for a campus of shelters Reno is building for its homeless population. Like many other cities, Reno has found itself with a "tent city" — an encampment of people who had nowhere else to go.

From Seattle to Athens, Ga., homeless advocacy groups and city agencies are reporting the most visible rise in homeless encampments in a generation.

Nearly 61 percent of local and state homeless coalitions say they've experienced a rise in homelessness since the foreclosure crisis began in 2007, according to a report by the National Coalition for the Homeless. The group says the problem has worsened since the report's release in April, with foreclosures mounting, gas and food prices rising and the job market tightening....

I think this might be a sign of things to come. Given our current financial picture, is it likely that government expenditures will increase at the federal, state and local levels to accommodate these additional homeless people? I doubt it.

Wednesday, September 17, 2008

Financial Three Card Monte

Just a bit ago I came across this gem in Yahoo! news:

How We Got Here: It's Housing, Stupid
by Chris Isidore

Thursday, September 18, 2008

The Wall Street crisis has been caused by plunging housing prices. So despite the billions of dollars being thrown at the problem, experts say more trouble lies ahead.

The nation's financial system is in the midst of a massive shakeup and many on Wall Street and in Washington are pointing fingers and looking for someone to blame.

But in the end, it all comes back to one issue - housing.

Earlier this decade, it was much easier to get a mortgage. Home prices soared about 85% from 1996 through 2006 in inflation-adjusted dollars, creating a bubble.

Then the bubble popped. And the fallout isn't over yet, experts say.

In the past two weeks, the government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America.

If all that weren't enough, the Federal Reserve announced late Tuesday night that it was loaning $85 billion to insurer American International Group....

"The housing correction poses the biggest risk to our economy," Paulson said the day he announced the Fannie and Freddie seizure. "Our economy and our markets will not recover until the bulk of this housing correction is behind us."

I agree that housing, right now, is the most immediate financial problem we face. However, I do not believe it will only take a "housing correction" to set this right. The housing problem is significant of deeper flaws in our economy.

The United States government recently accepted liability for the debt previously owed by Fannie Mae and Freddie Mac, to the tune of some $5.4 trillion. That's 'trillion' with a 't'. Most recently, AIG group became the recipient of government generosity, to the tune of an $85 billion loan. If the government already fails to meet its own debt obligations each year and has to borrow money in order to fully fund the budget, how can it provide the funds for these enterprises? Short answer: it can't.

So, the Federal Reserve has to fire up the presses and throw another $85 billion in cold cash into the system. When this much added "liquidity" enters the system, it makes every other dollar out there worth a little less. Which, in turn, makes most goods and services cost a little bit more.

What happens as the government has to fulfill Fannie Mae and Freddie Mac's obligations? Is it safe to predict that they will service this debt the same way they service all others -- by printing more money? What impact will that added "liquidity" have on our currency?

Furthermore, it's not as if the government is spending this money on anything actually utilitarian. We're neglecting our bridges. We're not investing in upgrades to our outdated and overstressed electrical grid. We're not rebuilding our rail network to help cushion long-distance freight from rising and volatile fuel costs. Instead, we're using it to bail out an industry -- high finance -- whose primary concern seems to be creating money out of nothing.

I can appreciate another side to this argument -- that by the government (meaning taxpayers, you and me) taking on this debt, it is more widely dispersed throughout our financial system. Think of this debt as water -- if you pull the plug from a large pool of water, the level goes down gradually and doesn't pull under nearby. However, in a small pool a vortex can form and pull other objects into it. Taxpayer liability is like the large pool, while corporate liability is like the small pool. If AIG were to fail, then it might pull others down with it. By spreading the risk, serious damage is averted.

However, this assumes that our economy and currency are in good order, and able to weather the storm. I don't think they are, nor do I believe they can. Our national financial pool is getting shallower with each passing year. We're taking on increasing debt every year, at every level from the federal government to individual households. Most of our currency is just that -- debt. This arrangement can persist so long as creditors can expect to get paid. However, if creditors begin to suspect that they might not get paid, all hell can break loose.

Think about it:
A current national debt of $9.6 trillion
Fannie Mae and Freddie Mac debt of $5.4 trillion
War costs of Iraq and Afghanistan, $3 trillion (est.)
estimated by Joseph Stiglitz
includes deferred and future costs
Future unfunded Medicare and Social Security obligations, $50 trillion (est.)
Total U.S. household debt, $50 trillion (est.)

That's a total of $118 trillion of future and current debt in the United States. What happens if more of this debt starts to go into default, as has happened in the popping of the housing bubble? What guarantees that a nation that only produces about 5 million barrels of oil per day will continue to use 20 million in perpetuity? What happens if creditors increasingly lose confidence in our currency?

Confidence is what's keeping us afloat anymore. That confidence appears to be unraveling a bit. Of course, most confidence schemes eventually unravel, whether they be three-card monte or paper currency.

Tuesday, September 16, 2008

The madness that is Chris Matthews

I'm not entirely certain why I do it, but I sometimes slip and flip through the cable news programs during primetime hours. Since I try to look at issues and events through a historical lens, this practice often leaves me cursing at the television and turning it off. Tonight, Chris Matthews was the one who pushed me over the edge.

Matthews was interviewing Mitt Romney and asked him, "Do you trust the current administration to fix this financial crisis?" Romney gave the kind of answer to be expected -- a series of talking points that not only don't address the question, but don't provide any kind of evidence or support. I think Romney's response left me more shaking my head and chuckling than irritating me.

That's where Matthews came in. He rattled off a series of his own conventional wisdom soundbites, most of which I quickly forgot. However, one of the completely unsupported talking points stuck firmly in my mind. Matthews said something close to, "The people look to the chief executive to manage the economy."

I watched an interview with Andrew Bacevich on Bill Moyers' Journal (August 15, 2008) that immediately came to mind in contrast to Matthews' statement:

BILL MOYERS: So, this brings us to what you call the political crisis of America. And you say, "The actual system of government conceived by the framers no longer pertains." What pertains?

ANDREW BACEVICH: I am expressing in the book, in a sense, what many of us sense, even if many of us don't really want to confront the implications. The Congress, especially with regard to matters related to national security policy, has thrust power and authority to the executive branch. We have created an imperial presidency. The congress no longer is able to articulate a vision of what is the common good. The Congress exists primarily to ensure the reelection of members of Congress.

As the imperial presidency has accrued power, surrounding the imperial presidency has come to be this group of institutions called the National Security State. The CIA, the Joint Chiefs of Staff, the Office of the Secretary of Defense, the other intelligence agencies. Now, these have grown since the end of World War Two into this mammoth enterprise.

But the National Security State doesn't work. The National Security State was not able to identify the 9/11 conspiracy. Was not able to deflect the attackers on 9/11. The National Security State was not able to plan intelligently for the Iraq War. Even if you think that the Iraq War was necessary. They were not able to put together an intelligent workable plan for that war.

The National Security State has not been able to provide the resources necessary to fight this so called global war on terror. So, as the Congress has moved to the margins, as the President has moved to the center of our politics, the presidency itself has come to be, I think, less effective. The system is broken....

(Further down in the interview)

BILL MOYERS: I was in the White House, back in the early 60s, and I've been a White House watcher ever since. And I have never come across a more distilled essence of the evolution of the presidency than in just one paragraph in your book.

You say, "Beginning with the election of John F. Kennedy in 1960, "the occupant of the White House has become a combination of demigod, father figure and, inevitably, the betrayer of inflated hopes. Pope. Pop star. Scold. Scapegoat. Crisis manager. Commander in Chief. Agenda settler. Moral philosopher. Interpreter of the nation's charisma. Object of veneration. And the butt of jokes. All rolled into one." I would say you nailed the modern presidency.

ANDREW BACEVICH: Well, and the - I think the troubling part is, because of this preoccupation with, fascination with, the presidency, the President has become what we have instead of genuine politics. Instead of genuine democracy.

We look to the President, to the next President. You know, we know that the current President's a failure and a disappoint - we look to the next President to fix things. And, of course, as long as we have this expectation that the next President is going to fix things then, of course, that lifts all responsibility from me to fix things.

One of the real problems with the imperial presidency, I think, is that it has hollowed out our politics. And, in many respects, has made our democracy a false one. We're going through the motions of a democratic political system. But the fabric of democracy, I think, really has worn very thin.

Source: http://www.pbs.org/moyers/journal/08152008/transcript1.html

I completely agree with Bacevich's criticisms of the imperial presidency as presented here. Matthews' comment regarding the President and the economy confirms these criticisms. Congress neither bears nor has any responsibility. Business has neither. Nor do the people. Rather, it is yet another responsibility of the President to ensure that the economy satisfies our endless parade of wants.

Let me be clear -- in no way do I think this absolves the current administration (or the last few, at least through Reagan) for the emergence of an "anything goes, greed is good" culture in high finance. However, our expectation that such hopes and demands could be placed in the hands of one person, and those hopes and demands be fulfilled, is the height of folly. Our institutions of democracy are weaker for it.

Raspberries to Chris Matthews for perpetuating this particularly odious piece of convential wisdom.

On Socrates

There is a reason I picked The Death of Socrates by Jacques-Louis David (1787) as my image. Although he never wrote anything himself, I believe that Socrates is one of the most important and influential figures in the history of human civilization.

Socrates was, from the accounts we still have, a short, portly, unattractive man. He walked barefoot at all times and rarely bathed or washed his clothes. However, he dedicated his life to the pursuit of truth -- truth that could only be arrived at through honest, critical analysis of your perceptions and beliefs. While this pursuit did not endear him to the more prominent citizens of Athens, who were often played for the fool in debate with Socrates, it attracted many dedicated students, Plato the best-known among them. The Socratic method still provides the basis for scholarship in the modern world.

In a world that demands life be lived at dizzying speed with neverending instant gratification, we stop doing the thing that makes us human -- THINKING. We're losing touch with Socrates and his command for critically analying ourselves -- "The unexamined life is not worth living." My hope is that this blog provides a small space for reflection and analysis.