business – The Social Critic

For all the talk of Wall Street reform and consumer protections the problem of predatory lending has not been eliminated.

Subprime lending continues in the auto financing industry and elsewhere, and unlike conservatives’ criticism of the housing market there are no federal subsidies to finger. Policymakers have, indeed, caused the problem but for reasons other than what many of us have been led to believe. True, Freddie and Fannie Mae advocated for the dream of home ownership even as it floated out of Americans’ reach. However, this reality only begs the obvious but lesser asked question: Why is the American Dream drifting out of reach in the first place? And might the answer to this question reveal that the hollowing-out of the middle class bears a reciprocal relationship to market volatility?

Like so many things, the makings for crisis have not been quite as partisan or straightforward as mainstream media pundits, among others, have made it out to be. Take the Financial Modernization Act of 1999. The legislation to undo among the last of the Depression-era separations between commercial and speculative banking was spearheaded by a Republican, Sen. Phil Gramm, and signed into law by a Democrat (President Clinton). Both the Right and the Left have been complicit in the sin of short-sighted gains at the expense of long-term sustainable growth. And yet, for all the harm the nation has suffered, many policymakers are unwilling to soften their deregulatory dogma.

For conservatives, in particular, a core free-market assumption holds that participants are inherently rational when they pursue self-interest. The mid-Century writer and philosopher Ayn Rand posited that when individuals pursue ego-driven self interest it benefits others, too. Objectivism and its outgrowth, rational choice theory, attracted fierce devotees including former Fed Chairman Alan Greenspan.

Decades would pass before Greenspan acknowledged the “euphoric bubble” — the group-think of irrational exuberance — that erupted with the subprime mortgage securitization frenzy from 2003 through 2007. Still, Greenspan’s devotion to Randian ideals remains unshaken.

Do we have Rand to thank for our proclivity for great, grand global delusion?

Intangible Risk

What is appreciated far too little, nearly four years into this lingering economic malaise, is the rationalism of loss. The process of placing side bets on underlying assets is referred to as the financial derivatives market. As depicted in “House of Cards“, Wall Street has figured out how to profit when we’re on the upswing and to benefit when we’re on the downswing. When it is possible to “win by losing” the incentive for straight-up commerce declines. Consequently, ours is the era of the “Bubble-Based Economy”. And it explains a lot about our uncertain economic and employment outlook.

In a pessimistic climate businesses don’t want to expand. Consumers don’t want to spend. Volatility spooks investors. And the self-perpetuating slide contributes to lesser demand, greater unemployment and protracted austerity.

The real economy consists of productive and tangible goods and services. The speculative (shadow) market consists of a bet a trader places on whether commodities and assets will prosper or fail. Over the past 30 years we have gradually inverted the market. According to a piece on “Seeking Alpha”, there are more paper-based IOUs in the Wall Street casino than the entirety of Main Street — and, indeed, all the sovereign wealth in the world — can make good on. This inside-out-upside-down international economy began not only because it was legal to engage in casino gambling but because it is increasingly attractive to do so in the face of economic atrophy — that is, an eroding middle class.

When traders have a competing incentive to speculate on failure, a “bipolar duality” emerges between forces that benefit when the economy is built up and forces that gain from tearing it down. It is rational to gain. It is rational to lose. The so-called moral hazard depends on where you sit. In fact, market relativism may be a prime yet largely unheralded reason why prominent economists disagree on the cause of the crisis.

All market activity transfers wealth. The question we have to ask ourselves is whether or not we want to siphon wealth out of the productive class and into the speculative class. Because that’s exactly what we’ve been doing to the mind-blowing tune of quadtrillions of dollars worldwide.

Tangible Capitalism

Restoring a robust middle class has nothing whatsoever to do with the socialist aim of taking from the wealthy to redistribute gains to the less fortunate. Rebuilding Main Street is about counteracting the next bubble before it blows. It’s about putting an entire generation of young war veterans and college grads on the path to prosperous productivity through better and more numerous jobs.

Ours is a time to return to market fundamentals — the three “Rs” of a real economy: Rational Reinvestment. Reasonable Regulation. Realistic Rewards.

Essentially, we need a 12-step program to recover from “speculation addiction” and its economic enablers who made reckless risks not only possible but deceptively attractive. We need a worldwide intervention in which we come to terms with the fact that the credit crisis is but a symptom, not the underlying disease process. The disorder is inequitable trade agreements and the middle-income earners that egregious economic policy and careless commerce elbows out of the productive class to the peril of all who remain. The economic pathology is the proliferation of highly concentrated, specialized markets in which the West consumes and the East produces; small businesses’ lack for capital and competitive entry into increasingly monolithic markets; big businesses that cannot be permitted to fail and, increasingly, advances in technology that we have uncritically embraced.

Capitalism must recapitalize —- not merely liquidity and credit but values, virtue and opportunity.

If we want to improve the employment outlook and lower the odds of one boom-and-bust cycle after another in today’s hyper-connected small world, we have no choice but to outlaw off-the-books trading in securitized debt, reign in the institutional speculator and to regulate over-the-counter financial derivatives on the whole.

A healthy free market is based on the diversification and dispersion of real enterprise.

The “job creators” — the haves and the have-nots — should not be defined on the bets they won but by their creative and concrete contributions to society. The only cap on trade should be the casino variety. The only free market we ought to uphold is the Real Market — not its derivatives’ doppelganger.

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Resources

Out of Control: The Destructive Power of the Financial Markets | Spiegel Online

Middle-Class Areas Shrink as Income Gap Grows, Study Finds | New York Times

As New Graduates Return to Nest, Economy Feels Pain | New York Times

With MF Global Money Still Lost, Suspicion Grows | New York Times

Paul Ryan and Ayn Rand | New Republic

Greenspan: Financial Crisis Doesn’t Indict Ayn Rand Theories | ABC

Ayn Rand: Conservatives’ Abortion-Rights, Anti-Religion Inspiration | NPR

Why Ayn Rand Is Wrong (And Why It Matters) | Amazon

Why Ayn Rand and Her Legion of Followers are Hopelessly Wrong | AlterNet

The Trouble With Liberty | New York Magazine

President H.W. Bush, borrowing a phrase from an earlier era, popularized the term “New World Order” (NWO) in the early 1990s. But while the New World Order has legitimate roots, it has come to be associated with little more than paranoid conspiracy.

Given what we’ve witnessed in recent times, however, is it wise to continue to dismiss the notion out-of-hand?

The following metaphor, Friedmanesque but nevertheless useful in view of the controversial nature of this topic, paints a picture of what political and economic progress may look like as the 21st Century progresses — and why a NWO may not be as far-fetched as so many of us are inclined to believe.

Imagine a smattering of raindrops hitting the pavement. Each raindrop represents the relative isolation and sovereignty of each nation. As those raindrops increase in number — meaning more countries climb aboard the international trade bandwagon — they connect like dots.

With enough rain — overlapping treaties and trade agreements — pools of water form (commonwealths operating under a shared constitution and/or currency). This is a natural evolution of the free trade process.

The European Union is but one such trade and currency pool, and it is not at all out of the question that more are to come. In Asia, in fact, The Wall Street Journal reported October 12, 2009 that an “Asean Plus Six” proposal seeks to integrate the 10 member nations of the Association of Southeast Asian nations as well as Japan, China, South Korea, India, Australia and New Zealand.

Much like a succession of raindrops merging to form large swaths of water, boundaries between nations may become less distinct in the years to come. Such a progression inevitably begs the question: Is national sovereignty passé? And in even longer-range terms, will ethnic, language and cultural distinctions begin to dissolve too?

While far-sighted, these questions are just that: Legitimate questions.

When people say that the prospect for a North American Union is little more than a conspiracy, they are, in effect, saying that they know the future beyond a reasonable doubt. What this denies in the here-and-now is an appreciation for the reality that a World Federalist Movement (WFM) has been afoot for decades. The mainstream media may not give these long-ranging issues press time, but world federalist organizations do, in fact, exist in the United States, Canada and elsewhere in the developed world — and they run websites replete with historical timelines that anyone can verify for themselves.

Our Mission is to promote global governance to address inequality, violent conflict, mass atrocities, climate change and corruption
World Federalist Movement and Institute for Global Policy: https://www.wfm-igp.org/

This much we know of modern times: Peacetime economies are evolving toward tighter integration for the sake of shared prosperity. Debates over whether this is incidental or intentional detract from the point: The logical extension of removing conflicting trade laws and legal barriers may well be a set of conditions wherein borders are intact on maps, but members function more like states in a global confederation (interregionalism).

Some say we may even see this convergence culminate within our lifetimes.

In a speech then-president-elect Barack Obama gave in Berlin, he had this to say:

No doubt there will be differences in opinon. But the burdens of global citizenship continue to bind us together.
A change of leadership in Washington will not lift this burden.
In this new century Americans and Europeans alike will be required to do more, not less.
Partnership and cooperation between nations is not a choice. It is the only way. The one way to protect our common security and advance our common humanity.

President Obama’s message? This isn’t personal. This isn’t partisan. This “burden” is the future. And no, we do not have a choice.

President Obama, to be clear, is but one of several American presidents in recent years to share a globalized vision — hence his statement that a “change in Washington” will not deviate world leaders from a transnational progressive path:

SERIOUS QUESTIONS FOR SERIOUS TIMES

Does a shift toward increasingly large and impersonal centralized governance bode well for freedom to exclude oneself or one’s nation from a one-size-fits-all policy? Or will freedom to opt out be the one guarantee regional integration proponents — world federalists — can’t promise?
Is it in keeping with human history and human psychology to share a collective vision without breaking rank? How does world federalism propose to respond to “agitators” and civil unrest within its Utopian framework?
Does consolidation of legal and political powers represent a net gain or is it offset by the potential for corruption and abuse at the hands of a powerful few whose legislative reach has gone global?
At an economic level, can or will world federalism deliver on its promise of peace and prosperity for all world citizens? Or does it violate the all-eggs-in-one-basket principle: posing, instead, a dangerous level of economic and international codependency that will hold individuals and markets alike captive to the weakest link within the whole?

How do you feel about the path we are apparently headed down?

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The Social Critic

Tag: business

The Bubble Economy and the Rationality of Irrationality: Recapitalizing Virtue