The Bubble Economy and the Rationality of Irrationality: Recapitalizing Virtue

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.



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

Rethinking Globalism: Why We Need a Cell-Based Economy

When you listen to the pundits and economic experts, you come away with a mixed bag of blame for the economic woes the United States, and by turn the global economy, presently faces.

At first blush, it’s middle class “Annie” with her subprime mortgage, too ignorant or materialistic to admit that she can’t afford the McMansion she lives in.

At second glance, it is the greedy, not-my-problem mortgage broker who knows banks routinely sell off homeowners’ loans to Wall Street investors who will be left holding the bag when homeowners default.

Looking at it from another perspective, deregulation of the telecommunications, energy and financial markets — under the premise that free markets are self-policing and never irrational —  has been blamed for everything from the collapse of WorldCom and Enron, to the subprime mortgage crisis that has spiraled into the credit crunch we see today. And the chief instigator, critics point out, is none other than Sen. Phil Gramm, Sen. John McCain’s economic adviser. Is it possible that an adviser who perceives no harm in unchecked deregulation may be at a loss for words, leaving McCain’s presidential campaign with little choice but to run distraction — personal attacks — at a time when the rest of the nation is galvanized around the economic harm striking ever closer to home?

Flashing back to September 11, 2001, a few may trace the problem to President Bush’s not so subtle suggestion to grow the economy in support of the War on Terror. The President admonished consumers to go on spending, and thanks to what amounted to an eight-year Wall Street “stimulus” consisting of interest rate cuts and easy credit presided over by presidential appointee and former Federal Reserve Chairman Alan Greenspan, Wall Street enjoyed what some economists have described as a once-in-a-generation bull market. The bear had to make his appearance eventually.

Tracing the issue back a step further, another camp of blame-gamers pinpoints the Clinton Administration, which in 1999 “openly urged the Federal National Mortgage Association (aka “Fannie Mae”) to reduce down payment and credit requirements for ‘at risk’ borrowers in an attempt to increase home ownership rates among minorities and low-income consumers,” the Visalia-Times Delta reports.

To watch “IOUSA“, a recent documentary film following former Comptroller General David Walker, who in 2005 launched a “Fiscal Wake-Up Tour“, our present problems are tied not so much to who occupies office — for both parties suffer from what Walker calls a “leadership deficit” — but to a financial system that is leveraged as much as 30 to 1. Simply put, that means that for every dollar a bank has in reserve, it can borrow 30 more. Artificial money props up an artificial bubble. And to these Perfect Economic Storm clouds, we add Walker’s dire warning that the U.S. is headed toward bankruptcy. Unfunded liabilities for Medicare and Social Security, not to mention a deficit approaching $11 trillion, threaten to sink our Ship of State as it is.

Will the recently passed $700 billion bailout help?

The Dow Jones Industrial Average was already on its way to an 80-year low on September 29 when the original bailout package failed. All the while, the media elite insisted that without a bailout the hurt would hit Main Street. Yet when Friday, October 3rd’s second bailout passed the House, NASDAQ and the Standard & Poor’s 500 Index fell yet again even as bank-to-bank lending rates hit new highs. Why would Wall Street react as if the bail out were bad news when virtually everything we’ve heard in the mainstream media holds otherwise?

For one, $700+ billion — which if dollar bills were laid end-to-end would reach the moon and back 138 times over — simply isn’t enough. Speculative figures run as a high as $1 trillion. For another, it came too late. The subprime crisis started over a year ago, yet only in recent weeks has President Bush acknowledged that Wall Street is grappling with a “house of cards“. Unemployment rates, meanwhile, have surged to 6.1 percent nationally. Make no mistake, however: The hurt at home doesn’t mean taxpayers won’t be called upon to write Treasury Secretary Henry Paulson yet another blank check. Worse, the bailout plan might just make the problem worse, critics allege, by heaping inflation on an already shaky financial services sector.

In the midst of all the madness, perhaps there is a greater lesson here that we risk missing. That picture begins to emerge when we contemplate the notion “too big to fail”.

What does that have to do with the human body, you ask?


Call it nature or God, but every living creature is a multiple-cell organism. In fact, we have billions of tiny cells, each working in tandem to make our bodies function.

In bygone days, economies were less like machines and more akin to living organisms. Geographically rooted, they grew their own food, lent money to their own community members, put out their own fires and built their own homes with supplies they sourced within the region.

Planes, trains and automobiles have changed all that.

Today we have multinational corporations, increasingly, whose failures threaten to resonate throughout the global economy not like a handful of harmless 3.0 earthquakes on the Richter scale, but more akin to a life-altering 10.0 “Big One”.

When globetrotting Gulliver begins to teeter as the ground beneath him sways, the little people won’t pillage him, they’ll be called upon to prop him up.

That’s the New World Economy for you. This bailout isn’t the first and it will hardly be the last.

What’s wrong with this picture?

Globalism produces unprecedented potential for gain, but it also puts us at proportional risk. Socialist or Capitalist, the role governments undeniably play is this: underwriters of corporate risk. We need to stop right there and think long and hard about whether this is the road we want to go down.

One of the core problems, which is so taken for granted that it hasn’t even received a second look in the mainstream media, is that an efficient market rests upon a surprisingly delicate underpinning. Sure there are trillions of dollars trading hands, and when all goes well it is a sight to behold. But what happens when the economic body gets sick? Can 10,000 or so massive cells do the work of millions that preceded them?

Probably not.

If our bodies were designed or evolved in the manner modern economies are structured, a simple cold, let alone heart disease or cancer, could take us out. A couple of sick cells would be sufficient to bring the entire body to its knees, a far cry from a massive, systemic infection attacking billions of cellular citizens.

The problem with conventional global economic thinking is that it operates on the assumption that the Titanic is impossible to sink. But what if we reverse that assumption and ask ourselves what we can do to protect ourselves should the unthinkable take place?

To borrow a phrase from so-called tree huggers, what we need is sustainability. Only this time, we’re not talking ecosystems. We’re talking financial systems.

There’s a lot of buzz about “going Green”. But greening our economy isn’t just about clean energy. It’s about local control. Self sufficiency. The type of accountability no regulatory system can substitute for: neighbors, coworkers, bankers and business owners who know each other by name, who rely on each other and help keep one another honest. When you see the consequences of your actions played out not on some abstract global financial stage but in your own backyard, that’s what economists call an incentive: an incentive not to play poker with your neighbor’s hard-earned money.

You might call this concept a CELL-BASED ECONOMY. It’s modeled after the only sustainable concept evolution has taught us: A cosmos filled not with a few thousand Jupiter-sized bodies with a disproportionate gravitational pull, but blanketed as far into the depths of space as an astrophysicist can see. The human and animal organism, likewise, populated not by the few and irreplaceable but the many and regenerative, whose power lies in numbers, not reach. Until economies restore a sense of “place” within the larger economic body, markets will again and again prove in need of oversight (regulation) to reign in the masterminds of greed who exploit nameless victims, which the current globalized modus operandi all but encourages.

We’ll know we’ve become active stake holders in this Cell-Based Economy the day we refer to economic participants as people, not too-big-to-fail multinational “entities” that can make or break economies in a few short months or years. Under this scenario, loan originators would not abdicate responsibility. For only when risk is no longer another investor’s problem, will much of the temptation to approve hasty, house-of-cards loans fall by the wayside.

Going back to a Main Street economy might just save us from ourselves. Why? Because the more impenetrable the global economy grows, the more difficult it becomes for would-be entrepreneurs to elbow their way in to the feeding trough otherwise known as the American Dream. President Woodrow Wilson, as far back as 1913 in a book titled “The New Freedom”, bemoaned the fact that we have a “system of credit” that all but precludes the little guy. We pay more taxes yet become, essentially, debtors, producing very little. Indeed, that is what the United States has become: Not the proud productivity-based economy of yesteryear, but a middle class-squeezing, downwardly mobile “consumer economy” whose very survival is dependent on the goodwill of global benefactors (investors). So when former Comptroller General David Walker talks about an $800 billion annual trade deficit with China in the chilling financial exposé “IOUSA”, this is the kind of leverage we’re giving away. Equally disturbing, it all but hog ties us where foreign policy is concerned. We can ill afford to anger nations who prop us up financially by opposing the actions of their Axis of Evil allies — i.e. it saber-rattling nationalists in Iran or Russia.

The fact that so many Americans have poor credit, little or no rainy day savings, and are defaulting in such vast numbers paints an unsustainable economic picture. But it isn’t just the little guy who is struggling. If nothing more, this debacle has proven that Big Business is more vulnerable than we thought. Looking back a year or so ago when the first rumblings on Wall Street were shaping up, sovereign Mid East wealth funds came to the rescue. Yet NASDAQ Chief Executive Bob Greifeld praised the 20 percent stake Arabs stood to gain in the exchange as “a good transaction for the U.S. capital markets system … it will make sure that NASDAQ is a key player in the global consolidation.” If “global consolidation”, arguably a euphemism for economic contraction, is what market bellwethers foresee, what does that say about the long-term solvency of the U.S. economy?

“Last week, just by coincidence, our national debt exceeded the $10 trillion mark, and a lot of that money is owed to foreigners. The tide of money that washed away any sense of proportion or ethics on Wall Street also comes, in part, from overseas. When critics of the $700 billion bailout complain that it was passed just to keep foreign banks happy, there’s some truth to that. It’s a chilling sign of just how much national sovereignty we’ve signed away in return for overseas capital,” writes Atlanta Journal-Constitution columnist Jay Bookman.

From a foreign investment standpoint, American assets may resemble a smorgasbord — fodder for a fire sale in the event the meltdown continues despite the bailout. In one possible scenario, financial assets may go the way the U.S. steel and auto industries did in the 1980s and ’90s — outsourcing investments the way manufacturers outsourced production. Do those of us who call Main Street USA home wish to owe Asia and the Mid East our mortgages and 401Ks? When the dust settles, will the U.S. financial services sector have an American face?

If you bring the issue out of the abstract and closer to home, the global business model has brought us to a point where critical vaccines and medications may be manufactured by a single source. A pandemic, economic, political or natural disaster threaten to precipitate mass shortages or an over-reliance upon risky, untested foreign sources. One day, what if those shortages included food? What if a severe economic crisis combined with even higher fuel prices means that truckers are temporarily, even, unable to receive a paycheck? Will every grocery chain and retail store from one end of the country to the other face the prospect of bare shelves because the handful of transportation companies to survive globalization’s push toward consolidation are idling down due to strike or disaster, manmade or otherwise?

In an efficient, mechanistic economic system there are fewer and fewer redundancies. This leaves fewer players in place to go on conducting “business as usual” in the event of a crisis. The result is that problems that formerly hit one community — not unlike the recent gasoline shortages in the Southeast following Hurricane Ike — may transform from regional problems, to national shortages, to global crisis.

There is something to be said for the idea that local communities should be self sustaining to whatever degree possible. This means that each region of the country should develop or retain capacity to produce food and energy using locally sourced suppliers, and to maintain manufacturing capacity. That community model may seem unrealistic for now, but it should be a long-term national security priority.

It was once believed with near religious devotion that the world was flat. And later, infamously, that the Titanic was too sophisticated to sink. If there’s one thing this economic crisis has taught us, it’s never say never.

It would be foolhardy to manufacture a rope with only one thread, for at best it could be described as a string. Yet with each multinational merger, each death of a competitor, each transformation of a local economy into a consumer economy, we’re taking a rope of many threads and reducing it, cut by cut, to just one cord. That sort of efficiency may reduce waste and redundancy, but it’s also the source of our global economy’s potential unraveling.

Perhaps it’s time to rethink basic assumptions.

The prospect of global recession is an inevitable byproduct of an economy that has become overly enmeshed. Like a pair of young lovers joined at the hip, this is a relationship that might look ideal at first glance, but is psychologically dysfunctional. None of this is to say that international business ought to become a thing of the past. National and international trade brings commodities that are overabundant in one region to areas of the world where they are in great demand. That form of commerce cannot and should not be stopped. Rather, it is a long-overdue reminder that global business should not come at the expense of local productiveness (sustainability).

Reviving an economic system that promotes multiple supply chains with emphasis on local distribution and long-term sustainability as a hedge against instability elsewhere in the world flies in the face of what started out as a giddy 20th Century globalization experiment.

But if and when the Titanic sinks, nobody will be laughing — except, perhaps, the World Federalists.



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Ron Paul’s Texas straight talk on the bailout

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