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Wednesday, April 22, 2009


crisis and mythology

david goldman wrote this piece for asia times back in january, but it may be the best one-stop-shop for understanding the nature of the global crisis.

i noted it while reading his... evisceration of simon johnson, who has now rather famously been establishing the meme of a conspiracy of bankers in the public eye, more particularly the conspiracy of goldman sachs.

Economists like Prof. Johnson are experiencing a dreadful sense of powerlessness. There must be a conspiracy to explain why our policy prescriptions don’t work any more. Perhaps a witch has conjured Satan to sour our cow’s milk, or Goldman Sachs is secretly controlling the government.

Whether or not the government bails out banks, the crisis will continue. One school of thought, represented by San Francisco Federal Reserve Bank President Janet Yellen, insists that the crisis occurred because the government let Lehman Brothers fail last fall. Another school, represented by Prof. Johnson (and New York Times columnist Paul Krugman) believes that the problem is that the government didn’t allow all the other banks to fail. Both schools are wrong. The banking crisis is merely a surface manifestation of a deeper problem. The West failed to produce a new generation large enough to buy the existing housing stock, or fund existing pension programs, or maintain the wealth that the West thought it had. That is why we are poorer, as I show in the current issue of First Things.

goldman then further clarifies.

What I object to in Prof. Johnson’s article is the notion that if only the banks hadn’t wielded all that undue influence, things would have been better. That simply is not true. The public was speculating with all the leverage it could obtain, just like the bankers. Leverage was available because of a global savings/investment imbalance ultimately arising from demographic causes.

Of course I was unfair to him — I made fun of him the way an opinion journalist is supposed to. But my point stands. I don’t want to let the public off the hook by hanging bankers from street lamps. The roots of the crisis go deep, as I argued in my First Things essay, Demographics and Depression.

that is a quite salient and wise critique of a point of view being set out not only by johnson and krugman but yves smith, rolfe winkler, dean baker and many other of the crisis' best interpreters who favor (or perhaps better said do not see an alternative to) nationalization.

the vital counterpoint has arisen, forwarded by goldman, richard koo, john hempton and at times it seems jck of alea -- one which has won me as a convert. in many respects, it is a yet more dour outlook than that being put forward by either the nationalization school or the obama administration precisely because fixing the banks is seen to be the easy part, not to mention completely insufficient as an avenue to ending the depression.

i have recently taken time to revisit the work of jack lule, "daily news, eternal stories: the mythological role of journalism". in it lule, a former journalist, analyzes a set of news articles from the new york times in the context of an academic understanding of mythology and its role in society. few books one can read will more thoroughly upend the way one approaches the news, for lule makes all too clear how information is but a secondary pretense for the retelling of age-old stories which serve to reinforce social norms and mores.

this is perhaps obvious on consideration, but the ramifications are profound -- most of us tell ourselves that the fourth estate of journalism serves the public to keep it informed of reality so as to dispose it to make the reasoned public decisions which are the backbone of the democratic concept. while some measure of information conveyance may be a secondary function, lule sees something very different in the news: information is selected and in fact often distorted in order to make it a proper conveyor of what was folklorists might call morality plays. this is of course the understood function of myth among anthropologists, which is why lule sees the mythology of postmodern society in the news. lule goes so far as to outline seven master myths which are so common across disparate cultures and civilizations in both space and time that their foundation must be something beyond a long-lost shared experience.

taken through the lens provided by lule, it at once becomes apparent that the mythologizing of the crisis is in full swing and has been for some time. incarnations of 'the victim', for example, are too many to enumerate or exemplify. but there are other more interesting myths at work to recast events in a moral light.

the scapegoat

johnson -- whatever his conscious motives, which one can be sure are as true as anyone's -- is forwarding in part a retelling of the master myth of 'the scapegoat'. as goldman points out, responsibility for the crisis is everywhere one cares to look.

The public was speculating with all the leverage it could obtain, just like the bankers.

but by loading the banks with the sins of the multitude and casting them out, society exonerates itself and can move on without a destabilizing admission of systemic flaws in not only the consumer credit model but in the concept of the masses as a rousseauian font of virtue, homespun wisdom and innate reasonability. the exoneration of the common man is completed by the myriad examples of the victim, noble in their sacrificial demise, which seem to flow through the media in a torrent as if from a vast reservoir.

it is important to note that, while some concentrate on bankers -- many of whom have had their persons excoriated endlessly, new examples of which are showing up almost daily -- some others are making scapegoats of banks as institutions, suggesting that they are on some level intolerable agents of dissent from acceptable morals. this is one of the undertones of johnson's argument: nowhere does he personalize his argument as is so famously done at outlets like clusterstock or dealbreaker. instead, banks and abstracted impersonal entities such as bondholders are to be punished for their transgressions through nationalization or liquidation.

the trickster

a more complex mythology is also being retold through the travails of the banks -- that of 'the trickster', the archetype of the ruinous animal-child. lule:

Almost always, the Trickster is driven by physical appetites, lust and desire. He has no control over his impulses. Paul Radin, with Karl Kerenyi and Carl Jung, produced one of the earliest treatments of the Trickster. Radin too found the Trickster to be a kind of antihero "who is always wandering, who is always hungry, who is not guided by normal conceptions of good and evil, who is either playing tricks on people or having them played on him and who is highly sexed."

The Trickster, as Radin implied, usually serves as an exemplary model in reverse. Hynes and Doty call him a crude and lewd moralist. "The rude mockery, even scatology, present in Trickster stories is not simply anti-religious or anti-social criticism," they argue. Rather, the Trickster serves as a model illustrating the necessity of societal rules. Like the Scapegoat archetype, the Trickster archetype shows what happens if the rules laid down by society are not observed. But instead of being punished by society in a cumulating, climactic drama, in the manner of the Scapegoat, the Trickster continually shows the need for societal standards as he lives an error-filled life of ruin. The Trickster proceeds from one afflicting happenstance to the next, seemingly always on the edge of self-destruction.

lule, almost surprisingly, didn't write this in response to the crisis and the banks' role in it. yet if you've been reading the press of the crisis closely, alarm bells should be ringing in every quarter on reading those paragraphs.

the myth of the trickster is not a simple comprehension because of the implied duality of the nature of the archetype. while a monster, the trickster is also a victim -- a savage, a wild animal, a reckless child in need of a direction or authority to corral his appetites that was never offered. it doesn't take much to draw the parallel to the massively increased regulatory power over banks which is both part of the narrative and broadly taken as a common sense prescription.

the flood

most obvious, perhaps second only to the victim, in the mythological narrative of the crisis is the flood. again lule:

Through the Flood myth has many interpretations and permutations, some basic characteristics or themes can be established.

  1. Flood myths almost always are based on the premise that humankind has sinned or that a particular people have erred or strayed from the path of righteousness.
  2. The Flood comes in and is total in its devastation. The Flood does not discriminate in choosing its victims or evaluate their fine gradations of evil. Whole populations are destroyed.
  3. Humans are helpless against the power of the Flood. The Flood humbles. People struggle futilely.
  4. Humankind, once purified, is regenerated and renewed. Some few worthy or fortunate individuals live to rebuild society, solemn and chastened in the wake of the Flood.

here again it is not hard to see narrative parallels between the representation of the crisis and its archetype. but particularly we might pay attention to a characteristic of the myth which lule terms, 'striking those who have strayed'.

A primary characteristic of the Flood myth is that devastation comes to a people who have done wrong. Detailing the wrong -- defining the sin -- is a crucial and socially specific aspect of the Flood myth. Were people punished for hubris and pride? Did they worship the wrong gods? Did men take wives for themselves, "whomever they chose," as in Genesis?

there is a very active debate ongoing as the mythology of the crisis is being shaped as to who did wrong and how. johnson's retelling suggests that the hubris of an investment bank is responsible. others have branded those who worshipped the false god of mathematical modeling. still others lay blame at the ridiculous ideology of this or that political faction. in a very important respect, winning this debate will ultimately characterize the history of the crisis.

the point of this analysis of how the crisis is being presented in a certain narrative stream is not to void it completely of intellectual merit. johnson and others who are casting the story of the crisis through these myths are not doing anything unusual and are certainly not paranoid in any sense of the word i recognize; indeed such reduction and framing of the narrative through myth may be the only way in which large numbers of people can communicate anything at all to each other about the crisis. nor should it be implied that, because johnson may be representing his point of view through myths, no one else is; indeed i think it more likely that everyone in the public discourse is offering some manner of mythology in the guise of explanation.

but it is nevertheless a sort of warning, as i perceive it, and a rather stark one. the crisis is a reality external to any individual explanation of it. that reality, being an economic and therefore human construct, will interact with widely accepted mythologies in ways that may be hard to fathom and impossible to predict. but it is i think extremely important not to misunderstand the nature of the crisis, its mechanisms and potential solutions, by seeing it primarily not through an essentially pragmatic or mechanistic lens but an essentially mythological one.

myth represents a reconciliation of a complex world often beyond our understanding with our capacity to understand, the intersection of the apparent and overwhelming chaos of reality with a clear social order upon which we depend for survival as an often-fragile cooperative culture of human beings. seen as such, following through on the moral imperatives of our myths -- the need to cast out the goat bearing our sins, the need to humiliate and subjugate the reckless deviant, the need to see the wicked stricken by god -- may be important to reinforce our conception of a righteous social order deserving of allegiance.

but satisfying those moral imperatives without recourse to reason may very well be at odds with our economic interests -- perhaps devastatingly so. just possibly, the flood myth that will be told in ages to come about our time will not be of how god smote the hubris of banks but rather of those who, to borrow from a higher order of human story, dared to ignorantly and brazenly cast stones.

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So...what you're saying is - it's the same old story.

Our hero-leaders, powerful and fearless, chosen from the ranks of the unworthy, purified and anointed in ritual ceremony; our heroes seek out and reveal the greedy manipulators and their sycophantic hangers-on as the lower-than-lowlife they are; the perpetrators are put to the trial and their certain fate. All the while the chorus wails, lamenting the sad tale as known only too well by the long-suffering audience who in fairness were only trying to catch a shred of the great dream, and bring a little light to their miserable existence.

Art imitates life.

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Goldman is long on the ad hominen attack, short on fact-based arguments. Suggesting that someone you disagree with is mentally ill is distasteful in the extreme.

Goldman is too mean-spirited to be credible in my opinion. I find it painful to read his blog for this reason.

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In Goldman's January piece he appears to be arguing for the "fat spread" solution to fixing the banking system and that the government can't afford capital injections. That differs significantly from Richard Koo's "four kinds of banking crisis" analysis. And even if $1 trillion of value really can be extracted from hedge funds by the banking system, Roubini's estimate (always too conservative so far) is for $3.6 trillion of losses on US-originated assets (granted, some are held by foreigners). Also it seems surprising to me that all these assets would really be so much cheaper right now than fair value and therefore have cashflow exceeding future losses from writedowns -- do you agree with that?

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or art imitates our perception of life, rm, which is a far thing from the unknowable reality of the world as it is.

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Suggesting that someone you disagree with is mentally ill is distasteful in the extreme.agreed, og. johnson isn't mad. i think he's simply seeing the situation through ancient convention -- and not without cause. social order is important.

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the "fat spread" solution ... differs significantly from Richard Koo's "four kinds of banking crisis" does, hbl. for better or worse, there's not a unanimity of opinion.

right now, the spreads are so ridiculously fat that banks can and should take in massive positive cash flows. banks are anecdotally becoming active in the secondary market as well, using incoming cash to sop up AAA asset-backed at 25 cents. housing has big problems yet to come, but these securitizations can withstand quite a lot of damage and still pay handomely from such prices (it's the hedge funds that soaked up the mezz and equity tranches that are well and truly cooked). so they can earn well for some time.

eventually, though, spreads should narrow and paying securitizations dwindle. only then we'll know the extent to which the majors really need capital. until then, i would simply refuse to mark the books and make big banks into black boxes. no one will invest in them and that's fine; government guarantees should keep the counterparties trading. they'll still have more than enough lending capacity to fill the amount of loan demand that will likely exist -- likely that aggregate private sector debt contracts hugely over time, and not all through default, meaning banks will take in more money than they know what to do with.

there may come a time for recapitalizations for a number of big banks, but i'd wait. i'm not sure i see the need to rush. in the meantime, the administration had best focus on demand management to stave off depression.

Also it seems surprising to me that all these assets would really be so much cheaper right now than fair value and therefore have cashflow exceeding future losses from writedowns -- do you agree with that?it wouldn't happen in an efficient market, would it? but there isn't enough balance sheet capacity in the aftermath of the collapse of the shadow banking system to make an efficient market. too many securitizations, not enough room to hold them -- so they get puked out and marked very low.

i haven't seen a good retail exposure to this market, have you? maybe a newly-formed bank? i should maybe comb the FDIC for new banks that have IPO'd. i recall seeing a bank called heritage floated late last year -- maybe a new york bank? not sure.

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this is the bank i'm remembering.

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Wow, this is a very powerful glimmer of hope to the extent that it is a feasible outcome... (thanks!) Hedge funds are relatively speaking the segment of our financial system best able to bear these losses without major systemic consequences. But it still seems a little too good to be true -- the banks themselves held such a huge amount of these toxic assets at the start of this crisis, from what I understand. Also I find it hard to believe that a sufficient number of assets on aggregate will be given up by hedge funds so cheap -- can't they use the new accounting rules to pretend things are worth more, also? Or will investors continue forcing so many redemptions that it won't matter? And cash flow on all this stuff will recede in deflation (defaults and prepayments) so this still seems to be a LONG process in even the best case.

I have wondered to what extent the articles about Volcker being marginalized could be a smoke screen by the administration to conceal the degree of this involvement and the nature of the potential plan that necessitates deception. Perhaps there's merit to that. I have been surprised to see no one else raise that possibility -- everyone has seemed to buy into the story without questioning.

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ed harrison on bank cash flow generation.

I find it hard to believe that a sufficient number of assets on aggregate will be given up by hedge funds so cheap -- can't they use the new accounting rules to pretend things are worth more, also? Or will investors continue forcing so many redemptions that it won't matter?

hedge funds are faced with what the banks are not -- a run. waves and waves of liquidation requests from investors. our shop (runs a closed fund-of-funds) is similar to many, and we've done nothing but redeem capital for months. the result is hedge funds that are closing up shop, refusing to redeem (a delayed failure), or raising cash and staying liquid. even that last is a problem, though -- many funds get into side pocket private-equity-type deals that are small when times are good but now consitute a large and completely illiquid part of their balance sheet. it is utter devastation for most. no one i've spoken with has seen any significant capital allocated since lehman brothers -- all redemptions.

And cash flow on all this stuff will recede in deflation (defaults and prepayments) so this still seems to be a LONG process in even the best case.agreed -- banks have a long row to hoe. years, but the front end would be the best. this is largely what folks are talking about when they complain that banks are taking TARP money only to speculate, taking "bigger risks" to get out from under the last set. hard for me to see how 25 cents for loss-buffered securities yielding 6% on face value is a bigger risk, but if the government were to abandon demand support it conceivably could be a loss generator. by then, though, we'll have bigger problems.

I have wondered to what extent the articles about Volcker being marginalized could be a smoke screen by the administration to conceal the degree of this involvement and the nature of the potential plan that necessitates deception. Perhaps there's merit to that.thing is, volcker's the king of this stuff. he was responsible for organizing the conspiracy of silence in the aftermath of the latin american debt collapse; he advised japanese banks (contra many american public voices) to go slow on writedowns and obfuscate balance sheet information. while his reputation in blogging circles seems to be build on his willingness to hike rates to kill inflation with pain, his diplomatic skill in managing the devastating fallout in banking is what made him the highly respected central banker he is in policy circles.

i'm okay with summers because i think he understands the problem even though he's got other problems. but i would dearly love for volcker to be installed tomorrow in a position of real power. to be honest i think he would be a very major disappointment to many who want to see a bloodbath resolution.

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David Goldman is a very bright guy, and well worth listening to generally. Nice to see what he is saying on the topic. I had lost track of him.

Regarding Flood myths, that's another issue... the issues regarding their historicity are significant, but fossil evidence argues for a significant catastrophe of some sort to explain all the strata shifts. It is one reason why I think non-catastrophist evolution theories are wrong. The earth and the solar system are too irregular to support uniformity hypotheses.

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