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Wednesday, April 15, 2009

 

why banks cannot be nationalized


david goldman in two posts -- here and here -- on why major banks with large capital structures cannot be resolved nor even pushed into a large debt-to-equity swap.

The next sector to collapse would be the insurers: as I’ve said here again and again, the big pyramid scheme in the US financial system is that the insurers own the bottom of the capital structure of the banks. Bank preferreds, trust preferreds, hybrids, etc. were the favorite repast of yield-hungry insurance portfolio managers. ...

[W]hat [goes] if the insurers go?

The answer is, “everything,” including the most mundane transactions in trade — because everything requires insurance. ...

Of course it was a pyramid scheme: of course the insurers who allow a load of kasha to get from Minsk to Pinsk should not have owned the bottom of the banks’ capital structure, and so forth. No-one should have owned bank preferred shares but misers living in caves in the Swiss alps living exclusively on home-grown goats’ milk, so that the vaporization of these securities under nationalization would not even have gone noticed. Bank subordinated debt should have been sold exclusively to the hoards of sleeping dragons who would not hear the crash of the issuer thousands of miles away. We know that now. My recommendation is that Larry Summers and Timothy Geithner should be deputized to find sufficient dragons and Swiss misers to place the $135 billion in TARP capital injections to the banks….

…but in the meantime, the only alternative is to allow the banks a zombie existence cannibalizing the “toxic” assets left over from the structuring excesses of the boom.


the government of great britian is now being forced, in the wake of a collapse in private trade finance or supply chain insurance, to make a market where insurers no longer can. one can imagine such a step as but a taste of what could come in the aftermath of large bank resolutions. even the creeping restructuring presented on the citi example is unlikely to run very far very fast.

with the help of goldman, richard koo and others, i've changed my opinion on bank nationalizations severely since this posting in late february. critical to my changed understanding has been the exposition of a mechanism by which the united states government can rationally embark on a plan to support monetary aggregates and incomes and therefore (following a severe repricing to discounted cash flows) asset prices with the expectation of never testing a national bankruptcy -- that is, by dredging the banks for all cash flowing into them which cannot then be lent out, thanks to the collapse in loan demand as the private sector retrenches, in exchange for treasuries.

but equally important has been a deeper understanding of exactly who and what stands to be liquidated in the event of grand-scale bank debt restructuring. such a process would, so far from leaving a cleansed banking system, wreak untold havoc on the global economy -- indeed loosing what australian academic economist steve keen considers in recent comments to be an unwind so vast and pervasive as to dwarf even the great depression in its potential. needless to say, many western governments would not survive such a turn.

whereas i once said

[I]n my view these are problems that have to be remedied, if only because an FDIC-style resolution process -- probably involving a long-term RTC-style bad bank to warehouse and sell assets taken over in resolution back into the private sector -- is the only remotely practicable, safe and fair way forward. it won't be painless, but it will put losses where they belong and leave in its wake a stronger and healthier banking system.


i now see both that there is an alternative and that to "put losses where they belong" is not a reasonable course of action regardless of any perceived moral imperative. i hope to write more upon the subject of that moral imperative soon.

Labels: ,



Structural Sustained Immoral Kleptocratic/Oligarchic/Serfish US Economic Structure 1

Gaius 0

 
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"by dredging the banks for all cash flowing into them which cannot then be lent out, thanks to the collapse in loan demand as the private sector retrenches, in exchange for treasuries"Does that mean you are no longer worried about treasuries finding enough buyers, assuming this process happens in relatively slow motion?

 
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is it really more moral, anon, to attempt to lay waste to western civilization in a reactionary populist quest of vengeance?

i understand people want a simple and clear moral solution, but none exists. this just in: reality is complicated.

fwiw, there is plenty of room to punish individual criminals without destroying institutions which, after all, are only instruments.

 
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I don't understand why recapitalizing banks by converting bonds and preferred into common equity would hurt destroy insurers. Goldman doesn't explain.

I also think that if Geithner has the Fed and FDIC give handouts through underwater nonrecourse loans. Because that is illegal, it will lead to civil unrest once the losses come to light. I think the only way to avoid violence in the streets is for Obama to have a public debate over recapitalizing the banks. If he doesn't, I think people will start doing stuff like kidnappings, vandalism, and worse. I don't think the politicians understand the level of anger that is building up.

 
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that's right, hbl -- what concerns i have are at the periphery. flows into banks that cannot be lent out will represent demand lost to the paradox of thrift. that flow cannot be allowed to dead-end in excess reserves, and can easily instead be used by banks to fund treasury purchases. there's going to be no problem in that recycling.

it's what happens when treasury is trying to float large amounts of debt to recapitalize banks that may be more difficult. it has to be done to some extent, given that net loan demand is going to be negative, net interest differential will close, and banks will therefore have a hard time recapitalizing by earnings alone. or it will take a very long time.

following on your comment, it's critical that writedowns run very slowly. as gov't injects cash/equity, the temptation will be there for the banks to reserve against loan losses.

 
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I don't understand why recapitalizing banks by converting bonds and preferred into common equity would hurt destroy insurers. Goldman doesn't explain.many insurers can easily be rendered insolvent by losses on bank debt -- that's the obvious part. but if it were converted to an equivalent face value of equity, however, wouldn't the problem be circumvented?

no, and the reason is that insurers cannot hold a significant slice of common equity in their general account -- it's not permissable to do so precisely because equity is too volatile and not safe enough to back general claims. the conversion would turn supposedly-staid insurers -- whose business is predicated on reliably outliving its clients -- into nothing more than big equity funds (something they're already much too close to) and destroy the public confidence in their business model. chances are good that the result would be runs on the insurers, forcing an industry collapse.

then you'd be facing a bailout of the insurance industry more expensive than the bank bailout in an environment that would probably much resemble 1932.

i understand your point about candor, anon, but to be honest i think you have a lot more faith in the virtue of the probable public reaction to an honest assessment than is justified. the administration needs to articulate a legitimate attack plan to gain public trust; but they do not at all have to be honest about the frightening extent of the devastation, which to my way of thinking wildly exceeds the worst fears of most americans. government is having to walk a fine line between assuaging public paranoia and dealing with the reality of a global depression more intimidating in many ways than its 1930s counterpart. i don't envy them that job, but their fear of public counterproductivity under these circumstances could hardly be better founded.

 
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"I think the only way to avoid violence in the streets is for Obama to have a public debate over recapitalizing the banks. If he doesn't, I think people will start doing stuff like kidnappings, vandalism, and worse. I don't think the politicians understand the level of anger that is building up."Agreed. I see this every day. I am a bankruptcy attorney and I meet with 12-14 people a day from all different walks of life and social backgrounds. The changes in the type of people that I am working with is staggering. Individuals who make $200K+ a year voluntarily foreclosing on their homes. Unemployed couples with $100-200K in credit card debt. Illegals with 4 properties and $1M+ of debt simply filing Chapter 7 and sending 70%+ losses to the banks. Business owners and developers with $10-$30M in business and personal debt.

A year ago, it was mostly individuals who couldn't pay and who had marginal debts ($30-50K of CC debt, a house with a $200K mortgage, etc). Now it is the largest players that are starting to file. Now it is those who simply don't want to pay anymore. Now it is those who have had their rates raised, their limits and their score droped who want revenge. The main thing (IMHO) that keeps people from filing is their credit score. When Citi & Chase raise rates and cut limits, a person's score get crushed. They lose the last reason to hold on to their debt. The banks are absolutely slitting their own throats.

My take is this: The social contract is being torn to shreds by Washington's response to this crisis. The stigma associated with BK has collapsed since October. A year ago, most people felt bad not paying back "those nice people who lent them money when they needed it". Now they gladly stick it to the banks. The floodgates are open and I don't see any way to turn back the tide. Anger is exactly what I am seeing.

With a large portion of American homeowners underwater or with little equity when sales costs are considered, the incentive to walk away and declare BK is huge. Most people can live in their homes 6-24 months before it is foreclosed, especially if they hire an attorney to fight the bank.

The public is starting to wake up to this reality. And with a growing population of unemployed attorneys, it is only a matter of time before bankruptcy services are expanded and agressively marketed to the public. Short of banning it(difficult, given that it is in the Constitution), Washington can do little to slow down these losses. A BK forces the writedown on the bank, whether they like it or not. I don't see how a Japanese solution is possible in the USA. Consumers are already rejecting debt slavery in record numbers.

http://www.creditslips.org/creditslips/2009/04/my-entry.html#more

http://www.creditslips.org/.a/
6a00d8341cf9b753ef01156fc46b52970b
-800wi

Now that's a BULL MARKET.

 
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many insurers can easily be rendered insolvent by losses on bank debt -- that's the obvious part. but if it were converted to an equivalent face value of equity, however, wouldn't the problem be circumvented?

no, and the reason is that insurers cannot hold a significant slice of common equity in their general account -- it's not permissable to do so precisely because equity is too volatile and not safe enough to back general claims.

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The government can modify the rules to let the insurance companies value the common equity received at the par value of the preferred stock or bonds relinquished. They could also have the banks distribute to them in kind debt held by the banks, and give the insurers guarantees.

And of course, if assistance is requried, force conversion of bonds and preferred issued by insurance companies into common equity. Doing this would recapitalize insurance companies, so they have capital to pay out insurance contracts, annuities, etc.

The government could also void all OTC derivative contracts.

 
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"reactionary populist quest of vengeance"


No; Clear the system that reaches a multigenerational debt reset;

Really? Reality mostly grey? Whocouldanode........

The FIRE based economy, in combination with its monetary and cognitive capture of .gov, set itself up for collapse. Collapse happened. The Fed and .gov use 1.7Trl and 12.8 Trln in balance sheet and payments/guarantees - respectively - to catch a collapsing market. To save all sorts of creditors (and equityholders) Save the status quo with scare taxpayer resources. This is all rear view mirror. The economy remains crippled. Where are the new jobs coming from? Putting humpty dumpty back together again? The Social Contract gets no schrift - not just short shrift. There is no social contract really compared to the FIRE bailout contract. The system is utterly maladjusted to epic 370% debt to GDP and rising. Ben and Tim and Shiela whore out the FDIC. Games, lies, deceit and protection of the kleptocratic, oligarchic FIRE based tail that wags our whored out manufacturing base productive economy.

I am at peace with it correcting itself to a new, sustainable equilibrium after allowing those that made fraudulent bets to eat them and fraud criminality prosecuted.

We are nowhere near this point and running in the opposite direction.

The instruments and institutions are horrilby insolvent. You seem to imply the acceptance of permanent fusion of the parisite/cancer to the patient.

Ill pass.

 
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Why not just start over? New banks and new insurers, if that's what's necessary to insure that grain gets from Minsk to Pinsk. Why prop up a failing system? Why are high asset prices better than low asset prices?

I agree that justice (vengeance) is a very expensive commodity, but from a practical standpoint, is it better to prop up the system for a few years or start over now?

 
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The government can modify the rules to let the insurance companies value the common equityit can modify the rules, anon. it cannot convince other market participants of the validity of those rule changes.

rather as in the mark-to-market debate -- the economist made a good point recently by saying that the solvency of a modern bank is not a defineable technical condition but rather depends entirely on the aggregate of the opinions of its creditors. i doubt very much that the market would regard a massive conversion of fixed income to stock underlying insurers ability to pay as a survivable event. most counterparties would be compelled by their own controls to quit such a firm.

and if government guarantees are meant to reassure those counterparties, then why not cut out a step and guanrantee the banks? it would be less expensive and less convoluted with fewer unintended consequences.

 
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My take is this: The social contract is being torn to shreds by Washington's response to this crisis. The stigma associated with BK has collapsed since October.i agree, r -- the floodgates ARE open and the latent damage done to the social contract over some generations will be manifest. but this is part and parcel to household balance sheet remediation -- it is a big step toward debt repudiation and these people will not be back to borrow money again soon. you're going to be busy, and the intelligence of your clients regarding debt will have grown immensely.

but i would say

I don't see how a Japanese solution is possible in the USA. Consumers are already rejecting debt slavery in record numbers.debt slavery is exactly what the japanese have quietly been emerging out from under. true, the debt was corporate and not household, but the effect should be quite similar.

one can say, "what of the massive government debt! think of their children!" but the truth is that the government's ability to support debt is predicated on GDP.

this is not a choice i would wish to make, but it is ours anyway thanks to the baby boomers and their thirty-year escapist love affair with deregulation and debt:

1) refuse to add to government debt, but crash GDP as debt deflation takes hold. monetary aggregates and incomes collapse, with tax revenues falling even further. deficits, rather than contracting, widen -- and debt:GDP forms a spike similar to that seen on this chart in the early 1930s, but starting not from 170% but 350%. such a spike would probably run the ratio over 700% and possibly force international capital flight -- sparking the kind of emerging market crisis most people think impossible but which reinhart and rogoff have demonstrated is quite normal under these conditions. eventually, as in 1933, the chaos forces political change and fiscal remediation of the disaster. perhaps it comes via the ballot box as in the american election of 1932; perhaps it comes via a back door putsch as in germany 1933.

2) use the government balance sheet to refinance the monster private debt bubble by a process of stabilizing monetary aggregates and cash flows. micro allocation will not be optimal, but it will be survivable. assets reprice to these stagnant cash flows but fall no further. GDP stagnates but does not fall. government debt:GDP rises dramatically from the current 50%, but total debt:GDP (seen in the aforelinked chart) slowly declines as some private debt is run off while the rest is transferred to the public. this condition of stable macro GDP and income can be made to persist until private debt is minimal, privae savings are high, assets have repriced completely and the conditions for the next growth phase are present. GDP starts growing again, and the resultant explosion of tax revenues allows government to repay debt out of taxed profits.

this has been done before, notably by britain during and after ww2. it was not easy, but it was vastly easier than a Greater Depression.

if you fear civil unrest as i do, if you fear for your children's future as i do, then the only intelligent thing to do at this point is support government efforts to refinance private debt through aggregate demand support. notably contra all the fucking idiots dumping tea into any puddle they can find, to do so is the OPPOSITE of enjoining debt slavery.

 
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notably contra all the fucking idiots dumping tea into any puddle they can findand just a further note on this, as i refuse to dedicate an actual post to such stupidity:

what we are witnessing with these contrivances is nothing more or less than yet another extenstion of the narrowminded puerile narcissism of the same privileged bourgeois morons who ignorantly fostered this mess by similar means. the united states is the most horrendously undertaxed and underserviced postindustrial society on planet earth, not that such people would bother to know it, and more to its detriment than its benefit (as will become apparent later in this depression, i fear).

these adolescent NIMBYists -- who, by the way, would claim to be patriots -- are traitors as soon as anything like the real heavy lifting of their country needs to be done. these neojacobin sockpuppets -- who, by the way, would claim to be christians -- are devils as soon as anything like true charity or compassion becomes imperative. there is as little sense as morality in such people -- selfishness seems to be their primary prerogative, and fuck their fellow man as he simply deserves all he got or didn't get.

what rot. such people are exactly those which this society must purge to repair its moral structure. for far too long now, americans have fetishized the rote escapism of nth-degree individualism, living out a despicable nihilistic cartoonish caricature of neitzschean principles. christian civilization is neither created nor maintained of such things; it is instead fundamentally the active institutional and cultural repression of them. these contemptible tea parties, i would firmly state, are yet another example of how the decline of western civilization is manifest.

 
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I am at peace with it correcting itself to a new, sustainable equilibrium after allowing those that made fraudulent bets to eat them and fraud criminality prosecuted.as am i, anon. what we disagree on is how resets can happen.

i'll write much more on this soon, but the pervasive public reaction (and pardon me for lumping you in with them, anon, if it isn't justified) has been driven less by analysis and more -- much more -- by mimesis. confused and alienated people are shrugging off reason and progress to fall back (as we are wont to in crisis) on the ageless mythologies that form the bedrock of primitive animistic religions. it's clearly observable in the news, which is as always as much mirror as leash.

that is a deeply satisfying response because it recasts recent events as a most primitive kind of morality tale, one which appeals to the parts of our brain that we've had longest. but it is not an intelligent or sensible or, in my view, civilized one.

this crisis can be viewed coldly and empirically and some have actually viewed it as such. we can punish criminal individuals and reform without destroying institutions. there do appear to be reasonable avenues to a return to economic health while avoiding wholesale economic (and thence potentially political) destruction. we needn't necessarily court superdepressions, revolutions and warfare as we sometimes in the past have. there are examples -- postwar britian, post-1990 japan -- that provide evidence.

is that not the legacy we would choose to leave to our descendents? in preference to periods like 1929-53, or 1870-96, or 1775-1815?

 
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a good LOL on the tea party isolation chamber.

 
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I am in total agreement that the only choice we have is to continue to let the lunatics steer the asylum into the event horizon.

I would also remind everyone that we don't live in a vacuum. We have pulled in almost everyone else on the planet in with us.

I would also say that I am more than certain that not all them will go willingly into this abyss.

No one seems to give credence to the notion that forces beyond the control of bankers can render all this effort as pointless.

I think Putin will be the first to pull away from the poker table and wait it out in the wilderness. Relative to everyone else he has almost no skin in this game.

 
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Gaius,

The Tea Party movement is brilliant in its conception. Get middle-class taxpayers who pay marginal tax rates higher than Warren Buffett and Lloyd Blankfein out in the streets protesting against taxes. Combine that with the continual reminder that the wealthiest 10% pay more income taxes than the remainder of the population, forgetting to mention that the wealthiest 10% have more income than all the rest of the populace, and stir up resentment against the poor by saying they have no skin in the game so will ask for and receive more handouts.

Goebbels would bow before such genius.

That said, there are some genuine problems with appearances these days. To wit:

(1) Larry Summers earning $5.2M for 1 day/week at DE Shaw; $2M+ for delivering "talks" at the Houses of Finance
(2) Treasury Sec cheating on his taxes and using the Statute of Limitations to limit his liability until forced to act otherwise by events
(3) John Thain spending more to redecorate his office than the median wage worker will earn in 22 years (NPV)and being smug about it
(4) Lloyd Blankfein "earning" $53.6M in one year
(5) Edward Liddy's stake in Goldman Sachs
(6) "Government Sachs" (self-explanatory)
(7) The list could go on. And on.

The arrogance and misplaced sense of privilege of the titans of Wall Street, coupled with the general disdain for Congress in particular and politicians in general, is fueling the populist rage against bailouts. Some heads need to roll to restore the Public's trust. This has not happened, rather, it appears that private avarice is being back-stopped by the Public purse.

Current policy is utilitarian and morally agnostic. This is public policy the way lawyers make it. Obama's challenge here is to provide some moral leadership without being accused of being a wealth re-distributing socialist. So far, he has not risen to that challenge.

FDR's fireside chats established the need to take action for the sake of the body politic; he excoriated the money changers and committed to a policy of broader social welfare. FDR was elected 4 times, each time by large margins. Political courage and moral clarity pay political dividends. The Presidents who exhibit these traits are the ones We the People value most highly.

 
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The cant about "civilization" ignores that fact that institutions depend on the trust and respect of the average citizen. Confidence in the integrity and fairness of the system is a public good that definitely has monetary value in voluntary payment of taxes, willingness of foreigners to trade in our markets and invest here, etc.

Some contemporary neuroscience is relevant. Feelings about fairness and reciprocity are deeply wired into the nervous system. Monkeys that receive smaller rewards than other monkeys will protest by refusing to participate in the experiment, though a pure game theory analysis says this is self-destructive behavior. This has some normative aspects: general estimations of the quality of governments and societies tend to be simple applications of individual behavioral patterns to institution.

The "teaparties" seemed to be a dumb PR stunt, but the protest at Paulson's shakedown of Congress for $700 billion showed that there's large reservoir of people who think that the bubble and bailout were totally rotten. Yet, no one will be prosecuted or penalized for their behavior. And none of the incentives for corrupt behavior will be changed.

I fail to see the merits of having Joe Sixpack write a check for a Goldman partner's yacht. You appear to be arguing that as long as Mr. Sixpack can be kept in the dark, things are A-OK. That may be correct, but it isn't the general understanding of what the Founders had in mind. And it runs the practical risk that if Mr. Sixpack becomes one of the army of unemployed, he may be susceptible to some nasty political seductions.

One of my relatives was Ambassador to France during the Terror, and someone asked him about using the US Constitution as a model for a new French government. His reply was that it required the US citizenry to operate, and that letting the French of the time apply it would be a disaster. I do wonder what he'd say about our situation.

--Roger Bigod

 
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The cant about "civilization" ignores that fact that institutions depend on the trust and respect of the average citizen.it does not ignore that at all, rb -- i'd be the first to tell you that western civilization first went astray when its master institution lost, by abandoning the ethereal for the temporal, the allegiance of its most important constituency. but that constituency was not the mob.

the truth is that the "average citizen" does as much thinking along these lines as a bird. "feelings of fairness" are notoriously manipulable. democracy is a contemptible concept precisely because the mass of men are meant to be led, not lead. however difficult that is to reconcile with revisionist notions of what the founders wanted or rousseauian visions of popular sovereignty, it's true nevertheless. and so a democratic power structure inevitably empowers the degenerate demagogue, trivial examples of which are leading these tea parties.

(fwiw, as an aside, i'd argue you that the founders, perhaps excepting jefferson, knew this all too well and constructed american government specifically to closely circumscribe the power of the mob. constitutional power is loaded into the senate, where no one was to be elected. presidents are selected by a college of electors, not the voters. even in order to vote one had to be a fee-simple freeholder -- that is, less than 10% of the american population could vote, and it was broadly the wealthiest 10%. that is not a democracy; that is a republic of landed gentry. the founders were not rousseauian revolutionaries; they staged and luckily won a middle-class tax revolt which at the start had utterly no intention of leaving the british empire. all of this has of course been revised away in the public conception as rousseau's ideas have risen in the ascendant, as democracy has gone from obviously despicable vehicle of despots to the self-evidently righteous form of governance at the end of history.)

as far as the bank bailouts go, i think you read me right -- if there has been a real fault in the political machinations regarding the crisis, imo, it has been in the public face of it. it's been presented horribly. political corruption is irremediable but public relations is not, or at least has not been in the past. and yet i harbor some awful fears, particularly in light of how things have played out.

following the latin american debt collapse of 1982, american banks were absolutely skewered. no significant american bank was solvent -- not one. but there was no public furore because there was no public awareness. indeed, a far bigger stink was made over the S&L problems of 1990, a crisis one-tenth the size.

the latam crisis was resolved thanks to the work of global central bankers, particularly paul volcker, maintaining a conspiracy of silence for a decade as the banks were allowed to slowly recapitalize themselves on earnings. and that is how 90% of all banking crises in history have been resolved.

the question now is whether crises can be resolved in that way in the age of the internet. or must we have more frequent and severe mass panics in the name of public awareness? must we have an unlimited forum for rabble-rousing idiots on every end of the political spectrum who have abdicated their social responsibility in the name of freedom of expression and lust for influence? because i uneasily suspect that, were the current conditions of communication always present in every age, we may never have got much past tribes and clans, to whom we were at least bonded by blood.

i wonder now if the death of the gatekeeper paired with the rise of individualism and diversity -- both, regardless of current norms, harbingers of social collapse through the ages -- has not ultimately rendered a complex society basically ungovernable, or at least incapable of unified action. i rather wonder if imperial rome and post-periclean athens were not very similarly afflicted.

anyway -- it's too much to think that everyone could simply be kept in the dark. this is, after all, a household debt problem at core -- and one that households share culpability for, of course. but this entire effort at remediation might have been presented with a vastly different and more positive face, and in a different age might have been done so much more easily.

 
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Wow gm, most of your comment responses continue to pack enough insight to form their own blog ;)

 
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I didn't say we need to be a perfect democracy. I said that trust and confidence in the government is an important public good, and that your purely financial analysis ignores it.

I certainly agree that the Founders didn't intend a pure democracy. One day they spent some time discussing the proper extent of the franchise. My relative remarked that they were wasting time, since the rich would have their way with the electoral process no matter how it was formally set up. IIRC, there's no attempt in the Constitution to specify the qualifications. But it isn't the case that the populance were happy peasants until the internet addled their brains. They were very interested in the political process, as you can tell from the quality of political coverage in their newspapers, the profusion of political parties and schools of the right and left, the role of political conventions.

I'm familiar with the Latin American debt crisis. But there certainly was public awareness. You might be interested to know that Citicorp and other banks were insolvent again in 1990 and recovered because of zero-interest loans approved by Greenspan. It didn't get a lot of publicity, but it was hardly a state secret. I probably ran across the matter in Barrons.

It's a respectable position that these efforts were to some extent corrupt. The choice of banks to help was somewhat arbitrary and invites the speculation that there were payoffs. The money had to come from somewhere and was indirectly taken from the public. And the management of the banks weren't penalized for their bad judgment.

Several features distinguish those bailouts from the current round. The mistakes then appear to have been in good faith, not wholesale fraud. No one was collecting huge salaries and bonuses justified by "creativity". The money came from the Fed, not the Treasury, where it will have to be repaid by taxes. There were no elaborate shell games to waste more of the public's money in order to conceal from the public that their money is being wasted.

This is the kind of mismanagement and abuse of power that brings down empires, not "the rise of individualism and diversity".

--Roger Bigod

 
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I said that trust and confidence in the government is an important public good, and that your purely financial analysis ignores it. rather than ignoring it, rb, i think we see that trust and confidence as emerging from different sources.

if, as it seems, you believe that the majority or even a significant minority of the public at large informs itself cogently through available media and arrives at relevant and meaningful judgments independently -- so that trust and confidence emerges from a more or less rational assessment of reality as it is -- we completely disagree.

i would instead say that information media -- from the roman catholic church of the 10th c to the television news of the 20th -- are largely engines of mythology which utilize the pretense of information broadly to perpetuate and reinforce social order, to create trust and confidence. peasants may or may not have been happy under that regime, but they were not politically restive unless roused and organized to action by some iconoclasm. when they were roused, it was by the promulgation of alternative mythologies, as much a nascent trust in a new emergent order as a mistrust in the existing order. news can thus be a force for fomenting revolt, if only rarely, in the pre-mass-media age.

at least remnants of that basic condition still exist, i hope. consider the ability of the bush administration to manufacture "popular" civil disobedience to serve its ends in places like ukraine, lebanon, georgia and elsewhere -- publics are still easily manipulated in the age of the internet because that ease is a function not of technology but human nature, and the bush administration showed that at least in some societies it is possible to coopt the narrative sufficiently to break up a society.

but if it showed that, did it also show that the narrative can in this age of increasingly diffuse information access be controlled sufficiently to support a society? this worries me. competing mythologies pushed by powerful competing interests are now rampant, and mistrust is commonplace as a result.

to be fair, i think there are levels of corruption that cannot be overcome through social reinforcement, where spontaneous disorder results. but we are nowhere near them. i doubt north korea is near them, frankly, though nearer.

the general public here will absolutely not arise of its own volition because it is incapable of doing so -- the idea that it can is a fantasy of rousseau's intellectual descendents, imo. however, it COULD arise provided a compelling alternative mythology organized and forwarded by demagogic iconoclasts playing on the steady undercurrent of mistrust that is the natural result of a social order founded on something less perfect than the divine. and perhaps the internet -- perhaps the ultimate technical expression of the memes of individualism and diversity yet invented -- provides a means of doing so in the same way that the printing press was in a different age.

 
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