How politicians failed us

 

The global financial crisis and its subsequent repercussions were the inevitable consequence of governments’ abrogating their responsibility to govern. In thrall to nonsense arguments about “financial de-regulation”, they weakly handed over the job of setting the rules of money to the markets. As previously discussed, this did not result in fewer rules. It resulted in a spectacular explosion of new rules such as derivatives and, lately, high frequency trading. Inevitably, the new rules collapsed at some point. The GFC was triggered by collateralised debt obligations and their relationship to the US housing market, but it could just as easily have been credit default swaps or interest rate swaps or some other confection invented by the greedy to profit for (or game) the system.

Having given up the job of governing, the job of saving the system has fallen to “regulators”. This is very important, because regulators do not govern, in the sense of sitting outside the financial system and managing its political and social repercussions. Regulators work from within the system, making sure it operates according to its pre-determined internal logic.

This means they cannot critique it from an outside perspective. They cannot determine its social utility, let alone its morality. They must accept its basic assumptions and it is the acceptance of the basic assumptions of the financial system, especially the proliferation of meta money (such as $700 trillion of derivatives) that is the problem. It is a measure of just how much we are in thrall to nonsense arguments about “de-regulation” (to reiterate, you cannot deregulate rules, and money is a system of rules).

Perhaps the best example of how regulators are insiders, unable to critique the system from outside, is Alan Greenspan’s famous admission to the congress after the GFC:

 

“Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.”

 

One notes how Greenspan conflates ideology (a political position concerned with power) with a conceptual framework (an intellectual hypothesis concerned with truth). That is the heart of the problem. What has been avoided, or passed off, is that the financial system is political, like any other system of human organization (sorry to state the bleeding obvious, but the obvious has been very effectively buried). No matter how many anodyne or quasi-scientific prescriptions are applied to financial markets, they are finally about power and social arrangement. So for governments to pass off the job to regulators and traders is to pass off the very job of governing, to give up on their most important role.

It has certainly come back to bite governments – and citizens and tax payers. Politics is increasingly ruled by what the bond markets think. The European financial crisis is the problem writ large. So while the much larger volume of private debt creation largely gets a free pass (that is the “free market”, so fine) relatively small government debt creation, at least in Europe, not so much in the US or Japan, is hammered, producing deep social damage. You know, politics. America, of course, has the world’s reserve currency so can bully the markets and Japan is, well, Japan.

The abrogation of responsibility continues. The job of managing the social impact of markets continues to be handed over to the regulators, while governments try to duck responsibility by observing “processes”. Europe is now ruled by regulators.  It is becoming clear that, except for Japan and America, government debt is socially perilous (the lack of Federal government debt is a major reason why Australia has weathered the storm well).

The political failure will inevitably resurface; nothing has been learned from the GFC about the need to govern. The next crisis will come from high frequency trading, one suspects. Tom McDonald from the Australian Risk Policy Institute (ARPI) has described the risks in a recent paper:

 

“The principal purpose of capital markets is to facilitate the efficient allocation of capital across industries, and by extension, society, and via efficient means of allocation, create financing options to facilitate consumption and future additional wealth creation. Capital markets are unique but constitute the lifeblood of capitalism and thereby promote national growth, opportunity, peace, order, good government and individual welfare.

That said, the risks inherent in capital markets are like no other. Ultimately, when these risks manifest, they can destroy national economies (Iceland), even the world economy, wreak famine and the total collapse of ordered society. Accordingly, any development that carries uncertainty or intrinsic risk must be scrutinised, understood and dealt with to protect the whole.

Put in the bluntest way, HFT is parasitic in relation to capital markets. It adds little or no value and it creates friction, as opposed to greater liquidity. It can also dislocate or render markets unusable. Most importantly, it operates within an environment alien to the underlying structure that underpins markets. In fact, it operates generically across different market platforms so that in a worst case scenario, automated decisions may dislocate multiple markets at the same time.”

 

The question that needs to be posed of our politicians is: “How did they ever imagine that the financial system was not their political and moral responsibility?” Then perhaps they may notice how they have been seduced by nonsense arguments. It is an old problem. Witness these comments from US president James Garfield in 1881:

 

“Whoever controls the money of a nation, controls that nation and is absolute master of all industry and commerce. When you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”

 

Quite. Except now it is not just the nation, it is the world.

 

 

 

 

Comments

  1. Thank you for another wonderfully insightful piece. I greatly admire your ability to so eloquently argue what many intuitively feel is wrong with the system.

    It’s astounding that no-one currently in power is willing and/or able to acknowledge the broken framework. Articles like this provide a glimmer of hope. Unfortunately I agree that further crises are inevitable before current leaders abandon their damaging ideologies.

    SON for President.

    • To change the system we need to educate our family and friends to vote against sitting politicians. This gets rid of the entire current crop. Do it twice and we will have reformed the system and got rid of the connected people who run the show for their own interests.

  2. Whichever part of the global financial problem we look at; the beginning – wherever you choose to stick the pin in the map; the middle – where we probably are now – or the end, the same culprit was, is and will be present. Residential property speculation. I doubt we’ll get to the end-part without the problem being addressed in a rather painful way. Here; I expect it will be just painful in a monetary sort of way. But elsewhere, it looks like it’s going to be physical.

    • Residential property speculation encouraged by our government with Negative Gearing. Ponzi schemes rarely happen by accident.

  3. In the fertile ground where plump windfall profits lie(be it gambling, drug dealing or residential property speculation),there corruption shall florish

  4. Thanks SoN. You make some interesting points in your article.

    I agree that politics and politicians have definitely failed nations. And it is not just because they have handballed the hard yards to regulators. Politics has been thoroughly corrupted by Banksters and the Finance Industry. Witness some of the far reaching changes that have been wrought;
    – The repeal of Glass Steagal by Clinton.
    – The masses of regulatory change enabling the unregulated derivative boom, brought on by Rubin and Summers( ex GS) as SecTreas.
    – Very favourable accounting rules that are/were protecting Banks casino antics and keeping investors completely in the dark – FASB157 , SIV’s etc
    – The ongoing abuse of sovereign powers that allow the perpetuation of the Offshore Tax havens to prosper and hide hundreds of Billions in profits from legitimate taxable jurisdictions.
    – Favoured tax entities sitting under the very noses of regulators – City of London, Delaware and The Caymans.

    These are just a few examples. The Fed is no better as we saw with the handouts give to GS during the AIG fiasco. From an outsiders view these guys look like they are a law unto themselves, helping themselves to all manner of favours, money and influence as they please. Without any form of restraint being applied. The whole system is corrupt, to the very core.

    In this chaotic minefield we have for a Global Financial System, the bond markets are holding politicians to account for the many self serving and flat out wrong financial choices they have made in the past. And man, they do not like it. Italy for example has handballed the running of it’s country to a banker , as a result. What we see is a furious contest of can kicking , anything to assure that a) It doesn’t happen on my watch and b) If it does I cannot be blamed. The real issues : Debt and Bad Debts, are being are being studiously avoided.

    I’m convinced there will be a Reckoning. It may well be already underway as we enter years of Japan like low growth /slow economy ( I think the RBA is signalling it has no answers to provide, but to indulge the property bubble further). Perhaps something more dramatic may occur , like GFC 2. Or something in between. But the problems of the Financial System are far too bad and have become far too big to escape this Reckoning or to fix it. It’s way too late.

    So what to do? Position yourself as best you can for profit and in a way that will minimise any hurt. Clear and careful strategic thinking and actions are what is needed. Because my impression is we seem to be parked alongside a bomb that could go off at any time with little or no warning and we will be with it for some time yet.

    PS: Our so called” lack of Govt debt” is misleading. Only when you compare it to the failures of Europe and the US do we look good. A more false and failed metric there is not. To truly prosper in our future, we need Govt out of the way, small and Unburdening – living within limited means. We are going in the exact wrong direction now.

    • GSM blames:

      The repeal of Glass Steagal by Clinton.
      – The masses of regulatory change enabling the unregulated derivative boom, brought on by Rubin and Summers

      …then as a fix, prescribes:

      we need Govt out of the way, small and Unburdening

      You don’t see the contradiction? :roll:

      We need government, oh yes we do, and we need them to do their jobs, even if righties think of it as a “burden”. Your arguments about “Govt out of the way” is the exact same argument that was used to get rid of Glass Steagel and loosen many other regulations. 😯

      • I don’t recall saying that we DON’T need Govt. I dont recall advocating that we DON’T want Govt to do it’s job. What I DID say was that Gov’t should be smaller and live within limited means. No contradictions , unless you advocate the bigger the Govt the more it gets done- a stupid position to hold. Govt should have teeth, as should it’s financial regulating agencies. Often they do not. You are not going to change that.

        To the naive the argument “getting Govt out of the way” was used to deregulate per Glass- Steagal repeal. The reality however was that Rubin and the Wall St Bankster cohort had influenced and corrupted US Govt policy , that allowed the repeal to pass. That is the point of my post.The corruption worked for the Financial Industry but great damage was caused.

        In any case the horse has bolted. That battle has long been lost. We can squabble about what is best to remedy it , what caused it and it wont matter one iota. What we are now left with is how to deal with the destruction and latent threats still with us.

      • We need decisive leaders not willy-nilly politicians.

        It pains me so much to watch the parliament shouting matches on all those trivial matters. (one of those performances somehow became very famous…)

        I like the idea of small yet powerful govt. Not sure how realistic it is tho.

      • You mean, like Hitler and Stalin?

        Ironically, long periods of wishy-washy and ineffective government can lead to the sort of breakdown that results in tyrants arising. In the words of Inspector Grimm in ‘The Thin Blue Line’ “there’s far too much arty-farty, namby-pamby, hoity-toity, wishy-washy, lardy-dardy, sun-dried tomato eating, decaffeinated fannying about” taking place in government and financial markets currently.

      • @R2M

        Indeed, history is quite clear, and tends to repeat (or rhyme) itself. People must be careful of what they wish for!

      • In democracy, MPs are constitutionally only responsible to the voters (i.e., masters) in their electrolates (whoever that may be). As such, other than those already in a pocket of a mega-gazillionair, wishy-washy, trend-chasing, wind-reading politicians are inevitable….

      • “like Hitler and Stalin?”

        No. I said leaders, not a dictator.

        Leaders inspire people. They challenge the status quo. Leaders ask why we do things, not how we do things. They have long term visions and plans.

        We don’t need those populist politicians who only care about their own career/power/money. They do us more harm than good.

      • @Hewell

        Perhaps it is worth remembering that neither Hitler nor Stalin inherited power from his daddy or a relative. They both seized power by “counting numbers” in the respective electorates.

        Especially in the case of Hitler, he legally increased the number of his party’s seats in a democratic Weimar parliament to a point he gained an absolute majority that enabled him to change the constitution. Hitler could not even win the election for the President of the Republic until Hindenburg died in office.

        So how did Hitler seize power? By exploiting the widespread despair in the electorate that was longing for a strong, decisive leader who could lift them out of their plight.

      • dumpling

        I understand your concerns. But I wouldn’t let one rather extreme bad apple spoils the bunch.

        After all, out politicians call themselves “Leader” of the opposition and “Leaders” of the country.

        I’m only hoping them to act like real leaders. Is that too much to ask?

      • “Is that too much to ask?”

        Very good question, Hewell.

        Because nobody was a dictator by birth, we have to keep an eye on anybody highly charismatic.

        Another tricky bit is that in order to implement necessary changes, it requires power, a great power that can “override” any opposition from interest groups. Almost dictatorial, in fact.

        So it is a very fine line.

    • Only when you compare it to the failures of Europe and the US do we look good.

      Indeed. Here are some of the “failures of Europe” with greater public debt than Australia: Norway, Sweden, Denmark, Germany, Switzerland, the Netherlands, Finland.

      • The Swiss and Danes, both have negative interest rates on the government debt. The rich greeks and spaniards who are buying their debt are paying it off.

      • Thanks doc,

        Here are some more;

        Greece, Portugal, Italy, Spain, Ireland, France, UK…..

        Always ready to defend wasteful Govt spending and borrowing on the taxpayers account doc. Good for you. It’s clear you will not rest until we are wallowing in Debt.

      • Here are some more;

        What’s your point ?

        Always ready to defend wasteful Govt spending and borrowing on the taxpayers account doc.

        I don’t recall ever doing that.

    • GSM said:

      In this chaotic minefield we have for a Global Financial System, the bond markets are holding politicians to account for the many self serving and flat out wrong financial choices they have made in the past.

      Ah yes, those wise, omnipotent and all-knowing bond markets. The politicians were so sure of this “truth” that they deregulated bond markets and allowed them carte blanche to do their own thing. And what did the bond market’s do with their newfound freedom? They blew the biggest credit bubble in the hisory of the world.

  5. The simplest solution is for governments to take charge. Legislate the banks. Set the boundaries especially on HFT activities acknowledging that these activities only service & reward the banks anyhow & do squiddley-dot for everyone else. Australian based & owned manufacturing companies should be rewarded and offered massive incentives for the short term and ongoing support long term. This would not just be the sensible or right move but a great move ahead from where we are right now.

    • So, Protectionism, then? Just what set off the 30’s nightmare. We ‘incentivise’ our lot; they, theirs, and no one gets to trade outside their borders. Australia might get away with it. What about, say, Japan. Haven’t we been here before?

      • I think the causes of what set off the 30′s nightmare are a bit more complex and I have heard theories that lay blame elsewhere, like the gold standard or governments fiscal tightening at the wrong time. We currently have fairly porous borders globally and yet I would say we are still headed to a very dark place.

        All of that aside I want to ask when did protection become a dirty word?

        The purpose of government is to protect the individual rights of its citizens. Since rights can be assaulted both within a country or outside of it, the government must deal with either threat.
        Thomas Jefferson.

        A government that doesn’t protect it’s citizens is a government that has abandoned it’s purpose and it’s people. Our current governments – both Tweedle Dee and Tweedle Dumb – are displaying a complete lack of loyalty to this country and it’s citizens and are ideologically enamored with globalism. So much so that they have earned the moniker “The Free Trade Taliban” at international gatherings and they care not that blind adherence to globalist ideas must result in a much lower standard of living for their citizens – whom they dismiss as a bunch of immigrants anyway.

  6. The IMF forced Australia’s (part of the G20) hand back in the 80’s (1986?) to deregulate the banking system in Australia. All hell has broken out since. Trade outside the borders is fine but reward Australia’s own first thereby allowing the reward system to set the parameters.

  7. I wish I could find the article again (I think it was in the WSJ) that graphed the staff levels and the budgets of the agencies tasked with “regulating” financial markets in the USA. It looked like the graph of world population from 1820 to now.

    The GFC certainly did not happen for LACK of numbers of people paid to watch out for risk, or for lack of budget devoted to such people.

    The only people actually smart enough to see the risk, were working for hedge funds, and “shorting” everything in sight.

    • Totally agree Phil – begs the question, what the hell were all these people doing? In my view the regulators need to start with a basic assumption – all banks etc are out to game the system. The simpler the system, the more transparent the “gaming” will be, and the consequences will be more obvious. The problem is that they keep inventing rules to stop the gaming, making it more complex and actually resulting in more obtuse and nonlinear relationships. Far easier to just accept gaming you can understand (and thereby accept to a certain extent, as the “least worst” option).

      • … what the hell were all these people doing?

        They we largely all using standard neo-classical economic models to analyse the financial system that they were regulating thereby being unable to see that they were not doing their job.

        If only the resource that are put into perpetuating the gothic neo-classical school of economics were put into studying how the economy actually function using empirical data to analyse and model the economy using modern techniques [multivatiate differential equations, stochastic systems theory]

        I am sure that the people at the top engage in this with willful ignorance; knowing full well that the system is flawed and silent because of their benefit for it.

      • Bob, knowing a bit about models, I can’t see any way you could come up with anything even remotely fit-for-purpose. My basic premise is that you make the system simpler, so that the outcomes are more obvious. Better the devil you know…

    • + Phil.

      So if these parasites are not doing there job there is little sense in adding to their number. In fact, with a much more smaller , focussed and tightly controlled regulatory force better outcomes may be achieved.

      • I love how the loony right’s solution to massive regulatory failure is a smaller number of regulators with less funding.

        We all agree regulation before, after and during the financial crisis left a lot to be desired, I cannot fathom how the solution is to slash funding and numbers. How this will magically lead to a more “focussed and tightly controlled regulatory force” is beyond me.

        I realise you guys are paid to come here and spruik for your employers, but someone has to call bullshit when they see it, and this is bullshit.

      • Lorax, with all due respect, you are an idiot. You would say, when the number of staff at regulatory agencies had grown steadily, to, say, 5000 people in 1990 and 10,000 people in 2007, and the average pay of these people had grown to $100,000 each, and the GFC still happened with no official reports giving the slightest warning, the solution would be to increase the number of regulators to 20,000 and increase their pay to $150,000 each.

        A CLASSIC response from a pathological statist. The solution to any problem is more bureaucrats and bigger budgets.

        Tell me, what high profile politician in the USA most makes “Wall Street” shunt in its rompers? Barack Obama? Harry Reid? Al Gore? Bill Clinton? Hillary? Nancy Pelosi? Barney Frank? One of the Edwards Dynasty?

        BAH. Try RON PAUL.

      • Bold statement there GSM. Why can’t a big organisation equipped with the same regulatory force achieve the same or better outcomes outcomes? Politicians love big toothless bureaucracies, it given them something to hide behind and blame for their failings.

    • +1. I think recall the article Phil. It also maintained not the lack of regulation (of which there was plenty) but rather inappropriate ineffectual poorly conceived regulation, much of which had dubious ‘unintended consequences’.

    • The GFC certainly did not happen for LACK of numbers of people paid to watch out for risk, or for lack of budget devoted to such people

      If you want a startling account of how regulation and regulators failed before and during the GFC, mainly due to a level of corruption and fraud so pervasive it beggars description, try listening to Professor William Black on Why Nobody Went to Jail During the Credit Crisis.

  8. I think it is extremely easy to point at the politicians and say “they did it”.

    Lets not forget the main driver for any political decision: re-election.

    What drives re-election? Exactly, popular sentiment. What has been the popular sentiment of the last 15 years or so? De-regulation, less government, “government bad – market good”.

    I reckon politician’s behaviour is a reflection of the people. Isn’t it time we start looking at our own role in this entire debacle? Our own greed and focus on short term interests?

    • Without a doubt. But who’s going to vote for any party that promises to lower property values (or whatever else is similar) in the name of the greater good? Very few. The only hope there is, is for the next Government to get in on a set of popular promises, and break them all, immediately; hope that in the ensuing 3 years ‘things come right’ from those breaking their promises, and that they get forgiven. I doubt many politicians would take than gamble.

      • Absolutely, ignoring popular sentiment is sometimes required for good leadership… but then the day after everyone will be shouting that politicians never listen to the people and are only in it for their own interests.

        I’m not a politician (just so there’s no doubt as to my reasoning behind these comments) but I certainly think the art of politics and the difficulties politicians face are greatly underestimated and underappreciated while at the same time people overestimate the capabilities and space to manoeuvre of individual leaders (they are human after all and only part of a group, with all the limitations that come with it).

        Who we now consider to be the best leaders in our history often had careful crafting of their reputation afterwards because that was in the interest of many others and/or an important cause. Not always undeserved, but even Nelson Mandela, Winston Churchill, George Washington and the likes weren’t/aren’t superhuman.

      • I would absolutely refuse to believe anything like the GFC would have happened if the USA was still being run by the likes of Washington, Jefferson, Adams, Madison, etc etc. For a start there would have been no Federal Reserve and no monetary expansion. And there would not have been any urban land rationing rackets (a prerequisite to property price volatility). And a host of other factors.

      • The USA had an estimated population of 3 million people when Washington died. During his life the world’s first shareholder company operated from The Netherlands, which highlights the state and complexity of the economies of the world.

        What Washington was facing doesn’t even begin to compare with what politicians are facing in nowadays world.

        Besides, like I said… we base our impression of those leaders on what we were thought in primary and highschool. The likes of the founding fathers had their reputation carefully crafted because that is what a young, new and ambitious nation needed.

        Land rationing was non-existent because it was unnecessary. People were just told to “Go West”, where land was plenty regardless of claims by native tribes.

      • Land rationing is still unnecessary anywhere in the USA. Anywhere it is necessary, Japan, the Netherlands, people need to be forced to emigrate by the high house prices. It is absurd for land-rich countries to inflate their house prices to levels just as bad as the land-scarce nations, merely by regulatory over-reach.

        Would the native tribes rather have be still running around on foot “hunting and gathering”? What was their land “worth”? The indigenous peoples activists get all stroppy a couple of hundred years later when the colonisers have put in infrastructure and the rule of law and connected up the global economy, and the land is suddenly worth something. Then the indigenous peoples elites demand the right to “clip tickets” in what is just another manifestation of contemporary rent-seeking. You won’t see any of them going back to hunter-gathering lifestyles and practising their “spiritual” values on “their” sacred land, you will find them living in luxury mansions and driving BMW’s with the proceeds of their demands. While “their” people remain mired in poverty, family dysfunction, educational failure, and occupational under-achievement.

  9. I stopped reading after:

    …interest rate swaps or some other confection invented by the greedy to profit for (or game) the system.

    Interest rate swaps serve a legitimate purpose in hedging interest rate movements. They were not invented to profit from the system contrary to your anti-finance bias.

    • Interest rate swaps serve a legitimate purpose in hedging interest rate movements. They were not invented to profit from the system contrary to your anti-finance bias.

      Interest rate swaps certainly helped Jefferson county go bankrupt.

      Next up, you’ll be defending the cross-currency swap that Goldman Sachs used to help Greece hide its debt.

      IMHO, SoN has an anti-parasite bias.

      • Sure, credit cards help people go bankrupt too. And “credit”, period. And cheque accounts. Insurance companies go bankrupt if they under-price risk. Shock, horror, these risky innovations must not be tolerated.

    • If you stop reading every time you come across a statement you don’t like you won’t learn much.

  10. This whole ‘blaming the government’ for everything thing sounds like the sort of dribble you hear from Geriatrics who listen to too much talk-back radio!

    Don’t be a media victim, You yourself are either part of the solution or you’re part of the problem.

    Thinking that only politicians can fix your problems is apathetic…

  11. WeNeedaWarpDrive

    Excellent article, but it makes me feel so frustrated how powerless we are to change things. We just have to sit at our computer screens while we slowly morph into the USA .

    Remember reading a quote once supposedly by Einstein that if he had say 1 hour to solve the worlds problems he would spend 55 minutes defining the problems as clearly and accurately as possible and then the last 5 minutes creating a solution.

    Hence the value in the above article.

    The frustrating part is the rules of the game. Politicians behaviour is closely dictated by their incentives which is to win office from opposition because then you get a pay rise/power/status etc then to do as little as you can to rock the boat so you can do a few terms and get your pension….plus the necessary incentive of having to follow the party line. then on a party level they have to submit to everyone to get their donations so there is no freedom to make the right decisions anyway once they are in office.

    So how do we get any change in Aus when nearly everyone has their essential needs met?

    Maybe we just have to work back from who has the power. ultimately the cabinet has the power to make decisions to solve this stuff. They submit to their party, they submit to the media and public perception. therefore to influence them we need to influence public perception…which leads us to MacroBusiness..The Conversation etc etc…

    Such a long road…

    • Don’t underestimate how much better the political system is in the USA. For example, do you get to choose who actually stands for the major parties in your electorates, by way of a “primary” process?

      I strongly recommend Daniel Hannan’s book, “The New Road to Serfdom”, which has a few chapters on the often-overlooked advantages of the democratic system that the USA has. Another major difference they have, is in the extent to which they ELECT officials at the local level; the Sheriff, the District Attorney, Judges, the Chief Property Assessor, the Town Clerk, etc etc etc.

      In this part of the world we have a serious democracy deficit, by comparison.

    • but people like being told what to do. they prefer others make tough decisions for them. just look how many people still believe in 2000yr old fairy-tales.

      • Hewell said:

        …just look how many people still believe in 2000yr old fairy-tales.

        And with the advent of Modernism, the even larger number of people who believe in the new, even more delusionary, secular fairy-tales.

      • +100, Glen5875.

        I often say how ironic it is that religious people are mocked for believing in “the unseen”, when “secular” people believe in so much that IS “seen” and can be clearly seen to be NOT SO.

      • So morality can only be derived from “words” of invisible men? Which version though? Right, it largely depends on in which country one was born, or one’s family background.

        Grown up men can’t decide what’s right or wrong without referring to rules written thousands years ago? pfft. I prefer thinking on my own feet.

      • The mere admission that there is an absolute truth, means that there can’t be more than one of them. It does not “depend” at all. There actually are a few absolutely universal values:

        http://www.columbia.edu/cu/augustine/arch/lewis/abolition4.htm

        There is no reason that this list could not be extended to include some more values which remain in dispute, if we remain dedicated to the concept. But moral relativism leaves people “seeing through” “everything” and “seeing” NOTHING.

        The rejection of the concept of absolute truth usually is an exposure of the person concerned as having a mind “in denial” about one or more specific things.

      • I think it is rather (extremely?) arrogant to claim your “truth” is the one and only absolute truth. While on the other side of the world, another group of people are making the same claim on their version of THE “truth”. You see the problem? (I see wars.)

        Of course, it makes sense (NOT) that all the proof you need to make that “absolute” claim are some documents written thousands of years ago. And no further evidence are needed. “You just have to believe me. Or you are going to HELL!”

        How about show some faith in humanity? Let kids grow up with a free mind. Give them freedom to choose what they believe makes the most sense.

      • “……How about show some faith in humanity? Let kids grow up with a free mind. Give them freedom to choose what they believe makes the most sense…..”

        This goes to the crux of the basic disagreement between “conservatives” and “progressivists” (which I mean to be something more than “progressives” – I mean people that want progress for its own sake).

        “Conservatives” hold that generations of past experience have gone into the traditions of a culture. The really arrogant people are the ones who assume that smart-arse teenagers will work out for themselves what is best. One conservative put it something like this; every human is born a savage and is only “civilised” by the extent to which he is inculcated with the traditions of his civilisation.

        True progressives would indeed be able to process evidence and reach rational conclusions. C.S. Lewis put it like this; if we have taken a wrong path, he who first retraces his steps is the “most progressive”. But there is no sign whatsoever that modern political correctness, a sibling of moral relativism, has any capacity at all for the confrontation of hard evidence.

        Prof. John Robinson in NZ recently had a brave tell-all book published about the way he was forced by those who paid his salary, to write revised versions of NZ pre-colonial and colonial history, to make the white man look like evil incarnate, and savage, cannibalistic, tribal-warfare pre-colonial NZ like a garden of Eden, of course.

        Robinson recently commented of political correctness generally, “I am surrounded by zombies here at the Uni”, and commented unprompted (and outside the area of his expertise) that the single biggest lie held to as an article of faith by the modern P.C. establishment, was that the incidence of fatherlessness in society was without consequences.

        My favourite illustration of belief in “seen” things that just plain are not so and can be seen to be not so, is the matter of land “scarcity”. In this day and age of flight and Google “Earth”, we are paralysed by hysteria, in the least-populated land masses in the world, that we might be “paving over paradise”. And we export a considerable surplus of primary produce at a level of profitability that results in a stunning value of agricultural land, per acre, of $6000. Hmmmm, tiny proportions of it can’t possibly be better utilised, going by that basic piece of economic evidence, no?

        I WOULD say that many cultures NEED “progressives” of their own to admit that their culture IS a failure and that Reformation, enlightenment Christendom really DID crack a magic formula and stole a march on everyone else. But modern P.C. relativism does not merely insist that different cultures have equal validity, it is flat out promoting paganism and exotic cultures that have left their adherents in poverty, backwardness and strife everywhere they prevail. Hence “Victorian” patriarchy in our own culture was a bad thing, but what Sudanese Muslims and Australian Aborigines get up to (and always did, and have not “progressed” from) is something deserving of our respect….!!!!

        I could go on at length but this is not the right forum. The modern P.C. establishment is RIDDLED with such contradictions and hypocrisies. And our young are not just being left to “make up their own minds” as the custodians of our new relativistic culture might have us believe to be what they desire, they are getting brainwashed with utter nonsense; nay, worse, deliberately destructive lies that an enemy of our civilisation could not have devised better.

      • Thank you for your reply Phil.

        I’m not convinced. Probably never will. But I’m certainly intrigued.

  12. Quoting the value of the underlying principal on which an interest rate swap is derived, as the value of the swap itself, is like saying a photo of my house is worth as much as my house. To me, a party in an interest rate swap, the value of the swap is simply the net difference between the present value of the payments I must make and the PV of the payments I receive. The payments are derived from some notional underlying principal, but this principal is not at stake in the swap. All that is at stake is the respective streams of interest rates. That is, the market value is what matters, and obviously it’s tiny compared to the value of the underlying principal, or notional value, of interest rate swaps.

    The notional value is of more significance to, say, a credit default swap, because that sum must change hands if the reference entity defaults. I agree that multiple CDS being written on a single reference entity seems unwise, as it amplifies potential losses. However, the practice is mainly problematic when a single institution writes and retains too many of such contracts, as was the case with AIG. Without counterparty risk, there aren’t net losers to swaps. Of course, that’s a big ‘without’ in a world where risk management is left almost entirely to the discretion of private firms.

    • Great, informative comment, MJV.

      It can be very interesting to ask people with strong opinions, exactly what CDS’s are and how they work, and so on – hardly anyone really knows. And that included a lot of people in Wall Street itself, even at the top of finance firms.

  13. “The next crisis will come from high frequency trading, one suspects.”

    HFT will not be cause of bad economic times. Period!

    HFT, a large bank collapse, a sovereign debt default or any of a myriad of events may trigger a market crash and a recession/depression but they will not be the root causes. Fractional reserve banking practice on a global scale or more simply put as creating credit out of thin air as central banks and commercial banks have been doing on grand scale for decades and currency debasement or printing money from thin air ( I prefer the word ‘counterfeiting’) are the root causes of booms and busts. Flawed (Keynesian) economic policies cause poor outcomes and we can see that this has been occurring severity since 1913 and especially since 2000. Do the research objectively without prejudice and you find the truth of what has and is going which will continue to cause much hardship to many people.

    The general population either believes that Chairman Bernanke of US Federal Reserve System (“Fed”) genuinely believes that the Fed policies under his stewardship are appropriate or otherwise.
    it is possible that that goosing the money stock can grow the economy temporarily as illustrated in recent times.There is no historical evidence whatsoever as far as I know to support Bernanke’s publicly expressed belief that past and current Fed policies can grow the economy back to good health and reduce the high level of unemployed Americans in the longer term. Bernanke has got to know that such belief is false and even if he does not so believe at least some of the other FOMC members, Fed senior management and senior economic staff members and Fed regional banks probably do know. For example the independent ( non bank) members of the FOMC a do not agree with the FED’s (Bernanke’s) decision to buy $40 billion of bonds per month indefinitely. Where does the Fed get the money from? They print it ( electronically)by hitting a few keys on the computer keyboard. It does not come from the pool of savings ( deposits) of the private sector- businesses and citizens.You and I would go to goal if we tried the same counterfeiting stunt. The fact is that the policies of the Fed and other central banks and the US government have not resulted in good economic conditions – just a huge increase in debt levels,high unemployment,distortions in the markets such as interest rate settings which in turn effect spending and savings patterns and malinvestments such as the allocation of scarce capital to inefficient enterprises which are being propped up by loose monetary practices .

    The reality is that the Fed because if its very existence and its relationship with government HAS to what it does and has done in the past. Realistically the Fed’s hands are tied. It is virtually impossible for it to admit its past and present policies are flawed and do a complete U turn. So an argument may be put that the Fed is trying its best using its adopted Keynesian economic theory to right the ship so to speak. The truth is that its policies and those of the government are unsustainable in the longer term because they are based on false economic theory. Their policies will only prolong the time and duration of the forthcoming inevitable economic depression,social unrest and misfortune that awaits us all . Kicking the can down the road is the popular phrase i understand.The Fed probably thinks that the safest route for avoiding a perfect storm and ensuring it’s very survival is to continue do what it has always done i.e. currency debasement, manipulating interest rates and propping up the financial sector(banks,hedge funds and insurance companies). The problem facing us today is that since 1913 when the Fed was created and especially since 1995 up to the present such (flawed) policy actions are very much greater in scope and extent than ever before.They are simply unsustainable!

    When the SHTF there will a myriad of reasons published in mainstream media and social media networks as to why the bust and subsequent depression happened and who is to blame.There is a possibility ( not probability) that some of such reasons in will be valid but they will very likely be secondary reasons and not primary. The root or fundamental causes of the depression will be known by a very small minority, less than 1% of the population. This small band of people will not have much of a voice. The then current crop of government legislators, central bankers, and their supporters present and past will almost certainly blame everyone and everything other than themselves. Congressman Ron Paul is mostly correct in what he believes and states publicly in speeches , interviews and on his website and yet only a small minority of people understand what he is about ( even amongst his own supporters IMHO). In short his message is not understood nor accepted by the vast majority of the population.

    The reality is that fractional reserve banking, excessive money printing or currency debasement together with excessive government and central bank interference in the economy are truly the root causes of the booms and busts experienced since the Fed’s inception in 1913 and the booms and busts to come. Reversal of such flawed policies voluntarily or forced by the markers will not prevent an economic bust/ depression. It only a matter of degree and duration and that will depend on what the government and central banks do or not do. The sooner they get out of the way and do virtually nothing the lesser the severity of the bust and the quicker the economy will recover back to good health.

    People need to understand that it is the system, the process that is the real and fundamental problem and not government leaders. It matters very little, if at all, who you vote for because they are all subservient to the system.

    So IMO the Fed and the government are trying to achieve NOMINAL economic growth over the longer term. Real economic growth after discounting for price inflation is not possible because of the flawed policies stated above. Any mug can achieve economic growth for a little while if money in excess of 1 trillion dollars is injected in the economy year after year as has been happening since 2007.As long as GDP is nominally positive and above nominal interest rates then the public will be probably duped into believing that all is OK and that there is no economic contraction – ” just muddling along – tough times but we are doing OK” are what we are likely to hear in the shorter term. When things start to go pear shaped in the longer term we will likely see commentary like “After all Europe was/is the real problem which has mainly caused the slowdown/ recession in China /Asia and other emerging economies which in turn caused the US and the rest of the world to suffer bad economic times. But unless we had taken the action(s) we took things would have been a whole lot worse.. Blah, Blah,Blah …… “.In any event it will probably take decades for the the economic truths will be widely known and accepted and when the previous and current crop of central bankers and government leaders will be dead or in nursing homes. As Keynes correctly said ” In the end we are all dead”. About the only thing he said that was correct.

    Incidentally the policies of the US central bank are essentially practised universally. The most important are the central banks of the Eurozone Countries, the European Central Bank (“ECB”), the Bank of England and central banks in other English speaking countries and the Swiss National Bank. So the commentary above essentially apply to the central banks and governments globally.

    All the best.

    • Hello.i note this morning that my post of yesterday has a response “Your comment is awaiting moderation”.
      What does that mean?
      Is there a problem?

      • ..would you believe ,that some of the crew at MB have been busy building fractional bunkers on the weekends..n sometimes left in-charge the HFTaking moderator machine @MB can get forced into a collapsing period,n end’s up all backed-up
        reading All the best,n sorts the rest out later..mistakes are in fractions,indebted we stand…Jobs solved

  14. So our evolving depression is the politicians/regulators fault? No it’s our fault. WE are the economy – we bid up the asset prices – not the banks. They were just the enablers.

    I worked in the US in 2000 – people were proud of their excessive credit card limts. I told my next door neighbour (in OZ) in 2003 that the US was so indebted that they can only survive with free money. Have a look at the increasing fed interest rate curve prior to the 2007 blow up. They tried to make money worth something but they can’t.

    • Jerry Seinfeld: People don’t turn down money! It’s what separates us from the animals.

      If Jerry Seinfeld can spot this psychological quirk, I can guarantee the bankers figured it out also. It continually surprises me that people will borrow whatever amount they are enabled to. Therefore the enablers are complicit and not innocent bystanders.

      A conservatively run bank should be a good little money spinner, not the rapacious juggernauts we see today. They just shuffle paper around anyway – why does that entitle them to obscene profits? Within 10 years of having the Glass Steagall Act repealed the Banks had destroyed the economic foundations of Western Civilisation in a crises that is still roiling to this day. That is why banks need to be regulated within an inch of their lives. It is regulation they resist mightily and therefore needs to be enforced mightily.

    • WeNeedaWarpDrive

      Our politicians/regulators in Australia were not responsible for causing the GFC.

      Despite the rhetoric, the USA is still controlled/advised by the guys that helped create the GFC.

      On a personal economic vote perspective we can exercise our responsibility by say taking out less than the average sized loan and not playing the negative gearing card to get ahead in the rat race.

      The financial problem is like a tumor spreading from the USA around the world. As voters/wage earners we are like one cell in that big tumor. The government ministers/treasury minister/ cabinet etc is like the central artery going into the tumor.

      strike at the root.

      • “…..Despite the rhetoric, the USA is still controlled/advised by the guys that helped create the GFC……”

        ABSOLUTELY. If justice was done, the monetarists and Keynesians would have been sacked and replaced by “Austrians”, who comprised a significant majority of people who called the crisis absolutely correctly. Fred Foldvary, for example, has authored numerous papers that make perfect sense, about how stable money and land taxes would be a very much superior system to the status quo – AND he was the author of a paper, “The Business Cycle: A Georgist-Austrian Synthesis” published in an academic journal in October 1997.

        Foldvary said (as “Austrian” economists do) that expansions in money and credit fuel malinvestments in higher-order capital goods and speculative cycles in real estate and land. He takes land values and real-estate trends to be particularly telling indicators of unsustainable booms and impending busts. He applies the ideas to the historical studies of U.S. cycles, building on the idea of real-estate cycles by Homer Hoyt (1933).

        From the final paragraph in Foldvary’s paper:

        “The 18-year cycle in the US and similar cycles in other countries gives the Geo-Austrian cycle theory predictive power: the next major bust, 18
        years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war. The Geo-Austrian synthesis provides
        a research agenda that can test historical cases in more detail. Much work needs to be done on empirical studies linking the money supply,
        real estate markets, and business cycle……”

        Now, why should not an economist who had authored those lines IN 1997, for goodness sake, not be in a position today, of major influence over official policy?

      • WeNeedaWarpDrive

        Charles Ponzi…misunderstanding. Have no interest in blame.

        Just about who has the power to DO something about it in the present moment. If the whole cabinet woke up this morning with the desire to solve this stuff they could go a long way to cutting off the blood supply to these problems. Where as we can only talk about it.

        Bit of a vague analogy on my part..

  15. Sorry I couldn’t get past the first sentence:


    The global financial crisis and its subsequent repercussions were the inevitable consequence of governments’ abrogating their responsibility to govern.

    What a load of tripe. Instead try:

    The global financial crisis and its subsequent repercussions were the inevitable consequence of US Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac scrambling to meet Federal Housing and Urban Development (HUD) housing goals, namely to boost home ownership of low and middle income families, in underserved areas, and generally through special affordable methods such as “the ability to obtain a 30-year fixed-rate mortgage with a low down payment… and the continuous availability of mortgage credit under a wide range of economic conditions.” (ie. to boost home ownership by people who could not afford repayments and who should never have been given loans)… all of which encouraged the debacle in Mortgage Backed Securities (MBS) which in turn lead to the GFC.

    • Good grief. Not even the conservative wingnut propagandists in the US even believe that nonsense anymore. Yes – it was the government all along ! And all of those private lenders, not subject to the Community Reinvestment Act, the ones with the larger subprime exposures than Mae and Mac ? Countrywide, Chase, Wells Fargo, Litton, Washington Mutual ? Nothing to do with it ? Tripe indeed.

      • I personally believe that the CRA is a diversion from the real major problem. There are several different types of housing bubble, including in the USA up to 2007, and Atlanta was a classic case of the local market that was a CRA-induced “bubble”. But dodgy mortgage markets in Atlanta and maybe half a dozen other cities would not have brought Wall Street institutions down. For a start, the average mortgage value was ridiculously low, thanks to Atlanta’s lassez-faire approach to urban fringe development.

        The REAL problem in the USA was California, where the average mortgage value was a totally unnecessary few hundred thousand dollars, thanks to anti-growth policies – i.e. exactly the same as Australia. Without these policies there would definitely have been no crisis at all. Over half of the equity lost in the entire crisis was in California, and much of the rest was in other anti-growth areas with similarly unaffordable house prices.

        But another factor was certainly that Fannie Mae and Freddie Mac were buying the mortgages from the initiators flat out – the cost of these institutions to the US taxpayer is significant and far from “fully accounted for” yet. And then there is mortgage insurance from the HUD – another black hole for taxpayer funds and one that today is still being used by the politicians to try and help re-inflate the still-unaffordable prices in California. I recommend “DrHousingBubble” blog for regular bulletins on all this.

        Can anyone point to anywhere in the world except South Korea, where politicians were on the side of RESTRAINT in mortgage credit at ANY TIME? Everywhere in the world where there are affordability problems – due in every case to urban planning – the popular political “solutions” will include demand-side subsidies, “public” housing, and credit innovations if not outright mandates on lenders. There is not a cat’s chance in hell that politicians will ever force mortgage credit to be TIGHTENED in the face of a crisis in home ownership opportunity. Except in South Korea, where they have at times insisted on LVR’s of up to 60% – and this still did not stop median multiples blowing out to 14 plus. Where the underlying problem is “supply”, only banning lending against property, period, will keep a lid on prices. Good luck with that.

      • Phil
        As your link to Bonner’s piece on Greenspan below alludes to – with the developed world’s workers’ real wages and share of profits falling, the only way to create the ‘wealth’ for them to keep consuming at increasing levels in the first place, is for governments and central banks to engineer asset price inflation (be it in residential property or shares). Constraining land supply is a pretty good way of achieving that.

        I suspect the advanced progression of globalisation, deregulation of markets (including for labour) as well as establishment of international judiciaries leaves ‘local’ politicians (such as, say, the Prime Minister of Australia) effectively powerless. They are beholden to a broader economic/ideological structure, long entrenched, which leaves them little choice but to find a way for their citizen consumers to stay wealthy.

        This framework is inherently, fundamentally flawed, and I think is currently collapsing upon its own inconsistent internal logic.

      • You might enjoy this interview a friend of mine sent me the other day:

        parte#1 http://youtu.be/tF8dbuZKEHU

        parte#2 http://youtu.be/8XaP_egIwEQ

        parte#3 http://youtu.be/jvBIWj3SUCc

        parte#4 http://youtu.be/XrydTWK5jcI

        Samir Amin is Egyptian and is billed as being one of the world’s leading Marxist thinkers.

        The title of the video is “The world as seen from the south.”

        He speaks of what you call the “broader economic/ideological structure, long entrenched,” and what some of the nations of the southern hemisphere are doing to escape this insatiable monster.

        There are areas where I disagree with Amin, such as his embellishment of China. From where I’m sitting, there are warts all over. In the ommissions column he fails to mention the effect that the limits of the biosphere—-e.g., resource depletion and AGW—-are having.

        But if you’re looking for a hard-hitting critique of the entrenched “economic/ideological structure” I don’t think it gets any better than Amin.

      • Come on, both of you. Urban land price inflation relative to incomes is a near-universal plague. Anyone who thinks China is showing anyone how to succeed as a developing economy, is a blathering idiot. The wealth transfer surrounding urban land rents in China is among the worst such epidemics in history.

        This condition ONLY ceases to exist when there is BOTH “total mobility” and “freedom to develop”. Marx was right, in his time. As long as most people could only walk everywhere, the rentier class was bound to capture most of the gains of rising productivity, as rising incomes capitalised into rising land rents. Marx wanted land nationalised. Henry George wanted it taxed instead of incomes. But Alfred Marshall and numerous economists, social reformers, and politicians after him, saw the solution as increased mobility and increased “supply” of urban land. The writings of Ebenezer Howard, the so-called “father of urban planning”, was full of this stuff.

        It is ironic in the extreme that urban planners today are unanimously working towards the very opposite of what Howard was. Howard wanted rural land to be converted to urban with nil capital gain (or “planning gain”) in the process. This is actually a reality in dozens of cities in the USA even today, where median multiples are consistent and stable at around 3. It is impossible to have median multiples consistent and stable at around 3 without this proviso.

        Here is an excerpt from the Introduction, by Paul Cheshire and Edwin Mills (Eds.) to “The Handbook of Regional and Urban Economics, Volume 3: Applied Urban Economics” (1999)

        “…..housing demand parameters are remarkably similar among most countries, even though purchasing power and housing costs differ greatly. Housing supply parameters differ greatly among countries, depending of course on technology and materials availability, but mainly on the extent to which governments have permitted conversion of land from rural to urban uses…….. These are the keys to understanding why housing quality varies more than can be accounted for by income variation and why house prices vary among countries from 3 to 15 times the annual incomes of urban residents……”

    • At best (from your point of view) it was a chicken and egg scenario. Which came first, direction from Congress to the banks? ie. to give loans to people who clearly couldn’t afford to pay them back. Or direction from the bankers to Congress, who then gave direction to the bankers? But there is no doubt Congress was at the heart of the mess.

      • “Putting people in homes, though desirable, should not be a goal of a government. It is an ambition.”

        – Warren Buffett

      • Perhaps Congress was exercising their democratic right to fulfil the wishes of their FIRE donors.

  16. Regulators work from within the system, making sure it operates according to its pre-determined internal logic.

    That’s their job, yes.

    This means they cannot critique it from an outside perspective. They cannot determine its social utility, let alone its morality.

    Logic fail — that doesn’t follow at all. Witness for example the way that the Australian Energy Regulator is pushing for a review of the rules that it implements (so as to take into account additional factors such as consumer prices — the current rules are mainly designed to ensure that there is adequate infrastructure investment).

    Of course, if you have a revolving door situation (where regulators are all come from the regulated industry, and all go on to plush jobs in that same industry after they finish being regulators) then you are asking for trouble. But that’s a problem with incentives, motivations, and the rules that are applied to the regulators themselves, not an intrinsic problem with regulators’ capacity to reflect on the rules that they implement.

    • To begin with, the decision to maximize social utility is a moral mandate, and an exclusively materialistic one at that. Since the triumph of Adam Smith’s moral and economic philosophy, the holy grail has been aggregate utility—-“the wealth of nations” or GDP; with little regard for the utility of specific individuals operating within the aggregate.

      Furthermore, aggregate utility is not the only possible moral option. There are others which compete constantly with it, such as equality, justice, fairness, political freedom, and the attempt to minimize the psychic and physical pain inflicted upon individuals that exist within the aggregate.

      Setting moral priorities should be left to the democratic process. Once the moral priorities are decided upon, then it is the job of the experts and technicians—-that is the regulators—-to implement those moral priorities.

      When regulators become both arbiters and enforcers of morality, however, they transmogrify into technocrats. They are, in other words, what Reinhold Niebuhr called “scientist kings.” This unfortunately is what has happened in the United States, the UK and in Europe. And when you have a charachteropath like Greenspan who becomes your top technocrat, this of course spells trouble for the nation, and for the world.

      • aggregate utility is not the only possible moral option

        That has always been my hang up with utilitarianism, for the reasons you mentiond.

        When regulators become both arbiters and enforcers..

        Yes, if the final decision rests with a regulator then that too would be a recipe for trouble. Ultimately the decisions about what the rules should be are political decisions.

        But in the course of implementing regulations, I am sure that regulators become keenly aware of the shortfalls in the rules they are enforcing, and so they are actually in a good position to /critique/ the rules (something SoN dismissed as impossible) and make recommendations about how the rules could be improved. Of course, other stakeholders might have other recommendations for reform, and the ultimate decision should be a political one.

        A special problem occurs when the reglators buy into the idea that the less (government) rules is necessarily better. Props to SoN for pointing out that a failure to regulate effectively can in fact lead to a proliferation of non-government rules.

        For a slightly different argument with a similar conclusion, check this article: “How free market advocates have delivered us big government” http://paulgilding.com/cockatoo-chronicles/cc20101214biggovernment.html

      • Paul Gilding said:

        How this will all unfold is not driven by politics but by science.

        The role of science has been two-fold. The first is to discern reality. And in fulfilling this role, science has had a mixed record. In fact, I think most scientists are pretty skeptical and would argue that the role of science is not some quest for sure truth, but a process by which we progressively attempt to move closer to the truth.

        The second role of science is to modify reality, taming nature so as to benefit man. Here again, science has had a mixed track record, with a great many unintended consequences. Nature, both human and physical, has a way of circling back around and biting man in the butt (like with the acidity of the oceans and the AGW that Gilding speaks about.)

        Amongst the libertarian faithful, I think you will find a high percentage who embrace the Prometean vision that nature is mere putty in the hands of men with their instruments of science. The blue empyrean is the limit when it comes to harnessing nature for human flourishing. Or to put this another way, in Kant’s antimony between nature and freedom, they come down exclusively on the side of freedom. Of course this is a highly unrealistic doctrine, and when the backlash that Gilding predicts finally comes, man will have suceeded neither in achieving freedom nor taming nature.

      • “…..Of course this is a highly unrealistic doctrine, and when the backlash that Gilding predicts finally comes, man will have suceeded neither in achieving freedom nor taming nature……”

        No, but the extent to which nature has been “tamed” probably correlates pretty closely to the degree of freedom men have. Russians under Communism generally did not have HEVAC systems, or high levels of personal mobility, or an abundant range of foodstuffs or consumer goods to choose from, OR a clean local environment – far from it.

        The “mitigation” argument re CAGW has the fatal flaw that its adherents, even some highly qualified ones who should know better, present their data as if the costs of the mitigation they are advocating will avert 100% of the costs of climate change, when it is more like 1%. Adaptation is the only rational response – but we left rationalism and the enlightenment behind us a couple of decades ago when we relinquished major political influence to the new Green Taleban.

      • Perhaps “science” was not the best word Gilding could have chosen here. His basic point is that we can’t negotiate laws of nature, that “how all this will unfold is driven by objective physical reality”, and that science (in the “discerning reality” sense) is our best shot at understanding how this reality works, and how it is likely to unfold.

        I have my own reservations about science, its methods, its applications and the tendency to put it on a pedestal, but when it comes to confronting objective reality – as it actually is rather than who we would like it to be – then it seems to be the best option we have.

        I have a whole raft of criticisms of Gilding, too, so I’ m not going to try to defend him, but he is consistently thought provoking.

  17. Excellent article and clearly stimulating. I guess one can only hope that there are a few curious politicians and bureaucrats out there who might actually get it. God help us if we have not seen the last of the effects of the unsettling embrace of Greenspan and Ayn Rand.

    • “Greenspan and Ayn Rand”????????

      That rumbling noise you hear is Ayn Rand’s corpse spinning in its grave.

      Greenspan as Chairman of the Fed, bore no relationship whatsoever to Greenspan the young colleague of Ayn Rand. “I, Greenspan” by Bill Bonner is a satirical article, but many a true word is spoken in jest.

      http://www.lewrockwell.com/bonner/bonner188.html

      • I think that is quite a fine summation by Bonner. For mine, these passages in particular get to the nub of the issue:

        No one wants honest money. No one. The politicians, bankers, investors, voters, and householders — anyone with a voice in the matter wants “easy” money. It is just too delicious to resist. (I wondered what kind of a central banker would stand against them; he would need a backbone of titanium like Paul Volcker, and a head as thick and hard as a vault.) Debtors want a little inflation to lighten their burdens and put a wind to their backs. Creditors want inflation to swell their asset values. Politicians want to be re-elected. Businessmen want customers with money to throw around. Is there anyone who doesn’t appreciate a little inflation?

        Easy money only works by defrauding people into thinking they have more money than they really do. Easy come; easy go. They get it; they spend it. Before you know it, you have a boom. But people soon adjust their expectations. Prices rise to catch up to new money. Debt levels increase, and with them come heavier debt service costs. The magic fades. What can a central banker do? He can do the right thing. He can “take the punch bowl away,” as my predecessors used to say. But this is where the trouble begins. Take away the punch bowl, and they begin punching you! I recall they burned Paul Volcker in effigy on the Capital steps when he did it. They would have burned him alive if they could have gotten their hands on him

  18. SoN said:

    One notes how Greenspan conflates ideology (a political position concerned with power) with a conceptual framework (an intellectual hypothesis concerned with truth).

    I’m not so sure that the line between ontology and epistemology, on the one hand, and politics, on the other, is that clear-cut. The extent to which human power and will can modify reality is perhaps the greatest philosphical and metaphysical question of all times.

    Consider, for instance, this from Francois Haas’s “German science and black racism—-roots of the Nazi Holocaust”:

    Leo Alexander, in his 1949 article “Medical Science Under Dictatorship” (NEJM), suggested that, “Science under dictatorship becomes subordinated to the guiding philosophy of the dictatorship (28)⇓ .” I am proposing the inverse, that Politics under Science becomes subordinated to the guiding philosophy of that Science.
    http://www.fasebj.org/content/22/2/332.full

    • I found the ultimate quote in that article telling, “Words which formerly were simple terms become slogans… This completely alters their socio-cognitive value. They no longer influence the mind through their logical meaning — indeed, they often act against it — but rather they acquire a magical power and exert a mental influence simply by being used” Pass any “Sold!” sticker on a property, and our initial response is “Golly! I’d better buy, as the market must be going up!” rather than, the vendor has just sold an asset, it might be going down.

    • Well, yes they are big questions. The point here is that Greenspan considers the questions to be resolved. As you imply, they are not.

  19. Share the blame around. As AnonNL said, the politicians are elected and the majority favoured candidates who chose this path. I certainly remember Hawke, Keating and Howard talking about deregulation and its benefits, and the endless rivalry over interest rates. Low interest rates are a result of the economic reforms that were implemented after we chose candidates who offered this to us.

    Then again, after a while there wasn’t really much choice. Labor and the Liberals were offering versions of the same, supported by their mates in industry, finance and the media. There’s a whiff of conspiracy to it. Not the sort of conspiracy that involves old men sitting in darkened rooms. Just the sort of semi-intentional conspiracy that comes about from our governing classes associating with a particular class of people, listening to them, acting for them and selling it to the masses as good for them.

    But then again, when I look around in Australia, we’re all pretty well off. And my TV is bigger than it was a decade ago, so clearly the choices we have made were good ones.

    • Good comment Monkey. They will let us debate gay marriage endlessly but matters of real import are decided around a glass of chardonnay and later presented/sold to the plebs as a fait accompli. The system only allows an illusion of choice and I certainly don’t see anyone representing me except the occasional voice from the wilderness.

      We might be well off short term, as these things are measured, but is that a perfect storm I can see on the horizon?

      • Of course, when times are good, that is precisely when the wise ones start planting the seeds for the next big thing for prosperity and the dumb ones indulge in complacency…

        We all know that (well, except the dumb ones I guess), but history repeats itself nonetheless.

  20. Is it really only the government to blame or the government has always been a part of the scheme?

    Today’s capitalism is the capitalism per se. Why?

    In the past when capital was not so concentrated it still funded the election of the government, but none of the companies had enough power to buy the government for its own interests. That is why the governments were working for the benefit for all individual capitals and we had a democracy.

    Today the picture is no much different, only the size of some individual capitals (corporations and banks), as a result of competition and free market forces, is such that they can afford to buy the government for their own interests and we have lost the real market competition and the political democracy.

    It is pity how people don’t understand the dialectic of free market and competition. Only when the worst strike they can SEE the reality as it is. From the lack of good philosophical, economic and political education and too much ideology and propaganda, this is the final outcome – shortsightedness.

    Otherwise good post for discussion as usual.

    This is must read too:
    http://neweconomicperspectives.org/2012/10/the-best-way-to-rob-a-bank-is-still-to-own-one-a-postscript.html

  21. “(the lack of Federal government debt is a major reason why Australia has weathered the storm well)”

    Really? How so? Some logical support please.

  22. “Whoever controls the money of a nation, controls that nation and is absolute master of all industry and commerce. When you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”

    Is the absolute master the Fed?

      • The Fed is not a government institution.
        The board of the Fed are not public servants.

        The Fed is a private bank with monopoly charter granted by government.

        It is not accountable to congress or the executive.

      • …..influenced by Oppenheimers……Chase Manhattan Bank…..Rothschilds and the like…….a few with fat fingers in the pie while their thumbs are on the rudder.

  23. Thank you once again for another superb piece SoN. You are without doubt my favourite current author.

    Your final quotation of James Garfield is key. It is why I believe that maximal decentralisation of “money” (currency) creation, is key to a better future.

    • Great article, and given my moral and political proclivities, it surely sings my tune.

      However—-and this goes back to what johnyaku said above about “how all this will unfold is driven by objective physical reality”—-is not a more compelling explanation for the Italian city states’ decline De Gama’s discovery of an alternate trade route with the Orient? In 1497 De Gama sailed around the Cape of Good Hope and on to India and China, thus eliminating the Italian city states’ trade monopoly with the Orient. Thus we saw Portugal’s star rise, and that of the Italian city states fall.

      The need to find a materialistic justification for fairness and equality before the law seems to be the driving force behind many of these studies (like this one in the NY Times). The formula is always the same: with the right political policy, the right economic policy, the right moral policy, utility for the masses is assured.

      Nowhere are the limitations of these doctrines demonstrated more clearly than in the areas of resource depletion and global warming. For instance, all the magic and mysticism of the “invisible hand”—-that is laissez faire capitalism—-could not arrest the US’s decline in oil production, as the following graph of US production shows:

      http://seekingalpha.com/article/88160-u-s-oil-production-today-same-as-in-1948

  24. + 100 Econ-fart

    Why expect leadership from politicians?

    They are Branch Office middle management temps.

  25. our pollies reflect what we are……

    we’re alright jack screw you……

    nothing else matters……

    ….. get used to it and enjoy or change your ways – but this little bunny is not holding his breath

    • And the honourable exceptions, like Ron Paul, somehow do not capture the votes like the politicians who sell the said voters down the river to the vested interests. Sad, huh?

    • Our pollies are the end product of the members of political parties .

      The membership of political parties in Australia represents less than 0.05 % of the population .

      They are not” what we are”

      Even we do not know what we are

      • What’s stopping you from becoming a member, starting a political party or using other means to influence the system?

        A democracy is only as healthy as the willingness of the people to participate… and in that regard I have seen few people (if any) who are as apathetic as The Australian while still always pointing at those who at least ARE willing to try and follow their ideology. No wonder vested interest have won in this country.

  26. People who shriek about financial regulations being written by the biggest market players have absolutely no understanding of the concept of regulatory capture.

    Under all forms of large government with strong regulatory controls, there will be massive incentives for lobbying and regulatory influence by the biggest banks and institutions.

    It is completely inevitable that when governments set the rules, that the large market participants will do everything to exert a huge influence on what gets put into those rules. This usually ends up with huge moral hazards, anti-competitive laws such as licensing and other barriers to entry, and ultimately, the whole concept of too big to fail.

    If market forces would have been allowed to prevail, many institutions would have had to take their medicine by now and we would already be in the recovery phase. But instead we transferred all bad investments onto the balance sheets of governments, which only kicks the can down the road another few years.

    • This is the best essential summing up of the problem, on this entire thread.

      We have certainly kicked the can down the road, to get ourselves an even bigger problem in a few years; and even the current round of problems was largely a consequence of moral hazard established in previous rounds. Like, why should Wall Street bother to look out for “systemic risk” when there are thousands of bureaucrats being paid to do that?

      I keep arguing that the whole problem this time round consists of one failure of imagination: “house prices can’t fall”. Had Wall Street, or the thousands of highly paid regulators, been prepared to entertain the possibility, the whole crisis would have been averted.

      It never ceases to amaze me that pinkos all over the world, but especially in Australia, get all judgmental about those evil “rampant free markets” and “deregulation” and “untrammeled greed” that led to Wall Street causing a global financial crisis; but when you ask them about house prices, their opinion is that indeed, they “cannot fall” unless Reagan-Bush-Gramm Republican “rampant free markets” and “deregulation” have set the stage first. I am sure pinko Irish and Spaniards were just as sure of themselves too, and pinko EUtopians are the most sure of all.

      And it is such a convenient narrative, that the Wall Street crisis provoked all the problems since, and that European nations would not have had their own bursting bubbles and national insolvencies otherwise. (Bunkum – they would have, and a USA unaffected by its own crisis would have been generously bailing them all out to the tune of trillions).

      Check out:

      http://www.thebubblebubble.com/european-housing-bubble/

      http://www.thebubblebubble.com/