Posts Tagged ‘Recession’
[NOTE: This post was originally made on March 23, 2009. But with the recent discussion of Paul Ryan's long-standing commitment to Rand's thought--which he now appears to be trying to deny in spite of evidence to the contrary--I thought this post worth a rebroadcast. On Ryan's commitment to Rand, see the article in The Atlantic Wire, “Audio Surfaces of Paul Ryan’s Effusive Love of Ayn Rand.”]
In times such as these, our times, when unregulated capitalism has once again proven that it can bring down the house, literally, it’s worth reminding ourselves about the voices that have spoken so eloquently in favor of selfishness over the years. (Not Adam Smith, by the way; he thought that sympathy was a basic feature of human nature.) Here is Colbert discussing one of the leading lights of selfishness, Ayn Rand.
The Word – Rand Illusion | March 11th | ColbertNation.com
On Capitalism Run Amok, readers might want to check out Sullivan’s site today, March 23rd, “Are The Jacobins At The Gates?” Let’s just say, a bit over the top, but worth a look. (Btw, Sullivan thinks of himself as a conservative.)
P.S. Interesting fact: Stephen Colbert was a philosophy major at Hampden-Sydney College. Training in philosophy has its uses.
One doesn’t need a Ph.D. in economics to know certain facts about the current state of America’s economy:
1) Unemployment continues to be a serious problem not only for the unemployed but for the economy as a whole.
2) Consumers are skittish about spending money, so they can’t help drive an economic recovery.
3) In response to fears about unemployment and the economy, consumers are paying off debt.
4) Reducing debt may be a a good thing for individuals and for the economy in the long-term, but when too many people do it all at once it leads to less goods and services being bought, which reinforces and helps sustain a recession or a weak recovery.
5) Many of the largest corporations in America are sitting on huge sums of cash. Among the reasons for not investing it and hiring new employees: aversion to risk, preoccupation with the current bottom line, and hefty profits through making current employees more productive, that is, making them work longer and harder.
Enter the Bank of America. You know, the corporation that American taxpayers shelled out 45 billion dollars to rescue. Its past and current behavior exemplifies the failings of many giant corporations to do the right thing in national crises. Make no mistake about it, the way that the Bank of America mistreats its customers is bound to reinforce exactly the types of behavior that will maintain the economy in its present anemic state.
Let’s take the story back a few years. It seems that for several years the Bank of America has been arbitrarily raising interest rates on its credit card customers. Here is an excerpt from an article on MSN from BusinessWeek, February 2008.
Credit card issuers have drawn fire for jacking up interest rates on cardholders who aren’t behind on payments but whose credit scores have fallen for other reasons. Now, some consumers complain, Bank of America is increasing rates based on no apparent deterioration in their credit scores at all. The major credit card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving explanations for the increases, according to copies of five letters obtained by BusinessWeek. Fine print at the end of the letter — headed “Important Amendment to Your Credit Card Agreement” –- advised calling an 800-number for the reason, but consumers who called say they were unable to get a clear answer. “No one could give me an explanation,” says Eric Fresch, a Huron, Ohio, engineer who is on time with his Bank of America card payments and knows of no decline in the status of his overall credit….But Bank of America appears to be taking an even more aggressive stance because, beyond credit scores, it is using internal criteria that aren’t available to consumers. That makes the reasons for the rate increases even more opaque….Analysts also say they are surprised by the magnitude of the rate increases Bank of America is imposing on affected cardholders.
You can find stories all over the web about Bank of America’s bad behavior regarding its credit card customers. Recently it appears that BofA has accelerated the use of one of its strategies: arbitrarily reducing the credit limit of customers who have very good credit histories, pay on time, and pay more than the minimum. The deal goes like this: You borrow an amount from BofA at a good interest rate. After a few months you get a call. You are told that your credit limit is being reduced to almost exactly what you owe. When you ask for an explanation, you are given transparently bogus reasons. And there is no appealing the reduction. This action is unfair to credit card customers because it can adversely affect credit scores. Consumers now appear to be maxed out on their cards when 24 hours earlier they had a nice cushion. A lawyer in California became so incensed about this practice and arbitrary increases in interest rates that he threatened to sue the BofA. The story can be found in the Huffington Post, January 2010. An excerpt:
“Banks have done really well figuring out ways to screw people without making themselves legally liable,” said Ira Rheingold, director of the National Association of Consumer Advocates. “I think [the limit reduction] is another example of Bank of America’s venality. Whether or not it’s a successful lawsuit, I don’t know. Whether I think it ought to be challenged — absolutely.”
But maybe Bank of America is just trying to do what is best for its shareholders. That’s often what you hear when companies are challenged about their executives’ pay or other practices. Yet BofA doesn’t seem too keen on giving its shareholders a say in the pay of its executives. For example, a Los Angeles Times headline on February 23, 2010 announced:
Bank of America resisting shareholders on executive pay. . . The bank is working to keep investor proposals on executive compensation off the ballot.
The machinations of BofA are sad stuff. The resulting likely behavior from customers with reduced credit lines: pay off debt more quickly and spend less money in the marketplace. Of course this will only help to extend the anemic recovery. The fact is that the actions of leading banks and corporations have often not been good for the economy. They rant and rave about taxes and the federal government, but it’s a shell game. (Banks and their supporters will tell you that the reason they are not loaning is because of federal regulations. BofA is currently sitting on 172 billion in cash.) The intense preoccupation of corporations with the bottom line (and the well-being of their executives) has left millions of Americans un- or underemployed. The way that credit has been handled, for example, has increased the fear that we will never come out of this downturn, which will only help to prolong it.
Socialism is no threat. Corporations only looking to the bottom line, which in times such as these is downright unpatriotic, are a threat. It’s time for companies that have done so well in America to stand up and sacrifice for America. We are not asking you to become charities, although you were willing to take our charity when you needed it. We are asking you to spend some money, damn it, and put people back to work, even if it’s not the absolutely best thing for your corporation’s current bottom line….and stop harassing responsible citizens while you do it.
Oh, and just in case you might be worried about the well-being of the former Chairman of BofAm, Ken Lewis, here is what ABC news reported regarding his retirement pay in 2009.
Outgoing Bank of America CEO Ken Lewis’ nearly $64 million retirement pay puts him ahead of most, though not all, fellow major bank CEOs who have left their institutions during the financial tumult of the last two years.
A poll recently done for the New York Times and CBS News on the state of the American Dream has some interesting results. It appears that more Americans believe that they have achieved the American Dream today (44%) than they did four years ago (32%). The results may seem strange given the depth of the recession. However, it appears that for a substantial number of Americans the way in which the Dream is understood has undergone a revision. There is now less emphasis on financial security. The New York Times article excerpted below is worth a read, although the examples given in the article are open to alternative interpretations.
The Times and CBS News asked this same open-ended question four years ago and again last month: “What does the phrase ‘The American dream’ mean to you?”
Four years ago, 19 percent of those surveyed supplied answers that related to financial security and a steady job, and 20 percent gave answers that related to freedom and opportunity.
Now, fewer people are pegging their dream to material success and more are pegging it to abstract values. Those citing financial security dropped to 11 percent, and those citing freedom and opportunity expanded to 27 percent.
Delacroix’s Lady Liberty leading consumers and investors who say, enough is enough.
We have all wondered how the financial wizards down on Wall Street managed to help tank the economy. No doubt creative accounting played a substantial role. This clip will explain to you, in a straightforward and easily accessible fashion, just how simple creative accounting can be.
In thinking about the financial crisis—Wall Street, brokers and bankers, and their supporters in Congress, those who have promised us so much in return for so little these past few decades—I remembered hearing the words, “We ask only that you trust us.”
But I was not trusting. I was suspicious. I was ill at ease. Yet, who was I to question the wonders that they produced, the capital that they created, the products they financed, the fortunes they made.
But now I recall. We had been warned. They would come bearing gifts. And then…. Here is that warning (in abridged form), drifting over the air waves for almost fifty years.
It begins with an introduction by Rod Serling, “Respectfully submitted for your perusal: a Kanamit. Height: a little over nine feet. Weight: in the neighborhood of three hundred and fifty pounds. Origin: unknown. Motives? Therein hangs the tale, for in just a moment we’re going to ask you to shake hands, figuratively, with a Christopher Columbus from another galaxy and another time. This is the Twilight Zone.”
Consider as you watch that “a Kanamit” may have been a clever way to say “a Capitalist” back in Serling’s day. For as Wikipedia tells us, “Throughout the 1950s, Rod Serling had established himself as one of the hottest names in television, equally famous for his success in writing televised drama as he was for criticizing the medium’s limitations. His most vocal complaints concerned the censorship frequently practiced by sponsors and networks. ‘I was not permitted to have my Senators discuss any current or pressing problem,’ he said of his 1957 production The Arena, intended to be an involving look into contemporary politics. ‘To talk of tariff was to align oneself with the Republicans; to talk of labor was to suggest control by the Democrats. To say a single thing germane to the current political scene was absolutely prohibited.’ Twilight Zone’s writers frequently used science fiction as a vehicle for social comment; networks and sponsors who had infamously censored all potentially ‘inflammatory’ material from the then predominant live dramas were ignorant of the methods developed by writers such as Ray Bradbury for dealing with important issues through seemingly innocuous fantasy.” The Twilight Zone
RockefellerJ.P. Morgan in action
Obama’s budget is smart and far-sighted. I wish I could say the same about the bank bailout. We are certainly not out of the woods on this one.
On April 1st, the New York Times ran an Op-Ed piece by the noble winning economist, Joseph Stiglitz. (There is an excerpt and link below.) It’s about as clear a presentation of the issues involved as I have seen (in a short piece). And it lays out why we should be concerned about the plan, which is no doubt the work of Geithner and Summers. I worry, as many do, that the red-herring rhetoric of “nationalizing” the banks will prevent us from properly addressing the situation. I worry that Geithner and co., for all of their good intentions, are too close to Wall Street not to be sucked into the myth that “nationalizing” must mean socialism or the appearance of socialism. (The irony here is that this is precisely the rhetoric that the right has used so successfully in the past to prevent such needed programs as universal medical insurance.) I worry that this plan is viewed as a shrewd move to get the Wall Street/banking crowd on board by Geithner and co., but will end up providing the banks only a temporary boost in liquidity, yielding “profits” that will once again allow them to laugh all the way to their own banks.
J.P Morgan headquarters
My hope is that if the plan doesn’t work, the Administration will quickly turn around and say, we tried, and move on to a solution more appropriate to the problem. I am confident that Obama the pragmatist would make such a move. The question at hand: how hard will his own soft ideologues fight to avoid the appearance of “nationalizing” the banks?
Obama’s Ersatz Capitalism (excerpt)
by JOSEPH E. STIGLITZ
THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.
Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency. . . .
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.
So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.
1934 movie poster, United Artists
For reasons that you might easily be able to infer from our present collective financial woes, I recently had an urge to read (and listen to) a book that I have never read, The Count of Monte Cristo. My more philosophical side says, avoid revenge. No good will come of it. My gut says, go, go, go.
Here is a short passage you might enjoy. The Count is speaking to the banker Danglars, one of the guys who “done him wrong,” but is unaware of the Count’s actual identity.
“But what is the matter with you? You look careworn; really, you alarm me; for a capitalist to be sad, like the appearance of a comet, presages some misfortune to the world.” The Count of Monte Cristo, Modern Library Edition, 2002, p. 887.
Music to the rescue in the face of economic troubles….In this case some saxophonists.
Another reason to support the arts, even in times of trouble.
Moral Hazard and Mortgages (or don’t worry, you won’t become a bad person if the government assists you with your mortgage)
Moral Hazard. If you haven’t already heard about it, be prepared. It’s a monster epithet. The Republicans will be hurling it at those attempting to develop plans to assist defaulting home owners. Namely, one President Obama. I can already see Eric Cantor, the House Whip, parting the clouds to hurl his epithet from on high. He’s positively giddy, I am sure, to be getting an opportunity to condemn liberal (or perhaps even socialist) politicians seeking to help people who have been “irresponsible” about their finances.
Moral Hazard refers to situations in which organizations or individuals are tempted to break or modify a contract if the risk associated with the agreement can be transferred. With regard to the current mortgage crisis, if we set aside high rolling institutions, it boils down to this: home owners with mortgages agreed to pay lenders back on certain terms. If the government now assists those who can’t keep up their side of the bargain, that is, make their mortgage payments, they are creating an incentive for future bad behavior. The government is creating a moral hazard. When viewed in these terms the so-called moral hazard issue can be understood as akin to the slippery slope dilemma. Once you do X, say, have a beer, before long you will become an alcoholic. Doesn’t sound plausible? Okay, here is a more common one: if we provide birth control to young people, it will lead to rampant promiscuity. Likewise, if we provide assistance to those who have gotten in over their heads by having mortgage payments that are too expensive, it will lead to people running around and buying things that they can’t afford (assuming that they will be rescued). It will lead us (as a nation) to become irresponsible about our finances. QED
Ah, wait you say. You think that this horse has been out of the barn for quite some time. I couldn’t agree more. I don’t think that helping a few million people (out of a population of 300 million) who are going to lose their homes is going to create a culture shift, that is, get the horse back in the barn. Perhaps Cantor and friends believe that by drawing a (Maginot) line in the sand they will begin a great transformation of our culture. We will halt financial irresponsibility, etc. There are labels for people who believe in magic of this sort: radical right wing utopians. Change just doesn’t work this way. Further, these utopians would love to mislead us about what’s actually happened and frighten us about an imminent moral collapse.
1) Such radicals might say that people should have known better. Many/most people who are in dire straights acted in good faith when they took out a loan to buy or refinance a home. There was supposed to be a process in place that told them whether they were qualified or not. Now you can say, well, they shouldn’t have listened to the banks that wanted to lend them money to buy a home. But this would have been counterintuitive for most folks. If a bank wants to lend me its money, it must know what it is doing. It’s the bank’s money, after all. Why would they give it to me if I were a risk? That’s a reasonable assumption. And it’s one that the banks wanted us to accept.
2) I haven’t seen the banks, credit card companies, or mortgage houses doing anything to help inculcate the proper attitudes toward financial responsibility in the populace. Quite the contrary. They spent millions (billions) to advertise the virtues of easy credit. The economy road on this paper tiger for years, and the bankers laughed all the way to their banks regarding how much debt that they could get people to absorb by offering items such as “teaser rates.”
3) Does anyone really believe that many folks are going to run out and start taking mortgages that they can’t afford, because they think that they can depend on the government for a rescue sometime in the future? These are extraordinary times. Help that may come from the government now is not something that people will be able to depend on in the future. Hell, they can’t even be sure that they will get it now.
4) The phrase “Moral Hazard” sounds very serious and terribly scary, as if the entire moral sky will fall if we succumb to granting aid. Right wing radicals would love us to believe that the notion of “Moral Hazard,” and their contractual understanding of morality, should be at the center of all of our ethical and political deliberations. It is the talisman that can hold big government at bay. However, the kind of personal responsibility that it refers to is a piece of the moral puzzle that is our lives, not the whole puzzle.
We must keep our guard up to defend against a Moral Hazard tempest in a teapot (dome). Republican discourse about MH associated with mortgages tends to focus on individuals. They want to make sure that individuals are not rewarded for bad behavior. But when one lives in a society in which wealthy individuals, rich bankers, CEO’s, etc, are regularly rewarded for bad behavior, it’s unproductive to start scolding the little guy. There are bigger fish to fry. And further, perhaps more importantly, holding fast to worries about MH in the current economic crisis is like saying that we should let the ship sink–and we are altogether in a ship of state on this one–so as not to reward the shipbuilders for having done a lousy job. People like Cantor will argue that if we plug up the holes, we will just be doing the builders a favor. And if we give home owners assistance, we will just be rewarding them for lousy planning and disrespect for contracts. Even if this were true and things were this simple, which I dispute, we would still need to assist these homeowners in order to help stop the bleeding in the economy. Their losses will continue to become our losses if we don’t stop the death spiral in the real estate market.
Deep commitments to broad stroke principles–for example, never create a situation in which you seem to reward someone for behaving irresponsibly–must not get in the way of common sense. This is why we must all be pragmatists now.
Here are several labels that have recently and often been applied to Obama: pragmatist, bipartisan, compromiser, and centrist. The Republicans take no prisoners strategy regarding the stimulus package–which has been driven not by concerns about pork, but by an ideology that still affirms that the market always knows best–has depended on using Obama’s bipartisanship to their advantage. They typically view him as someone whose pragmatism guarantees a willingness to compromise and operate in a bipartisan fashion. And yes, it’s true, Obama would prefer bipartisan solutions. But be not confused, Republican comrades, pragmatism and bipartisanship are not two sides of the same coin.
Obama, as I have argued elsewhere, is not only a political pragmatist, but a philosophical one. Two points here: 1) Philosophical pragmatists are not dogmatists; they are falibilists who are suspicious of those who claim to possess certainty in political and ethical matters. 2) Broadly speaking, pragmatists seek what works.
Much confusion is possible regarding these points. One might think that if someone doesn’t believe in certainty and also looks to what works, he isn’t deeply committed to any values. This is specious inference. Pragmatists can be deeply committed to any number of values. They just don’t think that they have a direct line to the Deity regarding the truth of these values.
So, then, how does this relate to the Republicans’ misreading of Obama? Republicans have been assuming that Obama’s desire for bipartisanship and compromise is at the heart of his pragmatism. If they push hard enough, his pragmatism (read: desire to get things done “only” through compromise) will win the day for them. They will be able to hold back the tide of reform.
But bipartisanship and compromise are strategies and goods, not absolute goods for the philosophical pragmatist. The pragmatist respects them because they speak to his or her commitment to fallibilism and community, and because they might help us get the job done. However, if they are failing as strategies to achieve pressing ends, a philosophical pragmatist will not hesitate to engage in triage. If people don’t have jobs and are without medical care, if the economy is in a death spiral, well, we have an obligation to address these problems. Be nice to do so through having everyone on board, but we can always return to pursuing bipartisanship another day. It’s a good, not The Absolute Good.
If bipartisanship is not working as a strategy to get the stimulus package through, which Obama deeply believes is necessary for the well-being of the country, his political and philosophical commitments, and temperament, will move him to turn his energies to figuring out what will work. And what will work here may turn out to be an offensive against recalcitrant Republicans whose failed policies cost them two elections, 2006 and 2008. And you know what, he’s got the upper hand if he makes this move. (Republicans might think that Obama wouldn’t dare because he will need them down the line. However, if they aren’t playing ball now, he can’t be sure they will do so down the line.)
A piece of advice to Republicans: Don’t push this guy too hard. You are dealing with a mindset that you haven’t seen in a couple of generations. You will end up regretting it. (He’s perfectly capable of wearing the black hat.)
(Image from The Boston Phoenix)
UPDATE, February 9th, 2009, PM. The following is an excerpt from The New York Times of Obama’s first press conference as president:
So my whole goal over the next four years is to make sure that whatever arguments are persuasive and backed up by evidence and facts and proof, that they can work, that we are pulling people together around that kind of pragmatic agenda. And I think that there was an opportunity to do this with this recovery package because, as I said, although there are some politicians who are arguing that we don’t need a stimulus, there are very few economists who are making that argument. I mean, you’ve got economists who were advising John McCain, economists who were advisers to George Bush — one and two — all suggesting that we actually needed a serious recovery package.
And so when I hear people just saying we don’t need to do anything; this is a spending bill, not a stimulus bill, without acknowledging that by definition part of any stimulus package would include spending — that’s the point — then what I get a sense of is that there is some ideological blockage there that needs to be cleared up. [emphasis added]
UPDATE, February 10, 2009 Peter Baker in the New York Times writes (excerpt):
Taking on Critics, Obama Puts Aside Talk of Unity
“It is not too late to craft a bipartisan plan that creates more jobs and helps get our economy back on track, and Republicans stand ready to work with the president to do this,” Representative John A. Boehner of Ohio, the House Republican leader, said after the news conference.
For his part, though, Mr. Obama seemed to suggest it was too late, and that the time for bipartisanship lay further down the road. He said he recognized that some Republicans had good-faith doubts about his program, but he also characterized some of the opposition as an effort to “test” the new president.
(Baker’s article, which includes discussion of the press conference, is worth a read. It’s clear that Obama’s pragmatism does not require him to stick to “bipartisanship” and that the Republicans are about to find out that they have overplayed their hand. Poor Boehner, the Republicans’ goose egg vote in the House, of which he was so proud, is coming back to haunt him.)
UPDATE, February 14, 2009, excerpt from UPI.com:
WASHINGTON, Feb. 14 (UPI) — U.S. President Barack Obama plans to travel and campaign more to pressure Republicans in
Now that a mammoth, $787 billion economic stimulus bill has been approved virtually without Republican support, White House advisers have determined that Capitol Hill horse-trading with GOP opponents wasn’t successful and that Obama should instead tap his immense popularity and public salesmanship skills to push legislation in the future, the Washington publication Politico reported Saturday.