Stiglitz on the massive need for Keynesian stimulus policies

"The obstacles the global economy faces are not rooted in economics, but in politics and ideology." - Joseph Stiglitz, 2016

He makes this case in the form of a sensibly Keynesian diagnosis of the state of the world economy in The Great Malaise Continues Project Syndicate 01/03/2015.

The politics in much of the West have been in hock to the gospel of neoliberalism (aka, free-market fundamentalism, Herbert Hoover economics, Angela Merkel economics) for so long now that bonehead textbook Keynesian economics sounds dangerously radical. But however one chooses to position it on the current political spectrum, Keynesian economic analysis address the kinds of problems many economies currently have and offer useful solutions. Not least among them is the need to flush what Stiglitz calls "deficit fetishism." That's why Keynesians like Paul Krugman, who tend to call themselves New Keynesians these days, and Post-Keynesians like Jamie Galbraith and Yanis Varoufakis find a lot to agree on in terms of immediate policy needs right now.

Krugman gives us a hint of what some of the difference would emerge in his post, Presidents and the Economy 12/30/2015:

After I put up my post comparing private-sector jobs under Obama and Bush, a number of people asked me whether I believe that presidents have a large effect on economic performance. My answer is no — but conservatives believe that they do, which is why this kind of comparison is useful.

To expand on my own views, in normal times the economy’s macroeconomic performance mainly depends on monetary policy, which isn’t under White House control. Now, we’ve been in a liquidity trap for the whole Obama administration so far, giving fiscal policy a much more central role — and the initial stimulus did help quite a lot. Since 2010, however, fiscal policy has been paralyzed by GOP obstruction, so we’re back to a situation where the WH has little influence. [my emphasis in bold]

The last book of John Kenneth Galbraith's (1908-2006) published during his lifetime was The Economics of Innocent Fraud (2004). He devotes one of the chapters in this short book to what he calls "our most prestigious form of fraud, our most elegant escape from reality." That, he explains, is that, "Quiet measures enforced by the Federal Reserve are thought to be the best approved, best accepted of economic actions. They are also manifestly ineffective. They do not accomplish what they are presumed to accomplish. ... Here is our most cherished and, on examination, most evident form of fraud."

This is a major difference between New Keynesian and Post-Keynesian economics. The former have faith in the effectiveness of monetary policy, the latter have little or none. I assume that some in the post-Keynesian camp don't go quite as far as Galbraith senior did in dissing monetary policy. However, when it comes to addressing a recession or depression - specifically in economist-speak when the interest rate is at the lower bound, i.e., near zero - New Keynesians and Post-Keynesians alike recognize that monetary policy isn't much use in restoring growth. And not just monetarists, who have declined tremendously in their number of adherents since the 1970s, but the other various forms of conservative/neoliberal economic theories are still devoted to the notion of the Fed's magical monetary powers. As are many investment advisers and people who try to follow the stock market closely on their own with no specialized training.

But getting back to Stiglitz, he's right on the mark here:

Former US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering from a “savings glut.” That might have been the case had the best use of the world’s savings been investing in shoddy homes in the Nevada desert. But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing.

The only cure for the world’s malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system – not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs.

... It makes sense for countries like the US and Germany that can borrow at negative real long-term interest rates to borrow to make the investments that are needed. Likewise, in most other countries, rates of return on public investment far exceed the cost of funds. For those countries whose borrowing is constrained, there is a way out, based on the long-established principle of the balanced-budget multiplier: An increase in government spending matched by increased taxes stimulates the economy. Unfortunately, many countries, including France, are engaged in balanced-budget contractions. [emphasis in original]

Slow growth prospects in the world

Joe Stiglitz has some sobering things to say about the current state of the world economy.

In Joseph Stiglitz explains why the Fed shouldn't raise interest rates Los Angeles Times 08/27/2015, he writes:

Six years into a lackluster U.S. expansion, price growth for personal consumption expenditures — excluding food and energy — has averaged less than 1.5% annually in the recovery, well below the Fed's unofficial 2% inflation target. It slowed to 1.3% so far in 2015.

Global economic forces are poised to drive inflation still lower. Last week, oil prices fell to $42, a low not seen since February 2009. Europe's growth remains anemic and is likely to remain so: The IMF forecast for 2015 is just 1.5%. And while it is difficult to piece together a precise picture of what is happening in China, most experts see growth slowing markedly, with effects in other emerging markets.

With a weaker euro and yuan, our exports will decrease and our imports increase. Together, this will put pressure on domestic businesses and the job market, which is hardly robust.

In an interview with Jason Kirby (Joseph Stiglitz on why this stock market upheaval is so dangerous MacLean's 08/26/2015), he says of the US:

... I’d say it’s not a strong recovery. The crisis was 2008, we’re now in 2015—eight years later after the recession and the gap between where we would have been and where we are is huge and not closing. That in some ways was expected, in that the defective response to the crisis lowered potential U.S. economic growth by leaving all these people unemployed. The implied unemployment rate is still very high. Labour force participation is very low, at something like a quarter century low. Not so much because of the aging population, but because of discouraged workers. And the increase in the wages in the second quarter was the lowest performance in 25 years. So overall, before this last turmoil, the U.S. economy was in better shape that Europe or Canada, but not strong. This turmoil will almost surely make things worse.

The median family income in the U.S. is lower than it was a quarter century ago, and if people don’t have income, they can’t [consume], and you can’t have a strong economy. We had assumed it was the emerging markets that would keep the global economy going. With Europe weak, with our household income weak, it would be China and emerging markets. And what’s clear is that’s not true. There’s significant risk—actually it’s, no longer risk—a significant likelihood of a marked slowdown not only China, but also in a lot of other countries—Brazil, which is in recession, all of the other countries that depend on commodities, including Canada, are facing difficulties. So it’s hard to see a story of a strong U.S. economy.

In the LA Times piece, Stiglitz also comments on the role that quantitative easing can play in inflating bubbles:

After the 2008 crisis, the Fed tried to stimulate the economy by buying bank debt, mortgage-backed securities and Treasury assets directly from the market — so-called quantitative easing — which disproportionately benefited the rich. Data on wealth ownership show clearly that the portfolios of the rich are weighed more toward equity, and one of the main channels through which quantitative easing helped the economy was to increase equity prices.

So quantitative easing was yet another instance of failed trickle-down economics — by giving more to the rich, the Fed hoped that everyone would benefit. But so far, these policies have enriched the few without returning the economy to full employment or broadly shared income growth.

More Stiglitz on eurozone austerity economics

Lynn Parramore reports on economist Joe Stiglitz' views on the Greek disaster in Joseph Stiglitz: “Deep-seatedly wrong” economic thinking is killing Greece New Economic Thinking 08/19/2015:

Socially conservative Germans, Stiglitz warns, are doubling down on the discredited notion that austerity policies help economies recover in times of crisis. In reality, the insistence on keeping wages down, stripping away bargaining power from workers, forcing small business owners to pay taxes a year in advance, and cutting pensions will only hamper demand and lead to a deepening spiral of debt. (Stiglitz emphasizes that hardly any of the money loaned to Greece has actually gone to help the Greeks themselves, but rather private-sector creditors – namely German and French banks).

Reflecting on a recent panel at Columbia University with [German] Finance Minister Wolfgang Schäuble followed by a dinner, Stiglitz said, “My heart goes out to Greece, even more so after meeting Schäuble.”

And he makes this important point about "moral hazard," a favorite scare slogan for advocates of neoliberal policies on sovereign debt:

When an audience member asked whether forgiving Greek debt would lead to moral hazard — encouraging other countries to borrow beyond their means — Stiglitz responded that it was unimaginable that any country would want to go through what the Greeks are currently enduring. He noted that the lenders bear even more responsibility for the current mess than the borrowers. Goldman Sachs, for example, structured irresponsible deals that allowed the Greek government at the time of the Maastricht Treaty to hide its debt. Stiglitz concluded that if anything, moral hazard is a problem on the lender side, as there is little to discourage lending money to countries that are unlikely to be able to pay back. He also noted that the idea of the Greek government selling assets in the middle of a depression to pay back debt was a bad idea, because prices are so low that this amounts to little more than a fire sale.

Angela Merkel scolds a group of Nobel laureate kettles

Jens Berger in Eurokrise: Kleine Hoffnungszeichen beim Mainstream, kein Lernfortschritt bei Angela Merkel 16.09.2014 references the following two articles describing criticism by Nobel laureates in economics of Angela Merkel's Herbert Hoover/Heinrich Brüning economic policies that are wrecking the eurozone economy and hurting millions of people:

Ambrose Evans-Pritchard, Nobel economists say policy blunders pushing Europe into depression The Telegraph 08/20/2014

Holger Zschäpitz, Nobelpreisträger rechnen mit Merkel ab Die Welt 24.08.14

Evans-Pritchard quotes Joe Stiglitz:

Professor Joseph Stiglitz said austerity policies had been a "disastrous failure" and are directly responsible for the failed recovery over the first half of this year, with Italy falling into a triple-dip recession, France registering zero growth and even Germany contracting in the second quarter.

"There is a risk of a depression lasting years, leaving even Japan's Lost Decade in the shade. The eurozone economy is 20pc below its trend growth rate," he said.

Mr Stiglitz said the eurozone authorities had massively underestimated the contractionary effects of austerity and continue to persist in error despite claims that the crisis is over. "I am very concerned about the future of monetary union, and they haven't yet felt the impact of geopolitical tensions."

He said the eurozone needs joint debt issuance to repair the structural flaws of EMU, but almost no progress has been made. "Europe suffers from fatal politics," he said.

That's an excellent summary: Europe suffers from fatal politics. Angela Merkel's politics.

Angie gave the keynote address in English to this year's Nobel Laureate Meeting in Lindau last month, on which those article are reporting. Video here, but embedding doesn't seem to be available.

Deutsche Welle English reports on her speech in Chancellor Merkel challenges Nobel economists 20.08.2014. It opens with this priceless linein the summary: "German Chancellor Angela Merkel has asked Nobel laureate economists why their discipline got so much so wrong in recent years."

Frau Pot, meet the Herrn Kettle.

Tags: angela merkel, austerity economics, eu, euro, european union, joseph stiglitz

Ethics, incentives and inequality

Joe Stiglitz digs out a quote from Adam Smith, the great classical liberal theorist of capitalism, and uses it in an op-ed piece, In No One We Trust New York Times Opinionator 12/21/2013:

The undervaluing of trust has its roots in our most popular economic traditions. Adam Smith argued forcefully that we would do better to trust in the pursuit of self-interest than in the good intentions of those who pursue the general interest. If everyone looked out for just himself, we would reach an equilibrium that was not just comfortable but also productive, in which the economy was fully efficient. To the morally uninspired, it’s an appealing idea: selfishness as the ultimate form of selflessness. (Elsewhere, in particular in his "Theory of Moral Sentiments," Smith took a much more balanced view, though most of his latter-day adherents have not followed suit.)

AS it happens, I just finished reading Smith's Theory of Moral Sentiments (1759). He took fellow Dutch philosopher Bernard de Mandeville (1670-1733), whose most famous work was The Fable of the Bees, to task for his philosophy that asserted a radical version of a sort of invisible hand that bring virtuous results out of selfish actions:

It is the great fallacy of Dr. Mandeville's book to represent every passion as wholly vicious, which is so in any degree and in any direction. It is thus that he treats every thing as vanity which has any reference, either to what are, or to what ought to be the sentiments of others: and it is by means of this sophistry, that he establishes his favourite conclusion, that private vices are public benefits. [my emphasis]

Smith was specifically rejecting this Ayn-Randian philosophy of Mandeville's. Contrasting the "love of glory" to "the love of virtue," he argues for the virtue on conforming to the moral standards of the community: "The man who acts solely from a regard to what is right and fit to be done, from a regard to what is the proper object of esteem and approbation, though these sentiments should never be bestowed upon him, acts from the most sublime and godlike motive which human nature is even capable of conceiving."

Stiglitz' op-ed emphasizes the need for a minimum level of trust in the functioning of a country's banking system, referring to the crisis that began in the US in 2007:

One of the reasons that the bubble’s bursting in 2007 led to such an enormous crisis was that no bank could trust another. Each bank knew the shenanigans it had been engaged in — the movement of liabilities off its balance sheets, the predatory and reckless lending — and so knew that it could not trust any other bank. Interbank lending froze, and the financial system came to the verge of collapse, saved only by the resolute action of the public, whose trust had been the most abused of all.

There had been earlier episodes when the financial sector showed how fragile trust was. Most notable was the crash of 1929, which prompted new laws to stop the worst abuses, from fraud to market manipulation. We trusted regulators to enforce the law, and we trusted the banks to obey the law: The government couldn’t be everywhere, but banks would at least be kept in line by fearing the consequences of bad behavior.

Decades later, however, bankers used their political influence to eviscerate regulations and install regulators who didn’t believe in them. Officials and academics assured lawmakers and the public that banks could self-regulate.

But it all turned out to be a scam. We had created a system of rewards that encouraged shortsighted behavior and excessive risk-taking. In fact, we had entered an era in which moral values were given short shrift and trust itself was discounted. [my emphasis]

He discusses a critically important issue, how supposedly performance-based incentives have in practice contributed to reckless behavior that can be rational for individual CEOs but destructive to the society at large and to their own corporations:

So C.E.O.’s must be given stock options to induce them to work hard. I find this puzzling: If a firm pays someone $10 million to run a company, he should give his all to ensure its success. He shouldn’t do so only if he is promised a big chunk of any increase in the company’s stock market value, even if the increase is only a result of a bubble created by the Fed’s low interest rates. ...

In practice, the right’s narrow focus on incentives has proved inimical to long-term thinking and so rife with opportunities for greed that it was bound to promote distrust, both in society and within companies. Bank managers and corporate executives search out creative accounting devices to make their enterprises look good in the short run, even if their long-run prospects are compromised.

And he explains how the staggering levels of inequality in American society corrode the basic levels of trust within society.

Tags: adam smith, inequality, joseph stiglitz

Rent-seeking and the growth of inequality in the US

Joe Stiglitz in Mitt Romney's tax avoidance weakens bonds of American society Guardian 09/03/2012 discusses the concept economists call "rent-seeking", which is an important concept in understanding the dynamics of inequality in the US today:

[Romney] evidently does not recognise that a system that taxes speculation at a lower rate than hard work distorts the economy. Indeed, much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie.

Those at the top include a disproportionate number of monopolists who increase their income by restricting production and engaging in anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households). It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased.

Today, a deficiency of aggregate demand afflicts almost all advanced countries, leading to high unemployment, lower wages, greater inequality, and – coming full, vicious circle – constrained consumption. There is now a growing recognition of the link between inequality and economic instability and weakness. [my emphasis]

Robert Kuttner talks about an aspect of the problem of rent-seeking in the US economy today in Debtors' Prison The American Prospect Online 06/06/2011. Paul Krugman picks up the discussion in The Rentier Regime 06/06/2011:

What explains this opposition to any and all attempts to mitigate the economic disaster? I can think of a number of causes, but Kuttner makes a very good point: everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff. Deflation is hell for workers and business owners, but it’s heaven for creditors.

I don't mean to suggest that it’s all cynical; my experience is that there are relatively few people who consciously keep a secret set of intellectual books, who preach Neanderthal goldbuggism because it’s in their interests while rereading Keynes by dead of night to figure out what’s really happening. Instead, people generally manage to believe whatever is in their interests. And maybe not even that: I suspect that there are a fair number of small business owners who faithfully believed in Glenn Becks’s warnings of hyperinflation by 2010, quite unaware that the intimidation of the Fed has savaged their own bottom lines.

Still, thinking of what's happening as the rule of rentiers, who are getting their interests served at the expense of the real economy, helps make sense of the situation. [my emphasis]

Andrew Button at eHow provides a very simple definition of rent-seeking as "any economic activity dedicated to expanding your share of existing value rather than creating value." The term itself as an economic concept has a pejorative edge and is not identical with credit. Credit is necessary for the economy to function. Even the Mitt Romney/Bain Capital leveraged-buyout ("private equity") brand of rent-seeking can be constructive, though the business model for a firm like Bain Capital is focused around extracting fees whatever it may do to the profitability of the acquired company. And not infrequently, that turns into "rent-seeking" in the sense of an "economic activity dedicated to expanding your share of existing value rather than creating value." The Economist calls rent-seeking: "Cutting yourself a bigger slice of the cake rather than making the cake bigger. Trying to make more money without producing more for customers." Since they include unions negotiating for better wages and working conditions, but don't specifically include companies paying workes less than they are worth, as part of "rent-seeking", it makes me wonder if the concept isn't largely a term to stigmatize unions.

But attempting "to make more money without producing more for customers" sounds an awful lot like Bain Capital's main business to me.

It's worth noting that lobbying for government benefits is also considered rent-seeking. And lobbying for permissive laws and favorable tax treatment is also part of what creates the particular conditions for a Bain Capital to thrive. Yes, public policy helped build that, too.

Tags: joseph stiglitz, paul krugman, robert kuttner, rent-seeking

Mitt Romney's taxes and the common good

Joe Stiglitz in Mitt Romney's tax avoidance weakens bonds of American society Guardian 09/03/2012 looks at how tax avoidance by prominent wealthy people like Republican Presidential candidate Mitt Romney serves to undermine the basic social contract in the United States:

Conservative politicians in the US underestimate the importance of publicly provided education, technology, and infrastructure. Economies in which government provides these public goods perform far better than those in which it does not.

But public goods must be paid for, and it is imperative that everyone pays their fair share. While there may be disagreement about what that entails, those at the top of the income distribution who pay 15% of their reported income (money accruing in tax shelters in the Cayman Islands and other tax havens may not be reported to US authorities) clearly are not paying their fair share. ...

Democracies rely on a spirit of trust and co-operation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable.

More broadly, a market economy could not work if every contract had to be enforced through legal action. But trust and co-operation can survive only if there is a belief that the system is fair. Recent research has shown that a belief that the economic system is unfair undermines both co-operation and effort. Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice. [my emphasis]

Democracy can't survive the extremes of wealth that our tax policies are creating. It isn't just about budgets or deficits, it's about the nature of our political system and political commonwealth.

Tags: joseph stiglitz, mitt romney

Dominique Strauss-Kahn's arrest and the IMF's political direction

Robert Kuttner gives a quick run-down on arrrested International Monetary Fund (IMF) chief Dominique dubious personal and professional history as it relates to the pending charges against him in Strauss-Kahn and the European Left Huffington Post 05/15/2011:

Strauss-Kahn, who until yesterday headed the International Monetary Fund, was the Socialist front-runner to challenge French President Nicolas Sarkozy next year. Polls showed that Strauss-Kahn well ahead of both Sarkozy and far right populist Marine Le Pen.

But even before this latest scandal broke, Strauss-Kahn didn't seem like much of a socialist. Last week, the press caught DSK, as the local press calls him, and his wife tooling around in a borrowed $150,000 Porsche, which reinforced his image as wealthy playboy. In 2008, Strauss-Kahn barely survived a widely publicized affair with one of his IMF employees, and in the wake of the New York incident, another woman has stepped forward claiming a rape in 2002.

Cynics here have argued that the wily Sarkozy promoted his likely rival for the IMF post to increase the chances that the imperious Strauss-Kahn would commit some highly visible and politically fatal act. For demolishing the Socialists' claim to speak for the common Frenchman and woman, it's hard to beat an accusation of the entitled Socialist standard bearer orally raping a chambermaid in a $3,000 luxury hotel room and then trying to skip town.

Politics is politics, so it's certainly not unthinkable that Sarkozy may have had such a possibility in mind.

While Strauss-Kahn may not have been "much of a socialist," as Kuttner says - the IMF during his term in office had moved a bit away from the neoliberal Washington Consensus that had so badly discredited the IMF in much of the world. Joe Stiglitz discusses that shift in The IMF’s Switch in Time Project Syndicate 05/05/2011 (before Strauss-Kahn's arrest). Stiglitz describes how "Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact." And that subsequent capital flows to growing developing nations has made the need for such capital controls even more widely appreciated. The IMF has now "blessed such interventions," i.e., capital controls, though Stiglitz notes that the IMF stayed witht he neoliberal notion that they should be only a "last resort." And he argues:

On the contrary, we should have learned from the crisis that financial markets need regulation, and that cross-border capital flows are particularly dangerous. Such regulations should be a key part of any system to ensure financial stability; resorting to them only as a last resort is a recipe for continued instability.

Stiglitz considers it an even more signficant shift in IMF policy has been "the link that the IMF has finally drawn between inequality and instability." This is an issue of particular concern in the United States, though we are a long way from being subjected to the dubious tutelage of the IMF that threaten Greece and other EU countries under attack by the capital markets. Stiglitz notes, "As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a 'land of opportunity' than even 'old' Europe." And he concludes

For progressives, these abysmal facts are part of the standard litany of frustration and justified outrage. What is new is that the IMF has joined the chorus. As Strauss-Kahn concluded in his speech to the Brookings Institution shortly before the Fund's recent meeting: "Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace. This goes to the heart of the IMF’s mandate. It must be placed at the heart of the policy agenda."

Strauss-Kahn is proving himself a sagacious leader of the IMF. We can only hope that governments and financial markets heed his words.

Obviously, Stiglitz was commenting on Strauss-Kahn's public role as IMF chief, not on his alleged sexual assaults. Kuttner concurs with Stiglitz' judgment on the recent direction of IMF policy:

For all his personal flaws, Strauss-Kahn, in his current job as head of the International Monetary Fund, has been less of an austerity-monger than most of his predecessors. That's a pretty low bar, but under Strauss-Kahn and his chief economist, Olivier Blanchard, the IMF has uncharacteristically weighed in on the side of not punishing nations with large deficits, but helping them to grow their way out of recession.

With Strauss-Kahn sidelined and probably finished, the IMF has appointed an American, John Lipsky, a career official, as acting managing director. Strauss-Kahn, as a French Socialist, had been leaning against the IMF austerity culture, and Lipsky is considered more orthodox.

Steve Clemons also discusses recent IMF policy and Staruss-Kahn's public leadership style in The Meaning of Strauss-Kahn Washington Note 05/16/2011.

Tags: imf, international monetary fund, joseph stiglitz, neoliberalism, robert kuttner, strauss-kahn

Financial meltdown and the Establishment press

Tom Engelhardt amkes a similar observation to that of Joschka Fisher when he writes:

It is far clearer now [than in 1998], as American economic power visibly crumbles, that rather than a victor and a vanquished there were two great power losers in the Cold War. The weaker, the Soviet Union, simply imploded first, while the U.S., enwreathed in a rhetoric of triumphalism and self-congratulation, was far more slowly making its way toward the exit.

It's long been the case that during economic expansions the business press and the Establishment press more generally adopt an optimistic tone about the future, and we get articles speculating about how this time, the expansion will go on and on and just maybe the business cycle has finally been banished for good.

When the inevitable downturn comes, the press tends to go to the other extreme and starts predicting catastrophe. When an actual economic catastrophe like the failure of the private financial system occurs, we can expect panic reaction from the press, as well.

The Washington Post gets into the act with The End Of American Capitalism? by Anthony Faiola 10/10/08. But don't let the headline worry you. Of course, "free market" capitalism is still the magic that heals all. Well, almost all:

Other than a few fringe heads of state and quixotic headlines, no one is talking about the death of capitalism. The embrace of free-market theories, particularly in Asia, has helped lift hundreds of millions out of poverty in recent decades. But resentment is growing over America's brand of capitalism, which in contrast to, say, Germany's, spurns regulations and venerates risk. [my emphasis]

Gee, what kind of "fringe" newspaper would run "quixotic headlines"?

Faiola's article isn't entirly frivolous, though. He quotes Joseph Stiglitz, for instance, who has become a leading critic of the "neoliberal" economic dogma that clearly has failed:

"People around the world once admired us for our economy, and we told them if you wanted to be like us, here's what you have to do -- hand over power to the market," said Joseph Stiglitz, the Nobel Prize-winning economist at Columbia University. "The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us." [my emphasis]

It's still darkly amusing to see how supposedly serious American journals still tippy-toe around the word "nationalization". Why can't they describe current policies straightforwardly? The US currently owns the largest insurance company in the world (AIG) and the mortgage giants Freddie Mac and Fannie Mae. Those together are already the largest nationalizations ever undertaken outside the Communist world. But here's how Faiola describes that realiy:

The government's about-face goes beyond the banking industry. It is reasserting itself in the lives of citizens in ways that were unthinkable in the era of market-knows-best thinking. With the recent takeovers of major lenders Fannie Mae and Freddie Mac and the bailout of AIG, the U.S. government is now effectively responsible for providing home mortgages and life insurance to tens of millions of Americans. Many economists are asking whether it remains a free market if the government is so deeply enmeshed in the financial system. [my emphasis]

The current bailout plan is a bridge measure to keep the financial system afloat through nationalization and regulation during the Presidential transition period. The Treasury this week discussed further nationalization, i.e., the government will buy shares in banking corporations to provide them additional capital. And this is actually needed, and sooner rather than later, because the banking system generally is current under-capitalized. (I take it for granted that the Cheney-Bush administration would try to implement any bailout plan in their typically corrupt, crony-capitalist style.)

As I'm writing this, I'm listening to a broadcast on the Austrian radio channel Ö1 that matter-of-factly describes the current demand for more capital injections to American banks as the demand for further systematic partial nationalization.

It's not surprising but nevertheless sobering to see how inadequate our "quality" American press is to describing even the economic events themselves, so accustomed are they to reciting the "free market" gospel that both Democrats and Republicans have been preaching for decades, but only the Democrats actually try to take seriously.

Note the tone of mourning in which Faiola reports the fall from grace of the sacred myth of the "free market" in capital:

In South Korea, rising criticism that the government is sticking too close to the U.S. model has roused opposition to privatizing the massive, state-owned Korea Development Bank. South Korea is among those countries that have benefited the most from adopting free-market principles, emerging from the ashes of the Korean War to become one of the world's biggest economies. It has distinguished itself from North Korea, an impoverished country hobbled by an outdated communist system and authoritarian leadership.

But the repercussions of crisis that began in the United States are global. In Britain, where Prime Minister Margaret Thatcher joined with President Ronald Reagan in the 1980s to herald capitalism's promise, the government this week moved to partly nationalize the ailing banking system. Across the English Channel, European leaders who are no strangers to regulation are piling on Washington for gradually pulling the government watchdogs off the world's largest financial sector. Led by French President Nicolas Sarkozy, they are calling for broad new international codes to impose scrutiny on global finance. [my emphasis]

Say what? Nationalization??!!! Oh, wait, it's that exotic, kinda-sorta European country Britain that has moved to "partly nationalize" its banking system. The far greater assumption of public owernship of banks by the Republican government in Washington isn't some sinful European thing like "nationalization". No, it's that "the U.S. government is now effectively responsible for providing home mortgages and life insurance to tens of millions of Americans".

It would have been nice to have had a functioning national press corps during the years Cheney and Bush were doing everything they could to establish a Party-controlled authoritarian semi-democracy in the US. It would also be nice now to have a press corps that could actually focus and report realistically on what's happening in the protracted financial crisis.

But, to paraphrase Rummy, you go through the failure of the private financial system with the press you have, not the press you would want or might like to have.

If you read Faiola's dumbly ideolgical story all the way to the last three paragraphs, you see an interesting fact noted:

China had been resisting calls from Washington and Wall Street to introduce a broad range of exotic investments, including many of the once-red-hot derivatives now being blamed for magnifying the crisis in the West. In recent weeks, Beijing has made that position more clear, saying it would not permit an expansion of complex financial instruments.

With the U.S. government's current push toward intervention and the soul-searching over the role of deregulation in the crisis, the stage appears to be at least temporarily set for a more restrained model of free enterprise, particularly in financial markets.

"If you look around the world, China is doing pretty good right now, and the U.S. isn't," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "You may see a push back from globalization in the financial markets." [my emphasis]

For the last two decades or more, China has been regarded by American conservatives as a sort of honorary capitalist country because of its relatively good relations to the US and its de facto alliance with the US in offsetting the power of the Soviet Union.

And it's certainly true that China has allowed greater private business ownership and less regulation than was the case during the days of Soviet-style "Stalinist" economics. But, as James Galbraith pointed out in Rich World, Poor World The American Prospect 04/08/06 issue) about China:

What is the Chinese secret? The other day, the distinguished Russian economist S. Menshikov put it to me this way, “Well, it’s because they are communists, you see.”

More precisely, China has adopted markets without capitalism; it has not had broadly open, speculative markets for capital assets and land. The result is that you usually have to make something in order to get rich. So companies produce and produce, flood the markets with goods, accept low profit margins, improve quality, and hope to strike gold by exporting to the West. If they have losses, as they often do, these may be covered by borrowing from China’s rotten, state-owned banks, protected by capital control. Workers thrive on the glutted market for goods. Meanwhile, the richer local governments finance themselves with land rent and spend the proceeds on infrastructure at an incredible pace. The system looks like capitalism to the naked eye. But it is not capitalism; it’s an outgrowth of what was there before. What was communism has become, one might almost say, Galbraithian - private affluence, with much less public squalor than one finds elsewhere in the Third World. [my emphasis]

Put in a slightly different way, China was foolish enough to trust their economic development to the notion that there could be a "free market" in capital.

A free market in automobiles is one thing. People can actually gather meaningful and reasonably complete information on the market in which they are interested. They can look around to see what cars they find attractive, they can look at the cars at the dealers and test drive them, they can talk to other car owners and hear their experiences, and they can research more systematically compliled information from Consumer Reports, Car and Driver and numerous other sources.

But when you're talking about exotic sub-prime mortgage derivatives that even the investment bankers who created them apparently didn't understand, it's a whole different story. The notion that the purchasers - even other financial institutions - have the full relevant knowledge about the product that "free market" theory assumes just doesn't apply in the real world with such products. More generally, even before the current mortgage-induced financial meltdown, many developing countries like Argentina had rejected the idea that they should make their own economies completely dependent on the daily whims of the international capital markets.

The most darkly amusing part of Faiola's article is this one:

... World Bank President Robert Zoellick was questioned by reporters about the "confusion" in the developing world over whether to continue embracing the free-market model. He replied, "I think people have been confused not only in developing countries, but in developed countries, by these shocking events."

Yes, we're pretty much all "confused" about the virtue of continuing to have a clearly self-destructive financial system.

Tags: financial system, joseph stiglitz

The Afghanistan War and "The Surge" in Iraq

Josepb Stiglitz warns that At All Costs, We Must Avoid a 'Surge' in Afghanistan Alternet.org 09/13/08. He begins by looking at the problem that, in my mind, was largely created by the inadequate efforts by the Democrats both Presidential and Congressional to keep the Iraq War as a central issue in the 2008 campaign:

The Iraq war has been replaced by the declining economy as the most important issue in America's presidential election campaign, in part because Americans have come to believe that the tide has turned in Iraq: the troop "surge" has supposedly cowed the insurgents, bringing a decline in violence. The implications are clear: a show of power wins the day.

It is precisely this kind of macho reasoning that led America to war in Iraq in the first place. The war was meant to demonstrate the strategic power of military might. Instead, the war showed its limitations. Moreover, the war undermined America's real source of power -- its moral authority. ...

To be sure, the reduction in violence is welcome, and the surge in troops may have played some role. Yet the level of violence, were it taking place anywhere else in the world, would make headlines; only in Iraq have we become so inured to bloodshed that it is a good day if only 25 civilians get killed.

This doesn't mean that the Iraq War has become more popular. Only that the Republicans have been able to, shall we say, put lipstick on the pig and convince a significant number of people that the end is in sight. Which it will not be if McCain is elected President.

In particular, the Democrats have failed to articulate the real results of The Surge. And that affects the unfounded optimism about the Afghanistan War:

The belief that the surge was successful is especially dangerous because the Afghanistan war is going so poorly. America's European allies are tiring of the endless battles and mounting casualties. Most European leaders are not as practiced in the art of deception as the Bush administration; they have greater difficulty hiding the numbers from their citizens. The British, for example, are well aware of the problems that they repeatedly encountered in their imperial era in Afghanistan.

America will, of course, continue to put pressure on its allies, but democracy has a way of limiting the effectiveness of such pressure. Popular opposition to the Iraq war made it impossible for Mexico and Chile to give in to American pressure at the United Nations to endorse the invasion; the citizens of these countries were proven right.

But back in America, the belief that the surge "worked" is now leading many to argue that more troops are needed in Afghanistan. [my emphasis]

If the US under either McCain or Obama tries to escalate the war by simply adding more US troops and escalate the bombing of villages and assassination-by-drone tactics, which is turning the Afghan public even more intensely against the Americans, that the European NATO contingents will either leave entirely or restrict their operations to very limited areas, clearly delineated from the areas where the American approaches are being applied.

Two world wars and the collapse of the British and French colonial empires have given European leaders - and apparently the European publics, too - an understanding that pulling out of wars in which the costs have become much greater than any possible benefits isn't shameful or dishonorable: it's good sense and good policy.

Tags: afghanistan war, iraq war, joseph stiglitz, surge