The Fronhausen Review

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2010-06-04T16:39:00.000-05:00

After a long hiatus, the reprobates of FR will be returning to more active duty and soon. Stay tuned, true believers!

Alive!

2010-06-04T16:38:00.003-05:00

Alive!

North, to the future: Sarah Palin's Farewell Address

2009-07-29T18:00:00.002-05:00

Following is the poetic middle section of Sarah Palin's farewell address, delivered on July 26.

"It is the best road trip in America soaring through nature's finest show. Denali, the great one, soaring under the midnight sun. And then the extremes. In the winter time it's the frozen road that is competing with the view of ice fogged frigid beauty, the cold though, doesn't it split the Cheechakos from the Sourdoughs? And then in the summertime such extreme summertime about a hundred and fifty degrees hotter than just some months ago, than just some months from now, with fireweed blooming along the frost heaves and merciless rivers that are rushing and carving and reminding us that here, Mother Nature wins. It is as throughout all Alaska that big wild good life teeming along the road that is north to the future."

To really catch Palin's spirit, I recommend watching the recitation of it by The Great Shatner. And for something completely different, here is some fantastic verse by a great American poet, Robert Frost. This is the poem that he recited at Jack Kennedy's inauguration. But I like it anyway.

The Gift Outright
by Robert Frost (1874-1963)

The land was ours before we were the land's.
She was our land more than a hundred years
Before we were her people. She was ours
In Massachusetts, in Virginia.
But we were England's, still colonials,
Possessing what we still were unpossessed by,
Possessed by what we now no more possessed.
Something we were withholding made us weak.
Until we found out that it was ourselves
We were withholding from our land of living,
And forthwith found salvation in surrender.
Such as we were we gave ourselves outright
(The deed of gift was many deeds of war)
To the land vaguely realizing westward,
But still unstoried, artless, unenhanced,
Such as she was, such as she would become.

Liveblogging from the Lehrman American Studies Center's Summer Institute

2009-06-09T17:00:00.000-05:00

These days I write from Princeton, New Jersey. I am a fly on the wall of the Lehrman American Studies Center's Summer Institute. The Lehrman American Studies Center (LASC) is connected to the Intercollegiate Studies Institute (ISI). The Summer Institute is a two-week course which combines substantive discussion and lectures of core texts and ideas from American history, political philosophy, and political science, with sections on professionalization. Common themes of the professionalization sessions are things like strategies for obtaining tenure, teaching the millennial generation, professional networking, balancing the use of technology in the classroom (instrumental vs. detracting), and fellowships. The substantial component of the course consists of readings for each day, for instance Thomas Jefferson or the writings of a modern scholar like Walter McDougall. The day begins with a lecture and is followed by break-out discussion sections. I would heartily recommend the LASC Summer Institute for rising academics whose teaching fields include the American founding, American statesmanship, American political philosophy, traditional political science, the Civil War, Abraham Lincoln, or the progressive era (a misnomer, but, well). The Summer Institute fellows learn a lot, give a lot, and gain a lot in terms of career advice and good ideas. To boot, they stay in a nice hotel in the heart of Princeton and meet scholars from related fields. If you are a late-term PhD in something American-Studies-ish, or a rising faculty member, or just recently tenured or otherwise early on in your academic career, write to LASC via their website. Tell them the folks at the Fronhausen Review sent you. They may not know what that means, but they they will nevertheless be happy to hear from you. Ho!

Map of Battlestar Galactica

2009-05-31T20:51:00.002-05:00

Take a look at this map. Contains spoilers, if you still haven't finished the series.

AFF Chicago round table: Marketing the classical liberal alternative

2009-05-25T08:00:00.000-05:00

Went to a great panel discussion by AFF Chicago on Wednesday evening, May 20. It was moderated by John Tillman; the panel consisted of four short presentations suggesting different approaches for libertarians to advance their agenda and candidates. The first discussant, Nikki Sullivan, said that since voters vote irrationally anyway, a movement needs a charismatic leader, whether it's Reagan, Obama or a new libertarian spokesman. By contrast, Marisa Maleck presented the argument that since the intellectuals distribute ideas in society, convincing the intellectuals is crucial. In other words, the Right (whichever Right) needs to hone its arguments first, and keep up its bottom-up pressure on the universities. Kent Nielsen, viral marketer, spoke wittily about internet marketing. In conversation later, he related the funny story about a presentation at the University of Chicago a little while back by the head CTO of the Obama campaign (who had skillz, said Kent, but not mad skillz). A woman in the audience on that occasion stood up to say that she had volunteered for the campaign and found that the much-vaunted listening of the campaign (by text message, from local brown-shirted volunteers) was a joke. Finally, Melissa Hayes spoke of her own efforts to use fun and friendly internet marketing (Libertarians make better Lovers is one) to tip the swingable voters in the center, and get them to see libertarianism as not a hoky, blurry idea, but a regular position.

Someone in the audience proposed that AFF or a group like them hold a contest for coming up with a new ad campaign to get a good marketing idea. Perhaps a video contest with a $1000 first prize for shooting a 1-2 minute PSA-type advertisement against the new tax increases in Illinois. Tillman, the moderator, mentioned that something like that was already in the works.

Another person proposed that between Nikki's suggestion of the charismatic leader and Marisa's suggestion that ideas have consequences lies the bridge of the easy formula. Thus, the left wing argument for nationalizing health care goes like this: It's unconscionable that so many people don't have health care in our rich society and ridiculous that it costs so much. We should have national health care because it would be such a good thing and cost each individual on average little.

The right needs to formulate a simple, ready to hand argument against this. I don't have such a simple formula, or else I wouldn't be writing this note. But it would go something like this: If government takes over health care, it will be just like when it runs the post office, GM, the airlines or any other complex service industry--low quality, lack of accountability, lack of innovation, and very hard to fire bad workers, etc. (Note that a good rhetorical form for listing things is to list the least persuasive aspect first, the more persuasive aspect last. So the argument should continue on the more important point, which is that the private market can do it better: We need less government intervention and cartelization, not more. Right now, [something about the insurance system] incentivizes doctors to perform lots of expensive tests, in order to check for every last possible detail, even when they don't think there's a high chance that this will get results. The problem is that neither doctor nor patient has a direct price-motive. If people can just adding extra stuff to their shopping cart, like in one of those old game shows where you run around the supermarket grabbing stuff, then they will just take and take and take. And [that] is why the system costs so much. Also hospitals and the medical profession itself are heavily cartelized -- they have the quasi-legal means to decide who gets to join their club. Well, if college professors could basically get together as a professional association and vote to limit the number of new hires in the field absolutely, and strictly control who could even get to be a professor, the supply would bec choked and the their pay would be ratcheted up. Doctors aren't any different.

Anyway, you probably get the idea. This is not a short argument, nor a simple one, nor does it get at all the major points. But we need to formulate a basic, simple counter-argument to the foolish and misguided claim that We The People should just step up and essentially nationalize any "problem" that comes along. Anyone have any suggestions? How about we hold a contest?

Tales of the unconscious: Finding out who you really are

2009-05-18T15:24:00.001-05:00

The remark by Irad Kimhi I posted the other day is at once creepy and profound. It is also more familiar than it at first appears; think of the stories and narrative methods employed in the following:

In several television shows and films, a character's everyday ego (his I) is unaware of who he really is. He really is a saboteur or a murderer, another person, and so on. Think of "The 4400" (Kyle Baldwin, son of the putz secret agent protagonist); "Angel Heart" (Harry Angel); "Battlestar Galactica" (the false surface consciousness of Sharon "Boomer" Valeri, as in Episode 1x3, "Water"); "Fight Club" (the narrator); "Evil Dead" (Ash's hand, which went bad, so he had to cut it off).

A different kind of thing-beneath-you is the fascinating depiction of the Echo-consciousness in Joss Whedon's current going concern "Doll House." Echo is perhaps a being underneath the surface of Caroline, the woman who semi-voluntarily gave up her body for five years for employment as a doll. In the first season finale, the two confront one another in a cleverly-devised scene. Echo is not quite Caroline's unconscious.

The "unconscious" (Freud's "Unbewusstsein") is not an especially helpful term for this kind of investigation. While evocative, on its own it does not do much work. Lacan's concept of desire, which fills the same logical position, is a little more helpful, since it at least names a dominant tendency or forcefield in the unconscious.

Three more tales display a related idea, one which however does not quite illustrate false consciousness. First, to use some common cultural currency, consider the narrative of the film "The Usual Suspects." About 80% of the film takes place in the flashback narrative of toady Roger "Verbal" Kint. It appears certain at the end of the film that important elements of Kint's story were lies, including such things as who people were, including his own identity, who committed crimes, and when things happened. The adhesion which we trust between story and what really happened is split asunder. In a sense we have experienced a lie throughout the film, and therefore experienced tellig a lie. Who was Verbal, as opposed to Keyser Soze? Take another example, from one of my favorite pieces of popular fiction in the last decade, "Battlestar Galactica." Early in season 2, as Commander Adama is recovering from being shot, the Chief comes to ask him to go easy on Callie. The Commander presses him on his relationship with Boomer, now rather dramatically exposed as a cylon in their midst.

Commander Adama: Did you love her, Chief?
Chief Tyrol: Excuse me?
Adama: Boomer -- did you love her?
Tyrol: I thought I did...
Adama: When you think you love somebody, you love them. That’s what love is -- thoughts. She was a cylon, a machine. Is that what Boomer was? A machine? A thing?
Tyrol: That’s what she turned out to be.
Adama: She was more than that to us. She was more than that to me. She was a vital, living person… aboard my ship for almost two years. She couldn’t have been just a machine. Could you love a machine?
Tyrol: No, sir. I guess I couldn’t have.

(See also general post on BSG from last November.)

This is similar to the experience of remembering false belief. You know that you thought something, and believed that you knew it to be true at the time. Yet it turns out to be false. The problem here is that with false belief about states of affairs ("I thought that man over there was my brother, but it turned out to be someone else"), finding out you were wrong clears everything up. In the dramatic scene quoted above, the characters have to wrestle with their false beliefs, and remain at least a little unsure what they think.

In his Philosophical Investigations, Ludwig Wittgenstein wrote that if there were a verb which meant "to believe falsely" it would have no meaningful first-person present indicative use. (not quite quoting verbatim)

There is a tempting application to history and other social sciences: The idea that there might be a big narrative or plan or "logic" unfolding in time or structuring a space or community, which the individuals are not aware of. We should be very weary of this, since it is nigh unverifiable. For the same reason we should be weary of the original Freudian-Kimhian argument to which it connects.

At least two of these fictions (the example from Adama and the Chief and Wittgenstein's remark) might be described instead or as well by saying that a person consciously does not know or understand or recognize his own thoughts. Thoughts are not things standing before me for observation or for "grasping" in the Fregean sense. They are not things just as I am not a thing.

What about the idea of "becoming who you are", as Zarathustra put it? Over time, I write enough that I eventually draw my borders and emerge as a soul with a certain shape. Over time, the king and parliament of England make enough laws that there is a body of positive law to recognize as the English law. It is there. It was not an it at one point, but then suddenly when they looked for it, it was there. The Renaissance sculptors--I forget who (see Vassari's Lives) said that to carve a statue is like cutting away the extra rock that holds the already extant shape inside. See Michaelangelo's "Prisoners" in the Uffizi.

Rumour of the Hidden King: Irad Kimhi

2009-05-17T16:13:00.001-05:00

This is just a short note of a kind of introduction, but not to me. I am not very familiar with academic blogs, though I know they exist. The point here is just to say a few words about Irad Kimhi. Kimhi is an Israeli philosopher who had taught in both the United States and Israel. In the mid-1990's he was an assistant professor in the Philosophy Department at Yale. He has guest-taught courses on a couple of occasions for the Committee on Social Thought at the University of Chicago. As I understand it, his regular gig is to teach courses in Tel Aviv in Israel. His name and reputation are well known among a fairly small group of cognoscenti, including friends, colleagues and former students (like myself). He has a kind of magical reputation to him, unique as far as I know in the academic world: He has not to my knowledge published a book and I don't know that he has published even any articles, but several of his draft manuscripts circulate privately among ravenous devotees of his thought. When he taught courses at the U of C this past Autumn and Winter, established, famous professors sat in on the classes and took notes as eagerly as the attendant graduate students. I will do a poor job trying to explain Kimhi's work here, but think I have to say something. His two main teaching and research subjects, nominally distinct, are psychoanalysis and judgment. In the former, he marries the work of Plato, Freud and Lacan. In the latter, he reconciles the work of Aristotle, Frege and Wittgenstein on the philosophy of language. I posted a brainstorm inspired by Kimhi's recent Chicago courses on this site a few months ago on April 8. He is pretty sure that he has solved the Question of Being, as Heidegger used to call it. To be sure, rumours of great minds and similar gurus are often exaggerated or steeped in exhuberant expectation. But a lot of us seriously think that he will turn out to be one of the hidden kings (another trope once used to describe Heidegger) of contemporary philosophy. I have considerable notes from these courses which I might partially post in the future, if it seems like a good idea.

Clifford S. Asness: Unafraid In Greenwich Connecticut

2009-05-14T18:16:00.001-05:00

[From the Ney York Times' Dealbook: May 5, 2009, 6:07 pm: "Hedge Fund Manager Strikes Back at Obama. Clifford S. Asness is not afraid to defend himself against attacks from the Obama administration. The outspoken managing partner of AQR Capital Management, a $20 billion hedge fund in Greenwich, Conn., has written a scathing letter striking back at President Obama for his harsh words blaming hedge funds for Chrysler’s bankruptcy. The letter is making its way around Wall Street, where it’s being met with cheers from other hedge funds managers, one of whom sent it to DealBook. Among other things, Mr. Asness said he was “aghast at the president’s comments” and called them “backwards and libelous.” I found this through Diana West's blog. While she is quite the American Zionist, I think her angry skepticism of the GOP's post-election strategy is right on. This comes the same day that I noticed Richard Posner's recent renunciation of the GOP or the rump conservative movement as any kind of home for intellectual conservatism. It seems clear to me that the various forces and players on the non-evangelical American right have the tools, the talent and the ideas to recenter the Republican Party, to rebuild from the centrist pussyfootery of the recent McCain-Palin campaign which, despite my measured enthusiasm for the governor of Alaska last fall, I readily agree as a disaster. The party needs to convince disappointed lovers, fellow travelers, moderates, people who work for small business, and all kinds of independents, professionals and other dynamists that the Grand New Party should be and will be the opposite of the waxing Obama Mussolini-style corporate state...]

Unafraid in Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter,” was the superb note from “The Committee of Chrysler Non-TARP Lenders,” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course, these are my own views, not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out.

Angering the President is a mistake, and my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens, it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first.

The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for reorganizing the company and partially paying off Chrysler’s creditors. Some bondholders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice,” they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not.

The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice,” you would not be happy.

Let’s quickly review a few side issues.

The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to “sacrifice” some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying.

The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protesters soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred-plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the Oval Office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

University of Chicago Conference on the Financial Crisis (April 10, 2009), Panel 1: Sources of the Crisis

2009-04-17T14:02:00.001-05:00

[What follows is my reportage of the Panel 1 of the conference, which I attended. I took pretty thorough notes, but they are necessarily incomplete. I welcome corrections. In the coming week I will better type up my notes on Panels 2 and 3. I did not attend Panel 4. The impatient can find the rough notes to Panels 2 and 3 in my earlier stub post.]

Conference on the Financial Crisis
Co-sponsored by the Money, Markets and Consumption Workshop, Economica, and other organizations. Held at the Franke Institute in the Regenstein Library at the University of Chicago, April 10, 2009. It was mighty.

Panel 1: Sources of the Crisis

Moderator: Gary Herrigel (Department of Political Science, University of Chicago)

Douglas Diamond (University of Chicago Booth Graduate School of Business)

Diamond gave a slightly slow-moving but persuasive talk on financial crises in recent historical perspective. He argued that basically such crises are all the same, being caused by runs on short-term debt. Diamond unfortunately did not do a great job dumbing down his talk, so that my sense was that it was difficult for many people in the room to understand it well. (See below my account of the Q&A session at the end of the panel, where I give more detail on Diamond’s ideas. I took bad notes at the beginning and good notes at the end.)

Mark Mizruchi (Sociology Department, University of Michigan)

Mizruchi presented other, perhaps deeper causes than did Diamond. According to Mizruchi, the longer-term causes stretch back into the middle of the 20th century, to the decline of manufacturing in the United States. He described a process in the last several decades that he characterized as a “revolt of the owners.”

First he spoke of the general environment of deregulation over the last twenty-five years. The most famous example of this was the abolition of the Glass-Stiegel act, but he observed that deregulation had begun in the late Carter administration. New financial instruments emerged, but financial and securities regulation did not always follow promptly. Here emerged one of the common themes of the conference presentations, namely the notion that there is a kind of race or competition between regulation and financial innovation. Thus, according to Mizruchi, this apparent absence of regulation is clearly part of the story.

Mizruchi began his story of “the revolt of the elites” (to steal Christopher Lasch’s phrase). American business, he argued, does not act as a unified or singular political actor. Business interests and activities are too uncoordinated and divergent for that. Yet from WW2 to the 1970's, there was an elite that had a "high degree of cohesiveness." They were at odds with traditional American business, which was against labor, against high taxes. This 20th-century elite was more “practical,” by which Mizruchi meant that they were more politically centrist or favorable to the demands of organized labor and Democratic congresses. They opted to cooperate with labor. In Mizruchi’s phrase, for them, the concerns of “the larger society” were more important than were their profits. You cultivate the goose which lays the golden eggs; you don’t kill it.

(I think that I can provide an example of this, although Mizruchi did not discuss this: Consider the handsome settlements made between labor and the auto industry, from whose crippling expenses we will all suffer in the future. This example is the kind of thing that Mizruchi did not mention, but which is the very important downside to his example: The elite, centrist coordination basically has the problems of corporatism, which is that it moderates or adumbrates price-competition in a market, because seller/supplier (of labor, the labor unions) and buyer/demander (the employer, the auto industry) basically agree on a high price, knowing that they are relatively insulated from external market competition for their products, in this case from foreign car manufacturers. Unlike ordinary private-market supply and demand, this is done by a few large monopsonists and quasi-monopolists whose position is guaranteed by the state, in the way of financial aid to the industry and pro-labor-union laws. Their respective seats at the table secure, both sides set comfortable, high prices, which eventually other people have to pay. This happens either through high marketplace car prices or through future liable payments like the pensions. The former is inflationary, meaning that everyone else in society suffers for it. As to future liabilities for pensions, in the future we're all going to pay for the folly of the Motor City.)

This elite coordination broke down in the 1960s and 1970s, under pressure from new inflation, increased foreign competition, and the energy crisis of 1973. For the first time, we saw the emergence simultaneously of high inflation and high unemployment, or stagflation.

In short, Keynesian demand-side policies were failing, and economists, businessmen and policy-makers could increasingly see that. Put very crudely, for I am a crude reporter, Keynesian policies had been to manage economic growth by giving people money to spend. That's why it's called demand-side: The consumer has money to spend, so by spending, consumers increase demand for products. This causes businesses to sell more, and everyone is better off. If I have this right, the problem with this was that by increasing wages, managing competition and keeping comparatively cheaper foreign products out of American domestic markets, policies dampened price competition. So prices rose. Prices rose and rose, meaning that there was inflation.

In response to these problems, there emerged new supply-side arguments. Businesses mounted a new counter-argument, opposed strongly to government regulation. They put pressure on labor. They were so successful in this “counter attack” in the 1970s and 1980s that they no longer needed to be organized as the cozy elite which they had been before. This resulted in the takeover wave in the 1980's. CEOs were increasingly under pressure to return high profits, or they might be out. They were thus encouraged by marketplace frenzy and by their own firms’ governance structures not to worry about the long term. So they didn’t.

In short, this 1970's elite dissolved. There was and remains a leadership vacuum in business.

(This appears to be a rather inaccurate way of expressing his point, however, which is really that there was more coordination of business interests with policy in the 1960’s and 1970’s. The other way to express this is that there was more regulation, which is almost inherently favorable to larger businesses over smaller ones, and probably contributory to the inflation of the 1970's which utterly annihilated the savings of people on fixed incomes and the poor. The irony, in other words, is that while regulation is supposed (i.e. said) to make competition more safe or stable, the inevitable flip side is that is secures the positions of the players already in the game at the expense of newcomers. It works against innovation. It also hurts anyone who is not actively in the labor force, i.e. the poor and retired.)

Duncan Foley (Economics Department, New School for Social Research): It's about Global Neoliberal Capitalism, Stupid!

Foley was the person sent here by the hand of destiny to deliver the message from Karl Marx and Immanuel Wallerstein that the current crisis is one example of many, already in the past and coming in the future, which are endemic to “global neoliberal capitalism.” Things like this have been happening for three decades. Crises, he observed, seem to come along precisely when everyone thinks they're never coming back.

The pattern of such crises, he argued, has emerged over the last three decades. This is a position presented by “heterodox, especially Marxist” economists and other similar social scientists. Economists of this red stripe like Gérard Duménil, Dominique Lévy, and Derek Jeffers (Capital Resurgent: Roots of the Neoliberal Revolution, 2004) argue that the historical origin of this was that in the mid 20th century, a certain system of financial capitalism superseded Fordism and Keynesianism. By contrast, in response to this, Milton Friedman and Friedrich Hayek “invented” neoliberalism.

(The neo in neoliberalism is misleading. It is thus tagged to indicate its newness. But this is not very accurate, since there has been a slowly growing tradition of liberal thought continuously for hundreds of years, from Adam Ferguson and Adam Smith to Friedman and Hayek. Generally, people who use the term neoliberalism are on the left. People who speak of markets or market solutions are more likely to be on the right or classically liberal. And anyone who speaks of global neoliberal capitalism is waaaay out on the left.)

According to Foley, the present crisis should be seen as one in a series of crises, the others being those in Mexico, Brazil, East Asia, Indonesia and Russia. In the US, we got caught in the same pattern.

Foley’s heterodox-Marxist model begins with the freedom of movement of exchange rates. Investors move their investment capital from market to market in different places in the world economy. The drama goes like this: There is an inflow of foreign capital. This bids up the exchange rate in a country, I guess because an investor like Colignius Asset Management needs local national currency in order to buy shares in a country’s market. In India, I need rupee rather than dollars. So I and other investors need to buy rupee, thus increasing the demand for rupee and concomitantly raising the price. This, according to Foley, causes “de-industrialization.” I think he means that because the currency now trades at a higher rate, it is more expensive for foreigners to buy products sold in the country. Thus for instance, if a British firm manufactures widgets, but the pound is trading at increasingly higher rates, then an American or German person who wants to buy widgets made in Britain ultimately must pay the British widget-maker increasingly more pounds. If the pound is trading high, then it is comparatively more expensive for the American or the Hun to buy British widgets. In other words, at a high exchange rate, it's hard for the local firm to compete in foreign markets.

Thus far in Foley’s account everything seemed to make sense, as far as it went. It said little of course for other considerably important factors, such as the production costs of goods in two respective economies. That is, Chinese labor rates are simply far lower than labor prices in the U.S. or Germany for instance. It seems pretty obvious that these are not simply matters of large international investors coming and going, but have to do with decades of market activity and investment growth. Hong Kong and mainland China seem like the perfect comparison to prove this point. Take them as a pair of environments with the same people, mores, prices, etc. a century or so ago, and see how different they had become because of only governance and social inputs over a century.

Anyway, if he had stopped there Foley might have made some sense. But he ran along ahead so fast that he lost most of us. High exchange rates in the victim-country, he continued, “set off a consumption binge of household goods” which he called “tradeables.” This in turn tends to finance a bubble in non-tradeable assets. This leads to inevitable collapse. (If you can follow this or correct my account so that it makes sense, please leave a comment below. You might be the first, and earn a prize. Seriously. I may seem a little snide about this, but I genuinely do not understand this account and think that it is incredibly myopic. I think that a lot of audience members did too.)

Strangely, Foley volunteered that the United States did not actually follow one of the core patterns of the model sketched above, even though the entire premise of his talk was that the United States financial crisis is one of a series. In the United States, there has uncharacteristically not been a devaluation of the currency. This point left much of Foley’s presentation in doubt. After all, in a nutshell he said that a financial crisis typical of global neoliberal capitalism is set off by high foreign investment which bids up the value of the currency, followed by fall and devaluation. This has not happened here.

I didn’t understand very well what Foley suggested about policy remedies for all this. He was clear enough though in general in alleging that the ordinary solutions to such crises “maintain the policies of global financial capitalism.” Generally this involves “putting pressure on the real economy.”

The “real economy” is how people on the left like Foley or his co-ideologist on the following panel Randy Wray characterize business activity in the manufacturing and agricultural sectors and the non-financial services part of the service sector. That is, there are the bankers and then there are all of the “real” people. Typical I think of “heterodox” economics is to argue for a kind of modern economic nationalism, in the form that nations should guarantee some prices (like higher wage rates and price maximums) rather than deregulating most sectors of the society. Such policies are nationalistic because they favor co-nationals within the country. Of course, this is an old argument in economics. The well-known problem with it is that where prices (e.g. wages) are kept high, the policy reduces demand (e.g. causing unemployment or underemployment), and were prices are capped (as in Venezuela, on just about everything besides labor rates), shortages result. The socialist man of the future who would not behave according to these patterns proved a mirage, and a very miserable one at that. The appeal of such economically nationalistic policies seems clear enough--though I don’t think you often hear proponents respond to the criticisms which I have just rehearsed above.

The reason that the IMF opposes such policies when it offers aid to countries is that they dampen domestic economic growth and make the country less attractive to international investment, and make its manufactured goods and services comparatively less price-attractive. For instance, if labor unions with real power were able to organize and raise the level of wages for workers at Chinese factories, much to the personal benefit of Chinese workers, Chinese manufactured products would become more expensive and demand from purchasers abroad (like you and me, in ‘Merica) would decline.

Thus what Foley characterizes as “putting pressure on the real economy” means resisting policies of economic nationalism. As John Cochrane would put it later on during the day’s presentations, what Foley calls “global neoliberal capitalism” has lifted hundreds of millions of people out of crushing poverty over the last couple of decades. This happened precisely as a result of “putting pressure on the real economy” through deregulation of domestic markets and reducing trade restrictions. The evidence on balance seems to be that although cushy labor conditions have become less cushy, the increase in foreign demand for e.g. Chinese manufactured goods has been of overwhelming benefit to huge numbers of humans the world over.

Foley’s last point was to argue that diversifying investments and using derivatives does not allow investors to manage risk. As he put it, “markets themselves are sources of complex endogenous risks.” I gather that he meant to take fluctuating exchange rates as sui generis chaotic movements, and in this sense “endogenous” to a market. It seems to me that this takes an effect (changes in currency prices) for a cause, and a self-moving and chaotic cause, at that.

More broadly, this is part of the view that international capital movements are chaotic, like the ocean in Machiavelli’s metaphor for the swings of Fortune. Thus Foley like Mizruchi ultimately argued in favor of trying to manage economic growth, in this case by fixing or manipulating exchange rates.

This wrapped up the third of the three panelists’ presentations.

There followed a long and rich Q&A session. The moderator, Gary Herrigel, asked, What about regulation? What about political pressure to extend home ownership? And thus the business and political actors? And, you are exaggerating the deindustrialization of the US a lot! And the Fed kept interest rates low.

Diamond recapped by presenting some diagnoses and policy suggestions which follow from both his arguments earlier and some of his recent professional published work.

One big problem, he argued, was “systemic risk externalities,” especially in the form of short-term debt. I believe that his example was of Bear Stearns. Toward the end they had been financing their debt by short-term debt instruments, of about thirty days’ duration. These were highly vulnerable to something like [margin calls.] That is, they gave things like Credit Default Swaps (CDS) as collateral for debt, which they should not have been able to or allowed to do anyway. As investors began to realize that CDS and other little understood credit instruments like mortgage-backed securities (MBS) were overvalued, Bear and other banks suddenly could not raise enough short-term debt to keep itself afloat and there was the equivalent of a large-scale run on banks. Generally speaking, you can say that one big problem was that there was so much similarity among all of these institutions’ positions—they each were “holding positions... identical to everyone else.”

Diamond also added that there should have been “higher capital requirements.” That is, investment banks should have been legally required to keep more cash or other easily convertible assets on hand, rather than financing their [cash flow] via short-term debt. Again, the problem with short-term debt was that if rates went up or the collateral assets (like MBS and CDS) on which it was raised declined in value, suddenly the investment banks would have to sell their other assets fast. And whenever anyone has to sell anything fast, he doesn’t get a good price for it. We call it a fire sale. There were lots of fire sales late in 2008 and the net result was to drive down the value of all sorts of financial assets, including ordinary stocks. It contributed mightily to a decline in prices and confidence in the market.

Finally, Diamond suggested that some kind of an international legal mechanism is needed to resolve problems like the ones just discussed. National bankruptcy laws work well enough domestically (another themes which would recur again and again in the day’s panels, especially in Panel 3), but not for foreign investors. Diamond left this point unexplored. (I noted that Diamond mentioned that he writes for an outfit called the Squam Lake Working Group, a think tank adjunct to the Council on Foreign Relations (CFR).)

Financial Crisis Conference 2009, University of Chicago (transcript)

2009-04-10T19:26:00.001-05:00

[Dear Reader: What follows is a transcript of the conference held today at the University of Chicago on the origins and implications of the current financial crisis. It was enormously stimulating. The panelists were twelve professors of economics, history, sociology and anthropology from the University of Chicago, Rutgers, the New School for Social Research, the University of Michigan, and the University of Missouri at Kansas City. NB This is the raw transcript; I will correct it for spelling and turn it into full Thucydidean prose in the next week or so.]

Panel 1: Sources of the Crisis
(see separate posting, where I have typed these up complete)

[What follow are the rough notes to Panels 2 and 3. I will turn them into prose soon.]

Panel 2: Crisis in Perspective: Historical and International Comparisons

Michael Bordo
Dept. Econ., Rutgers
ecoinonmic history in long term

def. financil acrisis episode of financial turbulence leading to distress
insolvency among participatns
official intervention to containt hese consqeuences
curency and banking crises
twinning of crieses also soometimes

four periods

first era of glibalization
1880-1914

intrewar period
GDepr

Breton WOods period
WW2 to early 70's

second era of globalizations
70s to 90s

divide number of crises by number of country year observations
there are a lot mre crises today than in thte first period
had to do with frequ of currency crises--more today because more countries andmore capital mobility
so crisis problem is not something that just happened
severity of recessions is linked to asset price busts (def. as asset and equity prices)

IMF event study:
house price busts tend to rally make reessions a lot deeper
credit crunches do not do quite as much damage
stock market crashes are not quite as serious

with a housing price colapse, a crisis lasts about 6 years. we're now in year 3; housing prices are down 30%
decline in GDP last about 2 years

in the past, a lot of financial crises began in US--1857, 1893, 1907, 1929-1933, today

This crisis began with collapse of US suprime mortgage market.
Multiple causes, as discssed in Panel 1. plus savings glut in Asia.
...through network of derivatives
then spread US to rest of world
Fed responded by flooding financial markets with liquidity.

There has not yet been a big bailout (!) as in RFC in 1930's or Swedish banking more recently.
(REALLY? HUH?)

shows graphs os spreads, discount rate, recessions ,and political events (too much to write down)

financial innovations

Fisher and Minsky story--investment boom and new credit instruments, state of euphoria, bust, overindebtedness, crisis
assymetric information--borrower has better information on loan than has the lender (see graphs just mentioned)

Tradition view sees crisis from iability side.
Depsitors run to bank to gtry to get their money out.
Panic occurs when a bank fails, and a contagion of fear and panic spreads.

But most of these panics started on asset side, until after GD the govt set up depsot insureace
So now crises come from tha asset side.
1970 collapse of Penn Central
Fed headed off incipient crisis as lender of last resort.
LTCM was also headed off.

1763 one too

What drives these is financial innovation, today the securitization of subprime mortgages.

Crises are transmitted across countries. This crisis today too. Start in advances countries. Happends through sudden stop -- with crisis, we suddenyly stop lending. In 1890, the Baring crisis.

Policy: initially you provide liquidity becuase of run on banks. THat's what the Fed did; good. But if crisis spreads to insolvency, then story become how Treasury can deal with bansk--remove toxic assets from banks, creating a bad bank. And close down insolvent banks. US is making moves in this direction, but not much yet. Bordo predicts that US will have to take over insolvent banks, remove management, wipe out shareholders, put bad assets in bad bank, then recapitlize an sell it off to new shareholders. Bordo thinks that the easing right now will attenuate the crisis.

Bordo thinks that fiscal policy will not get us out of this recession. That is his reading of the GD.

L. Randall Wray
Economics UMKC
The Rise and fall of money manager capitalism: A Minskian analysis

Boom and Bust
virtually no (??) crises before 1970's

The problem is not irrational exuberance.
The seeds of this crises date back to 1951, sewn by Fed's incrlt aggressive use of interest rates.
financial instn innovations

Stablity is destabilizing
Huh?
Big Bank and Big Govt constrained the instability
this allowed managed money to grow
shifted the wirgh to fht financial system away from banks toward pension funds etc.
virtuous cycle, in which stablity and competition fuel a cycle of rising asset prices

3 innovations: securtization, futures, swaps
originate to distribute model

convention wisdom is that lowering spreads, spreading ownership sna dn drmocratiaiton of criedit was evidence of risiing efficiency

so not originally a suprime problem

CDS "Insurance"
$60-70 TRILLIOIN
held and sold by banks abd hedge funds
used to make bets on death of assets, firms and countries!
CDS: I sell 1 million life insurance policies to you on a 90 year old nursing home patient for $1M each at $50 and book revenue $50M
Patient worsens so premium rises to $100
You sell 1 million policies at $100, book profit of $50 M
YOu are fully hedged: If patient dies, I pay...
[...]
So CDS purpose was to perpetrate fraud.

...

Role of Managed Money
Commodities wer epreviously not managed - pure gamble.
Studies showed commodities not corrleated with equities. So they were diversification tools.
Thorugh 2004, managed money bought physicals; holding is costly, so they moved to futures market.
Rolled on delivery date.

Obama's Recovery Plan
infrastructur project up to 3 million jobs
creat 5M green jobs
address widening income innequality gap, strengthen usions, raise minimum wage, reduce taxes on middle class
subsidizie states; share of medicated and child helath
TARPS and PPIPS Fed purchase of toxic waste... Money manager version of trickle down theory.

successful crisis resolutions require four things:
transparency
assertiveness
accountablity
clarity

Rather, we need:

liquidity: we need to lend without limit, on no collateral at all. Exapnd FDiC insurance.
But Paulsona and Geithner plans: Who needs socialism when Goldmann Sachs runs the Treasury?
Their plans wil not work of it is a solvnecy crisis.
insolvency: no urgency
Need a payroll tax holiday--$4000 per workers and same for firm.
fiscal stimulus: we need both tax relief and government spending, unemployment compensation, infrastructure, $400 B block grants to grants
Mortage relief: refinance on favorable terms
rent to own
comination of private and sociazlized losses

Sustainable growth package I
We need to change the form of capitalism: from the ideas of Hyman MInski
need payroll tax reform--it's inflationary, regressive, discourages employment
Abolish the trust fund.
Need Payygo and tax income to share real income
State and local govt: reverse devolution
Need public pension fund system for all, and health care!

This guy is talking about massive govt management of the economy.

see www.levy.com

----
The Perils of Shifting form Personsal to Impersonal Finance, 1637-2007
Larry Neal
Economic HIistory, LSE

a lot of parallels to South Sea and Mississippi bubbles
See his book The Origin and Development of Financial Markets and Institutions

2007-2009 is unique in historym but there are precedents.
Financial innovations help economic growth in the long run.
Cordinate innovations between banks, markets and govts.
Crises often occur i the short run.

Banks really should operate on personal connections (so long as it's confidential).
But for large scale growth you need to go to capital markes. (Require transparency.)
In bakground, govts have to try to coordinate this.

list of several historical crises
(Ann Goldgard, The Tulip Mania - new book)
The Dutch govt solved the mania by allowing people to back out of the tulip forward contracts by paying a pennies on the dollar backout unwind possiblity. Most of what people lost was just the paper gains that they had made.

With South Sea Bubble, Walpole solved in 1723 by separating out shares into a trading company and the other half into long term annuities perpetual to shareholders. He thus detoxified the bulk of the assets. (Neal shows this in unpublished paper.) resumption of trading in South Sea annuities. France takes the Randall Raich approach (the Dutch solution).

Obstfield & ___ trilemma graph for international gold stadnard, Breton Woods and post-Breton Woods

Steven (Larry) Epstein - _Freedom and Growth_ - on Italian city states. They figure out how to expand stability across northern Italy.

----
Q&A
Bordo and Neal emphasize that evolution of capitalism occurs through financial innovation.
Crises are hiccups or blocks along the way. But then growth always resumes afterward, always.

Sewell: Getting it right is different at different times.
Neal: The French mistake after the Miss bubble in the 18th centiry was a big misstep.

...

Bordo: Minski usee irrationality ; cannot be modelled. wasn't taken seriously in 60s through80s
Bordo to Randall: yours is a recipe for inflation

Randall thinks that his model is not inflationary, but recongizes that this is a potential problem What we need is JOBS.

-----
LUNCH
-----

Karen Ellis babbles, thanking

Chris M., head of Economica the undergraduate student organization. They publish a journal too.

---------------------

Panel 3: Ramifications, Philosophical and Political
2 PM - 4 PM

Moderator: John Kelly, Department of Anthropology, University of Chicago

Richard Epstein
Law School
University of Chicago
has taught here since 1972
Senior Fellow, Hoover Institution

When you are faced with cries, should you staythe course with sound first principles, or do you have to do emergency mode,newer dift and more daring than what you have done before? Hard question to answer in abstract since need baseline. Most Americans are comforatble with mixed economy, partnership between govt and private sector. Not Epstein.

Ram Emmanuel: "A crisis is too good a thing to waste." (//Naomi Klein)

in short run, deregulation will not be enough to get us out of this recession. some kind of stimulus prudent, if you can believe that, "if you can keep the regulatory impulses out." "...not as easy as you think."

Think of Autumn 2008 bailouts of banks. In secretary's bill in fall, there was ridicoulous bundling, so that a bailout bill incldd weird stuff about helath care.

Classical liberal theme: first you wish to attack this system of the creation of state monopolies and cartels. IN New Deal era, while there was modest public good projects, there was also huge cartelization. agricultural industry, labor markets, etc. Each cartel at micro level each increased prices and reduced output but no one thought that in aggregate this would be a problem. If you take into account the losses to the losers, this is huge! But after the stimulus packages passes, the regulatiory package remains. Smot Haely, strong union packagges, state laws for protections of dealers and franchises. These things start to matter! IN times of general prosperity, these price minimums have less effect. But these rigidities astart to hurt people in tough times.

Think of bailout of auto industries. Why do big 3 do so badly compared to Japanese companies in the US?
"legacy costs," everyone says. Where do legacy costs derive from? IN a competitive market, a firm will not take huge debts in furuter against prosperity today. INtrodude a monoly and everything changes. "If you put together a program which wil forge you a winning political coaltion, you have sold out."

bankruptcy reorganization is what we need for these big companies
Not that we believe in freedom of contract come hell or high water; rather, need an easy way out in case things get too bad.
IN bankruptcy, all executoary contracts may be disavowed by beneficiaries in bankrupty court. THat means you can disavow the conracts, so that things can get going from the start again.

(Given that this is unrealistic, what is a distastegul but moderately principled approach to the Big 3 and their legacy costs?)

Everyone must be subject to the ravages of bankruptcy.

All of the micro stuff that Epstein worries about go straight to the bottom line.

Now, is what is true about these very business sectors also true of "the financial sector"? It is difficult to disentangle everything. The classical liberal model does not call for total dergeulation. Rather, sensitive regulation. YOru regulatory schemes need to be able to keep up with the flow.

Take a first example: the velocity of transactions. Mortgages in the GD. Even in the GD this was not a trivial problem. "Roosevelt in one of his good moves introduced the bank holiday." underlying causes took more time. Bottom line is that there was low velocity, fewer transactions, etc. Esp because banks tended to hold their own mortgages. Now holding own mortgage may not be a good financial strategy, eg if there is a regional catastrophe. So modern computer techniques an ficnnance allowed repackaging, the story we have been hearing today. Even simple recording of who owns these things becomes very difficult.
...

Banker regulators are there to protect us by making sure that asset values on book reflect curent position: "mark to marekt" , "fair valuation". The problem with financial derieves porobelm was that you couldnt do this evaluation.

Huge global problem of competing regulatory frameworks. That's one reason why this crisis is an international problem.

We may have to slow down the transactions in order to get the rules right.

-------------------------------------------------------
David Ruder
Law School
Northwestern University, since 1961!
chairman of SEC 1986-1989!
founder of Mutual Fund Directors' Forum

Some of the panelists suggest that there is no solution; Ruder will offer us a solution. Global problem.
complex instruments
oversight failures
lack of adequate national and international attention to systemic risks
administration and congress signal interest in reforming the whole system
Is an international financial regulatory system necessary?
unikely that US will cede power to an internatinoal regulatory body. but we should obviously take other pwoers' opinons into account.

A sound system will:
restrain greed and fraudulent activities
encourage innovation
protect the public and the economy.

What should the components of such a system be?
here's the POV of a financial regulator, chairman of the SEC:

Listening to Richard Epstein, you wonder how an ideal solution can also be made to fly with Congress.

Any revisions should seek to improve on the current system, not to creata a single financial regulator, which would be likely to fail and to introduce an unnecssay level of bureaucracy. bodies like the SEC can make independent decisions, able to reissit siren call of Congress and White HOuse. Also, eidence from countries like BRitain with single regulator do not offer hope. Britain's "Big Bang" regulation of a few years ago did not find the right solution.

should have task of protecting against huge dislocations such as we have had

he has testified bfore congress that first we need disclosure of risk positions.

look at the positions of entities like hedge funds which have the ability to affect the financial circumstances of the US and the world.

Then, that regulator needs the power to do something, to impose leverage ratios and risk prohibitions and the possibility of taking over an outfit which has access to Fed funds.

the regulator could be the Fed, but needs to be something.
do need to preserve the Fed's function

Regulation should continue to be based on fucntion.

So banks should be supervised by banking authorities concerned with... should be more centralized and coherent.
Reg of insurance companies is inadequate in US. Should be an alternative federal regulator.

The SEC should regulate other financial instns. should also have expanded power to reg hedge funds, ratings agencies and other players in the game.

"Participants need protection against misrepresentations and stealing by others." protection against fraud in particular.

Bernie Madoff problem--what went wrong? Ruder says SEC has best enforcement system in the world. What is needed is enhanced funding so that the SEC can cope with innovations. Wall Street has used the young best and brightest to create new financial products. Monetary incentive will remain the way to get the minds. So the SEC needs a bigger budget to pay good people to cope with these products. People who know about modeling anf tails. NEed people who know about catastrophes.

Philosophical propositions: capialistm is not enough. Unregulated markets do not provide sufficient protection. need regualtrion of capital markets for securites, as in other things.

shoudl be different regulation for banking soundness and for other market areas where there is a presumptio tht those who are unsound will fail. that is good.

remember also global interconnections between financial markets around the world.but US will never relinquish control over regulatory systems to a world body.

John Cochrane: "The Good, the Bad and the Ugly: Politics in the CUrrent Situation"
GSB, University of Chicago

not repeating the three main mistakes of the GD:

1. money: in financial crisis, people want to hold more money. the Fed can let them do that. That is what the Fed failed to do in the GD< leading to 25% [de]flation. The FEd learned that lesson. has put about a trillion into the economy. we also now want treasurey bills too, and the Fed has figured out a way to do that. evena danger of inflation.

2. runs: there were chaotic runs on banks.

banks: There was a wave of bank fialures, so there was no on e there to make loans. Nowadays, the market is open, ans new banks can start up. Decades ago, if the bank failed, then there was none to replace it.

When WaMu failed, it wasbought up and infused with cash within a week.

3. FDR fuoght dfeflation with price supports and cartelizaiton. We have still the legacies of the GD, but have not make matters worse.

Bad:

We are turning into the bailout nation, refusing to let anything big go under. Bernanke said as much recenty. AIG just came around for its second round of baoiulaiotts.

TARP like a horror movie refuses to die and is even standin in the way.

Say you have bank with troubled assets at $.40 on dollar. If it sells, then the bak has to mark all its assets down to that.
There is this dream of liquidity, s though the govt can just stir a little. Doesn't work that way.

Assets are always illiquid; that's how bank assets always are.

peasant with putchforks get angry about GM, but think that it's dift with AIG

Myth: illiquid assets, hard to value, people don't want to buy them. Banks need capital. Story is that banks cannot raise capital, so they are dumping assets =on the market, so lendin ghas stopped. At leat this focuse on a reasonable policy answer. ANd it is true, something has stopped banks from lending. But this story is not proven. It rings false. First because assets are always hard to value. 10 MBA's won't get close to figuring the market alue out of an aeset. THis is not liek engineering. 2. It is not true that banks cannot raise money. ...What we should care about is new lending. For that, all yo uneed is one healthy bank. And banks as a whole have not deleveraged. Teh Fed AH report show sthat banks are alctually lending more than they did just before.
accounting rules for money marketk mutual funds
repo rules and chapter 11
this is the engineering level

The danger: That we wil hva e febderally run banking system for years

Remember how hard it was to hget rid of the rural electrification program.

There is no defintion of "systemic." You cannot put a stop to the bailout, since everyone wabnts one. Now adays life insurance industry wants a bailout. The Hartford bought a bank and now wants balout money.

Why baoil out people who invested in guaranteed rate of return contracts? ike Bernie Madoff's victims or people in Florida.

Bakruptcy court is where you go to get $.50 on the dollar for your investments.

Itcannot be the job of the federal govt to stop anyone from losing money. And it is not able to do that thing.

Fiscal stimulus, bad #2: this fails basic accounting. it will not raise the level of the whole economy. If you take from A to give to B, then A cannot spend his money. It prevents A's oney from being leant out by A's bank on a loan. Were in a credit crisis, so this is counterproductive!

If you like fiscal stimulus, then you should like Bernie Madoff, big bonues, TARP money. In all cases, they took money and gave it to people who are likely to spend it. It is just not important for the short run behavior of the ecnomy.

(how distinguish this from multiplier effect in ordinarytimes?)

The Danger: Inflation:

Will the Fed raise interest rates [to slow things down to prevent inflation]? It will be politically difficult. And the Fed may not be able to 'take th emoney back' sp to speak. (This directly addresses Randall's utopianism of earlier.)

Regulation: big decision is to leave monoliths in place or brak them up? Fed govt cannot watch over everyone to make sure that they do not do anything stupid.

Look at IRS forms.

Most of our current problems come from bad regulatios of the past.

clever device for getting around capital requirements ex.

...

A little hope:

Hope #1:
Investors bear most of the blame.
We should write catastrophe insurance?
There is no magic in investment; there is only risk. When investors reaize this, they will understand that money has to be for the long term.

Hope #2: signs of recovery
The economy needs to recover quickly before the quack medicine can take its effects and then people learn the wrong lessons from this.

-------------------
Q&A and discussion:

Kelly's questions

"imperative cooperation" as a euphamism for domination

recent G20 meetings: Obama press conference. Have we reached a new post-Washington Consensus model?

national capitalist regimes vs global capitalism

Epstein: China is not innocent of any of this. Big run up from cheap money in China. similar effects as subprime crisis...

Cochrane: some financial innovation is to get around regulations. But another kind has a genuine economic function--make sense--e.g. mortgage-backed securities.

fix the bugs in accounting rules. CDSs are also great innovations.

David: structured products are 50% of the financial system. In 90s Greenspan argued that derivateves should not be regulated. And they were. Unregulated system resulted. So now what we need to do is reregulate.

Cochrane: instns should be able to innovate, but only if they are not guaranteed by the Fed. The porblem is unregulated traded with someone else's money. In 80's, everyone took high risks.

Epstein: the problem with disclosure is that it means disclosig your trading strategies.

Cochrane: global savings glut is BS story
distinction between savings and bearing of risk
There is no liquidity trap out there; rather, people want to put there money in the bank/bonds and not in securities or something high-risk.

Cochrane: the crisis is...

Epstein: this is not an innocent discussion. it wil drive the prices further down. [?] threat of renegotiation and late payments: uncertainty. The legal priority rule is a great thing.

A question from crowd: Should we nationalie banks temporarily?
David: yes
Epstein: govt ownership will last on and on

Epstein: priority rules must be held to. The only element of discretion is to figure out how a trustee maximizes aggregate value. What % of system can you solve by ex ante rules which are reasonably rigid? Optimallity is you go as far as you can with rules first. "You have to toss old peope off the end of the ship in order to make room for people at the other end."

Cochrane: one good thing about xecutive compensation rules is that it makes it unattaractive to be a govt-owned bank, so it may speed the return to private banks

practical rules;
sec
accounting rules rule 157 - how banks evaluate assets
should SEC impose short-selling rules on the market? (Cochrane & Epstein: no. short-sellers make prce discovery)

Epst: another reform: reuirement of publicisizng reseaerch destroyed rsearch. SEC non-discrimination rules kill some of the research discipline.

David: given notion that you have to give all info to the regulator, a tough qursytion is what the regulator should DO with that information. Will he stifle information?
Espt: But you really want to create a partition.

Cochrane: speculators and short-setlleres are good because they are willing to buy stuff up quickly.

David: CDSs need a clearing system. That is the solution to that problem.

-----------------

PANEL 4: AFTER THE CRISIS: RE-IMAGINING THE ECONOMY
4:30ish-6:15

Eugene Fama
Booth School of Business
University of Chicago

Keith Hart
Department of Anthropology
University of London

James Galbraith
Public Policy
University of Texas, Austin

Moderator: Moishe Postone, History Department, University of Chicago

You are not the one who dreams your dreams

2008-10-09T13:00:00.000-05:00

"Who is dreaming your dream? It is not you, but it is also not someone else. It is not like your heart beating. The... point in Freud is that the one who is dreaming my dream is the one who is living my life. [It is not a man within the man, but rather another form of] strange agency... This is an inversion of the [expected relation of conscious and unconscious.] It is not that the conscious has an unconscious, but rather that the unconscious has a conscious..." --Irad Kimhi, October 8, 2008