"Get The Government Off Our Backs"

[peterbirks]

Yes, it's the plaintive cry of small-town America every year.

Unless, of course, your small town is in such deep shit that you can't cope, in which case the cry is:

"Why isn't the Government doing something?"

The US probably has one of the most state-interventionist (if you take 'the state' in a rather broader sense than 'Washington') systems in the developed world, and it finally gave up any pretence that it wasn't interventionist by effectively nationalizing 50% of the mortgage debt in the country -- just the $5,000 billion. Presumably it saw the alternative as the total collapse of the US monetary system. Freddie Mac and Fannie Mae have always had an odd status, with the latter harking back to Roosevelt and the former being an even weirder institution, created to provide 'competition' to Fannie Mae. Until now, the shit hasn't hit the fan, so people have not cared to look too closely at the ins and outs of the matter. Now that the shit HAS hit the fan, the US Government has come to understand the downside of modern economics -- many financial institutions are 'too big to fail'.

Of course, for non-Americans, it's great news. The US taxpayer funds a bail-out of the world economy to the tune of about $30bn. Well, at least, that's what one hopes will happen. Because, make no mistake about it -- this is just about the last throw of the dice. If defaults and repossessions continue to rise in the US, and if the level of credit available shrinks back to the levels of the 1970s (the 1990s would be disastrous, the 1970s would be apocalyptic) then all of that consumer spending in the 1990s and early 2000s that was 'borrowed against the future' will be have to be paid back in a rather shorter timescale than anyone imagined. And if THAT happens, it's quite feasible to see serious political upheaval as a result.

And, in that sense, one can see that all politicians worldwide are conservatives, with an interest in maintaining the current system. If maintaining the current system requires mass government intervention, then all principles about 'no government intervention' get thrown out of the window. One of the appealing things about Thatcher (despite her many practical lunacies and penchant for economic juju men who shouldn't have been allowed out of the asylum) was that she didn't give a shit about the implications of her principles -- she would stick with them anyway. If a certain economic strategy could lead to glory or total social collapse, Thatcher wouldn't have looked at the risk vs reward and taken the 'safer' option. She would have gone ahead gung-ho. She was, indeed, the anti-politician politician. The people in charge today have a rather more pragmatic attitude. That's what makes them politicians. And so, the US takes a lien on half the mortgaged property in the US. Stalin would have been proud.

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Headline in yesterday's Sunday Mirror:

"Ross Kemp fights on behalf of troops in Afghanistan"

Jolly noble of him, but, surely, isn't that the soldiers' job?

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Poor old Ray Nagin has a potential upcoming problem with Hurricane Ike, doesn't he? Will it be another "storm of the century"? How many of them does he plan to predict? But, if he stays quiet, and Ike DOES hit New Orleans, one would be tempted to say 'God, Ray, can you get nothing right?"

At the moment, it's v hard to predict Ike's actual course -- with a range from Key West to Mexico. It's also a much 'smaller' hurricane. By that I do not mean 'weaker'. It could indeed get very ferocious, but it has a smaller size of impact -- about 22 miles from the epicentre is the peak wind speed, as opposed to 70 miles in the case of Gustav and 90 miles in the case of Katrina (although I quote those numbers from memory). That can make for more spectacular pictures, but lower overall economic damage. Not much compensation if it happens to be your house that's 22 miles from the epicentre, of course. But, hell, serves you right for being mug enough to move to Florida. I've got rather more sympathy for the poor souls on the coast in New Orleans, in that at least the majority of them haven't retired there from Queens.
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Comments

[real-aardvark.livejournal.com]

Ah yes, bugger "fiat currency" -- let's go with "fiat politics."

I don't think it's much like Stalin, though. Uncle Joe would have gone for something insane like collectivising brick-making (even though 95% of American houses are made of wood), got some arse-licking creep like Lysenko to fabricate a quasi-intellectual justification, and then shot anybody and everybody who even knew what a brick was. Well, it seemed to work in the '30s and '40s -- largely because the result was such an almighty cock-up that the whole civilised world, and 20 millionn walking corpses, were pretty much forced to back him up. Somehow I don't see this happening with America any time soon. Give it six months and the dollar will tank.

Actually, it looks more like Mao to me. For some reason it reminds me of his solution to the shortage of blast furnaces in China -- get everybody to build one in their back garden. Granted, this is in the Fed's back garden, but it's liable to be just as catastrophic.

Anyway, nice to see the Bush family embracing the New Deal, at last. Quite amusing, really.

[peterbirks.livejournal.com]

Well, no, the Stalin reference is just to put a bit of tabloid sensationalist blue touchpaper under the whole affair. Stalin would have made much less of a hash of it, I suspect. And, when you consider Stalin's track record for macro-economic plans (not to speak of his tractor record) that gives you some idea of how ballsed up the whole thing is.

The sad thing is, the Fed's action at the weekend was probably correct, unavoidable and, given that the whole situation is the fault of politicians and Fedmeisters in the past (mainly, it must be said, Greenspan's actions in 2001 to stave off a recession as a result of the dotcom collapse). To act now, to be proactive, was the best that the Fed could have made of a bad job.

And I hope that any whinging at the US on any economic matter in the near future (e.g., steel protectionism) is batted back with the 'er, and would you like to contribute to the twin-FM bailout?' response.

PJ

[peterbirks.livejournal.com]

But, I digress; tell me more of these Chinese bricks.

PJ

[jaybee66.livejournal.com]

I would prefer US to UK interventionism. The ghastly socialist experiment with Gay Gordon at its helm, promising us that we can all be Kings and Queens but dragging us all into the gutter as there isn't enough to go round. In US schools they may lack Darwinism but in the streets it's alive and kicking butts.

I flew out of the 38C, cloudless skies of Madrid on Friday and just as we passed over the Isle of Wight everything went grey. On touching down I saw grey, sour faced people.

So happy to tell you that the next time I go to Madrid it's a one-way ticket. Navidad en Espana. Woohoo!!!

[(Anonymous)]

That's odd; I thought that the cave-dwellers in Spain were somewhat more to the south of Madrid, in and around Andalucia. Say hello to the Neanderthals when you touch down.

I do wish people would stop bandying the word "socialism" around as a fuzzy-headed short-cut for "things a doctrinaire right-wing git like me disapproves of." I predict that the diminution of this noxious habit will be one of the major benefits of the Fannie & Freddy double act. It's already quite amusing to see UK newspaper pontificators twisting their scabby little heads around the concept.

However, it's all in good fun. Which is more than I can say for the astonishing levels of combined scientific ignorance and pant-peeing primitivism associated with the switching on of the LHC. You're right, James, about the social position of Darwinism in the USA; the sad thing is, in Britain we seem to have it the other way around -- unquestioned in all schools bar those "academies" favoured by Blair, and invisible on the streets.

You would think, after the seventh wettest summer on record, that the Chicken Littles of this country would realise that the sky has already fallen in. Repeatedly. Bashing a couple of protons together every now and again will make sod all difference.

Get the government off our backs

[(Anonymous)]

Similar thoughts about government intervention were going through my mind when I was analysing the results of house builder Redrow today. Their chairman said:

"We believe that the Government needs to urgently reappraise many of its policies in relation to the housing market given the change in market conditions. Whilst we welcome the Government's recently announced package of measures, we encourage it to take action to help improve the availability of mortgage finance. In particular we also consider that more needs to be done to help first time buyers to become homeowners. In the medium term, it is important that the Government review their proposals for the value of land to pay for a wide range of initiatives relating to sustainability, infrastructure and social policies. Without this review the short term adverse consequences for the economy and the longer term impact on housing supply could be very significant."

Then, once they have sorted out our mess for us, please leave us alone to make pots of money and grant each other huge salary increases.

Until recently I thought Maynard Keynes was a town in Buckinghamshire.


Johnny H.

Fannie and Freddie

[(Anonymous)]

Pete,

Saw this very interesting blog about Fannie and Freddie:

http://billburnham.blogs.com/burnhamsbeat/2008/07/fannie-maes-gol.html

I also saw that the reason why Paulson took them over now (I was expecting it to happen when their short-term funding fell due later this month) was the dodgy accounting with the deferred tax credits.

Hey ho.

Pete N.

Re: Fannie and Freddie

[peterbirks.livejournal.com]

Hi Pete.

As I said, I think that the action was well-timed and contrasted well with the way the UK handled the Northern Rock fiasco. The Wall Street Journal had a vituperative piece on Barney Frank, one of the great defenders of the two FMs, who was screaming for years that the taxpayers would never lose a penny on these "two great institutions".

PJ

Fannie and Freddie

[thurb.blogspot.com (from livejournal.com)]

The Economist has been urging the US government to take over these funnily-named institutions for some time, although it was also recommending that after nationalization they should be broken up and sold off.

I think it reckoned that this course of action was better than allowing them to become a bottomless pit into which taxpayers' money might be thrown for ever after.

Whenever the government finds that it's paying the piper, it may as well ensure that it can also call the tune. However, as I'm not in favour of government-run industries (which normally work very badly), the idea of then breaking up the organization in question and selling it off appeals to me too.

Any organization "too big to fail" is bad news anyway. People are better served by having a large number of competing companies in any field. I'm obliged to use Microsoftware because of my job, but I curse it on a daily basis.

-- Jonathan

Re: Fannie and Freddie

[peterbirks.livejournal.com]

As I've pointed out before Jonathan, the paradox that "non-interventionists" suffer is that, if government fails to intervene, then stuations that require intervention develop. It wasn't government intervention that made the banks (and the two FMs) too big to fail. It was the free market. Indeed, it was a lack of interevention in the case of the two FMs (permitting the market to 'assume' that there was an implicit government backing when they should not have been allowed so to do) that caused many of the current problems.

The Economist's solution sounds neat, except that it would appear to imply the taxpayer rescuing the FMs, and (if a sale is to be successful), institutional investors benefiting from the sell-off. And any assumption that private equity would necessarily run things better is dodgy ground indeed (the preivate finance sector has hardly covered itself in glory here).

That said, although there would be a redistribution of wealth as a result of nationalization-followed-by-sell-off, it wouldn't be that great, since most of the institutional investors are pension funds and mutual funds, etc, so the money works its way back to the taxpayer. The distribution would mainly be from borrowers to savers. The problem is, to get us out of this mess, it's likely that we need a redistribution of wealth from savers to borrowers.

And, since you mention Microsoft, I think it would be fair to point out that the dominance of that particular company was nothing to do with government intervention and everyting to do with how capitalism tends to work. "People are better served by having a large number of competing companies in any field" sits uneasily with "unfettered capitalism will, in many industries, tend to lead to a small number of companies exercising oligopolistic power of pricing and supply".

PJ

Re: Fannie and Freddie

[thurb.blogspot.com (from livejournal.com)]

The FMs were set up by goverment, and Fannie Mae was a government agency for a long time. I suppose that's why people assumed that the government still had some responsibility for them; and that's why they became "too big to fail". If people hadn't made that assumption, I suppose they wouldn't have become so big.

It's not true in every case that the private sector will run things better. However, if a company screws up, the costs should be limited to the people involved with that company.

"Unfettered capitalism will, in many industries, tend to lead to a small number of companies exercising oligopolistic power of pricing and supply": I think this is questionable, but I'm not enough of an economist to question it rigorously. As I understand it, monopolies (and, if you like, oligopolies) arise because of barriers to entry. I think such barriers are most often legal. Change the law, and you can remove the barriers.

The rise and rise of Microsoft frankly puzzles me. Its software has never been innovative nor particularly good; its customer service has always been lousy; its documentation was once adequate but has become steadily less so. Gates has been adept at manipulating the software industry to his advantage, but I haven't studied the mechanisms by which it was done and perhaps I wouldn't have the expertise to analyze them even if I studied them. No doubt the law was one of the mechanisms used.

A special factor has been the difficulty of writing software that will run well under multiple operating systems. It can be done, but it's still difficult. If it were easier, it would be easier for other operating systems to compete with Windows (which has no special virtues other than market dominance). We seem to have here a technical barrier to entry.

I suppose this is why some companies are trying to persuade people to run software on the Web instead of locally. The Web then becomes the operating system, and it's open to all.

Re: Fannie and Freddie

[peterbirks.livejournal.com]

"If people hadn't made that assumption, I suppose they wouldn't have become so big."

Not true. There are several examples of private sector institutions not set up by the government that have become too big to fail. And the "assumption" was that of the private sector, not of government. It was a private sector failing, not a governmental one.

Perhaps the FMs would not have become so big, but they would still have become big enough to make any complete failure a systemic apocalypse.

If the rise of Microsoft baffles you, I recommend the book "The Tipping Point", which illustrates why rational factors and legal barriers are far from the only reasons for oligopolistic and monopolistic situations arising. As you observe, there are technical barriers (and others) that favour dominance of industries by a small number of companies that have nothing to do with legal barriers to entry (or, in some cases, cost of entry).

This leads to effectively monopolistic pricing power. See, for example, EBay. You can't blame too much government and too many laws for everything Jonathan. The 'free market', in some instances, does not work well. I'm not denying the existence of legal barriers to entry (a quick look at the lack of the implementation of those barriers in, for example, the building industries in Nigeria and Turkey would show that in some cases these barriers are desirable), but I would certainly deny that this is the majority cause of barriers to entry.

PJ

Re: Fannie and Freddie

[peterbirks.livejournal.com]

Actually, I've just realized what this line reminds me of. It's a bit like Richard Dawkins and his book The God Delusion. While belief in God can fairly be said to be a reason for a lot of misery in the world, it's a bit harsh to bblame all the bad things that happen in the world on a belief in God -- which appears to be Dawkins' general theme.

PJ

Re: Fannie and Freddie

[thurb.blogspot.com (from livejournal.com)]

I read the book but didn't fall in love with it. He seems a bit obsessed. It is pretty disturbing that vast numbers of people go wandering around with strange delusions in their heads. But I think the people who get most disturbed are the ones who used to be religious but gave it up. They feel something's missing from their lives and they don't know what to do about it. I've never had religion in my life so I don't feel I'm missing anything.

-- Jonathan

Re: Fannie and Freddie

[thurb.blogspot.com (from livejournal.com)]

"It was a private sector failing, not a governmental one."

Hm, surely it was a government failing to set these things up in the first place. And making the assumption that the government would bail them out was a generalized people failing rather than a private sector failing. Unfortunately, that's the sort of thing people expect governments to do. A human nature problem.

I have the impression that people have been gradually getting more cynical about governments and politicians for decades; but nevertheless when things go wrong they still expect the government to do something about it.

"You can't blame too much government and too many laws for everything Jonathan."

No? Well, maybe not for the weather.

Re: Microsoft

[thurb.blogspot.com (from livejournal.com)]

I think Microsoft's position is founded on law in at least one respect: the law on 'intellectual property'. As it is, plenty of people go around with bootleg copies of Microsoftware, whatever technological tricks are used to protect it. If they could do so legally, would Microsoft still have a business left? I'm not sure.

The open-source software phenomenon has shown that the world doesn't actually need Microsoft, or any company like it, in order to have software.

I'm not sure whether I would campaign for the death of intellectual property; but it seems an interesting option worth considering. Certainly the name 'intellectual property' is a rather irritating misnomer. If someone steals your car, you don't have a car any more. If someone copies your book, music, or program, you still have whatever you started with.

-- Jonathan

Intellectual property: one foot in the grave

[thurb.blogspot.com (from livejournal.com)]

Of course, whether I campaign for the death of intellectual property or not is neither here not there. I rather suspect that its days are numbered whatever anyone decides to do about it.

The young Larry Niven reckoned that picking pockets would become legal in a more crowded world, because it would be infeasible to enforce laws against it. Similarly with copying computer files: it's too easy to do and too difficult to prevent. Unless someone finds a really neat technological trick to prevent it.

Bill Gates, JK Rowling, the Beatles, etc., can consider themselves lucky to have lived in a world in which it was possible to make vast sums of money out of stuff that can be copied easily and cheaply.

It will have been a short-lived phenomenon. Not long ago in terms of human history, it was difficult for creative people to make much money because the copying technologies were non-existent or too primitive. In the near future, it will be equally difficult for them to make money because the copying technologies are too efficient.

I don't think it really matters. History shows that creative people go on creating however little they get paid to do it. If they happen to earn vast sums, that's jolly nice for them, but it probably doesn't make sense for the rest of the world.

-- Jonathan

Re: Intellectual property: one foot in the grave

[peterbirks.livejournal.com]

I agree with every word of this (you may or may not be surprised to hear). Massive income from creative processes will indeed be a very short-lived phenomenon in the grand scheme of things, going the way of half the population turing into Morecambe & Wise on Christmas Day and the concept that we, the general public, should be keen to appear on TV for nothing just to satisfy the whims of "TV people".

The democratization of the mass media is petrifying for the mass media elite because the entire concept of "mass" media is threatened. Home Taping didn't kill music; what efficient copying will do is slaughter the profits of those music brokers who took a (large) share of the income of music makers. If the music makers's share drops, then the music brokers' share drops as well.

Oh dear what a shame never mind.

Rock on Radiohead and groups which have got their head round all of this. Six Radio has a show in the evening which plays stuff from MySpace pages. This is nearly all self-released stuff, and much of it is on a par with the duff stuff released by the majors. I might, for example, point you in the direction of Isaac's Aircraft, an excellent piano-based group who knowck Keane into a topped hat.

Oh, and I see that the live music industry turned over more than the recorded music industry last year. That, too, is the way of the future; just as it was the way of the past.

PJ

Re: Intellectual property: one foot in the grave

[(Anonymous)]

I rather disagree with your lines here. I don't see 2050 JK Rowling being much worse off than today's. Certainly it depends on what you mean by copying, when technology reaches the point where you can create a perfect copy of a book at home, then I suppose the threat is there - however, this will feel much more like theft to greate slice of the masses, than copying something intangible such as a movie, or music file. The e-book, for example, would be no threat, even if pirate-copies were freely available of HP's latest quest - books have value beyond words. As for artists, it matters less whether perfect fakes can be created, just whether the original is known. Moreover, having the Mona Lisa on the wall would seem tacky unless it was the orginial - to those of us who dont gasp the finer points of art. Musicians, would just adapt, recordings would simply be vehicles for selling tours, or live tv broadcasts. Also, it's important to realise society will always want to make super-bands super rich: they'll find away. In a world of copying, greater value will be placed on experiences than cannot be faked - back to the old days of street performing and poetry readings then.