Tuesday, September 30, 2008

"Maybe this thing ain't men at all"

In a previous post, I made a structural argument for what is taking place. Steinbeck makes the argument more convincingly:

Some of the owner men were kind because they hated what they had to do, and some of them were angry because they hated to be cruel, and some of them were cold because they had long ago found that one could not be an owner unless one were cold. And all of them were caught in something larger than themselves. Some of them hated the mathematics that drove them, and some were afraid, and some worshipped the mathematics because it provided a refuge from thought and from feeling. If a bank or a finance company owned the land, the owner man said, The Bank —or the Company— needs—wants—insists—must have—as though the Bank or the Company were a monster, with thought and feeling, which had ensnared them. These last would take no responsibility for the banks or the companies because they were men and slaves, while the banks were machines and masters all at the same time. Some of the owner men were a little proud to be slaves to such cold and powerful masters.


..................

Well, it's too late. And the owner men explained the workings and the thinkings of the monster that was stronger than they were. "A man can hold land if he can just eat and pay taxes; he can do that."

"Yes, he can do that until his crops fail one day and he has to borrow money from the bank.”

“But—you see, a bank or a company can't do that, because those creatures don't breathe air, don't cat side-meat. They breathe profits; they eat the interest on money. If they don't get it, they die the way you die without air, without side-meat. It is a sad thing, but it is so. It is just so."


..................



"It's not me. There's nothing I can do. I'II lose my job if I don't do it. And look—suppose you kill me? They'll just hang you, but long before you're hung there'll be another guy on the tractor, and he'll bump the house down. You're not killing the right guy."

"That's so," the tenant said. “Who gave you orders? I'll go after him. He's the one to kill."

“You're wrong. He got his orders from the bank. The bank told him, 'Clear those people out or it's your job.'"

"Well, there's a president of the bank. There's a board of directors. I'll fill up the magazine of the rifle and go into the bank."

The driver said, "Fellow was telling me the bank gets orders from the East. The orders were, 'Make the land show profit or we'll close you up.' "

“But where does it stop? Who can we shoot? I don't aim to starve to death before I kill the man that's starving me."

"I don't know. Maybe there's nobody to shoot. Maybe the thing isn't men at all. Maybe, like you said, the property's doing it. Anyway I told you my orders."

“I got to figure," the tenant said. "We all got to figure. There’s some way to stop this. It's not like lightning or earthquakes. We've got a bad thing made by men, and by God that's something we can change." The tenant sat in his doorway, and the driver
thundered his engine and started off, tracks falling and curving, harrows combing, and the phalli of the seeder slipping into the ground. Across the dooryard the tractor cut, and the hard, foot-beaten ground was seeded field, and the tractor cut through again; the uncut space was ten feet wide. And back he came. The iron guard bit into the housecorner, crumbled the wall, and wrenched the little house from its foundation so that it fell sideways, crushed like a bug. And the driver was goggled and a rubber mask covered his nose and mouth. The tractor cut a straight line on, and the air and the ground vibrated with its thunder. The tenant man stared after it, his rifle in his hand. His wife was beside him, and the quiet children behind. And all of them stared after the tractor.



Read the whole chapter here. Better yet, read the whole book. It's worth it for the end alone.

Monday, September 29, 2008

I'm so lonely

A few people have told me that they are reading this blog (thanks mum). I have no added the "Followers" gadget on the sidebar so that you can publicly proclaim yourself and I will know that I am talking to someone.

The Blame Game

Well folks, here it is. The world is officially going to hell. In the face a serious disaster House Republicans (and some Dems - but credit where credit's due) decided to vote along ideological grounds - or to save their congressional seats - and show Wall St. who's boss by taking a big knife and cutting off all our noses.

That will teach, uh, someone..?

As result of the bill failing to pass the DOW had its single biggest drop in history: a whopping 777 points (I foresee this number being the answer to an IPE question for undergrads 40 years from now*).

One of the big questions which has been an integral part of the story so far - and is going to become a bigger and bigger one as time goes on - is who do we blame for this mess? In big disasters there is often a tendency for some to deride the "blame game" (a term I hate) as unhelpful and besides the point. We're in a disaster; get on with it. For example:

Representative Maxine Waters, a Democrat, said the measure was vital to help financial institutions survive and keep people in their homes. “There’s plenty of blame to go around,” she said, and attaching blame should come later.


However, apportioning blame and responsibility is hugely important for a number of reasons, and correctly locating the source of the problem should be a big part of what happens as soon as the fire is finally (ever?) put out.

Why?


Well, somebody is going to be blamed; so we might as well get it right. People apportion blame differently, often according to their levels of education. Following Hurricane Katrina, people at higher levels of sophistication were likely to blame the states, people with lower levels were likely to blame the President (the relevant study is here though is behind a paywall). The point is someone is going to get it either way.

Already the debate is beginning. The generally populist view - and much of the way the that the media is telling this - is that Wall St. got us here though unscrupulous practices and they deserve to suffer for it. Some on the right have (implausibly, in my opinion) argued that much of the fault lies not with Wall St. but with foolish borrowers who should have known better than to take the loans offered. In one instance, I heard one hack argue that banks were forced to give these risky loans due to the "Carter-Clinton" policies (yes, I noticed the 16 year hole in this argument too)which tried to make housing accessible to the less well-off. (Hat tip to Sadly, No! for this nugget and its rebuttal.) Others argue the political establishment is to blame: either for not passing the bailout right now; or for repealing regulatory legislation all the way back when.

So, in the midst of this crisis the "blame game" (ugh) has already begun. For many this is probably simply catharsis. In the middle of a mess it is nice to have a scapegoat for one's woes. Indeed, for many who may genuinely be responsible, shifting the blame may not only be a way of avoiding punishment, but it may be a way of telling themselves that it really isn't their fault at all. Cognitive dissonance studies have shown that when people make morally negative decisions they tell themselves that what they did really wasn't wrong. It's either do that, or admit to yourself that you're piece of nasty work. This second choice has a high psychological cost that many do not want to pay. It is less costly to convince yourself that it truly isn't your fault.

But aside from this motivated element of blame-assignment, there are more practical reasons to determine who or what is to blame.

Obviously, this is a big disaster that we're getting ourselves into and it is worth truly understanding what got us here. This is not just a simple matter of discovering which "facts" are more salient. Facts rarely speak for themselves, and in the social world many "facts" - poverty, the international system, democracy - are not readily apparent at all. Determining what did the analytical leg-work and when can help us better identify the causes of this event, and leave us better equipped to guess when the next one is on the way. (Of course, this wasn't an entire surprise; this crisis has been bubbling for about 18 months and many knew it was only a matter of time.) For me there are two large theoretical questions that must be asked which radically alter the way we assign blame for this crisis.

(A) When did this crisis begin?
For example, if it began with the repeal of the Glass-Steagal act, then our explanation would treat the crash as the final consequence of a process of increasingly risky financial transactions etc. which finally culminated in Congress allowing it all to go to hell. However, if we say that the crisis began last week, then Congress and its decisions feature prominently in the narrative and today's failure is the primary cause of the disaster. So locating the temporal precedence is important in determining the causal story.

(B) What caused the crisis?
This is the more critical question for us to understand as it means that in future we might spot the "thing" if it pops up again. It also lets us assign blame properly. Although I am no IPE expert (and therefore do not have an especially compelling explanation of my own) what we think "exists" is at the centre of this explanation. Bear with me as I take a small detour into theoretical wankese but what I am really talking about here is ontology - or our theory of "being". Do we think that there are broad social forces which have pushed this outcome along, for example? An argument that "capitalism" or the "market" is to blame means that we believe - at least for the purposes of analysis - that there is a structure bigger than the individuals involved which is forcing along the outcome. Anyone who has read War and Peace (a set which does not include me) might recognise such an argument. Tolstoy basically argues that "History" drives the actors on, and that individuals do not, in of themselves, have any real effect. Alternatively, if we don't believe in social forces or structure we may think that "CEOs, and their lobbyists in Congress" or "individual homeowners" are responsible. By prioritizing the individual and saying that they are the cause of the outcome we saying that they are therefore ultimately to blame. As Colin Wight points out many political arguments shift ontologies depending on whether the politician is trying to avoid blame (they say its the system) or assign it (they say its another politician or whoever).
This structure-agent problem dominates certain (sub)disciplines in social science - such as international relations - and the two concepts do not necessarily have to be mutually exclusive, although often they are (classical economists put all the explanation in the market, for example). At times, one might privilege structure over agency and vice versa.

My two-cents explanation is that at one time, the CEOs etc. did exercise their power and changed the system to their favour by having Glass-Steagal repealed. This individual action helped to alter the fundamental structure of the financial system, which in turn became the primary cause of outcomes from then on. In other words, I blame the "financial system" for the last 18 months of the crisis (brokers were just doing what brokers do) but ultimately I blame the individual private actors and politicians for setting the ball in motion back in 1999. I should note that this (half-baked) argument is heavily influenced by this very good book.

This populist conclusion is not out of the mainstream to say the least. As I will discuss in my next blog, however, the backlash against Wall St. - while cathartic - could usher in some nasty politics of its own.


*Yes I know it's 778 in the story, but that's only because they rounded up.

Wednesday, September 24, 2008

The politics of the financial crisis

It seems that McCain is swooping in and saving the day. How wonderfully presidential. McCain has postponed his campaign and says he won't debate on Friday - the first time a debate will have been canceled since TV debates began - because the economic crisis is too serious. Instead, his campaign has suggested that Obama and McCain debate the day the VP candidates were supposed to face off. Biden and Palin will then have their debate, y'know, whenever.

I don't want to be a cynic all of the time but this is truly a load of horlicks if I ever saw it. McCain, who is not a member of any finance committee now suddenly wants to show up to help out, and this behavior is not influenced in any way by the new polls or by the fact that Obama is finally opening his war-chest and outspending McCain in the ad-market?

Also, I find it pretty hard to believe that the McCain camp were not trying to find any excuse not to have to have Palin have to respond to questions, if this performance is any indicator of what she might be like in the debate. Bear in mind this is only the third time she has taken questions since declaring her candidency.

Smashing.

Congress says, "Thanks but no thanks," to bailout to nowhere

As I mentioned in a post two days ago, much of what is driving a quick adoption of a bailout for the stock market is the impending sense of doom. This was most apparent when it first hit last Thursday, but it still remains. A couple of hours ago Bush warned the U.S. that failure to adopt the $700 billion dollar bailout would result in a "long and painful recession."

Now, I am not suggesting that there isn't a crisis, but I am becoming increasingly skeptical that only Paulson's uberplan can save us.

In fact, it seems that a plan is close to being finalised and is far closer to a solution for the whole country; rather than just a Wall St. bailout. This plan is apparently 98% complete and

includes a strong provision for congressional oversight, limits executive pay, and would allow bankruptcy judges to adjust mortgages in order to help homeowners, among other items. In other words, the major Democratic priorities.


So it seems calmer heads have prevailed and that instead of the blank check Paulson had wanted last week, a much more nuanced and - ahem, accountable - plan is in the works. Let's hope they can get it out before Friday so McCain can stop making silly excuses for not turning up to debate.

The greatest philosopher of science in the 21st century?

Donald Rumsfeld

Hat tip: Monkey Cage

Tuesday, September 23, 2008

Information Asymmetry and the Financial Crisis

As the credit crisis continues it is becoming increasingly difficult to figure out what exactly is going on. Like most people, I am not an expert in economics so it is difficult to understand what is really causing the problem, how to fix it, and what to do next.

Last Friday, Treasury Secretary Paulson was arguing that the sky was about to fall unless intervention happened immediately. Said Paulson:

“There will be ample opportunity to debate the origins of this problem,” he said. “Now is the time to solve it.”


On Sunday he reiterated his point on a number of morning shows, arguing that there could be no time for debate and urging Congress to rush through a "clean" bill as fast as possible, although even then Congress was already beginning to push back a little.

Nonetheless, if you were like me last week, you were buying the urgency.

However, as a new week dawned, it started to become apparent that the deal may be as much a welfare package for banks as it was an emergency stopgap. Leading economists such as Paul Krugman were questioning why Paulson was seeking so much money and power in deal that gave so little to the taxpayer. By today, it seems Congress got properly skeptical. Charles Shumer even asked Paulson why not just $150 billion as opposed to $700? This evening I even read one journalist ask why - if credit is so "dried up" - is he still being offered plenty of loans? What gives?

If you are asking, "So, what is actually going on with the economy?", I don't know the answer. That wouldn't be so terrible if it also wasn't true that most people don't know the answer. As sophisticated a thinker as I might like to think I am, trying to fathom - never mind de-tangle - the inner workings of the financial markets is way beyond my abilities or training so I am left reading other experts, trying to figure out who to trust, and then coming to an educated - though variable - position.

Even though I am not sure what is exactly going on with the financial crisis, I am able to give a much stronger answer to the question, "What's going with Secretary Paulson and Congress?".

The answer to this problem lies in understanding the principal-agent problem.

The principal-agent problem has its origins in Economics but has been slowly imported into mainstream Political Science. Here is how it works. Often people want things done but may not posses the time or the skill to be able to do them themself. As a result, they employ an agent. The agent is hired to preform the job on the principal's behalf. But there are two elements which can negatively affect this relationship (at least for from the perspective of the principal): conflicting goals, and information asymmetry.

Consider the following example. One morning you get up, go out into the snow, and get into your car. When you turn the key in the ignition, nothing happens. You try again; nothing. You get out. You open the bonnet. You look inside. You touch a wire. You wonder can you electrocute yourself by touching a wire. You get back in the car. You get out again. You wander around the car. You curse. You have a small and very undignified tantrum. A neighbour sees you. You go back inside and call a mechanic to come tow the car.

A few days later you head over to the garage to see what happened to your car. You are obviously eager to get it back as fast as possible and as cheaply as possible. This is your goal. Unfortunately for you, this is not the mechanic's goal. His goal is to be able to charge as much as possible for repairing your car. So, conflicting goals.
Compounding this issue is an information asymmetry. You don't know what's wrong with your car. The mechanic does. This means it is difficult for you to asses for yourself whether the agent is doing his best for you. Furthermore, the mechanic knows it.
Voila: a principal-agent problem.

This is a popular concept in Poli Sci and appears a fair bit. Some examples:
Principal(s): The nations of the UN; Agent(s): The UN.
Principal(s): Citizens; Agent(s): Elected representatives.
Principal(s): The State; Agent(s): Bureaucracies.

So in this instance it breaks down as follows:
Principal(s): Taxpayers; Agent(s): Paulson (plus Bernanke).

It is clear from the get-go that Paulson had more information. When the crisis first struck last Thursday, Paulson ushered in leaders of both parties and painted a stark picture of what would happened if his counsel wasn't heeded:

"The room got very serious, very quickly," said a House Democratic aide who attended the session.
"When you listen to them describing this, you gulp," said Sen. Charles Schumer, D-N.Y. He said he felt the weight of "history hanging over them" in the room.


Now, less than a week later, the same Schumer is starting to question Paulson. Why? Because he spoke to other experts. Importantly, he spoke to experts who had no stake in the outcome. It's the same logic that has you give a car-expert friend twenty bucks for coming to look at the new car you're about to buy. Once he has his twenty bucks, he has no reason for you to buy a dud. If anything, the twenty bucks as an incentive for him to give you accurate information (as you may ask him next time too).

So with the information asymmetry somewhat reduced, Congress is now more skeptical of a plan drawn-up by an ex-CEO of one of the investment banks that got us into this mess; a plan which would have allowed him to keep distributing golden parachutes to his chums while Joe Michigan gets his house pulled up from under him.

Perhaps Congress are wondering if the Agent has the same goals as the Principal.

Monday, September 22, 2008

The Great Transformation

It seems that Paulson and chums may not be getting all they want in the big bailout. As I detailed yesterday, the bill that was originally being drafted would have given the Treasury Secretary complete and unreviewable discretion to control the entire $700 billion that was earmarked for the bailout. The key passage in the bill as it stood then, was this one:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
It may be that it was generous terms such as these which had encouraged the market rally on Friday.

Since then, things have been moving very fast and it seems that the usually pliable Congress has realized that granting what will in practice be $1 trillion dollars in debt relief without any oversight may not be the most functional behavior for a democracy. Furthermore, the original bill had made no compensation for ordinary peons at the bottom of the trickle down effect. The plan was for banks to be bailed-out sufficiently well to be able to continue the hard work of ousting people in foreclosure.

Now Congress is demanding oversight, debt relief for the hard-up at the bottom of the pyramid, and a share in some of the future profits of these otherwise bankrupt institutions. This has not made Wall St. especially happy.

I am glad that Congress is trying to take charge of such an important and wide-reaching solution and has not handed dictatorial powers over to big-business just yet. If Congress fails to respond actively it will be extremely damaging to U.S. democracy in two ways.

1. Such a radical nationalization of business, without democratic accountability, pushes the U.S. further into a corporatist form of government. The idea that one individual, a previous head of Merril Lynch, who was appointed - not elected - to office, should be able to wield total control of what is left of the federal reserve is something that should make anyone - no matter how commited to fixing this problem, pause.

2. "Solving" the financial crisis by only helping the financial sector - which is responsible for this to begin with - will not enamour ordinary people very much to the governoring classes. In fact, such a situation will not only enrage most people; it will enrage them at a time when we can expect day-to-day life to become seriously tough for the next few years. Such an environment is a breeding ground for radical politics. Considering the current state of political discourse in the U.S., this something that should not be encouraged.

I will post further on this second point at a later date.

It's a slam dunk!

Hopefully we can begin the attack as soon as possible.

There can be no doubt about the target.


Hat tip: Marginal Revolution

Sunday, September 21, 2008

Understanding the financial crisis

I like to think that I have a fair understanding of basic economics but the current financial disaster is considerably beyond my means. If Alan Greenspan saying it a few days ago didn't make it obvious, the enormous 700 billion dollar bailout offered by the Bush government has really hammered home how bad this is. So, sayin that, how bad is it?

It is really bad. The NYT is reporting that if this goes unchecked it could get to the stage where people will not be able to get car loans. A professor who I am TAing for, and who teaches IPE (International Political Economy) said she was surprised that she'd be teaching students the political aspects of economics during the second great depression. Unsettling stuff, to say the least.

But it is worth considering the political aspect of what is going on right now. Currently, the Treasury Secretary - Henry Paulson - is pushing for a recovery package which may be worth up to 1,000,000,000,000 dollars. Take a long look at that number and, while your whistling, understand that he is requesting that there be almost no oversight on how this money is spent (the details of the bill are here). Barney Frank is making a decent stab at trying to push in some relief for homeowners who are being turfed out on their ear right now, but it seems sauce for the goose is not necessarily distributed equally. In a nutshell, the financial industry wants the government - that is taxpayers - to pull them out of the enormous slurry pit of greed they jumped into with their eyes open, but they don't think that taxpayers should (a) alter some of the conditions under which the banks foreclose or (b) interfere with the messed up incentive scheme (e.g. obscene bonuses etc.) that fails to punish this kind of sociopathy. It's fine for these financial gluttons to take our money to fix a problem they asked for, but not for anyone to benefit from that recovery except for themselves.

Insert comments about all animals being equal here.

Incidentally, for a good rundown on exactly how we got here, my friend Tim helpfully posted this

UPDATE: I may have spoken too soon


Explaining 35% of voters


This seems about right

Hat tip to TPM


Supporting what I've thought for some time

Interesting article in the Washington Post the other day. The bit that stands out for me:

People who startle easily in response to threatening images or loud sounds seem to have a biological predisposition to adopt conservative political positions on many hot-button issues, according to unusual new research published yesterday.

The finding suggests that people who are particularly sensitive to signals of visual or auditory threats also tend to adopt a more defensive stance on political issues, such as immigration, gun control, defense spending and patriotism. People who are less sensitive to potential threats, by contrast, seem predisposed to hold more liberal positions on those issues.
.....

The study, published in the journal Science, recruited 46 white partisan Republicans and Democrats in Nebraska. The volunteers were quizzed on their views on a variety of topics -- including the war in Iraq, same-sex marriage, pacifism and the importance of school prayer. All the questions were designed to test how strongly people needed to guard against various internal and external threats. None focused on economic issues.

Read the whole thing to get further details on the argument. In a nutshell the researchers are saying there may be biological traits to being a conservative or a liberal. While I have some reservations with that assertion (from my knowledge of political preference, a person's parents are the best predictors of their voting behavior - which strikes me as much as a nurture as a nature argument). Plus, there might be some questions about the methodology used (e.g. sample size).

Nonetheless, it does appear to me that support for policies such as wire-tapping and torture - while often being dressed-up and reported as hard-nosed and tough - actually usually smack of cowardice. As I put it in a comments section about torture a long time ago (when I was obviously very worked up about it):

What really gets my back up [about the torture issue] though, is how the whole issue is framed to begin with. Somehow making the moral argument is characterised as a kind of weak, flabby, naive, and all-round “liberal” point of view. It’s not the hard-nosed stance of Bush and co. and wingnuts consider it indicative of how some people (i.e. the right) are more willing to make “tough” decisions than others. This is total BS.

How does you condoning the torture of another person so that you can marginally increase your own chances of survival make you tough? It strikes me as the essence of cowardice. Being tough means standing up for the principles you believe in, even if it increases the risks of your own demise. I live in DC and know that if anywhere has a chance of getting hit it’s here. Big deal. I’ll take my chances. I certainly am not so craven and terrified that I am willing to compromise pretty much all of my principles (habeus corpus, torture etc.) just so the big nasty Osama bin-monster-under-the-bed won’t get me.

Being tough means standing up for your principles and accepting that living in a free society carries risks. And the test of this toughness comes at times of danger.

Whatever supporters of torture may think they are, tough they ain’t.

Cowardly and pathetic might be better adjectives.


It's nice to see a little evidence backing up my rant.