One of these economists is not like the other.

I feel like I cannot stop walking around muttering "fucking bankers" every fifteen minutes. Despite all the messes they have/are making of the world, they still give the impression that they are masters of the universe. Hindsight is, of course 20/20, and although no-one could know exactly WHEN the world was going to go to hell, it was going to happen, and it was the bankers' and their lobbyists' fault.

Now that we are on the beginning of what may be a very long slide, videos like this really grate.

Smug wankers.

It is nice to see them get their long-overdue kick-to-the-face; at least in terms of how they are being viewed by society, if nothing else. Check out this evisceration conducted by the Daily Show. Bankers and financial gurus (although witch-doctors might be a better description) take note: you must be truly hated for people to be booing on a COMEDY show.

The Great Transformation III: Society's Backlash

This follows from this and this.

Last week we saw the McCain camp take a turn towards a very ugly form of populism during campaign rallies, which basically amounted to asking who was the "real" Barack Obama; the implication being that he was some sort of alien 'other'. This type of paranoid fantasizing has been a staple of modern American conservatism; as a cursory glance at right-wing blogs can testify.
The "black helicopter" crowd in the U.S. were around all during the Clinton era, so in some ways, there should be no surprise to see them around in this election cycle (and certainly long into a Obama presidency: see this comments page).

What was surprising about last week, however, was the open (and extremely cynical) way that the McCain camp - desperate to alter the media narrative - decided to just go for it, take these memes out of the fringe, and put them directly into the campaign.

This is a unsettling strategy for a number of reasons. Firstly, it is simply not good for democratic discourse for politicians to be suggesting that their political opponents may or may not be traitors. This type of discourse should be left to the fringe. Bringing it into the mainstream gives it a a legitimacy that it does not deserve.

Secondly, there is a lot of rage out there. This is understandable as the it looks like the world is heading for the crapper, but this is not a constructive way to direct this anger, and - if it continues - is truly worrying. This type of smearing is especially destabilizing to democracy when the speaker knows full well that people will buy into it; leading audience members to shout out "kill him" or suggest Obama is a terrorist,

Think I am exaggerating about how disturbing this might be? Even the mainstream media in the U.S. - which usually tortures itself by trying to present everything in terms of moral equivalency - had commentators speaking out:

CNN contributor David Gergen, who has advised Democratic and Republican presidential administrations, said Thursday that the negative tone of these rallies is "incendiary" and could lead to violence. "There is this free floating sort of whipping around anger that could really lead to some violence. I think we're not far from that," he said. "I think it's really imperative that the candidates try to calm people down."

Thirdly, once you let the genie out of the bottle, it may not be as easy to put back in - as McCain has found out since his campaign realised that this tactic was not helping him in the polls.


When you link these points together, there is cause for genuine concern. There has always been a radical fringe in American politics. However, for it to surface so openly at the same time that there is a economic crisis - which makes a radical message that more attractive - has a distinct whiff of the 1930s about it. This is, in other words, one potential societal backlash that might be occurring as part of the global meltdown. Just as Polanyi predicted, the right rises in such economically dislocating times times.

Of course, it is a little too easy to dismiss one's political opponents and call them fascists just because they like flags, or are socially conservative, or choose slogans such as "Country First". I am not suggesting that anyone who does not share my political persuasion is further right that Joseph Goebbels. Plenty of conservatives are fully democratic, intelligent, and able to defend their intellectual positions.

However, there is a real darkness going on in these fringe movements that has a definite crypto-fascist element, and which is frightening when it is dragged out from under its rock. Take a look at this video, of a rally in Ohio to see an example of what I mean.

These people are displaying many of the key features which would make them susceptible to right-wing movements.
First, and most obviously, they are highly emotional and are reaching conclusions about the world based on how they feel rather than their basis in fact (are we really to believe that that woman had heard of Palin before she heard of Obama, for example?).
Secondly, it is not clear what people in this movement are for so much as what they are against. Fascism is a classically anti-intellectual movement partly because it has to be, as its theoretical edifice is often incoherent (it is egalitarian whilst also hierarchical; it believes in private property except when it doesn't etc). Therefore the unifying component of fascism - what brings many people together to believe in it - is its strong sense of what it doesn't like. Aside from the unifying themes of flag and country (which right-wingers get to define in ultra-nationalist terms of their own choosing), fascist movements are negative about other movements and political positions, without have a clear unifying program of their own.

Part of this process of negation is done by identifying what you don't like in your opponents, and saying you believe the opposite. So if you hate liberals and liberals believe in global warming, then you don't believe in global warming. If they believe in evolution, then you don't. This can help explain how otherwise intelligent people believe that man ran with dinosaurs just a few hundred years before the pyramids were built (this also once again highlights the anti-intellectual element of such movements).

It also leads to scapegoating of your enemies and holding them responsible for your own failures, or failures in general. I was wondering for a while who the right-wingers were going to hold responsible for the economic catastrophe of late. I would have put my money on "liberals" as they are generally held up by the Right as everything that is wrong with the U.S., or the immigrants and foreigners as they always get it. Perhaps unsurprising it seems that black America and the voter-registration group Acorn are being held involved and responsible, at least by many of the nuttier groups.

All of this wouldn't matter if it weren't for two things. As I said, the backlash against the status quo is beginning. Although (thankfully) this right-wing populism does not look like it will dominate the discourse in any way, and that calmer heads are prevailing, it is present and liable to become stronger and certainly more shrill; especially once its coalition partner (e.g. the mainstream Republican party) gets thrown out of power. The other worrying issue is that these headbangers really are dangerous. They have a documented history of violence in the U.S.. They have extremely noxious eliminationist views gowards their political opponents. And they are they are feeling threatened.

It seems like a sensible administration is about to come just in time.


NB: Orcinus is a very good site for tracking these issues


Update: This is exactly what I am talking about

Update II: And this

Update III: Sigh...and this

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.

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.

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.