Saturday, October 27, 2007

Rummaging Through the Cedar Chest

There's some well written, provocative thinking going on as contemporaries search through the cedar chest of history for old ideas to wrap around today's troubles:

On Democratic presidential front-runners (from "Schlesinger's Affairs" by George Packard):
Is something similar going on in the current Democratic Presidential campaign? Two months ago, I wrote that Obama, with his veneer of idealism and his pragmatic core, reminded me a bit of J.F.K. That might have been wrong. Since then, it’s become clear that Obama is not “a devious and, if necessary, ruthless man,” as Schlesinger called Kennedy. Democrats drawn to Obama’s camp project onto him the sense of politics as a higher calling that Stevenson pioneered in the early nineteen-fifties (whether there’s much substance to it in Obama isn’t completely clear). In the American liberal tradition, this means almost certain defeat. Clinton, on the other hand, appeals to those liberals who want to sleep with power and its compromises and have made their peace with it. For this reason, she will always be despised by a significant minority of people on her side of the partisan line, in addition to everyone on the other side.
On Walter Lippmann's view of "the essential role of the press and reporters in safeguarding the values of the republic," (quoting extensively from Sidney Blumenthal's "Journalism and Its Discontents"):
Lippmann had witnessed firsthand how the “manufacture of consent” had deranged democracy. But he did not hold those in government solely responsible. He also described how the press corps was carried away on the wave of patriotism and became self-censors, enforcers, and sheer propagandists. Their careerism, cynicism, and error made them destroyers of “liberty of opinion” and agents of intolerance, who subverted the American constitutional system of self-government. Even the great newspaper owners, he wrote, “believe that edification is more important than veracity. They believe it profoundly, violently, relentlessly. They preen themselves upon it. To patriotism, as they define it from day to day, all other considerations must yield. That is their pride. And yet what is this but one more among myriad examples of the doctrine that the end justifies the means? A more insidiously misleading rule of conduct was, I believe, never devised among men.”
Robert Kuttner, author of "The Sqaundering of America: How the Failure of Politics Undermines Our Prosperity," on the need for regulation of the economy:
ROBERT KUTTNER: Regulators and the public don't get any kind of disclosure. And hedge funds, because of the loophole in the securities laws, they're not regulated at all. And to the extent that there is a degree of transparency, regulators do get to look at the assets of banks. Sometimes they don't know what they're looking at. Now, you put those three things together, you have a risk of an economy based on asset bubbles where people--

BILL MOYERS: Asset bubbles?

ROBERT KUTTNER:Yeah. It's what happened in the '20s and it's what happened in the '90s. There's a euphoria that sets in. Some of it's engineered euphoria. If you cook your company's books to make it look like your profits are higher than they really are, that's gonna bid up the price of your stock.

And if you're an executive who's compensated on the basis of the price of the stock, that's called a conflict of interest. And that was at the heart of what happened in the '20s and what happened in the '90s. That's why we need the kind of transparency that Mr. Donaldson was promoting when he was head of the SEC.
* * *
ROBERT KUTTNER: You know, the problem is that in the old days when a bank examiner went to a bank and looked at its portfolio of loans, the examiner could tell which of the loans were performing. Was interest being paid on the loans? Was the principal being paid back? Which ones weren't? And the examiner could direct the bank to reserve assets against the risk of a loan default.

Well, today it's a kind of a regulatory black box. The regulators are relying on the banks' own so-called stress models, which make certain assumptions about human behavior. And we just had a full field test of this in the sub-prime mortgage meltdown. The models didn't work. Behavior wasn't supposed to occur along these lines.

And a lot of this turned out to be junk. And a lot of innocent people got hurt. And the only reason the economy didn't crash was the Fed, which was not inclined to do this before the sub-prime meltdown-- the Fed opened the spigots. And so even though the sub-prime sector is a complete mess, the stock market, as you pointed out in your introduction, hit new highs.

Why? Because the more alarmed the Fed is about the economy, the more the Fed is gonna lower money. And that's good for the stock market.

ROBERT KUTTNER: I mean Alan Greenspan, is one of the revered public figures of our time. I think he made one huge mistake — he did not use a lot of the regulatory power that he had. Every time there was a credit crunch, he would race to the rescue.

BILL MOYERS: By putting in cheap money?

ROBERT KUTTNER: Yeah. So it seems to me, if you're gonna bail out-- problems after the fact, you have an obligation to prevent some of them before they start. And for 13 years, Greenspan's Fed and now Bernanke's Fed has had not just the authority but the mandate from Congress to look at mortgage loan origination standards.

Had they issued regulations under that authority, you never would have had a sub-prime crisis because they would have gone in and noticed that loans were being made that people couldn't possibly pay off. And the only reason they were being made was that somebody at the end of the daisy chain was willing to buy the paper.
Then, of course, there's this book:
Are We Rome?

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