NYT Opinions on Goldman Sachs (and why I won’t boycott Arizona)

David Brooks, the New York Times’ genial sorta-conservative columnist, views the financial reform debate roughly as I do, which makes me tentatively pleased that the GOP turned the lemmings back from the cliff yesterday:

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.

If you take this as your premise, the Democratic bill is fine and reasonable. It would force derivative trading out into the open. It would create a structure so the government could break down failing firms in an orderly manner. But the bill doesn’t solve the basic epistemic problem, which is that members of the establishment herd are always the last to know when something unexpected happens.

Kudos to Brooks for nicely stating what is obvious to me. Cries and lamentations that it is unknown to most of Congress, whose centralizing impulse continues because it so nicely fits a good guy/bad guy mythology. As Brooks says:

If this were a Hollywood movie, the prescient outsiders would be good-looking, just and true, and we could all root for them as they outfoxed the smug establishment. But this is real life, so things are more complicated …

In this drama … the establishment was pleasant, respectable and stupid, while the contrarians were smart but hard to love, and sometimes sleazy.

However, Congress is mostly ignoring the outsiders, vying for the white hat role itself.

Elsewhere on the Grey Lady’s editorial page, Linda Greenhouse, who usually functions as a Supreme Court reporter with supposed neutrality, gives free rein to her fury at Arizona for its new immigration bill:

I’m glad I’ve already seen the Grand Canyon.

Because I’m not going back to Arizona as long as it remains a police state, which is what the appalling anti-immigrant bill that Gov. Jan Brewer signed into law last week has turned it into.

…

[T]he phrase “lawful contact” makes it appear as if the police are authorized to act only if they observe an undocumented-looking person actually committing a crime, [but] another section strips the statute of even that fig leaf of reassurance. “A person is guilty of trespassing,” the law provides, by being “present on any public or private land in this state” while lacking authorization to be in the United States — a new crime of breathing while undocumented.

I don’t think the “police state” label is a good fit, even if the new law is ugly. Most Arizonans are walking around without fear of police hassles, after all, while everyone cowers in a police state.

I’ll not make it a point of principle to follow Greehouse’s lead (and in fairness, she’s not explicitly calling for a boycott), if only because I want to return to St. Anthony in the Desert Monastery. But if you want to get an eerie police state feeling, drive down to the Monastery from Phoenix to the north. You’ll pass through Florence, whose dominant industry is prisons. Several of them. Public and private prisons (e.g., Corrections Corporation of America), large and forbidding, lining both sides of the road on the drive through town. It’s like stumbling onto something that was deliberately moved out of the way because of its brutal ugliness. One almost wants to divert one’s eyes, the better to say, if challenged for straying onto a scene the public wasn’t meant to see, “I didn’t see nuthin’, and I won’t tell nobody! Please, Officer, let me go!”

It oddly makes the Monastery seem particularly apart from the (seedy) world, coming and going from a day visit or pilgrimage.

Goldman Sachs – “the other side” told persuasively

“Goldman Sachs” is not a term of endearment at my favorite websites, such as Front Porch Republic. And I have reflected my own ill-ease with such too big to fail concerns in recent weeks, as well as passing along some counter-arguments.

Wall Street Journal columnist Gordon Crovitz today defends Goldman Sachs in his own way: short selling a derivative signals the market that a sector may be ready to collapse. I certainly agree with that – just as short selling a stock signals that a particular stock may be ready to tank.

The most telling point for me in Crovitz’s column – apropos of why the SEC may lose its case against Goldman Sachs rather than why derivatives are good – is simply that once you accept the premises that (1) shorting a derivative is beneficial because it signals the market of a possible sector collapse, and (2) long buyers in these specially created securities knew someone else was selling short, it seems to follow that “it would be hard to prove that it mattered who [the short seller] was.” That John Paulson was selling short and that Goldman Sachs bundled the derivative for him seems to be what SEC thinks GS should have disclosed.

All this, of course, ignores John Médaille’s, invocation of Aristotle and Aquina to distinguish natural from unnatural market exchanges, but Distributist economics are, for the time being at least, so far out of the mainstream as to be easily ignored. Considering the repeated failures of mainstream economics, that may be ripe for change.

The Democrats have a bright if peurile idea: “Hey, guys! I’ve got a great idea! Regulation utterly failed to prevent the economic collapse, and voters are mad at Wall Street, so lets grab this chance to make Washington bigger with even more regulation! Whaddya think, guys?!” (I’m not sure the Republicans have a counter-plan. They’re just in denial that a market could fail.)

Pretending to regulate something as complex as derivatives is destined again to fail, so I would be remiss were I to pass up, before Congress passes “the most sweeping overhaul of the financial regulatory system since the aftermath of the Great Depression,” not to sing another rousing chorus of “if they’re too big to fail, bust ’em up!”

Goldman Sachs again: a defender and a “third way” step back

Holman Jenkins at the Wall Street Journal rises to the defense of Goldman Sachs, and this time it’s not half-hearted. (You knew someone would, didn’t you? Some people are just contrary.)

Make no mistake: The gestalt behind the SEC case is that short selling is bad. Constructing deals to enable short sellers to bet against certain markets (as Goldman did) is bad. When longs lose money because of freely chosen participation in such trades, it’s bad. When shorts make money, it’s bad …

Remember, the long investors could have bought mortgages directly if they wanted to invest in housing. They wanted the more attractive premium stream from insuring mortgages for an investor who was betting they would fail. And only in hindsight has Mr. Paulson become the mastermind who made billions betting against what now is judged to have been a bubble.

Of course, you can’t go wrong betting on the media’s unwillingness to unwrap itself from the errors of hindsight bias—that bet by the SEC has paid off. But there are bigger fish being fried. For more than a year, certain knowledgeable bloggers and investigative reporters have argued that such deals—Goldman’s was hardly unique—exacerbated the bubble, with special focus on the activities of a Chicago hedge fund called Magnetar.

It’s true that such deals gave housing bulls an additional way to lose money. But to blame shorts for making the bubble worse comes close to saying salvation for the markets is to exclude participants who are bearish.

This is especially peculiar since the bubble’s true Rosetta Stone is being ignored, though it has been hammered away at by a member of Washington’s own Financial Crisis Inquiry Commission, in the person of Peter Wallison.

Mr. Wallison has publicized new data showing that Fannie, Freddie and FHA financed a lot more subprime and Alt-A loans than anyone realized (because they were mislabeled). It turns out almost half of the $10.6 trillion in U.S. mortgages outstanding in 2008 were low quality. This is the data that might have changed investors’ minds—suggesting that the American public’s capacity to shoulder housing debt was far more saturated than anybody knew.

I don’t think any account of the housing bubble collapse is even near complete without factoring in the role of the federal government and its creations, Fannie, Freddie and FHA, in encouraging subprime mortgages to make homeowners of more people. That is turn is driven by lobbyists from the real estate industry. It is part of the crony capitalism I blogged about yesterday.

Is it evil to want to empower people to own their homes? No. Is it fraught with unforeseen consequences? You bet.

(Full disclosure: I’m a sucker for writers who use “gestalt.”)

Meanwhile, out of the mainstream, a Distributist economist, John Médaille, invokes Aristotle and Aquinas as worthy bank regulators:

Not too long ago, a Prominent Economist told me that Aristotle had nothing to teach us about modern finance. I beg to differ; Aristotle, and the Scholastics who adopted his approach to economics, were surprisingly sophisticated on these topics, while so many Prominent Economists are surprisingly naïve. Indeed, Aristotle left us a principle of commerce that serves very well as a principle of regulation. This principle is the distinction he makes between natural and unnatural exchange. Modern commentators, who make no distinctions, have viewed this as a mere primitive hostility to business; actually, it was a shrewd appreciation of commerce. For Aristotle, natural exchange was that which was necessary for the provisioning of the family (the true meaning of economics.) Unnatural exchange that which had only money as it object.

The former is “natural” because it limits itself; that later unnatural because is has no natural limits. For example, a man wishing to buy bread for his family will buy only as much as he needs; this is a natural exchange. But a man wishing only to make money in the bread biz may wish to buy up all the bread and corner the market so as to raise prices and make a fortune on others’ necessities; this is an unnatural exchange. When applied to finance, a transaction is natural when it is when it is firmly and directly tied to the production of some actual product; it is unnatural the more abstract and derivative it becomes, and when its only object is to make money rather than profit from production. Thus, we may say that banks directly financing home purchases or construction are natural transactions, and less natural when they become “securitized,” bundled together and sold in packages to remote investors who will have no contact with the actual homes, banks, or borrowers. The situation becomes even more abstract when you speak of securitizing the securities (“CDO-Squared” or even “CDO-Cubed”) or with CDSs, which become pure speculative bets on the market. The more abstract the instrument, the more closely it should be scrutinized.

As things now stand, we have reversed Aristotle’s order: the natural exchanges are highly regulated, while the unnatural ones are often unregulated. In more normal times, when you went to George Bailey to get a mortgage, he squinted at you real hard to see if you are the kind of person who will pay him back for 30 years. George needs little oversight to encourage him to be prudent, since he has the bank’s capital and the depositors’ money at risk. But if George merely intends to securitize the loan, then he merely glances at you to see if you are the kind of person who will pay for two weeks, because after that you are somebody else’s problem.

(Full disclosure: (1) Tipsy is intoxicated by Distributism, a “third way” economic theory, like wine to the head of a teetotaler – see masthead. (2) Tipsy is part owner of a title insurance company that was formed partly because mortgage loans were routinely being sold out of the community, and consequently old-fashioned county-seat-lawyer abstract opinions weren’t worth jack any more.)

Crony capitalism

I haven’t yet, and probably never will, fully think through this editorial from today’s Wall Street Journal, titled An Economy of Liars. The author is from the Cato Institute, a right-libertarian group, so read it discerningly for that bias.

Thomas Carlyle, the 19th century Victorian essayist, unflatteringly described classical liberalism as “anarchy plus a constable.” As a romanticist, Carlyle hated the system—but described it accurately …

The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow. And financial institutions should have a duty of care to their customers. Lawyers tell me that would get us closer to the common law approach to fraud and bad dealing …

Hayek’s mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct.

In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.

Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out.

Note through this that it’s not just big business lying. Big business and government are in bed together.

But “financial institutions should have a duty of care to their customers”? And “Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism”?

Yes, but who will enforce that if not the “cognitively captive” regulators? Class action lawyers? Sheesh! They’re as unpopular as bureaucrats, and justifiably so in many, many (most?) cases. Dismantling regulation per se is not an adequate response. That will only leave us captive to megacorp or to a new cartel of judges and shysters with a chaotic jumble of 50 different rules, one per state.

On the other hand, a local bank, not answerable to a Mother Ship in New York City, might behave itself without massive, Washington-based regulation and without big gun bullshit slingers like the Breck Girl, John Edwards, to sue them if they do get out of line.

Isn’t this another indicator that we need some trust busting of the “too big to fail”? Then we can deregulate. Right?

Where’s a Conservative to turn on election day?

There’s too many good, smart people blogging and too few running for office.

Daniel Larison, to whose blog I just resumed subscribing, has several items in the last week on the incoherence of “movement conservatism” – i.e., the fake conservatism of the current G.O.P., Fox TV, TownHall.com, etc..

In The “Republican Obama” Syndrome on April 6, he writes, in the context of Movement Conservative Hosanna’s for some neophyte named Marco Rubio, about a paradox:

Obama causes a very strange reaction in Republicans. On the one hand, they want to regard him as a joke and an incompetent, but they also desperately want to find someone who can imitate his appeal and success, and so it is almost as if they go out of their way to anoint whatever young politician they come across as their new hero and then disregard all of the person’s liabilities by saying, “Well, he’s no more inexperienced than Obama was” or “She’s still better than Obama!” It is an odd mix of contempt for Obama mixed with admiration for Obama’s success and an even stranger need to outdo him in the categories that originally caused them to view Obama so poorly.

In Hawks Are Just Embarrassing Themselves on April 7, he deconstructs a particular hawkish comment (about Obama’s supposed contribution to “a startling period of auto-emasculation” in nuclear policy) and thus reveals a common genre of attack on Obama:

“The substance of Obama’s positions is unchanged from the previous administration, but it is imperative that I make him appear as a weak buffoon, so I will simply invent a complaint about entirely superficial appearances that mean nothing.”

[The author of the lame hawkish comment] is just one among many conservatives thrown into apoplexy by basically nothing.

One Republican Obama critic actually lamented that “Obama will downsize the military-industrial complex.” Really?! And that’s bad?!

On a roll, on Thursday Larison questions in The Triumph of Ideology the claim that the conservative mind has closed by denying that the “Movement Conservative” mind was ever open.

The conservative mind of the sort described by Kirk is one that is both grounded in principle and also very capable of critical thinking and self-criticism, but what I think we have seen in recent years is not much the closing of such a mind as its replacement by an ideological mentality that is basically hostile to a conservative mind …

Where conservative intellectuals once had to prove themselves by the strength of their arguments, they could now increasingly get along by repeating not much more than slogans and audience-pleasing half-truths …

The creation of the conservative media as an “alternative” to mainstream media gave way to conservative media as a near-complete substitute for their conservative audience. At one point, there was a desire, which I think was partly very genuine, for greater fairness to the conservative perspective, but this soon morphed into the need to construct a parallel universe of news and commentary untainted by outsiders …

[T]he supposed radical reactionary extremists [so labeled by Movement Conservatives] were actually the far, far more reasonable ones who were not advocating all of the things that have become so important to movement conservatives: aggressive war, reckless power projection, expansion of state surveillance and detention, exaggeration of the nature and scope of foreign threats, and absolute deference to the executive in “time of war” ….

I’m not keen on Obama (and neither is Larison), but give me some criticisms that aren’t brain-dead sound bites, for gosh sake!

One wonders where Republican hawks can possibly go from here. They have almost three more years of an Obama Presidency to endure, and already they have gone mad with alarmism, hysterics and overreaction to fairly ho-hum policy decisions. Obama needs a credible, sane opposition to keep him in check and challenge him when he is actually wrong. Right now, he doesn’t have that, and all of us will suffer for it. His own party will not hold him accountable, because a President’s party never does, but in any contest between an erring Obama and a mad GOP the latter will keep losing.

(Deterrence and Disamarmament, April 8, again by Larison – emphasis added).

I’ve been reading for the first time Russell Kirk’s classic, The Conservative Mind (alluded to by Larison), and I am struck by the extent to which today’s putative conservatives are not true conservatives, but hawkish and cynical statists. Having lost the “evil empire” in 1989, they keep looking for enemies we supposedly can and must eradicate, and dissing the Democrats for insufficient eradicatory zeal.

Do you think I exaggerate? Are you going to fling 9-11 at me?

My take on 9-11 and terrorism, after more than a little vacillation, is “if there’s no solution, there’s no ‘problem.'” Problems have solutions. Terrorism has no solution and thus is not a problem. Terrorism instead is an evil, a dark mystery with which we must live for the foreseeable future – taking reasonable precautions, of course, but stopping short of “aggressive war, reckless power projection, expansion of state surveillance and detention, exaggeration of the nature and scope of foreign threats, and absolute deference to the executive in ‘time of war.’”

In 1972, I voted for McGovern over the patently-crooked Nixon. Having absorbed in subsequent years the radical change wrought in the Democrat party that year (I’m thinking of blogging on that change), I’m not sure I could do something like that again. Not that I slavishly follow its endorsements, but Indiana Right to Life announced this week a blanket policy of endorsing no Democrats in 2010. My first reaction was negative, but it’s a decently-thought-out position:

Whereas the Democratic Party officially endorses the right to unrestricted abortion on demand; and

Whereas Democratic leadership continues aggressively to advance federal policies that undermine the right to life of unborn children; and

Whereas Congressman Brad Ellsworth, Congressman Baron Hill, and Congressman Joe Donnelly betrayed the trust of pro-life Hoosiers by voting for the pro-abortion federal health care reform bill; and

Whereas the Democratic caucus in the Indiana House, under the leadership of Speaker Pat Bauer, continues to block all legislation aimed at limiting, restricting, and reducing abortions in the state of Indiana; and

Whereas candidates of the Democratic Party are responsible for the policies and actions of the party and its leadership;

Be it resolved that the Indiana Right to Life Political Action Committee will grant no endorsements to any Democratic candidates for any public office.

Still, Republicans: give me a credible choice! Voting for McCain was the hardest Presidential vote I’ve cast since 1972. I’m beginning to understand people who stay home muttering “to hell with them all.”

Obamacare and the future of the Democrat Party

Interesting column at the Washington Post today from a columnist I can’t remember reading before, Matt Miller, a progressive think-tanker, about why Obamacare is driving Republicans to distraction. (I guess I’m going to use “Obamacare” as shorthand for a while, although Obama let Congress write “his” signature legislation.)

Shock 1: Losing big. For starters, Republicans simply have not lost on an issue this big in decades…

Shock 2: The quest for security. The next blow is the dawning awareness that the quest for economic security in a global era is reshaping politics. The instant premise of Republican analysis — that the public will never tolerate Obamacare’s repeal once it is implemented — concedes the point that health reform will bring a measure of security that families crave…

Shock 3: The death of the tax issue. The final shock is the cruelest of all: the demise of the tax issue that’s defined the Republican brand since Ronald Reagan…

Until Obamacare, I had said that the parties had become very similar in economic policy. Miller thinks the Republicans engineered that, and I think he’s onto something:

Media coverage features so many breathless political ups and downs that it’s easy to assume each party tastes victory and defeat in equal measure. But as a matter of ideology, these overheated fights take place between the 45-yard lines on a field that conservatives shrewdly tilted to their advantage several decades ago.

Meanwhile, in the less-august-than-Washington-Post blogosphere, a Democrat explains with many charts and graphs why his party is doomed because their “tent” is too big:

Time and again in American politics, Republicans have voted as a unit to frustrate our disorganized Democratic majority. No matter what’s on the table, a few Democrats will peel away from the party core; meanwhile, all Republicans will somehow manage to stay on-message.

I think that’s what Matt Miller is referring to as the GOP keeping the game between the 45 yard lines.

After the Market State: Phillip Blond on the Future of a Free Society

I must pass along an important lecture which summarizes the direction my thought has been heading in politically.

Society and the private sphere have become increasingly monopolized by the state and the market, which seem inadequate for dealing with increasing economic and social dysfunction. Phillip Blond, the influential Director of the London think-tank Respublica, argues for the necessity of the enduring bonds of family and local community, and the wide distribution of property and public responsibility that these require. Blond will outline the vision that has increasingly captured the attention of Britains Tory Party in his lecture, Red Toryism: What it means and why it is a genuinely radical alternative to the Market State.

I tried to embed the YouTube video here, but couldn’t get that to work.

Market state, welfare state

“The welfare state and the market state are now two defunct and mutually supporting failures.” Thus saith Phillip Blond, whose name will no doubt generate a spate of “dumb blond” jokes, primarily from the Right defenders of all things Leviathan except the Leviathan state needed to keep Leviathan capital in check.

I don’t know Blond well at all, but people I know who know what’s going on in political thought are among his groupies, so I’d say the name bears watching.

Lighting an Economic Candle

If it’s better to light one candle than curse the darkness, Allan Carlson, an Editor at Large over at the Porch (and a pretty major figure is real conservative American thought for decades now), has done a better thing recently, and I the curser of darkness pass it along.

Carlson’s keynote address for a University lecture series starts, necessarily, with a little darkness-cursing to set the stage:

Eighteen months of severe recession have brought to the surface old truths that many chose to forget when times seemed to be good: the business cycle has not been eliminated; finance capitalism is by its nature unstable; politically-connected corporations commonly escape market discipline; and there is nothing conservative about the “creative destruction” of a capitalist economy.

…As one commentator noted in the mid 1930’s, the label “conservative” had then been thoroughly “discredited,” twisted by the “apostles of plutocracy” into a defense of “gamblers and promoters.”

He then turns to the more illuminating task at hand, noting recent historic

seekers after a “Third Way,” a social and economic system that in important respects would be neither capitalist nor socialist.

In Europe, these seekers included: Great Britain’s Hilaire Belloc and G.K. Chesterton, architects of the Distributist program [to which I will return]; the Russian agrarian economist Alexander Chayanov, who crafted a remarkable theory of “the Natural Family Economy”; the Bulgarian peasant leader Alexander Stamboliski, who turned his nation into a model agrarian republic and co-founded the “Green International” in 1923; Nancy Eriksson, a Member of Sweden’s Parliament who defended a curious political movement that might be accurately labeled, “The Desperate Swedish Socialist Housewives”; and Gilbert Dru, Etienne Gilson, and Wilhelm Roepke, architects of a vibrant mid-20^thCentury Christian Democracy that aimed to build a Humane Economy. These episodes effervesced in events of brilliance and excitement, sometimes reaching fruition, only to fade in the face of the two main 20^th Century ideological contestants: capitalism and communism.

Then he summarizes the true core of his talk:

Tonight, I want to tell you about three American writers and activists who also have been part of this quest for a Third Way: Ralph Borsodi; Herbert Agar; and Wendell Berry. I will also suggest ways in which their examples and ideas may help us understand the current economic crisis and point toward an alternate Conservatism for the decades ahead, one combining a preferential option for the natural family with a more decentralized, human scale economy and a curtailing of the “national security state.”

There’s enough thereafter to make almost anyone squirm. Anyone who thinks Rush Limbaugh and Sean Hannity are genuine conservatives may go postal upon reading it. But it challenges me, too: can my vision of walkable cities and food co-ops survive except as parasitic of those who live in rural areas and burn fossil fuel to get their edibles to my cozy co-op or picturesque farmers’ market? But what becomes of community and “Front Porch” conversations if everyone’s sitting on their own 40 acres with their mule?

I don’t think I can commend it too highly or excerpt its treasures adequately. My PDF version for my archives is already heavily marked up. You must read it yourself if you, like I, suspect that we’re toast economically in the short term but hope for a humane life beyond the coming collapse.

Better cabs through innovation

From the Financial Times, an interesting article on the competition between the “Black Cabs” of London (with their legal privileges, tradition, and undeniable Knowledge of their drivers) and an upstart company, Addison Lee, that is challenging the Black Cabs on several fronts. For instance, the story opens with how Russians are working with Addison Lee to collect GPS data, the better to predict trip length, preferred routes, and fleet allocation.

We all no doubt tend to find confirmation of our prejudices wherever we can. Climate scientists claim corroboration in a winter weather pattern that coincides with global warming theory, but then, seemingly inconsistently, deny that a weather pattern to the contrary is evidence of anything. Heads, we win; tails, inconclusive.

So take it with a grain of salt however big you like that I find in this story evidence that if we regulate an industry, we should think very hard before granting it any outright monopoly. The innovation potential of allowing upstarts is especially prominent in this story. What if the regulators had crushed the upstarts, especially since they tended to be a bit shady?

Dare I think of this story even as being evidence of the virtues of policies that promote small-scale innovation so as to prevent even “free market” success from creating excessive concentrations of corporate power? (Most of our megabusinesses like Wal-Mart, ConAgra, Archer Daniels Midland and such, owe a great deal to cozy relationships with legislators and regulators – hardly examples of pure free market success. But that’s a story for another day.)