Does Europe Exist?

Europeans need to decide whether or not Europe exists. If it does, the rich need to act accordingly.

If Europe exists or wants to exist in the future, if there is a community of like-minded people who care about each other and want to stick together, then the fortunate need to help the unfortunate. This remark by former European Central Bank Executive Board Member Lorenzo Bini Smaghi is typical of Europe's problem:

Ireland has made huge progress over the last year. It is really a pity what is happening in Greece is spoiling all this. Without the Greek events, I think Ireland would be able to come back to the markets. [Bloomberg 5/18/12.]

Well, of course, without those who are in trouble, those who are not would be better off. What is the point of such churlishness? The point, clearly, is that "we" are out for ourselves and could care less about our neighbors. And there are currently more than a few rich Germans who think exactly the same thing about Ireland.

Domino theories usually don't hold much water, but the idea that eliminating Greece will only pull the plug on Spain...and Ireland is hard to dismiss. It is beginning to appear that the only Europe that exists is the old one that brought us a century of fascism and war. Is there a European community or are there just rich and everyone else?

It seems unimaginable for Europeans to turn their backs on the society that gave democracy to the West, but if the Acropolis no longer means anything, if the various little nationalities over there don't want to be Europeans working together in the face of adversity, here's an option: all the Mediterranean societies can walk away from the EEC, leaving it to the cold-hearted Germans who apparently are now quite happy to discover that they won WWII after all. It is not clear what that would accomplish in economic terms since Spain, Portugal, Italy, and Greece all face the same economic challenge, but at least they might have empathy for each other. And I perceive certain gentlemen standing in the shadows with welcoming smiles on their faces. Erdogan, Gul, and Davutoglu today constitute the most innovative decision-making team in the neighborhood. Could they lead a Mediterranean common market to a better tomorrow?

Current Economic Indicators

Keep the following evidence in mind when calculating your financial future...

Shooting Ourselves in the Foot

Human nature creates crises: the safer, smoother, more stable things are, the more risk people will take, sooner or later wrecking all that stability. Despite the outpouring of analyses of the 2008 Financial Crisis, it remains unlikely that society has internalized this lesson about the ever-present threat of human nature even as regards economic crises, however obvious the message may be. How much less likely is it that we are anywhere close to protecting ourselves from self-inflicted political crises?

We all are now aware that the shortsighted, selfish behavior of a few millionaires on Wall Street, a few politicians, some compliant regulators, and--truth be told--more than a few of the "other 99%" looking to cheat their neighbors for a quick buck can combine to generate a financial tsunami. It's not about foreigners. We are our own worst enemy. What most complacent and confused Americans fail to understand is the degree to which we make our own international political crises as well. From the American War in Vietnam to the Global War on Terror to the looming war against Iran (backed by Russia, China, and maybe Pakistan), the U.S. has the power to take the initiative and create these disasters but lacks the power to resolve them in a beneficial manner.

Note clearly that this discussion concerns “self-inflicted crises,” those resulting from the conscious choice to engage in unnecessarily greedy behavior. A crisis caused by an external force, human or natural, lies outside the discussion. Here the concern is on a class of crisis caused by perfectly avoidable human greed leading to obviously risky behavior (in effect, investing in a chain letter). To put it differently, the class of crises of interest here is a class for which one should expect the guilty to be named and punished (both by the judicial system for crime and by God for their sins).

Since everyone is now thinking about utterly unnecessary and egregiously man-made financial crises even as we are hit by repeated utterly unnecessary and egregiously man-made political crises, a question that seems timely and useful flows from the above paragraphs:

Can our recently learned lessons about financial crises help us to avoid political crises?

In The Black Swan, Taleb reports an alleged pattern of economic risk-taking:

The economist Hyman Minsky sees the cycles of risk taking in the economy as following a pattern: stability and absence of crises encourage risk taking, complacency, and lowered awareness of the possibility of problems. [78.]

Nouriel Roubini, the economics professor who predicted the 2008 Financial Crisis in brilliant detail, described the “vicious cycle” of economic crises as consisting of [once I delete the economic adjectives] the following steps [Nouriel Roubini and Stephen Mihm, Crisis Economics 18.]:

1. Worries drop;
2. Costs fall;
3. The bubble drives growth;
4. Increasingly risky ventures are undertaken.

Applying this abstract vicious cycle (to which I would simple add the obvious final step—collapse, i.e., the point at which the cycle ends...with a bang) derived from economics to international relations is suggestive. Whether in economics or politics, the dynamics of the bubble of greed are frequently equivalent. In the aftermath of 2008, the point as regards economics must be obvious to all, whether they have read Marx, Keynes, Minsky, and Roubini or not. Every poor, naïve, uneducated (or just greedy) homeowner who took out a mortgage that he or she obviously could not afford and has now lost that home is today an expert in bubble economics and the danger to us all posed by unregulated capitalism.

But international politics is harder to see clearly through the fog of greedy politicians who classify information to prevent the voters from learning the truth and who wave the bloody shirt of foreign “menace” to promote their careers. Language too helps to obfuscate. We do not talk of “imperialist bubbles.” But if one abstracts to clear away the clutter of detail, the dynamics of greed, willful denial, moral hazard, and willingness to risk—even promote—“collateral damage” in so-called Global War on Terror looks like nothing so much as the 2008 Financial Crisis. Leaders became increasingly confident that they could not be stopped, with their appetites for new victories, new wealth, and new power rising apace. As the new policy—be it the issuance of new securities based on sub-prime mortgages or military adventures in yet another Muslim society—proceeded without major defeat, each new venture seemed less and less costly. Every small gain was used to justify a larger gain, every small risk to justify a larger risk. Even when the risks were seen, they were dismissed; after all, it was the poor who would suffer from unemployment and foreclosure…or death on the battlefields of Iraq and Afghanistan, and in the case of the wars, most of those poor were foreigners. Moreover, like the Wall Street firms bailed out by politicians generous with taxpayer funds, the White House was “too big to fail.” Like Wall Street megabanks, the White House knew it and took advantage of it: moral hazard gone wild. Like big bank CEOs, presidents and vice presidents are almost never held criminally accountable in court for their sins. And then suddenly, the financial/imperial party was over, and the victims were left to clean up the mess.

In the abstract the pattern of failure is clear: failure of the people to carry out their democratic responsibility to monitor their leaders, arrogance, abuse of power, denial about the risks, corruption, lack of concern about collateral damage, and moral hazard.

As long as society trusts those in power, the powerful will abuse that trust for personal advantage, be it the selling of bad securities or the selling of bad wars. The more society is willing to countenance collateral damage to workers driven into unemployment and homeowners foreclosed, or Muslim wedding parties bombed and Muslim societies denied the right to civil liberties and national independence from the globalization avalanche, the more the rich and powerful will hold parties at the expense of everyone else. Bubbles are very good business for those who create them. “They” will never stop doing so until “we” put in place the moral strictures, legal regulations, and judicial holding to account necessary to stop them. But it is not that simple, for many of “us” were tempted to buy houses we judged we could flip into the hands of a more naïve neighbor to skim an unfair profit; many of “us” looked the other way while innocent Muslims across the globe were slaughtered in the name of global war to retain all the undeserved special privileges that make possible a rich life in a poor world. So in the end, the old saying is true: we get the government we deserve.

Government Collusion With Big Finance

Does the appearance of government collusion with Wall St. crime come from government incompetence or...from government collusion with Wall St. crime? Intentional or not, when the government lets financial criminals off the hook, the result is to undermine U.S. national economic security.

For the latest evidence of government collusion with Big Finance, read the piece in Bloomberg Businessweek [11/4/11] accounting an alleged SEC habit of slapping Citibank on the wrist for repeated fraud while allowing Citibank to grin all the way to the...well, you get the idea. Here's the deal, judging from the article:

1. Government, desiring popular respect, sternly exposes Wall St. fraud;
2. Wall St. criminal enterprise sincerely apologizes;
3. Government demands that Wall St. criminal enterprise promise never to do it again;
4. Wall St. criminal enterprise agrees, departs, and does it again.
5. Return to Step 1. 

But the SEC settlement has to be reviewed by a judge, in this case Judge Jed S. Rakoff of the Federal District Court in Manhattan, and he is showing signs of independent thinking.This raises some serious questions:

• Is he sincere?
• Can he resist the pressure that will surely come his way to "play ball?"
• What does the SEC really intend to do about Wall St. fraud?
• Is there actually hope that someone in government will support the 99% and Occupy protesters to bring big financial criminals to justice?

As the reports of violence appearing during Occupy protests become increasingly frequent, it is important to keep our eyes clearly focused on the main issue: the degree to which the financial criminals and exploiters sneaky enough to defraud in ways that are not technically illegal under our highly biased system of "justice for the rich" are held to account for their attack on national economic security.

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Historical and Moral Background:

There is of course nothing new about corruption, self-serving behavior, or even collusion between rich financiers and rich politicians at the expense of the citizenry. A huge distinction needs nevertheless to be made between elite corruption in a context of a "rising tide lifting all boats" and elite corruption slaughtering the goose that lays the golden egg. Even a society founded on a bias in favor of the rich must make that distinction in theory and, through the workings of the system of justice, in practical law. Whatever the pro-elite, pro-business bias of American capitalism, the government does occasionally strike back against the extremes of Big Finance's "abuse of privilege." The dismissal of an early 1950s government suit against Wall St. by U.S. Circuit Court judge Harold R. Medina on September 22, 1953 was, despite its immediate defeat of government efforts to rein in Wall St. corruption, a long-term landmark in making the behavior of Big Finance more transparent and in establishing in law a clear distinction between the narrow legalities of the situation and the broader concept of morally appropriate behavior in a democracy.

In his history of Goldman Sachs, Money and Power [Doubleday, NY, 2011: 95], William D. Cohan summarizes the significance of Medina's penetrating ruling:

It demonstrated in vivid detail how investment banks garner business. Medina ruled that the investment banking firms did not violate the law. But his lengthy analysis raised the question of whether Wall Street's practices at that time furthered its ostensible mission--to help companies raise capital for growth--or whether much of the banks' activity was designed to increase the bank accounts of their senior partners. An activity may be legal, but is it just?

As the American system of government evolves and--citizens must hope--matures (not at all an inevitable evolutionary trajectory), it maneuvers through an environment rich in alternative strands of governance DNA. "It" picks from among these strands with two frequently contradictory motivations in mind--short-term benefits being sought by individual actors or groups for self-aggrandizement and long-term benefits being sought by actors or groups that choose to act for the benefit of the whole society. These strands of "governance DNA" include bits and pieces of fascism [e.g., brute force joint dictatorship of industry and government over the people with massive welfare for corporations], raw capitalism [e.g., child labor], and socialism [e.g., welfare for average individuals], not to mention less fertile alternatives such as communism, religious fundamentalism, and feudalism. Evolutionary trends may push the system in any direction; if democracy is to mature, however, the system must surely evolve generally in the direction of, albeit not necessarily all the way toward, socialism, i.e., governing for society. A landmark step toward such maturation of governance would be the transformation of Judge Medina's concept of just behavior on the part of a rich financial elite into law that would prohibit behavior by Big Finance that failed to contribute to the general welfare.

Do Not Mention the Israeli Threat

After the mess created globally and domestically by the U.S. campaign against Islamic independence, Washington may find the idea of a nice, clean little surgical strike too good to resist.

The Utility of Terror

Terror is a wonderful tool, opening wide the door of opportunity.

Clear Financial Thinking from Washington

It is not fair to criticize Washington endlessly. Here is one example of clear thinking.

More Bank Fraud

The latest bank scandal, concerning Belgium's Dexia, suggests that Europeans learned nothing from the 2008 financial crisis brought to them by the U.S., and now it's our turn to get the favor returned.

Politicians With Real Solutions

Some of the politicians in Washington really are earning their pay: keep an eye on the Congressional Progressive Caucus.

Short Voter Guide for Restoring the U.S. Economy

The mid-term future for the U.S., as the result of apparent short-term and secular negative economic trends amplified by political failure from both major parties (splitting conservative elite rule over the U.S.), appears highly unfavorable. Those who benefit have generated much confusion, but some simple steps toward a solution benefiting society can be taken by a concerned voter.

Elizabeth Warren Speaks the Truth on the Economy

There is a class war in the U.S., and the financial crisis exposed it to all, but those under attack--the American people--have not yet begun to fight back against the super-rich.

Pursuing Financial Criminals

Judicial movement against some of the institutions that created the financial crisis are intensifying, although so far there is little indication that individuals in the financial corporations, much less the Government, will be held responsible. Despite these limitations, this process is a bellweather of the health of our democracy and merits close attention. With luck, we will all eventually have a clearer indication of the degree to which the appearance of fraud reflects reality even if the degree of corporate-government collusion remains concealed by the fog of politics.

1. The SEC sued Goldman Sachs for fraudulent betting against its own customers in 2010. Goldman settled a few months later, paying a half billion dollar fine.
2. The National Credit Union Administration (NCUA) sued Goldman Sachs for “misrepresentation” in August 2011. The NCUA is the Federal credit union regulator. This is its fourth suit flowing from financial schemes that contributed to the recession.
3. Goldman Sachs and two other firms agreed in August 2011 to cease foreclosure fraud and compensate victims.
4. A class action suit was filed against Goldman Sachs in August 2011.
5. The Federal Housing Finance Agency, which regulates Fannie Mae, is bringing suit against 17 banks and mortgage firms, including Goldman Sachs, Bank of America, JP Morgan Chase, and Deutsche Bank, and Countrywide Financial.

It is also unclear how many of the victims of the financial scheming will be compensated.

Exports: A Winner Over the Years

Amid all the gloom and doom about the U.S. economy, exports would seem to be a bright spot:

Source: tradingeconomics.com


 If you go back to the original chart and extend it back a couple decades, you will see that the growth trend is fairly steady throughout. The U.S. needs its trade partners; I wonder what might happen to the domestic economy if Washington put its emphasis on stimulating exports rather than fighting wars?

The Speech Bernanke Should Have Given

We, the American people, can no longer afford to pay the bill for the lifestyle of the rich and powerful.

Federal Reserve Chairman Ben Bernanke missed a critical opportunity to tell the truth with the world listening at the annual Jackson Hole, Wyoming economic conference. Here is the speech he should have given:

We have reached a level of political irresponsibility over the past 35 years, and specifically over the past decade, where we can now quite realistically see the possible collapse of the U.S.-centric world order as the U.S. is allowed to decay from within. If you, the Washington policy-making elite, do not want this to happen, then you must change course in a more fundamental way—in domestic terms--than Washington has done since Lincoln made ending slavery the moral foundation of the Civil War and—in international terms—than Washington has done since Roosevelt defeated isolationism and took us into WWII.

Domestically, you must personally sacrifice your class interests as the representatives of the rich and powerful by reorienting U.S. financial and tax policies to put the interests of the low and middle classes first. This will entail policies that will severely punish non-productive investment strategies, that will strictly regulate with harshly applied criminal penalties both the banking and mortgage industries, that will re-create a highly progressive tax structure, that will heavily tax carbon use, that will make the ownership of expensive vacation homes prohibitively costly, and that will transfer excess wealth rapidly into the hands of the poor. Such a revolutionary set of reforms will obviously be feasible only in an environment in which real political power is transferred from the rich to the average voter, and will thus entail such political reforms as public financing of elections and legislative steps to encourage rather than discourage third parties.

Internationally, Washington policy-makers must accept that their primary job is to manage the U.S. on behalf of the whole population, i.e., to ensure quality education, plentiful jobs doing productive work, a healthy civil society, political inclusiveness, civil rights, universal health care. Their primary job cannot be the pursuit of global empire. The empire must go. The U.S. must eliminate most of the U.S. military budget, cutting back from some 40% of total global military expenditures to perhaps 10% of total global military expenditures, a budgetary shift that will have the enormous benefit of forcing the U.S. to emphasize moral leadership, rather than leadership through force. The global U.S. military base structure will disappear, and wars of choice will no longer be launched by the U.S. against the wishes of the majority of mankind.

The bottom line is simple: either you, the rich and powerful, must agree to go on a diet and live life in the U.S. as part of rather than as parasites on American society or America as we know it will disappear. We, the American people, can no longer afford to pay the bill for your lifestyle.

But of course I am dreaming, because Bernanke would have been called “a troublemaker” and “not a team player.” Then Bernanke would have been fired.

Can the U.S. Reverse Its Decline?

If an historic shift—the decline of the U.S.—is unfolding before our eyes, then the double scandal of the invasions of Iraq and Afghanistan followed by the scandal of the recession will be seen as key pieces of evidence. But…just as those events constituted failures of leadership rather than external accidents, good leadership could avoid the decline they point to.

It is very easy to offer the double military debacle of the U.S. in Iraq and Afghanistan as evidence of the decline of the U.S. Indeed, it is evidence, and strong evidence at that. But that of course does not prove that the U.S. decline is, so far, more than a “bad decade” that could be overcome by an educated and determined population led by a responsible national leadership aware of the mistakes of its predecessors. Stephen Walt neatly spells out this all-important caveat:

The good news, however, is the defeat in Iraq and Afghanistan -- and make no mistake, that is what it is -- tells us relatively little about America's overall power position or its ability to shape events that matter elsewhere in the world. Remember that the United States lost the Vietnam War too, but getting out facilitated the 1970s rapprochement with China and ultimately strengthened our overall position in Asia.  Fourteen years later, the USSR had collapsed and the United States had won the Cold War. Nor should anyone draw dubious lessons about U.S. resolve; to the contrary, both of these wars show that the United States is actually willing to fight for a long time under difficult conditions. Thus, the mere fact that we failed in Iraq and Afghanistan does not by itself herald further U.S. decline, provided we make better decisions going forward.

What lessons should we be learning from the Iraqi and Afghan wars?

• Don’t deify your enemies.
• If the enemy is a gang, war against states is the wrong strategic response.
• If the problem is social, a military solution will make things worse.
• We can’t do everything.
• Even if we can do everything, we can’t do everything without sacrifice.
• Foreign policy and domestic policy are linked, and a strong society—workers gainfully employed, people living within their means—forms the basis for an effective foreign policy.
• Breaking our own laws, ignoring our own principles, and undermining our constitution do not strengthen our position.
• Our ignorance of the rest of the world and of the actual behavior of our government and corporations overseas makes it very easy for enemies to set traps and sucker us into voluntarily stepping into them.
• The military card is most effective when available but never played.
• Never trust American leaders: they harm Americans far more than our foreign enemies do.
• Most enemies of the U.S. are more like hornets after you throw a rock at their nest: their hostility did not come out of the blue.
• Learn some history.

Evidence that either voters or leaders in the U.S. have learned any of these lessons is, unfortunately, hard to find.
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Whitewashing U.S. Behavior

Robert Danin of the Council on Foreign Relations recently called for improving our "message" to Muslims. Focusing on the idea that our problem lies in our message rather than our behavior exemplifies the failure to learn the fundamental lessons of 9/11. Empire-building, supporting Israeli rightwing expansionists, and--yes--taking the oil are what they don't like.

The Economy Is About Jobs, Not Stock Prices

Paul Krugman, cutting as usual to the chase, provides this bottom line little set of statistics on the real state of the economy (where ECONOMY = JOBS):

In June 2007, around 63 percent of adults were employed. In June 2009, the official end of the recession, that number was down to 59.4. As of June 2011, two years into the alleged recovery, the number was: 58.2. [New York Times, 8/4/2011.]

Krugman pointed this out a few days ago; it is worth recalling in light of the gyrations of the stock market this week. It does not matter what the stock market does. Ignore it. What matters is whether or not the average person has a job or is unemployed, frustrated, stressed, angry, unproductive...

So if politicians talk about ANYTHING ELSE, they are probably hiding something (like their inability to solve real problems). Bob Reich explains this very clearly.

And here's the video on how to generate those jobs [Real TV].

Too Big to Exist

When corporate or government institutions become too big and too socially destructive to exist, we need a graceful method of putting them on a diet and reforming their lifestyle.

The American genius for creating magnificently productive mega-institutions has a potentially fatal downside: we have, as a society, no idea how to downsize them when they "go rogue," i.e., become socially destructive. On balance, today, several of America's major mega-institutions--the Imperial Presidency, Big Oil, Big Pharma, and Big Finance--either are or are fast becoming socially destructive. They are "too big to exist;" we need to figure out how to downsize them gracefully, reorienting them toward socially useful behavior.

Perhaps the first step toward this new way of thinking that needs to replace the tarnished old "bigger is better" mantra is to understand the evidence supporting the contention that these mega-institutions are so bloated that American and, indeed, global society can no longer afford them. (I call these social units "institutions" because each is truly a unified organization composed of, perhaps, separate governmental or private units, but operating according to a clear if unstated and frequently illegal set of monopolistic rules designed to maximize profit and power at public expense and, in the case of the Imperial Presidency, at the expense of the rest of the Government as well.) Consider the following examples of mega-institution misbehavior:

1. The Imperial Presidency, i.e., the rising ability of the White House and all its military-industrial support mechanism to overshadow Congress and Constitution on foreign policy, now employs something in the neighborhood of a quarter of a million mercenaries overseas, constituting an armed force capable of making independent war on most countries--completely outside of Congressional control and often beyond the reach of U.S. judicial authorities [see Jean MacKenzie, Jeremy Scahill, Glen Ford]. Since Augustus overthrew the Roman Republic with his palace guards and established the Roman Empire, we have known the profound threat to democracy posed by a mercenary army under the command of the chief executive.
2. Big Pharma, constituting the whole U.S. health care industry, has degenerated so far that, to boost profits, it now essentially writes off as a "business loss" all of the nationa's elderly with the almost universal cognitive problems associated with aging. At their most vulnerable, they are thrown into the arms of untrained relatives utterly unprepared for 24/7 nursing.
3. Big Oil, alb eit receiv ing billions annually in welfare payments from U.S. taxpayers, can destroy ever-growing chunks of the earth through careless cost-cutting measures and escape responsibility. For the rest of our lives, we will be watching BP's poison creep with Gulf Stream currents up the North American east coast and over toward England, while everyone complains about $4 a gallon gas, a price only a fraction of the real cost.
4. As for Big Finance, the cost of its irresponsibility is now glaringly obvious to everyone. At the very least, Wall St. should keep accurate books, and regulators should scrutinize them.

The traditional way of toppling rogue mega-institutions is of course well known: the "barbarians" did it to Imperial Rome, Lincoln did it to the Southern slave system, Gorbachev did it to the Soviet state. But as these mega-institutions take on global scale, the cost of violent overthrow rises sharply. We should be able to do better.

Key to the smooth downsizing of rogue mega-institutions is twofold: 1) the breakthrough understanding of the bottom line insight that a cherished social structure has outlived its usefulness as currently designed combined with 2) the identification of specific traits requiring elimination. Specific reforms (Step 2) without acceptance of the goal of institutional downsizing, and redirection into a socially beneficial mode misses the point. That was the mistake of the Wall Street bailout, which successfully saved the bad old exploitative system rather than taking the opportunity to dismantle it by, for example, rebuilding the wall between the stock market and personal savings accounts. Similarly, eliminating mercenary forces while leaving the political supremacy over Congress of the Imperial Presidency untouched will only have a temporary impact. Surgical removal of a specific cancerous tumor must be done in the context of lifestyle changes related to nutrition, avoiding pesticides, and exercise.

Rogue mega-institutions must be recognized as enemies of society and redesigned to return to their proper purpose of servinhg society. The Presidency's power should be balanced with that of Congress; stock market investments should b e used to stimulate growth, not gamble with people's mortgages and savings accounts; the health care system should exist to provide a universal right, not to make a profit; the cost of gas should b e set by government to reflect its true value, incluyding the cost of pollution clean-up and the cost of wars fought to get the oil. And no industry that takes welfare from the taxpayer should turn its leaders into billionaires immune from prosecution.

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READINGS:
To its credit, Washington is at least thinking about this issue. See comments by FDIC's Sheila Bair.

Republican Games and the Trashing of the U.S. Economy

Former Secretary of Labor Robert Reich has a critical perspective on the linkage between the Republican political games over the debt ceiling and the state of the real economy (i.e., your job, your income, your mortgage, the profit of your business, the appearance of your main street). Curiously, the gamblers all Republicans love (known as "Wall Street") lost big as soon as Obama caved in to the Tea Party extremists. Watch today's DOW Jones figures. The recession did not wake up very many people in the U.S. Will the double dip, now showing on your favorite main street, finally teach us our lesson?

Welfare for the Rich. One reason for the U.S. economic mess is that the rich are cheating everyone else. Check out how much billionaire hedge fund managers pay in taxes. Just as we give welfare to Big Oil, we also give it to Big Finance. Did you really think they got that rich just by working hard? If my income had been taxed at the rate paid by hedge fund managers, I'd be rich now too.

Employment. In April, unemployment fell in most U.S. cities. In May unemployment rose in 210 U.S. cities; in June, it rose in 345 cities. Meanwhile, July job growth almost matched population growth. (U.S. population growth requires at least 125,000 new jobs per month to stay even.) Pundits saw the near tie as "progress." One pundit reportedly called the U.S. economy, the world's largest still (I think; though China is catching up), "not dead." Well obviously. If it were "dead," the U.S. government would no longer be paying out retirement checks to retired Federal workers (using all that cash so kindly loaned to us by...the Chinese).


Euroschlerosis. With whole European countries sounding more and more like the Lehmans and AIGs of Recession I, the double-dip seems more and more likely. Keep in mind that there is only one global financial system (unless you count North Korea and Myanmar as having their own). In fact, as every U.S. worker and homeowner knows, Recession I never ended; it just keeps transforming itself in interesting ways that just leave the average person poorer and poorer. (Remember, U.S. wages have now been stagnant for more than a decade.)

Bait and Switch for Dumb Voters. John Atcheson explains how Republican leaders have tricked the very uneducated American public:

Bait and switch.  Divide and Conquer.
So, after starting with a surplus in 2000, Republicans used two wars, two rounds of tax cuts, and a giant giveaway to big Pharma, to get the country racking up debt like a drunken sailor. 
Along comes the Bush recession, and the debt accelerates, and the Republicans declare the debt to be an “emergency” and right on schedule immediately attack popular programs like Medicare, Medicaid, Social Security, Student loans –and virtually anything that doesn’t help the uber rich or the corporations suddenly must be cut if we are to stay solvent.

OK, I will offer a partial apology to the American voter. I admit it is very hard to persuade oneself how insistent supposedly patriotic Republican politicians are on wrecking the society's circumstances in order to enrich themselves. But really, after the $3 trillion war against Iraq, the trashing of the Gulf of Mexico, the endless trillions of above-board and under-the-table Wall St. bailout (evidently totally somewhere around $12 trillion), the recession, and the lack of government reform of our financial system, it is about time you started focusing. The U.S. is probably the world's richest nation in terms of resources, but we are throwing it away at a rate that will in fact put us into another depression. And the last time we had a depression, it came with camps of the unemployed, fascist police attacks on the poor, and a brush with communist revolution. You really don't want to go there.

The Lesson of AIG

The man-made recession, which continues, did not, apparently, cause the collapse of civilization as we know it, but if we do not take this opportunity to learn how better to manage big institutions, the next time may be worse. Or, perhaps civilization as we know it, based on a capitalist rampage, should undergo planned obsolescence.

The lesson of AIG’s collapse and purchase by the Government, using taxpayer funds definitely not intended for that risky purpose, at a minimum is this: some of our society’s institutions have in fact become too big to fail, without unacceptable collateral damage, and should thus be managed under intense public scrutiny to minimize such potential collateral damage. Whether or not the AIGs fail is a private concern; how they fail is the business of the Government and the People.

It seems fairly obvious that AIG decision-makers were running their company in a manner irresponsible to their shareholders, their customers, and society [Sorkin, 376-411]. This statement is based not just on their business decisions but, more, on their lack of understanding of their own business: despite the billions they maneuvered, they evidently did not know their own numbers, like a private individual who borrows from all his friends and spends every penny he gets without ever figuring out how much income he has, how much he is spending, or how much he owes. Such an individual will end up in jail; the penalty for executives in organizations too big to fail should be much more severe. A number of specific questions about the degree to which AIG decision-makers were held responsible for this failure of duty follow:

1. To what degree were AIG’s CEO and, perhaps more importantly, its previous CEO (for the one at the time of its collapse—Willumstad--had not been in the position long enough to have cleaned house) a) made to explain AIG’s failure and b) made to pay personally via fines that, after the fact, amounted to a removal of incentive for others to behave with such irresponsibility?
2. Were the decision-makers just below the CEO criticized by AIG’s own controller (David Herzog) [Sorkin, 410] fired, fined, and debriefed for the public record?
3. Where is the official evaluation of how the business practices of AIG went so wrong and what we as a Government and a Society should do to ensure transparency for such institutions in the future?

For their clients who held AIG paper (e.g., insurance policies), for their investors who hoped for a profit, and for the millions of innocent victims who would suffer from AIG failure, AIG had a minimal responsibility at least to understand its own balance sheet. The Government had a more profound duty since its primary (and grossly failed) responsibility in the years from the gutting of Glass-Steagall under Clinton until the Bush Recession was to society, not to the rich. The Government, specifically the regulatory agencies and Congress (which sent the financial institutions the message that “anything goes” and sent regulators the message that befriending the fat cats they were supposed to be regulating was OK), betrayed the interests of the U.S. public in favor of rich and generous institutions.

American society needs to think deeply about how to minimize such corruption. The first step surely is for Americans to wake up and educate themselves so they can differentiate between corrupt politicians who support the elite rather than the public interest, for it is unclear how to punish the politicians responsible for creating the anti-regulatory environment in which the recession was cultivated except by voting them into the ash heap of history. A second step would be to pass an amendment to the Constitution clearly defining “person” as referring only to “people,” not groups, institutions, or companies. A third step would be to prohibit three things that present clear conflicts of interest:

1.      electoral contributions by financial institutions;

2.      the revolving door through which the billionaire financial elite flows from Wall Street to Washington (where it passes legislation favorable to Wall Street) and then back to Wall Street, where they earn further billions with yet further safety from being held responsible;

3.      lobbying by financial institutions (which should be allowed only public statements of what they favor, not private lobbying of politicians).

Further Reading:

·        Impact of Government controls on AIG salaries

·        Brief review of the post-bailout continuation of Government favoritism for AIG, despite years of scandalous and criminal (for which a huge fine had been assessed even before the recession) behavior, at the expense of the public

·        Outspoken review of AIG

·        As of July 2011, AIG problems continue…

Designing the Orderly Failure of Large Institutions

Continuing the discussion of how to plan the compulsory failure of institutions that, believing themselves "too big to fail," are in fact too big for human society to afford.

If the wave of unemployment accompanying Washington’s post-recession care and feeding of guilty financial giants at the expense of American society did not make clear that Paulson’s concept of the “orderly failure of large financial institutions” was poorly implemented, then the wave of foreclosures did. While many Americans were clearly playing the (housing) market in full recognition that they were trying to benefit from a giant chain letter that would hurt only the last owner of their grossly inflated mortgage, thousands of other Americans unable to pay their mortgages because Wall Street irresponsibility had cost them their jobs had their homes taken by selfish banks who, once back in possession of the houses, could not find anything to do with them except let them rot. The Bush-Cheney-Paulson billionaire bailout, so uncritically supported by Obama, may have exemplified “orderly failure” for the billionaires, who kept the profits of their crimes, but was anything but “orderly” for the millions who suffered.

All that is of course rapidly becoming old, well-understood, and quickly-being-pushed-under-the-rug history. The whole U.S. financial and political elite-- from Wall Street, Washington, and many other places—was essentially complicit and has little interest in looking too closely at issues of responsibility. But for American society, not to mention the rest of the world, the issue, beyond punishing the guilty in the name of justice, is to determine exactly what a socially responsible process of orderly failure for a large institution would look like.

“Moral hazard” provides guidance. Institutions should be restructured and downsized (e.g., by preventing banks from playing the market with homeowners’ mortgages or savings accounts) to minimize socially harmful behavior and maximize socially beneficial behavior. Decision-makers at those institutions should be held personally responsible. Filling jails with brokers has little obvious value to society, but when a financier gets rich by inventing incomprehensible but obviously dangerous (because highly leveraged) financial “products,” the burden of proof should be on him to justify why all of his earnings should not be confiscated to compensate for “collateral damage.”

In truth, society needs to understand its frailty and, more, appreciate how often failure is due not to natural constraints or normal human limitations but to egregious cheating on the part of the powerful, who regularly kill the social goose that lays the elite’s golden eggs. Paulson deserves credit for enunciating the highly counter-cultural concept of “orderly failure.” American society, as the global leader (no moral judgment here; I mean the phrase simply as honest recognition that the U.S. is the biggest elephant in the room), needs to take primary responsibility for developing not just the biggest war machine, the greediest financial district, and the most wasteful consumption society but also the global standard for institutional rejuvenation.

The U.S. has done it before. With the Marshall Plan, it transformed Nazi Germany and the Japan of military imperialist dictatorship into pillars of democracy. By its very establishment, the U.S. also transformed a West of kings into a West of republics. It then transformed itself from slave society to free society. Those were truly institutions “too big to fail.”

But those transformations were seen as unique. No user’s manual existed, nor were the respective situations perceived as members of a class, so no user’s manual was written despite the priceless lessons. Political science has failed us here. No busy government official will ever have time to study the crises and develop a generic process for smoothly cleaning the rot from failed institutions; that would be the responsibility of a new sub-field of political science, a field that would recognize theoretically the need for institutional renovation by force from the outside and that would recognize theoretically that the word “institution” comprises private and public institutions, companies and countries.

The process occurs every day. With the brilliant insight of Gorbachev that military force to maintain the existence of the rotten U.S.S.R. would be inappropriate, that empire was transformed, but of course via a decade of depression and crime—hardly an example of “orderly” failure. We await the first book to do a comparative analysis of the financial mess of Soviet communism and Wall Street capitalism…of the corruption of nomenklatura vs. the corruption of derivatives. A follow-on study could compare the corruption of Soviet industrial pollution vs. the corruption of Western Big Oil’s rape of the environment from Nigeria and Bolivia to the Gulf of Mexico. From such studies, done properly, would be derived a set of generic lessons of inestimable value for designing a well-functioning society.

While this task of assessing key crises of institutions failing from a social perspective even as they functioned brilliantly for the elite who benefited personally is likely to take a century to complete (and will require a profound understanding of how complex-adaptive systems operate in the social arena), we can usefully begin with a few obvious (once stated, albeit mostly ignored in current practice) principles:

• The principle that the larger an institution, the greater its responsibility to behave in accordance with the common good should be established in law;
• Rules for behavior should be known in advance;
• Rules should spell out personal responsibility for institutional elites and governmental regulators;
• The assumption should be that in egregious cases (e.g., breaking rules about leveraging, ignoring engineers’ warnings about installing good quality environmental protection equipment), decision-makers and their management chain will forfeit all personal earnings gained as a result of irresponsible decisions. Any claim that one deserves exemption (e.g., a golden parachute for a Wall Street CEO or denial of personal responsibility by an oil executive after a pollution spill) should have to be made publicly in court;
• Just as buildings have plans for getting people out in a fire, institutions should have plans for emergency downsizing.

And every American should realize that the need to grade the social acceptability of big institutions applies not just to brokerages and oil companies but to the United States as a whole…today. Americans are far more skilled at building huge institutions than in building socially beneficial institutions. More seriously, until disaster strikes, the assumption, deep in the culture, is typically made that big is better...rather than more dangerous. In fact, national downsizing of a rather bizarre type is the constant refrain of a certain class of conservatives (not those who “conserve” but those who believe in freeing the rich to do the exact opposite by forcing “conservation” down the throats of the disadvantaged). These “conservatives”, more properly these “elitists,” want not conservation by society but conservation by government. This is at least a step in the direction of downsizing, but one informed less by the theory of how to make institutions perform better than by raw greed. Nevertheless, this concept of downsizing is worth keeping, so long as the focus is shifted from downsizing regulation of, to be frank, piracy, toward the downsizing of socially pernicious behavior. Mankind has been stumbling in this direction for millennia, though the decades since Reagan entered the White House have seen the U.S. move in the opposite direction.

Part of the difficulty of making progress toward more socially responsible behavior by large public and private institutions lies in the lack of theoretical understanding of the concept of social responsibility for all large institutions. Society has no clear generic standard for the behavior of large institutions as a class. Seeing the generic issue rather than just the individual crises would facilitate asking questions in a way that would promote deeper understanding. How might one compare the harm to Iraqi society caused by the U.S. army during the occupation with the harm to U.S. society caused by the capricious approach of many banks to foreclosing on American homeowners? While this may seem at first glance to be an odd question, to ask it focuses attention on how to balance an emergency need to use force in a crisis vs. the long-range costs of force as the tool for conflict resolution. As technology improves, we gain the ability to approach closer and closer to the edge of chaos, a great achievement as long as we do not fall over the edge, but one that is becoming too dangerous without a deeper theoretical understanding of when institutions, including superpowers, become too big not to fail.