Keynes, Our Economic Times and a Liberal Education

The world-traveling alum strikes again with this find in Asia Times.  The article begins with a quote by Keynes, which should be enough to lure you in...

The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions ... [John Maynard Keynes, The Economic Consequences of the Peace], 1920

Keynes was a genius. Read the article and see what kind of shape we're in and what kind of thinking it's going to take to get us out.  GCS students, you'll be reading some of this.

When students graduate with an interest and some understanding of the world I feel a sense of pride and a renewed belief in the liberal eduation.

The Sky is Falling...

or something like that.

Robert Reich offers one of the most comprehensible explanations out there.

The Meltdown (Part IV)

The Dow is see-sawing but the reality is that the Bailout of All Bailouts isn't working. Credit markets are largely still frozen. Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing. It's not flowing to distressed homeowners. It's not flowing to small businesses. It's not flowing to would-be homeowners with good credit ratings. Students are having a harder time borrowing for their tuition. Auto loans are drying up.

Why? Because the underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.

Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks' capital adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital.

Paulson is recapitalizing the banks -- giving them money directly rather than relying on reverse auctions -- largely because he's come to understand that the banks have taken on so much debt that the reverse auction system he told Congress he would use(designed to place a market value on these fancy-dance instruments) will leave too many banks insolvent.

But pouring money into these banks, expecting they'll turn around and lend to small businesses and Main Streets, is like pouring water into a dry sponge. Nothing will come out of it because Wall Street is so deep in debt that the banks are using the extra money to improve their balance sheets. They're hoarding it because their true balance sheets -- considering the off-balance sheet vehicles they created over the past several years -- are in such rotten shape.

In other words, taxpayers are financing a massive effort to save Wall Street's balance sheets from Wall Street's previous off-balance-sheet excesses. It won't work. It can't work. The entire effort is merely saving the asses of lots of executives and traders who got us into this mess in the first place, and whose asses should not be saved at taxpayer risk and expense.

What to do? Immediately require the Treasury to stop the broad Wall Street recapitalization, and require Wall Street to lend the money directly to Main Street. At the same time, force Wall Street to write down its true balance sheets: Let the executives and traders take the hit. Let their shareholders and even their creditors take the hit for Wall Street's collosal irresponsibility. This is the only true way to restore trust. It's also the only way to save Main Street's small businesses, homeowners, students, and everyone else.

(Death) March of the Penguins

Why global warming might not be good if you're a penguin:

RIO DE JANEIRO, Brazil (AP) -- Hundreds of baby penguins swept from the icy shores of Antarctica and Patagonia are washing up dead on Rio de Janeiro's tropical beaches, rescuers and penguin experts said Friday.

More than 400 penguins, most of them young, have been found dead on the beaches of Rio de Janeiro state over the past two months, according to Eduardo Pimenta, superintendent for the state coastal protection and environment agency in the resort city of Cabo Frio.

While it is common here to find some penguins - both dead and alive - swept by strong ocean currents from the Strait of Magellan, Pimenta said there have been more this year than at any time in recent memory.

A Trillion Here, A Trillion There

Brad Delong points to this article at Vox EU referring to the Fed's attempts to control the crisis in the finance industry. I will post some U.S. bugdet numbers for comparison's sake. My point is: if the federal government were to spend a trillion dollars on a military mission to "save our way of life," you better believe we would hear about it. (Ok, maybe not, our media suck.)

Just take a look at this:

[...]

These new programs are very different from the ones that had been in place prior to the crisis.... By changing the level of the monetary base (really commercial bank reserve deposits at the central bank) Fed officials keep the market-determined federal funds rate near their target.... Given the quantity of assets it owns, the Fed can decide whether it wants to hold Treasury securities, foreign exchange reserves, or a variety of other things.... By the end of March 2008, the Fed had committed more than half of their nearly $1 trillion balance sheet to these new programs:

• $100 billion to the Term Auction Facility,
• $100 billion to 28-day repo of mortgage-backed securities,
• $200 billion to the Term Securities Lending Facility,
• $36 billion to foreign exchange swaps,
• $29 billion to a loan to support the sale of Bear Stearns,
• $30 billion so far to the Primary Dealer Credit Facility.

Changes in the composition of central bank assets are intended to influence the relative price a financial assets -- that is, interest rate spreads. So, by changing its lending procedures, Fed officials hoped that they would be able to reduce the cost of 3-month interbank loans and the spread between U.S. agency securities and the equivalent maturity Treasury rate. At this writing, these programs have met with only modest success.

[...]

Now, here are a few budget numbers from 2007 courtesy of Wikipedia:

• $586.1 billion (+7.0%) - Social Security
• $548.8 billion (+9.0%) - Defense^[2]
• $394.5 billion (+12.4%) - Medicare
• $294.0 billion (+2.0%) - Unemployment and welfare
• $276.4 billion (+2.9%) - Medicaid and other health related
• $243.7 billion (+13.4%) - Interest on debt
• $89.9 billion (+1.3%) - Education and training
• $76.9 billion (+8.1%) - Transportation
• $72.6 billion (+5.8%) - Veterans' benefits
• $43.5 billion (+9.2%) - Administration of justice
• $33.1 billion (+5.7%) - Natural resources and environment
• $32.5 billion (+15.4%) - Foreign affairs
• $27.0 billion (+3.7%) - Agriculture
• $26.8 billion (+28.7%) - Community and regional development
• $25.0 billion (+4.0%) - Science and technology
• $23.5 billion (+0.8%) - Energy
• $20.1 billion (+11.4%) - General government

I don't want to argue the specifics of these numbers (military spending is actually higher than stated here). I'm also not saying that our government should refrain from action, though I think the Bear Stearns bailout was misguided and that homeowners, not hedge funds, should be getting the billions.

My point is that we are going through a national emergency simply by definition of the proportion of our government's emergency spending on a single problem.

But Pennsylvanians are bitter.