Connections

Frederick Soddy, a chemistry Nobel laureate on the economy and laws of thermodynamics.

He offered a perspective on economics rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief of the economy as a perpetual motion machine, capable of generating infinite wealth — a criticism echoed by his intellectual heirs in the now emergent field of ecological economics.

... Soddy would not have been surprised at our current state of affairs. The problem isn’t simply greed, isn’t simply ignorance, isn’t a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. There will always be a Bernard Madoff or a subprime mortgage repackager willing to set us up for catastrophe. To stop them, we must balance claims on future wealth with the economy’s power to produce that wealth. How can that be done?

Soddy distilled his eccentric vision into five policy prescriptions, each of which was taken at the time as evidence that his theories were unworkable: The first four were to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort. All of these are now conventional practice. Soddy’s fifth proposal, the only one that remains outside the bounds of conventional wisdom, was to stop banks from creating money (and debt) out of nothing. Banks do this by lending out most of their depositors’ money at interest — making loans that the borrower soon puts in a demand deposit (checking) account, where it will soon be lent out again to create more debt and demand deposits, and so on, almost ad infinitum.

Photo

Seen on the intersection of Clove Road and Victory Blvd, Staten Island, NY

From an essay last year on what a depression might look like in today's times...

By looking at what we know about how society and commerce would slow down, and how people respond, it's possible to envision what we might face. Unlike the 1930s, when food and clothing were far more expensive, today we spend much of our money on healthcare, child care, and education, and we'd see uncomfortable changes in those parts of our lives. The lines wouldn't be outside soup kitchens but at emergency rooms, and rather than itinerant farmers we could see waves of laid-off office workers leaving homes to foreclosure and heading for areas of the country where there's more work - or just a relative with a free room over the garage. Already hollowed-out manufacturing cities could be all but deserted, and suburban neighborhoods left checkerboarded, with abandoned houses next to overcrowded ones.
And above all, a depression circa 2009 might be a less visible and more isolating experience. With the diminishing price of televisions and the proliferation of channels, it's getting easier and easier to kill time alone, and free time is one thing a 21st-century depression would create in abundance. Instead of dusty farm families, the icon of a modern-day depression might be something as subtle as the flickering glow of millions of televisions glimpsed through living room windows, as the nation's unemployed sit at home filling their days with the cheapest form of distraction available.

Silver linings in a recession

From here: Recessions and depressions are brutal beasts that stalk the stragglers, especially retirees and the poor. There is too much inherent suffering during a recession to ever welcome it. But times of economic stress, it appears, can also be times of cultural renewal. "One reasonable hypothesis," argues James Q. Wilson, "is that the Depression pulled families together, and this cohesion inhibited crime." Many Americans who struggled through the Depression adopted a set of moral and economic habits such as thrift, family commitment, savings and modest consumption that lasted through their lifetimes -- and that have decayed in our own. The Depression generation controlled the things it could control -- including its own consumption and character.
We see hints of this type of reaction to our current recession, which has such clearly moral causes -- the burst of a bubble inflated by irresponsible debt, consumerism and unaccountable risk-taking. During an economic crisis, Americans return to a language of morality. Perhaps excess and recklessness are vices that deserve social stigma. Perhaps frugality and prudence are personal virtues as well as practices that prevent economic collapse. Perhaps there is a distinction between securing our needs and being dominated by our wants.

Best time to enact a universal health care bill - is NOW!

Paul Krugman on why this might be the best time (between the confusion surrounding the stimulus and the economic crisis) to enact a universal health care coverage bill..

The political argument that this is a bad time to be pushing fundamental health care reform because the nation’s attention is focused on the economic crisis is precisely wrong. Indeed. F.D.R. was able to enact Social Security in part because the Great Depression highlighted the need for a stronger social safety net. And the current crisis presents a real opportunity to fix the gaping holes that remain in that safety net, especially with regard to health care. And Mr. Obama really, really doesn’t want to repeat the mistakes of Bill Clinton, whose health care push failed politically partly because he moved too slowly: by the time his administration was ready to submit legislation, the economy was recovering from recession and the sense of urgency was fading.

On the tragicomedy of investment bank bailouts and distressed homeowners

From 1929 to 1933, during the time of the Great Depression, U.S. gross national product declined 29% and unemployment rate reached 25%. About 9000 banks suspended operations because of the financial distresses. In order to remedy the situation and restore consumer confidence in the banking system, The Banking Act of 1935, was introduced and a separation of bank types according to their business (commercial and investment banking) was developed. This was about the time that the Federal Deposit Insurance Company (FDIC) was created for insuring consumer deposits when a bank falls under. This means that if an individual puts their money (and faith) in a bank that is ‘FDIC’ insured, and in the event of the bank falling under, the Federal Government would step in to cover the shortfall and the consumer can ‘bank’ on the faith that s(he) will be compensated for the banks follies. In order that banks have this extra level of protection and Federal backing, they had to submit to a set of terms and conditions that included laws like minimum fractional reserves held in bank vaults as a hedge to cover shortfalls. The Federal regulatory framework also included a host of additional laws and rules that made the banks more beholden to Federal oversight (as it should - they are holding our monies). All of this extended regulatory frameworks put in place in turn cleared up the muddied reputation that the banks had developed after the Depression years…

Recently, I had written about the Bear Stearns bailout and how in my opinion, Bear should have been allowed to fail thus paving the way for a 'structural (re)adjustment' of the economy. Yes, this is bitter medicine, but much better than to live within the hype of inflated expectations and trigger happy indices that yo-yo on moment’s whim. Well, what happed was just the reverse, the Federal Reserve stepped in, bailed out Bear and helped JPMorgan orchestrate what now seems like a slapdash deal done hastily and a little bit suspiciously... A largely ignored sub-aspect of the flurry of activity that surrounded the Bear brouhaha was fine print news that the Federal Reserve also opened up its money spigots to non-commercial banks (the investment banks on Wall Street) and told them to borrow any amount that they wished from the Reserve sans oversight nor regulation. It was an open call – come by, take Federal monies, shore up your finances – all in the name of ‘preserving financial liquidity’. Recent reports state that the amount of drawing out of monies from this 'fund (called under the complex title of Term Securities Lending Facility)' is estimated to be in the region of 33 billion dollars a day over the last week and the number doubling to about 60 billion dollars a day as recent as yesterday. Can you guess the interest rate? - It was 0.33% (yes, that is correct).

Contrast this situation with news surrounding the deepening crisis that homeowners face as a result of the mortgage mess and the current state where millions of homeowners are either unable to pay their mortgages or are in danger of losing their homes because they are behind on their mortgage payments… Politicians talked about the crisis and proposed broad government rescue plans for homeowners that would each cost about $30 billion. The reply they got from the current administration was a dismissal of such ideas as bailouts and a vow (and threat) to veto even modest bills to help homeowners.

From NY1 news "All we're saying is homeowners need assistance too," said Darren Duarte of the Neighborhood Assistance Corporation. "You can't bail out the investors, bail out the Wall Street firms who created this crisis and leave homeowners at risk. We think that's not fair. And that's not the American way."

It is indeed funny and sad to see that modest bailouts for distressed homeowners screwed over by unscrupulous lenders and investment banks have little chance of success and have to go through a board legislative procedure with the attendant veto threats while broad bailouts where investment banks have easy access to over 50 billion dollars a day with little legislative oversight, zero threats of veto and little or no regulatory network passes muster with little talk or analysis… It is indeed staggering.

Georges Rouault, 1871-1958, 'Clown Tragique', 1911, oil and peinture à l'essence on paper laid down on cradled panel