Making Confession II: My Struggle To Learn More About Our Economy
(This blog started as a comment I was writing in response to an excellent blog from debbiedoesnothing. However, I thought it might be appropriate to put it here, so as to not hijack her comments section.)
The following is a quote from this blog. If you haven't had the chance to read it and its good comments section yet, please do.
I feel like the situation is hopeless - no amount of money they throw at the banking system is going to solve anything and no one in Washington has the will to do anything else.
So I just don't read the articles anymore. If I see a headline about an economic story, I skip the article. Sometimes sticking your head in the sand is the only way to save your sanity. My sanity is fragile enough already.
I think the above quote tangentially raises a very, very important point.
I think the financial gnomes who built this system count on people feeling exactly the way this quote describes, especially those lawmakers charged with its oversight.
Their continued dominance depends on people throwing up their hands and throwing shoes at the TV every time they hear words like "derivative", "Madoff", "recession", "trillion", "cramdown", etc.
So, I decided I would no longer turn away. I started reading about the economy last spring, and haven't stopped.
I primarily read Krugman and Reich (I personally prefer Reich, as he tends to balance his writing more between theory and practice). But I also read Stiglitz, Johnson, Roubini and Kudlow. I try to follow Summers and Geithner. My brother works for Chase, and worked for WaMu before that, so he was a monumental help in getting some kind of grasp on the housing bubble explosion and the credit freeze.
I still feel like I don't even know what I don't know. But I do think I have enough of a handle that I can stand to learn more. And now that I do understand the most elementary parts of this terrifyingly complex subject, I can begin to see through some of the BS that gets served up on the nightly news.
Every day, TPM readers discuss so many things. A quick scan of the current most recommended reader blogs shows pieces on the Vatican's outmoded approach to women, opposition to domestic spying, a competitive health care system, rightwinger religious hypocrisy, and more great subjects. Worthy subjects, every one of them.
As debbiedoesnothing points out (correctly, I believe), the economy trumps all of these. I've believed this since before the Lehman collapse (after all, the DJIA has been sinking since October 2007).
Now, I will never be mistaken for Warren Buffett. I don't even pass for Rick Santelli. But I have discovered that I am actually able to comprehend our current situation more, and even make some personal financial decisions with more clarity, than I could have at this time last year.
Most importantly, I have begun to spot economic BS better. I posted this criticism of Paulson's TARP proposal last fall, shortly after it came out. My main concerns were that it was not helping homeowners, and that, if left unregulated, it was a license to steal. Fast forward to February 2009, and those criticisms were being addressed by President Obama and Secretary Geithner...$350 billion too late, unfortunately.
That doesn't make me any kind of financial guru. I still need a calculator and a Sherpa guide for my taxes. But I do know that I couldn't have written that article in March 2008. And THAT means that I am getting closer to helping knock down that wall of confusion. Once that wall is demolished, then I can really use my voice against those who perpetrate these frauds against us.
As discouraging as the financial news is, and as labryinthine as the regulations and relationships are, we have to keep at it. All of us have to keep at it. We have to watch what's being reported, and learn to find out what's NOT being reported. The economy IS the number one issue. Neither it, nor our nation, will ever truly improve until we understand it just as well as we understand Darfur, FISA, habeas corpus, Proposition 8 and embryonic stem cell research.
Kudos to you for your tenacity and focus.
My concern is that for those who are not as inclined or have the time/energy to do in depth research and/or have the ability to separate the truth/facts from the a.) politically vested and b.) corporate misdirection that so much of the media publicizes - they will become only more stressed, frustrated and misdirected.
I spend (some say way too much) time attempting to research and achieve some modicum of understanding - yet I get so stressed and angry after watching some of the media who consistently spout half truths, etc. that I just turn it off.
It would be best if someone who had the fortitude, integrity and knowledge would put together a list of sources for those who really want to know the facts.
Thanks for post and all you do to help keep us and them focused on the truth.
March 9, 2009 4:04 PM | Reply | Permalink
I agree that it can be stressful to keep up with this and other massively complicated subjects.
My take on it is that, if we keep posting things here, the reader community will help pick it apart. Posting here forces people to read, quote sources and at least attempt to understand their subject matter. In that way, understanding comes much more organically, in my humble opinion.
Thank you for the compliments.
March 9, 2009 4:19 PM | Reply | Permalink
Well Boyd, you make me feel better. At least I read Krugman and Reich. TRY HARDER.
That is a good message.
March 9, 2009 4:18 PM | Reply | Permalink
To me, Boyd, the most important point you made here is that they do not want people to understand. They want you to just trust the experts. I see this in other areas too. Too much trust is expected of the citizen. And honestly too little trustworthiness is provided for the citizen.
I think there is a huge trust gap here. The obfuscation of policy. The use of that obfuscation to deliberately subvert and rob. Subvert laws. Rob funds.
So, yes the economy is in huge trouble. And it's bringing everything down with it. But I see the same kind of obfuscation, malfeasance, and mistrust everywhere I look!
Seems to me that all experts should be expected to describe things in ways your normal interested person can understand. Absent that, we are leaving our republic in the hands of an aristocracy of experts. And that leaves us open to be robbed blind in a land where the law has become a quaint ancient concept.
Sorry to have strayed beyond your blog. Sorry for the rant. But I am so tired of being lied to. Being ripped off. And seeing the Rule of Law go out the window, so the wealthy and the connected can make use of their "experts" to make it all look ok.
So my problem is partly that when I pay attention and I try to understand, I quickly end up mad about: One. More. Thing!
March 9, 2009 4:34 PM | Reply | Permalink
Thera,
Sure we agree that one person's 'expert' is anothers 'straight man'.
I second all you said and please keep 'ranting'.
March 9, 2009 4:39 PM | Reply | Permalink
Thanks for your indulgence.... I needed that. :)
March 9, 2009 4:45 PM | Reply | Permalink
You are the therapist of course but I have to say “Isn’t that the problem?” I mean if a person has an “issue” that makes them angry but they discount their anger then don’t they have two problems? They have the “issue” to deal with and then they have a lack of self-something (confidence, esteem, worth) which ultimately degrades their ability to live their lives in general. Aren’t we being led to discount ourselves? Isn’t that what this kind of deferring to “experts” is all about?
March 10, 2009 2:29 PM | Reply | Permalink
Excellent points, Boyd. My sense is that most of the people in Congress don't understand this mess any better than I do and that's why the financial wizards are getting away with all the crap they're getting away with.
March 9, 2009 5:41 PM | Reply | Permalink
Kind of makes you wonder why we don't have, as a minimum, an educational threshold requirement for congress.
A doctor has to have a minimum amount of certified knowledge. So do nurses, college professors, and a whole host of other professions.
Aren't our members of congress making decisions every bit as important as your doctor or accountant? Only many in congress have no expertise whatsoever in the vital areas of science or economics.
Could you imagine your doctor being so incompetent that you would have to research your own condition? That is what it feels like when I try to research our economic situation.
So it is my suggestion, from this point on, that we elect only representatives that have at least a BS in both Science and Economics.
In my humble opinion, the world has enough lawyers. We need reps who have the capability to understand issues important to the American people
March 9, 2009 8:26 PM | Reply | Permalink
If there were one thing I'd like to see in politicians, it is ETHICS!
March 10, 2009 8:02 AM | Reply | Permalink
I'm with you Thera!
March 10, 2009 9:41 AM | Reply | Permalink
I had an intuition about this a few months ago so I looked it up. Sure ‘nuff – Sen. Christopher Dodd, Chairman of the Banking Committee has a B.A. in English and an unused Law degree. Barny Frank, Chairman of the House Financial Services Committee by way of Harvard College where he had a very nice time. Heavy bats? Mmmmm No. More like appetizers for a Wall Streeter.
March 10, 2009 2:06 PM | Reply | Permalink
Boyd:
1) You write "like nobody's business" -- in general and, in particular, about business.
2) I admire you for deciding to undertake this challenge, and following through on it.
3) You are offering glimmers of light in understanding to those of us still basically in the dark.
4) We thank you.
5) That's two, of three? Well done.
March 10, 2009 3:26 AM | Reply | Permalink
Thanks, ww. Most times, I just read the blogs and move on, feeling unqualified to comment. Jesse Lava's recent religion blog left my head reeling. :-)
On occasion, I feel like I have something to say. I usually get in trouble. Oh well. :-D
March 10, 2009 10:53 AM | Reply | Permalink
Can you offer your summary (say 1/4 - 1/2 the length of this post of yours) of the economic and financial situation of the US?
March 10, 2009 3:49 AM | Reply | Permalink
We're screwed.
:-)
March 10, 2009 3:55 AM | Reply | Permalink
That's the short version. :-)
Long term, it is my (very much layman's) analysis that we have either reached or are fast approaching a crisis point. Almost all of our basic indicators (unemployment, unemployment plus underemployment, DJIA, SP500, national debt) are *accelerating* in the wrong direction.
I do NOT like having to bail out one bloated, underperforming, bloodsucking tic of a company after another. But this crisis is so interwoven between not only companies, but also NATIONS, that the best we can do is clean up (and maybe break up) behemoths like AIG and Citi.
I think Obama is on the right track. But, to even begin to restore consumer confidence (which will help unfreeze credit), our regulatory arms must do an infinitely better job.
I'm willing to give Geithner's policy ideas a chance. But he will have to show he can unwed himself from the corporate sewer that produced him and be heavy-handed in the cleanup process. And that is not something that can wait.
March 10, 2009 6:43 AM | Reply | Permalink
Actually, consumer confidence won't fix the credit freeze ... but it is necessary (to some extent) to push demand higher. Right now we have a deflationary spiral due to contraction in the work-required/jobs-available (demand) side that leads to contraction in wages that leads to contraction in manufacturing etc (supply) that leads back to contraction in work-required.
Classic supply-side intervention (lowering interest rates) cannot help in this situation since the problem is not on the supply side.
Improving consumer confidence, however, will not dispel the tremendous fear that the "investor class" (read: rich people :-) ) have experienced lately. Because assets (and money supply) have deflated pretty much across-the-board lately, the rich are largely holding cash (in actual dollars, and in cash equivalents like Treasuries). This is in fact the correct course of action for the moment. However, this is causing a new bubble to inflate: the "cash bubble". (This bubble is invisible when using dollar denominations, because $1/$1 is always 1.000 even when deflation increases the value of the dollar. I don't know if "real" economists ever use the phrase "cash bubble". Nonetheless, there is one growing now.)
As with all bubbles, this must eventually stop growing. Whether it simply levels off, or springs a slow leak, or bursts quickly, depends on future factors, and I make no exact prediction when and how this will happen. But this is when the investor class will find one or more new things to invest in. Credit conditions will improve and the deflationary spiral will end.
I think Obama's plan (classic Keynesian stimulus on the demand side) can help this happen sooner. And health care reform, which—if done right—will remove some of the worst of the drags on the economy, can also speed this up. Since the economy is incredibly complex, it can also (either instead or at the same time) slow it down, by making it harder for "market participants" (again, you can read this as "the rich") to choose winning sector(s) in the future economy. Mostly, though, it will take the housing market stabilizing (via exhaustion) to end the current free-fall. This is likely to occur some time between 2010 and 2012. The Obama plan may help it happen sooner (late 2009 to early 2010) and/or more vigorously, but only time will tell.
March 10, 2009 9:50 AM | Reply | Permalink
Thanks for your comments. A few thoughts:
(1) I do know that consumer confidence won't fix (or "thaw", if you prefer) the credit freeze by itself. Certainly, though, one of the reasons investors aren't investing is because they have no confidence that companies' fiscal conditions will improve in the short term. These companies have no confidence that consumers will buy more in the near future.
(2) Credit default swaps are (to me, anyway) frighteningly complex. But they're crucial to understand if one wants to delve into why we keep throwing money at AIG. I hadn't thought of them as insurance before, but I guess it makes since, as they're pretty much like underwriting instruments.
(3) Never heard of a "cash bubble" before. Perhaps you should expound on this in a separate post. Who knows - maybe you could be the next CNBC Ranter of the Month? :-)
More thoughts will have to wait until I've had my fish sandwich for lunch. :-)
March 10, 2009 10:31 AM | Reply | Permalink
...but I guess it makes sense...
*sigh* I is a kollej gradgitate.
March 10, 2009 10:32 AM | Reply | Permalink
Geithner seems to have some Congressional support.
I don't accept the "if" premise. That is, this business about domino effects and interlocking debt instruments reads to me as so much hogwash at the top level even if there are indeed such connections in a legal sense. I just don't buy the public versions from Geithner et al, and I don't believe they are required to bullshit us this way.
Contracts which violate public policy/interest need to go away.
March 11, 2009 12:33 AM | Reply | Permalink
Also.
March 10, 2009 8:06 AM | Reply | Permalink
OK Miss smarty pants chicken. > I saw you showing off for aMike.
By the way, if a chicken wears pants do the feathers get stuck in the zipper?
March 10, 2009 2:44 PM | Reply | Permalink
don't point that er, magic broomstick at me, unless you plant on using it!. Of course chickens wear pants. Ruffled. and nevermind about the feathers, we have learned to do without them.
March 10, 2009 11:40 PM | Reply | Permalink
ack
I meant
er,
zippers, of course
March 10, 2009 11:58 PM | Reply | Permalink
Now THATS funny!
March 10, 2009 2:52 PM | Reply | Permalink
You have a way with words.
Thanks
March 10, 2009 2:36 PM | Reply | Permalink
Boyd, I swear that we were separated at birth.
After the Madoff scandal, I almost gave up when I got to 'funds of funds' and 'feeder funds'. But I persist. :-)
March 10, 2009 4:00 AM | Reply | Permalink
Most of it is really not that complicated.
Well, no: it is complicated, incredibly so, in the details. The trick is realizing when those details matter, and when they don't; and in terms of macro effects, they mostly don't. The details matter when you go to work out what any given contract means or does, which you have to do to assess the position of a company loaded up with contracts, and so on. But in looking at the overall effects of things like derivatives, one merely needs to understand directions and approximate magnitudes, and (hence) motivations.
Credit default swaps, interest rate swaps, and so on all act like insurance. They do not meet the technical definition of insurance, so they are not regulated like insurance, but they quack like the insurance duck (not really referring to AFLAC here :-) ). One of the ways they are not like insurance is that anyone can "insure" anything, for a fee of course ... and an "insurance provider" (the one taking the fee for providing the "insurance") can sell the same policy multiple times.
Daniel Gross came up with a wonderful analogy for this. It is as if you are living in your house, and you take out huge, multi-million dollar insurance policies on all your neighbors' houses. And now that you have done that, why, you might stop worrying so much about those old cans of gasoline in your garage. And the oily rags ... well, accidents happen, ya know?
(Of course, the policy-writers—the AIGs of the world—should realize that the incentives for the policy-taker are bad. But this requires knowledge that they did not gather, and requires that they actually work all those bothersome details to do real risk correlation, instead of just assuming that the simplified equation with a single "gamma" number still applies.)
The government probably cannot, and should not, completely stifle "financial innovation". But the regulators should realize that these swaps are insurance, because they work like insurance, and therefore they need to be regulated just like insurance.
March 10, 2009 9:31 AM | Reply | Permalink
From this comment above:
Hey, I come here for clarification! Stop confusing me! :-D
March 10, 2009 10:38 AM | Reply | Permalink
Heh, well, I did say that it is (and isn't), in the usual self-contradictory way that life has....
There's a useful set of analogies from engineering and physics here too. Some systems are "inherently stable". If you have a round mixing bowl and a marble, for instance, set the bowl right-side up and put the marble in it. Then give the marble a push. It rolls around for a while, then settles back in the bottom.
Turn the bowl over, though, and put the marble carefully at the top. Then give it a push. It is likely to fall completely off the bowl, and getting it back up to the top by rolling it will be difficult.
In engineering (e.g., building amplifiers), the "stable" system has "negative feedback": the bigger the output is, the more inhibition it has, pushing the system back towards the center. The "unstable" system has "positive feedback": more output results in more input which makes the output even bigger, until eventually the amplifier goes boom (or if properly designed, self-limits in some other way).
The existing derivative system is poorly designed / regulated as it has too much positive feedback and too little negative feedback. Ordinary insurance is heavily regulated to provide the correct amount of negative feedback to stabilize the system.
"Normal" operation of (eg) the bond market is very well designed, because a rise in price automatically produces a fall in yield, and vice versa, so that the system has negative feedback and is internally stable.
March 10, 2009 12:07 PM | Reply | Permalink
I was actually being a little bit of a wise-ass with that last comment. *chuckle* Damn these impersonal internets!
Thanks, though, for a very useful engineering parallel. :-) Every frame of reference helps advance understanding.
March 10, 2009 2:51 PM | Reply | Permalink
"One must imagine Sisyphus happy." A. Camus
March 10, 2009 3:17 PM | Reply | Permalink
The pre-Quixote Quixote. :)
March 10, 2009 3:27 PM | Reply | Permalink
Es verdad. (from the Latin: Exactamundo)
March 10, 2009 3:31 PM | Reply | Permalink
I'd recommend the following article on the mess we are in, which could also have been entitled "Why Milton Friedman Sucks, part 203495".
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
It's a little on the dense side, but the explanations of the nature of the credit problems that we face are, at the very least, thought-provoking.
March 10, 2009 6:01 PM | Reply | Permalink