Criminalizing Financial Mismanagement

A nuance that has generally been missed about the recent episode allowing the banks to negotiate the outcome of the stress tests is the practical consequence to those responsible for running those institutions. In their discussions with their regulators, they cannot possibly have appropriately qualified their representations and negotiating positions to take into consideration all of the internally available information tending to question or undermine the assertions confidently made to, and taken at face value by, the federal civil servants who, if events do not play out as projected, will ultimately testify in criminal proceedings that they were not apprised on the information available to the defendants that contradicted or undermined their criminal misrepresentations. Let a lay jury determine, in light of subsequent events, whether criminal liability should attach to those conscious decisions to present without qualification unfounded hopes as though they were grounded in fact, rather than result-oriented self delusion.

Give the dialectic time to work out. The stakes are getting higher, and, like gamblers three sheets to the wind, the players aren't cognizant of it.

Weapons of Class Destruction

As we lurch towards a new global financial architecture, each country has something to learn from the other, and each has something to offer. In the spirit of international brotherhood, I'd like to offer some suggestions--about what the United States has to offer China, what China has to offer Russia, and what Russia has to offer the United States.

From the United States, the Chinese can draw valuable and specific lessons as to how various technocratic policies and initiatives can effectively work to refine and fine tune a powerful, globally competitive economy. While the example of the last 24 months isn't particularly edifying, U.S. policies drawn from the second half of the last century can be mined for extremely valuable precedent.

From China, the Russians need to take away a more impressionist sense of how better to accomplish the transition from a command and control economy to one that unleashes the productive potential of a large population occupying a continental space. Over reliance on natural resources and preferential dismantling of state enterprises transforming former managers into oligarchs did not work so well as continuous agnostic meddling. The first step is for the apparachiks to acknowledge they have something to learn from the Mandarins.

From the Russians, the Americans need to learn how to deal with their oligarchs. The first step, of course, is to stop thinking of the financial oligarchy as a meritorious elite in any sense, and admit the cognitive capture of the regulators by Wall Street. Then, redefine the Masters of the Universe as Enemies of the People. The Masters of the Universe were, after all, the ones who orchestrated the evisceration of the American economy and the conversion of a productive citizenry with savings into a mewling horde of consumers indebted up to their eyeballs. While showtrials and bullets in the stairwell aren't in the American tradition, tarring and feathering certainly is.

What we need are weapons of class destruction that maximize wealth impairment while minimizing the loss of human life.

Happy Mo-Fo Day!

On behalf of hedge fund managers, financial services CEOs and other Masters of the Universe, I wish to publicly protest the injustice of this Hallmark Greeting card holiday called 'mother's day'.

Why doesn't the public celebrate Mother Fucker's Day?

Yes, the financial elite has captured the commanding heights inside the Beltway. Yes, we have secured the better part of a trillion dollars to support our equity, and God knows how much more for the preferred, the debtholders, the counter-parties, and the control group. But how much respect, how much affection, has accompanied that niggardly acknowledgement of just how necessary financial oxygen is for the morons to keep on breathing.

We want the morons to worship us as infants worship their mothers. Suck on this!

A Mexican Standoff

Or, more appropriately, a Chinese American standoff. Here, in a nutshell is the situation:

1. The Chinese are nervous about holding large dollar denominated foreign reserves, but are also nervous about allowing their currency to appreciate. The only way to keep the currency to appreciate is to buy dollar denominated assets in sufficient amounts to keep that from happening.

2. The Americans want the Chinese to allow the Chinese currency to appreciate, but need the Chinese to continue buying U.S. government securities to finance the American deficits (fiscal and trade). If the Chinese were to stop increasing, much less begin liquidating, their dollar holdings there would be a serious problem.

So, the Chinese cannot achieve their currency objective without continuing to finance the American deficit. The Americans may lecture on currency manipulation (lecturers fallen silent recently) but urgently need the Chinese purchasing presence.

What makes this situation unusual, from an American perspective, is that the outcome is dependent more on how the Chinese assess the situation than on any American initiative.

The United States is in the unfamiliar position of responding to the policies of others, rather than framing an initiating its own. This is Un-American, and a situation ripe for miscalculation.

Neo-Marxist Caveats, Part 2

The first step towards assessing the current American situation employing a neo-Marxist analysis is to assess the Marxist approach itself in little of current circumstances. In particular, the continuing conceptual viability of several of the key building blocks of the approach is questionable.

The first of these is the notion of defining class in terms of relationship with the means of production. Forest of trees have died, and oceans of ink have been spilled in an effort to define class, which is a slippery concept indeed. A bit less attention has been devoted to defining the idea of 'means of production', mostly, because doing so actually requires some understanding of how things work, how work is done and all sorts of grubby details about all sorts of odd little backwaters in which the vast majority of humankind labors.

Suffice it to say that a mid-19th century focus on the industrial wastelands and imperial steamship routes of the dominant European nationstates of the era are about as relevant to the beginning of the third millenium as exegesis of Sharepeare's bare ruined choirs of 16th century Catholicism would have been to understanding the 18th century Enlightenment on England.

I would be inclined to acknowledge from the get go that class is defined in political and social as well as economic terms, and that the 'means of production' has to be understood to mean something radically different in a service dominated economy with an significant public sector than it did a century and a half ago. That said, focusing on what makes fmembers of the population productive (or economically autonomous) rather than blathering on about the "American consumer" or the "consumer society" or looking to renewed credit flows to stimulate consumer spending as a way out of the economic malaise is probably a step in the right direction.

A second major caveat to a neo-Marxist analysis is what I'll call the Freudian problem. Like Freudian analysis, Marxism was a product of a time and place, and it's not at all clear how well either travels through time and space so as to be usefully applied elsewhere (even assuming that they served explicatory purposes where they originated). There can be perfectly valid, local belief systems that organize human activity and regulate human conduct that do not serve the came purpose once exported. Voodoo and witchcraft may have local power in Haiti, but in New Orleans, they are merely camp. Clearly, the Freudian approach to understanding the human mind was premised on a set of bourgeoisie family relationships that were simply not to be found in, say, the Japanese imperial court or an Amerindian tribe.

A fair amount of the Marxist tradition falls prey to the same tendencies. There is a progressively more complex self-referential conceptual trend of increasing refinement that is progressively less-intelligible to outsiders and, indeed, less and less concerned with the external world and more and more focused on the internal balance of philosophical construct.

This criticism is not, however, confined to Marxist philosophical developments. No fair minded legally trained American can help but look on the development of First Amendment jurisprudence and not marvel at how we have tied ourselves in knots in a similar fashion. The ancient criticism of the Scholastics debating how many angels can dance on the head of a pin shows similar theological tendencies. So, while the Freudian analogy is cautionary, it is not a grounds for discarding the approach.

Basically, this is boiling down to a question of whether one can identify groups of actors sufficiently well defined by their roles to be deemed classes, and whether those actors have a reified class consciousness that determines (in some sense) their actions.

Neo-Marxist Approach, Part 1

It's time to put the politics back into political economics.

The Financial Times is taking a first tiny step by introducing ideas of behavioral economics into the discourse. But that is a timid, trivial and bourgeois approach to a bigger problem.

Let's begin by accepting that the current analytical framework is roughly as bankrupt as the financial services sector that crucified the general economy on its own contradictions. So, folks are casting about for something a bit more, er, operative.

There are some serious problems with attempting a neo-Marxist construct to explain the current mess. And that's leaving aside the delicate American queasiness at being labelled a socialist, a commie, a pinko, or anything of that sort. Forget, for the moment, that queasiness, or at least enjoy the outre opportunity to leave respectability behind.

First serious problem is that state directed economic production schemes utterly failed in the 20th century. Call it communism. Call it socialism. Call it state planning. Call it Marxist-Leninist. As a way of organizing complex economic activity, the approach which had its genesis in the writings of Karl Marx and Frederich Engels in the mid-19th century failed the test of history. Their thoughts, as developed and implemented by their followers and adherents, were relatively inferior to alternative approaches to organizing collective economic activities. This approach failed in multiple cultures and different societies. So, let's not even suggest that Marxist-Leninist state planning provides a viable approach to organizing and regulating the economy of a developed or developing country. But that doesn't mean it doesn't offer a tool with which to critique the current situation.

Second serious problem is that no one, and I mean no one, has been pursuing seriously an attempt to apply this analytical framework to the current economic situation for at least a generation. Following the collapse of the Soviet Empire in Eastern Europe, I believe all the departments of Marxist-Leninist studies were shut down. In the West, the few adherents of the approach focused themselves of issues of social justice, income distribution, and the like--not so much attempting to understand the prevailing economic system as critique certain of its outcomes. And most of those guys are either dead or pensioned off. There is no expertise, and there are no experts.

Third serious problem is that there is no coherent and agreed theoretical framework that can be applied to the current crisis. There are (or were) as many flavors of Marxism as there have been flavors of ice cream in the last century or so. And they've all melted into a big puddle. On the other hand, this may be an advantage, since it would allow picking and chosing, adapting and applying what's useful, while leaving the rest of it in the intellectual recycling bin.

With those caveats, we proceed.

Stale News Remains Important

Some things to remember if you want to anticipate the future:

1. In the United States, the financial services sector is and will remain until recapitalized, insolvent. This is a solvency problem, not just a liquidity problem. 6 of 19 per the leaked stress test results, need additional capital. And that's the official story. We need to learn how to get along without those guys.

2. U.S. house prices are and will continue to decline, making it impossible to value a huge chunk of assets critical to financial services sector liquidity. The sociological consequences of unemployed company store peons trapped in real estate they don't own are interesting. And, commercial real estate is in the early stages of joining the residential stuff in a revaluation. While the trajectory is the same, the commercial stuff will be, ah, lumpy, and less suceptible to smoothing.

3. The regulatory apparatus has been captured by the financial services sector. Whatever squabbling is under way within the political classes (viz., the competitive outing of Raul Emmanuel and Larry Summers this month, and the Thain/Lewis catfight, with Paulson calling the count), has yet to metastize into a purge of the financial elite. While bullets in the head aren't called for in America, a rather less drastic purge in, ahem, called for. This is, incidentally, a global issue.

4. The epicenter of this particular crisis was in at the heart of the developed world, and that is where the pain is most likely to be felt most intently. Countries like China, India and Brazil have an opportunity to, if not displace their betters, at least join them at the high table. If that happens, look for some changes in the menu.

And that is the way it looks from here, today.