The New Yorker Article

Hey All:
Brockstar mentioned this article in class the other day (it explains the stock market volatility): http://www.lexisnexis.com/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T4609912238&format=GNBFI&sort=BOOLEAN&startDocNo=1&resultsUrlKey=29_T4609912246&cisb=22_T4609912245&treeMax=true&treeWidth=0&csi=237442&docNo=1

And if that link doesn't work just search on LexisNexis for "That Uncertain Feeling" in Magazine stories combined

I wonder if FDR read Keynes...

Keynes seems to find his British countrymen heading into a depression much like the one the United States experienced at about the same time. Due to the growing unemployment rate the British government began disbursing tax money to the unemployed to give them financial relief. In Keynes view this was a waste of money entirely. It wasn’t enough money to actually help these people and pull them out of poverty, but cumulatively it was enough to tank the British economy as the unemployment fund was just draining the country of tax dollars. In a way it reminds me of our current welfare system which seemingly dumps money into people who are unemployed and while it is not enough money to pull someone out of poverty, it is enough to persuade someone from working a legal job that creates tax dollars because once they do that, they lose their free ride. As Keynes states, “Since 1921 we have paid out to the unemployed in cash a sum of 500 million pounds—and have literally got nothing for it.” Just like our current welfare system in the US, these cash handouts keep people poor and do not encourage a vigorous push to return to the workforce and actively find employment.

Keynes saw ongoing economic problems that were bound to lead to an economic crash sooner or later, as no country can absorb such exorbitant loss of money year after year and not see any financial damage as the guaranteed result. This goes to bring up a good point. Economies do not just tank without reason, in fact whenever an economy tanks it is usually a slow process having to do with countless economic problems or a flawed system. For example, the United States’ current economic issues have been in the works for years. There have been many small problems such as the inefficiency of the welfare system, but the big problems that led us to our current state have to be our flawed credit system that we as a whole greedily allowed our finance firms to take advantage of. If anyone thought about it, we have been screwed for a while. While major finance firms were buying subprime loans like it was their job as the returns were supposed to be amazing, it is hard to believe that people didn’t believe the whole subprime thing could fall like a house of cards if even a small percentage of people went into default… Especially in a country that has such liberal bankruptcy laws and does not have a debtors prison, not that I think a debtors prison would be good. In 2006, people as a whole were spending largely more money than their income. That stat alone is terrifying as it should not be a possibility. The fact that our system allowed people to spend other people’s money to such a degree would have been cause for Keynes to write an essay about the US in the early 2000’s.

I wonder what would happen in our current situation if our country decided to do what FDR did in the 1930’s to bail us out of our economic problems. To me it seemed like Keynes and FDR were on the same page. Instead of handing money out, FDR used the money to pay people to work on the infrastructure. That way people were not just receiving money for being poor, but earning it for creating value. If we scrapped our welfare program and instead paid people on welfare money to fix our railways, our bridges, and help with other areas of our infrastructure at least nobody could say the United States has literally gotten nothing from their handouts of money to the unemployed. Of course there probably are not as many jobs the United States can give out now supposed to in the 1930’s for improving the infrastructure, but the point is if the US is going to give people money for not working, why not make them do something to earn it so it is not a handout, but a salary.

Realigning Incentives/Autonomy

Like the founding fathers and good economists espouse: incentives are important, if not omnipotent. Responding to Sarah, it seems to me that Keynes would agree that borrowers and lenders have to be brought together in a certain way in order for the housing market to regain a robustness lost. But isn't that how we got here, the land left of robust (housing markets)? To attack it using my limited knowledge of this subjects vocabulary, the costs did not fall upon the actors! Externalities abound!

In Keynesian fashion, let the government spend! But let's do it in a way that promotes an infrastructure of incentive, not of immobility. I think Keynes gets a little loose with his figures at the beginning. Suggesting that a measure of the value lost of 10% unemployment was the average worker's productivity times the number of unemployed workers assumes the unemployed are no different than the employed. I may like to argue this position (its probably racial discrimination!), but I may also realize it is a little unfair (unemployed person may not be the same as an employed person in terms of productivity while working). I like his mention of the lost value of working and being self supportive. Everything relates to autonomy!

Keynes & Balakrishnan

Though there are clearly many incongruencies between the depressed economy of which Keynes was speaking in Essays in Persuasion and today’s slumping economy, Keynes’ assertion that the micro-level actions of firms and individuals in the market (i.e. saving too much) can lead to macro and aggregate outcomes that are suboptimal is very pertinent to today’s financial woes. However, even though Keynesian economics is generally all about stimulating the G (in the every-so-famous macro model, Y = C (Y-T) + I + G +(X-M)), I think he would think twice before making the assertion that “no one can take the first step except the central banking authorities of the chief creditor countries” in the current market (146).

First of all, Keynes was not supportive of the government investing in infrastructure while running a deficit; and secondly, the main reason he turned to the Central Bank was because he hoped for the institution to restore confidence. In that sense, perhaps he would approve of the Fed’s decision not to lower the fed funds rate. As Andrews states in the NYT article, “Policy Makers Keep Key Rate Steady” (9/16 – same one everyone has been citing), “Some economists said the decision on rates also reflected the unhappy truth that a cut in the overnight federal funds rate might have merely highlighted the Fed’s limited ability to solve a problem that entails the entire housing and mortgage markets.” The Fed is trying to retain consumer confidence, without which, the institution would lose significant power.

Thus, even Keynes may question the Fed’s “New Role” (9/17 NYT article title) in bailing out AIG with an $85mil loan, though the bailouts of FM&FM and now AIG makes one consider the possibility that, as Balakrishnan writes in The Hindu Business Line, “Keynesian economics could soon be back on the table.” [Yes, The Hindu Business Line is my #1 source for all that is important.]

John Maynard Reagan Bailing Out AIG

First off, I would like to point out that Matt only found out what magneto trouble meant because of me. I was reading Keynes and asked Matt what it meant, then Matt googled it, and subsequently hijacked my curiousity for his own post. And now on to much less important matters...

I was struck by two different things while reading Keynes.

1. The interesting relationship between Reaganomics and Keynesian Economics

2. The central role of banking to the economy

At one point (pg. 121 to be exact), Keynes says that "If it were announced that some of our leading captains of industry had decided to launch out boldly, and were about to sink capital in new industrial plant ... we should all expect to see a great improvement in employment." Keynes brings up this example, as a counterargument to those that believe that government policy cannot actually create capital and jobs. Apparently, at the time, there was a somewhat popular belief that if the government were to spend to create capital and jobs, the government was not actually creating capital or jobs, it was just diverting this capital from private markets. Keynes attempts to defeat this point, by explaining that if some large private firms were to open a new factory, we would think it were a true improvement, and that the government is no different.

I bring up this part in Keynes, because it was specifically this counterargument that made me realize the closeness of the realtionship between Keynesian economics and trickle down Reaganomics. Keynes advocates government spending to build capital that will create jobs (through employment program of some sort). Reaganomics argues for tax cuts that will put extra money in the hands of the rich (although I am not sure they would admit to the rich part in public) so that rich people can invest in capital and create more jobs. While normally, the two are thought of as polar opposites, they actually are quite similar. Both rely on the use of savings to invest in capital and create jobs. Whether this savings is voluntarily used by rich people, or whether this savings is collected up as taxes and used by the government.

What is interesting is that apparently in Keynes time, there was a school of thought that advocated not using this savings at all. Keynes warns against the programs that attempt to reduce interest rates by reducing investment opportunities. This is interesting because, as far as I know, this school of thought is no longer even really present in economics. It has become a duality between Reaganomics and Keynesian economics. We now all agree we should invest money to build capital and make jobs, the question is who is in charge of doing it. I wonder if Keynes were alive today, what he would say about this. In the assigned reading at least, he does not seem to be arguing against trickle down economics, so much as he is combating some bizarre "safety first" view that seems to consist of a straight up dole for poor people and nothing else. The obvious advantage of trickle down economics is that you can count on the rich people to invest in industries that are economically efficient (where there is the most profit), while the government may or may not do that. This also could be construed as a disadvantage though, because industries that provide some kind of public good may end up underinvested if all the investment is left to the rich instead of the government. For example, we might lack a massive interstate system if the government didn't finance it, because there is not as much profit to be had there, but it may well be economically efficient to have it. In any case, it would be interesting to see how Keynes would balance these concerns.

The other point I was struck by, I will just touch on very briefly. In reading the third essay, I was struck by the sentence that said "it is the serious embarrassment of the banks which is the cause of our gravest concern" (Pg. 168). This point struck home, because obviously, we are in the midst of a banking crisis at the present time. Keynes description of how the banking industry basically set the scene for the Great Depression was interesting to me, because it made me realize that banking is really the only thing that can completely collapse an economy. You can have problems in other areas, but ultimately, to have a true economic disaster banking collapse is needed. Although, writing this, it seems to me this argument may be circuitous, as banking collapse may not always be the cause of economic disaster, but perhaps simply a necessary symptom of true economic woes. In any case, it seems that in the 1930s, banking held a central role in the economy, much as banking does today. Looking back at the errors of those times, I hope we can take better care of our banking system now to avoid our problems of the past.

Keynes: Eugenic Prophet

“…agriculturists and households throughout the world, who have borrowed on mortgage, would find themselves the victims of their creditors. In such a situation it must be doubtful whether the necessary adjustments could be made in time to prevent a series of bankruptcies, defaults, and repudiations which would shake the capitalist order to its foundations.” (139)

Prophetic, almost, in the above statement, Keynes nearly describes the current lending/foreclosure mess of recent. Take August 2008 as an example: one in every 416 households received a foreclosure filing, a 27 percent jump from August 2007 (NYT, “Finding Profits in a Distressed Market”). Keynes might have had an “I-told-you-so” look on his face if he heard Center for American Progress say that nearly 0.6 percent of all housing units in the U.S. are owned by a bank, the same percentage during “The Great Slump”.

So what do the candidates have to say? To stabilize the housing market, Obama has sponsored the “HOPE for Homeowners Act of 2008,” legislation that creates a new Federal Housing Administration housing security program based on five principles (please excuse some of the obvious political rhetoric…):

• Long term affordability. New loans will be based on the ability to repay the loan.
  No investor or lender bailout.
• No windfall for borrowers. Borrowers will have to share their new equity and future appreciation equally with the Federal Housing Administration.
• Voluntary Participation.
• Restore confidence, liquidity and transparency.

(“Dodd Announces ‘Hope for Homeowners Act’ ”). McCain’s proposal would allow burdened homeowners to trade their mortgages for more manageable loans that reflect the current market value of their homes. But, only holders of nonconventional mortgages taken after 2005, who were creditworthy at the time of the original loan, are eligible for the loans that would also be backed by the Federal Housing Administration.

Either way, Keynes would argue that until lenders and productive borrowers “are brought together again” by “lenders becoming ready to lend on easier terms and over a wider geographical field” and “borrowers recovering their good spirits and so becoming readier to borrow” the crisis will not be resolved. Lehman certainly can’s help.

Side note: WE would be proud. According to Wikipedia, before his death in 1946, Keynes declared eugenics “the most important, significant and, I would add, genuine branch of sociology which exists.”

Keynes Should Take a Philosophy Class

Keynes writes like a medical doctor in Essays in Persuasion: he diagnoses economic problems and prescribes solutions to "fix" the economy.  He views the depression like the flu: with proper care, we can get back to our healthy state.  But just as Keynes might be identifying our problems and solutions, he seems to be committing a philosophical error - jumping to conclusions.

Let's examine his most doctorly statement: "We have magneto trouble.  How, then, can we start up again?"  (Page 140).  In this statement, Keynes recognizes that the economy needs a boost just like how a car might need a jumpstart if its battery were dead.  His diagnosis might be correct - the economy might need a jumpstart - but his next statement (how can we start up again?) presupposes that the government is responsible for jumpstarting the economy.

I am not meaning to suggest that the government cannot adequately address the problems Keynes identifies.  Surely, expansionary fiscal policy would do the trick.  But presupposing the government is responsible for "fixing" the economy is too far a conclusion from the premise: "we have magneto trouble."

Confidence

Despite the current depressed state of our economy, and the dismal outlook on employment (matt), reading the complaints Keynes raises against the English government and the English Bank’s propensity to follow a policy of "negation, restriction, [and] inactivity" made me thankful to be around at a time where economics is better understood, especially by our governments. Indeed, it was interesting to reading how Keynes puts forth an argument for increased government expenditures and lowered interests, when I feel many of us take the positive effects of such fiscal and monetary policies as given. When he argued against restricting capital expenditures, I almost felt as if I was reading some antiquated article questioning the validity of bloodletting as a cure for nausea.

Personally, it’s been a while seen I’ve taken Macro so I’m not as clear on the effects of lending to foreign entities. I understood Keynes was opposed to decreasing interest rates as a response to high unemployment levels, if they could not secure that the borrowed funds would be utilized to modernize the country, but do bank currently place such restrictions? Would I not be able to get a loan in China if I meant to spend the money in Australia? Are such restrictions justified economically?

I found his take on the increased vulnerability of manufacturing nations, when compared to primary producing nations, interesting. He gives good reason why that my be the case including a lack organized contraction, increased rates of self-employment, slower production cycles, and increased social costs to unemployment, but is that currently the case? I always thought the opposite was true, but maybe the integration of economies thanks to trade and specialization has eliminated this buffer for primary output nations…

Although I’m uncertain as to what Keynes would think about the current economic state, I’ll postulate and say he would suggest that the Central Banks should continue to do what they can to help borrowers and consumers recover their good spirits (144). If Jordan’s article is right, then confidence is, again, an issue decades later.

Mayday, Mayday

We have magneto trouble. This was how Keynes described the international economy in the early 1930s: an engine with a key part (the alternator) unable to function. (Disclosure: I only figured this out by googling “magneto trouble”) The whole engine wasn’t in tatters, but since one key part couldn’t turn, nothing worked. Reading Keynes would certainly be more fun for all of us if there weren’t so many horrific failings in the current “Grand Depression” we seem to find ourselves currently in. The only difference is that no one will make a heartwarming Christmastime movie about Lehman Brothers, a la It’s a Wonderful Life. Will the financial sector be our broken magneto? Or is our economy so much more robust and secure than in 1930 that we will be able to weather this storm without too much damage?

On a limb here: doesn’t today’s problem seem to be proving the opposite of what our current CMC dogma has told us, that the markets are capable of policing themselves? Within a week of a Karl Rove protest? Liberalism scores a bank shot off the greed of men!

That doesn’t mean Keynes isn’t my still homie. Nothing ventured, nothing gained- even if that means snapping up sub-prime securities like they are cookies at Scripps. I am especially for that expansion of government spending- you nailed that one Keynes. The problem is that I am having a hard time figuring how to use Keynes mad knowledge to our current advantage. Though I do know now that Keynes was totally not for excessive saving, but that’s ok because Americans currently have a negative savings rate on average. USA! USA! USA!

A quote that was about the 1930s that feels painfully relevant today: “The worst of it is that we have one excellent excuse for doing nothing. To a large extent the cure lies outside our own power. The problem is an international one, and for a country which depends on foreign trade as much as we do there are narrow limits to what we can achieve by ourselves.”

Boo-ya! Good luck getting an I-bank job. Let’s hope Bain is looking to hire 12 kids from CMC.

Lower interest rates...is this the answer?

As investors ran out the door today, pulling their money out of potentially volatile investments and investing their money in Treasury Bonds, (pretty much the safest investment option), I wondered how J.M. Keyenes, as an investor on Wall Street, would have reacted to today’s events. Would he have surged for the door with the other investors to safety, would he have stayed put hoping things would get better, or would he have taken his money out completely to start, buy a few things hoping to stimulate the economy, and then finally, enter back in when interest rates were lowered? While currently the economy is still volatile, Keyenes would have probably chosen a response to the response to stressful economic times by taking actions that would work towards stimulating the economy. Like other investors, he would have ran to the door too, to ensure that once the economy settles, he has money to re-invest. However, to be a successful economy, especially in these tough economic times, the private sector and public sector must meet half way to help each other out. In the most stressful of economic situations, Keynes (as perhaps a member of the Federal Reserve) would suggest decreasing the interest rates due to "an abundant supply of savings" as it would be "very much in the national interest"(131). He believes that interest rates should not be lowered if there is a deficient supply of investments, i.e. on desirable purposes on which to spend the savings" (131). So if Keynes was a part of the Fed today (as well as an investor), what may he suggest in terms of interest rates?

After reading an article today, on the NY Times, Policy Makers Keep Key Rate Steady, the Federal Reserve has decided not to lower interest rates as they see that interest rates have little to do with the economic trouble today which has been induced by the credit and mortgage crises. Therefore the problem today is a confidence-in-the-market issue, not necessarily a liquidity issue (like it was during the Great Depression). The Fed has been helping out the market by injecting cash into it, like $50 billion yesterday to ensure the rate stayed near two percent. Although I am no expert, if this is a confidence in the market issue, I think the Fed should focus on giving investors reasons to jump back in, rather than to wait it out. Just injecting the economy with cash does not necessarily give good and obvious incentives for investors to reinvest, not yet, at least …they are still too hesitant. Perhaps this is just a short/long term dilemma that will sort itself out eventually. The economy, though it fails us at times, benefits us all in the long-run. All of this being said, I now wonder what Keynes would have done had he been here as both an investor and as a member of the Fed.

Oh Keynes...

Keynes is amazingly brilliant. If anyone could make me believe that economics is alright, it is Keynes. Through these several essays he is able to diagnose and describe the downturn in the economy, effectively explaining what is wrong and how to fix it in everyday language. I admire his ability to step back and look at the big picture, a skill that has yet to permeate my entire life. In one fell swoop he accurately diagnoses the entire problem of the Great Depression and offers a solution. You all might think I am a nerd for this, but he reminds me of Dr. House. I loved the way he can explain through a series of simple questions the "magneto trouble" that the economy is facing. It's all so logical when you take out the passions of the people. To him it's just a simple lack of investment into new capital because the market for capital goods is unappealing.

Another thing I like about Keynes is that he is willing to take a chance and at least try a solution before giving in and leaving things as they were. Even if his solution is wrong it can't hurt to try, especially if the economy is already in that bad of shape. At least there was some effort by him to remedy the solution and not just sit by and let your country go to shambles. This active involvement is something I advocate and it makes me lean towards classifying Keynes more as a searcher and a little less on the planner side. Perhaps we've found a balance in Keynes between a will to act to remedy the problem but also take into consideration the wider consequences like true planners would do first.

Essays in Persuasion: a response/rant

Keynes’ Essays in Persuasion not only contains a characterization of the state of the Economy after the economic crash, but it also serves as a forum for him to expound his musings on the nature of man in regard to the economy and how this psychology has economical implications. He goes beyond formulas and into the psyche of man; a true critique or motivation (so to speak) of and for man to renounce these remarkably inefficient dispositions, begin to accept the truth and strive to be better (or smarter!).

Where exactly do these gems appear? To start, note the last paragraph of “Inflation and Deflation” where Keynes explains bankers as suicidal ignoramuses who are “blind” and cannot see past their own nose let alone into the future, he shows us that human psychology can be partially blamed for what is (was) to come. Another example: he shows that much of what makes markets move is human influence or the “confidence” people hold in the market. Such confidence makes or breaks success if it pervades the whole investment society—and among human beings rumors are more easily spread and feared than dispelled (146). By this I mean not to expound some fallacy that we, humans, are so fundamentally different from other animals socially that all forms of gossip exists within our species alone, but I can only refer to personal and narrated experience of others and generally accepted truths when discussing such matters…but I digress.

Keynes points to “eagerness” to invest and “amount of credit created” as conflicting halves of the same market soul. The underlying problem in relation to these halves is our fear of consequences—a fear which then creates worse outcomes in its end.

Keynes’ spirit speaks out in his statement “there is no reason why we should not feel ourselves free to be bold, to be open, to experiment, to take action, to try the possibilities of things” (133) and I wonder what he would say about our economic situation today. Would he exclaim “What fools! Your foresight sickens me! You are destined to wallow in the shame of your own self-prescribed failure, drenched in the storm of financial ruin and inevitable market and environmental destruction” Probably not—but it sounds cool.

Naomi Klein at Scripps

This lecture at Scripps ought to be pretty interesting.

The Scripps College Humanities Institute Fall 2008 Lecture Series "GLOBAL MEDIA" presents: "'The Shock Doctrine'" NAOMI KLEIN
Award-winning Journalist, Syndicated Columnist and Author
http://www.naomiklein.org/main

Thursday, September 18, 2008
7:30 p.m.
Garrison Theater
(Scripps College Performing Arts Center)

For more information please call the Scripps College Humanities
Institute (909) 621-8326, or visit our website for the entire fall schedule of
events.
http://www.scrippscollege.edu/campus/humanities-institute/index.php

***********************************************************
NAOMI KLEIN is an award-winning journalist, syndicated columnist and author of The New York Times and international bestseller, The Shock Doctrine: The Rise of Disaster Capitalism. Published worldwide in September 2007, The Shock Doctrine is being translated into 20 languages to date. The six minute companion film, created by Alfonso Cuaron, director of Children of Men, was an Official Selection of the 2007 Venice Biennale and Toronto International Film Festivals and was a viral phenomenon, downloaded over a million times.

Her first book No Logo: Taking Aim at the Brand Bullies was also an international bestseller, translated into over 28 languages with more than a million copies in print. A collection of her work, Fences and Windows: Dispatches from the Front Lines of the Globalization Debate was published in 2002.

Klein writes a regular column for The Nation and The Guardian that is syndicated internationally by The New York Times Syndicate. In 2004, her reporting from Iraq for Harper's Magazine won the James Aronson Award for Social Justice Journalism. Also in 2004, she co-produced The Take with director Avi Lewis, a feature documentary about Argentina's occupied factories. The film was an Official Selection of the Venice Biennale and won the Best Documentary Jury Prize at the American Film Institute's Film Festival in Los Angeles.

She is a former Miliband Fellow at the London School of Economics and holds an honorary Doctor of Civil Laws from the University of King's College, Nova Scotia.

Keynes confuses me

So I dug the first essay. Fed straight into my memories of Macro with the ideas of steady state levels of investment and savings. With some detailed reading I could picture the graphs of steady state markets as they applied to the British economy of the time. However, as Keynes starts delving into the issues of losses by producers of consumable goods and explains (actually doesn't explain and simply says "as a little thought will show") how greater portions of consumer income devoted to such goods will actually cause producers to lose money and greater savings by said consumers will cause gains. Sounds to me as if he is saying that if people buy less of a good then the producer of the good actually is better off. I assume I am just missing something here but as I see it the logic doesn't hold and I am really looking forward to trying to map this out in graphs in class on Thursday. Any insight into this would be greatly appreciated.