Rational Philosophy

Congress And The Bailout

I just deleted several hundred “spam” comments from my comment moderation queue. The mysterious originators of these comments, which are then automatically generated in huge numbers around the Internet, aim to attract or influence commercial traffic in their direction. I don’t really care whether the operation works. I presume it does, since otherwise why would they keep doing it? But I care about having to delete all of those messages when I have better things to do with my time.

A couple of weeks ago I was on the phone with my friend in Australia just after the AIG bailout and he mentioned that had AIG gone under he would have been left in the hole for several hundred thousand dollars. Many clients of his medical business have insurance with AIG. The fingers of this particular invisible hand spread far.

But why did AIG, with its trillion dollar balance sheet and stalwart history of conservative risk management need to be bailed out?

Joseph P. Cassano AIG Financial Products

Well, if the NY Times has its story straight, AIG’s problems were catalyzed by the overreaching overconfident overpowerful work of one man — Joseph J. Cassano, a former executive with Drexel Burnham Lambert — Michael “the-junk-bond-king” Milken’s old investment bank. Cassano helped found AIG Financial Products in London and built it into a very profitable, very independent entity within AIG that leveraged AIG’s tremendous financial strength and standing to sell ever more speculative products. AIG Financial Products, being drastically overleveraged, eventually imploded. Cassano left and now lives quietly in a Knightsbridge town-house. (I love this picture from the NY Times; Cassano peering around the corner in his bright red shirt like a con at the perimeter of the prison yard.)

When McCain debated Obama last week after supposedly spending several days in intense economy-recovery sessions he didn’t seem to have much of a grasp on what had happened to cause the problems in the first place, nor on what needed to be done to avoid them happening again. It was as if invoking the specter of regulation caused him such shudders that it wobbled his brain off-kilter.

John McCain at a loss

Ideally, regulation is what we do when we don’t want something bad to happen. Avoiding regulation is something we do when we care more about a belief or concept than real-world consequences.

The Bush administration has been bad for America and the world for many reasons, but there has been one overriding and all-pervasive reason for its badness — the arrogance of favoring faith over fact. The administration has consistently argued for, lied for, evaded for, invaded for, and bullied for its ideologies in the face of the evidence against them. They have set the bar very low for what a government can do to manipulate and subvert in the name of ideology and get away with it.

All that being said, when the congress began beating up on Paulsen and his three page proposal I felt for the first time in a long time that we were seeing government in action. Rusty, creaking, inept as it may have been, the house gave us the hint of an idea of what it should be doing for us — working in our best interests. For once we got a glimpse of the invisible hand.

The Invisible Hand Part 1

Related posts from around the web:

Walter Williams and Bryan D. Jones: The Most Important Election … - Choose McCain and likely opt for a third term of the governing philosophy that has pushed the United States back toward the economy of the Great Depression. Select McCain and keep the governing approach of unregulated free market …

McCain Touts Plan to Privatize Bailout [3rd attempt] - “The problem with the earlier plan,” McCain explains, “is that it relies on big government to save the banks. My plan puts the bailout in the hands of the free market, which is the only solution that works in times like these.” …

The Invisible Hand

Ah, the invisible hand, what a fine, dark metaphor to match these dark times. Adam Smith in The Wealth of Nations: The individual who “intends only his own gain is led by an invisible hand to promote an end which was no part of his intention.”

Wednesday’s New York Times editorial “Mr. McCain and the Economy” criticizes McCain on several fronts. 1. His claim that the economy is fundamentally sound, despite the latest cataclysms. 2. His clarification that what he meant by “fundamentally sound” was that he “believed in American workers.” and 3. His broadside that any blame that could fall fell surely on Wall Street’s “unbridled corruption and greed.”

“The crisis on Wall Street is fundamentally a failure to do the things that temper, detect and punish corruption and greed. It was a failure to police the markets, to enforce rules, to heed and sound warnings and expose questionable products and practices,” says the editorial, and with a flick of the wrist ends with a call to McCain to proffer new solutions or approaches that might correct the problems.

McCain, we’ve heard and he admits, suffers from a fundamental lack of interest in things financial (he doesn’t recall how many properties he and his wife own — eight). This is an unfortunate quality in the prospective leader of a country, especially during economic upheavals.

Record Profits in 2007 $1,300 per second

The invisible hand has another meaning here, too. McCain, intent on gaining the presidency is led by the invisible hand of greed in the Republican power-makers. It is no part of McCain’s intention to lead the country into financial disarray, to risk further dismantling of what was, prior to Bush’s presidency, a remarkably strong economy.

Economics is a complex subject. Even the experts don’t understand how economies really work. They are too vast, multi-faceted and irrational.

This last is an incredibly important point. Emotion, fear, mania, addiction, overoptimism all play significant roles in the way the economy heaves and rolls. The concept and model of a completely free market fails in the real world on this basis alone.

Subprime mortgage rescue plan (Simplified Diagram)

Subprime mortgages and the resulting current woes illustrate the second point about the illusion of the completely free market. A free market, a market without restraint, is free to collapse. If we want to prevent this (and who would argue that it’s not in the nation’s best interests to prevent occasional collapse of the economy) someone outside the market needs to be monitoring, reviewing and, if necessary, regulating such things as new financial instruments.

The last problem with the notion of a completely free market is the dangerous relationship with the seat of government. Large, wealthy corporations have deep pockets with which to influence government policy. And, worse yet, if agents of those corporations influence government thinking, policy and strategy (think Rove and Cheney) the power of government will exert an ultimately skewed and even destabilizing influence on the market.

This is exactly what has been happening, as the Times editorial points out: “The disconnect between work and reward has been especially acute during the Bush years, as workers’ incomes fell while corporate profits, which flow to investors and company executives, ballooned. For workers, that is a fundamental flaw in today’s economy. It is grounded in policies like a chronically inadequate minimum wage and an increasingly unprogressive tax system, for which Mr. McCain offers no alternatives.”

The free market is a nice idea, a useful model to illustrate one of the forces at work in an economy. But we should not forget that the invisible hand bends and shapes the market according to the will that wields it.

Related posts from around the Web:

Senate Democrats Discuss Bush-McCain Economic Policies - Senators Boxer, Stabenow, and Menendez discuss how the turmoil on Wall Street is a direct legacy of Bush-McCain economic policies that have failed this nation for eight years. Refusing to police lenders and neglecting to protect …

McCain’s Economic Solution: Hemorrhage More Money - … GOP nominee for his statement this morning — which they asserted was an announcement of support for $25 billion in government loans to the auto industry. So there we have it. McCain’s solution to our terrifyingly failing economy? …

McCain Follows Obama With Direct Economic Ad (VIDEO) - “You, the American workers, are the best in the world,” says McCain. “But your economic security has been put at risk by the greed of Wall Street. That’s unacceptable. My opponent’s only solutions are talk and taxes. …

On the notions of free will and government influence in society.

In Ireland, back in 2002, the government imposed a hefty tax (33 cents) on plastic shopping bags. Supermarkets and stores resisted the change at first, anticipating that it would be unpopular with customers. But as the NY Times reports, avoiding the use of plastic bags has become not just an accepted fact of life but a mark of personal commitment to environmental change. “When my roommate brings one in the flat it annoys the hell out of me,” said one Dubliner.

Dominique Browning writes in an op-ed piece that she saw plenty of plastic bags and other refuse on her visit Patagonian glaciers. Dominique laments the self-absorption of many of her fellow eco-tourists. If we can’t check ourselves when faced with of the decline of such monumental beauty close up, Dominique’s piece asks, how can we check ourselves when global warming and environmental protection are simply abstract concepts?

In unveiling his proposed $3.1 trillion budget package, President Bush speaks of “the hard work of the American people and spending discipline in Washington.” His formula for achieving a balanced budget? “Simple: Create the conditions for economic growth, keep taxes low, and spend taxpayer dollars wisely or not at all.” Meanwhile, as White House budget documents reveal, the accumulated total of all federal borrowing will grow from $3.3 trillion in 2001, when President Bush took office, to $5.4 trillion this year and $5.9 trillion in 2009. Even if we’re giving Bush the benefit of the doubt, it’s clear that his economic policies haven’t met with great success.

Like many people, I tend to dislike any overt external influence on what I do. This applies just as well to my wife’s influence as it does to the government’s. When my wife told me I should be taking a canvas bag to the grocery store to cart our groceries, I bridled and ignored her. If the government told me I should be taking a canvas bag to pick up my groceries I would probably ignore it, too. I don’t like irrational parking regulations, or jay-walking laws, or prohibitions against buying alcohol on Sunday. But I was struck by the report of the sea-change against the use of plastic bags in Ireland that began with a very pointed and determined government initiative to raise people’s awareness.

The success of Ireland’s plastic bag tax shows us is that if a government attaches a societal cost to something, publicizes that cost, and acts on it (levies a charge to offset or avoid the cost,) the result can be an improved awareness of the right thing to do. As a result, the Irish don’t resent the tax, they resent those who don’t respect the underlying impetus for the tax.

It strikes me that this translates into something akin to a free will for society or societal free will. Armed with an awareness and a perspective on its behavior, society can choose to do things that don’t necessarily come naturally or easily.

Raising society’s awareness of global warming has been a major challenge in the United States since we’ve had a government that refused to acknowledge that global warming was really a problem related to society’s actions. When other forces began to raise US society’s awareness, though, even a recalcitrant government couldn’t prevent a change in society’s will to change.

But what does any of this have to do with Bush’s budget package? Implicit in Bush’s budget package and explicit in his statements is an argument for the free market, and for hands off government. But since inaction is another form of action, hands-off government isn’t really hands-off. What we don’t do can have just as much impact as what we do do. And when we think about the role that government can play in raising awareness of the populace and championing policies that foster and catalyze people to act in ways that help improve society and the world we live in we realize just what a flawed governing philosophy the free-market, hands-off mantra makes.

(My computer erased my first attempt at this post. A circumstance I’m trying not to take to heart.)

In writing yesterday’s post (”The Joy of Sexual Reproduction“) I came across the work of Herbert Spencer, who apparently first coined the phrase “the survival of the fittest” after reading about Darwin’s theory of “natural selection.” While Herbert Spencer’s ideas seem to have much soundness in some respects (that all organic and inorganic stuff must exist according to the principles of space and time, for instance) they are run through with an idealistic belief that evolution has an end point, at which life will have reached a state of perfect equilibrium. A thrust that comes across implicitly in his spin on Darwin’s theory of natural selection in his misleading use of the absolute term “fittest.”

(I love Wikipedia’s choice of this marvelously sinister-looking photograph of Spencer.)

I didn’t set out to write about Spencer. It occurred to me though that a parallel may exist between the Spencer-like utopia of a perfect evolutionary end point, and the common belief that markets should be left to freely find their form; that a theoretically perfectly free market (which is impossible) would ultimately most benefit society. I don’t want to get stuck in attacking or defending absolutes, just examine whether flawed idealism might be doing us a disservice.

It’s easy to pick on George Bush, but in this case (as in so many others) he serves as a great example of what may be wrong with freely advocating a free market. While it’s hard to imagine that he ever had anything to do with actually writing a book, he did put his name as Author to one called “A Charge to Keep.” Herein we find a quote that will be perfect for our discussion: “A free market promotes dreams and individuality.” (I must add that I found this quote elsewhere; I didn’t read the book. But I can readily imagine Bush subscribing to this perspective.)

It’s easy to point to failures in the market — for instance the recent shakiness caused by subprime loans. But it’s also easy for a free market proponent to point out that poor choices cause these problems and that they are actually examples that indicate that the market isn’t yet operating transparently or efficiently enough. As Alan Greenspan argued: “the securitization of home loans for people with poor credit - not the loans themselves - were to blame for the current global credit crisis.”

If we get into debates between free market advocacy and free market opposition, we’ll never get anywhere (that’s just politics as usual).

Instead, I’m wondering whether there may be a philosophical basis for understanding whether a free market is necessarily good or bad. I’ll try to explain what I mean. If we consider the free market as a concept it must rest on the two concepts of impulse and friction. Market changes require impulse or friction. An impulse initiates a market motion or activity based on an expectation of return or profit. A friction or counter-impulse provides inhibition to the momentum of the market in a particular direction. I’m being deliberately abstract. But we quickly determine that nowhere in the concepts for a free market do we come across any concept of virtue or goodness, other than the reflexive concept that freeness is virtue.

To be more specific. Let’s say a person engaging in commerce spies an opportunity for profit. He or she pursues that opportunity freely, responding to the impulse to benefit from the profit. And let’s say that in a perfectly free and transparent market, another person or group responds to that action by providing friction, thereby reducing or sharing in the profit, or generating an alternate profit for themselves.

A free and transparent market consists of a multitude of such transactions. Each person operates always according to impulse or friction. Never, in free market terms, does any subjective desire to act virtuously enter the equation.

Now, if we look again at Adam Smith (the father of the free market concept?) we find that he firmly believed that selfishness was immoral and that the individual would a act in accordance with the good of themselves and the good of all, since society is required for the market to exist.

But I go back to this idea of impulse and friction. People have coopted the concept of the free market as a virtuous mechanism. But a perfectly free market just “is.” People act and it responds, not according to any virtue, but according to its internal structure (which can never be perfect).

As the real market (synonymous in some ways with the stock market) becomes more abstract and more remote from the worldly barter and trade that Adam Smith witnessed, we lose the very connection to humanity that transforms a morally neutral market into a socially responsible market.

People love to tout the idea of the free market because it notionally frees them from worrying about the fiscal responsibility of the government in ensuring that markets operate responsibly and sensibly. Bush may be right in saying that a free market promotes dreams and individuality, but if we think that’s a good thing, we should perhaps think again.