I've been quite remiss in tending to the Ramblings of late, so thanks to Don for picking up some of the slack. Time constraints have kept me from writing as much as I would like, and the result has been a piecemeal and somewhat incoherent set of posts on my part. But the scope of the issues raised by the current economic situation is so vast that it's hard sometimes not to feel overwhelmed and just throw up one's hands in despair. Surveying the economic and political landscape today evokes in me a feeling somewhat akin to watching the last scene in Raiders of the Lost Ark.
I do believe that at root we probably agree on more than we disagree, but that makes for boring television. So I'll cut right to the chase and say that I think that quibbling over which way the causality ran in 2008 is badly missing the point. The problems we're experiencing right now have been forty years in the making (and there is evidence that the seeds were actually planted 80 years ago). None of the policies that put us where we are today have been changed, nor is there any indication that they will or even could be changed given today's political realities. It has next to nothing to do with Ben Bernanke. My problem with Bernanke is not that this mess is all his fault (it isn't) it's that he's not even pretending to know what's going on and what to do about it, which is the job he's being paid to do.
(That's the thing that pisses me off most about this situation: tons of people are being paid tons of money for being incompetent. I want a piece of that action. I can be more incompetent than any of those clowns, and I'll do it for half what they're making.)
The situation is so complicated that it's very hard to boil it down to a pithy sound bite, but here's my best shot at it: the people of the United States, including, apparently, those at the very top, have fundamentally lost sight of the difference between money and wealth. They think, for example: if I pay more taxes, I have less money, so I'm poorer. If I pay less taxes I have more money so I'm richer. So cutting taxes makes everyone richer. Duh! It's very compelling logic (if you're an idiot), but it is, of course, wrong.
I am reminded of a scene in one of Douglas Adams's books where the smart people on a particular planet that is becoming overcrowded manage to con all the stupid people to emigrate to a different one. Upon arrival on their brand spanking new planet the stupid people decide to declare that leaves are money. Everyone stuffs their pockets full of leaves, and -- presto! -- everyone is rich. They didn't even have to go to the bother of building printing presses!
This is, I am sad to say, the kind of logic that is being bandied about in all seriousness today by people who really ought to know better. The proposition that all our problems would go away of only Bernanke would print more dollars is not so far from the Adamsian proposition that all our problems would go away if only we just proclaimed leaves to be money. That at least would solve the problem of the Fed chairman's obstinacy, wouldn't it?
The problem is that money isn't wealth. It isn't even a proxy for wealth! It's a tool, a technology, and like any technology it can be used to help create wealth, but it can also be used for other purposes, like obtaining power and influence (which some people -- mainly those who have it -- reckon as wealth).
This is the fundamental problem: not everyone reckons wealth the same way. Not everyone has the same quality metric. One of the things that makes money so useful is that it helps catalyze a process by which multiple disparate quality metrics can be mutually reconciled so that everyone gets what they wants. This is the beautiful promise of the free market, that actual wealth can be created out of nothing merely by providing a venue where people can exchange goods and services, and an accounting mechanism that allows the goat herder and a barber to trade 1/10th of a goat for a shave without having to actually go to the trouble of butchering a goat.
No one seems to understand this any more. Certainly the "wizards of Wall Street" don't seem to understand it.
Sub-prime did not cause the great recession. Neither did the great recession cause the mortgage crisis. Both were caused by vast numbers of people buying into the theory that money is wealth, that if you create money you create wealth, that everyone can get rich by stuffing leaves into their pockets. Of course, the details are quite a bit more complicated than that. The reality was more like: the recession and the crisis were caused by vast numbers of people buying into the theory that you could eliminate risk from financial transactions by building up a Ponziesque scheme of derivatives. The problem was then exacerbated when the perpetrators of this scheme were let off, not just scot-free, but were actually rewarded by the government for essentially perpetrating a fraud. (I am speaking here of AIG being forced by the treasury to pay Goldman Sachs 100 cents on the dollar for their credit default swaps in exchange for a government bailout of AIG. It is no coincidence that many of the government officials who instigated this policy were Goldman alums.)
I could go on and on and on. The level of incompetence at the highest levels is truly staggering. Take the ratings agencies for example. They got paid to rate bonds. They gave AAA ratings to bonds backed by sub-prime mortgages that they knew would default. They did this because they got paid by the bond issuer. Then they hid behind the first amendment to evade liability. Again: vast numbers of people getting paid vast amounts of money, not to create wealth, but to actively destroy it.
Go back and watch that clip from Indiana Jones again.
Of course, ultimately the blame lies with the American people. None of this would have been possible without the complacent acquiescence of vast numbers of ordinary citizens. But although the responsibility ultimately lies with them it's hard for me to count these folks as villains. Most people, I think, just want to do an honest day's work for an honest day's pay and leave the complicated stuff to someone else, and it's hard to find fault with that. The wealth of this nation was built in large measure by people with that kind of outlook on life. Those people are not the bad guys.
The bad guys are the intellectual elites in this country who really ought to know better. No one should be allowed to graduate from Harvard or Yale without understanding the difference between money and wealth, and yet the corridors of power in this country are chock full of ivy league grads who either don't get it or don't care. Either way, this mess is their fault.