Bare-faced gall

"“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”" Garnered from Mike Shedlock's blog

I laughed/coughed out when I read that quote. The criminals are again to be bailed out by the tax payer, and without remotely contemplating prosecution! FFS! This has warped beyond the other side of funny, hurtled across bizarre, skidded over surreal and has thudded down somewhere sick, fetid, putrid and indigestible. The proper words to describe the situation don't actually exist. Maybe future generations will look back at this and come up with something appropriate. I hope we make it that far.

'Free' Markets = Corrupt Markets?

An economy — whether local, national or global — is just a system, as are all other multi-component, cohesive processes we know of. As such economies are subject to internal and external forces acting upon them, affecting their behaviours, shaping the manner of their operations. The discipline of economics studies economic systems, but, sadly, comes to the task with a raft of core assumptions about the ground rules governing economic operations — such as rational buyers and sellers, unlimited wants and scarce resources (though, strangely, energy is assumed to be infinite in some regards!) — all of which are, at least in the mainstream, out of bounds when it comes to what may be discussed. These assumptions shape socioeconomic policy generally, which shapes our lives. I refer the reader to Steve Keen’s “Debunking Economics” for a forensic analysis of the internal inconsistencies and logical contradictions of the dismal science (it really is not a science), my focus here is on the discipline’s blinkered attitude to corruption, an observation I first heard made by William K Black. Generally speaking, according to the professor, economics fails to consider corruption at all.

For me the best sentence I have read so far highlighting the systemic pressure to corruption inherent in economic systems was written by Jacque Fresco (from “The Best That Money Can’t Buy”):

“In a monetary system there is an inherent reason for corruption and that is to gain a competitive advantage over someone else.”

A core assumption that arises from the perception of unlimited desires having to deal with limited resources is eternal competition. In economic theory rational market participants are also “law-abiding” market participants (though laws are not really considered), so this endless competition should produce efficiency everywhere it is allowed full scope. The real world, that messy, recalcitrant thing, makes this assumption laughable. Here some quotes from a recent discussion at Financial Armageddon:

“Don’t forget the Dow is fake also. They took out GM and Citibank from the Dow. Those are two zeros and they put in Travelers and Cisco…that’s 640 Dow points that were added because they swapped GM and Citi for Travelers and Cisco.”

and

“Those trades [in Citi, Bank of America, AIG and Wells Fargo] are 80% of all trades in the market and the total market volume is less than half of what it was back then [2007]. In other words, you’ve got half the market participation of what it was and of that half, 80% of it is concentrated in less than half a dozen financial firms.”

Some observers are resolutely opposed to the idea that the markets are manipulated by powerful market players, but we need only recall that economic systems have built in to them a constant and unending pressure to corruption, for the idea of corruption to become more than predictable. We then see corruption as inevitable. There is crime (of which some 90% is economic), humans are capable of a great variety of behaviours — that is, they are not the robotic, homogenous, mechanical components of economic engines economics theory needs them to be — consequently it is silly to assume all who are motivated to become ever richer are nice human beings. If they were we would need no laws in this scarcity-based system. That we have laws, and that laws cannot be perfect, says enough.

And of course the world is vastly more complex than a ragtag of markets efficiently distributing scarce goods and services via the price mechanism. We poor saps watch the voodoo of stock markets in hushed awe, feeling good when it rises, and concerned when it drops. In Ellen Brown’s “The Web of Debt” I came across a wonderful analogy for the importance of stock market performance; the Dow is a dead military dictator propped up in the castle window, his arm moved reassuringly up and down by some mechanical device to pacify the troubled crowds outside. So not only do we have internal, get-rich-quick motivations to corruption, we have external, socioeconomic and political pressures to corruption. Economic systems experience constant internal and external pressure towards corruption, and yet in the mainstream the idea that markets are even manipulatable is a virtual heresy. ‘Free’ markets are the panacea for all ills. Just leave markets alone to work their magic and all will be fine.

But at last there are the beginnings of a serious attempt to address this woeful shortcoming of economic theory, and the fallout of this on socioeconomic practices. From the abstract of a recent paper at www.voxeu.org (hat tip nakedcapitalism):

“How does economic theory need to adjust in light of the global financial crisis? This column presents a new insight on how innovation leads to rent capture, which in turn is a sign of a potential crisis. This stems from asymmetric information in the financial sector. To avoid a repeat of the crisis, policymakers need to increase transparency.”

Asymmetric information is anathema to perfect (and free) markets, in which all participants need to be perfectly informed about what’s going on, for price to be fair and distribution to be efficient. Of course, to the untrained eye, such a market is impossible right from the get-go, but here, in the rarefied air of economics academia, we must look at particular instances of a particular sector of the economy (finance), rather than at the very foundations. Such is change of established institutions; a painfully slow nibbling at the edges.

The article looks at the arcane complexities of CDSs, asserting the sellers are privy to more information than the buyers, and as such possess too much power in the transaction, favouring them greatly over the buyer. The authors extrapolate from CDSs to the financial market as a whole, arguing that the entire sector benefits the sellers with asymmetric information advantages that destabilise the entire economy over time.

What is important about this is that the holders of the keys of current orthodoxy, that elite shouting loudest about the beauties of ‘free’ markets, are suddenly under the microscope being exposed as the least ‘free’ sector. A small beginning it may be, but it has the potential to weaken considerably the paradigm-controlling power of financial institutions. Hopefully the debate about the ongoing crisis will widen as a consequence of this, and other, research.

Meanwhile, it must still be only at the extreme fringes that scarcity itself is viewed as an outdated assumption. Once momentum builds around open and unbiased discussions of scarcity and its fallout, then the idea of a resource-based economy might take hold in the public’s imagination. So much of what we ‘know’ about life on Earth arises from this key assumption. Tackling it will prove, I feel, to be humanity's greatest challenge to date.

Ponzi scheme, meet brick wall

Recent posts by blogger George Washington on money creation and fractional reserve banking are drawing much needed attention to the fact that the monetary system effectively functions as a state sanctioned ponzi scheme, a highly simplified version of which looks like this:

All money that comes into existence does so as an interest bearing loan. This activity takes place at private banks, which are authorized to create new money by extending credit to willing borrowers. That debt-money is then expunged as the borrower makes the final payment on the loan, but the interest is kept by the bank. The interest was not created, but "won" from the existing pool of money in the economy. This happens over and over again worldwide, millions upon millions of times, in a kind of tectonically-slow but tectonically-inexorable sucking up job, to money creating institutions, of all money in the economy. Over time more and more borrowers drown in debt as they compete amongst themselves to stay afloat financially, until there are not enough borrowers out there to keep the ponzi ballooning. This is debt saturation, and the data here shows very clearly that this has indeed happened.

Though I have probably the bloggosphere's tiniest readership, I urge you all to check that link out. It's very sobering ... for those still inebriated anyway.

Welcome to the end of the line. If we make it past this monumental challenge, the future might just be very wonderful indeed.

Humans Synthesize Happiness

What would make you happier, winning the lottery or becoming a paraplegic?

Even though we all "know" the answer to that question, the results of people measured for happiness one year into their respective experiences showed very little difference between the two, with paraplegics actually showing marginally higher happiness levels than the lottery winners. Without going into too much detail, the reason for these surprising results (though I imagine I am not alone in thinking, after seeing the data, "you know, that kinda makes sense"), is that humans can synthesize their happiness, somewhat along the lines of "Love the one you're with."

I recommend Dan Gilbert's talk (all of it) for those interested in learning more about this than I divulge in this brief blog entry. What interests me most of all here is the extent to which such revelations should fracture, even shatter, economics’ core beliefs, were it ready to listen and learn. We too, at a cultural level, need to pay close attention to such information, since the energy we spend chasing illusive “success” is indeed, as wise men through the ages have said, wasted, because most often it’s right in front of us, and not “somewhere over the rainbow.” But of course, this wisdom is one the current system does not want us to learn. Dan Gilbert puts it very well:

"What kind of economic engine would keep churning, if we believed that not getting what we want could make us just as happy as getting it!?"

Of course, we cannot realistically expect to be happy with every life circumstance. Our ability to synthesize happiness is constrained to some degree. Interestingly, there appears to be a degree of material comfort we all “need,” which once achieved serves as a good bedrock for progress along other lines (perhaps artistic or intellectual). It looks almost certain that we won't get more and more of what we chase (happiness) if we expend our limited energies climbing the greasy monetary pole in pursuit of it:

"Below $60,000 a year people are unhappy, and they get progressively unhappier the poorer they get. Above that we get an absolutely flat line, I mean I've rarely seen a line so flat." Daniel Kahneman (www.ted.com)

Such findings are, taken together and in terms of their combined gravity and relevance, fatal to orthodox economics. Any socioeconomic model predicated upon the untested assumption that the pursuit of happiness, and indeed even freedom itself, is somehow about the accumulation of money and material goods, about earning more than your neighbor, with totally insatiable yet calmly rational market participants everywhere you look, is not remotely in line with what science shows us, nor can its narrow prescriptions ever make proper use of humanity’s great subtleties and wonders. If we are to set our civilization on a course which has a half-way decent chance of approaching our creative potential, it will be by listening closely to what science tells us, and in being fearless when it comes to reassessing all the things we think we know.

My personal reading of this is that we’re here, the train’s arrived, we’ve solved the material problems of shelter, food, water, warmth and transport. More and more of each per rich person yields nothing extra, in fact does serious harm as income inequality grows and our priorities remain sick and unwise. Now that we have a very good idea of what makes us healthy and happy, we owe it to ourselves to deconstruct the system that got us here, and prepare a new one to take us forward. As I’ve said before, we have the know-how and the resources to do this. For the moment, however, a tool we made earlier, money, is in our way.