Sunday, October 5, 2008

Power is never having to say you are sorry

Citing a Greenspan interview: "The majority of lawyers, in my experience, seek to regulate -- that is, to contain certain activities with little weight given to the lost benefits of such activities," he says. "The question is: What do you lose? In this case, a very valuable instrument [credit default swaps, the derivatives at the core of the current mess] for the diminution of systemic risk. You can stop the system dead and eliminate speculative losses. But you will also get significantly reduced economic activity and ultimately lower standards of living."

Barrett, Paul. 2008. "Wall Street Staggers." Business Week (17 September): pp.


Sandwichman said...

"But you will also get significantly reduced economic activity and ultimately lower standards of living."

This quote is admirable in that it illustrates precisely the error that characterizes conventional economics. Standard of living is the CAUSE not the EFFECT of economic activity. Oh, I know that sounds somehow "upside down" to ears that have never heard anything but "a rising tide lifts all boats." The reason it sounds upside down is because everyone is used to hearing it the other way around.

Well, remember Marx's line about turning Hegel on his head? Or the line in Chapter One of Capital: "But, so soon as it steps forth as a commodity... [the table] not only stands with its feet on the ground, but, in relation to all other commodities, it stands on its head, and evolves out of its wooden brain grotesque ideas, far more wonderful than 'table turning' ever was."

This "standing on its head" stuff is serious philosophical business. I've started posting George Gunton's Economic and Social Importance of the Eight-Hour Movement to EconoSpeak. It develops Ira Steward's eight-hour theory and, sure enough, that explicates the correct order of priority between standard of living and economic growth. Production is governed by consumption. Labor income is governed by expenditure. Expenditure is governed by the standard of living, which is a habit acquired as the result of social opportunity.

When one reverses the direction of causation, as Greenspan has, one arrives at the perverse conventional wisdom that debt -- and not social opportunity -- is the cornerstone of prosperity. Hey, you want to know why debt has to come first in the Greenspan universe? Because that makes bankers the heroes in the tale of prosperity. The fable would be a tragic if it was the first time it was told. It has become a farce.

The Big Mook said...

Change the profession, the activity and the unintended consequence in Greenspans interview You get

"The majority of Republican politicians, seek to de-regulate -- that is, to liberate most entrepreneurial activities with little weight given to the lost benefits of regulation,"

Anonymous said...

Paul Volker used to run a Fed on the "strong dollar" principle.

Greenspan has evolved a "Happy Stock Market" principle.

Clearly he has forgotten all moderation. Remember when he said with a fatherly smile that it was his job to "take away the punch bowl just as the party really got started?" He's turned into the guy who goes out on a beer run when it looks like the keg is running low, and comes back with some crack coacaine as well.

Did he pick up the idea that a high "burn rate" was desirable back in dotcom boom?

Look what he said: He equates a high level of "economic activity" with a high standard of living.

I guess once you get over debt = $ and the lower the fractioonal reserve the more $ baloons out of every dollar of indeptedness, it's just too addicitve.

4 years ago Greenspan told everybody to BORROW, so we could have a higher standard of living than we could afford -- so the banks could continue to manufacture money from that debt at a feverish rate. In fact, I think that may have been necessitated by war, as the national debt is compared to GDP -- and DEBT is our main "product!!! So the more debt the US had for war, the more we individuals had to borrow to offset it.

We as a nation went into personal debt to help finance war!

But back to Greenspan's whine:

Banks are basically crack whores for debt, and when we can't borrow any more, they go into withdrawal, sieze up, shake and sweat.

I think they need to detox and remember that idea about the strong dollar.

Anonymous said...

Look, it's pretty clear where Greenspan got this from.

But you will also get significantly reduced economic activity and ultimately lower standards of living.

It is the fundamental assumption of libertarian advocates that every voluntary exchange makes both parties better off. The proof is by contradiction: if it would not make them better off, they would never consent to it.

So it does not require further explanation that prohibiting certain contracts lowers standards of living. It does so definition. A libertarian feels he does not need to explain or prove it beyond this point, because its axiomatic.

Of course, if there is an unnamed third party to the trade which will get hurt by it, well...