$700,000,000,000 (And Apparently Counting)

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Decisive demonstrations of leadership amidst a crisis never fail to capture the imagination. Churchill helming a nation under savage aerial attack, declaring the British will never surrender. JFK informing the nation Soviet nuclear missiles are being positioned just minutes from American shores and then calmly, nimbly leading a petrified world back from the nuclear precipice.


Watching the collective elected leadership of the country begging for legislation to grant an appointed Cabinet secretary (with an uncertain tenure) the authority to expend $700 billion to rescue1 reckless bankers and investors from themselves just defies the imagination.2


Running a search for “financial crisis” on Google News serves up 426,730 results in only 2.04 seconds (10/13/08 0045Z). Gargantuan sums of ink and electrons are being put forth reporting and commenting on the crisis; the following simply provides additional observations.


Short-Term Imperatives


Inevitably in crises like these is the solemn declaration that “something must be done.” Unfortunately, the words usually cross the lips of the leaders and representatives the citizenry has elected to do the something that is necessary, even when that something is doing nothing. Principled conservatives stand out as contrarians and ostracized when they stake out this position, but they’re used to this, since they’re also rarely afforded this attention when they made the same argument during the deliberations deciding on the action that probably precipitated the current crisis. Hoping for decisive action and insightful solutions from American political leaders has become a fool’s errand.


When the something that is to be done is finally proposed, the next exhortation is to support it, because it is “better than the alternative.” In this case, the powers that be argued that failing to support the $700 billion package would risk a financial collapse. Left unspoken was exactly how Secretary of the Treasury Henry Paulson arrived at this figure, how the authority would be exercised, when it would be executed, or why it was an optimal course of action. While financial collapse is to be prevented, this uncertainty is not grounds for confidence.


When the bailout package lost its first vote in the House, the corresponding 700 point drop in the Dow seemingly vindicated proponents warning of impending disaster. Chastened by the drop, Congress then passed the package and the president signed it into law four days later on Oct 3rd. Between then and the opening bell on 10/09/08 , the Dow Jones Industrial Average declined an additional 1,802.91 points, or 17.4 percent. Again, financial collapse is clearly unwelcome, but it has not been demonstrated the more expensive proposed cure is better than the malady.


Moreover, if the predictions of decision-makers have been so poor to this point, why should their predictions of a financial collapse being taken seriously as well. While the seizing up of credit markets will induce the failure of many institutions, reckless and judicious alike, this alternative entails a reckoning for those who have forfeited their right to rescue.


Lack of credit and illiquidity is not the problem; the hesitancy to extend credit reflects the dearth of trust within our financial community. Trust will not be restored nor will justice be served if this government saves those who abandoned prudence. Failing to identify this lack of trust whenever decision- and policy-makers discuss this fiasco should remind citizens who the least worthy of trust are.


Long-Term Narratives


When the aforementioned House vote first occurred, the 133 Republican congressman voting in opposition were roundly castigated as narrow-minded obstructionists who abandoned the country in the name of partisanship.


The coinciding turmoil in the market left the House Republicans in a precarious position. Coming after the disastrous rebuke at the polls in 2006 and on the eve of what will be another poor showing on Election Day, initial commentary depicted the Republican vote as self-serving. (A corresponding characterization of the Democratic congressmen voting nay as well has been inexplicably slow in coming.)


But as Eve Fairbanks, congressional correspondent to The New Republic, has pointed out, 82 percent of retiring GOP congressmen voted for the package on the second vote, while zero percent of GOP freshman voted for it. While some would argue the freshmen were merely placating the overwhelming opposition being voiced by their constituents, Fairbanks correctly explains how this contingent of votes heralds the rising new guard in the Republican party – defiantly conservative, ideologically committed, and enthusiastically uncompromising.


Ms. Fairbanks warns this approach may only lead to the new guard’s marginalization in an electoral period trending Democratic and liberal, it is incontestable this kind of integrity will be a force multiplier despite reduced numbers. (Those skeptical should consider the impact wielded by Senator Tom Coburn of Oklahoma, that body’s “Dr. No”.)


After the package was defeated, Senators and Congressmen reverted to craven form – augmenting the bill with inducements (i.e. bribes) to persuade members to switch their votes. Apparently, when an appeal on behalf of the country is insufficiently persuasive, one’s vote can easily be obtained by promising benefits to wooden arrow manufacturers.


Eighty-two House Democrats reversed their votes after the bipartisan leadership delivered enough goodies (all completely tangential to the purposes of restoring liquidity to the market). In marked contrast, 131 of the original 133 Republican no votes stood by their original vote. Here’s a list of these courageous congressman; honorable mention goes to Rep. Paul Ryan, who originally voted against the package and has been a steadfast conservative.


Some observers compared the House Republican vote as the modern-day reprise of the fateful Hawley-Smoot bill in 1929/1930, which raised tariffs to prohibitive levels just when the country needed to embrace freer global trade amidst the Great Depression. With the aforementioned 1,800 point drop after the package’s passage and continuing bleak prospects for the economy, history may judge the House stalwarts the true heroes in this crisis, not the “ideological irritants” Ms. Fairbanks warns them they may become.


Remote Perspectives


The historical perspective will take time to develop. Interestingly enough though, one distinct set of observers can provide it today from a distance.


The Russian people have fresh memories of a seemingly all-powerful government grappling with setbacks on the imperial front and upheavals in the domestic economy. Some Russians may experience schadenfreude at the expense of self-described “indispensable nation,” but many other Russians will also somberly recognize the parallels between the former USSR amidst its decline and the United States in its current crisis, and what the future might hold for the unsuspecting American people.


The United States and the Soviet Union perceived a world from diametrically opposed ideologies, but the nature of a powerful state’s decline and fall is very familiar.


When Americans warily endorse a surge to reinforce a failed occupation in a faraway nation beset by ethnic rivalries, Russians remember lamenting the thousands lost in Afghanistan trying to impose communism on a rancorous tribal nation. When Americans decry the high price of gas and the billions sent offshore, Russians remember when oil prices bottomed out and scarce oreign exchange went to the hated West for basic consumables. When Americans grudgingly accept the government’s massive emergency interventions in the economy as critical to the preservation of the free market, Russians recollect former Soviet leader Mikhail Gorbachev advertising the paradoxical introduction of market mechanisms as essential to ensuring the survival of communism.


More ominously, Russians recall these episodes occurring just before the fall of their mighty nation.


Alexei Bayer, a native Muscovite and a New York-based economist, compared President Bush to former Soviet leader Leonid Brezhnev in a recent Moscow Times op-ed. Bayer has no use for euphemism, stating forthrightly, “Uncle Sam faces the financial crisis bereft of resources and heavily in debt. The congressional debate about the $700 billion bailout package ignored the fact that the country simply doesn't have this money.”


Similarly, Dmitri Orlov, a leading Peak Oil theorist and eyewitness to the Soviet Union’s demise, discusses the similarities at great length in his briskly written Reinventing Collapse: The Soviet Example and American Prospects. Orlov recounts the broad similarities between the two nations. Each nation had global aspirations for its founding ideology, each nation prided itself on the tremendous technological progress each had attained, each nation imprisoned a large proportion of its population(!), and each nation was ready to exercise military force within its own sphere of influence. As Orlov darkly notes:


here are two 2oth century superpowers, who wanted more or less the same things – things like technological progress, economic growth, full employment and world domination – but disagreed about the methods. And they obtained similar results – each had a good run, intimidated the whole planet and kept the other scared. Each eventually went bankrupt.” (PG 2)


The reference to bankruptcy in both cases is key. The Soviet Union was not conquered. The United States is not fighting back invaders. There are simply no resources to sustain the agenda of the current national leadership. As Bayer put it more bluntly, 2008 America is no different than 1990 Russia, citing the “the nexus between an unnecessary war abroad and economic collapse at home.”


In Russia, the economic collapse stemmed from overemphasizing military capital investment. In America, the economic collapse is being driven by the excessive social insurance commitments. Paul Kennedy famously predicted America’s decline on the basis of “imperial overstretch,” just when the critique could have been more appropriately applied to the Soviet Union. Liberals oppose committing four percent of the GDP to national defense, but fail to disclose how the three largest entitlement programs - Social Security, Medicare and Medicaid - alone will increase from 8.4 percent of GDP in 2007 to 25 percent in 2082 (J.T. Young, 10/08/08 Washington Times). In America’s case, decline will arise from altruistic overstretch – establishing entitlements beyond the capacity of the citizenry to pay for them.


Ultimately Inconclusive


In the October 7th presidential debate, the closing question proved to be the best. Via the Internet, a woman emailed “What don't you know and how will you learn it?”


Both candidates alternately failed to capitalize on the opportunity presented. Obama recited another paean to himself, recounting his meteoric rise and how America should hitch itself to his star, while McCain, albeit more humbler, could not similarly confess, as everyone can, there are matters simply beyond one’s grasp.


Outstanding thinkers like Nassim Nicholas Taleb and Robert Schiller warn us repeatedly against attempting to model away risk or discounting the irrationalism inevitably inherent in the rational marketplace. Ignored before the fact, the result is the denial of Black Swans sitting in plain sight and the frenzied dismissal of pessimist warnings about bubbles.


One must remember one can only know so much, one can know the limits of what they don’t know, and finally, one will never know what they don’t know.


In closing, the words of Friedrich August von Hayek from his acceptance speech for the Nobel Prize in Economics are presented:


If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, "dizzy with success", to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will.


The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.


In prefacing his speech, von Hayek stated, “[Economists] have indeed at the moment little cause for pride: as a profession we have made a mess of things.”



If only the current national leadership had the same modesty.



1 Rescue or bailout -- at this scale, the difference just becomes semantic, but amusingly the thesaurus also suggests “escape, abandon,” which could aptly characterize Washington’s conduct, as in escaping responsibility and abandoning the taxpayer. Conversely, the thesaurus also serves up “liberate, release,” ironically cruel, in that the action performs the opposite, adding another $700 billion to the next generation’s debt.


2 And defies technology too. On October 9th, the National Debt Clock in New York City ran out of digits to record the growing figure. As a short-term fix, the digital dollar sign on the billboard-style clock near Times Square has been switched to a figure — the "1" in $10 trillion. It's marking the federal government's current debt at about $10.2 trillion. The Durst Organization says it plans to update the sign next year by adding two digits. That will make it capable of tracking debt up to a quadrillion dollars. (AP, video)


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