Eliot Spitzer, by way of "The Economic Populist

Though long, the following is very thought provoking.

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Econ-Fin News - Dec 5, 2008 – Basic Assumptions and Nationalization

• Economics
• Elliot Spitzer
• finance
• Nationalization
• Oil for Paper
• Steve Fraser
• Stirling Newberry

Back in the middle of September, when the Wall Street model of investment banking collapsed into the dustbin of history Stirling Newberry wrote a series of articles laying out the underlying realities of the financial crises, and re-framing the issue as a Constitutional crisis because of the existence of a reactionary faction in American politics that is as yet unwilling to move from the existing means of storing wealth – the development of land, i.e., suburban sprawl – to a new store of wealth that would allow us to begin building a workable future. The Constitutional crisis arises because the present monetary configuration of the United States rests on the valuation of mortgages, the values of which are supposed to keep increasing as more land is developed:

It is not ironic that the crisis of an order often centers around the control of future value in the old monetary order. Often reactionary forces control (or attempt to control) the means of creation of future value, and use this to prop up old value. This is because there is no wealth that exists by itself; wealth must be maintained, and the cost of maintaining it grows over time. It is at the point where all of the profits of the future are burned supporting wealth stored by the past, where the living work for the dead, that the constitutional order falls, because its money falls. It cannot keep all of its promises yet provide an incentive to work in the future. The rip becomes a pair of coalitions which are often very strange bedfellows. Those who have been most aggressive in pursuing the kinds of value that make up the future are often the most reactionary, because they hope to leverage that control into a permanent command of the economy. Those who hope to disrupt the present order often have a lagging control of the nascent assets, but have more of the potential growth if only previous claims in silver, gold, and revenue streams from mortgages are removed.

The financing of land development, Newberry pointed out, is based on the U.S. trading oil for financial paper. The unwillingness thus far to abandon these economic / financial / monetary arrangements has now lead us to committing $3.125 trillion to a vain attempt to rescuing the banking system, with additional future commitments bringing the total to $8.490 trillion. (See Barry Ritholtz’s Calculating the Total Bailout Costs.)

Despite this massive amount of funding, the financial system remains in crisis, and lending remains frozen. And the effects on the real economy, are becoming truly frightening, with 1,250,000 jobs lost in just the past three months.

This inability of such a stupendously costly bailout to stop the collapse has prompted Elliot Spitzer to urge a reconsideration of basic assumptions. In his first article in his new gig as a columnist for on-line magazine Slate, Spitzer points to the recent purchase by GE Capital of five Chinese-made airliners (I would have thought that news would be causing an uproar here – we’re going to start importing effing airliners now?!) and warns that

The CACC story highlights the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector . . . .

This long-term change frames the question we should be asking ourselves: What are we getting for the trillions of dollars in rescue funds? If we are merely extending a fatally flawed status quo, we should invest those dollars elsewhere. Nobody disputes that radical action was needed to forestall total collapse. But we are creating the significant systemic risk not just of rewarding imprudent behavior by private actors but of preventing, through bailouts and subsidies, the process of creative destruction that capitalism depends on.

A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.

Long before these crises erupted into clear view, people like Newberry have been prodding us to ask these questions. Maybe had we done so, the crises could have been averted, maybe not. No matter, it’s too late now. In his article, Newberry observed

The complete lack of understanding of this historical process by current political parties, is the sign that while we could rearchitect the financial system, we cannot rearchitect the constitutional order. This means, with certainty, that there will be another crisis. The Federal Government has taken over the mortgage system, not to tell creditors that they will have to accept a different kind of money and then architecting a new economy which will generate that new kind of money, but in hopes of collecting the control of the old money. Since there is not enough future economic activity in the current form - that is, there is not enough money on the planet - to pay back all of the debts held (the speculative money having all been used to pyramid claims) this will fail, because it must fail. . . .

The great write down will come, because very shortly someone must pay. The reactionary forces want the write down to come in the form of ending Social Security, and indeed all of the social safety net, and turn the US government in fact and name into an insurance company for their investments. . . .

[The solution] is what is already happening: nationalization. The reality is that the United States is in a situation were it must, as a national unit, optimize its exports and imports. While the market mechanism will be part of this process, the incentives of the market mechanism will have to be determined by politics. The market has been proved over and over again to be unable to price its own meta. This is in fact part of the theory of market economics. . . .

The natural solution is not to stop with nationalizing AIG, but to continue to nationalize not merely the financial sector but the media sector as well. Since the financial crisis has not reached that point, it will not happen yet. But it will one day, and on that day the media sector will be ripe for nationalization as well. This is a dangerous process, but it is also a necessary one. It can be effected by regulation, and in many cases by simply applying regulations which have been long ignored.

Nationalize the entire banking system? And the media? Wow, far out stuff. But that's a first reaction. Talk a walk, go for a run or bike ride, and think about it, and the audacious correctness of it becomes apparent. And what do we find today? Todd Gitlin on TPMCafe pointing to Steve Fraser writing on Tomdispatch:

A real democratic nationalization of the banks -- good value for our money rather than good money to add to their value -- should be part of the policy agenda up for discussion in the Obama era. As things now stand, the public supplies the loans and the investment capital, but the key decisions about how they are to be deployed remain in private hands. A democratic version of nationalizing the financial system would transfer these critical decisions to new institutions created by the Congress and designed to pursue public, not private, objectives. How to subject the flow of credit and investment capital to public control ought to be on the drawing boards if we are to look beyond the old New Deal to a new one.

Or, for instance, if we are to bail out the auto industry, which we should -- millions of jobs, businesses, communities, and what's left of once powerful and proud unions are at stake -- then why not talk about its nationalization, too? Why not create a representative body of workers, consumers, environmentalists, suppliers, and other interested parties to supervise the industry's reorganization and retooling to produce, just as the president-elect says he wants, new green means of transportation -- and not just cars?

So far, the boldest calls for action, from people like Robert Reich and Paul Krugman, have been for a "massive" stimulus program of $700 billion or so a year for two years. But is $1.5 trillion enough to turn around a $15 trillion economy and steer it into the future? I believe just infrastructure needs along amount to over $5 trillion. How much will a national health system cost? Such numbers used to be politically improbable. That was before Wall Street stuck a gun to our heads and demanded $8.490 trillion.

Thanks to Naomi Klein, we now understand how the elites use the shock doctrine to impose unwanted changes on entire populations; clearly, we are living in such a time. But we do not have to let the elites choose our future for us. We have a clear list of needs requiring funding. Thus far, the financial and banking system has refused to meet those funding needs. But a new path is opening before us. The politically improbable is inexorably becoming the politically possible.

So, how best do we seize the moment?