Unforeseen Contingencies

Ludwig von Mises, born 29 September 1881.

Bailout voted down in the House, 29 September 2008.

The blocking of a huge transfer of power to the executive branch, blocking a huge transfer of taxpayer wealth to crooked financiers, and plans of the central bankers come acropper...a great present for Mises and his followers!

We here at Unforeseen Contingencies do not care who wins...we'd just like to hear reason, defense of liberty, and policies that support these.

We didn't get what we wanted. Jim Lehrer did a creditable job, particularly in his repeated pestering of these two about how the bailout will affect their spending plans. Neither candidate seemed to have given this matter any consideration at all. This is such a crucial and obvious issue that I can't imagine either is fit to be President. McCain finally called for a spending freeze, which I'd love to see, but it sounded as though he suddently thought of it...it certainly took a lot of arm twisting on Lehrer's part to get it out of McCain. I wonder if we will hear anything more of it. Obama had no idea what to say. Neither candidate budged an inch on tax cuts, and neither had budget plans that were in touch with reality even before the financial disaster. The federal budget is like a ship with a gaping hole in the hull, and water rushing in. The two would-be captains arguing about how to decorate the ballroom. I found it painful and depressing to hear them repeatedly evade Lehrer.

I guess sometimes one guy sounded better than the other, and sometimes they both sounded bad. Obama seems to be much readier to make attacks in Pakistan than McCain; I'm sure that Pakistanis will be delighted to hear that. McCain seemed to confuse preparations with preconditions in negotiating. Kissinger supports negotiations with Iran, but the McCain-Palin team seems to be having difficulty figuring this out despite repeated encounters with the question.

I could go on, but why bother. Both were shallow, and I didn't learn anything listening to them. It's very unfortunate, because America needs something much better than what it is going to get.

I just read the transcript of the President's speech on the financial crisis.

His account of what happened is this: 1) foreigners sent too much money to the U.S. 2) American entrepreneurs borrowed it and began building homes. 3)People started the buying homes. 4) Entrepreneurs built too many homes. But all of these people foolishly supposed real estate prices could only go up. Wrong expectations, blindness, entrepreneurial error...the free market just didn't work.

But so long as we give his Treasury Secretary $700 billion to spend as he sees fit, they'll fix things for us.

The President's account is a mix of nonsense and lies. The federal government has its fingerprints all over this disaster, and granting extraordinary powers to BBP (Bush/Bernanke/Paulson) would be terrible thing to do. At the very least, there must be genuine checks on Paulson, outsiders able to monitor and block actions he undertakes. I've written my Congressman and Senators asking them to block this plan. If you are one of my few American readers, you should too.

House contact info

Senate contact info

Tell them "Just say no" to extraordinary powers for Paulson.

Here's something I came across a few minutes ago, while looking for something else... somone's humorous April Fools Day 2008 post. I reprint it here without permission, but it is freely available online, after all.

It's just a joke, right?

## ## ##

"Today the GSEs Fannie Mae and Freddie Mac merged with the Federal Reserve Bank, the US Treasury Department, Goldman Sachs, Citigroup and JP Morgan Chase to form Gosbank USA

Capping a year of crisis in the credit markets and global financial system that led to the nationalization of banks in Europe and England, the US today consolidated and merged ownership of the nation’s largest banks under co-chairmen former Federal Reserve Chairman Ben Bernanke and former Treasury Secretary and ex-head of investment banking giant Goldman Sachs Henry Paulson. 'We made lemons out of lemon-aid and turned a terrible crisis for the US economy and the American people into a golden opportunity to expand the power and reach of the State,' said Paulson in a speech made today from the new headquarters of Gosbank USA on Wall Street, the new administrative center for several recently created US government planning authorities, including Gosfin USA, the State Central Financial Regulatory Authority, and Gosrec USA, the State Central Housing Reconstruction Authority.

The new bank gets its name from the Soviet era Gosbank.

One of the first initiatives for the new bank is to restructure loans made to borrowers during the housing bubble to extend the payment periods from 30 to 100 years under a new federal government loan program called 'Debt for Life.'

'We’re reading your email, you work for a company that manufactures weapons or other goods for the government or you will soon enough, and now we’re managing your investments and loaning you the money you need to eat and put a roof over your head. You work in our companies and you live in our houses. It just doesn’t get any better than this,' remarked Paulson.

..........

Gosbank (Gosudarstvenny bank SSSR - the USSR State Bank) was the central bank of the Soviet Union and the only bank whatsoever in the entire Union from the 1930s until the year 1987. Gosbank was one of the three Soviet economic authorities, the other two being 'Gosplan' (the State Planning Committee) and 'Gossnab,' the State Committee for Material Technical Supply.'

The Soviet state used Gosbank primarily as a tool to impose centralized control upon industry in general, using bank balances and transaction histories to monitor the activity of individual concerns and their compliance with Plans and directives. Gosbank did not act as a commercial bank in regard to the profit motive. It acted, theoretically, as an instrument of government policy. Instead of independently and impartially assessing the creditworthiness of the borrower, Gosbank provided loan funds to favored individuals, groups and industries as directed by the central government."

The proposed enabling legislation for saving the financial system is brutally short, simple, Stalinesque.

Section 2b gives authority to the Treasury Secretary "to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation..." (emphasis mine)

Section 8 needs to be quoted in full:

"Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."


So... an unelected official, the Secretary of Treasury, is to be given a line to $700 billion "to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets..." and his decisions "may not be reviewed by any court of law or any administrative agency."

This is the United States of America. Does "rule of law" ring a bell? "Unalienable rights?" "Division of powers?" "Checks and balances?" "Accountability?"

Memo to the Democrats in Congress: are you really about to hand such unchecked power to the Bush administration? PLEASE WAKE UP!<

## ## ##

Note: Barack Obama is endorsing the plan (I guess this is "hope" at work), but John McCain appears still to be undecided. Memo to Senator McCain: Ready to be maverick? Turn Washington upside down? No more business as usual? Country first? OK, now is the time.

That's the United Socialist State Republic of America in Nouriel Roubini's words.

With the AIG nationalization, the United States government has become the world's largest insurer. Now it intends to become the world's largest holder of mortgages, in effect the biggest owner of America's housing stock. The mainstream media is suggesting this will cost $500 - $800 billion. That's probably the lower limit.

There's much that might be said about these disastrous developments, but here are a few points I think most important.

1. The misinvestments have already been made and resulting losses cannot be averted, the milk is already spilled. The only things that can be done are (i) to shift the "costs" (damages) and (ii) to try to avert further damage.

2. The federal move is supposed to address (ii). I think it mostly does (i). The taxpayers become the owners of the downside risks. The argument that Main Street U.S.A. is intimately tied to Wall Street NY is true, but this bailout transfers downside risk and losses directly to people who never meant to take them on, and protects people who did. (Incidentally, taking on risk and failing isn't a crime, nor immoral, although it is being portrayed this way lately.)

3. The distinction between private property and public (government) property is vanishing. We're socializing losses, so why not profits? And since capital markets failed, shouldn't government direct capital flows? Proposals for central planning in various guises are in the works, and this ill-begotten plan will lead the way.

We already have a method for dealing with these problems: it's called bankruptcy. Let firms that fail, fail. This isn't the USSR, let's take our market discipline. If it really is the case that unacceptable harm is done to some, e.g. homeowners, go ahead and spread that damage among the taxpayers. But don't make the feds the owners of the U.S. economy. Congress must block this scheme to shift downside risk onto the taxpayer, and put tremendous power into the hands of the executive branch and Federal Reserve. I know, slim chance, but it has to be done.

This is apalling. OK, we've already established that McCain doesn't know anything about economics. But his advisors must, right? Apparently not.

Senator McCain's initial statement, that the fundamentals are sound, might or might not be true, but it is surely defensible. (I think in some respects it is very true; our technology is extremely good, the capital structure is probably not terribly wrong, etc.)

But challenged, he falls back on this incredibly silly response. It would be easy to simply say "strong fundamentals" means "technological know-how, capital equipment, labor productivity, entrepreneurship, etc., but what is weak is the financial system." This is ridiculous.

Or maybe not... maybe it is a cynical play for the votes of the stupid. I heard Larry Summers asked if the economic fundamentals are weak, and he had to begin with a paean to the nobility of the American worker before he could answer the question.

Oh great, it has become unpatriotic and anti-American to discuss economic fundamentals now.

What's dreadful about this is that Obama's economic plan is full of holes, and could be easily deflated. But McCain's advisors have apparently decided to promote ignorance instead of light. Good lord, this really is Bush II.

Something rather chilling in the Army Times: preparing the Army for permanent missions in the U.S.

I've already been asked why I hold such a drastic view of the economy. And why believe over-the-top "America has gone socialist" Nouriel Roubini? Other analysts, e.g. financial economist Brian Westbury, argue that the crisis will soon be over - Westbury argues that the financial debacle will be limited to a segment of the finance markets, and won't spill over into the non-real estate real economy.

Good questions. I think it's worth asking whether I might not be wrong, because...

First, betting on disaster is usually a losing proposition. We're hard-wired to worry, because panic helps trigger the fight-or-flight response that can keep us alive. But it also makes us prone to false alarms. Second, the U.S. economy is big and resilient, with enormous productive capacity and entrepreneurial "talent." Predictions of imminent economic disaster have been around longer than I have, and are almost always wrong. Third, the mere fact that Roubini's predicted some things correctly doesn't mean he's right about others. Maybe it's simply been random luck, like the Royal Head Flipper.*

These are serious objections, and deserve some thought. After all, what if they are right?

Let's take them on in reverse order. Why do I tend to believe Roubini? It's not simply that "well, he's been right so far." Success in predicting really ought not be taken as an indicator of future success, because only successful predictors will come to our attention; hence we have no way of distinguishing between a Royal Head Flipper and someone with genuine insight. I tend to believe Roubini's analysis because I have followed his arguments for quite some time. His theory, his description of the mechanisms behind financial crises, matches well with what I understand about these. His "model" makes sense to me, and I think is a good description of the way the world works. His predictions are, in part, logical consequences of his theory. But ultimately, it's "my" theory, in that this is an area to which I've devoted a fair amount of study, and in my view Roubini has the story basically correct. Conclusion: my belief is based in the best theory I can find.

But this isn't sufficient. One can believe in malinivestment business cycle theories and still see the current situation as only a blip; this seems to be Westbury's position (he too takes an "Austrian" view of the Fed's role in this). Why do I think the magnitude of the problem is so great, especially in light of the enormous potential of the U.S. economy? Here I frankly cannot judge on my own. How big the problem, and how many markets it affects, is an empirical question, one best answered by someone who studies it as a full time job - thus certainly not me. OTOH, the RGE Monitor assembles and reports a substantial amount of research on this issue, and it suggests that, contrary to Westbury, the problem is very big. Furthermore, lurking in the background is likelihood of exploding federal budget deficits. Hardly anyone seems to pay any attention to this, but every serious study projects unsustainable levels of debt; I don't think there's any controversy here. Conclusion: the magnitude of the financial problems is big enough to entail substantial economic harm.

OK, so much for points two and three. But what about point one, particularly in light of unforeseen contingencies? What things *haven't* I looked at that might mitigate or obviate all this? If they are really unforeseen, "unknown unknowns" (did anyone notice that Paul Krugman mentioned these in the 14 September op-ed I referenced two posts ago?), I won't be able to identify them. But where could my "train wreck" story itself derail? If I have the theory right, and the magnitude, then... unexpected sources of economic growth? I suppose that's one. I can't think of much else. I keep coming back to doubts about the magnitude, but I don't see why such doubts would be reasonable. So on this point, I can only say that I don't think this is mere panic on my part.

So yes, I'm saying "the sky is falling!" And I agree that it seems a strange and doubtful thing to be doing. But it's not a viewpoint I've come to recently, and there's reasoning behind it. I can only hope I'm wildly wrong.

###

* Footnote: What's the Royal Head Flipper? A king decided to find the person in his kingdom who had the greatest skill at flipping a coin and getting "heads." So he assembled all his 32,768 subjects, gave each a fair coin, and they flipped. The 16,384 who flipped "heads" then flipped again, and 8,192 obtained a second "heads." These then flipped a third time... and after 15 flips only two were left. These two flipped, and one got "heads." He was immediately proclaimed the "Royal Head Flipper." Question for reader: on the next flip, what was his chance of obtaining "tails?"

A quick thank you to American taxpayers (and Chinese lenders) who have kept my AIG auto insurance intact.

From AP:

In an interview on ABC's "Good Morning America" program Wednesday, former longtime AIG CEO Maurice "Hank" Greenberg was asked whether critics are being fair who say the situation at AIG and the financial markets generally happened because of greed, bad business practices and corruption.

"No, I think it's an unfair appraisal," said Greenberg, who was replaced as CEO three years ago as part of an accounting probe. "You know, there are many things that contributed to this unfortunate episode. After I left the company, all the risk management procedures that we had in place were obviously dismantled. I can't explain that. There's a new board of directors. One should be asking that board of directors what they did and why."

Greenberg said he has lost "my entire net worth. Literally, my entire net worth.'

"Worked 40 years building the greatest insurance company in history, one that everyone in the world envied who was in this industry. I'll get by, but my heart goes out for the thousands and thousands of employees and their families who shareholders and not only in the united states but worldwide. That is a tragedy," he said.

In the 14 September NYT Paul Krugman writes that he doesn't think the U.S. financial system is about to collapse. He's rather hesitant, so I might as well be bold: he's wrong. The catastrophe I suggested (e.g. my 1 December 2006 post) is upon us. The financial system is collapsing.

Not that I am especially prescient - what's happening is exactly what NYU's Nouriel Roubini has been warning us about for quite some time, the creation and eventual collapse of a house-of-cards credit system in the United States, which in turn is an updated version of the credit-driven "Austrian" business cycle of Ludwig von Mises. Roubini is now arguing (in a 16 September post "The Worst Financial Crisis Since the Great Depression") that it's too late to avert disaster, and that the only light at the end of the tunnel is the coming financial train wreck. He predicts the destruction of the investment banks, insolvency for a number of real banks (and FDIC), freezing up of credit markets, insolvency for American consumers, all resulting in a deep and lengthy recession for the U.S. and Western Europe, with fallout in emerging markets as well. Now that's what we mean by "financial collapse." The post nicely explains his reasoning, most of it hinging on the phony bookkeeping (he calls it "liar accounting") that has permitted, and still permits, investment banks to pretend that toxic waste is a valuable asset.

(I believe you'll have to have an RGE Monitor account to read the post, but if you can get it, read it.)

Roubini also has a very nice presentation - academic, but decidedly non-technical - of the economics and policy of financial crises, and this one is free for the downloading from the World Economic Forum (check out Chapter 1.3). It's here he makes the link between asset bubbles and easy money from a central bank.

I mention all this in the hopes that my few readers will avail themselves of these reading opportunities, because the more people who understand what is happening, the better, particularly since our would-be leaders are hopelessly lost on this one. (Can any of them be more clueless than Sarah "Freddie and Fannie were becoming too great a drain on the taxpayers" Palin?)

So is economic ruin really upon us? I suppose it depends on what is meant by "economic ruin." The world won't end, but the United States are coming against a hard budget constraint, and it's going to hurt. The only immediate way out of the financial mess that anyone can think of involves federal bailouts. But the Federal Government is itself insolvent, so a bailout means, umm, foisting this off on the Chinese? raising taxes? inflating the currency? If we had substantial surpluses, a bailout wouldn't seem threatening, but we don't. To the contrary, given good economic conditions we face exploding entitlement payments that threaten to sink us. And conditions are bad.

A crackup of the financial and economic systems seems inevitable to me. That doesn't mean the end of the world, but it does mean we'll be building new systems. And what we build will depend on our understanding of what went wrong. I'm hoping people will wake up and realize what is happening, and that this isn't simply the natural vagaries of the unregulated free market; it's corruption and criminality, abetted by interventionist government bodies. The solution isn't socialism, it's genuine free markets.

(Roubini often blasts free-market dogmatists, and he doubts that truly free markets will give the incentive to fix the problem. Maybe at some point I'll explain what's wrong with this part of his story.)

For those interested, here's a short article that summarizes the Russian preparations for war in Georgia. Given the war preparations described, it's understandable that the Georgian government tried to pre-empt Putin. And particuarly chilling is Putin's assessment that the time is ripe for Russia to assert power, because the West is on the decline. Worth reading.

"To hell in a handbasket..."

David Post, of the excellent Volokh Conspiracy, swears off writing about Sarah Palin because it distracts us all from discussion of the real issues.

I respectfully disagree. Regardless of what a few bloggers write, there’ll be no discussion of the real issues, because 1) the issues are not on the table for discussion, and if they were 2) most eyes would glaze over - either from lack of understanding or mere boredom - and that would be the end of it. Sarah Palin is at least interesting.

That’s a bit unfortunate, though, because America faces a looming catastrophe, and it’s not going to be addressed until it is too late. Heck, it’s already too late. Take a look at the CBO’s just-released Budget and Economic Update. For this year, the estimated deficit has increased $51 billion over earlier predictions. Even worse, the expected surpluses for 2012-2018 in the January baseline prediction are now gone, turned to deficits, thanks to spending increases. And the long term outlook remains unchanged: exploding debt levels as far as the eye can see. Under one set of fairly reasonable assumptions, in the CBO scenario the federal share of the economy grows to (gulp) 75%. Add in another 20% for state and local budgets, and that means they won’t be taxing the vegetable gardens in our backyards...but everything else will be going to the tax man.

Of course, all of this is unrealistic. The CBO is required by law to use unrealistic assumptions, the baseline...which essentially means spending will hold constant, tax reductions with an expiration date won’t be renewed, economic growth won’t be negatively affected, and the like. And as CBO states upfront, these assumptions are doubtful. Reality will be worse, much worse. The Concord Coalition, using what they call a plausible scenario, finds a total increase in debt between now and 2018 that’s more than three times what CBO estimates. (The graph labels are somewhat misleading, I think. If I understand correctly, the $7.8 trillion is additional debt, not "deficit.")

Of course, all of this is just academic exercise, because we are going to have a new President. And we all know that this means change.

Change, as in... tax cuts that would result in $2.9 trillion less federal revenue between now and 2018 (Obama) or $4.2 trillion (McCain). Look, I’m no fan of taxes, but government borrowing is even worse. So where are the planned spending cuts to more than compensate and get us well into the black? Well they’re here for Obama. (Econbrowser calculates the net effect of Obama’s planned spending, tax increases, and tax cuts, and finds deficits in this lovely little post.) And for McCain, well, who knows? He promises he’ll balance the budget, but so far as I can tell, hasn't even a vague idea how. In his own words he has only $100 billion in annual budget savings planned, and those are going to tax cuts: "The great goal is to get the American economy running at full strength again, creating the opportunities Americans expect and the jobs Americans need. And one very direct way to achieve that is by taking the savings from earmark, program review, and other budget reforms -- on the order of 100 billion dollars annually -- and use those savings to lower the business income tax for every employer that pays it."

The bottom line: nothing either of these gents says about the budget makes a lick of sense. If they do what they promise (I know, an unlikely event), it would worsen, not improve, the current disastrous status quo. (Say, did we remember to add in the costs of Fannie Mae/Freddie Mac?) (No.)

Nouriel Roubini argues, correctly, I’m certain, that financial prudence is essential for a country’s success, and particularly for retaining superpower status. He thinks America is on the decline, to be eclipsed by some up and coming Asians. I concur. And if this proves to be right, it means that the tide favors the non-Western illiberal ideas of the East. Yikes!

So let’s summarize: the key issue facing us - the federal financial catastrophe - is one that almost no one can understand, least of all the press. And no one but an economist can stay awake through a discussion of it. America’s presidential candidates have plans for it, but those are built on lies, and leave us worse off. And the problem is unavoidable at this point. We can make it worse, of course, but there’s no agreeable (read "politically acceptable") solution.

So yes, we might as well debate 'Sarah Palin'...a relatively pleasant way to go, all things considered.

Another guest post by Nathalie Vogel...well worth reading!

The faithful readers of UC will remember that in a previous entry a (friendly) controversy arose regarding the military. It was argued that the military turns out economic ignorants because of "a tradition that is regimented, authoritarian, central planning oriented, and not particularly intellectual." It was furthermore argued that some politicians had had to "overcome such a background" to become good Presidents in the past. As if having served your country in the military was some kind of intellectual or political handicap.

Firstly, I wish to reply to these statements with the following portrait of a French officer, Gen E. de Richoufftz who managed to tackle problems no politician had managed to tackle properly ... My question is simple: why?

Secondly, Gen. E. de Richoufftz does a great job defending the principles of tolerance, freedom and free market economy. My second question is: how many Libertarians are able to do his actual job i.e. pick up a weapon and go defend our freedom?

Read France - General(ret) Emmanuel de Richoufftz, a model for domestic conflict management

Note: the rifle is a French FAMAS, the standard weapon carried by French soldiers such as Gen. de Richoufftz.

I've been noting the hypocrisy of "progressives" and leftists who are incensed about the Palin nomination. So far as I can tell it's apparently that they think identity politics is their own private turf. Many of Hillary's supporters were explicit that they were for her because she's a woman, and it's one of Obama's big draws that he's black. We were told (correctly) it was "historic" that we'd have either a black man or a woman being nominee of "a major party." But What would they do if the first woman to "break the glass ceiling" were a conservative Republican?

Not historic at all, but a disaster...quelle catastrophe!

The wonderful Classically Liberal covered (scroll to the 30 August entry) a nasty rant in NYT against Governor Palin and the Republicans, from a female columnist who was outraged that McCain would pick a woman running mate, and claiming that a female running on the Republican ticket is "a step back" for women. Good grief, how idiotic! But it’s a fine demonstration of the hypocrisy of the "progressives." Since Palin isn't one of them, she doesn't count as a woman, I guess in the same way Colin Powell, Condoleeza Rice, Clarence Thomas, or the great Walter Williams don't count as blacks.

And then, farther to the left...I've looked at some, well, I guess we'd call them "radical feminist" blogs, and learned, as "Code Pink" puts it, "Palin is not a woman's choice." I was thinking of posting some of the comments I’d found, but they are too foul, and there’s nothing funny about the hatred spewing from such kooks.

But just to give an idea, here’s something from a discussion thread on Palin on Code Pink’s site. The Administrator explains why she deleted a critic’s comment:

"Hey Eve,

Just to correct your misguided assumption, in fact CODEPINK was out in full force last week disrupting everything we could at the DNC. Please check your facts next time, before you post, as we’ll simply delete comments in the future that are stupid and wrong. We’ve also deleted your follow-up comment, which accused us of not believing in free speech unless it’s the freedom to kill babies, because not only was it nonsensical, but it violated our comment policy by being stupid."

Interestingly enough, the comment immediately preceding this was not deleted for being stupid, vicious, or anything else:

"Woo-hoo! WAY TO GO, CODE PINK! Show that f***ing breeder bitch and her retard baby that if she doesn’t drop out of this race she’s in for a thumping! Back to Alaska, you small-town loser!" (Note: censored by UC, not Code Pink. I don't want that language on my blog.)

OK, I get it. Palin isn’t "a woman’s choice" (even though millions of women will no doubt vote for her). Circulating crazy stories that her baby son is actually her grandson is just political discourse. Nominating a woman VP is "a step back" for women if she’s not a leftist. And "Youngstown Democrat’s" foul language isn’t hate speech, because it is directed at someone the leftists, umm, hate.

What a spectacle of hypocrisy.

Well, thank heavens there’s the Libertarian Party alternative, with its voice of reason and, and, and... oops.

Ugh.

Not much, apparently.

Rasmussen Reports finds Governor Palin now the most popular of anyone in race.

It's nice to see someone who's not a professional politician making such a stir. I'm not a supporter of either side, but I am starting to enjoy the show.