2008-12-22 Madoff as Metaphor/Woozle

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This is Woozle's commentary on the article "Madoff as Metaphor" by Lew Rockwell, which is excerpted and linked here.


I *think* I agree with what Rockwell is saying, overall and in many of the details as well. I've read some of his other writing and generally found him credible -- although he seems to be anti-regulatory as well, which does not seem a tenable position overall. Regulating markets cannot solve everything, but failure to regulate them causes even worse problems.

Taking the article bit by bit...


First, Rockwell says "The puzzle is to explain the "cluster of errors" that appears at the beginning of a recession. How could so many have been so wrong about so much at the same time?" -- and I don't see a puzzle at all; as the water level goes down, the evidence tossed into the river often comes to light. Or less metaphorically: as the money dries up, schemes which depend on fast cash-flows will be the first to go.

However, I don't think this hurts his thesis overall, which seems to focus on the idea that our financial system has become dependent on a never-ending series of bubbles. There may well be something to this theory, though I don't at present have enough information to evaluate it.

The main question in my mind is: has it depended on these bubbles, or are there merely forces at work which profit from those bubbles and hence have encouraged them at every opportunity? In other words, if there is a long gap between bubbles, and this causes parts of our economy to collapse (because they depend on a continuous supply of bubbles), are those parts essential, or parts we might perhaps do better without?

"Most everyone believed in some version of the myth. We believed that house prices would go up and up despite the reality that houses are physical things that deteriorate from the instant they are finished, just like cars or computers or anything else." Actually, this always struck me as odd, but I had a theory for it: as population density increases, there will always be more demand for easy access to certain locations (primarily employment centers). It's not the value of the house itself, but the "location, location, location". This theory is borne out by the collapse of housing prices in some areas of the country where industry once was but has moved on.

On the other hand, I think the perceived "value" of these locations has been heavily exaggerated by the too-easy availability of credit -- a game where bankers are kind of like arms dealers who profit from selling to both sides, which only escalates the "conflict" by driving up the clout available to each competing bidder for any given property. We all end up poorer, each new homeowner owing the bank more and more for the same quality of house (and the rest of us paying higher and higher taxes as the "assessed value" of our existing homes goes up and up) -- and all of it is sold to us as "making the American Dream of home ownership available to more and more people".

What's more, businesses in popular areas have to offer higher salaries in order to attract the best people from outside, which drives up the cost of the goods and services they produce... giving the edge to foreign competition which has managed to avoid getting into the whole mess. ...and a thick percentage of the extra money passing through this system ends up in the hands of bankers – whose only apparent contributions are (1) to accelerate the development of land (often tearing down existing structures because easy credit makes this easier than renovation) (2) to inflate real estate prices.

(Not to mention the ongoing redistribution of old family farmland and estates as the combination of higher taxes and ever-increasing bids from developers makes it almost impossible to simply own a piece of land that isn't reeling in the bucks. One might argue that too little turnover of land would also be a bad thing, but I think what we have now is far worse.)

I suspect that this is something we would do much better without, and I suspect that some regulation in this area would be helpful.

I always figured the collapse of housing prices would come when the population started to level out (it's supposed to do this globally in approximately 2050, but it could come earlier or later for the US depending on how immigration patterns change) but I can't say I'm surprised to see other effects causing it sooner.

On the other hand, once the economy picks up again, there's absolutely nothing to stop the prices from heading back up again as long as the monetary demand is there -- which, if we assume that increased poverty is not an acceptable solution, essentially means "as long as (employed) population levels continue to rise".


Next: "And we believed that we could all become millionaires by putting our money in the stocks of companies that weren't actually earning money or paying dividends, companies whose wealth was entirely based on infusions of cash from the stock market which in turn were based on the belief that others would buy the stocks and so on."

Who is this "we" you speak of, kimo sabe? Not that I ever had much opportunity to play the market, but my understanding of it was always that if you see someone making something out of nothing, it's probably a scam of some sort. Knowing how to tell the difference between long-term viable businesses and get-rich-quick schemes has always been part of the art of investment.

Apparently a few people with a lot of money forgot this. Maybe there should be rules for playing with more than a certain amount of money, even if it's technically your own -- because if you go under, a lot of other people may suffer too.


"In fact, people routinely attacked official savings data on grounds that they did not include what people were "saving" in terms of their stock market accounts." I do think these figures should be included in any kind of national assessment of what people are doing with their money, but I agree with Rockwell that they should be kept separate from bank-savings because they are a measure of vulnerability to market conditions, while bank-savings are a measure of reserve capacity and resilience.


"The left is big on attacking the salaries of investment bankers, and they were indeed outlandish. But these too represented not a unique problem, but more evidence of inflationary finance. In a bubble economy, the money chases what is most fashionable, and financial services qualified. So the salaries were market."

If the salaries are market, then how do you explain the huge bonuses granted to failing (and failed!) investment firms? Brin's theory is that the outlandish salaries are due to cabals of executives collaborating to line their own pockets at the expense of their investors.

I think those salaries need to be looked at.


"Did anyone stop and wonder where the government was getting all this money to pump up the system? Yes, the Austrian economists warned us. The pages of Mises.org and LewRockwell.com were filled with alarms." It would be nice if he would explain exactly where the Mises/Austrian people thought the money was coming from, since there are no links... but I'm guessing he's talking about the government (well... the Fed) printing more money.

Assuming that's the case, then I should think it was obvious that printing money is essentially stealing a little bit from everybody who has some by reducing the value of what they have, otherwise known as inflation. It's arguable that a little of this may be good for the economy (although I'm currently very skeptical of the supposed evils of deflation; technology prices generally deflate steeply, but you don't exactly see chronic economic stagnation in the tech sector), but too much is obviously harmful.


"But listen: the government right now is using the same tactic to convince you that it is saving you from the recession." Tell me about it. I wrote to David Price counseling against any short-term bailouts, and I started writing an editorial condemning the $650b bailout, but Firefox crashed and lost what I had written (web-site based editor).

It seemed to me that bailing out Wall Street would have two negative effects:

  1. It would basically be giving yet more of our economy over to foreign lenders, making us more and more beholden to non-republican (I use the word in its original sense) interests, thereby undermining our freedom. In small amounts, this is okay -- but $650 billion?
  2. It would be rewarding failed enterprises for their political clout rather than their performance in the marketplace (or their value to our economy), resulting in a less healthy economy.

Overall, I felt it was better to take our lumps in exchange for what would eventually be a healthier and freer economy -- or, at most, engage in much smaller and more selective bailouts (e.g. of homeowners defaulting due to job loss -- or even larger issues like the auto industry, whose recent bailout is tiny by comparison).

"Remember," I wrote, "there's no real infrastructure being destroyed here. It's all paper." Why not save any bailout efforts for parts of the economy which are actually improving people's lives in some way by providing goods or services? Investment firms are supposed to be in the business of allocating money more efficiently. If they go broke, they've obviously failed somehow; turn them over to their debtors, and if their debtors think there's lemonade to be made, let them make it... otherwise we end up with a lot of really expensive lemons sitting in the fridge.

Which is all to say this: I agree with what he's saying here, but it's nothing unexpected -- and he's presenting it as a unique insight by himself and the Austrian School. Perhaps all this means is that they were right when a lot of foolish investors were wrong, but I'd be leery of any additional messages they might try to slip in: "See, we were right about this! So we must also be right when we tell you ____!"

Some candidates for that tag-along message:

  • "Social Security is a Ponzi scheme." Although it does superficially sound like one -- new participants fund the payoffs for previous participants -- as I understand it, it is not. A Ponzi relies on ever-increasing investment and is therefore not sustainable indefinitely, while SS pays off no more than what's put into it (perhaps including interest; I'm not sure of the details). Calling it a Ponzi scheme is rather dishonest.
  • But then comes the tangle of the last few paragraphs:
    • "The entire financial system that is propped up by the Treasury and the Fed is based on the same idea: that something out of nothing is possible." Yeah, that sounds pretty fallacious... so the Treasury and the Fed are the ones who set us up for this? On what grounds?
    • "...meanwhile, the likes of Bush, Bernanke, Paulson, Obama, and all the rest are still riding high, even though their scheme is far larger and more egregious." Ok, so Bush and Obama are both in bed with this set-up? Again, where's the evidence?
    • "are you being tricked by the elites who claim that they can conjure up a trillion dollars to stabilize our economy by clicking a few buttons on a computer screen?" Those darn evil computer screens, maybe we should just get back to using abacuses...
    • "Many more people are today being outwitted by the government and its central bank. And it will all end in disgrace and disaster, only on a far, far grander scale." Again, the government and its supposed tool, the Fed.

So the second part of Message X would seem to be: Don't trust the government, and don't trust the Fed because it's just a tool of the government.

And with the implication that it doesn't matter which party is in charge -- Bush or Obama -- the basic message would seem to be: government is always evil.

I don't think that's a defensible position, except possibly for very narrow definitions of "government". Rockwell should make it much clearer what he means; instead, he seems to be trying to work primarily below the radar of consciousness here -- which makes me very suspicious indeed.

Almost as a side-note, I've certainly heard some interesting negative theories about the Fed, but they all seem to view the government as the tool of the Fed, not the other way 'round. All the theories which view the Fed as run by the federal government (which includes the official one, of course) seem to view it as a necessity for countering monetary instability -- though I'm not convinced, myself. But again, that's a separate topic.

--Woozle 00:38, 23 December 2008 (UTC)