Modern Monetary Theory (MMT): What's the Grift?

Since we all need to know about the left's latest wizard wheeze, Modern Monetary Theory (MMT), it's time to make sure we understand it and put it in the context of government finance in general and how government finance developed in history.

I understand the historical progress of government finance as follows:

Stage One: Physical Collection. This occurred in the days before Italian banks. Governments collected tribute in grain and silver from their feudal vassals, and the vassals collected the same from their underlings. But the king was always short of money. Always. Of course, if the king were conquering another country then he and his soldiers would loot and plunder the country to the bare walls. The Roman Empire ruled the world for centuries on this plan.

Stage Two: Italian Bankers. By the time of England's Edward III (reigned 1327-1377) a European monarch could borrow money for his military adventures from the leading bankers in the world: Italian bankers. Pity that Edward defaulted on his loans, and all. Maybe that's why the Brits lost the Hundred Years War and have had a soft spot for the Italians ever since.

Stage Three: Dutch Finance. In their war of independence from Spain the Dutch invented the central bank, the Exchange Bank of Amsterdam, to finance the war. It worked so well that they exported their idea and their regime to Britain and the British used the idea to win the Second Hundred Years War against the French at the Battle of Waterloo in 1815. The beauty of Dutch Finance is that enables the rulers to loot and plunder using the indirect method, partly through seigniorage and partly by the advantage of having its debt as the foundation of the banking system. In the 20th century the various nations used central banking and unlimited debt to fight two world wars. They could do this because they could use money printing and debt to loot their countries to the bare walls without the people rebelling.

Stage Three and a Half: Hamilton Economics. Alexander Hamilton, first US Secretary of the Treasury, ignited an economic boom when he determined to honor the war debt of the various states in the Union at par, and service the debt with new federal taxes.

Stage Three and Three Quarters: Bagehot Economics. After the Crash of 1873 Walter Bagehot in Lombard Street proposed that in the case of a credit collapse the government's central bank should act as "lender of last resort" to keep the financial system alive.

Stage Four: Keynesian Economics. After the cock-up of the Great Depression western political leaders needed a real simple strategy (like in The Manchurian Candidate) to know what to do when the economy was wrecked by a financial crash. The strategy was spend and borrow and elect, preferably with a genius like Lord Keynes in charge.

Stage Five: Bretton-Wood Economics. A big problem in the aftermath of wars conducted under Dutch Finance was "resumption," the attempt to return the value of a national currency to its pre-war value after the monetary inflation of war. After the Napoleonic Wars, the US Civil War, and World War I this resulted in "deflation" and social unrest, and usually a big credit crisis. So, after World War II the US did not resume gold payments at the pre-war level while pretending the value of the dollar was still $35 per ounce. The pretense of $35 per ounce was abandoned in 1971 by President Nixon at Camp David.

Stage Six: Supply-side Economics. After the cock-up of the inflationary 1970s politicians needed a real simple strategy to know what to do when Keynesian Economics wasn't working. The idea was to think about what government taxing and regulation was doing to actors in the economy. Maybe high marginal taxes on the rich wasn't a good idea. Notice the cunning in this strategy. It doesn't attempt to deal with the real problem, the loot and plunder of entitlement programs, but attempts some fine-tuning of the loot collection game in order to restore the economy after the stupidity of a Keynesian episode.

Stage Seven: Modern Monetary Theory (MMT). After the cock-up of the 2006-08 Great Recession -- caused by under-collateralized and non-performing home loans and a sub-standard recovery -- politicians that hated Supply-side Economics needed a real simple strategy to know what to do when Keynesian Economics wasn't working. La Wik says that MMT 

describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.

So, print money until the economy begs for mercy. MMT also says that the government should run "a budget deficit large enough to achieve full employment through a job guarantee." using "non-accelerating inflation buffer employment ratio (NAIBER)" rather than "non-accelerating inflation rate of unemployment (NAIRU)," which I take to be the conventional Keynesian option.  In other words, politicians should do what comes naturally without limit.

Stage Eight: Schachtian Economics. Hjalmar Schacht was the guy that ended the hyperinflation in Germany after World War I. He simply stopped printing unlimited paper money.

Here's what I think.

I think that going back to the dawn of time, governments are always cocking-up the economy with their wars or their loot-and-plunder economic policies. And it's worse than it used to be. Back in Stage One it was really hard for the king to loot the place to pay for his wars. Stage Three: Dutch Finance made war-making much easier, but didn't have a real simple theory for dealing with the financial crashes that occurred from time to time, especially after wars when the government attempted to return to the gold standard at the pre-war parity.

Also, I think that as governments have fine-tuned and learned more and more how to use money printing and debt to loot the country that they have had to let the financial system in on the action. So now we have highly leveraged private-equity funds that the government permits, probably because the finance sector is willing to pay powerful people for the privilege of doing highly-leveraged finance.

My guess is that almost all government spending amounts to loot and plunder and is a net loss to the prosperity and the well-being of the people. So, with government spending at 40 percent of GDP in the US and 50 percent of GDP in the UK you can see that there is a lot of looting and plundering going on, and it subtracts from the possible prosperity that might obtain if the government weren't collecting so much of peoples' incomes and handing it out to its supporters.

And, I would say, as government collects and spends more and more money, it needs new theories to justify its looting and plundering and to get it out of a jam when its cock-ups wreck the economy.

The interesting thing to me is that even lickle AOC knows all about MMT. Like in The Manchurian Candidate, your average politician needs it to be "real simple."

But we wouldn't need all these dodges and cunning tricks to pay for wars and entitlements if government would only keep out of wars and away from loot-and-plunder entitlements.

In another world.

GameStop and Bailouts

The ruling class is shocked, shocked, that gambling is going on at Robinhood, the stockmarket app that helped rocket failing retailer GameStop into the stratosphere and apparently ruined hedge fund Melvin Capital that had shorted GameStop.

Of course, for us deplorables this is all great fun, and "far-right" writer Vox Day, wants to go all the way and suggests

One thing is clear from all of this. The America public is not going to support another bank bailout once the next financial crisis begins. They'd rather see Wall Street burn, and rightly so.

Er, no. The trouble is that when Wall Street burns, we the people get nuked. Big time. As in the Great Depression, when the Fed failed to bail out the banks. As in the Great Recession of 2008-09, when Little Ben Bernanke failed to bail out Lehman Brothers.

Yes, I'd like to see the malefactors of great wealth taught a lesson they will never forget. But I don't want to be caught in the blast zone.

And as far as I can determine, it is just not possible to design the credit system so there is no chance of a meltdown.

Most credit, as far as I can see, is the anticipation of income in normal trade. Thus, a merchant borrows money against the sale of his merchandise at a future date. The question is: how much borrowing is safe? One hundred percent of the anticipated sale price? Fifty percent?

The problem is that, 99 times out of 100, borrowing 100% of the anticipated sales price is perfectly safe. Until the day that your ship gets wrecked, or the market price of the merchandise takes a tumble before you sell it.

Then, if the merchant doesn't have other resources, he is bankrupt and his creditors may go bankrupt and their creditors go bankrupt, and so on.

It is all explained in Walter Bagehot's Lombard Street. Everything is copacetic in the credit system so long as borrowers make their payments and that loans can be liquidated by selling the collateral. But if the borrower can't pay, or the sale of the collateral isn't enough to liquefy the defaulting loan, then you got trouble right here in River City.

Bagehot's Big Idea in Lombard Street is that the central bank should be the "lender of last resort." So when a financial institution goes broke the central bank steps in and buys it. Thus the illiquid debt of the defaulting institution is diluted in the capital of the central bank. But Bagehot recognizes a further risk. What if the central bank can't absorb the defaulting debt of the defaulter? Well, the answer is that the central bank is backed up by the state, and its ability to issue debt.

But what if the state doesn't have the capital or the "confidence" of the market? Like, say Venezuela? 

Exactly. That is why it is best to make sure that the credit system does not allow hedge funds and other reckless investors to put the whole system at risk. That is why an ordinary stock investor is only allowed to borrow 50 percent of a stock's value "on margin." That is why, back in the day, before the gubmint got into the act with Fannie Mae, Americans could only borrow 50 percent of the value of a home.

Yes but what if the Wall Street smarties have come up with another way of "laundering" low-quality debt like they did back in the 2000s with their derivatives and credit default swaps. It looked like a good idea until it wasn't.

That is probably the Big Problem. Wall Street smarties are always thinking up new ways of sailing too close to the wind. And usually, their folly is only discovered after it is too late, and the system is already in meltdown. This is what happened with default swaps and derivatives in the 2008 meltdown. It turned out that the financial legerdemain did not in fact make all those high-risk mortgage bonds into low-risk bonds. Oh dear.

That is why we are always going to need that "lender of last resort."

Here's the thing though, as you can see from my report on the 2008 bailouts. The biggest item was not the bailouts, of monies lent to weakened banks and financial mastodons. The biggest item was $16.9 trillion in guarantees for money market mutual funds.

Yeah. And the cool thing about the guarantees was that the Federal government didn't have to shell out a penny in debt or outlays. All that was needed to keep the money market mutual fund business going was the guarantee that the Feds would keep it lubricated. How cool is that?

Very cool, until our ruling class figures out how to take advantage of it.

Whatabout the Next Crash?

Now that we are First and Ten with the Biden administration and we learn that President Biden is at 50 percent mental capacity, let's talk about the real question.

What happens at the end of the current deficits and money printing?

There's a piece at American Spectator about this. Donald Devine quotes a bunch of experts that say there is nothing to worry about. Not yet. Then he makes his prediction:

My prediction is that Biden’s control of executive and legislative branches will produce a short economic boom in 2021, followed by a big bust in 2022 that takes down the whole progressive edifice with it.

One of the problems he sees is the modern "repo" market.

“In repo, broker-dealers, hedge funds and banks construct short-term transactions. You put up collateral — Treasury bills or sometimes less-pristine instruments — with an agreement to buy them back the next day or week for slightly more, and invest the proceeds in the interim.”

The question is: what happens when things turn South?

But eventually, iffy collateral sneaks into the system. That’s also fine, until markets hit an inevitable rough patch, like, say, March 2020. No one will take the junky stuff anymore, and everyone scrambles for good collateral. So there’s a mad dash, a brawl really, to buy Treasuries — like musical chairs with six to eight buyers eagerly eyeing one chair.

If this sounds too complicated, let me give you Walter Bagehot and his 1873 book Lombard Street: A Description of the Money Market. 

As I understand Bagehot -- he was the founding editor of the London Economist -- the credit system needs the following to work:

All loans must be properly collateralized so that the borrowed money can be recovered if the borrower defaults.

All borrowers must be able to service their loans.

If either of these things breaks down, then you got trouble, right here in River City. If both things break down you got nuclear Armageddon.

For instance, in the runup to the Crash of 2008 we had the US government encouraging low down-payment mortgage loans. See the problem? If there is a downturn in home prices then some of those low-down payment loans can't be liquidated if the borrower defaults.

Then, in addition, the US government was encouraging, even mandating, that lenders lend to borrowers -- such as minority borrowers -- with low credit ratings, i.e., borrowers with a higher than normal risk of not making the payments.

So when the Fed tightened up on credit in 2006 many borrowers with adjustable-rate loans couldn't make their payments and because their homes came on the market the price of homes went down and banks could not recover the principal when liquidating defaulted loans.

And so you get a credit crisis where traders in the system don't want to trade in securities with "iffy collateral."

Then you get a credit meltdown which, according to Bagehot, can only be stopped by a central bank, a "lender of last resort" buying up distressed loans. It can do this because the assumption is that the central bank has, as capital, the whole wealth of the nation to back it up. You can see how the central bank acting as "lender of last resort" solves the crisis. It buys up dodgy debt, and pays for it with newly printed money that people trust more than the dodgy debt. So the panic subsides.

Usually, however, the guy in charge of the central bank, being a mere ruling-class courtier, partially flubs the "lender of last resort" bit. So, in the Great Depression of 1929-33 the Federal Reserve did not bail out the Bank of United States when it failed in 1931, probably because it was a Jewish bank. In the Crash of 2008, Little Ben Bernanke decided in September that he did not have the authority to bail out Lehman Brothers. 

The incompetence of the courtiers means that the credit crisis goes on longer and is deeper than necessary and ordinary people get wiped out.

The question you may ask is whether in the next credit crisis the market will believe that the central bank can in fact act as lender of last resort, or whether the problem is so big that it is beyond the ability of the Fed or the IMF to turn bad debt into good debt.

Here's an interesting factoid. In the 2008 crash the US government had an actual $700 billion TARP bailout program to bail out the banks where is borrowed and spent actual money. But it "guaranteed" about $16 trillion in money market mutual funds.

I wonder if the whole bailout could have been done with a "guarantee." It would have been a whole lot cheaper.

But there is something else to worry about. It is "MMT," or Modern Monetary Theory. It is Keynesianism on steroids and supported by lefties like Bernie Sanders and AOC and says that pedal-to-the-metal with debt and spending is OK for government. At least for now.

The real question is: what do you do when the balloon goes up? Gold? Bitcoin? And whatabout any asset that is held in a financial institution that you access over the Internet? How hard would it be in a great crisis for the government to seize 23.2 percent of all assets at Fidelity and Vanguard? When everything is just a record in a database.

When Government Screws Up: Skid Row Syndrome

When the economy goes south, the result is very often a Skid Row, that Seattle claims for its Yesler Way that was once a hill down which loggers skidded logs down to waiting ships.

But now Skid Row refers to a district where unattached men spend useless lives eking out an existence in cheap flophouses and drink. Only now it's homeless shelters and drugs.

Skid Rows were notable in the Fifties, as the haunts of men thrown out of society by the Great Depression. Then in the 1980s Democrats made a big thing about the "homeless" resulting from Reaganomics -- but probably the economic disruptions of the 1970s when the Good Union Jobs of the Fifties got hammered by the rise of Japan Inc. and inflation changed the terms of trade for millions.

Obviously the Great Recession of 2006-08 resulted in another surge of homeless and people were thrown out of work by the unwinding of the real-estate bubble financed by liar loans and Fannie/Freddie.

And now the forced lockdowns of the COVID era are tumbling another generation of the marginal onto the streets.

Mostly, of course, these people that have fallen out of society are men. That is because, I assume, women are coded to find shelter: somewhere, somehow, they have someone that will give them a roof over their heads. Whereas men... yes what is it about men that they spiral out of the social structure and end up on the street, or living in a Hooverville, or Skid Row, or a homeless encampment around Seattle's Green Lake?

In part, these recurrent crises are the result of the constant economic revolution of the capitalist era: the textile revolution, the steam revolution, the steel revolution, the electric revolution, the auto revolution, the computer revolution, the internet revolution. All these revolutions tended to transform the labor market for men, and it seems that some men aren't very good at picking up new skills and reinventing their working lives.

But a lot of the problem has been government. Let's leave aside the economic impact of wars, which goes without saying. But we can say this:

• The Great Depression of the 1870s was the result of government deflation getting the dollar back to its pre-civil war parity. A lot of unions got started in the 1870s; I'm not sure how much good they did.
• The Great Depression of the 1930s was the result of government deflation after WWI leading eventually to a big stock-market bubble and government failure to act as lender of last resort in the subsequent credit crisis.
• The 1980s homeless crisis was probably a result of the Reagan administration fighting the 1970s inflation. You can call this Reagan cruelty or 1970s inflationary stupidity. Take your pick.
• The Great Recession of 2006-08 was the result of the government encouraging home loans to people that weren't creditworthy and whose loans weren't properly collateralized. All intended to help minority homeowners who were then hardest hit in the subsequent housing crash. And then Ben Bernanke, Chairman of the Federal Reserve Board, failed to act as lender of last resort in the Lehman Brothers bankruptcy. Oh Ben!
• The homeless crisis of 2020 was caused by government lockdowns to prevent the spread of the COVID-10 virus that particularly impacted low-skilled workers that couldn't "work at home."

Let's admit that, from time to time, we moderns are going to experience economic dislocations in which marginal men will be hardest hit.

What is our 5-point plan for dealing with this recurrent problem?

Because right now, dealing with the problem of dysfunctional men is the last thing on the political agenda of our noble educated Gentry. To President Obama they were "bitter clingers." To Hillary Clinton they were "deplorables." To the wokerati they are "white supremacists."

See, I think that we've got our priorities completely backwards. I think that nine times out of ten women are pretty good at accessing the help that societies deal out. But men are too proud or too stupid to ask for help. They would rather molder away in drink and drugs than admit they have a problem.

And that has clearly been going on for hundreds of years, from the vagabonds and beggars of England in 1500 to the "waste population" that the Brits wanted to ship off to North America in 1600 and Australia in 1800, to the Captain Swing rioters in England right after the Napoleonic Wars, to the workhouse surplus population of the Dickens era, to the "shell-shock" victims of World War I and the "combat fatigue" of World War II and the PTSD of our current era.

Got any brilliant ideas? I certainly don't.

Liberalism Properly Understood

I saw a reference to Why Liberalism Failed by Patrick J. Deneen, and bought the book. And I am glad I did. Not that I agree with Deneen, who accuses liberalism, both in its economic-libertarian and progressive-social versions of being an “anticulture” that destroys the culture of virtue and sense of place of the great cultural tradition from the Greeks to the start of the Enlightenment. Says he:

Liberal anticulture rests on three pillars: first, the wholesale conquest of nature, which consequently makes nature into an independent object requiring salvation by the notional elimination of humanity; second, a new experience of time as a pastless present in which the future is a foreign land; and third, an order that makes place fungible and bereft of definitional meaning.

Actually, I don’t agree. First, humans have always been in the business of conquering nature. More and more, we learn how even our furthest ancestor mucked about with the Earth. For instance, we have just experienced a moral panic about monster bush fires in Australia, supposedly proof of runaway climate change. Only, skeptics point out, aboriginal tribes have done controlled burning since time out of mind. And all animal breeding and horticulture is a flat out conquest of nature: what are domestic animals but our conquered slaves?

And as for time: certainly it is true that we now think of time as linear, and we used to think of it as cyclical. But we also have cyclical theories of dynasties, such as the progressive dynasty that seems to be showing its age right now and doesn't seem to have the chops to see off the populist rebellion.

Deneen also makes a lot about the sense of place, about humans being rooted in a single place, anchored to land and community. Except that people anchored to place were usually not virtuous souls giving back to the place what they took out of it, but serfs, that thrived so long as weather and the political ambitions of their lord allowed it. And humans are notoriously a nomadic species that wanders the Earth in search of it knows not what.

Like many cultural conservatives Deneen’s ideal is a culture of virtue.

The Greeks especially regarded self-government as a continuity from the individual to the polity with the realization of either only possible if the virtues of temperance, wisdom, moderation, and justice were to be mutually sustained and fostered. Self-governance in the city was possible only if the virtue of self-governance governed the souls of the citizens; and self-governance of individuals could be realized only in a city that citizenship itself was a kind of ongoing habituation in virtue, through both law and custom.

The only thing, of course, is that all this good thinking was a kind of pious hope. The reality of Greek life was Peloponnesian wars. Followed by the rise of Alexander who conquered most of the known world. Not much virtue there, or a wise recognition of the sense of place and the obligations of community. Just flat out pursuit of power.

In other words, the ancient world through the Middle Ages may have had an ideal of virtue and looking after the Earth and cherishing community and the sense of place. But the Spartans were throwing kids off cliffs if they didn’t look like they were going to measure up to the Spartan ideal of masculinity. The Romans legions were conquering near and far and sending the booty and slaves back to Rome for a jolly old triumph. The feudal age was big on inter-lordly conflict with this lord teaching that lord a lesson. They recruited their armies with promise of loot and plunder.

Now I don’t know if you think of that sort of behavior as nurturing nature or conquering it. And as for a sense of place, well, you’d better have your armed knights and archers ready to defend it.

Let’s interpret that world in this way, as a Two Peoples world. There were the virtuous that had studied the classics or the Bible under worthy teachers and had succeeding in the endeavor of paideia, the education in virtue. But everyday life was superordinate and subordinate, with lords ruling it over their subordinates that looked to them from protection.

What Deneen doesn’t like is the advent of the age of creativity.

If you think of economic liberalism, it is saying that we can do a lot better. We can learn how nature works and put it to work for us. Conquest of nature, no question. Or as Horkheimer and Adorno put it in their Dialectic of Enlightenment: What men want to learn from nature is how to use it in order wholly to dominate it and other men. But you know what? We also got the Great Enrichment with an increase in income of 30 times in 200 years. In Africa people are using cellphones for money transfers. How crazy is that? And is it despoiling the Earth? Yes, probably. Only, as the London Economist wrote about 20 years ago, once a country gets to about $10,000 per capita income per year it starts to care about cleaning up the environment. And worry, as we have taught teenagers to worry, about our resource use destroying the planet’s climate. Whatabout the crash of 2008 and unsustainable debt? Well, people that take out debt are anticipating future income; debt is particularly useful in trade where the final sale may be months after production. But there's a problem when the political sector uses mortgage debt to buy votes, for if people can service their debt and/or the collateral on a debt can't be liquidated -- as was direct policy due to the Community Reinvestment Act, then you got trouble, right here in River City.

If you think of progressive liberalism, it is saying that we can do a lot better. We can free people from age-old hierarchy and subordination. We can create our own hierarchy and justice out of the incrustation of centuries. Is there a downside? Certainly. We can screw up and we have screwed up big time. And as plenty of critics have pointed out, the new world seems to be really good for educated elitists but not so good for lesser folk.

See I don’t believe that things were nobler and more virtuous and wise in the old days. People may have had a dream of virtue, but there wasn’t much around. Let us say that the Enlightenment with Francis Bacon (1561-1626) and all started the rot. But what about Henry VIII who disarmed the nobles in his reign of 1509 to 1547? His nobles forthwith threw out a good bunch of their peasants because they were no use as potential soldiers. I don’t think that had anything to do with virtue and lordly noblesse oblige. It was a simple power play: Henry VIII on his nobles to keep them from causing trouble. And nobles looking out for Number One and deciding that they didn't need no stinkin' peasants any more if they weren't going to be used in their private armies.

Now, I agree that the problem with getting all creative, economically and socially, is that you certainly throw out a lot of babies with the bath water. Untrammeled creativity is indeed what Nietzsche described, free spirits going all out for a bit of Wille der Macht before breakfast.

The interesting thing to me is that after Nietzsche described and celebrated pedal-to-the-metal creativity, the dialectical opposition of creation and destruction, the folks that came after him dug up the old wisdom about creativity, that it must be implemented through the agency of the Sacrifical Hero who has been on his Hero’s Journey into his personal unconsciousness and its demons and come back sadder and wiser, ready to explore on the border between chaos and order. And give his life so that others may live.

But however high we may reach into the creative empyrean we are still humans, and many of us merely want to hang on to some powerful lord for his protection -- not to mention a bit of free stuff. A good proportion of middling folks aspire to responsibility and virtue, learning how to live a good life. But what happens if the world changes, but conquest or by invention? What do the sensible Hobbits of the world do then? The truth is that life is full of challenge and tragedy and learning the virtues is not enough. You also have to suck it in in the hard times and perhaps up sticks and leave your beloved home and journey to a new land.

There is no doubt that modern liberalism in all its facets is a hot mess. And there is no doubt that the economic titans with their constant chop and change cause ordinary people much heart ache. And the progressive wokerati and their secular religions have caused untold misery, and it some cases a return to slavery. The whole thing could yet end in utter failure and disaster just as the climate change enthusiasts insist.

Or we may muddle through.

What I say is that we, the educated, the wise, the evolved, the people that have had an education in paideia and the virtues, need to understand that our own agenda is not all there is. The world is not here just for creative geniuses and creative knuckleheads. Creative people are destroyers as well as creators. Nor is it just for people what want to hold on to the culture and the accumulated virtues built up over the past. You can’t hold onto the past: it can disappear in the twinkling of an eye. And if you just want to hang on in the retinue of some powerful lord or onto your well-paying union job and its guaranteed pension and shelter from the icy blast, be warned that the day will come when you are no longer of use to the lord's power project. You do have a backup plan ready? Right?

Liberalism is a hot mess. So is every creative project. The only problem with creativity is for the creative folks to insist, as they do all the time, that creativity is the only thing, and beat up the ordinary mortals that just want to wive and thrive and get kids on the ground.

But hey, nobody needs to figure that one out. The Trumps and the Brexits and the Borises are teaching the creative geniuses a lesson and all we have to do is sit back and watch.

These creative guys, liberals of the market and liberal of the wokerati are so brilliant that they didn't see it coming.

Imagine that!

The Question of Whether The Deep State is Clever or Stupid

There is a natural instinct in all of us, I propose, that assumes that people in authority know what they are doing. More or less.

Thus, we tend to think that House Speaker Nancy Pelosi must have a card up her sleeve when she omits to send the impeachment of President Trump over to the Senate. But suppose she doesn't? Suppose she is just playing the next card in her hand because she doesn't know what else to do? Maybe she knows that a) to send the impeachment to the Senate as is would end up as a disaster for Democrats, so that b) playing manipulative games at least puts off the inevitable.

My 70-year-old yoga teacher usually manages to blurt out some New York Times conventional wisdom about Trump at the beginning of the class. This week it was that Trump would easily win in 2020 on the economy: if only he wasn't so crazy.

Earth to liberal bubble: it was Trump's attack on the liberal Gentry that made him president! Millions of Commoners that had given up suddenly discovered a politician that seemed to "care about people like them." Whoa! Who'da thunk it?

Or the Deep State intelligence community chappies that let themselves be suckered into spying on a presidential campaign. Are we to think they are cunning Svengalis? Or just easily duped Barnacles and Stiltstockings hoping for preferment from the next admininstration?

Or the geniuses that gave us the Great Recession. Science says that the credit system needs two things: properly collateralized loans, and borrowers that can service their loans. So how come our governing geniuses gave us 100% mortgages and liar loans? Are they dumb or somep'n?

Whatabout the brilliant Democratic Socialists that want to bring everything under the aegis of the admininstrative state after a century of proving that it doesn't work? And 100 million dead slaves under Communism? Are they evil or just stupid?

The truth is that they are just humans and, as usual Nietzsche explains the whole procedure -- The Will to Power §517. Our lords and masters are just average Joes walking in the world assuming that the conventional wisdom and things-as-they-are explain the world.

The fictitious world of a subject, substance, "reason,"etc., is needed--: there is in us a power to order, simplify, falsify, artificially distinguish. "Truth" is the will to be master over the multiplicity of sensations:-- to classify phenomena into definite categories. In this we start from a belief in the "in-itself" of things (we take phenomena as real).

Of course, it's been a long road for me to accept the Nietzschean view. That, as animals in the world, we have to discriminate among all the welter of information coming in through our five senses that deluges us every moment, and filter out the things that might kill us! So we -- so much higher than the ordinary animals! -- conjure up narratives about the world to try and understand it: gods arranging battles from Mt. Olympus; spirits in trees; reason and logic; matter; energy; Four Elements; atoms and molecules; quarks; dark matter and energy.

And I wonder what comes next!

Truly, human understanding has gone through an astonishing transformation since, well let's say since Descartes and "I think, therefore I am."

The truth is that all of our knowledge is conditional and a likely story. Good until it fails to explain the world. And we have to edit out 97.2 percent of the possibilities in order to stay sane. So everybody lives in their comfortable bubbles paying attention only to the edited information that tells them comfortable things that confirm their world view.

But, of course, what is comfortable to you in your bubble may be a perfect hell for me in my bubble.

And thus the whirligig of time brings in his revenges.

And I suspect that James Delingpole is right with his analysis that "The 2010s were the Twilight of the Elites." Would that be Führungsschichterdämmerung, James? Or something shorter?

Happy New Year!

Sebastian Junger: 2008 Crash Was Because US De-tribalised

Back in the day, when we were tribes, writes Sebastian Junger in Tribe: On Homecoming and Belonging, we had a natural solution to bad behavior, such as "tribe members who steal more than their fair share of meat or other resources." It was "group pressure. Not only are bad actions punished, but good actions are rewarded."

But now we have rampant cheating, from Medicare/Medicaid fraud at "around $100 billion a year" to insurance fraud at "$100 billion and $300 billion a year[.]"

All told, combined public- and privtae-sector fraud costs every household probably around $5,000 per year -- or roughly the equivalent of working four months at a minimum-wage job. A hunter-gatherer community that lost four months' would face a serious threat to its survival, and its retribution against the people who caused that hardship would be immediate and probably very violent.

And then there is the real-estate crash and banking bailout and Great Recession of 2006-08. These "illegal and unwise banking practices, cost American shareholders several trillion in stock losses and is thought to have set the American economy back by a decade and a half.

So the solution is to go back to the Stone Age and revive the pro-social face-to-face practices of the hunter-gatherers.

I don't think so, and the fact that a good little boy from elite Boston thinks this should be is, I think, one of the major items in the Bill of Indictment against our ruling class.

Because the whole basis of modern electoral politics is loot and plunder. Vote for me and I'll give you free stuff. (Hello Liz! How yer doin' gal?) If you look at our welfare state and the current financial system it is designed to be used as an instrument of power by the educated mandarin class, the people who have been to the right colleges -- Wesleyan in the case of Junger -- and got the right credentials and intoned the correct responses.

And, being as Sebastian Junger is a best-selling author he'd better toe the ruling-class line or forget his best-selling publishing deals and all the publicity that good little boys get from the fake media.

See, back in the day, Americans belonged to mutual-aid societies like the Masons and the Elks. These voluntary institutions run by their members provided a whole array of social services from employment referrals to job help when moving to a new town to "lodge doctor" medical plans to life insurance, death benefits, and looking after members' widows. They were incredibly pro-social and enacted the "group pressure" on defaulters that Junger praises in the hunter-gatherers.

But then the Progressives came along and replaced the mutual-aid system with government pensions and welfare. And I'll bet you that college-educated Sebastian Junger doesn't have a clue about the old system that florished in the 19th century and to which "everyone" belonged.

Instead what we now have is a full-scale loot and plunder operation that we call the welfare state. Scamming the system is the point, as you can see from the behavior of, e.g., the government employee unions in California.

Oh, and about the real-estate crash. That was a direct result of government policy that forced banks to loan to borrowers with small-to-none down payments and bad credit. Because redlining back in the day.

Anyone that knows anything has read Walter Bagehot's Lombard Street written after the failure of a bank on Lombard Street in London in 1866. Here is Bagehot's big idea.

1. Loans must be adequately collateralized so that, in the event of failure to service the loan, the value of the collateral will be sufficient to liquidate the loan.
2. Borrowers must service their loans -- make their payments -- and be seen to be doing that.

Unless these two requirements are met You Got Trouble, as the song says.

But the US government set up a system that violated both these provisions and they directed the government subsidized mortgage twins, Fannie Mae and Freddie Mac, to have a minimum percent of low-quality loans -- low down payment and low credit -- in their portfolio.

But here was the problem. Your pension plans and other regulated financial institutions were only allowed to buy top-rated bonds. How to enable them to purchase the Fannie/Freddie bonds with low-quality loans in them? The answer was derivatives, that attempted to neutralize the extra risk and thereby "create" highly rated financial instruments. Only it all fell apart in the market meltdown of 2006-08. Sorry Charlie.

Oh, and then Little Ben Bernanke choked and didn't think he had the authority to bail out Lehman Brothers.

Yeah, that's one thing that the hunter-gatherers were big on. Punishing lack of courage.

Do you see what I am saying here? I am saying that it is bootless for Sebastian Junger to complain about widespread cheating and fraud, everywhere from welfare to financial institutions.That's because the whole system has been designed by our modern ruling elite to be a scam. So that they could Divide and Conquer amd distribute the loot to their supporters.

And the worst thing is that we had institutions that replicated the pro-social world of the hunter-gatherer era. But Progressives "canceled" that world. And why? Because they wanted to be the Big Boys. They wanted to rule the new world. And they needed to be able to offer loot and plunder to the voters in order to win political power.

The point about the market economy is that it encourages pro-social behavior. It encourages people to offer products and services that other people want and at prices they are willing to pay. It encourages people to trust anyone that is trustworthy. And it requires everyone, every day, to align their behavior with the price signals of the market.

But the fact is that almost everything in the political sector is involved to some degree in allowing people to scam the system. Because marking your life to market is really hard. And, as Junger says, you need "group pressure" to keep that kind of stuff under control.

Now do you see why I call the left, all of the left, a Great Reaction? Because they have this woolly idea of how wonderful things were back in the day. But socialism is neo-slavery, the welfare state is neo-feudalism, identity politics is neo-tribalism, and so on.

What hope is there when bright young chaps like Sebastian Junger don't have a clue?

My Take: Ten Years after the Crash

It was September 15, 2008 that the financial services firm Lehman Brothers collapsed and the Federal Reserve Board, Ben Bernanke, proprietor, decided not to bail it out.

Then followed the worst financial crash in the United States of America since the Great Crash of 1929. Look: crashes and panics are part of capitalism, in the same way that invasions and famines are part of agriculture. Oh, and slavery. I'd says that panics and crashes and the subsequent recessions are the better option. But I am biased.

So who was to blame? Greedy bankers? Evil Wall Street firms? Derivatives brokers? Regulators asleep at the switch? Smarmy politicians? Or all of the above?

The following is my individual, idiosyncratic analysis. Your mileage may vary.

The first thing to understand is the message of Walter Bagehot's Lombard Street. La Wik's page here. Bagehot wrote the book after the Panic of 1866 following the failure of Overton, Gurney, and Company, "a wholesale discount bank located at 65 Lombard Street, London". During the crisis the Bank of England was unable to stop the panic with loans from its own resources, so it had to be backed up by the UK government.

For me, the message of Bagehot's book is his analysis of the credit system, that is, borrowings in money-denominated securities. The fact is that the credit system is a maze of borrowings to and fro, so when a question arises about the "soundness" of a financial firm -- such as Lehman or Overton -- the people buying and selling in the credit markets start to wonder. They ask themselves how deep their own counterparties were invested in the debt securities of the failed firm. And they get cautious; they wonder if they will get paid. Hello credit crisis.

So Bagehot decreed that two things are necessary for a healthy financial system. First, securities must be properly collateralized so that they can be liquidated without loss to the lender. Second, borrowers must be able to service the loan. If either of these are in question, you gotta panic.

In the boom of the 2000s there were lots of insufficiently collateralized loans which couldn't be fully liquidated if the borrower defaulted, and there were lots of borrowers that really couldn't service their loans. So when the housing market peaked in 2006 there were a lot of insufficiently collateralized mortgages around. Not good.

But why were there all those bad mortgages and "liar loans" to people with bad credit? Greedy bankers? Not exactly. Regulators asleep at the switch? Come on! When do regulators ever do their job?

The second thing to understand about the crash is that it had been federal government policy ever since the Great Depression to subsidize the housing market, to help Americans become homeowners.

One of the policies to help this out was the 30-year fixed mortgage. Hello sanity? You mean to say that you can forecast the economy and the housing market out 30 years and still have a solid security? Before the Great Depression the most you could get was a 10-year mortgage with a balloon payment at the end which meant that you would have to refinance at the then going interest rate.

Plus the government in 1938 started up the Federal National Mortgage Association, a government-sponsored enterprise that issued bonds based on baskets of mortgages. No problem, right, particularly if Fannie Mae bought good solid well-collateralized mortgages? Well, it all started out pretty nice, but then things got a bit out of hand, as this chart from usgovernmentspending.com of Agency Debt, mostly Fannie Mae and Freddie Mac, shows.



Golly. Who knew! Agency Debt went from nothing to 10 percent of GDP in 1980, then all the way to 55 percent of GDP when the crash came in 2008. Now remember, the federal debt is about 100 percent of GDP. So here we have an additional 50 percent of GDP effectively guaranteed by the federal government. What could go wrong?

And as the years went by the quality of Agency debt went down, as various federal mandates required banks to extend mortgages to less-qualified borrowers (to fight evil red-lining). And then Fannie Mae and Freddie Mac started goals of increasing their mortgage purchases of less-qualified borrowers and less collateralized mortgages. Then the derivatives guys got into the action, by using derivatives to lay off the risk on the quality of mortgage packages and provide triple-A securities required by insurance companies and pension funds. What could go wrong?

Thirdly, little Ben Bernanke, Chairman of the Federal Reserve System, failed to follow the dictum of Walter Bagehot that there should be a "lender of last resort" during a financial crisis. Bagehot's idea was that the Bank of England should "Lend freely. At a high rate of interest. On good banking securities." But even then, the Bank of England didn't have enough equity to do the job, so it relied on the credit of the UK Treasury. In our day, I would say that lender of last resort means you don't let any financial institution collapse. Period. Oh, you strip the owners and stockholders of their equity. You make a clean sweep of mansions in the Hamptons. You even make the bondholders take a haircut. But that is after the panic is over. And you use the full faith and credit of the United States government to keep the credit system going. See, in the Crash of 2008, interest rates on US Treasuries went down. People wanted US Treasury securities. They didn't think that the US government was going down. But little Ben Bernanke decided he didn't have the legal authority to take over Lehman Brothers with all those low-rate Treasury bills.

Well, little Ben. Given what we now know about how the Deep State takes care of its own, I think that a bit of courage by you would have gone a long way to moderate the Crash and the Great Recession. Think how cool Obama, the first black president, would have looked as the economy surged in the 2010s! Think how many Latino homeowners wouldn't have been wiped out!

But you choked, Ben. Just like a true Swamp Creature.

OK. But what do we do now?

I think that the basic problem is that governments are used to betting the whole country -- with the National Debt -- on their projects. And why not? If Zimbabwe or Venezuela goes down, the ruler himself doesn't suffer. Not so long as there are Swiss bank accounts.

Let me make this clear. When the ruling class bets the country with debt, or when the ruling class forces college students to bet their futures with college debt, the ruling class usually doesn't suffer if the bet doesn't pan out. But when ordinary people get over their heads with debt then they certainly do suffer.

The fact is that debt is always a big bet on the future. It bets the borrower's future income on a nice house now, and if the borrower fails and the loan can't be fully liquidated then it is the lender that takes the fall. And the borrower is wiped out. But the point of debt financing is that it is supposed to be low risk. Sorry, Charlie. In my book 80 percent 30-year mortgages are not low risk. Not for the borrower; not for the lender. That's why we have all the federal guarantees and subsidies: to paper over the real risks.

We have securities for high risk propositions: they are called stocks, equities. They are really cool.

The problem is that the way that governments finance their wars is by betting the whole country on winning the war by flooding the economy with its debt securities and its paper money. Strictly speaking, wars should be financed with equity. But they are not. Because governments can afford to break the rules, particularly when the whole country is at stake. And maybe that is as it should be.

But should the government bet the country on "affordable housing?" Or on grandpa's Social Security pension?  Or grandma's Medicare health care? Or Suzie Snowflake's college education? I don't think so. And the reason is that government just cannot bear to pull the punchbowl away in the middle of the party; they just do not have a clue when it is time to adjust things and maybe pull back a bit. And anyway, politicians and bureaucrats and regulators don't have a clue. You might say that someone should have known in the 2000s that something was out of kilter with housing. No doubt. So who does the "someone" button-hole? President George W. Bush? But he was executing on a cunning plan to get Latino votes with affordable housing. Liberals that care about the poor and marginalized? But they are clueless about anything except the latest liberal political scam.

Yeah. My solution to housing crises and crashes and so on is to get the government out of it, and that the government only borrow for wars. But I do demand that the little Ben Bernanke of the next panic do his job and act as lender of last resort, and get with the program.

In the Crash of 2008 you may have heard about the $700 billion bailout. But did you know about the $16 trillion guarantee of money-market mutual funds? Check it out. Do you think that the feds could have managed the whole thing with a federal guarantee instead of the $700 billion TARP game? Who knows.

The main thing to understand about governments and ruling classes and Deep States and Swamps is that they are idiots. They really do not have a clue what they are doing. So the less money they get their hands on the better.

So why doesn't the rest of America agree with me? Are they dumb or something, or am I.

Federal Budget: Best of Times or Worst of Times

Today there are a couple of commentaries on the federal budget. One is from Goldman Sachs, worrying that interest cost will eat the budget, and one from Stephen Moore, with the idea that "Obama cut the deficit in half" is crazy.

What's a mother to think?

The simple answer is: Yes.

Yes, the federal budget will dissolve in huge interest costs if nothing is done, and in the worst case if nothing is done we will end in hyperinflation, à la Venezuela.

Yes, it misses the point to say that Obama cut the deficit in half on his watch. Because the federal debt doubled on his watch.

OK. As President Eisenhower said, if you can't solve a problem then make it bigger.

Our big problem is that we spend a trillion dollars a year and more on government pensions. And we spend nearly a trillion and a half dollars a year on health care for old people and the poor.

The first problem is a monstrous injustice. We are saying that the needs of older, retired Americans come first, rather than the needs of young families that are getting the next generation off the ground. On my idea of justice, individual people are responsible for their own retirement savings and they retire when they can afford it. Of course there are going to be people who run out of money through no fault of their own. We, whether we the government or we the charitable or we the children, can take care of that without breaking the national bank. There is an additional benefit to this plan, apart from its justice. And that is that the economy would be borne aloft on a huge flood of savings.

The second problem is also a monstrous injustice. It is nice to provide health care for older people, and it is nice to provide health care for the poor. The trouble is that when you decide to do it with government it means that you do it with administrative bureaucracy. And that means, according to the theory of regulatory capture, that the health system gets run in the interest of the health care providers rather than the interest of health care consumers. It means that the health care system gets mewed up in thickets of government protocols and mandates and credentialization. So the health care system becomes incredibly expensive and learns how to respond to government mandates rather than consumer preferences. I don't know what health care would look like if it was basically driven by consumer demand, i.e. what individual consumers, backed up by catastrophic health insurance, wanted with their individual spending on health care. Maybe someone should write a book or make a movie. But we the government and we the charitable and we the children could still take care of people that couldn't afford health care through no fault of their own.

So my view is that the government should not occupy the commanding heights of pensions and health care. Pensions and health care are important social functions that should be the responsibility of individual people, who would be much the better for taking care of their own instead of having it taken care of, rather badly, by the ruling class. Put it this way: saving for your own retirement builds character.

Regarding the deficit and the debt, the basic facts are that in 2008 the US went through a once-in-a-generation financial crash, where the credit system almost seized up. In such a situation, according to Reinhart and Rogoff in This Time is Different, the national debt usually doubles. That's because the way to get out of a financial crash in which the whole credit system seizes up is for the government, through the central bank, to act as lender of last resort and basically nationalize the credit system for a while. And that is what happened: with TARP (at $700 billion in lending) and with various credit guarantees totaling $20 trillion, the government stabilized the financial system. And it was all in place before Obama was inaugurated in January 2009. I would say that Obama enacted the wrong policies in  2009, with a Keynesian stimulus and then the dead hand of Obamacare. But at least we enjoyed a modest recovery from the Crash. It could have been worse.

Yes, but how do we prevent this sort of thing in the future?

The proximate cause of the Crash of 2008 is that the financial system discovered, rather too late, that the derivatives based upon the mortgage bonds of government housing finance giants Fannie Mae and Freddie Mac were not sound because the mortgage bonds of Fannie Mae and Freddie Mac were not sound. In the 1990s and 2000s the government mandated that Fannie Mae and Freddie Mac lend, more and more, to sub-prime borrowers. By the time of the crash, over 50 percent  of mortgages financed by Fannie and Freddie were to sub-prime borrowers. This is a problem, according to Walter Bagehot in Lombard Street, published in 1873. The credit system is founded upon two notions. The first notion is that borrowers are able to service their loans. Obviously, sub-prime borrowers are not really able to service their loans if interest rates rise or if they lose their jobs. The second notion is that loans should be properly collateralized so that if the borrower fails to service the loan then the lender can sell the collateral to recover his principal. If people in the market start to question the ability of borrowers to pay their loans and/or question whether loans are properly collateralized then you get a crisis of confidence and the credit system seizes up. So, in 2008 we had borrowers that could not service their loans and we had low-down-payment loans that could not be properly liquidated. Really, we are lucky that the Crash of 2008 was not much worse than it was.

So what, you might ask, should government look like in the best of all possible worlds?

It is simple. The national government should only spend money on defense. In the case of war it should raise taxes and borrow money. After the war it should cut defense spending and reduce the debt. That is all. And its central bank should help finance the war and act as lender of last resort in the case of the once-in-a-generation financial panic. That is all. The government should not use its power to game the credit system with loans to its supporters.

Of course, this is all fantasy. The reality of life on this planet is that we the people are always petitioning the government to pull our chestnuts out of the fire when we get into a little trouble. But that is mere bagatelle compared to the sins of the ruling class. The ruling class is always using the government to fight the war to end all wars, whether fighting the Kaiser, fighting the Nazis, or fighting racism, or fighting global warming.

And it will be ever thus.

OK, Mr President. Now Stop the Next Bubble

After the usual Keystone Kops shuffle, with the Senate parliamentarian nixing a couple items in the House Bill, the Republican Tax Cuts and Jobs Act heads to the president for signature.

Right here, right now, Mr. President, there are two things to do.

1. Get interest rates back to normal. After the Crash of 2008 we have had ten(!) years of low interest rates. And no wonder, for the economy took a while to recover from the credit meltdown. But now we have sensible supply-side policy in place, instead of stupid subsidize-and-regulate. My guess is that the invigoration in economic growth -- already forecast to hit 4% annually in the current quarter -- means that we need to get in front of the business cycle, and increase interest rates now so that we don't have to play catch-up as usual to kill an overheating bubble economy. This time there is going to be an unusual factor, the repatriation of perhaps trillions of dollars in profits of US corporations, that I expect is going to unleash a huge credit boom in the US. Please, Mr. President, get the word out to the Federal Reserve Board that you will give them cover as they bring interest rates back to normal and maybe pitch them up 0.5-1 percent above normal to cool the over-excitement. Oh, and yes, the spending on interest on the National Debt will go from $314 billion a year in FY 2018 to $900 billion and very likely more. You can check out what will happen on my Interest Analysis page at usgovernmentspending.com. But I am sure that your chaps at the Treasury are already eager users of the Interest Analysis page.

2. Start increasing the down-payments on home mortgages. The main cause of the Great Recession was the violation of Walter Bagehot's dicta in Lombard Street about credit. First, all credit should be properly collateralized, meaning that if a loan is terminated, the value of the collateral is sufficient to pay the balance of the loan. Second, borrowers should be able to pay their payments. In the 2000s, as a result of US government policy, people got 100 percent loans, meaning that in any downturn they went underwater and couldn't liquidate their mortgage without somebody getting a haircut, and sub-prime borrowers got about half of the loans, meaning that in a downturn a ton of borrowers would not be able to make their payments. Hello! The whole policy of subsidizing home mortgages has been a disaster, because quite simply the easier you make it for people to get mortgages the higher house prices will go and the more difficult it becomes for young people to buy their first home. And the bigger the financial panic when the music stops, housing prices crater, and the sub-prime borrowers go to the wall.

I don't know whether this policy is possible, or if you care about it, Mr. President. And if you pursue it the Democrats will be all over you as a pal of The Rich, because high interest rates, and a racist sexist homophobe, because sub-prime minority home-buyers. So you will never get the credit you deserve.

But there is such a thing as doing the right thing.

Should Trump Take Credit for 4pct Growth?

Stop Press: The Atlanta Fed is forecasting four percent GDP growth for the second quarter.

Should President Trump take credit for that, or is this finally the economic policy of the former President Obama taking hold?

There are two obvious answers to that.

Point One: This is taking place on Trump's watch. So he takes the credit.

Point Two: After a major economic meltdown like the Crash of 2008 it takes about ten years for the economy to get back on track. That was true in the Crash of 1873, the Crash of 1929. So whatever the  government does, it takes about ten years to shake off the meltdown.

The point is that major crashes are major failures of the credit system. Millions of people lose everything they  have or at least take huge haircuts and can't do what they usually do: start businesses, buy houses, etc.

Now the theory: Per Walter Bagehot in Lombard Street, a healthy credit system requires that loans be properly collateralized and that borrowers should make their payments. If the market thinks that either is in question then you get a credit collapse, and a Lost Decade.

So right about now, the credit system should be getting back into gear, especially as housing prices have recovered. Did you know that one of the biggest ways of financing a new business is by taking a mortgage out on your house? People can't do that when their houses are under water.

Of course, I think that the way this worked out is rather cool. The Crash of 2008 was on Bush's watch, so he is to blame, even though the crash was caused by the Democrats encouraging non-creditworthy people to take out low-down-payment mortgages, and calling opponents to their policy red-lining racists. See Bagehot, above, regarding questionable borrowers and questionable collateral.

But the ten year hiatus after the crash took place on Obama's watch, so he is to blame whether or not he had anything to do with the case. Of course, he did a lot of stuff to slow the recovery, including raising welfare payments, putting a huge burden on small business with Obamacare, putting the financial system in a Dodd-Frank administrative strait-jacket, and throwing money away on crony-capitalist green energy. So there is that.

But now the ten year hiatus is over, and it is starting to look like the economy is ready to take off again. It's happening on Trump's watch so he takes the credit. But imagine if we had had a Republican president the last eight years. Imagine the fake news coming from the Democratic operatives with bylines about the cruel Republicans that didn't care about the suffering of the American people! The Republicans might have been out of power for a generation like after 1929.

But here is what I worry about. I worry that the economy will get such a boost from Trump tax cuts and the Trump Obamacare-lite and the lower energy costs of the fracking revolution, that the economy will overheat in a couple, three years, and we will have a nasty crash and recession.

But that is all in the future. Why, before then we might have Trump impeached and thrown out of office and President Pence impeached and thrown out of office and Hillary Clinton appointed president by acclamation.

So let's not worry about the future. Let's have another cup of coffee, and let's have another piece of pie. Yeah, that song came out in 1932, at the very bottom of the Great Depression.

Why Personal Debt is Different from Government Debt

This morning I got an email from a reader who asks about the prudent limit of personal debt vs. government debt. He writes:

it would be reasonable for a couple with annual income of $115,000 to carry debt of $400,000 on a home mortgage, $30,000 in car loans and $15,000 in credit card and $10,000 still owed on college loans for a total debt of $455,000. It could therefore be said that their debt is 4 times their annual income. If we look at our national debt of 16 trillion and our federal annual income from taxes and other sources at an estimated 4 trillion then the ratio of total debt to annual income is 4 times; the same as my household example.

Now I disagree with this, on the grounds that personal debt is very different from government debt. But first of all I must set forth my fundamental belief about debt, that I got from Walter Bagehot's 19th century classic about the credit markets, Lombard Street.

Bagehot proposes two things needed to avoid a credit crash.

First, people with debt must be able to service their debt. Obviously, if people do not pay their interest then the whole credit system goes upside down.

Second, debt must be properly collateralized, so that it can be liquidated when a borrower fails to service the loan. This is a confidence issue.

You can see that both notions applied to the real estate crash of 2008. In reports of the developing crash you heard a lot about "counterparty risk," the worry that the other party in a financial transaction was solvent. This applied both to the risk that the other party might stop servicing the loan, and also that the loan could not be liquidated by selling the collateral. Just as Bagehot wrote.

Now I believe that personal debt is not the harmless act we are taught to think it is. Personal debt is, in fact, a high-risk bet on the future. The family that takes out a big mortgage is betting that it will still have a job in 5-10 years, or that the price of its home will still be high enough in 5-10 years to liquidate the debt if the family had to sell. Obviously this is not true during a crash when home prices decline and jobs are scarce.

In fact, I believe that a family home is an equity play. If you need to get money to buy the home then the investor in your home ought to have an equity share, rather than be a simple creditor. Same thing with student debt. A student has no clue what kind of income he/she is going to earn in the future; nor does the student have any way of liquidating the debt, because there is no collateral. Student debt is an equity play; people financing students should be equity partners in the student's future earnings.

National debt is a horse of a different color. The national debt is in fact the ruling class betting the whole country on its policy. Normally, of course, the national debt is accumulated in a war, where the bet is pretty obvious. Win the war, and the government pays off the debt. Lose the war, and the government repudiates the debt and impoverishes the people.  The other big use of government debt is in the wake of a financial crash. The same principle applies: the government bets the whole country with an increase in debt to avoid a total credit collapse. You can see that on this view government should be running surpluses except during war or financial panic.

(By the way, the $700 billion TARP bailout was the least of the government's actions to rescue the economy. The total bill of bailouts and guarantees was more like $20 trillion. See my TARP bailout.)

When the government diverts a flood of credit to keep insolvent borrowers afloat after a crash it may rescue the borrowers and the credit system, but there is a cost. The cost is what we have seen in the Obama economy, with growth struggling along at 1-2 percent per year. The same thing happened after the Crash of 1873, the Crash of 1929. Moreover a ton of distressed borrowers after 2008 struggled along in their underwater houses, did not move to a better job opportunity, could not use their home equity to start a business. But this cost is better than the alternatives of wholesale debt default or hyperinflation.

So my opinion is that both high personal debt and high government debt are bad. There is far too much personal debt out that that is not properly collateralized and this debt puts the whole credit system in peril, and government debt is not debt at all, but a kind of national equity play. In my view we should convert a lot of debt, personal and governmental, into equity, where the investor is knowingly betting on a high risk proposition.

Is the current government debt dangerously high? No, but it makes it harder to pay for entitlements and more likely that government will default on its debt to pay Social Security and Medicare, and default on Social Security and Medicare with monetary inflation.

Could government have got out of the Great Recession with a bigger and better stimulus program? I doubt it. Government spending goes to powerful and politically connected interests. If their plans and projects were so brilliant they would not need government credit and subsidies. So it is likely that most stimulus spending is crowding out more beneficial uses of the nation's treasure to pay for the wasteful plans of the rich and powerful.

The go-to book on crashes is Reinhart and Rogoff's This Time is Different. They argue that government typically increases national debt by up to 100 percent after a financial crash. And they also point out that governments default on their debt all the time. In the Great Depression the US government went off gold, giving holders of US dollars a haircut, and it reset the interest rate on war bonds from World War I, giving widows and orphans a haircut. They argue that whenever a government gets to a debt of about 100 percent of GDP it is getting into dangerous territory. Note that The New Yorker thinks that Reinhart and Rogoff are all wet.

Anyway, my view is that personal debt is too high, and insufficiently collateralized when you can get 100% mortgage loans. Government should not borrow except for wars and crashes, and the high rate of government spending makes it harder to fight wars and recover from financial crashes.

We ought to convert a lot of the present personal debt and government debt into equity and recognize the real risk in many financial transactions.

The Downside of Government Programs

I hadn't heard of Edward Conard before, but apparently he worked with Mitt Romney at Bain Capital. So he should know a thing or two, being as how Bain was what you might call a corporate repair shop. Its job seemed to be taking in beat-up corporate jalopies and doing a complete makeover, before sending them back on the road, all fixed up and slicked up.

Conard's first book was Unintended Consequences, "which set the record straight about the financial crisis of 2008 and explained why U.S. growth was accelerating relative to other high-wage economies." In other words, it wasn't the banks' fault.

Now in The Upside of Inequality: How Good Intentions Undermine the Middle Class Conard shows how how pretty well all the standard nostrums won't work to get the economic moving again.

Yes, he says, inequality has been increasing, but only at the very top end. And how are the 0.0001 percent getting rich? We all know the reason. It is chaps like Steve Jobs and Bill Gates coming up with long-shot technology startups that can grow into $500 billion corporations with very little additional capital.

The thing to understand about today's knowledge-based economy, compared to the old manufacturing economy of old is that it doesn't take much to scale up to a global scale. In the old economy a Rockefeller or a Ford had to borrow money and/or sell shares to scale up; a Steve Jobs or a Mark Zuckerberg doesn't. He gets to keep all the value for himself and his startup buddies and early VC investors.

Aside: Someone once told me that they had encountered Bill Gates in a store just after Microsoft had gone public. He asked Bill why he did it. Gates answered: to share the company with the employees.

But who cares about the inequality? Zuckerberg isn't hurting anyone except when he is buying the houses close to his place in Palo Alto. He is making money just like an entertainment star does, because people all over the world love his product.

The basic proposition in the modern economy, according to Conard, is this. To succeed in the modern economy you need two things, "properly trained talent" and a capacity for risk-taking.

And the reason that the US has been growing faster that our high-wage pals in Europe is that we have been doing the knowledge economy thing better than they.

That doesn't necessarily mean "education." Most people going to college are majoring in things that have nothing to do with the new economy. And according to Conard, pretty well all the usual suspects to fix education aren't going to make a difference. Most useful training takes place on the job.

And most people don't want to put their savings at risk. That is why we have banks. Banks take risk-averse savings and lend them to people that are taking a risk. Of course, lending is supposed to be properly collateralized and credit-worthy. But sometimes you get a Black Swan and the banks go south.

So how do you mobilize risk-averse savings? You have to balance it with equity. That just means that the startup guys need equity capital to provide a cushion against failure for the risk-averse folks. The more equity out there the more risk-taking propositions the economy can address.

Here is where Conard introduces something I didn't know. Apparently one of the provisions of Dodd-Frank is to make it harder for the Fed to act as lender of last resort.

Rather than strengthening the Fed's ability to act more effectively as a lender of last resort in a bank run, policy makers have done the opposite. They have made banks more responsible for bank runs by intentionally weakening the Fed's ability to act in a panic. Banks pulled back by raising credit standards.

Hello! The "Intellectual Yet Idiot" class provoked the Crash of 2008 because the Fed felt it could not rescue Lehman Brothers under current law. So the Fed is still stupid like it was in the 1929-33 crash. The whole point of the Fed is to be a lender of last resort that lends whatever it takes to keep the financial system afloat, as per Lombard Street by Walter Bagehot. And then worry about the fallout later. Period.

In the event, not just the Fed but the US government ended up guaranteeing just about everything in the financial system, as my TARP bailout page shows.

The point about the banking system is that is really is doing a conjuring trick. It is taking risk-averse savings and making it into semi-risk capital. Of course that proposition goes south every now and again.

But the big message of The Upside of Inequality is that there really is not much that government can do about inequality or indeed anything else. Yes, we should help the poor, but we should not expect to get much result. We should fund education, but it is not going to have much result.

What we could do, in a chapter called "Real Solutions," is this:

• Encourage "ultra high-skilled immigration." Because that would help the "properly trained talent" problem. 
• Lower the marginal corporate tax rate, to attract employers back to the US. 
• Demand balanced trade. Not to save manufacturing jobs but because when we run a trade deficit we import a lot of risk-averse capital that gets invested in government bonds. Not good. We need more risk capital. 
• Increase bank guarantees, not reduce them. 
• Don't enact a middle-class tax cut. That would slow growth.

Of course, after reading a 250-page policy book I rather wonder about the premise of policy analysis books. They are always recommending some sort of pushme-pullyou hydraulic replumbing of government to get the right pressure to force growth -- or equality or justice -- out of a sputtering jalopy.

But what do people really want? The working class of 200 years ago was walking from starvation to wage jobs in the city. The immigrants from Mexico have been doing the same.

But once everyone has got to the city and has got a half-decent job, what then? Most people just want to sit back and live a modest life and blame "them" if and when things go wrong. They don't care about "growth" except when their part of the world is declining, and the kids have to move away to get a job. But they do want that free stuff the politicians keep offering.

Really, nobody has thought about what comes next. What you might call the Downside of Government Programs and free stuff.

OK. We know what comes next. The whole big-government edifice crumbles to dust because its free-stuff concept has completely wrecked the economy and the culture.

But after that. What do we do then?

Come on geniuses. Give it your best.

Mob vs. Snob: Let's See If I Understand This

Back in the post revolutionary period, writes Peter Lee, Alexander Hamilton was the guy that saw a critical need for the young United States. He needed to keep the loyalty of the economic elite bound to the new United States. After all, the rebellion of the colonies was based on the merchant elite becoming separated from the British homeland, and not backing the Brits 100% in the Revolutionary War.

Lee calls Hamilton's policy Mob vs. Snob.

So Hamilton's economic policy, from the Feds picking up the state debts at par to the Bank of the United States and the industrial policy, put the US government and the rich together like bacon and eggs.

It was the division of the southern and northern elites that led to the secession of the southern states, so that it took a Civil War force the southern states back into the Union.

These days the elite doesn't worry so much about secession as about runaway white populism. So the elite has formed an over-under coalition with non-white groups to form a united front against the disaffected middle class whites.

That's why the liberal elites have suddenly warmed to Hamilton, according to Lee. It was Hamilton that led the US forces against post-revolution rebellions like Shay's Rebellion. This was the elite putting down a troublesome mob.

A guy like that suddenly looks attractive to a liberal elite alarmed by the Tea Party and "Lumpenführer" Trump. Hey, the GOP elite thought that Hispanic-friendly Rubio, Bush, and Cruz would square the circle between Hispanics and whites. Instead they failed and:

White power, as I put it, was left lying in the streets…and Donald Trump picked it up.

Oops! That wasn't supposed to happen. It has scrambled the Baldrick's Cunning Plan of the US elite and reversed, at least for a moment, the elite plan to let the white working class die of despair while the elite bought the support of the rising non-white groups with pretty baubles while keeping its power and wealth and influence safe from the stirrings of white rebellion.

So that is why the elite wants to revive Hamilton's Mob vs. Snob politics on the theory that it should make the annoying Trumpian mob go away.

But there is a problem. The elite politics of Hamilton was founded on Hamilton's genius. He had worked in the world; he had seen a war financed; he knew about Dutch finance and how to tend to the health of the state.

But our current elite is soft and foolish. It sought to teach the Middle East a lesson and yet threw away its victory; it set on a foolish real-estate boom and bust based upon a faulty credit policy of insufficient collateral and unsound borrowers. It has failed to heal the economy broken on its cheap money policies. And yet, having "barely contained disaster for the last two decades," it dares to sneer at the populism of Donald Trump. These are latecomer fans of Hamilton that do not understand Hamilton.

The success of Hamilton's policy was that his fiscal bounty for the elite ended up enriching the common man as the sound state finance of his system turned the United States into an economic powerhouse.

The failure of today's elite is that its condominium with the financial elite is not the simple windfall of Hamilton's national debt that energized the whole economy. This new deal is more the protection policy of the criminal gang. Support us and our welfare state and identity politics if you know what is good for you. That is the message for the Warren Buffets and the techno billionaires, and nobody has got the message better than PayPal billionaire Elon Musk. He has built a crony-capitalist empire with NASA-assisted SpaceX and climate-focused and subsidized Tesla.

No wonder the middle middle class is getting restless.

The only question is whether there is a real Hamilton waiting in the wings with the magic potion ready to administer to the national patient and revive its flagging spirits with a new financial and political concoction, and whether Donald Trump would know him if he saw him.

For after all, everyone was amazed when Hamilton's system blew wind into the sails of the good ship United States and set it off on a prosperous voyage for 200 years. Would today's wise men recognize a Hamiltonian genius if he walked onto the national stage?

When Ronald Reagan strode onto the national stage 36 years ago the elite knew exactly what to think. He was an "amiable dunce," and a "bellicose Cold War cowboy."  Yet he was the guy that ended the "stagflation"of the 1970s and won the Cold War without firing a shot.

It isn't clear that the elite has learned anything useful in the last 36 years. Yet it still claims the right to rule.

Let us hope that God still looks after drunks, fools, and the United States of America.

Yes, Let's Think About the First Principles of Capitalism, Rana Foroohar

Over at Time magazine, one of their managing editors, Rana Foroohar, has penned a long think piece about "American Capitalism's Great Crisis," and ends up with a typical non-ending:

Crises of faith like the one American capitalism is currently suffering can be a good thing if they lead to re-examination and reaffirmation of first principles. The right question here is in fact the simplest one: Are financial institutions doing things that provide a clear, measurable benefit to the real economy? Sadly, the answer at the moment is mostly no. But we can change things. Our system of market capitalism wasn’t handed down, in perfect form, on stone tablets. We wrote the rules. We broke them. And we can fix them.

The article is based, presumably, on Fohoorar's book Makers and Takers: The Rise of Finance and the Fall of American Business. But the article fails to address its subject in the same way that the AP's Seth Borenstein fails to address the question of climate change. When you are a media hack you really can't move too far from the conventional wisdom on your beat. It's not just that journalists are "Democratic operatives with bylines;" it is just a fact of life for a beat reporter that if you move too far from the conventional wisdom you will lose your audience and you will kill your access to powerful people.

So what do we learn from Foroohar?

There is, she writes, a crisis of faith in capitalism. In a poll, only 26% of millennials "considered themselves capitalists." Indeed, "Americans have plenty of concrete reasons to question their system." And it's not just a question of breaking up banks or raising taxes on hedge-funders or more or less regulation. The problem is bigger than that, as Foroohar's book explains.

In the old days from "the late 1790s to the early 1970s, finance took individual and corporate savings and funneled them into productive enterprises, creating new jobs, new wealth and, ultimately, economic growth." But now "only a fraction of all the money washing around the financial markets these days actually makes it to Main Street businesses." And that goes not just for the US but across the world. "Most of the money in the system is being used for lending against existing assets such as housing, stocks and bonds."

America’s economic illness has a name: financialization. It’s an academic term for the trend by which Wall Street and its methods have come to reign supreme in America, permeating not just the financial industry but also much of American business.

We are talking about everything from the size of finance to "debt-fueled speculation" to "risky, selfish thinking," public and private, the "increasing political power of financiers and the CEOs they enrich," and the ideology of "markets know best."

The rot started when post-WWII growth started to slow in the 1970s.

[Instead of making tough decisions] politicians decided to pass that responsibility to the financial markets. Little by little, the Depression-era regulation that had served America so well was rolled back, and finance grew to become the dominant force that it is today. 

So we got the "Carter-era deregulation of interest rates," Reaganomics "that favored Wall Street," then Clinton era deregulation to get out of the late 1980s doldrums, and Greenspan era loose money that led to today's "near-zero interest rates to keep from falling back into recession." We have a financial policy that amounts to "let them eat credit," a "palliative" to medicate the "downward mobility in the middle class" instead of facing the nation's problems.

Of course, there are many reasons for America's "low-growth economy," from "globalization to technology-related job destruction."

But the single biggest unexplored reason for long-term slower growth is that the financial system has stopped serving the real economy and now serves mainly itself. 

And now small business formation is down and big corporations buy back their stock rather than invest in R&D. Apple borrows money so it doesn't have to repatriate profits and pay taxes on it.

But hey, help is on the way.

Remooring finance in the real economy isn’t as simple as splitting up the biggest banks (although that would be a good start). It’s about dismantling the hold of financial-oriented thinking in every corner of corporate America. It’s about reforming business education, which is still permeated with academics who resist challenges to the gospel of efficient markets... It’s about changing a tax system that treats one-year investment gains the same as longer-term ones, and induces financial institutions to push overconsumption and speculation rather than healthy lending to small businesses and job creators. It’s about rethinking retirement, crafting smarter housing policy and restraining a money culture filled with lobbyists who violate America’s essential economic principles.

This is, of course, mainstream conventional wisdom, as it should be, coming from Time magazine. It's full of standard liberal memes, from the good old Depression era regulation to the crazed Reagan era to the greedy banker stuff to short-sighted CEOs. It is the view of someone "in the arena." And it assumes that the answers come from the usual experts "crafting smarter" policies. Oh yeah.

But maybe there is another way to look at Capitalism 2016. Maybe we need a whole new narrative.

The first thing to establish is that government and finance are joined at the hip. To understand that, go and watch The Tudors on Netflix. In an early episode, Henry VIII proudly points out of his window to a warship at anchor. How do you think that warship and its heart of oak got built? On the profits from Henry's royal estates? Or watch Admiral on Netflix, and then go and read up on Dutch national hero Admiral Michiel de Ruyter on La Wik. In the mid 17th century the Dutch merchants had to do something about the Russian and the Brit and the French monarchs mucking about with their trading system. For that they needed a navy to protect their argosies and teach the monarchs a lesson and for that they needed to give money to government to build a navy to make the world safe for capitalism.

That is the story of capitalism from that day to this. Capitalism can't bring us fabulous goods and services unless government keeps the peace. So merchants have provided credit to governments so that governments could finance navies and keep the trade routes open.

But things never stop just there. After inventing the central bank and national debt and financing their war of independence from Spain, the Dutch launched a 500 ship invasion force on the Brits in 1688 and then installed Willem of Oranje as King William III and set up the Bank of England and the National Debt and used Britain as a base for a Second Hundred Years War against the French, won in 1815 at the Battle of Waterloo. British national debt went from nothing in 1688 to 250% GDP in 1815.

National debt won the US Civil War, and World War I and World War II. And probably the Cold War too. The point is that the incredible wealth of capitalism allows government to borrow and spend. On wars, on education, on entitlement programs, on anything that buys votes.

For over a century, from 1848 to 1990, high-minded intellectuals tried to bury capitalism with the romantic idea of socialism and a money-free administrative system, but by the 1980s even socialists realized that a much better system would be to use the wealth of capitalism to finance their agenda rather than replace it with administration and bureaucracy. So now government is busy using the credit system for all sorts of projects. Most notably it subsidized home mortgages, first with the 30-year fixed-rate mortgage, and lately with mortgages for people that couldn't service them. What could go wrong?

According to Walter Bagehot in Lombard Street, the credit system needs two things. It needs loans that are properly collateralized, and it needs borrowers that can be relied upon to make their payments. Looking back at the sub-prime mortgage era, what could go wrong? In fact, looking at everything that government does with borrowed money, what can you expect but mayhem?

You can see that the problem is mission creep. It's one thing to finance old Grandad de Ruyter to teach the absolute monarchs a lesson on the North Sea, or put the French in their place at a little town in Belgium. That is national debt serving the interests of commerce. But when government becomes 35% or more of GDP and the whole economy is riddled with government credit subsidy schemes, then something has to give. And don't forget that all the time the financiers are joined at the hip to the government. That's because, as I read years ago, the most important government program is the selling of the debt to the financiers. It misses the point to talk about breaking up the banks, or jiggling financial regulation. The elephant in the room is the government and its finances, and the various shifts and tricks it uses to get itself out of the latest jam.

It misses the point to complain that the finance industry doesn't finance growth. It never has. Credit and debt are for solid, no worries, ongoing operations, like financing a store's inventory, or lending money to get goods from where they are to where they are wanted. Financing growth is about startups and private equity and mad money.

It misses the point to complain about CEOs shorting R&D for buying back their stock. Big public corporations are usually reaching the end of their growth phase. They are just money machines until the inevitable day when some little startup puts them out of business.

It misses the point completely to write about American Capitalism's Great Crisis. Capitalism never had a crisis and never will. Capitalism uses credit as it is supposed to be used, to finance ongoing operations. And it can supply, from time to time, mad money for startups and other risky ventures which is the real engine that gets us from $3 per capita per day in 1800 to $100 per capita per day in 2016. The problem is the intersection of capitalism and government. When government grabs all the credit to fight a war, it really bollixes up the economy. When government encourages deadbeats to borrow money to buy a house, it leads to a Crash of 2008. And when government goes the easy money route to get out of a jam, the money sluices into all kinds of cracks and corners and encourages financial shenanigans from all sorts of shady characters.

But don't expect a Rana Foroohar to say that. A mainstream journalist has to stay mainstream. Just like Seth Borenstein, the AP's climate change guy. Really, how could an AP reporter on the climate beat do anything but breathlessly retail the latest wizard wheeze from the $1.5 trillion a year global climate community?

And how could a reporter on the finance beat do anything but retail liberal blame-the-bankers scapegoating?