Megan McArdle wonders whether there is really no such thing as “too big to fail” or too stable to default.
For a while now, I’ve been asking people at conferences, on and off the record, what America’s sovereign debt risk is? That is, how long until people stop treating treasuries as the “risk free” securities, and start demanding a premium for the risk that we might default.
The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.
AdvertisementBut last Thursday, the Treasury auction was . . . well, descriptions vary from “weak” to “horrible”. … Obama can assure voters that he inherited these deficits. But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%
Hubris often has its roots in pride. Richard Posner claims that conservatism has been dumbing itself down, but argues this is partly good news. “I sense intellectual deterioration of the once-vital conservative movement in the United States. As I shall explain, this may be a testament to its success.” It’s good news he claims, because the economic meltdown destroyed a great many shibboleths. But it may be argued that the real benefit was that it destroyed the tendencies to dogmatism.
By the fall of 2008, the face of the Republican Party had become Sarah Palin and Joe the Plumber. Conservative intellectuals had no party.
And then came the financial crash last September and the ensuing depression. These unanticipated and shocking events have exposed significant analytical weaknesses in core beliefs of conservative economists concerning the business cycle and the macroeconomy generally. Friedmanite monetarism and the efficient-market theory of finance have taken some sharp hits, and there is renewed respect for the macroeconomic thought of John Maynard Kenyes, a conservatives’ bête noire.
That’s as may be, but if the decline of intellectual conservativism has had an upside, it has been to destroy the faith in the proposition that we know — exactly — how the world works, and try to fix it. The decline of intellectual conservatism reduced the confidence it required to outsmart itself.
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Posner’s wrong. As he often is.
Joe the Plumber and Sarah Palin are the face of Conservatism and Republicans because the Republican became the party of Joe Average, and married women (admittedly the latter a small minority of women).
Democrats are the party of the Elites, inherited wealth, media big shots, celebrities, rich people on Wall Street and San Francisco Billionaires, Blacks, Hispanics, and most of all … WOMEN. Who in good times rolling, love nothing more than an aristocratic elite. A fairy tale filled with Prince Charmings (Obama) both dark and dangerous, and themselves as Cinderellas.
However, the ugly truth is about to hit. MASSIVE new taxes driving up the price of everything and causing payrolls to shred jobs as companies move everything they can overseas. Everything from Soda pop to carbon cap and trade taxes. Meanwhile money is printed like monopoly money, making imports hideously expensive and pushing up inflation even more, as jobs and wages fall into free-fall.
ONLY Government wages are intact, and that’s a female dominated workforce. Obama’s hiring, but White Men need not apply. Robert Reich and Nancy Pelosi and Charlie Rangel said so.
The recession hits men the most and they are starting to HATE Obama. No matter how much the female-dominated media loves the guy.
Mr. Fernandez said:
“but if the decline of intellectual conservativism has had an upside, it has been to destroy the faith in the proposition that we know — exactly — how the world works, and try to fix it.”
Faith in how the world works is exactly the point. Conservatism knows that Faith is how the world works. the Other knows something Else and that is the conflict.
I think Posner’s wrong. The failure is of the standard bearer, not the standard. Life is a good standard. (60% of Americans think so)
The death tax is wrong. If for no other reason than it destroys small businesses that create jobs or at least forces them into larger businesses that are less humane.
Marginal tax increases discourage entrepreneurship that creates wealth and jobs.
Originalism got us to the top of the freaking world for Gods sake, whats wrong with that?
The rest of his whine is not really worth addressing.
Whats right is right objectively. All of this positive collectivism and positive rights to wealth or houses or cars or cosmetic surgery or whatever is the need of the individual etc. etc is not what Man is made for. The damned State is NOT a source of our salvation.
We are a people based on the idea that the individual is a better judge of his own good than any others. THEY think they know better than we what we need and or want. I dont need to list anything for the BC.
Simply: we need to keep the faith that America continues outside the cities and the (few) blue counties.
That’s as may be, but if the decline of intellectual conservativism has had an upside, it has been to destroy the faith in the proposition that we know — exactly — how the world works, and try to fix it. The decline of intellectual conservatism reduced the confidence it required to outsmart itself.
As a rule, the definition of “liberal”, “conservative”, “socialist”, and even “communist” tends to shift over time, to the point where the views of one century’s liberal become the views of another century’s conservative. And vice versa.
Political factions seem to act like tectonic plates, crashing, splitting, and sometimes leaving pieces of themselves onto other plates. The last election had a interesting situation where paleoconservatives voted for Obama while paleoliberals voted for McCain.
Political orthodoxies usually wind up getting discredited after a generation or two, particularly after they lose touch with the people and thus lose power. That’s life.
Of course the debt clock is ticking. It always does. Sometimes debt is used to create assets, which provide the income to pay off the debt over time. Sometimes debt is used to buy votes and boondogles, which provide no future revenue stream to repay the debt. Compound interest is a killer.
But let me make a prediction. When the Chinese stop buying Treasuries and the Saudis stop accepting dollars for oil, the response from the Obama Administration will be — we need bigger Government!
Alexis @ #3:
“Political orthodoxies usually wind up getting discredited after a generation or two, particularly after they lose touch with the people and thus lose power.”
I would like to believe what you say is true. Alas, I’ve lived in more than a few countries — Mobutu’s Zaire, Banda’s Malawi and Moi’s Kenya, to name three — where the elite had more than lost touch with the people yet had not lost power. In fact it was always a marvel to me how much the elites and the common man despised each other.
I like your tectonic plate image, but I have a feeling that like Moi, Mobutu and Banda, Obama seeks only to consolidate power in his own hands. This is the African paradigm of The Big Man. It is too early to know if the same thing can happen in the USA. I tend to think not — that Obama will tumble, swiftly and far, when he reaches too far. The question then is, will the pendulum swing back or will it have been displaced far enough leftward that the next administration will govern from a center that is much further left than where we were when Obama took office. F
But let me make a prediction. When the Chinese stop buying Treasuries and the Saudis stop accepting dollars for oil, the response from the Obama Administration will be — we need bigger Government!
When all one has is a hammer, everything looks like a nail.
“[T]here is renewed respect for the macroeconomic thought of John Maynard Kenyes, a conservatives’ bête noire.”
That’s nice, but, to paraphrase Karl Marx, were Keynes to come back today, he’d take one look at Obamanomics and mutter, “I am not a Keynesian.”
We’ve fallen into the habit of saying “too big to fail” when what we really mean is “big enough to hire a lobbyist.” The sad truth is that we’re seeing is a massive shift from crony capitalism to crony socialism. Pray for the Republic.
F:
I think there’s a difference between political orthodoxy and political kleptocracy.
Africa, among other places, suffers from “The Big Man Syndrome”. I would argue that such a syndrome exists from the bottom up within a society; each big tyrant provides an example for smaller tyrants who support him in his rapacity. Far from being out of touch with the population, African tyrants tend to be very much in touch with their populations because they are acting out widely held fantasies. This was particularly the case for Mobutu Sese Seko. There is a big difference between opposition to slavery and opposition to being enslaved.
Political corruption tends to be tolerated when an entire society is corrupt. Sure, people will mutter and complain, but they tolerate corruption precisely because they are no less corrupt than their leaders are.
Political orthodoxy tends to lose touch with popular opinion. Political kleptocracy tends to cater to popular opinion in all matters except any opposition to its looting spree. Kleptocrats know they are hated. They understand why they are hated. They know that people just like themselves want their power.
If we don’t want kleptocracy in the halls of power, we need to not only promote a new standard for ethical government, but we also need to figure out some funding model that allows our politicians to act ethically. If it is easy to get corrupted by a political system, it may be necessary to redesign the system.
I found Posner’s piece conspicuously lacked Ronald Reagan. Yet Sarah Palin is in it…
Politicians are not intellectual heavyweights. Keynes’ observation of long-dead economists applies to political thinkers, too.
It would be very surprising that the ideas needed to survive the 70s and win the Cold War would be the same ideas we need now. I think Posner understands that something new is happening and requires new thinking. I think that’s true, and I think a lot of the old conservatives need to get out of the way for that to happen. If conservatives keep thinking that the public elects Democrats because they REALLY want libertarian conservative ideas, the Democrats will be in power for the next 20 years.
I saw a car parked outside a smoke shop with a mirror hanging that said “Obama-rama”. Underneath was one that lauded the Insane Clown Posse.I wonder if the driver caught the irony that the ISP name could describe Obama’s cabinet and advisers.
A fairy tale filled with Prince Charmings
Doggone it, our women must be total brainlessheads.
We give ‘em all this freedom and they run after some emotional swoon.
It’s odd though but I have yet to talk to a woman who really feels this way.
I am out in the boondocks which might explain this however.
Which just might go to show ya virtue resides in the countryside, like Jefferson said.
“Friedmanite monetarism and the efficient-market theory of finance have taken some sharp hits, and there is renewed respect for the macroeconomic thought of John Maynard Kenyes, a conservatives’ bête noire.”
Wow, this guy must like the sound of his own voice. Absolutely nothing that has happened in the financial world would elevate Kenyes from the economic dust bins. In fact, it was Kenyes-like Congressional manipulation that caused this mess. Again, Wow..
I’m working on a dissertation–I almost have it done–that will prove beyond a rational doubt that it was polygamy that caused the Mormons to invade Utah.
I think the debt bomb went off sometime ago. Think of it as an underwater volcano that went off thousands of mile away generating an enormous tsunami. The tsunami is bearing down on us as we play on the beach. There is no question it will hit us, the question is how soon.
The situation could be compared to two trains on parallel tracks one is a fast commuter train with many stops (the economy), the other a freight train that is heading all the way to the end of the tracks (the debt).
They leave the station at the same time and the commuter leaves the freight far behind at first. With each stop the commuter loses a little ground as the freight builds speed. As long as not to much weight is added to the commuter it can stay comfortably ahead of the freight.
The situation we are in is that the economy is running with a heavy load and a hand on the brake while the debt is currently running downhill and gaining speed. Many have already seen this.
The next Treasury offering will be a disaster I am afraid.
Alexis@10
Kleptocracy exists because of the laws and regulations we pay them to enact, at every level of gov’t. The citizenry has permitted the politicians to become lawmaking engines and forced the apparatchiks to become an ever larger enforcement regime.
Every law and regulation limits personal freedom. So, if we are to redesign our system to encourage virtuous performance, we must task (and incentivize) the politicians to stop making new law and start removing existing laws from the books. Same for regulation.
If we were able to get a Constitutional Convention, the one Amendment I would most like to see is one that mandated NO NEW LAW can be passed, until 10,000 are recinded. And independent of any new passage, a minimum of 50,000 laws will be recinded each year (they’ve over 1 million to start abolishing). The added benefit is that each of the 10,000 recinded laws will dramatically reduce its regulatory influence and impact.
We must change the “pay” structure for our elected officials away from lawmaking and regulation. BTW, this Congress is on schedule to pass more than 60,000 NEW Federal laws – in 2009.
How can we possibly need 60,000+ new laws in 2009, when the Congress passed 60,000 new laws in 2008? Talk about a lawyers guild. Herein is the basis for all political corruption.
I think we need to start by recinding all the laws that cannot be enforced full-time and are not explicitly funded to do so. Laws that can be passed and selectively enforced, depending on who’s in power are the tools of tyranny.
We need them to do something productive, other than dreaming up new laws, for which they can collect a vig.
Our debt risk, at this point in time can’t be fully measured. Hell, we can’t even account for the recent helicopter drop of snowflake dollars by the FED…we get the shoulder shrug and the palmed forehead slap is we press for an answer.
There are so many land mines out there: all the ususal mismanaged culprits, unfunded pension funds,a debt market hanging by a thread,government obligations for Social Security and Medicare soon to exceed the combined net worth of every household and nonprofit organization in the country. And now the naked communist strong arm tactic of creating crisis’ to effect takeovers of various industries. eg. We could have let GM declair bankruptcy prior to inflating our dollar…but no….then suddenly it was OK because that wasn’t going to work…and we now read from the “smart” people that Keynes is back in style, capitalism is dead etc. Capitalism isn’t dead but the current adminstration IS trying to kill it.
According to the Budget Office the government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates.
Parenthetically 35 states have reassurted their 10th Amendment rights due in part to unfunded Federal mandates.
I could go on for a long time but the picture is clear. The nation has, over the course of the past sixty years been dumbed down to the point where the citizen-as-serf is a reality, many unaware of thier most basic rights. A nation of tenant farmers toiling for an out of control Federal government.
Well, 35 states have now layed down a mark and we shall see. My bets on the states and the people, whether at the ballot box or loading the APC for a confrontation.
But we’re not going to sit back and allow a bunch of socialist lead by a maybe American to take this country down. He would be wise to rethink the efficacy of Alinsky writ large on this country. Too many are catching on to his empty suit and traitorous ways.
Wrichard writes: “Hubris often has its roots in pride.” Or always has its roots in pride.
Perhaps the opening scenes of the tragedy ‘Obama the King’ are underway. In the program notes, cribbed from Wiki, we note the ‘harmartia’ or fatal flaw of the protagonist:
“Hubris (/hjuːbrɪs/) (ancient Greek ὕβρις) is a term used in modern English to indicate overweening pride, superciliousness, or arrogance, often resulting in fatal retribution or nemesis. In ancient Greece, hubris referred to actions which, intentionally or not, shamed and humiliated the victim, and frequently the perpetrator as well. It was most evident in the public and private actions of the powerful and rich. The word was also used to describe actions of those who challenged the gods or their laws, especially in Greek tragedy, resulting in the protagonist’s downfall.”
Let the drama begin: Oedipus (adapted, http://members.tripod.com/Thimblerigger/oedipus.html:
Oedipus: Yo! Whats up homeboyz! You’re gathered all around. The hood is filled with saddening sounds. Lamentations are sweeping the nation. Speak up now cause I’m losing my patience. Tell me, Tell me, what is being said? Can trust only you, cause you’ve got cred. The all famous Oedipus is IN THE HOUSE! Hey priest! Old man, I know you’re sly and wise. I want to know how everything lies. Speak! Are you here in courage or simply here to cry. If you asked me I would do the same. All you’d have to do is shout out my name.
Priest: Lord Oedipus you have seen the young and old gathered here around the altars. The storm is upon us, my brothers! Our poor country can stand it no more! Pestilence is storming our land. Pestilence. Our crops are dying, and our women can bear us no children. I have seen the blight, my brothers! We know you are only homan Lord Oedipus. You who killed the sphinx, you have become our hero. you have been touched, touched, by God. Let us rejoice, my brothers! Let us pray, Lord Oedipus! Let us pray for all of our children. Come, man amoung boys, our saviour, and bring us to the promise land!
Oedipus: Yeah, I know what your sayin. I dig it. I feel for my entire Thebian posse. I’m on the situation. I’ve got it handled real well. I asked my bro-in-law Creon to check out the Pythian shrine and ask Phoebus, “What’s up? What do I have to do, to save brothers in the hood?”
Priest: What words. What words! You speak the truth, wise Lord Oedipus. Look yonder; my brothers. Creon approaches. Like Moses through the red sea. Surely he brings news that will liberate us from this oppression.
Oedipus: Man, look at the smile on that dog’s face. He’s got the truth. He’s got the solution straight from Apollo.
…one more thing. Yes, the Boomer generation hasn’t covered itself with glory, we weren’t allowed to win the war we were handed by the”Greatest Generation”, but it WAS the “Greatest Generation” that passed almost all of the socialized legislation this nation is encumbered with today.
It was the “Greatest Generation” that stuck the socialized needle of the free ride joy juice into our veins.
It is a legitimate question to take a hard second look at that generation and reassess their greatness. Toil and poverty they had for part of their life, and yes they won THE BIG WAR but that was prior to the advent of trans-oceanic weaponry. But that generation also supported the communist movement far more than any other, and the American Firsters and the Nazi Party had a huge following in the northern part of this country.
Greatest Generation, not even close. I’ll take those who were at Lexington and Concord , even though were weren’t the USA yet.
This crisis is rehabilitating Keynes among conservatives — right. So when all this keynsian nonsense destroys our currency will his reputation finally get a well-deserved stake through its heart?
All over the world, interest rates have been cut and budgets padded. France’s deficit is running at 8% of GDP. England is running a deficit of more than 12% of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13 trillion has been pledged…an amount equivalent to a full year’s annual output of the United States of America. This response is three times more (adjusted to today’s dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.” - Bill Bonner, The Daily Reckoning. May 2009
….But coming on top of a budget deficit already estimated at four times the record deficit set last year…and we begin to think of suicide.
The idea of spending twice as much as you earn should take your breath away. An ordinary man…hearing that fact…would feel like breaking the glass and pulling the alarm. “You can’t do that…you’ll go broke,” he would say. Basic arithmetic reveals the trap. In one year, you’ve built up debt equal to all of next year’s revenue. In two years, you’ve got debt of 200% of annual revenues. In 10 years, you’ve got debts equal to 1,000% of your annual receipts. Let’s see…say you only pay 5% interest…then, the interest alone takes up HALF your revenues. What creditor would lend you money?
This sort of propaganda is ridiculous. It is collectivist meddling that cause this, not some sort of failure of “freidmanesque free market”.
The true intellectual failure is in letting the left get away with tripe like thi s agitprop, this lie, this evasion of responsiblity.
What is wrong with us, why do we let them get away with this nonsense?
The fact are clearly there for all to see.
The GOP and conservative intellectuals need to clearly articulate what has acutaly happened and what is taking place now.
If there was ever a real world laboratory in which to demonstrate the success of capitalism and the failure of socialism, not to mention the dangers to liberty
from fascism, this is it.
Where is the GOP? What is wrong wth us? Where are the court challenges to all this lawlessness. Why are the Chrysler debt holders not taking the government to court?
How can we be so easily undone? We have weather much greater crises than this housing melt down.
It is beyond belief that we will go down this way. What is the matter with Americans?
Habu- you’re on fire. Amen to the comment on the Greatest Generation. There are significant lefties in every generation.
As far as Posner goes- he’s right. You can’t name one popular economics blog that is truly conservative. Most are way left. There are no great conservative economists stoking the fire of conservatism anymore the way Friedman and the Supply Siders did.
The Mises Institute comes close- but they’re don’t deal with the day to day issues. Simon Johnson of The Baseline Scenario says Walls Street has bought all the good economists. Maybe so. Either that or the rest are all in Academia and have been neutured.
This brings to mind the announcement by the Clinton Admin circa 1997 that they had overcome the business cycle. Chills went up my spine then. I shoulda dumped my mutual funds and bought gold.
At least Pres Bush never issued such an absurd announcement. In fact, I think that immediately after taking office he said “We have had a good party for the last 8 years. Now it’s time to pay for it.”
In contrast, Obama looked at the situation when he took office and took up a chant, “Toga, Toga!”
Habu> It is a legitimate question to take a hard second look at that generation and reassess their greatness.
I have been critical of that generation myself. They freed the world from the grip of fascistic tyranny but then failed to discipline their own children in the following decades.
Frontline has an online interview from one of the Nixon/Ford/Carter era drug czars. He hinted at this when said something along the lines of, “For unknown reasons, their [hippy youth] parents were asleep at the wheel and just didn’t intervene to stop their children from engaging in that behavior [drug use & abuse].”
The point was not visited again in the interview.
Habu:…”And now the naked communist strong arm tactic of creating crisis’ to effect takeovers of various industries.” This is the most frightening aspect of the Obama nation…that he’s actually doing it…a communist revolution in the US in less than six months without a shot being fired. The bullying of the Chrysler bond holders by Obama in favor of the UAW is so egregious and illegal yet where are the lawsuits? This guy is reading Marx and Lenin at night! Next comes Obamacare that if it passes it will wipe out the best pharmaceutical R&D in the world, health care choice and private insurance companies. All of this plus the larded up, earmark laden stimulus package which was nothing more than a pay off to the One’s bag men. Read about Alinsky and how he learned to organize a community (Chicago) by studying Al Capone. Where the hell is the reset button on this machine because it seems we are headed for the precipice of totalitarianism and a very grim future.
I’m baffled by the lack of lawsuits, too.
If those with ‘standing’ don’t plead their case there’s not much other can do at law.
Moody’s threatened US Bond Rating:
From Ed Morrissey at Hot Air:
Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.
That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.
Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.