How Not To Talk About Financial Panics: New Rules For Pundits





Mr. Livingston teaches history at Rutgers. His forthcoming book is "Against Thrift: Why Consumer Culture is Good for the Economy, the Environment, and Your Soul" (Basic, 2011). He blogs at politicsandletters.com.

Herewith a manual of utterance and deportment that might make you sound like you know what you’re talking about when the conversation turns to (a) the stock market (b) and/or the budget debate of the last few weeks and/or (c) the bond rating of the U.S. government as determined by Standard & Poor’s and other rating agencies. 

These are mainly prohibitions, mind you, mostly don’ts.  I can’t help you if somebody asks how we ought to be thinking about markets, unless you believe, as I do, that we’re living through social, economic, and political change so fundamental that every form of conventional wisdom now feels like an involuntary physical reflex—a spastic, instinctive response to archaic stimuli. 

Translation:  I think that we’ve been living through the end of capitalism since, say, 1973, rather than its triumph, and that the ideological extremity of our time makes more sense in these terms, as the frenzy to be expected when worlds collide, than in terms of “conservative ascendancy” or the dictatorship of the haute bourgeoisie.  The Owl of Minerva spreads its wings at dusk, when a civilization has exhausted its possibilities by fulfilling them, by realizing its every potential, thus sharpening all its edges and burnishing all its achievements, but meanwhile making all its backwardness and cruelties the occasions of mere journalism.

But enough of the long view.  What not to do or say, just for today, or until next Sunday, when the New York Times proves again that its new format leaves everyone except Maureen Dowd bewildered, unhappy, and bored, all, miraculously, at the same time?  

(1)  Never act like you know what will happen next.  You don’t, and nobody else does either.  In fact, nobody knows what just happened. 

So look as thoughtful as you’re able, look away from your interlocutor and stare at those fibrous floaters that drift across you eyeballs, pretend you’re actually thinking, take a deep breath, and say anything that comes into your head, such as “The market is giving us important data, but we’re not prepared to understand it, not yet, let’s see where stocks go today but not lose sight of the long term.”

Meanwhile, you’ll be thinking “What we do know is that I’ll be calling my bond trader friends at Goldman and Morgan to see what they think, and together we’ll decide what the markets might do, and might not, but really, I don’t have a clue right now because we’re near dark.”

(2)  Never say that the financial sector has nothing to do with the “real economy,” so that doubts, unease, and downright panic on Wall Street won’t affect “the fundamentals.”   

The psychology of the market is the market.  The intangibles determine everything else, in part because for over a hundred years the law has defined property as a stream of income that a reasonable person can expect from the deployment of tangible assets.  The “real economy” is exactly what we think it’s becoming, as measured by private and public projections.  Go ask John Searle or Alan Sokal is you want to start with objective reality. 

(3)  On the other hand, never say that monetary factors explain business cycles, or that a “financial fix” is the sine qua non of economic recovery.

Contrary to Milton Friedman, Anna Jacobson Schwartz, Niall Ferguson, and Christina Romer, the Great Depression wasn’t caused by a “great contraction of credit” due to massive bank failures.  If that had been the cause, the cure would have been a great expansion of credit due to exuberant bank lending.  In fact, the banks did nothing—I repeat, nothing—between 1933 and 1937, when the American economy grew at rates faster than any other five-year period in twentieth-century history.  Don’t take my word for it, look at the Reports of the U.S. Comptroller of the Currency, especially the summary statement published in 1938.

(4)  On the other other hand, never, never say that the stock market is a register of broader economic trends.

Except maybe when some drunken schmuck looks down the short slope of his Anglo-Saxon nose, realizes his glasses are in the way of his strong opinion—you can tell because his eyes suddenly focus angrily on those unruly rims—and explains why you don’t know what you’re talking about. 

Before this dinner party catastrophe occurs, rehearse these lines;  they will silence the schmuck and forever foreclose another invitation to this dinner table, but they’re worth remembering in case the big thing, the entire enchilada, really does collapse.

“With all due respect my dear man, the stock market does typically function as an index of corporate profits relative to other shares of national income because the two measures that matter to traders (the Q ratio, the market value of non-financial companies relative to their net worth, and CAPE, the cyclically adjusted price to earnings ratio) focus on this sum.  More generally, the stock market is a long-term register of surplus capital—it’s where profits unneeded for reinvestment have gone since the 1920s, or rather when there’s been no constraint on profit inflation in the form of public policy or labor movements, as for example since 1983, with Reagan’s tax cuts on marginal rates.”

The uncomfortable quiet that follows will allow you to savor your wine and find the nearest exit.

(5)  Never say that Standard & Poor’s decision to downgrade the U.S. government’s AAA bond rating to AA + was hypocritical just because it spent the better part of a decade announcing that those bundled mortgages which underwrote the housing bubble were a safe investment for all manner of money managers and financial planners.

Look at it this way.  S & P was paid by the banks that were bundling the mortgages and betting on (or against) house price inflation, so its judgments on the credit worthiness of both borrowers and lenders were, shall we say, occluded by its vested interest in continued compensation from those banks.  By contrast, S & P is not paid by the U.S. government, so its underwriting judgment is not here occluded by venal imperatives.  You might even say that its decision on the credit worthiness of the U.S. government was more objective than its previous decisions on those bundled mortgages.

(6)  Never say, on the other hand, that an assessment of sovereign debt must not factor in political division and dysfunction.

As if the credit worthiness of any nation-state can be sustained in the absence of political will, which of course presupposes  political consensus.  The invocation of the 14th Amendment as a possible escape hatch for Obama is instructive in this regard, for that constitutional summary of the end of slavery was, in part, a way of avoiding the repudiation of Civil War debt, a very real possibility with the return of the South to the national legislature after Appomatox.  Politics in a market society invariably center on the role of the state in creating opportunity, promoting economic growth, and thus realizing a certain kind of society, no more so than here in the U.S. since the 1790s.  So you can’t make pronouncements about any economic phenomenon without reference to the political context—and vice versa.

(7)  On the other other hand, never say that the numbers—the projections—foretell a sovereign debt crisis that might cause the U.S. government to default on the payment of the national debt (as against shutting down parts of the government’s day-to-day operations). 

These numbers just don’t add up to a crisis unless you believe that public debt as such is a moral problem to be grasped in terms of family budgets—in this case, I can’t help you—or that David Brooks is a reliable guide to anything except his reading habits, or that the costs of Medicare and Social Security are the real burden and the unbearable weight of the welfare state.  The rush to Treasuries in the last week indicates that nobody in his right mind has any doubts about the full faith and credit of the U.S.

(8)  Never say that China has a point in scolding Americans for their consumerism and indebtedness. 

Read between the lines and understand that Party leaders there are announcing that they’re not yet ready to map the transition to consumer-led growth—that is, to follow the inadvertent American example.  Yes, China will diversify its sovereign debt portfolio, but, like all other rational beings on the planet—this category excludes Rand Paul, Grover Norquist, Newt Gingrich, Rick Perry, and Michelle Bachmann—its leaders know that there’s no safer haven than U/S/ Treasuries, and no more resilient source of enterprise, than the USA.  They remember when Japan was Number One, ready to outstrip the colossus of the West, and they don’t want to reproduce that experiment.

Ready, then, are you, for the talk shows next Sunday?  Sure you are.  Just keep that Blackberry handy.

* * * * * *

UPDATE -- TUESDAY, AUGUST 9

(9)  Never say that the Fed has shot its wad, not even when it has delivered two huge doses of “quantitative easing.”

QE 3 is coming, and then what?  Inflation?  Not a chance.  Under Ben Bernanke, there is no limit to what the central bank will do in the name of recovery.  Milton Friedman once quipped that you could drop money from helicopters when monetary policy exhausted its effects.  Bernanke is a disciple, he’ll do it.  More is better, he believes, or at least not as bad as less.  Still, dollar bills from on high can’t work for long.

(10)  Never say that Bank of America will collapse…

…even if its stock loses 20 percent of its value in one day—that would be Monday—and every hedge fund is now circling the company like greedy heirs gathered in the parking lot of an upscale hospice.  On the other hand, maybe it will, and maybe it should, since B of A is more deeply sunk in the mortgage market than any other bank thanks to its acquisition of Countrywide.  No one has any confidence in the “management team” there, not even the team itself.  Triage?

(11)  Never say that you have to be bullish when stock prices plunge. (“You can buy cheap!”)

If you plug in the numbers (Q ratio, CAPE), the stock market is still about 40 percent overvalued, even in view of the slaughter of the last two business days.  But certain stocks are sure bets, they’re the ones, like Apple, that are driven by consumer demand, right?  Oops.  Where is that demand supposed to come from, now that state and local governments are cutting back, no spending stimulus is forthcoming from the feds, unemployment benefits are expiring, and wages are still stagnant?   Hold the presses.  Also, get cash heavy, and try to get out of equities unless you’re looking at emerging markets where local or regional distribution of consumer goods can be sustained by domestic demand.

(12)  Never say “double-dip recession,” because this locution marks you as a moron who can’t think seriously about what we’re going through.

The Great Recession didn’t end in 2009, when the NBER announced that it had, and it still isn’t over, not when you measure unemployment or consumer spending, or, for that matter, corporate investment.  There’s no correlation whatsoever between the numbers on output, employment, and consumer spending, in part because employers have increased output and shed jobs, in part because consumers are still trying to balance their household budgets.

(13)  Never say that private investment is crowded out by government spending…

…so that you then get to claim that cutting “entitlements” is the way to renewed growth.  If you do, be prepared to address this question:  since when was private investment the cause of economic growth? 

Don’t have a good answer?  Here’s a hint: not since 1919. 

Take the argument a step further and acknowledge the possibility that private investment follows the demand curve determined by consumer spending—in other words, it doesn’t create jobs and thus increase consumer demand, in the proverbial sequence we all know by heart—and then what?  Then you’ve got a real problem on your hands, which might be outlined as follows.

(14)  Never say that where markets exist, there capitalism abides.

Markets and commodities were in common usage before capitalism appeared in the eighteenth and nineteenth centuries, and will presumably outlast this mode of production.  There were merchants, bankers, traders, and pirates galore back then, before the creation of markets in land and labor, but no capitalists and very few proletarians:  there were market societies that weren’t yet capitalist societies. 

Think through the analogous possibility, that we already inhabit a market society that no longer requires capitalists as the trustees of the social surplus—a market society which is no longer a merely capitalist civilization. 

If private investment is not the cause of economic growth, and hasn’t been for almost a hundred years, what are capitalists good for?  Why do we keep them around?  To allocate resources rationally, to develop the productivity of the labor force, as Marx suggested?  In view of economic events since 1983, you’d have to say no.  To discipline our desires by containing them within the anal-compulsive demands of the profit motive, as Keynes suggested in calling that motive a “somewhat disgusting morbidity”?  In view of the same events, you’d have to say, probably. 

That is our real problem: we don’t know how to think past capitalism, even though it’s disintegrating right before our very eyes.  We don’t need the oligarchs, whether they’re members of the Politburo or the Business Roundtable, to allocate resources on our behalf, but we cling to the comforting idea that we do.


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