Liberty & Power: Group Blog
Aeon J. Skoble
Kenan Malik explains how an obsession with race harms those it is meant to help.
And India Knight explains that a drunken romp isn't rape.
Jeffrey Rogers Hummel
Jeffrey Rogers Hummel
This put AIG under the regulatory umbrella of the Office of Thrift Supervision (OTS). The Federal Reserve has regulated all multi-bank holding companies since passage of the Bank Holding Company Act of 1956 and all single-bank holding companies after the act was amended in 1970, whereas the Office of the Comptroller of the Currency (OCC) regulates all nationally chartered banks. After the S&L crisis, when OTS was set up in the Treasury Department alongside OCC to give thrifts a parallel regulatory structure, OTS became the regulator of all nationally chartered thrifts. But in one of the many byzantine inconsistencies in U.S. regulations, thrift holding companies also fall under OTS rather than the Fed. And many of the other early failures in the current financial crisis were of OTS regulated institutions, providing an intriguing historical link to the S&L crisis.
But more important, the fact that AIG was a thrift holding company meant that several of its subsidiaries were, of course, receiving the deposit-insurance subsidy. I have frequently suggested (here and here) that deposit insurance has played a bigger role in causing the current crisis than is generally acknowledged, and this just reinforces my suspicion. Not only might the moral hazard from leaking deposit insurance have encouraged excessive risk taking on the part of AIG itself. But this is probably one reason that AIG's counterparties put so much confidence in its credit default swaps.
Although neither bank nor thrift holding companies qualifies for deposit insurance directly, the FDIC or Fed had often bailed them out along with their depository subsidiaries prior to the current crisis. Thus, when Continental Illinois National Bank and Trust Company was essentially nationalized after its failure in 1984, the regulators covered the holding company's debt as well. (On the other hand, when Charles Keating's Lincoln Savings and Loan finally went under in 1989, the government chose not to reimburse the bondholders of Lincoln's holding company, American Continental Corporation, but that was before the creation of OTS.) Then in 1998, when Alan Greenspan came to the rescue of Long Term Capital Management, which was neither a depository nor a depository holding company, but merely a private, unregulated hedge fund, he inevitably reinforced the impression that more regulated bank and thrift holding companies were protected.
Bear in mind that the swap contracts AIG wrote were over-the-counter derivatives in which AIG agreed to provide additional collateral both if the insured securities looked more likely to default or if the financial condition of AIG itself weakened. Thus, after AIG's credit rating was downgraded in September of 2008, the necessity to post further collateral provoked a liquidity squeeze that led to the first Fed intervention. As James Hamilton recently put it at Econbrowser:"Could AIG's counterparties have been thinking that their payments would come not from AIG but from the Federal Reserve and taxpayers? . . . To the extent that the buyer and seller of the CDS were making a bet for which the taxpayers were implicitly picking up the downside, the CDS market, rather than helping institutions effectively manage risk, would have been a factor directly aggravating systemic risk." For useful details about AIG, check out this report from the Congressional Research Service.
Jeffrey Rogers Hummel
Amy H. Sturgis
The Prometheus finalists for Best Novel recognize pro-freedom novels published last year:
* Matter, by Iain Banks (Orbit Books) - Part of Banks' series of far-future space operas about the Culture, a utopia which reflects Banks' interest in anarchism through its avoidance of the use of force except when necessary for protection and defense. The novel focuses on an agent in Special Circumstances, the Culture's special forces unit, who returns to her home planet, a"shellworld" with multiple layers of habitation, after her father has been killed in a coup.
* Little Brother, by Cory Doctorow (TOR Books) - A cautionary tale about a high-school student and his friends who are rounded up in the hysteria following a terrorist attack, the novel focuses on how people find the courage to respond to oppression.
* The January Dancer, by Michael Flynn (TOR Books) -The classic space opera, set in an interstellar civilization created by a wide-ranging human diaspora, revolves around how discovery of a an alien relic sends agents of a multisystem federation on a quest that exposes them to political and economic institutions of many different cultures and requires them to deal with threats to freedom, from piracy to political corruption.
* Saturn's Children, by Charles Stross (Ace Books) -A robot's adventures after all the humans in a society have died raises complex issues of ethics, duty, family and struggle in this Heinlenesque novel.
* Opening Atlantis, by Harry Turtledove (Penguin/Roc Books) - Set in a world where medieval Europeans discover an island continent in the Atlantic Ocean, this first novel in a new atternate-history series explores the politics of colonization and the struggle for self-determination while offering parallels and contrasts with development of the Americas.
* Half a Crown, by Jo Walton (TOR Books) -The sequel to Walton's Prometheus Award-winning Ha'penny concludes her alternative-history trilogy, set two decades after Britain reached accommodation with Hitler's Germany in the 1940s, with a chilling portrait of people all too willing to trade freedom for security.
Today’s news brings us a perfect illustration—one of many during the past year of financial debacle and worsening economic recession. According to an AP report, “Treasury Secretary Geithner asked Congress on Tuesday for broad new powers to regulate nonbank financial companies.” Geithner, of course, earnestly expressed the finest motives: “We must ensure that our country never faces this situation again.” Geithner’s partner in crime, Fed chief Ben Bernanke, joined him in “calling for greater governmental authority over complicated and troubled financial companies.” These rulers of the universe want the legal power “to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.” (Extra-credit question: haven’t they been taking precisely such actions for the past year or so?)
Given what a manifestly big deal this bureaucratic power-grab appears to be, why would anyone in Congress want to go along with it? Simple: failure to hand over these powers to the apparatchiks might result in the complete destruction of civilization. Speaking of the government’s having already poured more than $180 billion into AIG, Bernanke told the House Financial Services Committee that the big insurance company’s “failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.” You heard him — catastrophic implications for jobs. That’s all that members of Congress needed to hear. Faux job creation is their very lifeblood when they run for reelection.
Since the onset of the current financial troubles, government officials have made repeated use of a new mantra to justify shoveling mega-tons of the taxpayers’ money to favored firms: systemic risk. So, naturally, at today’s hearings, Geithner trotted out this new hobby-horse: “As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can.” But did we really see systemic risk hovering over AIG, or have we merely been told repeatedly that it was hovering? One wonders whether Bernanke and Geithner are also on record as having reported that they have definitely sighted flying saucers.
In the true spirit of neoclassical economic scientism, I say let’s stage an empirical test: let AIG or Citi or B of A or some other giant, mismanaged financial institution go down, and then let’s see whether the world comes to an end. If it does, we’ll know that these transparent power-grabbers were right about systemic risk; but if it goes right on spinning more or less as before, we’ll know that they’ve been selling us a bill of goods. I think the odds are so greatly in our favor that I’m more than willing to see the experiement carried out. After all, it’s not as though these financial geniuses have demonstrated a great deal of prowess so far, despite having tossed more than $8 trillion to the wind.
It’s possible, of course, that some people failed to see what was going on at today’s hearing, because, as usual, all parties tried to throw the bloodhounds off the scent by dragging a red herring across the trail. This time the rotten herring is the $165 million in bonuses that AIG recently attempted to pay certain employees to retain their services. Joe Sixpack got mighty hot under the collar about these bonuses, of course, goaded by the news media’s usual efforts to make their emphasis inversely proportional to an event’s actual importance. Yes, people are furious about the bonuses; these payments are the populist outrage d’jour. People seem not to have noticed, however, that the $165 million scheduled to be paid in AIG bonuses amounts to approximately 0.00002 of the total amount the government has dispensed in its recent commitments for loans, capital infusions, “stimulus” spending, loan guarantees, asset swaps, and other utter (and utterly destructive) wastes. The public might just as well have become inflamed about how Tim Geithner combs his hair.
One snippet: Bruce Smith says that conservatives are not discriminated against in academia, adding that many of them are" crybabies." Right.
UPDATE 3/22/09: Two other Klein offerings on this topic:
1. An article in The Independent Review, entitled"Groupthink in Academia: Majoritarian Departmental Politics and the Professional Period," here.
2. A podcast of Klein with Russ Roberts on"Truth, Bias, and Disagreement," here.
David T. Beito
The first review has already appeared of my new book, Black Maverick: T.R.M. Howard's Fight for Civil Rights and Economic Power. I hope that this is the beginning of a trend. In the latest issue of Reason, Damon Root writes the following:
No single individual brought down the South’s Jim Crow regime, but there were a few dozen who played essential parts. Black Maverick convincingly elevates Howard to that rank. It also provocatively links Howard’s success to the controversial ideas of the 19th-century African-American leader Booker T. Washington, who had famously prioritized black economic independence over political liberty. In his celebrated “Atlanta Compromise” speech of 1895, Washington declared, “No race that has anything to contribute to the markets of the world is long in any degree ostracized. It is important and right that all privileges of the law be ours, but it is vastly more important that we be prepared for the exercise of these privileges. The opportunity to earn a dollar in a factory just now is worth infinitely more than the opportunity to spend a dollar in an opera-house.” Howard’s life at least partially vindicates Washington’s much-criticized approach, showing, as the authors write, “that the growth of voluntary associations, self-help, business investment, and property ownership was the best precondition for civil rights.”
Indeed, one of the book’s most significant achievements is to highlight the indispensable role that black entrepreneurs and professionals played in the crucial early phase of the modern civil rights struggle. Several years before the appearance of Martin Luther King’s clergy dominated Montgomery Improvement Association, Howard’s RCNL relied primarily on the support of “undertakers, entrepreneurs, professionals, doctors, druggists, and owners of small farms.” These men used both their financial resources and their professional networks to support some of the earliest economic and legal challenges to Jim Crow. For Howard, this focus on economic independence remained constant throughout his career. As the authors note, “although Howard’s speeches resembled those of a Baptist preacher both in style and content, he had always emphasized business and the professions, not the church, as the vanguards of future success.”
Read the views of Australia’s former Prime Minister, Peter Keating, in the Sydney Morning News. See the text below.
How is it, that the same people, usually Mandarin bureaucrats like Larry Summers, often from Harvard, keep turning up, decade after decade, in key policy positions in running and ruining(?) the American Empire?
In the decline of American Power, must the Empire grow senile as well?
Why can't we just elect Caligula's horse to run things? It is a great idea, whether true or not!
Obama's economic saviour savaged as Keating lets rip
By Peter Hartcher March 7, 2009, SMH.
When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner. The initial impression was good. The stockmarket surged and the pundits swooned."Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post. The paper gushed:"Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies.""A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was"up to the challenge". If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since. In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis:"Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis." In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription. Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts. The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment. But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances. The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind. But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem. Keating continued:"Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power." Exactly who was the"gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category. Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences:"The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose." China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen. Keating continued:"This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves."These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development." Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so:"After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money." And Asian capitals know that they have no real influence over the IMF - while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent. This is an artefact of the immediate postwar power structure, when the IMF was set up. Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis. As for The New York Post's claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries. Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy. China invested most of its reserves in US debt markets. Keating again:"So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it."That is the fundamental cause of the problem - the imbalance is the fundamental cause." If Keating's opinion of Geithner had circulated in the US, the Americans would not have been so surprised and disappointed with their new Treasury Secretary. They quickly learned that he had failed to pay $43,000 in taxes owing. Then, when he announced his much-anticipated plan to rescue the US banking system, share prices slumped by 4 per cent immediately and a new round of weakness in the financial sector began. The pundits turned savagely against him:"So much for the saviour-based economy," wrote Maureen Dowd of The New York Times. Senator Shelby changed his mind:"Aggravating economic problems by contributing to marketplace uncertainty about what steps the Government will take - is that what this is?" he fumed. US bank stocks weakened so much that nationalisation seems to be the only remaining option to put them quickly out of their misery. Australia's banks, by contrast, are strong, said Keating, because of his decision as Treasurer to create the"Four Pillars" policy. This requires that the four big banks remain separate, barred from taking each other over. This prevented them" cannibalising each other", in Keating's words. As protected species, they had no need to mount risky takeovers to bulk themselves up defensively. Their strength certainly wasn't due to the brilliance of their managers, whom Keating described as" counterhopping clerks" who had managed to work their way up the bank hierarchies. A further source of the soundness of the Australian banks, he said, was that they had learned well the lessons of risky speculative lending as a result of"the recession we truly did have to have". In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counterhopping clerks. It's a world of many villains. And only one hero. Peter Hartcher is the Herald's political editor.
Each year, my accountant sends his customers a tax planner with a cover letter. This year’s letter includes the following paragraph:
There are many new tax laws this year. Every one of the Stimulus, Reform, Recovery, Correction, Relief, Equity, Protection and Prevention Acts contains hundreds of pages of tax law changes. My favorite is the Heartland, Habitat, Harvest & Horticulture Act of 2008, which changes the depreciation rules for race horses. We have reviewed them all and are prepared to take you through this complex mess. It’s not that confusing after you remove the exceptions to the exceptions. IRS is not smart enough to make it really hard.I have been doing business with this accountant for about thirty years, and in that time his letters have always ended with the same words: God bless the IRS.
Jonathan J. Bean
(this blog entry continued over at my FreeU site: http://freesiu.blogspot.com/2009/03/great-depression-and-college-life.html
Jane S. Shaw
Aeon J. Skoble
I saw Zack Snyder’s film of Watchmen today. I couldn’t think more highly of the graphic novel on which the film is based – I’ve read it at least 15 times, I’ve taught it in classes, I’ve lectured on it, and I’ve published on it. I have a fanboy love for it and a philosopher’s respect for it. I was nervous about the film being made, because it was very important to me that it not disrespect the book. Alan Moore’s works have not fared well being made into movies, and Watchmen in particular is so much a creature of its medium – it’s not only a comic, it’s about comics. Moore and his collaborator Dave Gibbons used the medium to its fullest potential, so it was reasonable on several levels to be concerned about a film adaptation. But the news is good: Snyder did a great job translating the story to film. Part of what I mean by that is to recognize that movies are fundamentally different from comics, so the concept of “being faithful to the source material” is complicated. Some said Watchmen was “unfilmable” – in one sense, that’s literally true: watching a movie is simply a different sort of experience than reading a comic. So too is making a movie different from making a comic. So for me, “faithfulness” here is mainly about staying true to the story – not just the plot, but also the themes, the psychological insight, the philosophical ideas explored. If some layers of depth are left out, that’s sad, but in some cases unavoidable, and in any event excusable provided that the central story is still getting told, and as much of the deep stuff gets in as possible. An example of getting this right would be the film of The Name of the Rose. There was a lot of philosophy and theology and history in the book that couldn’t make it into the film, but I was impressed with how much of it did. On the other hand, the film version of V for Vendetta, while enjoyable on one level, not only lost a lot of its depth, it changed the underlying themes in important ways. Watchmen did not make that mistake. Snyder omitted some story elements, and of course the psychological portraits aren’t as in-depth as in the book, but what made it successful is that so much of the deeper stuff did manage to get in, and Snyder remained true to the main themes. Indeed, he was extremely faithful to the story for the most part. By now probably everyone has heard that he “changed the ending,” but that’s not exactly correct: he changed the mechanism by which the ending was achieved, while leaving completely intact the nature of what has happened, the ethical ramifications of it, and the dilemmas faced by the protagonists in response to it (as well as one of the best lines ever). Was it sad to miss the omitted elements? Of course. The book is richer and deeper. But I like movies too, and this is probably as good a movie of this book as it was possible to make. The fight choreography was spectacular, the visual effects were incredible, the cinematography was very evocative of the panels of the novel. I thought the acting was fine, Jackie Earle Haley’s in particular, but there weren’t any performances I thought were weak. And someone watching the film who has not read the book should be able to grasp the awful dilemma of the film’s end as well as its characters’ ambivalences. That means it was a success. A or A-. I am eagerly awaiting the deleted scenes on the DVD.
UPDATE: some readers have expressed interest in my 2005 essay on the subject, if you don't want to buy the book linked in the post, try here.
David T. Beito