Real Investment Versus Phony Finance

While efficient capital markets types lack the philosophical tools to question any hustle that arises from the markets, those who have taken a step back from the mortgage backed securities and credit default swap scandals notice something amiss.  Essentially, an elaborate series of hustles, frauds, and money-transferring (rather than wealth-creating) “innovations” have emerged in recent years that are not necessary under free market principles, create great instability, and damage the federally insured commercial banking system.

Jeremy Grantham, a gifted fund manager and very coherent writer, shows why the apologists at the Journal and CNBC don’t know squat:

Clients can’t easily distinguish talent from luck or risk taking. It’s an unfair contest, nothing like the fair fight assumed by standard Economics. As we add new products, options, futures, CDOs, hedge funds, and private equity,aggregate fees per dollar rise. As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more. As total fees in the past grew by 0.5%, we agents basically reached into the clients’ balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth.

This is true with the whole financial system. Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate financial services. Of course, adequate tools are vital. That is not the issue here. We’re debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down.

As yours truly said last year:

I have no problem with people making lots of money, particularly folks that develop, invent, manage, or otherwise run a productive business or invest in the same.  I’m glad someone like Henry Ford or Bill Gates made it big.  I do however have problems with people making lots of money in an industry whose benefit for the rest of the society is dubious, whose chief productive activity in recent years has been making impenetrable instruments that defy honest valuation, and who have now come hat in hand to beg for public funds,  even though they’re balk when they’re told they might have to cut expenses like every other person and every other business in America.  It’s a ridiculous, insulting, crony capitalist style of behavior that is more reminiscent of Mexico or Indonesia.  It should not be defended by those who purport to believe in free markets.

Revolution Within the Form

Oswald Spengler wrote in the Decline of the West about the “revolution within the form.”  In such circumstances, things appear to be what they always were.  They have the same names–nations, parliaments, cultures–but their essence is fundamentally changed, like the farce that was the Roman Senate under the Emperors.   Rick Darby of Reflecting Light describes this sad phenomenon brilliantly with regard to the now decadent entity that is Europe:

Old Europe died in 1945. A lot of it was physically destroyed, but buildings can be rebuilt, and in fact some have been re-created exactly as they were before the bombs struck. But Europe’s sense of itself, its individual nationhoods, its links with a past going back to the Roman empire, are gone.

What passes for Europe now is generic and technology-minded, its so-called leaders agreed on only one thing: that its indigenous citizens are cursed with a terrible past best left behind as quickly as possible. The quickest way is population replacement. And the Third World, especially Islamic, is happy to abandon their wretched homelands for Europe’s pleasure garden. But not to abandon the tribalism and belief systems that messed up their states of origin.

The New Europe is to be, officially, anything and nothing. Unofficially, in reality, its future is Islam unless the tide is turned soon.

This indeed is the great swindle of liberalism.  An entire continent exchanges its faith and its ethnic integrity for what? Microwave ovens and the ever-receding goal of forgiveness from the gods of political correctness?  It’s a depressing situation, a crime really, and one where the chief perpetrators will escape punishment.

The Establishment’s Military Establishment

Quoted over at Sully’s:

On everything from civilian trials to Gitmo to torture, we have two distinct groups — GOP leaders, the Cheneys, Limbaugh, and conservative activists on one side; President Obama, Gen. Petraeus, Secretary Gates, Colin Powell, Adm. Mullen, Adm. Blair, and Gen. Jones on the other…McConnell and his Republicans cohorts are reluctant to admit it, and political insiders have been slow to acknowledge it, but what we’re witnessing is exceedingly rare — the Republican establishment openly rejecting the judgment of the military establishment.

This is called believing your own bullshit. Both Republicans and Democrats know that the military “establishment,” on the whole, is extremely political and goes with the flow.  This is why Rumsfeld gets to hear what he wants on troop levels in Iraq and Lynnie England gets to guard hardened Iraqi terrorists. It’s true there is actually some debate on “Don’t Ask Don’t Tell” and probably a greater percentage of liberal views being held among officers, but these guys yapping are either speaking a minority view or saying what they think will get them promoted.   If you poll a bunch of random E-5s, I should imagine some different, less p.c. views would prevail.

The guys with stars tend to have friends in high places; their organizational chart changes with administration; and, they know how to say what the political leadership wants to hear no matter who is in power.  The scurrilous remarks on diversity from General Casey after Maj. Nidal Hasan’s murderous rampage were prefigured by the platitudes on women-in-combat mouthed by the cowed survivors of the Tailhook reckoning in the Clinton years.  Gone are the days when generals resigned in protest.  The last we probably had of that Old Breed was Shinseki, or possibly van Ryper, both of whom were proved right in spades regarding troop levels in Iraq.

Note too from Sullivan the contradiction, the “one way ratchet” on civilian control of the military.  We’re told the military needs to accede to civilian directives, and that it is often mindlessly against change to its rules or culture. This much is generally true.  But then we’re told not to listen to those civilians when they happen to say something illiberal, that is when they speak for the the military’s rank and file who cannot speak without being hammered by Pentagon commissars.

The problem with the “military voice” on political and even military matters is their complete lack of independence.  Soldiers and officers work for the government.  The President is their commander in chief.  They can be cashiered or down-graded or otherwise made miserable if they make too much of a fuss about anything.  For a long time, America’s military dealt with this constraint through a well-cultivated political independence.  They avoided interfering in politics, and politicians generally did not interfere with the folkways of their very distinct and undemocratic corner of American society.  Post-Vietnam, the military itself became seen as a problem.  Its regimentation and very warlike essence was seen as the root of social evils within (My Lai) and outside (Kent State) combat.  Politicians responded.  The draft ended.  Training was made easier.  And this political pressure to soften things up tended to drive career military men towards a distinct political conservatism.  This politicization of the military, however, had as much to do with the anti-military changes to the once-patriotic Democratic party as anything else.

Incidentally, as a practical matter, I don’t think allowing gays to serve openly will change much or destroy the military’s culture all by itself.  Times have changed somewhat since the early 90s.  With few exceptions, flamboyant or disruptive types (gay or otherwise) have avoided the service and tend to conform once they are in on a great many matters.  Most will keep their lives discrete if they judge it will be a problem within a particular unit.  But don’t ask don’t tell allowed all of this; it simply required discretion both up and down the chain of command.

The new policy will allow open service by gays.  This will be a big change, but, more important, this will usher in a whole host of related and very negative changes.  Judging by the umpteenth sexual harassment seminar our forces endure on a biweekly basis, open service will probably lead to demands for changing the military’s “homophobic” culture through indoctrination of one kind or another.  Those uncomfortable will leave.  They will be ostracized and eventually punished for the very cultural conservatism that leads them to join the military. Those who remain will be those who lack the courage of their convictions, if they have any convictions at all.

Beginning with the post-Tailhook approach to women in combat, to affirmative action, to enforced religious tolerance of anti-American Muslims, and now this, the military, which was once a bastion of competence and an Old World veneration of character, has slowly become a reflection of the dishonest, flabby, egalitarian, and leftist spirit of the 1960s–a spirit defined in great part by its hostility to the warrior and his ethos.

Volcker on Financial Regulation

A thoughtful and balanced piece by former Fed Chairman Paul Volcker on the need and desirability of new measures to limit volatility and risk taken by federally insured banks, viz.:

Combining those essential functions unavoidably entails risk, sometimes substantial risk. That is why Adam Smith more than 200 years ago advocated keeping banks small. Then an individual failure would not be so destructive for the economy. That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.

Instead, governments have long provided commercial banks with the public “safety net.” The implied moral hazard has been balanced by close regulation and supervision. Improved capital requirements and leverage restrictions are now also under consideration in international forums as a key element of reform.

The further proposal set out by the president recently to limit the proprietary activities of banks approaches the problem from a complementary direction. The point of departure is that adding further layers of risk to the inherent risks of essential commercial bank functions doesn’t make sense, not when those risks arise from more speculative activities far better suited for other areas of the financial markets.

Yet Another “Big Speech” for Obama

To appear more human, Obama tried to be funny and folksy, but his wise cracks and “million dollar smile” came across more as creepy sarcasm.  This act also created a problem of tone.  People want to see that he cares about them and their problems , that he “feels their pain” the way Bill Clinton did so well. He failed in this regard.  He always does.  It’s not his strong suit.  It was more like a pep rally atmosphere.  And he was fully of excuses, on banks for instance, rather than careful explanations and defenses of his policies.  This made him look simultaneously cocky and weak.

The speech was screwy on many levels:  he failed to convey empathy effectively, the speech lacked a unifying theme, his “rah rah” engagement with the partisan Democrats will likely alienate independents, the facts hurt him on unemployment and the debt, and his response to the same was logically contradictory, i.e., freeze spending but spend new money on flying cars and solar and what-not.  I also think his doubling down on healthcare will scare seniors, even if Medicare reform long-term makes good policy sense.  Finally, his jobs bill sounds kind of unbelievable; if a $1T stimulus couldn’t sort things out, what will $30B do. It hurts these programs’ popularity that none of us really knows anyone helped by the stimulus.  He named a few random companies, but I literally have never seen a project or met anyone who was employed because of that boondoggle.

Like most state of the union speeches,  it won’t move the dial much, but since the dial is pointed so negative for him, that makes this speech a big failure.

Et Tu Amcon?

The American Conservative has been a bit unwieldly from the start, attracting dubious characters whose only “conservative” instinct was isolationism rooted in the very unconservative impulses of pacifism and alienation from the values of fellow Americans.  Pat Buchanan has had little involvement for a while.  Taki left and started his own magazine, which now appears to be headed towards self-destruction.   What remained has been adrift for quite a while. Now, confirming for the millionth time the truth of O’Sullivan’s First Law, the American Conservative under the leadership of Ron Unz has started to question the immigration reform views of traditional conservatives, suggesting that fears of Hispanic Crime–which tends to be 3X the rate of native-born whites–are overstated and exaggerated. Don’t we have the Weekly Standard and the Wall Street Journal to promote such mythology?

Of course, crime is not the only reason to oppose massive Latin American immigration.  There are other issues like the job security of native born Americans and the ways that Third World values corrupt our political culture and collective ways of life.  Ignoring these other concerns shows a real lack of conservatism, and the suggestion that these fears are irrational is not only stupid, but is easily refuted factually, as Heather MacDonald and Steve Sailer have done for years.   But the bigger question is:  why, even if crime were absolutely a non-factor in Latin American immigration, would a conservative, concerned with conserving a particular American way of life from change and degradation, support what has been one of the most significant drivers of our national dissolution, disunity, and decline.  I would not want millions of people from anywhere coming here, even if they all were quite pacific.  Conservatism is supposed to be about conserving something, but Unz has demonstrated (again) a marked indifference to the survival of America as a coherent and historical entity.

Obama’s Charm Offensive

Recounting various failures of Obama’s rhetoric to accomplish anything–from Copenhagen on the Olympics to Iran–Bret Stephens’ timely editorial in today’s Wall Street Journal reminds us that Obama’s fatal weakness is his own and his supporters’ unshakeable faith in his powers of persuasion:

He seems to have come to office believing that America’s problems abroad could mainly be put down to the rough-edged persona of his predecessor. Change the president, change the tone, give magnificent speeches, tinker with the policy, and the world would revert to some default mode of liking America and wanting to work with it. It doesn’t work that way. Nor does it work in domestic policy, where personal salesmanship has failed to overcome the defects of legislation. Americans still generally like Mr. Obama, or at least they’d like to like him. It’s the $12 trillion deficit and Rube Goldberg health schemes that rub them wrong.

So what’s Copenhagen Syndrome? It is a belief in your own miracles. It is thinking that those who crowned you king actually knew what they were doing. It is buying into your own tulip bulb mania. It is the floating evanescent bubble of self. God help you when it bursts.

Incidentally, I wrote something on this earlier this year, and it’s notable that Obama’s experience with the presidency is much like the rest of his life:  a series of attainments but few achievements, exactly what one would expect from a smooth-talker who time and experience have repeatedly revealed is basically a sophist.

Neoconservatives: Still “Selflessly” Promoting Open Borders

Leading neoconservative Elliot Abrams, reveals his essential liberalism and indifference to America as an historical entity by calling for massive Haitian immigration as a response to the Haitian earthquake.   As we all know, there’s plenty of jobs to go around in America these days, and the Haitians that on Monday are swarming US Navy helicopters and practicing voodoo, would make fine citizens the minute they cross our frontiers.

This goes beyond mere liberal stupidity.  Abrams is a self-serving hypocrite. He openly and without apology promotes one set for rules for his ethno-religious group–Jews–for whom he publicly frets about “alarming demographic data” in the form of intermarriage, while promoting quite another set of rules for the historically European country he calls home.  For neoconservatives, America’s demographics deserve no respect and are only noticed as a remind for their own group’s status as a minority, a problem reminiscent of their once very vulnerable status in Europe, that must be rectified today through purposeful relegation of native-born European-Americans to minority status.  This is not good policy, and it will likely backfire some day on those whom it aims to protect and render invisible.

Death of the Prop Desk

Obama–for reasons that I think have a lot to do with the tastes of his advisors (i.e., Rahm) and Obama’s own comfort with Ivy Leaguers, rich people, and elites–has strangely kept his hands of Wall Street since taking office.  In fact, he’s rolled over on so many things that the occasional noises from Ron Paul types about the two party system being bought and paid for made more sense than usual, e.g., continuation of AIG bailout, Federal Reserve purchasing of MBS assets, renewal of Glass Stegal, raiding the FDIC to offload MBS assets, and permitting newer and less regulated entities to use the Federal Reserve’s “discount window.”  His occasional noises about compensation and the “fat cats” always sounded a little out of tune under the circumstances.  He’s much more comfortable apparently chewing out a middle class Cambridge cop than he ever would be going toe-to-toe with the barons of finance. After all, his two constituencies in Chicago were elite liberal whites not so different from Wall Streeters and poor and not-so-poor blacks in Hyde Park. Country club WASPs and working class ethnic whites always seemed to be the groups with which he was the least comfortable and towards which he was the most hostile.

In some ways, this reluctance by Obama to mess with Wall Street is good. Democrats tend to conflate productive wealthy people who invent things and cure diseases and build businesses with those whose only contribution is gambling with OPM (other people’s money).  For many Democrats, they’re all just “the rich,” which is frankly a stupid view of things.  On the other hand, a goodly swath of Wall Street has become little better than naked, bankrolled speculators in the last ten years, maybe more.  Conservatives who favor free markets and limited government must recognize that Wall Street is anything but; it has access to artificially cheap fiat money, its cronyism and various schemes to evade regulation and accountability are legendary, and its largest institutions have never hesitated to get special treatment that a gas station or car dealership in the hinterlands could never obtain.

Finance must be kept in a fairly narrow lane, or a free society is doomed.  Unregulated banks and publicly bankrolled speculators threaten systemic disaster.  This is particularly so with the unstable combination of a fiat currency, a central bank, and a cozy relationship of our deficit-running government and the insider game of public finance.  (Very few entities are treasuries dealers, and the entire market is opaque).

While getting rid of the banks (and pseudo-banks’)  “prop desk” is a step in the right direction, but what is missing is what is really needed:  a reduction in government deficit spending, rules to promote transparency, a reduction in the size and power of any one financial institution, reduction in leverage at all levels so no one is “too big to fail,” the end to AIG’s subsidy (which is really a Goldman Sachs subsidy) so that the big real estate gamblers of the recent past have to take their lumps, and finally some kind of compensation reform for entities that have a significant impact on financial markets, perhaps rules that requires greater personal stake and personal guarantees among those who would invest with OPM.  Sensible rules that limit systemic failure, volatility, harm to our industrial capacity, and financial security are difficult to devise.  Not surprisingly, it sounds like Obama’s rather late fussilade at the prop desk will not accomplish much.

But the conservative crusade for deregulation never meant and never should have meant no regulation. Even in the so-called Golden Age of limited government, panics were frequent, and large scale malinvestment and crises were not uncommon, i.e., 1875 (basically a European real estate speculative frenzy), 1905 (bank lending fueled stock speculation), and 1919 (government debt plus kooky monetary policy).  On the other hand, while some of the redistributionist nonsense of the New Deal was ridiculous and ineffective, the order imposed on financial markets and banks by the SEC, CFTC and other institutions, coupled with the FDIC’s protections for small depositers, did a lot to ensure the post-war stability of America’s financial markets and economy.  Perhaps none of this would be necessary if we had a real gold standard.  But it’s simply counter-factual to see these limits as all bad and for conservatives to mindlessly conflate those who produce things and create wealth with those whose wealth-making has no real public benefit or positive externality.  Even Michael Milken could point to some new businesses like CNN as a product of his so-called junk bond creations.  What has MBS, CDS, and the subprime frenzy wrought other than the worst recession since the Great Depression.

Our unregulated trade and unregulated publicly subsidized financial institutions have operated to completely fleece the middle class:  outsourcing and displacing American workers, stagnating wages, destroying our manufacturing sector, whip-sawing housing values, and strengthening an alien and hostile communist regime that we could have easily isolated 15 years ago at the end of the Cold War.  Most important, this out-of-control system has put millions of hard-working and productive people out of work.

Obama is Galvinizing Conservatives

A commenter on Larry Auster’s website put it best:

I couldn’t help thinking that this string of improbable election results—Christie in New Jersey, the Virginia clean sweep, Brown—in addition to the widespread Tea Party protests, have been powerful confirmation of what you said more than a year ago, and what I was thinking when I refused to vote for John McCain. Obama has galvanized and revived American conservatives in a way that no liberal Republican president ever could. I think it’s pretty well beyond serious dispute that if John McCain were president, we’d already have amnesty and none of those federal and local seats would have gone to a Republican. Moreover, people have coalesced around fierce opposition to a President whose leftist agenda and sheer, brazen contempt for the American people has awakened real panic and outrage.

I wrote too, around May 2008, that Obama would radicalize conservatives. So far so good.  But it’s not a costless thing; we are in a painful recession, and the “solution” of deficit-stimulus spending guarantees another bigger dip some time down the road, as whatever bubble is being inflated deflates unexpectedly.  Let’s just hope we’re not eating Soylent Green and taking our money in wheel barrows to the farmer’s market before it’s all over.  But hopefully we’ll come to our senses on the economy, fiscal profligacy, immigration, national security, and much else before this joker is through. But even that means a national decision to slowly, steadily climb out of this terrible hole and get our books in order.

Hopefully too “change” will become a bad word and we can, once again, remember John Randolph’s admonition that “change is not reform.”