Sunday, May 10, 2009

Yves Smith, "Animal Spirits", and the Big Lie Technique

One of the important moments in the financial blogosphere occurred at the end of a lengthy and impassioned post by Yves Smith at Naked Capitalism, where she opined:

The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.

Unfortunately, the financial and business has become political. Yves is hardly a right-winger; for her to use that terminology for a candidate who she fervently hoped would do the correct things is sad and shocking. (And appropriate!)

In that context, please consider the points made in a supposedly important book by two noted economists: a Nobel Prize winner- George Akerlof- and the even more famous Robert Shiller- in the popular book "Animal Spirits".

The book's subtitle is "How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism". Allegedly this is an Important work (for a popular economic tome). Perhaps within academic economics, it is worth reminding one's colleagues that Adam Smith and other empirical economists such as Keynes, who all theorized in words (not that Keynes did not also reduce his theories to equations) that at the root of economic actions are humans with emotions and non-rational expectations etc. etc. To non-economics such as a physician, however, this "insight" is jejune. of course individuals make non-rational decisions. How could one think otherwise?

The point of this post is how political "Animal Spirits" is, how mainstream it is, and how misguided it is.

Let us get right to the point. The book praises Asian economies for emphasizing saving. It ascribes the amazing long-term growth of the Singaporean economy to forced, massive savings. Yet it discusses the current American economic difficulty with a complete disregard to this philosophy:

The overwhelming threat to the current economy is the credit crunch. It will be difficult and perhaps even impossible to achieve the goal of full employment if credit falls considerably below its normal levels. (P. 86)

DoctoRx here. It's not clear if the authors are referring to the absolute level of credit or the growth level of credit.

The authors then go on to ascribe the current alleged credit crunch- which as I have previously blogged (citing such sources as the New York Fed to prove my point), only exists in relation to the loosest, most irresponsible granting of credit in generations- to a loss of animal spirits:

The segment of the financial system that initiated loans, and then passed them on, was fragile. It fell. In terms of our animal spirits, confidence disappeared. People became suspicious of transactions that they had previously undertaken to the tune of trillions of dollars. (P. 90)

DoctoRx here. The context of this passage makes it clear that government must cure the populace of this decline in animal spirits, of loss of confidence. How? With a hair of the dog strategy:

On pages 90-92, the authors have effusive praise for the Fed/Treasury solution of the Term Asset-Backed Loan Facility (TALF). They say (P. 92):

More generally, TALF shows us that there are two sides to creative finance: It may have gotten us into this crisis. But its genius may also get us out of it. (Emph. added; P. 92)

What is the "genius" of TALF? Basically, banks get to make a great deal of money with minor downside, with the Fed and Treasury taking substantial risk for limited upside. This is "genius"?

Now we get back to the beginning of this post. The entire set of actions of the government, which has really included the formerly-independent Fed ever since the Bear, Stearns/JPMorgan Chase bailout of March 2008, has been based on the combination of "high handed" and "Big Lie" tactics.

Why do I pick on Shiller and Akerlof? Well, consider that Dr. Akerlof is the husband of Fed Governor and Democratic stalwart Janet Yellen, and the authors have a classic 1960's Tobin-type liberal bias:

This had been the vision in prev ious generations of those who established central banks: the role of central banks is to insure the credit conditions that enable full employment. (P. 90)

Having recently finished reading Niall Ferguson's "The Ascent of Money", I would have to call that statement a Big Lie as well. The evolution of the Bank of England into a central bank was most assuredly not to insure full employment for the subjects of the Crown. It was much more to help finance wars, imperialistic expansion, and other matters. Similarly, while the origins of the U. S. Federal Reserve are a bit controversial, full employment in the U. S. was for the most part a given before the Great Depression (though the level of wages was another matter). The country in those days was much to busy growing and much too rural not to use more workers somewhere to do something. From the New York Fed itself on the creation of the Federal Reserve in 1913:

The Federal Reserve Act presented by Congressman Carter Glass and Senator Robert L. Owen incorporated modifications by Woodrow Wilson and allowed for a regional Federal Reserve System, operating under a supervisory board in Washington, D.C. Congress approved the Act, and President Wilson signed it into law on December 23, 1913. The Act, "Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. (Ed: This post from the NY Fed lacks a close to the quote mark; alert readers who noticed the missing "end quote" should complain to the Fed!)

Akerlof-Shiller's "full employment"? Think Humphrey-Hawkins, doctors, not Nelson Aldrich and buddies.

From bogus "stress tests" and overvalued "legacy" securities, extending to the noted academics Robert Shiller and George Akerlof, we are besieged by lies large and small and political agendas everywhere.

The good government types found on the blogosphere, such as Yves Smith and many other such as Mish, Barry Ritholtz, Jesse and Simon Johnson, are powerless voices in the wilderness. Even the President who they by and large supported as a candidate has dissed them, saying that his administration pays no attention to (mere) bloggers.

And so Big Finance continues its primacy, and the culture of Serfing USA, with a government insistent on more and more debt even as the citizenry tries to escape its own personal debt, uses every tool of modern persuasive communications up to and including the Big Lie technique to continue to enrich the Merchants of Debt even as those companies such as auto manufacturers that actually make useful physical products are left to die and ordinary people who believed the Big Lie that house prices never decline and were therefore placed in overpriced homes by the Merchants of Debt are sent to tent cities to rot with no help from the Party of Franklin Delano Roosevelt and while the financiers of this disaster not only keep their estates and fine art purchased with the proceeds of these nefarious transactions but continue to receive all the fruits of this productive nation that Washington, D.C. can provide.

Can all this really be occurring for some paltry campaign contributions?

Copyright (C) Long Lake LLC 2009

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