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Tuesday, September 30, 2008

Economy: Milagrito's Analysis

The Miracle of Finance

My friend Icebox brought this quote, attributed to Fraser Tytler, to my attention:
A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

The average age of the world's greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:
  1. From bondage to spiritual faith;
  2. From spiritual faith to great courage;
  3. From courage to liberty;
  4. From liberty to abundance;
  5. From abundance to complacency;
  6. From complacency to apathy;
  7. From apathy to dependence;
  8. From dependence back into bondage.
This quote is compelling (though it's not clear whether Tytler, an 18th century literary translation theorist, said it) as it seems to provide a clear explanation of why great nations fall: the growth of the welfare state. Of course, not every democracy is a great civilization and not every great civilization is a democracy. You would also need ignore other influences, such as war and natural disaster, as well as the fact that some people remain in poverty throughout the lifespan of a nation.

Nevertheless, you feel intuitively that this guy Tytler is on to something. You've seen this cycle in families, where the grandparents started with nothing, the parents worked hard to secure their place in society, and the kids are spoiled brats. However, the greatest appeal of this quote is to fiscal conservatives, as it seems to prove their point: the government should not help people. Only by letting people — or companies — sink or swim on their own can we avoid the fatal step of dependency, and the subsequent slide into bondage.

I do see our society bouncing around between complacency, apathy and dependence, though we are not quite the lotus eaters that the theory assumes. Society experiences waves of fear and anguish as well, our working class still has a foundation of ambition and determination, compassion and engagement are visible in the political activity of the young. The average person has their greedy, lazy moments, and also their inspired, committed, or just plain dogged years of work.

There are events that shake us out of complacency. Did you notice how patriotic and unselfish we all became after 9/11? Sometimes we want to make sacrifices and contribute to the common good. But in the long run, humans face a dilemma: rational economic behavior is not hard-wired in them. On the contrary, their circuitry induces them to act for short-term gain, which, when they were swinging from the trees, was what kept them alive.

People are stranger than cats. Back in the prehistoric days, they were capable of learning that if they ate the fruit and tossed the pit, they would survive for a day, but if they ate the fruit and planted the seed, they would do well in the future. But they had to learn this, and relearn it every generation; it’s not hard-wired. Achieving preservation and increase of resources requires cultural transmission. Once the hard-wired quick-score instinct gets loose, humans bite the hand that feeds them. Look at how farming turned out — somehow, humans have managed to turn agriculture from an exercise in husbandry to a form of rape.

Greed is a funny thing. It doesn't even work for the rapers half the time, and it surely doesn’t work for the rest of us. It creates structures (such as markets in ephemera like bundled mortgage securities) that any cat with an ounce of sense could tell were unstable and bound to crash. Then when the loud noise happens, everybody runs away at the same time, thereby making sure that the building and the people in it perish completely. Then come the scavengers. In the current scenario, these are the short-sellers, who make money from stocks going down and apparently, through their enthusiastic bets that the market is going down, can actually make the market go down.

So what happened to the idea that you could plant a seed and nurture it? When communities are so large that we cannot influence each other and promote this idea, and when there are a variety of opinions, cultural subgroups and emotional types throughout society, I can only think of one solution, one that causes a lot of pain to my independent and Republicat friends: you need law as the agent of cultural transmission. The only thing large and powerful enough to provide the needed regulation and control is the federal government.

As I get older, I get more frustrated and tired of human mistakes. Since my predecessor, Wilbur, lived in the 70s, there has been a steady decline in wise economic policy and respect for human rights by our government. However, I still think that we can promote a kind of government that provides the cultural transmission of ideas that would happen naturally in small communities. It’s our only alternative, or else we really are at Tytler’s seventh step. The government has to embrace principles that promote stability, different principles than it now represents. The government needs to focus on preserving and nurturing of our economic resources, making slow gains rather than providing scope for people to do anything at all for a short-term profit. The government needs to rein in the exploiters for the benefit of us all.

If this idea sounds like socialism, please refer to the Old Testament and the rules about fallowing land, leaving ears of corn for the gleaners, and not exploiting one’s neighbors economically. (Remember, before I was a presidential candidate, I was the Feline Pope-in-exile, so I’m never wrong about these things.) It would take several books to outline all the steps the government should take, so I’ll just mention a couple of things that I’m doing.

I’m communicating with my government. I meowed at Barney’ Frank’s congressional Banking Services Committee. They are very involved with the fate of Fannie Mae and Freddie Mac and I feel strongly that these companies should not be targeted for destruction. The notion that you hear over and over, that the taxpayers would be paying the investors, is a false one. All the government needs to do is to lend these companies the money to tide them over, while suspending interest payments to bond holders and dividends to stockholders, and eventually the companies would find their feet.

There’s a reason why I feel the government has a moral obligation to help out Fannie and Freddie. We used to have banking rules created to prevent the kind of get-rich-quick schemes that got the country into so much trouble in 1929. Starting with Ronald Reagan and most prominently under George W. Bush, the government repealed the rules that would have prevented the subprime mortgage crisis. Now, the Bushies want to destroy Fannie and Freddie, not because they are badly managed or bad for the economy, but, I suspect, as a way of transferring wealth to their rich friends. The Bushies say that the private sector can do the job of providing mortgages to the working class better. Hello? It was the private sector, not Fannie and Freddie, that created the subprime mess.

I’m also proposing a rule change in what’s called disclosure law. I got this idea from Hattie, when she asked why anyone would sign up for a loan they could not afford. The answer is, because they didn’t know they couldn’t afford it. Most defaults leading to the current crisis happened because borrowers did not know how high their payments could go. Disclosure laws make banks tell borrowers the truth about their credit terms. You’ve probably sat on top of Visa bills that have all that verbiage on the back. That’s all disclosures.

A terrible gap in the law exists in mortgages. When you get an adjustable rate mortgage, one that can go up and down (mostly up), the bank or mortgage broker doesn’t have to tell you the maximum possible payment, even though they know it, only the initial payment. Lenders always say they can’t tell you what your payment will be after it adjusts, but that's an evasion. They may not know exactly what your payment will be in a year, but they can calculate the maximum payment and any payment in between your initial rate and the maximum, and they can tell you how soon you could be liable for the maximum payment. I saw a letter in the Times today complaining that Americans’ math skills led to the mortgage crisis (the writer was a physicist), but honestly, who can calculate a mortgage payment without special training?

Then I got a brilliant idea (all my ideas are brilliant, that's why you should vote for me) and started working on a modest proposal for Barney's committee. I downloaded a sample loan document from the Fannie Mae site and I'm reworking it so it shows a borrower what their loan payment might go up to. I ran my idea past several humans. I asked, “If you knew your loan could adjust up to $4000 a month, from $2000, would you still want the loan?” Everybody said “NO!” This is the sort of information the banks should have given borrowers in the first place. It would have prevented the mess. I am telling my government that I want a rule that makes the banks tell people honestly what they’re getting into.

I am also investing. Am I rich? Certainly not. I have an investment budget of around $34.17, so my investments are really symbolic, a way to put my money where my mouth is, not to mention doing the opposite of what the headless chickens on Wall Street are doing. I am looking at financial companies that are strong, with reasonable debt, earnings, and less risky positions, but whose stock price went down because of the overall panic.

I bought Goldman Sachs and American Express and Bank of America at sale prices. I'm looking at Wells Fargo. I should have scored with Fannie Mae, too, because they were a well-managed company with zillions of houses for collateral, who actually refused to get deep into the subprime market. But I am not wasting time feeling sorry for myself over that. I'm worrying about all the working people who won't be able to buy houses if the Bushies kill Fannie Mae and Freddie Mac.

Note: ThePoliticalCat is currently posting Milagrito's pieces because Milagrito's Opposable-thumbed Slave has not yet had time to activate her keys to La Casa de Los Gatos. All Milagrito's posts are reflective of Milagrito's opinions alone, although these may or may not be shared, in whole or in part, by other residents of La Casa de Los Gatos.

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At 12:43 PM, Anonymous Anonymous said...

Thank you for the thoughtful piece of writing. I, too, think America can slowly draw back from the brink, even if she cannot climb to the hubristic heights that fanned the current bonfire of vanities we are witnessing. An old professor friend put your list more succinctly: "Nations go up the steps in boots, but they come down the stairs in slippers." Time to boot up and be ready to labor in the fields again.

At 12:51 AM, Blogger Chuck Butcher said...

Pah, Tytler was a right wing appologist, it is entire crap that entire nations go his route. What is true that a privileged elite is constructed and they give themselves all the keys to the treasury. And are allowed to.

Damn I get tired of Republican/plutocratic themes getting around progressives and being taken seriously. Fine. Find one example that contradicts my statement. Don't try to prove him in general, just ONE.

Not once in history is that the case, not once. It is always the creation of a privileged elite that gives themselves everything and destroys the nation. Apathy is one thing, this socialism or its cousins is evil is just crap. This country is nearly in the crapper right now and I'd like to know what presents the common man has voted himself. goddam.

I'm being very nice compared to my initial reaction to this revisionist crap.


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