CULTURE: FINANCE
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BOOK REVIEW:
Friedman Acolyte Jim Grant's The Forgotten Depression Critiques Obama, Bush and Government Crisis Intervention Using 94 Year Old Case Study
By Kevin Salveson
Grant is a respected author of market newsletters and a good journalist. He spent a lot of time, he says, scouring old newspapers to really get a feel for the era and who was proposing what back then. Unfortunately, while the book is a great read in many ways and he always offers a well-written, fairly incisive style (he does make a good case at least that the modern Fed tries to micromanage things too much and there is often the risk of unintended consequences), the book seems somewhat beholden to its conclusion: free markets worked back then in a crisis and we should return to that fork in the road and take it.
Thus, the book blows some of the right's most cherished dog-whistles, especially of the "liberal policy is always inferior to pure free markets" kind. In the end, he works towards stating that Obama's policy of investment to stimulate on the demand side via the ERA of 2009 was a bad idea which probably worked worse than doing nothing about it.
And from there, armed with some knowledge, the right will imply that Obama, liberals and Keynesians are "socialists" who don't love markets, commerce or America. Grant is a little more nuanced than that but it is what his book will be used for anyway. Still, the fact of the matter is, Democrats, liberals and Keynesians are pretty much just as capitalist as anyone. Not one elected official on the Dem side of the House of Reps has ever defected to Russia, as far as I know. They're still here working to improve capitalism. They are just not in favor of the kind of unregulated wild west type of Laissez-faire attitude that led to the 2008 crisis.
This book's parallel of a particular time in history before the advent of many modern modes of international finance/massive global interconnected banking/commerce and today's computer driven world is, as others have noted, a false equivalency. To suggest we are doing it wrong today because of how it worked back then does seem belied by the fact that the free-market found itself in a much worse spot recently than we saw in 1920 (due in fact to those free-market principles to a great degree). Like Homer Simpson says of beer: "the free market, cause of and solution to all of man's problems." Wages and prices stabilized back then fairly decently and fairly quickly.
But in 2008, unlike 1920, there was not just falling wages in some industries and falling net incomes which evantually stabilized themselves. The W. Bush era crisis was a near systematic freezing of the entire interconnected global credit and banking system itself. Grant's 1920s comparisons to today as a basis of criticism for Obama, Bernanke, Paulson, Geithner et all is somewhat misplaced because of that. As I used to out it to my clients, when Coke profits fall or the company is mis-managed a little the syrup still tastes as sweet. But when a bank is mis-managed that is a systematic risk at the foundational level for an economy. It not an apples vs oranges comparison, we could call it a National Apple Industry vs one glass of a citrus vanilla cola drink with caffiene comparison.
Why is it the case that free market acolytes always start with the induction (free markets always work better than government) and then they selectively find stats that allow them to work their way back and support their already arrived at conclusion? I believe it is part and parcel with the authoritarian mindset. Nonetheless, Grant says it is beyond the scope of the book but suggests his thesis might even be true in terms the Great Depression. That cola drink can go up against any of your fruit farms, anyday.
The Great Depression is of course much more of a sticky wicket so he hews to the case he can work better. In that way, Grant has done his research and assembled a lot of facts; at the same time much of the economic data is isolated from other causes and effects in terms of the turnaround of 1921 that don't fit the thesis and the ways in which the thesis may be challenged by other historic depressions and might not really apply to today's modern banking-led crisis.
The idea that government is an "interventionist" and should stay out of the way of a faltering economy also, to me, ignores the idea that both markets and government are made up of the country's people, all who mutually exert their powers to encourage economic prosperity. If "we" weren't doing it via the official channel of collective representation, we and everyone else with a stake might attempt to do the same things in other ways (cartels, etc).
One way or another, everyone responds when things slow economically. Government is simply another factor and actor in the markets to a great degree as it is comprised of the "people of the marketplace" itself and government even has its own built-in mechanism that makes it subject to the will of the people in the end (voting, freedom of speech). Bad government is bad, but not all government is bad government.
Meanwhile, Grant has the hard scientist's total cold fealty to numbers over humans. He sometimes mentions the human toll and gives examples from the newspapers of the time etc but merely as illustrations of the fact that it was a true depression. Sure, it is an economics tome not Agee's Now Let Us Praise Famous Men, but providing prosperity for the warm bodied humans is what the dismal science of policy is supposed to have as its ultimate goal.
What is not much explored by Grant is the human toll that is felt when the the invisible hand of the market, the hero of the story, is allowed to take its grip on society unchecked. It is apparently holding everyone in the palm of its hand with the best of intentions, even if it has to crush you once and a while when it presses down on its own wrist and restricts bloodflow to itself.
Meanwhile, instead of calling the hand "The Hand Comprised of All Of Us, with government as just one finger of the hand" it is instead invisible and disembodied so that it can be considered a kind of oversoul of capitalism rather than comprised of citizens with competing interests and their elected representatives as part of that system. Because if you were to embody it, it would also have to own the eyes and heart of the populace who has to suffer from the times when the hand itself is allowed to press on its own wrist and restrict its own bloodflow or choke its owners neck.
When dealing with a crisis more robust than the early 1920s, one might think twice about letting the hand cut off its own circulation until it gets gangrene. And so it was, we had the bailouts. Now, as my grandfather might say, that was an intervention! And it was pernicious not because it was an attempt by government to thaw the credit freeze but because it was structured poorly as deals that socialized the losses and privatized the gains. The same bailouts would not have been necessarily objectionable had they been able to extract accountability and longer, higher repayment rates on the extension of the people's goodwill credit to the failures on Wall Street. That the losses were socialized in 2008 is a travesty, sure, but that doesn't mean government involvement in crisis situations is always bad, just that they are probably a good option only in extreme crisis and with terms more amenable to the long term prosperity of the majority.
And in terms of Obama's Economic Rehabilitation Act of 2009, there is little of the same criticisms that can be applied to the Bush bailouts in terms of poorly structured sweetheart deals to help out Goldman Sacs. Rather, the invstments did tend to stimulate demand and created wage earners even as there were some failures and good examples of government over-sponsorship and its ability as a large spender to distort markets. (The solar industry cratered not only because Congress via Obama invested in Solyndra and distorted markets but also because a huge player in the solar markets also over-invested, China. This is a case of over-invstment risk and happens in the free market all the time as well. Meanwhile, the benefit of falling prices for solar goods and services was a boon to the average consumer if not the solar producers who couldn't manage their inventory well or source their materials cheaper).
Meanwhile, after the neo-freemarketeers of the Bush adminstration approved the bailouts on Paulson's promises, many of them then commenced to bad-mouth their peers. Though the conservatives such as Peter Schiff were wrong about the worst aspects of the bailouts and the "coming collapse of civilization" (hard to believe gold did not rally more, sure, and the risks were real but did not come to pass as Bernanke correctly anticipated), some still love to predict Fed policy will have bad unintended consequences. Just not on their initial timetable, not yet, but be on the lookout!
And, again, we often don't hear a free market acolyte talk about ways to soften the misery and have the executives accept less profit margins for their already exploitative wealth as a way to deal with the results of an executive's poor business planning. They are not interested much in the human aspect at all.
Instead, he complains (since the book is really a critique of current Obama policies as seen through the 1920 prism) that the last seven years of Obama were "lacking anything like a dynamic recovery". Nevermind that it can't really be proven that Obama's policies generally prevented an even worse depression from developing in 2008 because we'll never know how bad it might have become if Bush and Obama had not acted in some way. The predictions were dire, the Nasdaq fell 80% peak to trough, so at least the free markets themselves were well worried that the hand was losing blood too quickly to be able to pick itself up off its wrist. Muscles need oxygen to flex.
Meanwhile, without respect for the people's will in the marketplace as expressed in their civic institutions, and without the will to prevent crisis and systematic failure because of fealty to a flawed policy, what we often get is a very free but not very good model for equitable and sustainable growth, mutual American prosperity, and economic stability. Freedom and free markets are American hallmarks. So are great ideas for liberal democratic government policy that serves the greatest number. One doesn't have to mutually exclusive of the other.
So, he knows his history and makes many good points. Yet, in the end, Grant will carry the republican warm bucket of spit and badmouth the current reversal while championing many of the free-market general principles that also clearly precipitated the 2008 crisis (lack of regulation on excessive securitization of low quality mortgage assets such as CDOs, Swaps and other derivatives).
Meanwhile, IMHO, perhaps due to this recent intervention by the people for the people, we do have a decent reversal today in the USA if not a V shaped one. Unemployment has halved and the stock market has doubled. We are not facing a depression and deflationary spiral anymore. Still, that is not dynamic enough for those who always favor the expanding wage gap for favored executives and profit margins over people as a first choice. (Though the Japan lackluster growth scenario seems to still be a possibility and is probably now the worst risk we might still see concerning the unprecedented repudiation of the free market philosophy in 2007-2009 that led us to where we are today).
Well, anyway, the book is a good read as it illuminates the era and does bring some interesting facts and stats to the fore. To have a debate and look at case studies as a way to critique and evaluate today's policy? Good. To arrive at the conclusion first and then apply that case study to today when it is probably a pretty bad fit... not so good and why I can only give this four stars.
Yet the solution for conservatives isn't to put a leash the hand (unless its only on the government finger of the hand), or a few of the hand's more powerful muscle pullers. It is to just let the choking get over and done with. After all, it worked in 1920 to some degree. But it seems to me that the hand is our own hand, the hand is all of the people, the marketplace and the representatives that the "hand" elects to manage itself. But, somehow, that hand and those people --once they elect a representative to pull on some muscles of the hand to get it to stop choking its owners' neck-- become "interventionists" when they cross the threshold of the Congressional cloakroom or suggest that the collective can raise funds called taxes to invest for the future as well as spur wages and increase consumption on the demand side.
Even as we all recognize that there are going to be some bad eggs in both the market and government (Teapot Dome in Harding's day, etc), we never get the sense that the free market bad eggs deserve the same criticisms from Grant. As other reviewers have pointed out, the marketplace even back then was full of actors and agents (Mellon as Treasury secretary etc was one of them), some good some bad. Grant spends time giving us more about the good ones and less about the bad, just as often the free-marketeers give the exploiters, pollutionists and short term profiteers a free pass because at least they aren't socialists and you got to play the game to win it even if the consequences hurt a lot of innocents. So...If Smith's market really was a hand, it would be a hand with fingers that are all trying to break each other. But why is that so wonderful? Why not get a nice glove for the hand, keep it warm, keep the fingers from snapping off the other fingers?
Here is Grant's rationalization for why the invisible hand has to be so hateful of one of its fingers and why we should be inspired to let the market work itself out regardless of any human cost as summarized in a recent interview: "If wages hadn't fallen profits would have been eviscerated and there would have been massive unemployment," he says. Eviscerated! Oh my, that sounds so much more terrible than "if margins contract the business owner will have to consider a lot of contingencies." Of course, that is a negative which can't be proved in terms of "what would have happened if."
Sure, I understand, its not like Grant wants all workers to suffer and all businessowners to get inflated salaries per se, it just turns out that way. The idea is that the hand choking itself, enduring short term pain, will deliver longer term prosperity. Its not like Grant relishes others' suffering per se, its just that he wants to let the hand keep its thumb on the forefinger of government (via the mechanism of government to some degree, that is, vote in supporters of your small government policies) so that the other three fingers can do their work. Hmm, but howabout all five fingers go at it together?
We always wonder what is at the source of the conservative economist's insistence that the first choice is always defending margins via firings and lowered wages (since corporations and business owners can't tell Wall Street to expect to give up their constantly expanding precious profits margins even five to ten percent for a few years for the good of the overall business model and the sustainability of the model). Is it an ultimate contempt for the average person vs. the Randian supermodels they often fancy themselves to be? I don't know, but that tendency of theirs means that conservatives come off as suggesting everyone but the business owner has to suffer right away as fast as possible until the business owners can feel all better again. Profit margins over people, postulate the Friedmanites.
Seems when profit margins fall (the books says a up to 40% dip in "net income" occurred for all businesses between 1920 and 1921, but I'm not sure that means gross revenue or just after-expenses profits. If it is gross revenue then that indeed is a depressed economy) the first solution for the free-marketeers is always to have a run at the guys who yesterday were getting the businesses' tasks done.
That the business owner has no appreciation of the fact his business was to a great degree built by the labor and loyalty of his workers is another canard of the Randian right. In the end the smart guy at the top should just use and abuse his workers as he sees fit while he builds his business cathedrals in which they have no stake or interest, they are mere pawns in his more important game.
The free-market acolyte constantly suggests rewarding the business owner with an expanding bank account first rather than suggest that he or she make investments back into the business to create a sustainable model that can weather the next storm, keep employees happy, decrease turnover, improve reserves, make capital investments (leading to hiring), and contribute to society beyond the short term maximization of profits, etc.
Because, hey, employee turnover is bad for a business too, generally more expensive than keeping one. Why wouldn't Mr. Smart Business Owner be inspired to try and manage his business better, keep his loyal employees on the payroll, and endure a difficult time by investing in his own business and people out of the previous years' profits already sitting in his bank account? Since he doesn't seek that solution first but doesn't want to look like the failed businessman he is, he seemingly has to blame someone else for why he has to screw his employees. Well, howabout the hand itself? No, never. So... pick the finger on the hand that gives them the biggest boogeyman and then complain about taxes making it impossible to do their job right until they're blue in the face. Got it.
Sure, sometimes no revenue in an real and extended depression means no payroll no matter how smart the CEO. On the other hand, in a macroeconomic sense, Mr. Hand can't fire too many people and allow the firings to cause a deflationary spiral either. But that risk is apparently secondary to the priority of the businessowner to maintain his/her own personal prosperity in the short run above all others and even above potential greater prosperity over the long run? Again, the answer for too many Friedmanites is always: expect that employees will always get the screw first, don't cut your own wage or modulate your own business inventory and practices first, just fire away and let the chips fall where they may. Get the choking over with. Why, sixty percent of the time, it works everytime! Grant says it is good that the hand does the choking quickly since falling wages allow the system to fix itself faster. (Hey, at least like today, no rising wages means no inflationary issues for some time to come).
But, by "fix" he does not necessarily mean gradually rising wages for people over time though of course he would argue that the free market wants ultimate prosperity with that as a component. (Though that same free market does not want wages rising to quickly --causing inflation-- because that is the other problem that the hand sometimes needs to worry about. The hand sometimes jacks itself off too much! Thus, the Fed in the past responded to curtail demand some via raising rates; worked for Volker).
The method Grant favors to stimulate a recessed or depressed economy clearly is all about the owners and the benefits they receive over the advantages to the population at large. Society is just lucky if they can ride the coattails of all the Randian geniuses out there, see. However, as history since the 1980's has shown, in fact wages will stagnate and profits will be funneled to the top without "the people" getting together to modulate it on their collective behalf.
In fact, a real and lasting recovery for the population at large is often derailed by the ideas Grant is proposing since, if history is our guide, though profit margins might start to rise as a recovery takes hold, wages will not follow closely the way the free market people always promise. At best it seems they trickle down instead of gush down and thus the purchasing power needed to spark recovery is hampered by the Republican strategies involved with perserving oligarchy and the hedgemony of the already wealthy to the exclusion of even their own long term interests (a healthy economy).
So what do you get when you get a recovery but no wage gains? During the Reagan/Friedman freemarket era (the last decades of the 20th century) we've seen that the wage gap between the average worker pay and the CEO pay explode from abut 40% to over 400%. That is not hyperbolie like "eviscerated", that really is a 1000% explosion! In other words, you get a big wage gap that doesn't support growing and sustainable consumption from those most likely to spend the money and recirculate it into the economy.
Thus, history shows that the Reaganomics trickle-down promises to a great degree obscure the fact that even as the nation enjoyed apparent prosperity from a functioning economy on the supply side (hey, Westfield built a bigger mall, life is getting better every day) the rising profit margins didn't go eventually towards repairing the damage to wage losses (in the late 60s and early 70s recessions) quickly but rather to executives. So the workers / customers can wander the mall, but they can't buy much in it. Hence, Westfield sees boom and bust cycles rather than the more stabilized prosperity of rising wages and full emplyment which they would aim to get via a slightly more liberal government and economic policy during a crisis.
When profit margins expanded at the end of Grant's1920 miracle of the free markets --just like in the 2000s-- the majority of the recovery was indeed funnelled to the top. Wages and prices stabilized but did not grow even as margins again exanded, and we eventually hung on until the systematic issues that saw a short recovery in 1921 manifested themselves again by the end of the decade. (Grant approaches that type of lead-in to the greater issues of the Depression, but wisely avoids linking the two events or discussing how the free market response of Hoover etc may have failed the nation in the next round of challenges).
I understand the profit motive and the fact that the owner most often takes the capital risk to a great degree and has the vision for the product and the responsibility to make the model work, etc. But a smart business owner knows how much he owes to the labor he underpays for, how much public goodwill and sustainability is important to business success, and that one saves for a rainy day and anticipates potential risks and hardships or owns up to it and takes the hit first.
And, sure, in minor cases like a short recession or plunge his theory for how to handle it might work as it did with the 1920 recession. (Grant calls 1920 a depression due to its severity, and on its face it does seem surprisingly severe, but in terms of longetivity it seems a lot more like a recession; despressions tend to last over many years due to their total structural type collapes. The stats he picked to highlight the severity in 1920 would need a thorough going over to determine that, more than I have the time our resources to fact check).
Still, In such cases as the 1920 brief depression, sure, things might balance out a little if wages fall only some and allow the business owners to keep demand ok and most employees on the books and then eventually prices stabilize again, but that in itself and alone is not the cure IMHO to a banking sector-led crisis like we saw in 2008 under free market acolyte Bush. In such a crisis, the hand becomes somewhat paralyzed as it did when the credit system froze. (He does address the issue by saying that business confidence as a risk is an issue but that it is a nebulous one he can't quantify).
But a paralyzed hand is not in the free market vocabuary. They always just suggest that the cure to any ailment, as in the 20's, is to simply let many a worker, company, or bank fail and let the risk fall on the shareholders and potentially society at large. Well, ok, yes, that's mostly the way it should be in a capitalist economy that honors the forces of creative destruction to a point. (Though with FDIC in place now at least the system is a little more secure than it was in the 1920s for investors). As long as we are not dealing with a systematic failure of the banking system itself, sure, that's really the way it should be in terms of an economy run by humans with risks, rewards, and business cycles.
However, a systematic depression tends to start with too much of that "good choking" cure. By positing the firing of workers and lowering wages as the first option, you increase the potential for the good choking to get bad, like David Carradine on a bender. The less firing that goes on, the less chance of a depression to begin with as wages and purchasing power are deminished but not eliminated. Even Grant recognizes that unemployment is the real enemy.
Yet despite this evidence, too often under laissez-faire policies since the end of the WWII boom cycle in the late 1960, Americans have been saddled with Reaganomics and radically unequal results and distributed booms and absolute busts. Meanwhile, under Reagan's crass disdain for the workers of America (and the air traffic controllers union, for example), the oligarchy used each crisis to get cover for their continued excessive capture of their worker's productivity and raids on their workers' wages.
But, again, falling wages shouldn't be the only lure in the tacklebox for a business owner. It was not just falling wages which stabilized profit margins over time in the 20s and then in the Great Depression, it was the collective efforts of people at all strata of society from policy makers to individuals on the ground including massive government spending culminating in WWII.
And thus, it was indeed not the private sector to a great degree but rather the market's reps in government intervening and getting involved with the New Deal and WWII (creating stimulation of demand while at the same time providing security for the marketplace to function) which truly lead to the stabilization of prices and eventual growth in the 50s and 60s.
If the free market didn't have a war at its back would it have created a national patriotic movement on its own to stimulate demand and production in the 1940's? Would it have created a trans-continental highway system on its own, etc? Can government never act as an agent of the marketplace to stimulate demand and make long term sustainable investments on behalf of the people it serves? It would seem that in the 2009- 2014 period in fact again it was government intervention that allowed blood to flow into the hand after the hand had pinched its own wrist until it was drained of blood.
And in a crisis like 2008, in a modern interconnected global financial system light years more robust than the 1920s, one might think twice about letting the hand cut off its own circulation until it gets gangrene. And so it was, we had the bailouts. Now, as my grandfather might say, that was an intervention! And it was pernicious not because it was an attempt by government to thaw the credit freeze but because it was structured poorly as deals that socialized the losses and privatized the gains. The same bailouts would not have been necessarily objectionable had they been able to extract accountability and longer, higher repayment rates on the extension of the people's goodwill credit to the failures on Wall Street. That the losses were socialized in 2008 is a travesty, sure, but that doesn't mean government involvement in crisis situations is always bad, just that they are probably a good option only in extreme crisis and with terms more amenable to the long term prosperity of the majority.
And in terms of Obama's Economic Rehabilitation Act of 2009, there is little of the same criticisms that can be applied to the Bush bailouts in terms of poorly structured sweetheart deals to help out Goldman Sacs. Rather, the invstments did tend to stimulate demand and created wage earners even as there were some failures and good examples of government over-sponsorship and its ability as a large spender to distort markets. (The solar industry cratered not only because Congress via Obama invested in Solyndra and distorted markets but also because a huge player in the solar markets also over-invested, China. This is a case of over-invstment risk and happens in the free market all the time as well. Meanwhile, the benefit of falling prices for solar goods and services was a boon to the average consumer if not the solar producers who couldn't manage their inventory well or source their materials cheaper).
Meanwhile, after the neo-freemarketeers of the Bush adminstration approved the bailouts on Paulson's promises, many of them then commenced to bad-mouth their peers. Though the conservatives such as Peter Schiff were wrong about the worst aspects of the bailouts and the "coming collapse of civilization" (hard to believe gold did not rally more, sure, and the risks were real but did not come to pass as Bernanke correctly anticipated), some still love to predict Fed policy will have bad unintended consequences. Just not on their initial timetable, not yet, but be on the lookout!
And, again, we often don't hear a free market acolyte talk about ways to soften the misery and have the executives accept less profit margins for their already exploitative wealth as a way to deal with the results of an executive's poor business planning. They are not interested much in the human aspect at all.
Instead, he complains (since the book is really a critique of current Obama policies as seen through the 1920 prism) that the last seven years of Obama were "lacking anything like a dynamic recovery". Nevermind that it can't really be proven that Obama's policies generally prevented an even worse depression from developing in 2008 because we'll never know how bad it might have become if Bush and Obama had not acted in some way. The predictions were dire, the Nasdaq fell 80% peak to trough, so at least the free markets themselves were well worried that the hand was losing blood too quickly to be able to pick itself up off its wrist. Muscles need oxygen to flex.
Meanwhile, without respect for the people's will in the marketplace as expressed in their civic institutions, and without the will to prevent crisis and systematic failure because of fealty to a flawed policy, what we often get is a very free but not very good model for equitable and sustainable growth, mutual American prosperity, and economic stability. Freedom and free markets are American hallmarks. So are great ideas for liberal democratic government policy that serves the greatest number. One doesn't have to mutually exclusive of the other.
So, he knows his history and makes many good points. Yet, in the end, Grant will carry the republican warm bucket of spit and badmouth the current reversal while championing many of the free-market general principles that also clearly precipitated the 2008 crisis (lack of regulation on excessive securitization of low quality mortgage assets such as CDOs, Swaps and other derivatives).
Meanwhile, IMHO, perhaps due to this recent intervention by the people for the people, we do have a decent reversal today in the USA if not a V shaped one. Unemployment has halved and the stock market has doubled. We are not facing a depression and deflationary spiral anymore. Still, that is not dynamic enough for those who always favor the expanding wage gap for favored executives and profit margins over people as a first choice. (Though the Japan lackluster growth scenario seems to still be a possibility and is probably now the worst risk we might still see concerning the unprecedented repudiation of the free market philosophy in 2007-2009 that led us to where we are today).
Well, anyway, the book is a good read as it illuminates the era and does bring some interesting facts and stats to the fore. To have a debate and look at case studies as a way to critique and evaluate today's policy? Good. To arrive at the conclusion first and then apply that case study to today when it is probably a pretty bad fit... a little too clever.