As I mentioned about the difficulties of governing Economies and Greenspan’s disclosure on his workings on a paper in defence of his policies, The Economist recently wrote in their column about Greenspan’s recent defence of himself. Those interested might want to access his paper here.
In general, The Economist adopts a rather sarcastic tone when discussing Alan Greenspan’s role in the build up to the Subprime Mortgage Crisis in 2007. They are arguing that central bankers are around to ensure macroeconomic stability and therefore are expected to ‘play safe’ and manage the economy. That is, if reducing short-term interests rates could rein in the housing boom, that should have been applied. Even if Greenspan couldn’t have identified the bubble, and that the house prices are not related to the interest rates that central bankers could influence, the leverage growth in securitised markets might be worth managing:
By looking only at the effect of monetary policy on house prices, Messrs Bernanke and Greenspan also take too narrow a view of the potential effect of low policy rates. Several economists have argued convincingly, for instance, that low policy rates fuelled broader leverage growth in securitised markets.
Of course, having just read Dot.con and Lord of Finance, I do realise that central bankers’ attempts at interfering with specific market booms have often been ineffective or with rather disastrous results and thus choose to focus only on economic fundamentals like price inflation. Greenspan does have a point when he suggests that the central bankers are unable to deal with a global force that are changing the conditions of the economy. Very often, these efforts may create further imbalances that merely postpones a crisis.
Like I say, no one claims monetary policy is easy to conduct – it’s too often more of an art than a science.
After leaving it on my bookshelf for a while I eventually took out Lord of Finance to resume reading books on my journeys. Written by Liaquat Ahamed, I bought it at one of Harris’ 20% storewide sales during a period when I was thinking about reading up more about Finance after the recent crisis. I thought it was good to beef up my knowledge of American finance since Age of Turbulence was the closest I got to reading about the financial sector of America.
The book turns out to be more than what I was expecting. Written in the style that feels very similar to Doris Kearns Goodwin’s Team of Rivals, Lord of Finance traces the little stories that demonstrated the personalities of the four most important central bankers prior to 1929. They had exerted huge influence on the economies of Europe and United States, and unintentionally engineered in the Great Depression with their policies and beliefs. It was interesting to get a peek at a world still obsessed with the almost divine quality of gold as a storekeeper of value and with poor understanding of monetary economics.
Even more intriguing is that monetary policies and innovations are being created by these people who has a nuanced view of monetary economics and poor understanding of the workings of the economy. The stories and opinions of civil servants, politicians and aristocrats in those years demonstrates the experimentation humans had gone through in order to figure out how this gigantic machinery works. Of course, this study and experimentation carries on today.
Liaquat Ahamed got really good reviews (here and here) from New York Times for this book, especially for the fact that the contents of the book chillingly echos the stories of Wall Street in the past couple of years, involving banking heros and monetary policies, speculative bubbles and a huge crash. The description of the mania and the built up to the eventual crash sounds rather familiar to me given that I just finished John Cassidy’s Dot.con a while back. Men’s penchant for not learning from History seems particularly pronounced in bouts of ‘Irrational Exuberance’.
For that, Liquat gives a brilliant analogy for the role of Central Bankers or the policies makers trying to stabilize the economy and also pushing for growth. He sees them much like Sisyphus in the Myth of Sisyphus, condemned the work hard to create the conditions fertile for economic growth only to have speculation and irrational exuberance extinguish the fruits of their labour – much like Sisyphus who have to push a boulder up a mountain knowing that when the deed is done, it’ll roll back to its original position for him to do it again. Perhaps Albert Camus is right, for the struggle probably do fill the central bankers’ hearts and the belief of their heroism keeps them happy.
Lord of Finance simply surprises me with the rich collection of anecdotes about the main characters of the story Liquat tries to tell and the manner it imparts knowledge on finance and the workings of money in the economy to the readers – subtly and not too overwhelmingly technical. As a result the book caters to a wide range of audience; students interested in economics, history, finance and perhaps just stories about great men’s mistakes.
Those interested in getting a preview before making a purchase of the book or going on a trip to the library to borrow it might like to check out New York Times.
Inequality is a market failure. We do pick this up in A Levels but then there’s little discourse on that. Not only do we dwell little on the solutions – which ranges from progressive taxation to welfare handouts – we ultimately ignore how inequality undermines the ultimate roles of markets, which is the efficient allocation of resources. I’ve always grasp the idea rather intuitively but then fail to deliver it in a philosophical and economics framework. I’ve pointed out the lack of philosophical musings in today’s study of Economics when I introduced Michael Sandel’s lecture on Markets and Morals.
I’ve always pose the question to my Economics student, if a person earns $1000 a month and another who earns $1 a month both needs a glass of water. The rich guy is willing to pay $10 for the water while the poor one is willing to pay $1. The market thus allocates the water to the rich man. We all know that this allocation is problematic and it doesn’t seem efficient; how is it that, in terms of willingness to pay, a person who is only willing to part with 1% of his monthly income gets the good when another is willing to part with 100% of his monthly income for it? So what exactly is the problem of inequality?
Once again, Michael Sandel points this out in the second lecture presented in this video. You don’t exactly have to watch the lecture in order to grasp the point but the idea is that when inequality (in terms of unequal distribution of income) exists, effective demand cannot properly reflect the ideal sort of demand signal transmission that would allow the market to allocate resources efficiently. In extreme cases, free markets becomes not entirely free. In other words, people are not transacting out of their free will but coerced by their own economic circumstances. We see this very often in the case of poor people in developing countries who are forced to sell organs, resort to prostitution, act as surrogate mothers, become a runner for crack.
Gary Becker is not wrong about the rationality of these people. They’re making rational choices but it is often that their choices is very much limited. That unfeeling market processes coerce us into certain decisions is something close to the hearts of all of us. Often, however, we can’t quite work out what is so unjust about that because we believe that to a large extent, we determine our riches. Somehow, deep in our hearts we know that some other decisions that we made caused us to be in the state we are in such that we are coerced into making that next decision. The fact that this argument comes back to us shows how each and every decision made in the marketplace by us are not independent. This makes for a determinism argument in a market setting where free will is supposed to reign.
There are much wider implications of all these arguments and I shall explore them if I get the chance.
Many have attributed the housing bubble that eventually resulted in the Subprime Mortgage Crisis to the previous, one of the longest serving Federal Reserve Chairman, Alan Greenspan. We are pretty familiar with Greenspan, who have written Age of Turbulence. In his book, he highlighted his general argument against anyone who would finger-point him as allowing a bubble to inflate. He pronounce that it is impossible for anyone, whether the regulatory body or not, to accurately identify a bubble.
As for the Subprime Mortgage Crisis, politicians in the United States still blames it somewhat on Alan Greenspan and now that everything is cooling down, Greenspan offers his own defence. Although Greenspan was nicknamed ‘the Maestro’, he subtly attributes the period of great prosperity and low inflation to the globalization forces and technological advancement more than his skills at handling the monetary policy of US. In any case, he outlines his job at the Federal Reserve as an observer trying his best to keep to fundamentals of the economy and the crisis therefore comes as a surprise both because of how the economic agents have basically defied market assumptions namely on the issue of counter-party surveillance. Essentially the government cannot possibly provide the ‘self-interest’ that is supposed to drive the free market.
No one says that managing the economy is an easy job. Sound economics decisions by governments often turns out to be political disasters anyways so sometimes politicians stop heeding economists altogether. The recent issues that confront Tim Geithner is essentially similar; the economy is picking up thanks to his plans but people are unhappy with him. Figures on employment are not helping him anyways since the recovery is ‘jobless’ so to speak. Management of the economy is a huge balancing act for the government.
The idea of government has gone really far since the days of Locke’s conception of the social contract. The philosophy of governance in the modern world is just getting more complicated.
I’ve previously introduced Michael Sandel’s lectures on Justice in Harvard. I haven’t finished the series despite great interest in it but I recently watched another of his lectures, one at Chautauqua where he talks about the Morality of Markets. In some sense, I was particularly interested in this issue and believe that all those trained in Economics should be made to study it. After all, Adam Smith was a Moral Philosopher. The philosophical element of Economics is becoming lost in our study of it today.
Markets Corrupts?
That is what makes this particular Michael Sandel lecture extremely insightful. He starts with the idea that we’re now plagued by market triumphalism and he tries to question what is wrong with that. As often in his lectures, he poses a scenario either hypothetical or based on actual proposals in the real world and then solicits opinions from the audience. He eventually surfaces his points and ideas from the responses of the audience and does a brilliant summary of the issue.
He gives a good and important point in his conclusion of this lecture that explains why we should not allow markets to expand indefinitely in our lives. In other words, there are areas where markets can, indeed serve the best interests of the societies especially when we all can agree that the market system gives an accurate and fair valuation of the good or service involved. Unfortunately there are values out of the consideration of the market that we might cherish and therefore we should not allow particular goods or services to become commodities to be traded and transacted. The danger of the markets is that it leaves its mark on the commodities that are traded; the values that we cherish becomes diluted, corrupted by the market system.
The example of paying a child to read is important in illustrating this. We should cherish reading not because of the monetary gains but the intrinsic value derived from joy of reading and learning. Therefore when we start paying children to read, it sends out the wrong messages and distorts the valuation of reading. The trick then, perhaps is a solution around this limitation of the market, to be able to remove that mark that market leaves on the thing traded. Unfortunately there’s no easy solution and possibly none. This is a strong argument against markets and while it is applied to a small group of tricky issues, they are worth pondering over.
Michael Sandel makes Political Philosophy and Moral Philosophy not only accessible to the public and ordinary, non-philosophy students but also makes extremely relevant connections between traditional Western Philosophy and the issues plaguing us in the modern world. It’s really fortunate that we are able to access his lectures even though we are not studying in Harvard or in America. There are other videos of his public lectures available on FORA.tv.
Historically, technological advancement combined with economics have helped to push civilization towards greater levels of achievements; yet too often, there are times when they are combined in the wrong ways that produces somewhat problematic results for the aggregate society. An example would be the problem of counterfeit products, which is recently featured in The Economist. Interestingly it has extended beyond just luxury goods, luxury consumer electronics to the more sophisticated stuff like cars, computer and machine parts. The chief argument against counterfeits is not so much that they are unsafe. As technology advance, counterfeits that are of low quality would naturally be abandon by the market anyways. The reason for the market’s embrace is a result of their avoidance of taxes and the willingness to accept lower margins, which allows them to price way more competitively.
Another time when technological advancement is combined with skewed human intentions is the gender-based abortion that The Economist is hinting at. The distorted sex ratio have potentially disastrous consequences on society at large. Unfortunately the imbalance is already a fact and will take at least a generation to restore some balance so in the meantime we will probably have to put up with way lower rates of marriages (if rates sustain, it would only be because divorce rates have also been increasing; which implies re-marriages).
Well, more arguments for big governments, or if not, intrusive ones.
I frequently go on to Apple Trailers to look out for interesting movies that are upcoming or that I’ve been missing out. They offer a good mix of films from Hollywood as well as some independent film makers. Recently, The Joneses caught my attention. Their own movie site is not exactly ready yet but here’s the synopsis from IMDb:
“The Joneses”, a social commentary on our consumerist society. Perfect couple Steve and Kate Jones, and their gorgeous teen-aged children Jenn and Mick, are the envy of their posh, suburban neighborhood filled with McMansions and all the trappings of the upper middle class. Kate is the ultimate trend setter – beautiful, sexy, dressed head-to-toe in designer labels. Steve is the admired successful businessman who has it all: a gorgeous wife, big house and an endless supply of high-tech toys. Jenn and Mick rule their new school as they embody all that is hip and trendy – cool clothes, fast cars and the latest gadgets. But as the neighbors try to keep up with the Joneses, none are prepared for the truth about this all- too perfect family.
The Joneses
Obviously, the title comes from the English catchphrase, Keeping up with the Joneses but the idea is interesting. The Joneses is a perfect family made up to market goods to the upscale gated community by a stealth marketing organization. I do suspect that big companies does this sort of things at times but probably more through viral marketing than to consciously employ people to befriend potential customers and introduce goods to them. Whether this is considered ethical, is perhaps what the movie is exploring.
In a sense, the movie calls for a reflection on how social forces are increasingly shaping our economic lives, and at the same time questioning the value of relationships.
Meanwhile, Dot.con have been an interesting read. It’s an old book, no doubt. I believe reading about the Internet Bubble now seem rather weird given that it has happened a while back and don’t appear to have any immediate relation with what I’ve been working on. Still, I think that events like this have lessons to offer that are often missed out and I was looking to read something a little further back given that I’ve been updating myself with The Economist all the time. John Cassidy didn’t fail me, starting his story from the time when the technology was developing for the rise of modern Internet, describing the roles that the US military and government played in its conception, research funding and even implementation. He combines the events leading up to year 2000 with interesting comparisons of speculative manias of the past and talks about retrospective telltale signs of irrationality.
He introduced me to Charles Mackay and his writing, Extraordinary Popular Delusions and the Madness of Crowds. I subsequently realised I had the sections of Charles Mackay’s book in my 4-inch tome, The Real Price of Everything by Michael Lewis. Those pieces have just been added into my reading queue.
Cory Johnson reveals that John Cassidy was a rare skeptical voice with regards to the Internet Boom, but failed to live up to the promise of the title of the book:
Indeed, he is unable to dismiss the most fundamental notion (a mantra among the true believers) that the Internet changes everything. Despite the stock market meltdown, almost any reading of the evolving business practice wrought by the Internet suggests that more dramatic changes are yet to come.
In a sense, the Internet is not quite exactly an illusion so to speak. But I don’t think that was what John Cassidy was driving at. His idea is that business fundamentals have been abandoned during the period and it shouldn’t have been. The numbers he cites about businesses losing money even as stock prices climb is startling. He might have been against the arguments of the New Economy though, and he could have supported his argument with the fact that falling prices (with economic expansion) isn’t entirely an internal affair of US but a result of the external forces as well.
I’ve enjoyed the little stories told by Dot.con surrounding the whole boom and crash of the Internet, especially those about individuals trapped in those industries contributing and taking part of the boom. Besides that, Dot.con serves as a good look at human behaviours during a speculative mania.
It is interesting how I have got a friend who once commented that all forms of market failure is a result of imperfect information. He says that people are consuming too much or too little of a product because they don’t have perfect information about the impact of the products, and so basically all the inability to analyse cost and benefit is a result of imperfect information. Likewise, to this friend of mine, technological advancement is basically slowly discovering information, truths that we previously know nothing of. Of course, that’s a little extreme and basically demanding perfect knowledge as well. For him, perfect knowledge would naturally be attained from having sufficient information.
The digital age ushered in lots of information; so much that we don’t have enough time to process them. In fact, even cataloguing them might be troublesome enough and the process generates meta-data, which in fact is information about information. They would prove useful though they actually add to the information heap. Say for example I give you a quote:
The setting sun, and music at the close,
As the last taste of sweets, is sweetest last,
Writ in remembrance more than things long past:
If I don’t provide the source, it’s not particularly helpful unless you’re able to identify it from just the content. It’s from Shakespeare’s The Tragedy of King Richard the Second. But then that’s just a little bit of metadata; there’s more: it comes from Act II Scene I. And even more: it’s from Line 14-16. The ability to manipulate all these data themselves would create more information too. And they all might just prove to be way too much.
Economics have definitely become more complex thanks to the flood of information. Technology has allowed suppliers to maintain tighter inventory and reduce idle capacity but reality seem to drift further away from classical economics even as the economic agent are becoming more equipped with the information necessary to create a more perfect market. It appears, the next big assumption of Economics about the real world that needs toppling is in fact the idea of independence.
We read frequently in the news about the demise of Pax Americana or the rise of the post-American world. I am not about to discuss at length the decline of America, but I want to bring attention to what many people might have neglected as they watch America’s supposed decline: Europe’s concurrent decline. And Europe’s decline is also of its own making, though of a different nature compared to the Americans: the financial crisis and its aftermath triggered all these claims about America’s decline, but it is the EU (European Union) and the way it operates that will do Europe / the EU in as a global power.
In Time magazine this week, The Incredible Shrinking Europe discusses why EU is beginning to lose its shine as a global power of equal importance compared to America and China. The magazine recognises that it is not that Europe is becoming poorer or that the people in the EU are suffering (unlike in America right now), but rather how the EU administration does things.
I highlight some of the main problems I see with the EU.
Some problems with the EU that have affected its standing in the global arena:
1. EU is too huge. Managing 27 member nations that each want their own voice to be heard is a mess. Obviously there will be countries that dominate (large ones like France & Germany), but its actions seem to be confounded by the differences in opinion between many of the nations, which will hamper what it is trying to say and do. Germany wants to work closely with Russia but the Eastern European nations in the EU are terrified of getting closer to Russia due to fears of the Cold War / Soviet Union days. This makes EU decisions on issues regarding Russia difficult and contentious.
2. EU seeks too much consensus. It goes for the “least-bad options”, which may be useful in slowly amending the status-quo, but when it comes to crucial decisions necessary to reform, the EU might fail because it decides to go for the lowest common factor instead of what is really best even if it might hurt. The procedure and the eventual selection of the permanent President and Foreign Minister reflect this. Picking two affable and unoffending people, Belgian Prime Minister Herman van Rompuy and British Lady Catherine Asthon, may have achieved the purpose of happiness amongst all EU members, but it does not help EU if it really wants people who can “stop traffic” and portray images of leadership, decisiveness and power.
3. EU has too many underwhelming leaders. With regard to too many, it now has 4 leadership axes that will potentially create much conflict. There’s a permanent EU Council President and EU Foreign Minister, on top of the original leaders: the rotating presidency (amongst the EU nations) as well each country’s heads of government / state. This is a “complex mechanism” that makes it difficult for constructive work. It could encourage turf wars as well as make it difficult to show solidarity. Who is American President Obama supposed to call when he needs help from the EU? Chances are, he will probably end up calling French President Nicolas Sarkozy, British Prime Minister Gordon Brown or / and German Chancellor Angela Merkel, because he will directly enlist their help rather than go through the EU before reaching these leaders who make the decisions. Especially given current conditions, chances are he’ll skip calling Europe and go straight to other nations (that are, not coincidentally, emerging powers) like China, as evident following the Copenhagen climate summit where EU was almost totally sidelined despite having hosted the key summit in Copenhagen, Denmark.
4. EU is not as democratic as it claims to be. The way the Lisbon treaty was rammed down the throats of governments was evidence of how the EU parliamentarians and decision-makers just wanted to get things done without getting sufficient support from the people for their actions. The French and Dutch in 2005 first rejected amendments to the European Constitution. Then with the Lisbon treaty, making Ireland go through another referendum to force it to ratify the treaty (making little and unexplained amendments in the treaty along the way) does indicate of some undemocratic tendencies.
The United Nations (UN), with close to 200 members, has even more members, but while the UN may often be described as inefficient, it is still serving a huge purpose as a gathering of world governments that can act together in times of crises. At very least, it still has the symbolism and serves a purpose in its existence. While the EU has created much benefit for the member nations, it often seems to undermine or contradict local government decisions, probably because there is an isolated European Parliament that is rather insular to the real, on-the-ground views of the EU citizens.
In addition to this article in Time magazine, Time magazine interviewed EU Foreign Minister Lady Catherine Ashton for her views about EU. She does a good job with the publicity, but we will wait and see how she manages to get her job done given the difficult conditions she’s been placed in.
In my opinion, the EU has a lot of potential to create a balance of powers between America and the East / ascending developing nations such as China, India & Brazil. Indeed if we talk about the decline of Pax Americana, Europe should by right be part of the decline as well because it is after all closely allied with America and part of the West that is seeing stagnation / decline in political and socioeconomic spheres in the global domain. The EU can still serve as a role model in terms of an economic model that generally promotes cooperation and creates wealth for its denizens (but less so after the Greek debt crisis) as well as a relatively peace-loving actor on the global stage that can serve as a reminder for cooler heads to prevail in dealing with touchy issues like Iran and North Korea.
