Familiar readers know that I have on a handful of occasions written one-off posts off
Time Magazine's "progressive" columnist pieces; in part, this is driven by a compensatory print subscription when my long-term print subscription to
US News & World Report ceased. (
US News still publishes in a digital format.) It's not like I need to look for "progressive" pieces to disagree with; I could spend 24 hours a day of nonstop blogging refuting garbage on the Internet and barely touch it. I think what annoys me about the
Time pieces is that they have wide readership and the editors don't even attempt to push for more balance.
I'm not arguing for censorship, but for me it's a matter of professional integrity. I served early daily mass as an altar boy at the local AFB during high school, and when I graduated at 16, the chaplain gave me his multi-volume set of Aquinas'
Summa Theologica. Aquinas had a way of posing issues and exhaustively listing the pros and cons in deciding the issue. (I loved it when I could anticipate Aquinas' response to a compelling objection.) You will see an analogous approach in my parsing one-offs, say,
Meet the Press transcripts or segments of my ongoing review of Obama's SOTU address; I'll sometimes republish exchanges in certain Facebook groups. (I don't repeat most of the flaming responses. For example, I recently expressed my position against forced recognition of "gay marriage" on conservative and libertarian grounds, and one irate female "progressive", intolerant of my audacity to hold a politically incorrect opinion, wished that "old dinosaurs" like me would hurry up and die.)
Normally I would cite the original Rana Faroohar piece from Time, but for some reason (and I don't recall this being an issue with past cited columns) I wasn't able to pull it up through a search engine, at least at the time I'm writing this post. I did find a half-dozen or more references to the column. Let me provide this information for the motivated reader: the piece is titled "Tilting at Hillary" and it appears on page 28 of the Jan. 26, 2015 issue.
Let me be clear at the outset: I LOATHE populism in all forms, right-wing or left-wing. In today's economy, left-wing populism is often characterized by attacks on the "banksters", the top 1%, and alleged nefarious big businesses buying the US government courtesy of the SCOTUS Citizens United decision. And the high priestess of the left-wing populist movement is Sen. Elizabeth Warren (D-MA). [My tongue-in-cheek name, "Cherokee Lizzie", reflects the fact that she classified herself as a Cherokee on some HR paperwork, because of some ancestor Cherokee in her family tree. My Mom once told me I inherited my cheekbones from a great-grandmother Cherokee on my Dad's side of the family, but I classify myself as Franco-American (French-Canadian descent) and plain "Caucasian" on HR paperwork. I personally think the EEOC is an anachronism.]
There are a few intellectually dishonest talking points in the column, motivating this one off. Let's start with Warren's attack "
railing against the fact that lobbyists from Citibank and othe big banks had been allowed to squeeze a rider into the latest congressional budget bill that would make it easier for federally insured banks to keep trading derivatives, which Warren Buffett once described as the "financial weapons of mass destruction" that sparked the 2008 crisis".
Let us start by noting Buffett discussed a number of characteristics to derivatives which he has controlled for in
his own subsequent derivatives business through Berkshire Hathaway:
In the first nine months of 2013, Berkshire Hathaway Inc. made derivative gains of $1,361M, according to its earnings release. That may be minuscule in the context of its operating earnings of $11,363M in the same period, but is certainly not to be sneezed at. Berkshire Hathaway Inc. enjoyed an average annual float of $6B from the derivatives trade. It would have paid $10.5B had it borrowed the same amount in 2004 at an average annual interest rate of 5% for a 15-year maturity. Instead, it has only paid up about $3B in losses on these positions so far, and according to the author, no further payments are likely until 2019. Berkshire Hathaway Inc. therefore will likely make out with a $7.5B surplus.
I may return to this point in more detail, because Warren tries elsewhere to blame "laissez faire" for the 2008 crisis, but Reisman
makes an overwhelming, convincing case that the status quo was the result of massive failures of government monetary and fiscal policy. The companies that failed were not big commercial banks or integrated financial services (re: the Glass-Steagall red herring). Companies that failed included the GSE's, AIG, and some investment banks which were not playing dice with government-insured funds.
But let's go to Warren's shameless demagoguery about the rider. This
bipartisan-supported rider was a reform to a push-out rule that former Sen. Lincoln (D-AR) created isolating derivatives away from federally-insured deposits. The problem is that you throw out the baby with the bathwater. Derivatives in essence are like insurance. If banks are writing loans, say, for shale oil infrastructure, they may very well want to insure against a steep price drop in crude oil. The derivative hence serves to mitigate, not compound bank risk. But under the Lincoln rule, banks couldn't hedge against their loan portfolios. This was not some shady backroom political deal; in fact, Barney Frank, as in Dodd-Frank, supported the Hultgren-Himes reform before his retirement from Congress. Whereas Citigroup did help write language for the reform YEARS EARLIER (the reform got sidetracked over JP Morgan's "London Whale" loss), the measure was supported by energy companies and mid-size banks. (Let's also point out that big banks can work around the push-out rule through their European subsidiaries.) The point is that Foroohar should have done due diligence on the rider instead of accepting leftist talking points at face value.
Most of the piece is oriented more at a rift between the populists and the allegedy financial deregulation happy wing of the Democratic Party, which she traces back to Carter-era Fed Reserve Chief Volcker's "deregulation" of interest rates through the Wall Street-friendly, financial industry deregulating Clinton-era economists who finally did away Glass-Steagall in conjunction with the GOP-led Congress. Warren considers the latter trickle-down, "laissez faire" Democrats responsible for our "current wage stagnation" and responsible for having "exacerbated the staggering gap between rich and the poor": [Warren says] "
I'd lay it right at the feet of trickle-down economics, yes. We've tried that experiment for 35 years, and it hasn't worked."
Now really, quoting Shakespeare, a plague on both their houses, but I have to comment on Warren's delusional analysis. The Federal Reserve had already done a weak job defending the dollar, which had been remarkably stable since the birth of the republic through the creation of the Fed (there were final fluctuations of inflation and deflation but remarkably stable over the long run). Even with a loosely-convertible dollar through end of Bretton Woods (a fixed-rate exchange to the dollar, which remained tethered to gold). The market began to lose faith in the dollar because of Vietnam War and Great Society pressures exacerbating the federal deficit, inspiring redemptions of fiat currency. Nixon's closure of the gold window untethered the dollar from any discipline from the Fed
to protect the currency's stability. [Since 1971, the dollar has lost over 80% of its purchasing power.] In fact, the Fed had every incentive to maintain easy money policies to accommodate the Fed's controversial second politically-motivated mandate of full employment. Keynesians of the period believed in the
Phillips curve, describing a tradeoff between unemployment and inflation. i.e., high unemployment shouldn't coincide with high inflation. (Monetarist Milton Friedman famously argued this tradeoff is not true in the long run.) The Fed tried to finesse rate increases to control for inflation; strong rate increases were politically unacceptable, because of fears of triggering a recession. Volcker initially started out as a Fed governor favoring a gradualist approach but eventually became convinced that it wasn't working--in fact, the country was experiencing stagflation--high inflation and rising unemployment. Volcker began championing stronger medicine (bigger rate increases) to break the back of inflation, very much a minority position on the Fed. When Carter moved Fed Reserve chair Miller to head Treasury (Blumenthal was part of an administration purge), Volcker was unexpectedly named to succeed Miller. (In fact, Carter wasn't familiar with Volcker but had pursued David Rockefeller;
Rockefeller, a Republican, was convinced his famous surname would serve as a lightning rod if and when he had to recommend tough medicine and instead recommended Volcker.)
Recall that Volcker was named in August 1979 and inflation peaked on Reagan's watch, along with Volcker's 20% federal funds rate; farmers and construction workers were leading protests against the Fed. But here's the point: the Fed is anything but the free market. It is true that Treasury notes are traded in the market, but these transactions reflect expectations of monetary and fiscal policies, which are State-based, not free market. It's not clear what Warren is referring to here, unless she is trying to argue for government-imposed wage/price controls straight from the FDR era. We already know the results of these economically illiterate policies: surpluses (e.g., the minimum wage and the unemployed) when the market-clearing price is below the statutory minimum, and shortages when the market-clearing price is above the maximum price (consider, say, ice cubes during an extended power outage and dysfunctional price gauging laws).
Now I'm not going to going to review the history of banking here, but arguing that US banks are, or ever have been, free market is a laughable state of denial. From
Selgin:
U.S. experience does not demonstrate the failure of unregulated banking, for the simple reason that banks have been heavily regulated throughout American history. As Bray Hammond notes (1957, 186), legislators in the early years of the republic never applied the principle of laissez faire to the banking business. “The issue was between prohibition and state control, with no thought of free enterprise.” Banks were outlawed except when specifically authorized by state legislatures, and permission to set up a bank was usually accompanied by numerous restrictions, including especially required loans to the state. The situation after 1837—when the charter of the Second Bank of the United States expired—has been aptly referred to as involving “decentralism without freedom”;20 many note-issuing banks were established, but all were subjected to inhibiting regulations by the State governments that chartered them, and entry into the business was tightly restricted. Many western states and territories, including Wisconsin, Iowa, Oregon, Arkansas, and Texas, for a time allowed no note-issuing banks whatsoever. Other states restricted the business to a single, privileged firm. In most places branching was also outlawed.
Here is a
useful comparison/contrast involving US banking:
The U.S. banking environment is very unique when compared to systems in Canada and most other countries. Some of the factors which make the U.S. banking environment unique are:
Large number of depository financial institutions;
Lack of nationwide branching;
Significant usage of checks and mail-based payments;
Restrictions on corporate checking accounts;
Unbundled pricing of banking services;
Arms-length relationships between banks and customers; and
Involvement of a central bank (the Federal Reserve) in the processing of payments.
Among other things, when you review nineteenth century banking, branch banks in farm states would have allowed more geographical and economic diversification, better able to handle banks' ability to weather seasonal money supply constraints, e.g., harvest. [Note that local banks in farm states did not want big bank competition for obvious reasons.] In addition, there were often collateralization issues for issuance of banknotes, like a mandate of Treasury notes, at the same time the US government was looking to pay down its debt. In contrast, as I've pointed out in past posts, Canada has had a more stable system allowing branch banking and more flexible collateralization for issurance of banknotes. The following chart comes from the same cited source:
| Key Area | United States | Canada |
| Number of Banks | Over 8,500 | Approx. 70 |
| Nationwide Branching | Effectively Limited to Regions | Full Nationwide |
| Interest Paid on Corporate Checking Accounts | NO | YES |
| Foreign Currency Accounts | NO | YES |
| Number of Bank Relationships per Company | Many | One |
| Check Usage | Very High | Medium |
| Check Clearing Times | 1-3 Days | Same Day |
| Check Conversion Initiatives | YES | NO – Not Needed |
| Government Operation of Clearing System | Very High | Low |
| “Unbundling of Banking Services” | YES | YES |
Kam Chu compares the "unregulated" (Hong Kong), "regulated/no deposit insurance" (Canada) and US banking systems between 1935 and 1964
here: a period which saw several US bank failures but no Canadian or Hong Kong failures. I'm not arguing solvency is the only criterion for judging bank systems, but it is clear that the problems of US banking are fairly unique and directly attributable to bad government policy, including a morally hazardous deposit insurance scheme, which basically encourages more risky loan activity, transferring risk to the taxpayer.
Now as to financial modernization: the American banks were trying to compete against large foreign-based banks which were not subject to the same regulatory constraints and had a global competitive advantage. Glass-Steagall had basically been modified over the years before the financial modernization act was signed into law. AIG was not a bank; it had been writing swaps without sufficient loss reserves/hedges. Not to mention we had the Fed effectively doing bailouts of certain institutions under dubious authority; the likelihood of a Fed or taxpayer rescue basically serves to encourage risk-taking behavior. Almost all libertarians, including myself, oppose bailouts, deposit insurance, etc.
As far as the income-inequality kerfuffle, if you look at the Gini coefficient (recall 0 is perfect equality, 1 is perfect inequality), you see it start to rise among individuals in the post-WII era, absent from wartime wage constraints where more productive employees saw the benefit of a more competitive marketplace. However, it's been relatively flat since 1960, which suggests that the theory of expanding inequality is largely a myth. (There are all sorts of data issues, e.g., whether redistributed income/benefits are factored in lower income, plus the data come from different agencies and some observed changes reflect changes in methodology.) Many of the studies that Foroohar references are not longitudinal reflecting social mobility and transitions between income levels. My own income has been volatile; I did much better during the late 1990's and I struggled after my academic career ended in an early 1990's recession. For many people, they may have a short-lived period at the top--say, they get a large inheritance, cash in some stock options, sell some valuable asset like a house, a business goes public (on the stock exchange), etc. That income is not sustainable. Some professional athletes retire from 7-figure incomes,
I don't have an issue of others being economically successful; I personally find the Politics of Envy that Warren and Forhoohar espouse morally reprehensible.
Now there's no doubt some people have done better than others during the Obama era--in part, this has to do with Fed easy money policy which has manifested itself in ways like increased stock prices, with many of those assets held by higher-income individuals. But Foroohar ignores the fact that for the most part we've had subpar economic growth, and Congress had greatly added to business and hiring costs with unnecessary, costly regulations. Foroohar also ignores that while we've been slipping on economic freedom scales, economic liberalization has created millions of middle class jobs for Chinese and Indian workers. Our problem is not that the government needs to do more; the government needs to do far less.
As for Warren's pejorative description of free markets "haven't worked" for 35 years: there hasn't been a free market for 35 years. we need to get the government out of the way of the free market. Too many taxes and regulation, too much regime uncertainty inhibits economic growth. You don't grow investments by taxing or regulating them. A sustainable 3% growth economy is possible and will lift all boats as workers become scarcer. All punitive taxes do is to shrink the tax base.
It's rather humorous to hear Foroohar call for Warren to push Clinton further left than Clinton already is. Be careful of what you wish for: Hillary Clinton is no centrist or conservative. Only about 20% of voters call themselves "progressive". Krauthammer recently hailed any attempt to get Elizabeth Warren the Democratic nomination; he considers it the one sure way to get a Republican back in the White House.
