Big Think

Should Chrysler’s workers (i.e., unsecured creditors) get put in line ahead of its bondholders? Of course not, under  normal circumstances. But Chrysler represents anything but normal circumstances, says Daniel Gross, Slate’s Moneybox columnist. Gross argues that the U.S. government was right to do this, in part because investors who bought Chrysler’s debt were already dealing with something besides normal capitalism. He says they got greedy, expecting the government to overpay for their assets. The government called their bluff, and now they can go to the back of the line.

Gross does say this is dangerous if it happens again. He thinks it’s a one-off event. What do you think?

If you think the U.S government has flubbed the bailout plan, you’ll like Eric Janszen, the sometime venture capitalist and entrepreneur who runs iTulip.com. Janszen spoke at the Nantucket Conference on Friday, giving a likely preview of his book “The Post-Catastrophe Economy.”

If nothing else, Janszen is provocative. For starters, he thinks the U.S. government’s efforts to fix the economy merely guarantee an even bigger crisis in the future.

Janszen summarized government actions so far as:

• pouring money into insolvent banks
• monetizing bad debt (i.e., toxic assets)
• stimulus without restructuring (focused on shovel-ready projects, or as he put it, congressman-ready)

Tsk tsk, Janszen said. This “will not produce a self-sustatining economy. Debt will pass some threshold and we’ll have a currency crisis.”

But all is not lost. He reminds us of Churchill’s comment as a nation that will do the right thing, after exhausting all other options.

Janszen’s prescription: (more…)

The New Yorker’s James Surowiecki has been posting on the pros and cons of bank nationalization. Surowiecki today cites President Obama’s Georgetown speech of April 14th as The Most Memorable of Obama’s First 100 Days, in part because of its excellent discussion of the topic of nationalization.

As Surowiecki says, Obama’s speech “embodies the kind of pragmatic and rational approach that we want our policymakers to take, one that recognizes that in complicated situations it’s not always easy to figure what the right answer is, and that on difficult questions, smart people of good will can disagree.”

The Becker/Posner blog grimaces at the Federal Reserve’s lack of independence. Yes, says Gary Becker, we should expect the Fed to kowtow to political pressure in a time of crisis. But he doesn’t like the scope of the Fed’s submission in this crisis. He expects the Fed will face very difficult problems when the economy recovers, and may not be able to regain its independence.

He particularly fears the inflationary potential caused by the swell in bank reserves from about $8 billion to about $800 billion. Longer-term, he sees higher interest rates as an inevitable consequence of the stimulus plan, and a Fed stuck between choosing recession and inflation.
Judge Richard Posner’s post on the same topic goes on at length, and seems less troubled (but not untroubled) by the Fed’s manuevers and obvious lack of independence.

A generally fawning look at hedge fund manager Bill Ackman includes his plan to end the financial crisis. Developed along with Michael Porter, it is at least creative in arguing that bank creditors should get equity, and that the government should skip dealing with securities backed by mortgages, and instead promise to buy mortgages in default at 50 cents on the dollar, creating a floor for the market. Though Ackman claims they’ve had a good meeting with Larry Summers, creativity appears to be something lacking by Treasury Secretary Timothy Geithner, according to this hopeful piece. That these claims happen to be in the final issue of the failed magazine Portfolio does not make them wrong (disclosure: I have written for Portfolio). But I’m not sure that even the hedge fund manager with “the seminal financial career of the past two decades” is the best person to listen to when it comes to saving the economy. After all, Ackman’s bet on Target has gone terribly wrong.

I just ran across a review of Woody Tasch’s Inquires into the Nature of Slow Money: Investing as if Food, Farms and Fertility Mattered, which I missed when it came out last year. In fitting fashion, the book is slowly gaining attention. It was featured on NPR in March, and I ran across this thoughtful review late last week.

In it, Rebecca Coffey, who posts and tweets about books and such, lauded Slow Money, though she was unconvinced by the premise — and Tasch — for much of the early part of the book.

“the later essays…are more contemplative, and in them Tasch starts asking himself the kind of hard questions I wanted to ask. He doesn’t have all the answers, but he does show plenty of the sort of cold logic and realistic yet innovative thinking that will be necessary to create them.”

Tasch is certainly innovative; he has for almost two decades been involved in finding new models for social investing, notably as head of the Investors’ Circle, perhaps the preeminent social venture capital group. His book is timely. It’s not clear his idea can be.

Slow money is obviously much less dangerous than the fast money we’ve seen, and there’s a certain common sense to it. The challenge is, of course, speed. It is not quick to get returns and to build on them. It will not be quick to shift our food supplies back to local markets — much good farmland now grows suburban housing developments.The idea of food security is a little hard to focus on in a nation that suffers from an obesity problem.

What do you think? Is Tasch onto an important idea for economic organization?

An interesting post, Hard Landing and the China Paradox, from an ex-pat living in China, looks at the wildly divergent statements coming from China’s government and from overseas economists like Nouriel Roubini. It’s not a very happy post, and it shows how confusing things are there, though the ex-pat does not see China falling apart, as Roubini predicted.

The expat sums it thusly:

Bottom-line points: Huge disconnect between what China sees vs. the world’s financial gurus (the ones who had it right about the global crash). Huge disconnect between claims of greatness and claims of poverty. Huge disconnect between where China actually stands today and where the government is telling us it stands (see the Roubini report for numerous detailed examples).

Edward Hadas, a writer for BreakingViews.com, wonders why the protests at this week’s G20 meetings in London are so lame. He writes (paid subscription required)

The global mismanagement of the financial system has led to a deep recession. Intellectual paralysis has gripped the authorities and their policy response has been risky. After such failure, the political leaders gathered in London for the G20 conference deserve a serious challenge.

In fact, he argues that “any protester who can articulate a coherent alternative to the establishment’s tattered notions really could change the world.”

(Libertarians and die-hard Marxists must be shaking their fists in rage at Hadas, for his refusal to recognize the obvious.)

Personally, I’m glad the protests haven’t reached Weimar proportions. Maybe it means things aren’t as bad as all that.

Amartya Sen takes on free-market orthodoxy by looking at what its patron saint, Adam Smith, had to say. In Capitalism Beyond the Crisis, Sen uses a Smithian prism to look at three big questions:

1. Do we need a new capitalism?
2. What kind of economics institutions and priorities do we need?
3. How can we get out of our current crisis with as little damage as possible?

To summarize Sen, capitalism as a system based on unfettered, self-regulating markets is a fiction whose time should never have come. He thinks we don’t need a new capitalism, but a return to capitalism’s roots, which were much wiser about the limits of markets.

Sen quotes from Smith’s “Wealth of Nations” to show how he would have expected the current banking crisis would emerge. Sen writes about Smith’s warning about those who would promote excessive risk-taking, whom he called “prodigals and projectors” in “The Wealth of Nations:”

The implicit faith in the ability of the market economy to correct itself, which is largely responsible for the removal of established regulations in the United States, tended to ignore the activities of prodigals and projectors in a way that would have shocked Adam Smith.

As for our institutions and policies going forward, Sen cautions us on the return of Keynesianism. He says “Keynes can be our savior only to a very partial extent, and there is a need to look beyond him in understanding the present crisis.” Sen in fact looks next to Keynes, to the work of Arthur Cecil Pigou, a rival of Keynes also based at King’s College, Cambridge. Pigou worked on economic psychology, in a way that matters now, as we suffer a kind of psychological meltdown that reinforces and amplifies our economic one. Sen suggests the current crisis and its aftermath will demand an economic policy much more concerned with social services and economic inequality than Keynes was. Indeed, Sen argues that Keynes “came close to being the guru of a new capitalism, who focused on trying to stabilize the fluctuations of the market economy.”

Finally, Sen focuses his third answer on how we have an opportunity to remake our national healthcare system so it will function far more efficiently, and cites neither Europe nor Canada, but Kerala, a state in India. He wants to know why Kerala has been able to provide low-cost but effective healthcare for all, while the U.S. spends more per capita on healthcare than any other country in the world, but still manages to have indifferent results, and leaves more than 10 percent of our population uncovered.

So far, he finds the Obama administration lacking in imagination. Perhaps it’s time for them to dust off their Adam Smith.

Should our economic reset not only welcome but demand a bigger government? Jeff Madrick’s book “The Case for Big Government,” says unequivocally yes.

In Government Beyond Obama?, Madrick’s book gets an interesting review by Richard Parker, a public policy lecturer at Harvard. Parker starts out with a nice line: “Jeff Madrick’s The Case for Big Government arrives when one might think Wall Street has made the case quite persuasively on its own.”

Madrick, an eclectic thinker on economic policy, establishes the role of government as a change agent throughout U.S. history, and argues that what we need most of all right now is a government set to help drive transformation again. He calls among other things, for a big spending increase without tax cuts (little wonder that Madrick has skewered Obama’s economic team).   (more…)