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November 7, 2008 12:18 AM   Subscribe

Wall Street Lays Another Egg. "Not so long ago, the dollar stood for a sum of gold, and bankers knew the people they lent to. The author charts the emergence of an abstract, even absurd world—call it Planet Finance—where mathematical models ignored both history and human nature, and value had no meaning."
posted by homunculus (63 comments total) 11 users marked this as a favorite

 
That was an excellent brief summary of the financial crisis.
posted by iamkimiam at 12:36 AM on November 7, 2008 [1 favorite]


He's way off base arguing that property ownership for the masses is a 70 year old idea. The idea of quality housing was a cornerstone of the arts and crafts movement, which was well underway by 1880. Sears started selling kit homes in 1908 and was playing catch up with Aladdin which started in that business earlier.

What happened 70 years ago was that the vast majority of workers were middle class as a result of the ripples caused by Henry Ford paying people $5 a day, much to the chagrin of every other employer, back in 1914. And lo and behold there was rampant inflation....er, no, what happened was goods flew off the shelves, businesses expanded and the standard of living went way up. After that, yeah, once that happened, the idea that, "Hey, people who have wealth buy more stuff!" was the conventional wisdom. Cue "It's a Wonderful Life".

In related news, fire is hot.
posted by Kid Charlemagne at 1:59 AM on November 7, 2008 [3 favorites]


the transactions outnumbered the relationships

Don't they always?
posted by Phanx at 3:16 AM on November 7, 2008


dollar stood for a sum of gold

This reverence for the gold standard has always bothered me. Gold itself was used as a currency, and stood for a certain quantity of goods. The value fluctuates, and ultimately could crash at any moment as a new discovery of gold, or a new extraction process made it much more commonplace. It's happened to aluminum, which used to be considered a precious metal.

I understand that the article isn't specifically or even generally about what the dollar is based upon, but it's a lead-off sentence that sets the tone and timbre of the article, and it rubs me the wrong way that so many authors are willing to assume that gold, or the gold standard, is better.

After all, in absence of any rare and non-reactive substance like gold, currency would have still developed, having been distributed by a central government just as dollars are. They might have been certificates that stood for bushels of grain, but ultimately it's paper currency that's issued by the government and people take it on faith of government that they're worth something. Just like dollars.
posted by explosion at 4:16 AM on November 7, 2008 [16 favorites]


That was an excellent brief summary of the financial crisis.

Brief? Brief! It's nearly 10,000 words long. It is a good piece and I like Niall Ferguson . But I do often wonder if the reason the US population is less given to reading than so many other developed - and developing - countries is because its media never uses 3,000 words (a medium-long UK article) when 10,000 will do.
posted by rhymer at 4:31 AM on November 7, 2008


That trenchant Marxist analysis ("famous for predicting five out of the last three recessions”) I know you've all been waiting for, from Andrew Kliman:
Q. You and some other Marxists like Istvan Meszaros have argued capitalism never really recovered from the crisis of the 1970s. This contrasts to New Labour, for example, who say we have just been through unprecedented “economic growth”, even an “end to boom and bust”. If it was not an upturn what was it?

A: I don’t see how it can be denied that capitalism has failed fully to recover from the crisis of the 1970s, in the sense that there hasn’t been a new boom such as the one that followed the Great Depression and World War II. From the early 1950s through 1973, worldwide gross domestic product per person increased by right around 3% per year on average. That growth rate was basically stable throughout the whole period. But from 1974 through 2003-the latest year in the data set I looked at, the authoritative data set compiled by Angus Maddison- worldwide gross domestic product per person increased by only slightly more than half that rate, and only slightly more than one-third that rate if you exclude China. Again, there’s no trend here, just a long-term cut in per capita growth to about one-half or one-third of the growth rate that we had during the post-World War II boom.

I recently put the decade-by-decade computations on my website, http://akliman.squarespace.com/crisis-intervention, since the long-term slump in GDP growth isn’t all that well known. It certainly deserves to be better known.

During the period since 1974, there have of course been some shorter cyclical upturns. Some of these have been called booms, such as the “Clinton boom” of the 1990s in the US. But that’s another name for the “dot-com” boom, which was a bubble that burst. None of these cyclical upturns have reversed the long-term decline in GDP growth. That’s quite clear from the figures I just cited. They haven’t led to an era of stronger growth that’s sustainable over the long haul. Yes, it’s always possible to live well on borrowed money-but only for a time, until the day of reckoning arrives. And it always arrives. In the end, growth under capitalism is determined and limited by the growth of new value from production. Ultimately, it cannot be greater than that.
posted by Abiezer at 4:37 AM on November 7, 2008 [4 favorites]


Kid Charlemagne, he's off by more than that. The idea that property ownership confers virtues upon people goes back millennia. This is why there were property requirements on voting in the 18th century and earlier: people assumed that owning property either made you a better person or signified that you were one. Exactly which wasn't entirely clear--does property make people good or do good people own property?--but it was crystal clear that property ownership and social status went hand in hand.

Cue egalitarian sentiments in the US that have never completely dispelled this old idea (possibly because there may actually be something to it, unpopular as that may be), and you see home-ownership as a major political goal.

Marxist analysis is bogus. But so is neoclassical analysis. Both have insoluable math problems at the core of their philosophies. Fortunately, all we need do is return to the discipline from which economics emerged: moral philosophy. I think it's pretty uncontroversial that spending more than you make is dangerous, especially if you do it habitually, and I'm not sure why we need economic models of obscure origin and dubious veracity to tell us that.
posted by valkyryn at 5:30 AM on November 7, 2008 [4 favorites]


Some interesting stuff in there, but it's strongly skewed by Ferguson's peculiar views of history and economics, the gold-bug stuff being just one example (this blatantly ludicrous statement is presented as simple fact: "Those few goldbugs who always doubted the soundness of fiat money—paper currency without a metal anchor—have in large measure been vindicated"). For background, some quotes from his Wikipedia article:

Ferguson was recently appointed as an Investment Management Consultant by GLG Partners, focusing on geopolitical risk as well as current structural issues in economic behaviour relating to investment decisions. GLG is a UK-based hedge fund management firm headed by Noam Gottesman.

Ferguson has often disparaged the European Union as a disaster waiting to happen...

Ferguson has occasionally supported the policies of George W. Bush, especially his foreign policy...

In Ferguson's view, Bush has not done enough to cut entitlements in the area of social spending.

Ferguson presented a counter-factual version of Europe under Imperial German domination that was peaceful, prosperous, democratic and without ideologies like Communism and fascism. In Ferguson's view, had Germany won World War One, then the lives of millions would have been saved, something looking much like the present-day European Union would have been founded in 1914, and Britain would have remained an empire and the world's dominant financial power.

Benjamin Wallace-Wells, an editor of The Washington Monthly, has criticized Ferguson for making "sweeping, absolute claims" without sufficient support or any original research to back them up, and of contradicting the academic consensus for the sake of being contrarian.


And here are a couple of his ideas of how to reform the U.S. economy:

Replacing the personal income tax, corporate income tax, FICA payroll tax, estate tax, and gift tax with a 33% Federal Retail Sales Tax (FRST)

Replacing the Old Age benefits paid under Social Security with a Personal Security System, consisting of private retirement accounts for all


Private retirement accounts, eh? If you like that idea, he's got a barrel to sell you to wear now that your wardrobe has been repossessed.
posted by languagehat at 5:44 AM on November 7, 2008 [5 favorites]


I traveled to Planet Finance once. Pretty exciting place with lots of good nightclubs, but the drinks were very expensive and the hangover was brutal.
posted by twoleftfeet at 6:10 AM on November 7, 2008 [1 favorite]


I got mugged there.
posted by sandraregina at 6:16 AM on November 7, 2008 [7 favorites]


I've spent my early adulthood talking with folks in the financial sector (mostly my brother's friends) and I was always flabbergasted at how much money was being made without producing anything outright. Certainly I understood that the creation of debt and liquidity eventually meant loans and actual production for some end-user far down the line, but the byzantine apparatus these folks were building to milk even more money out of the system never looked at all sturdy to me. All I saw was a vast sea of arbitrary values shifting about with deadly serious consequences.

To any sane person, I thought, this has the appearance of an entirely unsustainable system. But then, so many smart people with so much wealth and clout were firmly invested in the system, so it must be legitimate.

The fact that articles like this are finally popping up makes me hopeful. Might this crisis finally lead to a more realistic concept of the limits of markets and lending? Will those who have invested so much in this big crazy fun house actually relent?

Well, probably not.
posted by es_de_bah at 6:58 AM on November 7, 2008 [4 favorites]


This reverence for the gold standard has always bothered me.

It actually always seemed obvious to me until recently - now, I agree. What "intrinsic value" does a lump of gold have for me? None, really. It's an agreed upon valuation, in its way as abstract as a paper dollar.

And what does $5 represent? Inside of 10 minutes, a beer or a burrito. Sure, the price may change, but that's true in both cases. There's no getting around the fact that everyone has to agree on an abstract value, in any model beyond direct barter.
posted by freebird at 7:02 AM on November 7, 2008


Money is the problem. We were OK when we had a barter economy. Then these guys with their fancy-schmancy gold come along. I don't want no gold, I told em, but no it's a repository of abstract value, they said. I told 'em that only worked if everybody believed in the value of gold, and one day there'd be a loss of confidence and then they'd come a cropper with their sopisticated metallic abstract financial instruments where no-one even knows what any particular piece of gold represents any more, and now I've been proved right.
posted by Phanx at 7:10 AM on November 7, 2008 [5 favorites]


A great read. Thanks homunculus.

Explosion: ...it rubs me the wrong way that so many authors are willing to assume that gold, or the gold standard, is better.

Are you saying that gold and/or the gold standard are not more secure than fiat money? From the article:

A man who decided to put his savings into gold in 1970 could have bought just over 27.8 ounces of the precious metal for $1,000. At the time of writing, with gold trading at $900 an ounce, he could have sold it for around $25,000.

This is new information to me and I would be interested in seeing someone refute this. Anyone?
posted by Laugh_track at 7:12 AM on November 7, 2008


It's not so much a refutation as ... selecting where you put your start and end points.
posted by Comrade_robot at 7:22 AM on November 7, 2008


Yeah, but you were all over the cowrie shell, Phanx, admit it.
posted by Abiezer at 7:23 AM on November 7, 2008


I've spent my early adulthood talking with folks in the financial sector (mostly my brother's friends) and I was always flabbergasted at how much money was being made without producing anything outright.

Think of them instead as logistics companies. Only instead of moving goods, they're moving capital (or risk). Shipping goods results in immediate payments, shipping capital results in long-term complicated payments.
posted by FuManchu at 7:24 AM on November 7, 2008


paging MUTANT

cleanup on thread 19 please.
posted by leotrotsky at 7:27 AM on November 7, 2008


Laugh_track, his price data does seem to be accurate, but it's misleading. Adjusting for inflation, $25,000 2007 dollars are really only $4730 1970 dollars. So yeah, moving from $1000 to $4730 is quite an increase, but actually below what the market has done in that time.

Funny thing is, he rails on inflation elsewhere, so it seems rather odd that he'd fail to take that into account when he talks about gold. Oh, wait, that's right, according to the author, gold is a magical substance which has intrinsic value, and thus isn't subject to normal economic forces. I forgot.
posted by valkyryn at 7:35 AM on November 7, 2008 [2 favorites]


I live check to check. What has Wall Street done for me? I'm a foreclosure baby.
posted by doctorschlock at 7:37 AM on November 7, 2008


Exactly which wasn't entirely clear

I think that the argument was that people who owned property would have a stake in the system, and would thus be less prone to careless or radical decision-making. So property ownership doesn't make one good so much as careful or thoughtful. That was the theory, anyway.
posted by AdamCSnider at 8:06 AM on November 7, 2008


It actually always seemed obvious to me until recently - now, I agree. What "intrinsic value" does a lump of gold have for me? None, really. It's an agreed upon valuation, in its way as abstract as a paper dollar.

This is, of course, quite true. But 'intrinsic value' isn't the reason why most people (at least those I've talked to who weren't also 9/11-truthers or UFO believers) think it's a good idea.

A gold-based currency could have value fluctuations, inflation (due to gold production rising faster than growth), and deflation (growth rising faster than gold supply).

What makes it different from fiat currency is that it's difficult to manipulate these fluctuations. If you want to inflate a true gold-based currency, you have to go dig up more gold out of the ground (or the sea); it requires significant effort, much more than printing paper dollars or performing some magic lending like the Federal Reserve engages in. I suppose a bank could buy up a lot of it and sit on it, thereby causing deflation, but that would also be very expensive.

It doesn't make a currency immune to fluctuation, it makes it immune to intentional manipulation, particularly by governments and central banks, whether for good or for ill. The main advantage to gold, in the minds of most people I've talked to, is that it takes the controls away from bankers and government -- it takes away a lot of their power and forces all of them to be slaves to the market rather than its masters. (And I think there's a certain nugget of truth here; fiat currencies were quite clearly created as a way of putting the money supply more firmly under government, rather than market, control.)

People who support precious-metals-backed currencies usually do so because they believe that government and central bank intervention in monetary policy has done more harm than good, and that a currency that was harder to manipulate (even if it was still subject to outside forces, even random ones) would be superior to the current system.

If you take this premise -- government monetary intervention is always bad, and anything that makes it harder or more expensive to do is a Good Thing -- than backing currency with a precious metal or some other substance that's very difficult to create out of thin air seems like a pretty good idea.
posted by Kadin2048 at 8:15 AM on November 7, 2008 [4 favorites]


Clarification of first sentence: I realized after submitting that what I wrote isn't quite what I meant; what I was going for was
...'intrinsic value' isn't the reason why most people (at least those I've talked to who weren't also 9/11-truthers or UFO believers) who support a gold standard think it's a good idea.
I'd be hanging out in some fairly interesting company otherwise.
posted by Kadin2048 at 8:17 AM on November 7, 2008


There is something that bothers me about how gold is valued. I understand that gold is considered a safe haven in tough financial times, but I do not understand why. A majority of gold consumption is from the production of a non-essential commodity, jewellery. Then,why is the value of a non-essential commodity inversely proportional to the strenght of the economy? Is it a holdover from when currency was backed by gold?


On another note,

Kadin, why would it be so difficult to manipulate gold prices? Diamond prices are manipulated effectively.
posted by batou_ at 8:37 AM on November 7, 2008


Kadin2048, I'm sensitive to those arguments, but one can believe that government intervention is generally bad, as I do, and still think that the gold standard is an even worse idea. How? Because by virtue of being finite, the money supply needs to be defined by something. And having it arbitrarily defined by the quantity of a random uncommon rock one has in ones vaults doesn't seem any more or less arbitrary than having it fixed by central bankers, and the idea that commodities manipulation is harder than currency manipulation is just silly. Furthermore, having the money supply tethered to a rock does not permit for much in the way of liquidity.

World currencies were on the gold standard in 1929 and that didn't prevent the Great Depression. Now we use fiat currency, and it seems that by "manipulation" of the money supply, we may have averted just such a disaster.

Is this conclusive? Absolutely not. I'm firmly convinced that economics is all voodoo. But there's bullshit and then there's bullshit, and the gold standard strikes me as being the latter.

In short: The Gold Standard: All of the risks and none of the benefits of fiat currency.

I'm done now.
posted by valkyryn at 8:37 AM on November 7, 2008 [2 favorites]


I was always flabbergasted at how much money was being made without producing anything outright.

Right. I don't want to take such a narrow view of what is productive and what isn't. But if you can't look at what you do for a living and trace what you are paid back to an amount of good in the world you are either not smart enough for the job you do or a robber. Teachers, factory workers, architects, journalists, farmers, and janitors aren't going to have this problem. It really shouldn't be a hard question.
posted by I Foody at 8:41 AM on November 7, 2008 [1 favorite]


Brief? Brief! It's nearly 10,000 words long. It is a good piece and I like Niall Ferguson . But I do often wonder if the reason the US population is less given to reading than so many other developed - and developing - countries is because its media never uses 3,000 words (a medium-long UK article) when 10,000 will do.

Attention spans these days are too short also why we are in the mess we're in. You can't expect a Reader's Digest version of something and think you have a full grasp on things...
posted by Alexandra Kitty at 8:43 AM on November 7, 2008


Laugh_track, his price data does seem to be accurate, but it's misleading. Adjusting for inflation, $25,000 2007 dollars are really only $4730 1970 dollars.

That is not the misleading part. He is implying that gold historically maintains its value in a fairly stable way (somewhat true), while fiat currencies (obviously) do not. If gold were a perfect hedge against inflation, you'd expect an amount of it purchased in 1970 for $1000 to be worth $1000 today in 1970 dollars.

The misleading part is that he's selected a time period over which gold did better than it usually does. It has so far done reasonably well when you look at its history from ancient times, but its price can stay well above or below its historical average for long periods of time, after adjusting for inflation. Of course, inflation is difficult to measure, and over long periods of time small errors in its estimation can make a large difference. So it is not all that easy to analyse. The basic fact that gold maintains its value a whole lot better on average than for example the US dollar remains true.

Personally I believe that while we could do a whole lot better than the present monetary regime, a simple return to the gold standard is not really the best answer. While its disadvantages are well-known, (at least on metafilter), it does have the advantage of being something that's been used with some success in the past. It's not going to happen any time soon though, and if we're going with hypothetical ideals of the monetary system we'd like to see, I'd prefer one in which the Federal Reserve and its peers actually do a consistently good job of managing things under the present system, the way they're supposed to.
posted by sfenders at 8:50 AM on November 7, 2008


Brief was my way of alluding to how complex this issue is. I really do think the article was brief, given the ground it had to cover. And excellent too.
posted by iamkimiam at 8:56 AM on November 7, 2008


Kadin2048 I've heard those arguments, and I think they ring false. It seems to me that a gold standard limits (but hardly eliminates) the ability of a government to manipulate money, but it also puts that power in the hands of anyone (foreign governments, big corporations, etc) who wants to spend the resources necessary to do so.

China, for example, owns a crapload of gold, and could use it quite effectively to manipulate the value of a gold backed currency.

The people I've spoken with, apparently much like those you've spoken with, seem falsely confident that somehow manipulating a gold backed economy would be sufficiently difficult that no one could really do it. There appears to be a certain "gold is magic" thinking involved.
posted by sotonohito at 9:01 AM on November 7, 2008


Comrade_robot: Thanks for the link. I did some googling and found a more extensive report from the same site.

batou_: There is something that bothers me about how gold is valued. I understand that gold is considered a safe haven in tough financial times, but I do not understand why.

The idea at least dates back to the Islamic philosophers such as Ibn Khaldun (circa 1377).

valkyryn: The Gold Standard: All of the risks and none of the benefits of fiat currency.

You know, it seems like Ferguson was advocating a return to the Gold Standard by mentioning it in his article, but he didn't really. He just sort of threw it in there. It makes me wonder if he really believes that a return to the Gold Standard is possible.

"Until the late 20th century, the system of bank money retained an anchor in the pre-modern conception of money in the form of the gold standard: fixed ratios between units of account and quantities of precious metal. As early as 1924, the English economist John Maynard Keynes dismissed the gold standard as a “barbarous relic,” but the last vestige of the system did not disappear until August 15, 1971—the day President Richard Nixon closed the so-called gold window, through which foreign central banks could still exchange dollars for gold. With that, the centuries-old link between money and precious metal was broken.

And his discussion on gold ends here, on page 2:

"In the immediate aftermath of the death of gold as the anchor of the monetary system, the problem of inflation affected mainly retail prices and wages."

A nice history lesson -- but what's the point?
posted by Laugh_track at 9:18 AM on November 7, 2008


It doesn't make a currency immune to fluctuation, it makes it immune to intentional manipulation, particularly by governments and central banks

You should get a time machine and explain this to the free silver movement, who had different ideas.
posted by ROU_Xenophobe at 9:21 AM on November 7, 2008


saw this over at iGreed; i think it makes a nice companion piece :P viz. If we only had a financial system!
...a financial system would be forward-looking. A financial system would be interested in the world, rather than fascinated by the patterns that formed behind its own mathematical eyelids. A financial system would hunger for information. It would leave no human preference overlooked and no technological possibility unconsidered. A financial system would embrace us all, would want to learn from us all. It would not be something external, something outsourced to specialists in London or Manhattan. It would want "savers" to express what they plan to do, how they hope to live, rather than offering generic claims on money along a disembodied spectrum of "risk". It would thirst for proposals, ideas, business plans designed to meet the preferences thus expressed, or to achieve possibilities not widely considered. A financial system would be creative. No stock exchange could contain the vast and multifarious tapestry of investable ideas a financial system would educe. A financial system would offer us opportunities to invest not in distant opportunities where we are disadvantaged, but in projects that are informationally, if not physically, near to us. A financial system would be ruthless. It would allow us to have a voice in the most important decision we collectively make, but would force us each to bear the costs of our errors...
btw ferguson, in addition to his other article for VF, made another apt comparison with the ottoman empire at the beginning of the year and has written a (poorly reviewed) book -- "The Ascent of Money: This rushed, uneven book... rarely come[s] to life, either as a source of ideas or as narrative... [readers] may be put off by Mr Ferguson’s attempt to be jolly."*

cheers!
---
*cf. his attempt as an advisor for the mccain campaign; like my (naïve) view of ferguson re: colossus is that the US really should try to resurrect the british empire as a force (and source) of good for the world, but like, per its jacksonian tradition, it just hasn't done empire well, so why? there's nothing stopping US, a uni-polar/brow superpower after all... is it america's general makeup, constitution and (colonial) history? the inherent contradictions of being a 'reluctant' empire? like you kinda have to embrace, if not relish, it -- the power -- to sit astride the earth and administer effectively... i'll submit that maybe, maybe, instead of Empire or Hyperpower or whatever, what we really need is a (sane) financial system :P
posted by kliuless at 9:27 AM on November 7, 2008 [2 favorites]


oh and, if i may! the khaldun option :P
posted by kliuless at 9:45 AM on November 7, 2008


What a gold standard offers is a check and balance on the economic system. It doesn't matter that it's gold specifically. It just needs to be something that the government can't handwave into existence to prevent solutions to problems.

We have tried to go into a severe recession repeatedly over the last decade and a half, and the government has actively prevented it from doing so, by injecting capital whenever there was a crisis. This prevented one of the fundamental jobs of a currency from working. It couldn't properly transmit the shortage of production and excess of consumption into the economy. This allowed us to build up to unbelievable maladjustment, to the point that the survival of the American Empire is very much in question; we are so deeply in debt, and have so little manufacturing left with which to pay that debt, that our continuation as a going concern more than about another fifteen years is very much in question.

Over the long span of history, governments start on solid money. When they start wanting to spend more wealth than they actually have, they start debasing the currency, and usually end up as a full fiat system. Not coincidentially, the fiscal state of those governments drops precipitously; the weaker the currency gets, the weaker the government's books get. Eventually, the government collapses and things are very, very bad indeed.

Fiat allows wishful thinking to rule, instead of hard economic reality. Instead of getting the message that the economy needs to consume less and produce more (a recession), goosing the system with fiat currency tells it to keep doing what it's already doing (consuming too much). So we go deeper and deeper into debt and maladjustment.

I have no doubt whatsoever that people are going to insist that fiat money is just fine, even as the country is crumbling around us. And all you have to do, to clearly see that is absolutely inevitable, is look at the trade imbalance figures, the personal debt figures, and the government books to GAAP standards.

The reason we haven't been forced to adjust and fix these things already is because of the soporific effect of fiat currency. It doesn't solve ANYTHING, it just hides problems. It's like prescribing painkillers for a broken bone; if the painkillers are strong enough, you can function almost normally, but you're just hurting yourself worse by doing so.

But no, there's nothing magical about gold itself. The only thing it really represents is stored labor; it can't be imagined into being. You have to pay workers and invest energy to smelt it into useful form. The goldbugs get confused about this part; they insist that money can only be gold, and that only gold is money, and they basically hold it in mythical terms.

That's just not accurate, and people are right to criticize it. But the dangers of fiat money are entirely separate. It's not that "it's not gold, so it's bad" -- rather, it's that it's ILLUSION, so it's bad. It doesn't actually represent any wealth at all, and takes no labor or effort on anyone's part to make. So anytime there's a shortage, instead of fixing the actual problem that caused the shortage, they just print more, and problems don't get fixed.

Result: America of 2008, in a fiscal situation so dire that we're sucking up the savings of the entire world to buy our plasma TVs and Hummers. On credit. Eventually, the world's gonna want the equivalent of those TVs and Hummers back, and it's not going to get it, because we've got very little export capability anymore.
posted by Malor at 9:53 AM on November 7, 2008 [7 favorites]


This reverence for the gold standard has always bothered me.

No kidding. Plus they mine about 3000 pounds of the stuff a year, give or take. So as you (or someone) point out, it's not even a fixed base of assets.
posted by GuyZero at 10:04 AM on November 7, 2008


You wouldn't want the commodity base to be fixed, Guy. If it is, it can't respond to market forces properly. If there's too much, less is produced; if there's too little, more shows up. It's like soap; you don't worry about the soap supply, it self-regulates.

If it's fixed and never changes, that means it's always getting more valuable, meaning the tendency will be to hold it. That would slow economic growth a lot. We'd probably still grow, but it would be slower than it should be. Commodities should, in general, be getting very slightly more valuable over time in comparison with manufactured goods, because we get more and more efficient at manufacturing, but it should be a very slow process, visible only in decade timespans.

Money doesn't need to be gold. That's a good solution, but it may not be the best one anymore. Money is just the most marketable commodity, the single commodity in the world that the largest fraction of people want. If that's not gold anymore, that's fine. It just needs to be something real, preferably with high value in a small volume, fungible, and durable.
posted by Malor at 10:12 AM on November 7, 2008


What a gold standard offers is a check and balance on the economic system. It doesn't matter that it's gold specifically. It just needs to be something that the government can't handwave into existence to prevent solutions to problems.

And this is the major problem with a gold standard, or any commodity backed currency. Unless you force people to trade physical gold, the government can hand wave into existence more gold reserves or arbitrarily change the price of gold, and this is precisely what happened when the gold standard was in effect, so it really isn't any different from a fiat currency. At the core it seems that you are against deficit spending, and that idea has merits. But to it seems like it would just lead to much lower economic growth, if not zero growth and conic unemployment.

As for the article, I was ready to dismiss it because of his bizarre take on inflation. If you look at the log scale graph of inflation over the past 90 years it is very consistent. And prior to the 50s the US had regular bouts of deflation, which most people agree is a bad thing. But on the whole it was a decent run down recent financial history.

The most important paragraph was this one:

"The benefits for the United States were manifold. Asian imports kept down U.S. inflation. Asian labor kept down U.S. wage costs. Above all, Asian savings kept down U.S. interest rates. But there was a catch. The more Asia was willing to lend to the United States, the more Americans were willing to borrow. The Asian savings glut was thus the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge-fund population explosion. It was the underlying reason why private-equity partnerships were able to borrow money left, right, and center to finance leveraged buyouts. And it was the underlying reason why the U.S. mortgage market was so awash with cash by 2006 that you could get a 100 percent mortgage with no income, no job, and no assets."

I've been thinking a lot about this frustrating post by Daniel Davies at crooked timber and this Keynes Quote he brings up, "Macroeconomic events have macroeconomic explanations, not micro ones."

If you look at the Macro economic factors, there was always going to be a bubble in the U.S. Interests rates were low and debt was huge (nicely exacerbated by the Iraq war and Bush's tax cuts). if you acknowledge this, it seem to put the Bankers off the hook. Yet there is not doubt in my mind that the deregulated enhanced lack of transparency in financial markets, allowed financial players to fraudulently overrate mortgage backed bonds, which everyone seems agree to lead directly to the current financial crisis. I'm having a really hard time relating the Macro factors lead to the specific misdeeds of individual banks.
posted by afu at 11:15 AM on November 7, 2008 [1 favorite]


afu: If you look at the log scale graph of inflation over the past 90 years it is very consistent.

No, it isn't. See figure 12.

malor: we've got very little export capability anymore.

US exports as a percent of GDP, according to BEA:
1960: 5.1%
1980: 10.0%
2000: 11.2%
2007: 12.0%
posted by sfenders at 12:34 PM on November 7, 2008 [1 favorite]


We have methodically erased information about real-world activities from the financial decision-making process.

This line from the third link in kliuless's comment reminded me of related discussions in a couple of other recent threads here in the blue.
posted by saulgoodman at 1:17 PM on November 7, 2008


It just needs to be something real, preferably with high value in a small volume, fungible, and durable.

I hate it when people start talking about marijuana legalization....
posted by lumpenprole at 1:18 PM on November 7, 2008 [1 favorite]


umm.... "high" value. (drools. bites donut. economy rebounds.)
posted by saulgoodman at 1:25 PM on November 7, 2008 [1 favorite]


paging MUTANT

cleanup on thread 19 please.


Repeated for emphasis.
posted by languagehat at 1:58 PM on November 7, 2008


The benefits for the United States were manifold. Asian imports kept down U.S. inflation. Asian labor kept down U.S. wage costs.
Right there, I think, is the reason why I hate so many economists with a burning passion. "Keep[ing] down wage costs" is not a fucking good thing from the viewpoint of those of us who earn wages you sanctimonious prick. I don't care what else he has to say, if he's brilliant, or stupid, if his economic theory makes sense or if its the ravings of a madman. All that matters is that from his POV its a *BENEFIT* to keep me and most Americans poor. Fuck him and anyone who agrees with him.

I still remember the fury I felt when St. Alan Greenspan, He of the Wisdom to Let the Markets Regulate Themselves, said that one of his greatest concerns was "preventing wage inflation". Because God, and St. Alan, forbid that us working stiffs should actually get more money, that'd be terrible. Thank goodness the Asian markets were there to keep down wage costs. The *ONLY* problem with that was that some gazillionares went into debt. Us working types watching our income shrink was a *BENEFIT* if only we'd been smart enough to see it.

I know not all economists take that sort of aristocratic view, but it seems that the vast majority do and I think that the only rational response to such people is to break out the torches and pitchforks.
posted by sotonohito at 1:58 PM on November 7, 2008 [5 favorites]


my head hurts...
posted by I, Credulous at 2:06 PM on November 7, 2008


He's way off base arguing that property ownership for the masses is a 70 year old idea.

Anecdotal evidence here. Both sets of grandparents, solid middle classers the pair, both rented throughout the last century, one set only buying in the late fifties (their late sixties).

Story I heard growing up at the dinner table is that mortgage was a dirty word, since in the old pre-war days, the boilerplate terms did not have you retiring principle until after the computed interest was paid off- perhaps year 28 or so? Thus, no equity build up for you! (Why this was worse than renting, I do not know- possibly a poor rent/own ratio? Small likelihood of living in the same house that long?)

Of course MUTANT may have other insight, if he'd take a look in thread 19.
posted by IndigoJones at 2:09 PM on November 7, 2008


Unless you force people to trade physical gold, the government can hand wave into existence more gold reserves or arbitrarily change the price of gold, and this is precisely what happened when the gold standard was in effect, so it really isn't any different from a fiat currency.

Yes, and that's exactly what caused the two largest American economic problems in the 20th century: the stock market bubble and crash leading to the Great Depression (made much worse by Smoot-Hawley) and the horrible 1970s.

In every other area, there's one thing that makes markets work. There's one principle that's always sound, that always improves outcomes. The single thing you can always count on for best results: tell the truth. Currency is no different. When currency is a lie, the basis of the system is a fiction, and things fall apart. Look around you: this mess is brought to you by the unchecked excess of fiat currency. The inflation we're going to have over the next decade, wild inflation, is also from the same thing.

A 1:1 currency is not a difficult thing, assuming you can expect your government to follow laws to that effect. If you can't, that's a government problem, not a currency problem.
posted by Malor at 2:30 PM on November 7, 2008 [2 favorites]


He's way off base arguing that property ownership for the masses is a 70 year old idea.

Not that far off. Curious about home ownership rates in the 19th century, I searched the web. This was the best I found. It seems to be true that "prior to the 1930s, only a minority of Americans owned their homes": 48% as of the 1891 census. Of course there had always been the notion, expressed in various forms, that owning property was a Good Thing. But the government actions following the Great Depression were still quite significant, and they preceded a surge higher in the ownership rate that took it to levels well beyond anything since at least 1891.
posted by sfenders at 3:27 PM on November 7, 2008


This is why there were property requirements on voting in the 18th century and earlier: people assumed that owning property either made you a better person or signified that you were one. Exactly which wasn't entirely clear--does property make people good or do good people own property?

That seems like a romantic interpretation. I'd suggest that while that might have been a "PR" line of argument, privately, a lot of people would have been thinking "The common riff-raff would just vote to better themselves at our expense! As long as only people like us can vote, then parliament will work for our interests, not theirs!".
posted by -harlequin- at 6:12 PM on November 7, 2008


Tell the truth: there's an idea who's time has come.

Also, it's time for us to go back to the salt standard.
posted by five fresh fish at 7:12 PM on November 7, 2008 [1 favorite]


Right there, I think, is the reason why I hate so many economists with a burning passion. "Keep[ing] down wage costs" is not a fucking good thing from the viewpoint of those of us who earn wages you sanctimonious prick.

Hah! So angry. One thing you might want to think about, though, is whether nominal wages increasing across the board is quite the same as wage earners getting richer. My understanding is that wage inflation is a source of concern because it's seen as a contributor to inflation. I don't know if it actually is.
posted by Mr. President Dr. Steve Elvis America at 7:30 PM on November 7, 2008


afu: If you look at the log scale graph of inflation over the past 90 years it is very consistent.

No, it isn't. See figure 12.


Yeah, your right. Consistent was the wrong word. I meant that the trend is linear, which means we havn't seen a remarkable increase in inflation in the past 30 years. Anyway, Ferguson basically cherry picked 1970 as his starting point to make the inflation rate seem much worse.
posted by afu at 9:41 PM on November 7, 2008


(A) If it's showing a straight line on a log graph, it is not linear: it is logarithmic.

(B) Logarithmic growth is never sustainable.
posted by five fresh fish at 10:29 PM on November 7, 2008


A. A linear logarithmic graph means a constant rate of change. I.E. a constant rate of inflation.

B. So you are pro deflation?
posted by afu at 1:33 PM on November 8, 2008


Ah. Sorry, I misunderstood.
posted by five fresh fish at 2:12 PM on November 8, 2008


Mr. President Dr. Steve Elvis America Yes, I'm angry. I guess that's horrible and makes me automatically wrong. How dare I get angry because some gazillionares think its a good thing to keep my wages low! I must be some sort of bizarre freak, because normally people react with glad cries and whoops of joy when their wages get cut, right?

As far as the economy goes, I'm not an economist. I still can't remember the difference between bears and bulls in the stock market. Ya know why? Because it doesn't matter in the slightest to me. The Dow Jones Average is meaningless to my life, I don't care whether "trading" is up, down, or spinning in circles and being confused. The Consumer Confidence Index is just a random number as far as I'm concerned.

What I *DO* care about are two relatively simple measures: income and expenses. I try to keep my expenses low and my income high, when I succeed I'm fairly happy with my economic lot. When my income is cut (either directly or by inflation) I'm not so happy with my economic lot. So, no, I can't say I view the elites of society deciding to work to keep my income down as a good thing. I note that St. Alan and the rest of the Priesthood of the Holy Economy never seem concerned in the slightest about CEO compensation inflation. Funny how they only want to make sure people like me are paid less. It can't be that they're promoting an aristocracy, right? Naah, its gotta be that they're selfless heroes boldly protecting the economy from the ravages of letting working people get ahead. Why, if that happened things'd be terrible.
posted by sotonohito at 2:25 PM on November 8, 2008 [2 favorites]


A man who decided to put his savings into gold in 1970 could have bought just over 27.8 ounces of the precious metal for $1,000. At the time of writing, with gold trading at $900 an ounce, he could have sold it for around $25,000.

And if you'd bought a barrel of oil in 1970 for $1.35 it would be worth $60 today (neglecting inflation), even after the recent bubble burst. That would have made the oilman three times richer than the goldbug (or by an even larger margin counting inflation).

Gold is a commodity, like any other. You could just as easily fix your currency to the price of molybdenum.

I suggest we switch our currency to the Triganic Pu.

"Its exchange rate of eight Ningis to one Pu is simple enough, but since a Ningi is a triangular rubber coin six thousand eight hundred miles along each side, no one has ever collected enough to own one Pu. Ningis are not negotiable currency, because the Galactibanks refuse to deal in fiddling small change. From this basic premise it is very simple to prove that the Galactibanks are also the product of a deranged imagination."
posted by justsomebodythatyouusedtoknow at 3:07 PM on November 8, 2008 [1 favorite]


took some notes :P

re: First came the invention of cashless intra-bank and inter-bank transactions... Then came the idea of fractional-reserve banking... That was followed by the rise of special public banks with monopolies on the issuing of banknotes and other powers and privileges: the first central banks.

also see brad delong's overview of the evolution of central banking and what might come next!

re: Significantly, a disproportionate number of subprime borrowers belonged to ethnic minorities. Indeed, I found myself wondering, as I drove around Detroit, if “subprime” was in fact a new financial euphemism for “black.”

just for the record, he shouldn't just blame the CRA and fannie/freddie; there was a lot of "prime" (or "white") option ARMs and alt-A mortgages to go around in phoenix, las vegas, miami and san diego; indeed, prime problems are starting to overtake subprime now.

re: According to the Bank for International Settlements, the total notional amounts outstanding of O.T.C. derivative contracts—arranged on an ad hoc basis between two parties—reached a staggering $596 trillion in December 2007, with a gross market value of just over $14.5 trillion.

there should be a disclaimer on "notional amounts" here, but let a few words (and links) suffice: "When the figures are netted, real gross credit exposure often falls by about 80 per cent, or more... a 2007 ISDA survey of credit risk found the 'real' credit exposure of the largest derivatives dealers to their biggest counterparties averaged just 6 per cent of notional exposures," which is kinda what the $14.5tn(/$596tn = 2.4%) is trying to get at, but of course you still have to be aware of counterparty risk OTC, cf., and other, um, 'anomalies' (nicely explained here).

re: But how exactly do you price a derivative? ... Working closely with Fischer Black, of the consulting firm Arthur D. Little, M.I.T.’s Myron Scholes invented a groundbreaking new theory of pricing options, to which his colleague Robert Merton also contributed. (Scholes and Merton would share the 1997 Nobel Prize in economics.)

the list he provides a little later on on all the assumptions you have to make for black-scholes to 'work' is pretty exhaustive, but perhaps needless to say, the map is not the territory, models aren't reality, garbage-in-garbage-out, etc.i'd also just add that i don't think it was really (the misapplication of) B-S that was the culprit this time around (its limitations are already well known) -- like ferguson goes:
"To put it bluntly, the Nobel Prize winners knew plenty of mathematics but not enough history. One might assume that, after the catastrophic failure of L.T.C.M., quantitative hedge funds would have vanished from the financial scene, and derivatives such as options would be sold a good deal more circumspectly. Yet the very reverse happened..."
and just kinda leaves it at that -- i'd say structured products, like the infamous CDO (and its credulous rating), the off-B/S SIVs housing them at arms length in the 'shadow' (unregulated) banking system [all brought about by the new kid financial WMD on the block, customised securitization, made possible by an entirely new (mis)appropriation of mathematical techniques, namely the Gaussian copula (the new 'B-S' :)] deserve a more thorough treatment by him.

anyway, these are all relatively minor points to what i think is, overall, a great history-as-it's-being-written piece.

cheers!
posted by kliuless at 9:18 AM on November 9, 2008


took some notes :P

re: First came the invention of cashless intra-bank and inter-bank transactions... Then came the idea of fractional-reserve banking... That was followed by the rise of special public banks with monopolies on the issuing of banknotes and other powers and privileges: the first central banks.

also see brad delong's overview of the evolution of central banking and what might come next!

re: Significantly, a disproportionate number of subprime borrowers belonged to ethnic minorities. Indeed, I found myself wondering, as I drove around Detroit, if “subprime” was in fact a new financial euphemism for “black.”

just for the record, he shouldn't just blame the CRA and fannie/freddie; there was a lot of "prime" (or "white") option ARMs and alt-A mortgages to go around in phoenix, las vegas, miami and san diego; indeed, prime problems are starting to overtake subprime now.

re: According to the Bank for International Settlements, the total notional amounts outstanding of O.T.C. derivative contracts—arranged on an ad hoc basis between two parties—reached a staggering $596 trillion in December 2007, with a gross market value of just over $14.5 trillion.

there should be a disclaimer on "notional amounts" here, but let a few words (and links) suffice: "When the figures are netted, real gross credit exposure often falls by about 80 per cent, or more... a 2007 ISDA survey of credit risk found the 'real' credit exposure of the largest derivatives dealers to their biggest counterparties averaged just 6 per cent of notional exposures," which is kinda what the $14.5tn(/$596tn = 2.4%) is trying to get at, but of course you still have to be aware of counterparty risk OTC, cf., and other, um, 'anomalies' (nicely explained here).

re: But how exactly do you price a derivative? ... Working closely with Fischer Black, of the consulting firm Arthur D. Little, M.I.T.’s Myron Scholes invented a groundbreaking new theory of pricing options, to which his colleague Robert Merton also contributed. (Scholes and Merton would share the 1997 Nobel Prize in economics.)

the list he provides a little later on on all the assumptions you have to make for black-scholes to 'work' is pretty exhaustive, but perhaps needless to say, the map is not the territory, models aren't reality, garbage-in-garbage-out, etc.i'd also just add that i don't think it was really (the misapplication of) B-S that was the culprit this time around (its limitations are already well known) -- like ferguson goes:
"To put it bluntly, the Nobel Prize winners knew plenty of mathematics but not enough history. One might assume that, after the catastrophic failure of L.T.C.M., quantitative hedge funds would have vanished from the financial scene, and derivatives such as options would be sold a good deal more circumspectly. Yet the very reverse happened..."
and just kinda leaves it at that -- i'd say structured products, like the infamous CDO (and its credulous rating), the off-B/S SIVs housing them at arms length in the 'shadow' (unregulated) banking system [all brought about by the new kid financial WMD on the block, customised securitization, made possible by an entirely new (mis)appropriation of mathematical techniques, namely the Gaussian copula (the new 'B-S' :)] deserve a more thorough treatment by him.

anyway, these are all relatively minor points to what i think is, overall, a great history-as-it's-being-written piece.

cheers!
posted by kliuless at 9:18 AM on November 9, 2008


oh fuck! it hung up and i hit it again (altho one is unlike the other; spot the difference); sorry...

i did remember something else tho :P

like the important thing i think about money is that it's just bits, a certain kind to be sure, systemically encoding the collective memory we have about value/utility, exchange and how it's all accounted for, but i think it helps provide some perspective on the distinction between fiat and specie currencies.

it's about how such information is encoded and who controls it. i keep coming back to this passage in keith hart's book (ch. 1):
The idea of money as a source of social memory was also crucial for John Locke who figures prominently in our story as the philosopher who inaugurated the modern age of democratic revolutions. Locke was obsessed with money’s role both in establishing a progressive social order and in subverting it as its criminal antithesis. Indeed he believed that money launched humanity from the state of nature onto the road to civil government. As long as men’s possessions were limited to perishable products, the scope for property was restricted. Money, by offering a durable store of value convertible against all useful things, unleashed the potential for property accumulation and for the intergenerational transmission of inequality. For Locke then, money was indispensable to that development of cultural memory on which civilisation depends.
what really interests me [and mutant] is (the potential for) alternative/complementary currency systems, if indeed: "To be short of money when there's work to get done is like not having enough inches to build a house," then other forms of (decentralised) agreement and transaction should be able to take place outside of what is officially sanctioned by those who hold the yardstick (or guard a platinum-iridium bar in their basement) and decree its length, i.e. a different system of weights and measures might be more suited to a particular community's wants & needs and means of (re)production. moreover, there could be meta-currencies that could translate and transform (allowing more conscious appreciation of) one value system into another (necessarily existing and determined simultaneously?) not just thru, or captured by, a single (crude) exchange rate, but more like a (relatively more sophisticated) virtual machine or ISA abstraction layer...

speaking of which, keynes' plan might be resurrected and finally adopted sixty-four years after bretton woods (if the US relents and is willing to loosen its grip on reserve currency status).
posted by kliuless at 11:23 AM on November 9, 2008


This is why there were property requirements on voting in the 18th century and earlier: people assumed that owning property either made you a better person or signified that you were one.

I'd have said it proved you had skin in the game. The vagrant or the have not having influence on government and its unusual powers might do anything, and probably nothing good. Agitate for spreading the wealth, say.
posted by IndigoJones at 1:37 PM on November 9, 2008


Robert Reich: The Mini Depression and the Maximum-Strength Remedy
posted by homunculus at 3:59 PM on November 9, 2008


so while ferguson (largely) provided the descriptive; soros gives the pre/pro-scriptive (normative) analysis [via] that i think behooves one to check out delong! (and waldman ;)
posted by kliuless at 10:08 AM on November 10, 2008


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