On use vs. exchange value: we must be careful about what we pretend to be

October 31, 2009 8:24 AM

Asset inflation, price inflation, and the great moderation
Economists as penance have been trying to locate the origins of the great chain of causation that has led us to our present situation -- the worrying conclusion is that problems remain -- imbalances precipitated by a labour supply shock [1,2] and/or (the rise of) machines [1,2] have not gone away and continue to persist in decimating the ('developed world's) middle class, as evidenced by high and rising unemployment, which has led to a crisis in central banking itself.

moreover, paraphrasing george washington, "the government's entire strategy now is to cover up how bad things are." iow, if there isn't a middle class 'civil rights' movement already, there should be...

posted by kliuless (31 comments total)

Or, people got so fucking greedy that the forgot they couldn't afford what they can't afford and other people got so fucking greedy that they forgot that they have to pay attention to what other people can and cannot afford.
posted by Kickstart70 at 8:36 AM on October 31, 2009

So ... you're saying this is a quantum grave situation?
posted by ZenMasterThis at 8:51 AM on October 31, 2009

I don't know much about finance, but I thought that it was really odd that the bank stimulus package was ostensibly aimed at keeping lending going. Personal debt was skyrocketing, but we somehow need to keep borrowing money to prop up the economy? The whole means of reckoning what "the economy" (a term which seems to me to be one of the worst and overused colloquialisms around) needs to be turned on its ass.
posted by Burhanistan at 8:53 AM on October 31, 2009

I don't know a whole lot about business, but there other forms of debt & lending besides personal debt. I do agree that personal household debt is way too high right now, and savings are much too low, but there are other things to consider when thinking about why banks *should* be lending.

For instance, the company I work for has an open line of credit with some bank, or maybe multiple banks, so that they can make payroll. Their income is not steady, so they don't have an enormous bank vault filled with cash ala Scrooge McDuck. They have to take out a series of short term loans to pay their employees until they come into a bunch of money all at once, and pay those loans off.

I imagine that this sort of thing happens all the time in business, in many other areas than just payroll.
posted by synaesthetichaze at 9:01 AM on October 31, 2009 [3 favorites]

As usual, economists are trying to create models that forget the one vital ingredient necessary to understand human behavior: greed.

The biggest reason for the imbalance: easy credit and securitization. When you develop a system that is based on kicking the can down the road, eventually you reach the end of the road. That's where we are now.
posted by tgrundke at 9:05 AM on October 31, 2009 [1 favorite]

I'm not sure what they expect when they design an economic system wholly dependent on ever-increasing consumer spending, and then reward the players for cutting jobs and wages to those consumers while luring said consumers to take-on increasing levels of high-interest debt so that the consumers can continue to do the job you expect of them...i.e. consume, motherfuckers, consume.

Then, when shit hits the fan, you blame the consumers for doing exactly what you wanted them to do.

So, now, maybe consumers have gotten wise, and are cutting-back their spending and actually trying to save. And what happens? The players panic and have a coronary, as evidenced by Wall Street's reaction yesterday to news that consumer spending dropped .5%. WTF?

Earth to Wall Street...consumer spending isn't going to come back to the levels of yore any time soon, if ever. Deal with it. The same way you told consumers to "deal with it" when you explained to them that those good jobs and wages weren't going to be coming back.
posted by Thorzdad at 9:24 AM on October 31, 2009 [5 favorites]

The key to all good cons is that victim doesn't even realize they have been conned after the money is gone.
posted by srboisvert at 9:38 AM on October 31, 2009 [3 favorites]

As usual, economists are trying to create models that forget the one vital ingredient necessary to understand human behavior: greed.

I think this is a vapid statement. Which economists are you pointing to that dismiss self-interested pursuits as motivation? I heard one economist along these lines: Greed doesn't explain the crisis unless you think America invented greed in 1994. Greed is part of human nature, right? So the question is, how did this expression of greed change?

Why did we develop a system of easy credit now, and why did people buy into securitization so readily? My personal, unscientific and underinvestigated theory is that AIG made that credit way too easy and this destabilized the decentralized "shadow" banking system. I admit this reaffirms my opinion that Wall Street attracts greedy bastards managed by stupid but well connected executives, but we can at least say that Credit Default Swaps did not previously exist.
posted by pwnguin at 10:41 AM on October 31, 2009 [2 favorites]

Here is the thing I believe; that all of civilization has accepted and depended on an unsustainable model of human progress from the get go.

In a recent essay, "Why is Lloyd Blankfien", I try and come to grips with the issue, and can't escape the very unfashionable fact that private property is to blame. Given that private property is a central leg in the three legged stool we call civilization, it makes a cure almost impossible to consider.

Everything else is tinkering which, as tgrundke says above, is simply kicking the can down a dead end road.
posted by Aetius Romulous at 11:09 AM on October 31, 2009

The primary driver of the three asset manias we've had (stocks, real estate, and debt) has been an excess of cash from the original source, the Federal Reserve. Somewhere in the mid-90s, the Clinton administration redefined the measurements of inflation, with the primary goal, of course, of making the economy look better. It appears that Alan Greenspan believed them, because right in that timeframe, monetary injection rates increased substantially.

Liquidity chases inflation; new loans being made into the economy (all dollars are lent into circulation and must be repaid, with interest) will, of course, go into asset classes that look the most profitable. In 1996 and later, the market with the best returns was stocks, so that's where the money went, causing further price rises, causing more demand for loans, causing more price rises, and so on. Just before 2000, Greenspan stuffed a ton of extra money into the system, fearing the Y2K crisis, and not coincidentally, the stock market peaked in March. It bled from there for a long time, and was approaching crisis proportions by August of 2001; in the early days of September, the market was looking really dire. It appears likely we should have had the crash we didn't actually have until last year. But then, of course, Al Qaeda threw some planes at some buildings, and in the aftermath, the Fed reacted more urgently than it ever had before, intervening on what was then an unprecedented scale to hold markets together.

Things sort of muddled along for another year or two, but then the nascent housing bubble turned into a full-fledged with the advent of securitization. We've talked about securitization ad nauseam, so I won't get too far into it here, except to make a couple observations. The various forms of derivatives and securitization ended up functioning in the economy an awful lot like dollars; they were denominated in dollars, and were incredibly liquid. The Federal Reserve made repeated comments that they were totally committed to the liquidity of these markets; they appeared thrilled by all the big numbers and huge profits, believing it was healthy prosperity.

The problem with that, of course, is that only market that is truly 100% liquid is cash. So all those derivatives and securities ended up functioning a lot like money, and caused the largest speculative mania in history, the US housing bubble. Derivatives created demand for housing, which drove prices up, which created more demand. It was a virtuous circle, and of course one that would turn vicious just a few years later when it went into reverse.

It's been said more than once that the primary job of the central bank in a fiat economy is to take the punchbowl away as soon as a party gets started; the hangovers are terrible things, and the only way to stop them is not to get drunk in the first place. Our Federal Reserve didn't just spike the punch and glad-hand all the participants, it started adding coke and then meth to the brew.

It was the best party ever, to the point that we had a heart attack. And now we're in the process of stuffing the system full of more drugs cash to try to avoid the terrible pain of withdrawal and all the work we need to do in order to get healthy again. Instead, we're retreating further and further into our chemical haze.
posted by Malor at 11:24 AM on October 31, 2009 [4 favorites]

turned into a full-fledged

... mania. Left a word out.
posted by Malor at 11:30 AM on October 31, 2009 [1 favorite]

Looked at from another angle: these bubbles were obvious at the time, and it's the Federal Reserve's primary remit to prevent this sort of thing from happening. Whether or not you agree with the causation argument, it's quite clear that they have utterly and absolutely failed in their role of oversight.

The housing bubble could have been stopped in its tracks at any time, almost overnight, by simply raising interest rates to a sane level. Securitization provided the "cash" supply, but low interest rates is what drove the demand for loans, and allowed prices to go so incredibly high.
posted by Malor at 11:33 AM on October 31, 2009 [1 favorite]

Which economists are you pointing to that dismiss self-interested pursuits as motivation?

Communist/collectivist ecomomists? (IANAE.)
posted by ZenMasterThis at 11:42 AM on October 31, 2009

Clearly what we need is another stimulus package.....
posted by rulethirty at 11:46 AM on October 31, 2009

As usual, economists are trying to create models that forget the one vital ingredient necessary to understand human behavior: greed.

I mean, I haven't taken economics for a while, but I'm pretty sure that was the one thing that economics assumes from everybody.
posted by empath at 12:02 PM on October 31, 2009

I'm pretty sure [greed] was the one thing that economics assumes from everybody.

It is, and it's called expected utility theory. Descriptions of people's actual behavior (e.g., Prospect theory) suggest that people tend not to be greedy, especially when it comes to large values. For example, for a person will evaluate a $100 gain as being more important if they have no money than if they have a million dollars. According to expected utility, however, $100 has the same value regardless of how much cash you already have. It's kind of like expecting Warren Buffet to pick up every penny he sees on the sidewalk.

Given how long humans have been around, and how the economic systems in place can't seem to go 10 years without puking all over themselves, I wonder which of these approaches is more conducive to long term stability. (/rhetorical question)
posted by logicpunk at 12:32 PM on October 31, 2009

kliuless: "Economists have been trying to locate the origins of the great chain of causation..."

Aren't we all. Good luck with that!
posted by sneebler at 1:02 PM on October 31, 2009

According to expected utility, however, $100 has the same value regardless of how much cash you already have.

No it doesn't.

Expected utility theory only says that people's bets or other choices under uncertainty are in accordance with the expected utility of each possible outcome. Expected utility can assume risk-neutrality, risk-seeking, or risk-avoidance.

The most common is probably risk-avoidance, which is the same thing as assuming a diminishing marginal return to money. That is, the most common way expected utility theory actually is used explicitly and clearly assumes that each $100 has a little less value than the $100 before it.
posted by ROU_Xenophobe at 1:35 PM on October 31, 2009 [1 favorite]

There is a strange alignment between "affordable x" programs and X becoming quite substantially more expensive. I've been out of University for 12+ years and can't help but notice that as student loans became far more common, so grew the cost of education. More dollars chasing the same resources.
posted by rr at 3:08 PM on October 31, 2009

Oops... I was thinking expected value. Apologies.
posted by logicpunk at 4:09 PM on October 31, 2009

rr: "There is a strange alignment between "affordable x" programs and X becoming quite substantially more expensive. I've been out of University for 12+ years and can't help but notice that as student loans became far more common, so grew the cost of education. More dollars chasing the same resources."

In theory, market participants should expand to meet the growing demand. More money chasing after housing led to a massive boom in construction.

Something similar might have occurred, but not in ways people measure it. Harvard can't readily expand their college without jeopardizing its exclusive reputation or its quality reputation. So instead they raise tuition.

But if you consider private for-profit or community college growth, that's likely where we see more growth and less smaller rate hikes.
posted by pwnguin at 5:45 PM on October 31, 2009

What do people think about the idea in several of the links that it is the imbalance with labour and wages that is the source of the problem? After all, how can you have a consumer economy, if the real wages of your consumers are stagnant or falling?
posted by jb at 8:25 PM on October 31, 2009

Something similar might have occurred, but not in ways people measure it. Harvard can't readily expand their college without jeopardizing its exclusive reputation or its quality reputation. So instead they raise tuition.

IIRC, Harvard recently expanded its aid program. Here it is.

In December 2007, Harvard introduced a new financial aid plan that dramatically reduces the amount families with incomes below $180,000 are expected to pay. Families with incomes above $120,000 and below $180,000 with assets typical for these income levels are asked to contribute 10 percent of their incomes. For those families with incomes below $120,000, the parent contribution declines steadily from 10 percent, reaching zero for those with incomes at $60,000 and below.

This year, applications to Harvard College exceeded 29,000, breaking all previous records. For the upcoming year, the estimated average total aid package of close to $41,000 will reduce the average cost, including non-billed personal expenses of approximately $3,000, to an estimated $11,500 for those families receiving financial aid. Need-based scholarship aid for undergraduates at Harvard has increased by 155 percent over the past decade, reinforcing Harvard's commitment to affordable education.


I think Harvard is actually more interested in generating as much revenue as they can in a difficult economic environment, because the law of diminishing returns is relevant in how much you can raise tuition in times like this, and next comes faculty cuts and salaries.
posted by krinklyfig at 12:41 AM on November 1, 2009

In December 2007, Harvard introduced a new financial aid plan that dramatically reduces the amount families with incomes below $180,000 are expected to pay. Families with incomes above $120,000 and below $180,000 with assets typical for these income levels are asked to contribute 10 percent of their incomes.

Harvard has an extraordinarily small undergraduate population for a big research university. I suspect that this odd tithing system is more of a quid-pro for the retention of legacy preference and other non-academic admissions criteria than a mitigation of economic disadvantage in general.
posted by GeorgeBickham at 1:49 AM on November 1, 2009

Harvard offers such good financial aid, because one competitor (Princeton) did, and that created pressure for the other competitors (Harvard, Yale). There has been a similar competition in graduate student scholarships, such that minimum PhD student stipends at Yale have gone up 38-66% in the last 8 years. That is WELL above inflation (except that, of course, this money flooding into a small city has caused a housing inflation which has been hell on older students on the lower stipends -- not to mention the not very affluent local residents).

But the relationship between students and elite universities are not a simple business:customer relationship. After all, PhD students with full tution scholarships and living stipends are a net financial loss to the university, as are undergraduates with high tuition scholarships. The students are customers and also product/reputation -- if an elite university raises its standing through claiming to bring in the best students, regardless of class, and then gets more applications, which also raises its standing -- all this demands attention from donors and granting agencies.

The sad irony of the undergraduate grants has been that even as Harvard (and Princeton and Yale as well) has been incrediably generous to its poorer undergraduates, only a small percentage of the undergraduates even qualify for such help -- the rest come from families who are too rich. I'm sorry, I can't find the link, but I had read somewhere at the time that the reduced or free tuition for students from families making under $60,000 would only affect about 15% of students. Acceptance into elite universities is still skewed heavily towards the well-to-do.

(This isn't so true for graduate students - but that would be because graduate students from cheaper state universities and international universities are much more likely to be accepted than undergraduates from equivalent high schools. And class makes a lot less difference on how well you do in a sociology class than it does on how many musical instruments you play -- graduate acceptances are based on very narrow academic requirements, and nothing else.)

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But this is all off-topic -- and I'm curious that there is very little discussion of the driving point of so many of the links: that the current financial crisis is only a symptom of a unbalanced society and economy in which the profile of class/income is looking more like a barbell -- with many poor and some rich -- than a bell curve. Both globalisation and monetary policy has devalued labour and wages of the lower half of society, even as the upper half gets richer.

I'm not an economist, just a historian who has been struggling to better understand economics -- but I'm very swayed by these analyses. Leaving aside the moral issues and how such inequality undermines any pretence at democracy, a healthy economy can't get by on such disparity. If the majority of people cannot afford cars, the car factories will close.
posted by jb at 7:10 AM on November 1, 2009

I think, jb, the underlying issue is that free trade only works with free people. Political oppression is a distortion of the market like nothing else is. The more the US comes to depend on market distorting regimes like China, the more US citizens loose out.
posted by ifandonlyif at 9:16 AM on November 1, 2009

As much as I dislike the Chinese regime, it's not just politics. There is also a lot of out-sourcing to India, which is a democratic country. And U.S. citizens lose jobs to those free people.

There is real significance in what one of the links said about the fact that globalisation has set labour around the world competiting with one another. And what is the gain of labour in one country - whether China or India, repressed or free -- is the loss of labour in another. The problem is that it isn't a 1-to-1 loss. It's not that a $10/hour job is lost in North America and a $10/hour job created in Asia. It's that a $10/hour job is lost in N.A. and a $1/hour job created in Asia. And the difference is profit to the investors.
posted by jb at 10:42 AM on November 1, 2009

There is real significance in what one of the links said about the fact that globalisation has set labour around the world competiting with one another. And what is the gain of labour in one country - whether China or India, repressed or free -- is the loss of labour in another. The problem is that it isn't a 1-to-1 loss. It's not that a $10/hour job is lost in North America and a $10/hour job created in Asia. It's that a $10/hour job is lost in N.A. and a $1/hour job created in Asia. And the difference is profit to the investors.

A free market for goods and corporate services, but not a free market for labor, in other words.
posted by dilettante at 1:47 PM on November 1, 2009

That's a good point with India.
posted by ifandonlyif at 6:38 PM on November 1, 2009

re: discussion, i started writing this whole thing on central banking,* but then realised SRW (alzi's cousin ;) pretty much covered it already in a few sentences:

The great moderation made aggregate GDP and employment numbers look good, and central bankers sincerely believed they were doing a good job. They were wrong. We need to build a system where changes in asset prices reflect the quality of real economic decisions, and where the playing field isn't tilted against the poor and disorganized in the name of promoting price stability.

this is from the first link btw, which tyler cowen calls brilliant! anyway, point being that the financial system -- and the whole global monetary architecture, imo -- has disconnected from reality (the real economy) which as jb describes is one where half the world will work for a tenth, if that, of the other half; nevermind (mega-)trends in mechanisation/automation...

so like as dilettante points out, whereas the corporate world has no problem 'hollowing out' (lots of) the 'haves' -- "the ('developed world's) middle class" -- and if there isn't free movement of labour, then it appears that 'rich country' governments are finally going to have to deal with what their central banks, chiefly the fed, have been trying to paper over the last 30 years. that is, uncomfortably for 'fresh water' economists, keynesian make-work programs or -- at long last! -- marxist revolution :P

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*in case you thought anything has changed since the Global Financial Crisis, central banking was invented to preserve the status quo, nominally over the monetary system (of control) -- value, exchange & accounting -- but, by extension, the entire financial system.

central banks have always relied on (the illusion of) trust, which is why their functions were separated from the (king's) treasury/exchequer, and a string of convenient fictions -- that there's such a thing as a general price level, that credit is the lifeblood of the economy, that maturity transformation makes any sense at all, etc. as such, central banks play a very powerful role -- unique institutions that are neither capitalist (they cannot fail) nor democratic. ostensibly they are technocratic, possibly socialist, altho they are definitely bureaucratic.

theoretically, the real economy can exist independently from money, cf. the money illusion, but practically speaking central banking influences everything we do and pervades our thinking about worth -- the relative importance of pursuing certain activities over others. when price signals portray an accurate prediction of future reality -- allocating resources to where they'd be most productive -- then we'd have what could be described as a functioning market economy and an acceptable (within the social contract) mechanism of development and progress. however, when those price signals from the market go awry, or are corrupted... well, we end up with the boom/bust exaggerated business cycles of creative destruction, assuming we can get past and fix the latter (destruction bit).

this is our global brain on drugs at work.

how worth is measured can be arcane and esoteric, but in my opinion the problem is the presumption of measurement and privileging of things that can be measured. all fine and good for agrarian and industrial society -- for market-based organisation and development -- but if the network and information economies are increasingly the (new newest) thing -- with all the externalities that entails -- then the control mechanisms and measurement systems that central banks operate and employ under that paradigm strikes me as becoming ever more archaic.

currently, money is free (for certain institutions with the right access) and the fed is printing close to two trillion dollars; my attitude is who gives a shit what the dow is at this point, if these assholes are still raking it in then, collectively, our value system is either seriously flawed or increasingly meaningless...
posted by kliuless at 12:24 PM on November 2, 2009 [2 favorites]

Sign of the times: McDonald's pulls out of Iceland.
posted by telstar at 11:05 PM on November 2, 2009