A Citizen's Guide to Indiana

James Galbraith has a pretty good summary of the roots of the financial crisis at The New Republic. I will summarize the summary. (Eventually, if we abstract this enough, it’ll boil down to “stuff happened, people got screwed.”)

1. The regulatory framework for financial institutions was weakened, allowing the casino to open.

2. The lack of standards led to fraudulent practices in the home mortgage industry – applicant financial information was mostly unverified; appraisals were little more than fabrications; mortgages built to fail were created (e.g. consumers were sold loans with teaser rates that would reset into something unsustainable.)

3. These notes would be bundled together, AIG or some other “insurer” (without anything close to the assets necessary to cover the risk) would essentially guarantee the value of the loans. Ratings agencies would proclaim these notes sound investments with little basis for making such a claim. And with this fairy dust sprinkled over the big shitpile, the notes were sold as AAA investments to pension funds and the like.

One of the consequences of deregulation was that insurers like AIG were allowed to use proprietary risk models as a way of determining the assets necessary to insure these financial products. The risk models did not accurately reflect the actual risk. Using these proprietary models is a little like trying to develop an encryption system with no external tests. You might mean well, and it might even look great to you; but without neutral or even hostile parties whaling away on it, you can’t know how effective it will be in the real world. And the short-term financial incentives were stacked toward encouraging rosy predictions.

Robert Reich suggests that the rising percentage of the country’s wealth appropriated by the very wealthy was the proximate cause of the meltdown:

Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total.

Each of America’s two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing. America’s median wage, adjusted for inflation, has barely budged for decades.

(emphasis added). (It’s a little odd to me that, when the owner of capital uses superior bargaining power to extract more work for less pay, that’s just business. When the masses, using the tool of government, uses superior bargaining power to extract more pay for less work, that’s tragically unfair. Seems to me either a basic sense of fairness or a mercenary willingness to use any tool available in negotiation should be applied to both scenarios equally.) Both articles suggest strongly that President Obama has missed a trick here; he had an opportunity to right that which went wrong and, instead, seems inclined to go back to business as usual. Because he didn’t take Big Money to the woodshed, we’re doomed to repetition because the underlying problems have not been addressed.

I don’t think I’m too unusual in my tendency to project. Whatever is happening to me is probably what is happening to other people. (See, I just did it right there.) When I see a news story with parallels to my own life, I am more likely to notice while I kind of ignore the stories that I don’t relate to, further skewing my bias.

Anyway, as part of our recent cross-town move, we dropped our telephone land line service, opting to rely on our cell phones instead. That’s why I noticed this story about Indiana State University’s plan to drop dorm telephone service since students have shifted to using cell phones.

The rise of the cell phone has been pretty dramatic. I considered myself a bit of a late adopter, not getting one until the year 2000 or so. Over the last decade, the things have become ubiquitous and are making themselves nearly indispensable as they morph from phones to Internet access points. In fact, they have probably contributed to me talking on the phone less.

I tend to dislike speaking on the phone if communicating otherwise is an option. The notion that both people have to be available for communication at the exact same time to exchange an idea is just so primitive; like the idea that the sun is a God, cans tied together with string, or fax machines. And, with the phone, there’s a need to pad that communication with small talk of one degree or another. (I suspect the person at the other end isn’t actually concerned with how I am; they probably just want me to perform a task or meet them at a certain time.) I’m sure we are losing something by trading telephone conversations for texts and e-mails, but whatever it is can’t be that deeply embedded, telephone conversations have only been around for a few generations in any case.

Another oddity of the cell phone revolution is that you’re no longer calling a place; you are calling a person. So, I suppose that land lines will remain viable for those scenarios where communicating with a place is more important than a particular person (e.g., calling a restaurant or other business). As long as I’m musing, I wonder how long it will take to abandon phone numbers. I already have trouble remembering the darn things since I don’t use the number pad very often – instead just picking “John Smith” out of a list. If we do move away from numbers, whatever we use will need a unique identifier – there are a lot of John Smiths out there – but the 10 digit phone number is a relic of old technology and isn’t strictly necessary.

If I had an editor, he or she could probably wring a paragraph of coherence out of this hot mess of a blog post, but I don’t, so this is what you’re getting on a Sunday morning.

(Via Robby Slaughter) – We should consider adding lack of Sunday liquor sales as a grievance against the king.

(Via Thomas Jefferson)

The Declaration of Independence of the Thirteen Colonies
In CONGRESS, July 4, 1776

The unanimous Declaration of the thirteen united States of America,

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. –That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. —Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain [George III] is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

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When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We still have a few hours left, but it’s close enough for a Fourth of July post I think. Two-hundred and thirty-four years ago, an inspired group of Englishmen resolved to commit treason against the crown. God love ’em. As it turned out, they did have a better way. I sometimes wonder if I would have joined in their little rebellion. Loyalty is a trait that runs strong in me, so I’m not sure if I would have. But, I’m certainly glad they were successful. We have our warts, to be sure, but so far the U.S. has been a reasonably successful experiment and, I think, a net positive for the world.

Still, I have to admit, the well of feel-good, unthinking, rah, rah patriotism has been poisoned for me. I have witnessed too many attempts to leverage support for the U.S. generally into support for less than great policies. I don’t know if that’s just part of growing up or a bit peculiar to the times in which we live. I see flags or hear God Bless the U.S.A. and instead of being reflexively supportive, I stop and wonder what someone is trying to sell me. Be that as it may, I’m happy enough with the country to still give my 6 year old the cartoon version when I’m explaining the broad outlines of history. We’ll get to the warts later, but I want him to have a generally positive impression of the enterprise.

And, let’s face it, the 4th is a great holiday. Family, fireworks, grills, alcohol, warm weather. That’s living! Happy 4th of July everyone!

Just because I’m sure I’ve probably posted references to polls conducted on behalf of Daily Kos by Research 2000, I think it’s appropriate to note that Kos is reporting that those poll numbers may have been fabricated to one extent or another.

Here is the report from statistics experts suggesting that Research 2000 data probably did not come from random polls. Here is a news report on Daily Kos’ intent to sue Research 2000.

Says Kos:

“While the investigation didn’t look at all of Research 2000 polling conducted for us,” Moulitsas wrote, “fact is I no longer have any confidence in any of it, and neither should anyone else.”

“I hereby renounce any post we’ve written based exclusively on Research 2000 polling.”

Everybody’s Favorite Economist (tm), Larry DeBoer, has a good post at Capital Comments about the nation’s budget deficits, the national debt, and the likely consequences of austerity measures during a recession.

Big future deficits are a problem. Big deficits now, not so much. They’re the result of the recession. Tax revenues are way down because of all that unemployment. Spending is up, partly because of added entitlement payments, and partly because of the government’s stimulus spending. But deficits during a recession help. The extra spending and reduced taxes increase the sales of goods and services, which give businesses a reason to employ more people. Without the deficits, unemployment would be even higher.

With unemployment near 10 percent it wouldn’t do to try to reduce the deficit now. The federal government tried that during 1937-38. With the unemployment rate still at 14 percent, the Roosevelt administration cut spending, and Social Security taxes were first collected. The deficit was reduced to near zero – and the economy dropped into recession. Unemployment rose to 19 percent.

We do need a long-range plan to reduce deficits to less than 3 percent of GDP. We need to balance the budget eventually. But not now.