The Quiet Coup - The Atlantic (May 2009)

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund and MIT professor, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. This disturbing similarity between the U.S. and emerging markets centers around the elite business interests—financiers, in the case of the U.S.—that played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

The Quiet Coup
by Simon Johnson

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.....(more)

Why We Think It's OK to Cheat and Steal (Sometimes)

In light of one of the worst economic and financial crisis in modern history, it is important to evaluate the fundamental assumptions, intuitions, and reasoning behind our human behavior and institutions. In this talk, Dan Ariely--a behavioral economist at MIT--attempts to uncover one particular behavior that may have played a significant role--Cheating. What is cheating, how does it manifest itself in economic behavior, and what are the implications of cheating for the larger economic system? Ariely's experimental studies suggest that their are bugs in our moral code: the hidden reasons we think it's OK to cheat or steal (sometimes). Clever studies help make his point that we're predictably irrational--and can be influenced in ways we can't grasp. That is, human behavior is often driven by irrational forces such as social norms, visions of morality, intuitions, and social groups, which are themselves predictable. Enjoy the talk!

Capitalism Beyond the Crisis

The New York Review of Books has an excellent article by Amartya Sen--Lamont University Professor at Harvard and 1998 Nobel Prize in Economics--that addresses the nature of capitalism and whether it needs to be changed. Some defenders of unfettered capitalism who resist change are convinced that capitalism is being blamed too much for short-term economic problems—problems they variously attribute to bad governance (for example by the Bush administration) and the bad behavior of some individuals (or what John McCain described during the presidential campaign as "the greed of Wall Street"). Others do, however, see truly serious defects in the existing economic arrangements and want to reform them, looking for an alternative approach that is increasingly being called "new capitalism."

What are the special characteristics that make a system indubitably capitalist—old or new? If the present capitalist economic system is to be reformed, what would make the end result a new capitalism, rather than something else? It seems to be generally assumed that relying on markets for economic transactions is a necessary condition for an economy to be identified as capitalist. In a similar way, dependence on the profit motive and on individual rewards based on private ownership are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist?

All affluent countries in the world—those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Australia, and others—have, for quite some time now, depended partly on transactions and other payments that occur largely outside markets. These include unemployment benefits, public pensions, other features of social security, and the provision of education, health care, and a variety of other services distributed through nonmarket arrangements. The economic entitlements connected with such services are not based on private ownership and property rights.

Also, the market economy has depended for its own working not only on maximizing profits but also on many other activities, such as maintaining public security and supplying public services—some of which have taken people well beyond an economy driven only by profit. The creditable performance of the so-called capitalist system, when things moved forward, drew on a combination of institutions—publicly funded education, medical care, and mass transportation are just a few of many—that went much beyond relying only on a profit-maximizing market economy and on personal entitlements confined to private ownership.

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Rand Illusion

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On a lighter note, this is a great clip from the Colbert Report that has a little fun with the new found supporters of the novelist Ayn Rand. Specifically, with all this economic turmoil of late, not to mention a suspected socialist in the White House, right-wing pundits like femmebot Michelle Malkin and fellow Fox-friendly cretin Glenn Beck are looking to “author, philosopher and female comb-over pioneer” Ayn Rand for guidance. Stephen Colbert thinks they should move to an island all their own, where less work gets done on purpose.

On a more serious note, how can a novel that depicts a non-existent world, rallies the darker side of humanity, and intensifies the inequalities in society be held up as a model for American?

NYT: The Geography of a Recession

Over at the Grey Lady, they have created an excellent visual depiction of the geography of the recession. In particular, the map illustrates that job losses have been the most severe in the areas that experienced a big boom in housing, those that depend on manufacturing, and those that already had the highest unemployment rates. To see more click here.

Synopsis-

What does the worst recession in a generation look like? It is both deep and broad. Every state in the country, with the exception of a band stretching from the Dakotas down to Texas, is now shedding jobs at a rapid pace. And even that band has recently begun to suffer, because of the sharp fall in both oil and crop prices.

Unlike the last two recessions — earlier this decade and in the early 1990s — this one is causing much more job loss among the less educated than among college graduates. Those earlier recessions introduced the country to the concept of mass white-collar layoffs. The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree.
The Great Recession of 2008 (and beyond) is hurting men more than women. It is hurting homeowners and investors more than renters or retirees who rely on Social Security checks. It is hurting Latinos more than any other ethnic group. A year ago, a greater share of Latinos held jobs than whites. Today, the two have switched places.