krebscycle

Duncan Black (Atrios) had pitch perfect note up at his Eschaton blog which illustrates several key problems in the kind of economics analysis that dominates “progressive” blogs.

Maybe Bill Gross Reads This Humble Blog As I have been saying for some time . As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital:

The failure of the banks to allocate capital productively is important, but what Dr. Black points to does not illuminate the issue at all. More shockingly, Black takes Bill Gross at face value, even though Gross as the manager of giant bond fund is obviously making a pitch. Limited to the the narrow grounds of conventional economics, ignorant of economic history, and willing to guilelessly buy anything wrapped in some hokey populism, “progressive” econ-pundits on line have repeatedly missed the mark. A look at Gross’s pitch in some detail and then at Black’s prior analysis is revelatory. Gross begins with the pseudo-populist lure: .

Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America.[…] Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.

That’s actually all phoney-baloney nostalgia – as I’m sure Bill Gross knows. The 1982 Fortune 400 was dominated by people who inherited money – although gangster Meyer Lansky made the list. Counting 3rd generation Rockefellers as not making money from money is silly. David Rockefeller may have inherited oil money, but he ran a little bank (Chase Manhattan) which was created by merging Aaron Burr’s bank with John D.’s bank. If you’ve never heard of JP Morgan or Mellon or Gould or Fisk or Marc Rich (on the 1982 Forbes list!), you’d be justified in thinking that bankers had only recently become powerful, but you’d be supremely unqualified to discuss the history of American finance. Gross then sets the hook for the pseudo-progressives by agreeing that they have the main point right: Obama sux.

This country desperately requires a rebalancing of priorities. After readjusting the compensation scales via regulation and/or free market common sense, America needs to anoint a new set of Mensans who can create something more than a cash machine and make this country competitive again in the global marketplace. We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system.

That’s really heartfelt. Gross, after all, only manages over $1 trillion ($1,000,000,000,000). He can’t invest in American manufacturing, make capital available for innovative companies, provide money for inner city entrepreneurs, invest in affordable housing or green energy or wind farms because Obama, somehow, won’t let him. What a bad man is Mr. Obama. Tsk. Tsk. And then we finally get to the point: the government is making it harder for Bill to make money:

Today’s negative real yield on 5-year TIPS (Treasury Inflation-Protected Securities) is perhaps reflective of a market that has lost its fundamental value anchor. A century-long history of average 5-year real yields would point out that bond investors in Aaa 5-year sovereign space have demanded and received a real interest rate return of 1.5% instead of today’s -0.1%. We are being shortchanged, in other words, by 160 basis points from the get-go, a “haircut” that is but one of four ways that governments attempt to escape from an over-levered national balance sheet.

Obama and Bernanke are so evil that they are not giving investors 1.5%, inflation protected, for the safest bonds in the world (the bonds rates come from an auction process). Ok, so the actual point here is that bond investors who have lost money recently at Mr. Gross’s fund should blame the President not Mr. Gross and prepare for more risk. Great. But what part of this message is so important to Dr. Black? Well, it appears to be that (don’t be too shocked) point that, you know, Obama sux. Here’s the learned Dr. Black:

I really don’t think the people in charge (Obama, Larry, Timmeh) understand the reality of the economic situation. It isn’t about turning the machines back on.

Those chumps are so dumb.

I have no idea why pumping massive amounts of money into a banking sector which proved that it was horribly bad at its supposed role – allocating capital efficiently – is a good idea. Who are they supposed to lend to? There’s still a big wave of ARM resets* coming, and the CRE implosion has just begun.

And we see we are back to more attempts to justify the spectacularly wrong claims by the certain “progressive” econ-pundits about the futility of the bank bailout. Black, and Yves Smith, and Dean Baker, and William Black, and even the usually smart James Galbraith, and many people on DailyKos and …. told us that the sky was indeed falling. Dr. Black explained that expecting BOA to pay back TARP money was “lucy and the football” – the chumps stupid enough to believe that one would be sprawled on the ground after being fooled again. Of course BOA did pay back, with interest. One of the favorite witnesses cited for the imminent collapse of the world was Neil Barofsky, the Inspector General for the TARP program. Barofsky just resigned .

In his letter of resignation to President Obama, Barofsky said it was the “right time” for him to “step down and pursue other opportunities.” He also said that TARP was “in a far better and more transparent place today than anyone could have reasonably hoped,” at the time of his appointment, and that the Office of the Special Inspector General’s work had led to “the criminal conviction of 14 individuals for fraud, more than $550 million in fraud losses avoided, and more than $150 million recovered.” [..] In his office’s quarterly report to Congress in January, Barofsky said that “on the financial side, TARP’s outlook has never been better,” since the congressional Office of Management and Budget had lowered its estimate of TARP’s cost to taxpayers from $341 billion in August 2009 to $25 billion in November 2010.

While the “progressive” econo-pundits assured us that only nationalization (for which there was no legal basis) would save the day and that we were on a fast track to total economic collapse were wrong. Tim Geithner was right. His policies worked. The failure of reality to conform to the predictions of “progressive” econ-pundits is a topic that is never discussed by the “progressive” econ-pundits – showing that they are indeed practitioners of standard economics, a field in which mere empirical data is considered subordinate to correct theory). Black’s post has only the most superficial connection to what Gross discussed. Gross at least knows that banks are not the only allocators of capital, Gross knows that bond funds, Private Equity firms, hedge funds, pension funds, and other non-bank institutions allocate trillions of dollars. So Geithner’s successful attempt to patch up the banking system to avert a massive depression and chaos, of course, does not address the fundamental problems of capital allocation in the economy – and was not intended to do so. Let’s consider for a moment what Black thinks Geithner and Obama should have done. Let the banking system collapse? Put money into some other capital allocation mechanism? Which one? And in fact, Geithner and Obama have tried to address the problem of poor capital allocation by investing hundred of billions of dollars directly from the government into the automobile companies, infrastructure and green energy/manufacturing. Amazingly, Black is not unusual among “progressive” econ-pundits in believing he can critique the TARP program under Obama/Geithner without even mentioning the $100B or more provided to GM and Chrysler (by direct investment and by forcing bondholder/shareholder writedowns). At the root of Black’s analytical failure is a combination of the analytical limits of conventional economics which assumes a static world and the fairy tale that Gross told us to start with about how things used to be so wonderful back when the system worked as intended and good deeds were rewarded with a nice, but humble home and pension, while evil speculation was sternly punished and the big bad bankers were held in check. That story does not describe America in any historical age. But if you believe it, you have to think that things can be fixed by resolute executive action that will restore the working system back to health. If only Timmy and Larry and Barack were not such chumps, they could have snapped their fingers, sent some bankers to the big house, and recovered the golden age of smart capital allocation. Well, over the last 60 years a variety of economists and other observers have charted the way the functioning of the system bled the manufacturing economy, built up military firms and finance, damaged the ecosystem, and created the mess we have to clean up today. C. Wright Mills diagnosed the centralization of power as business, military, and civil government developed a unified “power elite”. Seymour Melman showed how the immense military spending of the cold war period gradually broke the manufacturing economy and subverted democratic institutions. J.K. Galbraith analyzed the power of huge corporations to create and shape markets and public perception via market power and advertising. Assuming that the system back 30 years ago was fundamentally sound and that it only developed problems because of criminal mismanagement, the fauxgressive econ-pundits can neither understand the emergency actions needed to prevent collapse nor grasp the depths of what needs to change to get things to improve.