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It was only a few years ago that DailyKos and other "progressive" venues were filled with  stories about how the "banksters" running Obama administration finance were going to destroy the economy. Geithner and Summers, we were told, were buying worthless toxic assets, transferring government funds to the 1%, and ignoring the "solvency" problem that people like Duncan Black and Yves Smith diagnosed so authoritatively. The news that Fannie and Freddie have now returned $40 billion dollars in profits back to the taxpayers after repaying all the $180billion that Bush gave them, has not received much attention from progressives, however.  This is not surprising because TARP profits, Maiden Lane profits, PPPA profits, not to mention the rescue of the UAW and America's manufacturing heartland haven't got much attention either. It turns out that the people who were screaming so loudly about "banksters" are not interested in finding out they were wrong.

As with AIG, Fannie and Freddie investors want to get a share of the profits the taxpayers earned by bailing those companies out. The investors want to return to the good old days when the public assumed the risk and the stockholders got the rewards.  But, fuck it, let's pretend that pre-crisis, everything was just peachy. Let's imagine that  Reagan's S&L bailout which transferred $200billion plus to the richest people in America was the good old days and ignore that Fannie/Freddie were designed to subsidize real-estate and finance interests at public expense but that the Obama administration has now captured profits for the public. After all, screaming about Tim Geithner, forecasting doom,  holding hands with Rand and Ron, and urging purchase of precious metals  is more, you know, progressive.

n his comments, Stegman said Congress must step in to change the housing-finance system, because regulators can’t do it on their own.
“Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support” exposes taxpayers to risk and “is irresponsible,” he said.
bloomberg
Discuss

Fri Aug 08, 2014 at 10:06 AM PDT

OMG GEITHNER STILL AT IT!

by citizen k

Los Angeles Times: Fannie Mae reported Thursday that it earned $3.7 billion in the second quarter. Fannie, based in Washington, D.C., will pay a dividend of $3.7 billion to the U.S. Treasury next month. With its previous payments totaling $126.7 billion, Fannie has more than fully repaid the $116 billion it received from taxpayers.

Freddie Mac posted net income of $1.4 billion for the latest quarter. Freddie, based in McLean, Va., will pay a dividend of $1.9 billion to the government. Freddie will have paid $88.2 billion in dividends, exceeding its full government bailout of $71.3 billion.

BobSwern back in 2010 served up this quote and comment:
Ignoring the Elephant in the Bailout
By GRETCHEN MORGENSON
New York Times
May 9, 2010
IF you blinked, you might have missed the ugly first-quarter report last week from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world's biggest wards of the state...

--SNIP--

...Freddie and Fannie are nowhere to be seen in the various financial reform efforts under discussion on Capitol Hill. Timothy F. Geithner, the Treasury secretary, offered a vague comment to Congress last March, that after some unspecified reform effort someday in the future, the companies "will not exist in the same form as they did in the past."

Fannie and Freddie, lest you've forgotten, have been longstanding kingpins in the housing market, buying mortgages from banks that issue them so the banks could turn around and lend even more. After both companies overindulged in the lucrative but riskier end of home loans, they nearly collapsed, prompting the I federal rescue. Since then, the government has continued to use the firms as mortgage buyers of last resort, to help stabilize a housing market that is still deeply troubled.

To some, the current silence on what to do about Freddie and Fannie is deafening -- as is the lack of chatter about Freddie's disastrous report last week.

"I don't understand why people are not talking about it," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, referring to Freddie's losses. "It seems to me the most fundamental question is, have they on an ongoing basis been paying too much for loans even since they went into conservatorship?

The fact that we experience days upon days of stock market "activity" where the trading of essentially bankrupt entities such as Citigroup, Bank of America, Fannie Mae, Freddie Mac and American International Group (AIG) comprise the bulk of all stock trades just further magnifies these truths, never mind (and the MSM does tell us to "never mind," because they really don't report this to the public at-large) the reminder of the past week of how precarious our nation's markets really are.
OH MY GOD. I HOPE YOU HYPERVENTILATED ENOUGH.

In the depths of the crisis, a big section of the US "left" didn't waste time convincing the public of the need for apublic bank or postal bank, or  some innovative alternatives to Wall Street monopolization of investment capital to build some economic democracy. It did not divert itself with co-ops or ESOs or projects like those championed by Gar Alperovitz. It was not seduced by side issues like tax subsidies for Private Equity speculators or using the crisis to attack the crippling anti-labor laws like Taft-Hartley.  It didn't even push for a stronger jobs bill, or to broaden the reach of consumer financial protection bill.  No, the US left kept a laser like focus on apocalypse porn, despair, Birch Society paranoia about the Feb,libertarian demands for "mark to market", pitches for gold and silver, and, most of all, bitter personal attacks on members of the Obama administration. And it was wrong about everything.

Oh well. Let's all gather together to protest one group of financiers ripping off another - because surely the masses will rise up with pitchforks and suchlike once they get the horrors of Goldman-Sachs approach to asset valuation.

Poll

Most devastating canned response

5%1 votes
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27%5 votes
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5%1 votes
44%8 votes

| 18 votes | Vote | Results

Discuss

Tue Jun 17, 2014 at 06:19 PM PDT

Geithner was right: I told you so

by citizen k

Krugman

Finally, there was Geithner’s position, which was that despite its scale the financial crisis should be treated more or less as an ordinary lender-of-last-resort problem—that temporary nationalization would hurt confidence and was unnecessary, that once the panic subsided banks would be OK. A principal part of Geithner’s argument against nationalization was the belief that a “stress test” of banks would show them to be in fairly decent shape, and that publishing the results of such a test would, in conjunction with promises to shore up banks when necessary, end the crisis. And so it proved. He was right; I was wrong; and the triumph of the stress test gave him the title for his book.
And, a couple of years earlier.

Felix Salmon

In hindsight, Summers was right and those urging nationalization were wrong. (Which group includes Paul Krugman and Nouriel Roubini, as well as me.) What I’m particularly happy about is that the debate took place, in a lot of detail, within the White House, between people who had no ideological axe to grind and who were intent on working out the objectively right thing to do, given the uncertainty surrounding the banking system and the economy.
Discuss

Tue May 20, 2014 at 06:07 AM PDT

Yves Smith Three Card Monte

by citizen k

I’ve described the Geithner’s repeated claim that the TARP made money as three card monte, since looking at the TARP in isolation from the hidden tax on savers of ZIRP and QE was misleading. ZIRP alone is estimated to have cost US savers over $300 billion a year, more than 10x in a single year of the total “profit” attributed to TARP.
TARP did make money. That is just simple fact. Despite Bush and Paulson handing out $350billion to Wall Street, Geithner and Obama got it back. Smith's argument is that profits on TARP were negated by "losses" from "ZIRP" and "QE" that kept interest rates low. Fascinating book-keeping: you just subtract "estimated"  (i.e. just pulled out of the air ) costs to "savers" from actual earnings to US Treasury and - voila, you announce that there were no profits.  What would have happened to all the people with variable rate mortgages if interest rates were not low? Instead of tens of billions of dollars of mortgage refinances, we would have had millions of more homeless. Oh.   Tough shit for them, I guess.
Discuss

Mon May 19, 2014 at 02:07 PM PDT

Tim Geithner STILL not cool

by citizen k

Previously publishedthere.

Felix, like all the other cool kids, finds Tim Geithner just infuriating  - and he is thrilled to catch Tim foolishly trying to act cool when everyone knows that Tim is just a dork

But here’s the thing: we can read the speech, it’s archived on the Fed’s website. And so it’s pretty easy to tell whether Geithner did indeed try to push back against complacency, in his speech, and warn of the rise of the shadow banks.

Spoiler: he didn’t.

Ooh, what a burner! Man. Here's what Tim said back in 2004 - my bold:

The same developments in financial technology that have improved the sophistication of risk management and the ability to transfer risk can create positive feedback mechanisms that, for at least short periods of time, amplify large moves in asset prices. There have been substantial increases over the past decade in the capacity of the market, meaning the principal dealers, to handle very large increases in hedging-related flows. This dimension of the financial infrastructure is critical to the capacity of our markets to absorb and respond to large shocks. Dynamic hedging of options and other similar strategies, however, depend on the availability of sufficient liquidity to work effectively. Stressful periods, of course, are marked precisely by a material reduction in market liquidity.

Well, um, that sounds like a pretty fucking precise prediction, on the money, of what happened in 2007-2008. Here's a little more (my bold):

The financial innovations that have made risk transfer and hedging possible have increased the complexity of risk management, both financial and operational. The seemingly simple structure of a loan or bond issue can now involve a complex series of additional transactions that seek to allocate risks and responsibilities along specialized lines. This increased number of transactions that need to be separately settled and tracked by themselves create new risks that must be managed.

The economies of scale inherent in certain activities have led to a significant degree of concentration in some markets. A relatively small number of dealers account for a very large share of the over-the-counter derivatives business, with higher degrees of concentration in specific markets such as interest-rate options. Two institutions dominate the government securities clearing business. The growth in the size of government-sponsored mortgage entities creates a high degree of concentration in a market with very large systemic implications. Concentration has benefits, but it necessarily increases the vulnerability of the system to an operational or financial disruption in a single institution, or the decision by a single institution to exit a particular business. Moreover, to the extent that the same set of firms play dominant roles in multiple markets, this concentration can also give rise to linkages between markets that are not apparent in normal circumstances and that could potentially affect how the financial system functions in conditions of acute stress.

Strangely, Mr. Salmon does not quote any of this. Instead he gives us this summary:

"Or, to put it another way, “yay derivatives! Please use lots more derivatives!”

Let me just repeat a part of what Geithner actually said again:

Dynamic hedging of options and other similar strategies, however, depend on the availability of sufficient liquidity to work effectively. Stressful periods, of course, are marked precisely by a material reduction in market liquidity.

And how the fuck we are supposed to have a serious debate on the finance system in the presence of slippery bullshit like that "to put it another way" is something I do not get. But Mr. Salmon saves the best for last, finding a way to bring in the even more hated Larry Summers

[Salmon] And rather than concentrate on the risks being built up in the financial system, Geithner chose to end on his mentor Larry Summers’s favorite global risk at the time.

[Geithner] The stability of the financial system also depends significantly on the quality of macroeconomic policy, not only in terms of the credibility of monetary policy, but also in the degree of confidence investors have in U.S. fiscal management. The current deterioration in the U.S. fiscal position and the acute decline in the net national savings rate represent risks to the financial system and the economy as a whole. These risks are magnified by the size of the U.S. external imbalance and the unprecedented scale of financing requirements it reflects.

[Salmon] Summers — and Geithner too, it seems — was very worried that America’s “twin deficits”, the fiscal deficit and the current-account deficit, could end up causing a major global crisis.


Here Salmon, in his eagerness to condemn Emanual Goldstein, I mean Tim and Larry completely mis-states or misunderstands the plain sense of Geithner's speech. Geithner's main point here is "the acute decline in net national savings rate" during GW Bush's and Alan Greenspan's efforts to use massive government, consumer and business debt to float the economy and disguise the continued drop in worker income. The external balance is the TRADE BALANCE as the US manufacturing collapse accelerated in the Bush decade. This was all very important stuff and still is, no matter how much the Cool Kids sneer. And, just for the record, starting in 2000, Larry Summers identified wealth inequality as the critical economic issue of the age. Maybe when Mr. Salmon grows up, he can stop snickering and think about that issue.

Poll

The cause of the financial crisis 2007-2008 was

7%2 votes
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22%6 votes
3%1 votes
0%0 votes
11%3 votes
0%0 votes
7%2 votes
7%2 votes
3%1 votes
22%6 votes

| 27 votes | Vote | Results

Discuss

Sat Mar 29, 2014 at 10:32 AM PDT

Economics and Koch Brothers Math

by citizen k

Previously published in Hippie Punch Central.

Robert Lucas won the Nobel Prize for Economics and is widely cited as an authority. One of his more important papers from the 1990s  discuses tax policy and uses a mathematical model of the economy to supposedly show that taxing capital gains is a bad idea. The mathematical model is a variation of  "discounted utility" (DU)  proposed in 1937 by Samuelson who, at the time, expressed some reservations. Some testing has been done:

Virtually every assumption underlying the DU model has been tested and found to be descriptively invalid in at least some situations. [Frederick]

Thirty years later, Lucas used the same model:

The idea is that we are going to model the whole economy over all time as a single number which is the sum of every infinitely small instant of enjoyment ("utility") that a single "representative" household extracts from both consuming a single "representative" product and from leisure time. This "representative household" is immortal, but its enjoyment of consuming and hanging out in future shrinks exponentially over time depending on ρ (that "subjective rate of discount") which is a constant value that is based on absolutely nothing  -just pulled from the air. One choice of ρ means the household  places no value on its members eating even a crust of bread in 10 years, another  postpones that moment for 100 years. There is no room in this model for "I'm not hungry right now" or "I'd prefer more leisure when I retire"  or "I want my great grandchildren not to starve to death". Nobody in the Household enjoys working, even a little. There is no patriotism, no caring about the poor or the natural world, or beauty, or even civil order. For Lucas, taxes are only an expense, they don't produce positives like firemen or sidewalks or education or the Internet or national defense or vaccinations against smallpox. And for Lucas, the representative household is  also an investor with inherited wealth and unbounded income from investment. When you get down to it,  Lucas is representing the economy as the Koch brothers - and his model validates their creepy values and politics as good for them.

Despite Samuelson's manifest reservations about the normative and descriptive validity of the formulation he had proposed, the DU model was accepted almost instantly, not only as a valid normative standard for public policies (e.g., in cost-benefit analyses), but as a descriptively accurate representation of actual behavior. [Frederick]

It's not just that the Koch brothers ugly politics  is accepted   "as a valid normative standard for public policies (e.g., in cost-benefit analyses)" but that Economists claim this nonsense is science. Here is how Lucas characterizes his work:

 I hope as well that my story will serve as illustration of the way in which the search for theory at a more fundamental level can revolutionalize our thinking about important practical questions, and hence of the way in which progress at the most purely technical, abstract end of economics serves as the fuel for what Alfred Marshall called our "engine for the discovery of truth."

Even "liberal" economists buy into this. All over the economics literature we see respectful references to "the Lucas critique"  and to "rigorous microfoundations" - which is essentially a program to base all of economics on the kind of model Lucas uses. Because it is assumed, on the basis of nothing, that individual preferences of individual agents determines how large scale economic relations develop.

The usual  defense of this nonsense is that physics 101 is full of formulas that don't take things like friction into account, and besides, um, quantum mechanics. But, dear Lord, that's just general purpose misdirection that could be applied to anything at all. You could try to defend numerology with exactly the same argument. Or we often hear that it's just an approximation. But like much in Economics, microfoundations is not an approximation, it is an ideological proposition. Microfoundations is  Margret Thatcher's proposition that there is no such thing as society, just individuals. That is a moral assertion, not an approximation. Actually it is an immoral assertion. Mainstream economics has taken the values of rapacious sociopaths  as foundational principles, and then keeps endorsing  stupid, misery inducing policies that satisfy the short-sighted greed of those with too much.

Here's Paul Krugman - about as far from Lucas as one can get in respectable Economics. After complaining that there has been a decades long "de facto blockade of the journals against anything without rational-actor microfoundations" (something that in itself is an indictment of the entire profession), Krugmanwrites:

I would agree that being willing to use models with hyperrational, forward-looking agents was a natural step even for Keynesians. The Faustian bargain, however, was the willingness to accept the proposition that only models that were microfounded in that particular sense would be considered acceptable. It’s one thing to accept that models with an Euler condition at their core can sometimes be useful; it’s quite different to restrict your discourse to models with that characteristic, while ruling out everything else.

When, exactly, can these kinds of models be useful? Shouldn't the eagerness of "Keynesian" economists to latch on to such mythology give pause? Make one fear their judgment and standards are irreparably deficient and they never understood Keynes in the first place? Keynes even said that he had to work very hard to extract himself from the conceptual errors of Marshall's economics, the same errors that Krugman tells us were so alluring to "Keynesians".

Here's Simon Wren-Lewis

I doubt that most New Keynesian modellers adopted the microfoundations perspective against their better judgement. Instead I suspect most saw the power of the microfoundations approach (in analysing consumption, in particular), recognised the dangers in ad hoc theorising about dynamics (as in the traditional Phillips curve), and thought there was no contest

This is a remarkable passage because he is making a favorable contrast between Microfoundations (remember that "subjective discount rate") and something else he calls ad-hoc? Was that other stuff even less grounded in scientific research than what Lucas describes? But even "left" economists have internalized the microfoundations ideology. Here's Mike Begg, writing in Jacobin to insist that the value of money is:

determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms.

That's a claim of neoclassical economic faith, not an actual fact. But if you believe this stuff you will perhaps unconsciously incorporate right wing ideology into your economic analysis. This is why, for example, Christine Romer dismisses industrial/manufacturing policy and Robert Reich opposed the auto-rescue. If you believe, as a matter of faith or axiom, that economics emerges from the interaction of individual optimizing agents, then you carry the Koch brothers politics into your work intentionally or not.

[This is a rewrite of a previous effort]

Discuss
Reuters) - U.S. government-owned mortgage financiers Fannie Mae and Freddie Mac could send about $179.2 billion in profits to taxpayers over the next 10 years if the terms of their bailout remain intact, the White House budget office said on Monday.

The amount is more than triple the estimated 10-year payments calculated last year in the White House budget proposal, driven by the companies' increased profitability.

Fannie Mae and Freddie Mac have operated under federal conservatorship since 2008, when regulators agreed to inject capital into the companies to keep them afloat.

They received $187.5 billion in taxpayer funds, but they have returned to profitability and by the end of March they will have had paid $202.9 billion in dividends to the U.S. Treasury.

http://www.reuters.com/...

Remember all that stuff about toxic assets, Geithner's incompetence? Obama's naive, hapless approach? Me too.

Discuss

Previously publishedhere.

Mainstream economics measuring success


Much of mainstream economics is based on mathematical models which, it is claimed, represent the success of various economic policies. "Success" is often described as a number - the higher the number, the more successful the economy. And that number is often calculated in a way  that depends on two values "consumption" and "leisure". The intuition is that it is better to consume more and have more leisure. So we often see a formula kind of like

Success = U(consumption,leisure)

where U is some calculation balancing the two good things. Now to make things easier, economists often pretend there is a single consumer who represents the economy and so build models of the economy in which the goodness value of that one representative or aggregate consumer is the value used for the whole economy.

Let´s look at a really simple example of how this works. Suppose we approximate "consumption" by earnings, on the theory that the more you earn, the more you consume. Just an approximation. And suppose we measure leisure in hours of non-work and then calculate U(C,L) = C + L times ValueofLeisurePerHour. We just assign some value per hour to leisure, multiple the number of leisure hours by that value and add it to earnings (C ).  Suppose we have a society of two people, A and B and just add their earning and their leisure time together. Maybe we value leisure time at $10/hour and we have two people each working low wage jobs 8 hours a day for $10/hour - just to keep it simple. Then Success per day is  8x10x2 (for two people working 8 hours a day) plus 16 x 10x2 for their leisure hours for a total of 480. We measure Success as 480. Great. Suppose though that A decides to pimp out B and sends B out to the bus terminal where in an 8 hour day, B can earn $500 turning tricks. A now just needs 1 hour a day to beat up B and collect earnings. Say A leaves B with $80 a day. Now we calculate Success again, 1x420 + 8x10 for earnings since A works 1 hour a day for $420 and B works 8 hours for $10 hour equivalent (after A takes most of it). That's a total of $500. Add in the leisure which is up since A only works 1 hour a day for $390 and we now have a Success value of 890 - PROSPERITY! Up more than 50%!

Well, maybe B doesn't particularly like this arrangement, so, generously, A takes some of his new wealth and hires Professor M. from Harvard to come and give them an objective opinion. Plugging the numbers into his spreadsheet, Professor M. might note that things would be even better if A forced B to work 16 hours a day at the bus terminal - say doubling B's fees for service. In that case Success would be calculated by adding 500 to A's earning and subtracting $80 from the leisure calculation for B. Now we are at 1310 instead of 890. B should be grateful to participate in this massive increase in economic Success. Professor M. says he is just doing the science and that objections to his suggestions are emotional and irrational.


Utility


In economics jargon, what I have called "Success" is called "utility" and utility functions illustrate how mathematical convenience is used to justify unpalatable and frankly creepy theories of what people should want. Look, we are told, it's not perfect, but the math is simple and it  gives a simple approximation of the real thing - this is just like ignoring friction in Physics 101. But is it? Is the concept of a representative consumer meaningful in an economy where some profit at the expense of others? It would be easy enough to add a factor representing inequality by reducing "utility"  for consumers who are, say, below 1/2 average earnings. What is the justification for not doing that? Does a utility function that depends only on consumption and leisure time at all approximate prosperity? What about the utility of living in a society where most people are not poor and desperate enough to stick a knife in your back for a slice of bread? Because in the real world, economics theories are generally sold to A but B is not guaranteed to accept Professor M's explanation. Shouldn't the utility function also include "social stability" as a parameter? How about "environmental sustainability" so that increased consumption produced by, for example, burning rubber tires in the street, is balanced against dying painfully of cancer or something?

The example of A and B above is, like most examples in Economics, contrived but it illustrates a general rule:

Rule: By mainstream measures it is economically advantageous for a society to engage in brutal exploitation - slavery, debt peonage, mass immiseration, environmental destruction, and the like.  

Walter Johnson points out that in 1860 the "value" of the slaves in the United States exceeded the value of the entire industrial system: factories and railroads. From an aggregate economic point of view, slavery drove prosperity. The foundational models of Economics rely on the kind of averaging and aggregation that justifies exploitation. If a slaver can drive human beings to work under conditions of terror to produce more "value" than they would produce otherwise, Economics tells us that everything is good. This is not accidental: Economics as a discipline developed during the English industrial revolution and the mathematical trappings encode a great deal of the ideology of the English elites at the time. Consider the famous British intellectual Thomas Carlyle, in 1849, bemoaning the abolition of slavery in the sugar islands of the Caribbean.

“Our beautiful black darlings are at last happy [freed from slavery]; with little labour except to the teeth, which surely, in those excellent horse-jaws of theirs, will not fail… . Sitting yonder with their beautiful muzzles up to the ears in pumpkins [any tropical fruit], imbibing sweet pulps and juices; the grinder and incisor teeth ready for every new work, and the pumpkins cheap as grass in those rich climates: while the sugar-crops rot round them uncut, because labour can not be hired, so cheap are the pumpkins … Where a black man, by working about half-an-hour a day (such is the calculation), can supply himself, by aid of sun and soil, with as much pumpkin as will suffice, he is likely to be a little stiff to raise into hard work! … [via Harry Cleaver]

The sugar plantations of the Caribbean were vast sources of wealth and economic growth as measured by Economics because they ground up human beings as raw material to produce sugar, rum, molasses - the foundations of a massive trading system. All the bullshit about efficiency, free markets, and the rest in Economic ideology evades the fundamental mathematical truth that the aggregate measures of "utility" justify slavery, piracy, murder, and theft. The vast majority of people in the sugar islands were better off working 1/2 hour a day and enjoying their lives than they were working sunup to sundown under the lash, which is why it is so convenient not to measure it that way. Under standard measures of economics, the "utility" of the Jamaican economy increased when human beings were brutally turned into factory parts in the sugar industry and decreased when they lived for their own benefit. If A can force B to produce wealth in such a way that net "utility" increases, Economics will applaud any crime. 

Alfred Marshall constructed modern mainstream economics  around the same time Francis Galton was developing eugenics.  Both theories feature mathematical models to justify privilege and, of course, advocates of both theories often insist that they are just running the numbers, just dispassionately looking at the math, not in the least advocating some crazy ideology.

Next: Integration of Gibberish. How to use the tools of the integral calculus to transform nonsense into more nonsense.

Discuss

Previously published in Krebscycle

Thurgood Marshall was not nostalgic about the US Constitution.

I do not believe that the meaning of the Constitution was forever "fixed" at the Philadelphia Convention. Nor do I find the wisdom, foresight, and sense of justice exhibited by the Framers particularly profound. To the contrary, the government they devised was defective from the start, requiring several amendments, a civil war, and momentous social transformation to attain the system of constitutional government, and its respect for the individual freedoms and human rights, we hold as fundamental today.

In 2011 Harpers Magazine, the flagship of Upper West Side Liberalism, published a worshipful interview with Glenn Greenwald about a book in which he outlines his very different view of US legal history.

That the rule of law—not the rule of men—would reign supreme was one of the few real points of agreement among all the founders. Arguably it was the primary one.

In the course of this argument, Greenwald makes a series of pro-forma admissions that this shining ideal was not always actually put into practice. 

But even when this principle was being violated, its supremacy was also being affirmed: resoundingly and unanimously in the case of the founders [..]

“blind justice”—equality before law—was orthodoxy in American political culture. The principle was sacrosanct even when it was imperfectly applied.

I have to confess that this "analysis" makes me so angry that I have a hard time formulating an even tempered response. As history, Greenwald's story is so grotesque and incoherent that words like "delusional" and "fraudulent" seem inadequate. The only way to make sense of what Greenwald wrote - and the breathless adulation he receives among some sectors of the "progressives" - is to decode the underlying message. And that underlying message is profoundly ugly and should provoke some soul searching among Mr. Greenwald's fans.  Let me first show you a little bit of why Thurgood Marshall's view was so different from that given by   Greenwald before looking at what he and his fans actually mean.

Equal justice

Justice Marshall  noted that Gouvernor Morris, the "Founder" who actually wrote up the Constitutional draft, was quite clear about limitations of  the sacrosanct principle.

"The inhabitant of Georgia [or] South Carolina who goes to the coast of Africa, and in defiance of the most sacred laws of humanity tears away his fellow creatures from their dearest connections and damns them to the most cruel bondages, shall have more votes in a Government instituted for protection of the rights of mankind, than the Citizen of Pennsylvania or New Jersey who views with a laudable horror, so nefarious a Practice."

But "the principle was sacrosanct even when it was imperfectly applied"!  It's not just that the Constitution explicitly sanctioned slavery (equality before the law, imperfectly applied!), but that voting rights were generally limited to white male property owners, the "Senate" was explicitly modelled after the Roman Senate that represented the interests of the Roman slave owning aristocracy, there was an ongoing genocidal attack on Native Americans and theft of their lands ... but  the principle was sacrosanct! Even when imperfectly applied! Resoundingly! Greenwald puts it like this:

[..] the country’s vigorous embrace of the principle of equality before law enshrined it as aspiration. It became the guiding precept for how “progress” was understood, for how the union would be perfected.

In 1829, not much more than 30 years from the day the principle of equality under law was, you know, enshrined, the Supreme Court of North Carolina decided that a white man named John Mann could not be punished for beating and then shooting a young woman we know only as "Lydia, the slave of one Elizabeth Jones."

On the trial it appeared that the Defendant had hired the slave for a year--that during the term, the slave had committed some small offence, for which the Defendant undertook to chastise her--that while in the act of so doing, the slave ran off, whereupon the Defendant called upon her to stop, which being refused, he shot at and wounded her

The word "chastise" here is a euphemism for violent assault. Mann violently attacked this young woman - so violently that a jury of his white peers convicted him.

His honor Judge DANIEL charged the Jury, that if they believed the punishment inflicted by the Defendant was cruel and unwarrantable, and disproportionate to the offence committed by the slave, that in law the Defendant was guilty

So the jury of white men found that, even by the standards of this slave state, Mann's behavior was  "cruel and unwarrantable". The Supreme Court of North Carolina reversed the Jury verdict and acquitted Mr. Mann. The passage below from the decision is a little long but it's worth reading in full, because it so lucidly and clearly lays out exactly what equality under the law meant to the Founders generation. Judge Ruffin, whose opinions are still studied in US law schools as models of legal reasoning, notes that under the law some people in subordinate positions, like apprentices and students, are protected against disproportionate violence but this principle emphatically does not apply to slaves.

The difference is that which exists between freedom and slavery--and a greater cannot be imagined. In the one, the end in view is the happiness of the youth, born to equal rights with that governor, on whom the duty devolves of training the young to usefulness, in a station which he is afterwards to assume among freemen. To such an end, and with such a subject, moral and intellectual instruction seem the natural means; and for the most part, they are found to suffice. Moderate force is superadded, only to make the others effectual. If that fail, it is better to leave the party to his own headstrong passions, and the ultimate correction of the law, than to allow it to be immoderately inflicted by a private person.

So for someone "born to equal rights" the law limits the use of force by their "master". But unlike Mr. Greenwald, Judge Ruffin is unsparingly honest. Let me call the victim of the crime "Lydia Doe" because it seems disrespectful to just use the first name of this brave woman and she was a victim of a crime and her family name is unknown. Judge Ruffin explains that Lydia Doe cannot be protected by law because only unrestrained, savage, unlimited, violence can keep a person in bondage. Unlike an apprentice who can be convinced that his temporary subordinate status is for his own good, slaves remain slaves only by terror.

With slavery it is far otherwise. The end is the profit of the master, his security and the public safety; the subject, one doomed in his own person, and his posterity, to live without knowledge, and without the capacity to make any thing his own, and to toil that another may reap the fruits. What moral considerations shall be addressed to such a being, to convince him what, it is impossible but that the most stupid must feel and know can never be true--that he is thus to labour upon a principle of natural duty, or for the sake of his own personal happiness, such services can only be expected from one who has no will of his own; who surrenders his will in implicit obedience to that of another. Such obedience is the consequence only of uncontrolled authority over the body. There is nothing else which can operate to produce the effect. The power of the master must be absolute, to render the submission of the slave perfect

The "vigorous embrace of the principle of equality before law" is so inspiring. Here's Mr. Greenwald again:

And the most significant episodes of progress over the next two centuries—the emancipation of slaves, the ending of Jim Crow, the enfranchisement and liberation of women, vastly improved treatment for Native Americans and gay Americans—were animated by this ideal. That happened because “blind justice”—equality before law—was orthodoxy in American political culture. The principle was sacrosanct even when it was imperfectly applied.

Right. This was blind justice at the beginning of the Constitutional Era.

Get your government hands off medicare

Greenwald claims that the unquestioned American principle of equal justice under the law ran along happily for nearly 200 years and was only fatally compromised when Gerald Ford pardoned Richard Nixon.

The Ford pardon of Nixon changed that, radically and permanently.

Let me spell this out: Ford pardoning Nixon "radically and permanently" destroyed equality under the law, but Judge Ruffin deciding that Lydia Doe could be beaten without mercy and shot down like a dog did not destroy equality under the law. The Fugitive Slave act that said free black men and women and children kidnapped by armed thugs could not appeal to a court for protection left America animated by the ideal of blind justice but Nixon's pardon killed the idea. The post civil war Slaughterhouse decisions of the Supreme Court, the mass incarceration of Japanese-Americans, the Trail of Tears, police attacks on gay men and women, the second class legal status of women, the whole dismal history of injustice, legalized murder, slaving and genocide were all no barrier to "the country’s vigorous embrace of the principle of equality before law" but Nixon's pardon was? What can Greenwald possibly mean? Unfortunately what he means is also apparent.

The implicit, but not particularly well hidden premise of Greenwald's line of reasoning is that what happened to Lydia Doe doesn't matter. It's just some "imperfect application" of a resoundingly affirmed grand principle. What matters is what happens at the elite level - to white men, to powerful people, to the system of laws that governs the elite. Lydia Doe doesn't matter in some way that unpunished NSA spying or other infraction of concern to Greenwald does matter. The important actions of government and justice, according to this theory, are ones that affect privileged white men, the rest are just some imperfections, regrettable no doubt, but details in the grand scheme of things.

Well, call me an unprincipled Obot, an apologist, whatever you want, but I don't agree. I don't care about Greenwald's narcissistic "morality" or his  bogus history or the self-assessed moral purity of his fan base.  I don´t care about their grand principles that mean nothing or their fraudulent rule of law or the whole dishonest story.

Discuss

Thu Aug 29, 2013 at 02:24 PM PDT

Road to Serfdom

by citizen k

Previously publishedhere.

Is there is a book that is more deeply dishonest than Hayek's "Road to Serfdom"?  Towards the end of his life Hayek  visited Pinochet's Chile and - toasting  traitors, rapists, torturers, and murderers -  he thanked them for restoring "economic liberty".  In 1943 he was more circumspect:


It is important to remember that for some time before 1933 Germany had reached a stage in which it had, in effect, had to be governed dictatorially. Nobody could then doubt that for the time being democracy had broken down, and that sincere democrats like Bruning were no more able to govern democratically than Schleicher or von Papen. Hitler did not have to destroy democracy; he merely took advantage of the decay of democracy and at the critical moment obtained the support of many to whom, though they detested Hitler, he yet seemed the only man strong
enough to get things done.

The whole pitch of "Road to Serfdom" is that economic planning by  government sets the stage for Stalinist or Nazi tyranny - that well meaning or duplicitous reformers start a nation down this road to totalitarianism with their irresponsible  talk of day care centers and public works. But what Hayek means by liberty or democracy has nothing to do with enlightenment values of universal human rights. Hayek exploits the ambiguity between the old use of liberty by European monarchists and aristocrats to mean "power and privilege" and the use  by Enlightenment figures like Diderot, Locke and Mill  so that he can  disguise his actual political view.  Only when he extolled the Pinochet government for restoring economic liberty or dared to say that the terrorist Schleicher was unable to govern Weimar Germany democratically does Hayek open the door to a little truth


More recently I have not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under Allende - Letter to the London Times, F. A. Hayek July 11, 1978.


Here is the testimony of a guest of the Pinochet government about the personal freedom she enjoyed.


Then they called my father and began torturing him in front of me so that I would talk. They beat him and used electric shocks, but they still went on hitting me.

"1 finally lost consciousness. Then they brought in my brother and did the same thing to him. This went on from about 3 in the afternoon until 9 in the morning, "Then they began to cut my body. They pulled my nipples violently and they cut me with knives and razor blades. They put metal objects and their hands into my vagina, then more electric shocks — always blindfold except when they had me watching them torture my father and brother.

"They brought in my father and brother again and wanted us to have sexual relations. I screamed, and finally I fainted, They kept hitting me, my head and ears. I am still deaf and my head is full of strange noises.

"Then they threw me onto a mattress and raped me, I fainted. I don't know how many of them were there. [cite]

“I have not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under Allende.”


Hayek's defenders are apt to claim that when he was defending people who engaged in "economic liberty" he was 80 years old and such a minor oversight should not be used to invalidate his lifelong commitment to liberty as it is normally understood.  But look at that passage from Road to Serfdom above and pick out the name Schleicher, one of the well intentioned people, according to Hayek,  were unable to govern Germany democratically.

Freikorps were the brainchild of Major Kurt von Schleicher. The Freikorps were also called the "Black Reichswehr" (Black Army) for they were a 'secret' army outside the bounds of the Versailles Treaty. The idea was developed after the failure of an army unit to quell a small rebellion in Berlin at the Battle of the Schloss. The army unit, when confronted by a socialist group with women and children, threw down their weapons and either ran away or joined the protest group. This led Major von Schleicher to conceive an alternative to using Reichswehr units to quell "red" (socialist or communist) uprisings. He suggested to his superiors to form volunteer units recruited from the old Reichswehr and commanded by former Imperial officers under governmental control. This way the Reichswehr would avoid the stigma of having to fire on civilians and the government would be financially supporting these freikorps, leaving the Reichswehr to concentrate on training for real battle [Wikipedia]

Schleicher tried to govern Germany  "democratically" by setting up state sponsored paramilitary groups that would not balk at shooting women and children who were protesting.  We can see the same attitude in Hayek's frankly Orwellian "history" of 19th Century British Liberalism (this is the European use of "liberal" not the American one).

It is significant that this change in the trend of ideas has coincided with a reversal of the direction in which ideas have travelled in space. For over two hundred years English ideas had been spreading eastwards. The rule of freedom which had been achieved in England seemed destined to spread throughout the world. By about 1870 the reign of these ideas had probably reached its easternmost expansion. From then onwards it began to retreat and a different set of ideas, not really new but very old, began to advance from the East.


The Rule of Freedom which had been achieved in England was so extensive that the army was called out to suppress the Chartist movement. This movement had the following dangerous demands:


  • Institution of a secret ballot
  • General elections be held annually
  • Members of Parliament not be required to own property
  • MPs be paid a salary
  • Electoral districts of equal size
  • Universal male suffrage

Fortunately Personal Freedom was protected when the British Army and local paramilitary killed unarmed peaceful protesters in Manchester in 1819, many with sabres. The Chartists also opposed the Corn laws. These laws forbid the importation of grain into the United Kingdom unless the price stayed high.    Funny how Hayek doesn't mention even 19th century laws regulating trade - well before the evil socialists began their assault on civilization.  The Corn laws were finally repealed in 1846, which would have been good for English urban workers except that their wages then fell to match the reduced costs of grain.The falling wages of British workers were due, of course, to the Freedom of the Market, including such market forces as the Combination Acts that made bargaining for wage increases, picketing, strikes, or any other trade union activity illegal. In fact, trade union activity was a criminal conspiracy under these acts. British workers were blessed with the personal freedom to take the wages their employers offered or starve or go to jail. Only in 1870, when Hayek bemoans the retreat of the tide of Freedom was this law relaxed slightly. For workers who did not avail themselves of Freedom to Work Without Complaint, there were also those classic examples of 19th Century British Liberalism - the workhouses. In these institutions, poor people were taught the virtues of enterpreneurialism by being locked up and essentially reduced to indentured servitude and otherwise indulged in Personal Freedom:

Andover had a reputation for being an extremely strict workhouse, largely due its fearsome Master Colin McDougal, a former sergeant-major who had fought at Waterloo in 1815. His wife, Mary Ann, was a force to be reckoned with and was once described by the Chairman of the Guardians as "a violent lady". The McDougals ran the workhouse like a penal colony, keeping expenditure and food rations to a minimum, much to the approval of the majority of the Guardians. Inmates in the workhouse had to eat their food with their fingers, and were denied the extra food and drink provided elsewhere at Christmas or for Queen Victoria's coronation. Any man who tried to exchange a word with his wife at mealtimes was given a spell in the refractory cell. Work, too, was hard for the inmates. The workhouse's favoured occupation for able-bodied men was the strenuous task of crushing old bones to turn them into fertilizer. In 1845, rumours began to spread in the neighbourhood that men in the workhouse bone-yard were so hungry that they had resorted eating the tiny scraps of marrow and gristle attached to the old bones they were supposed to be crushing. Fighting had almost broken out when a particularly succulent bone came their way. cite

Rape was also common in workhouses, although I have not seen any documentation of Pinochet style Personal Rape Freedom with metal objects and such like. According to Hayek, this world of workhouses and combination acts was one in which the government did not interfere with individual liberty. 

Inmates in Victorian Workhouse
It must also not be forgotten that socialism is not only by far the most important species of collectivism or "planning"; but that it is socialism which has persuaded liberal-minded people to submit once more to that regimentation of economic life which they had overthrown because, in the words of Adam Smith, it puts governments in a position where "to support themselves they are obliged to be oppressive and tyrannical".

If we are going to talk about personal freedom in the United Kingdom in the 19th century we can't forget the Irish potato famine of the 1840s in which 1 million Irish people freely starved to death and a million more emigrated while Ireland remained a net food exporter. Apparently free Irish peasants, whose land had been freely appropriated and given away to British landlords by the British Army freely expired after freely choosing not to eat food. The Irish were not the only beneficiaries of the rule of Freedom. Think of the lucky Indians who got to labor in British government opium fields or purchase opium from the government monopoly! When the British Army and the East India Company (a government monopoly) extended the rule of freedom east to India, imposing punitive taxes on Indian peasants to pay for it all, the Indian share of the world economy went from 22% in 1700 to 3.8% by 1952! And the Chinese also benefited from the rule of Freedom when the British navy burned Chinese cities and extorted both blackmail payments and opening of China to sales of opium grown by the British government monopoly on confiscated lands in India! How lucky they were not to be oppressed by socialists.

So we see that in Pinochet's Chile, in Weimar, and in 19th Century British Imperium, the use of state violence to suppress workers demands for living wages and participation in government is Freedom but things like government health care and housing assistance are "oppressive and tyrannical". This is how Hayek puts it:

The question is whether for this purpose it is better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals is given the best scope so that they can plan most successfully; or whether a rational utilisation of our resources requires central direction and organisation of all our activities according to some consciously constructed "blueprint"

The knowledge and initiative of poor people in the UK apparently was given the best possible scope when cavalry attacked them with swords or they were put to work crushing bones in a workhouse or left to die of starvation in Ireland while soldiers guarded the export storehouses. Apparently combination acts and Opium Wars are not despotic central planning any more than military coups and shoving metal into the vaginas of prisoners. No "blueprint" though, so it's all good. Arbeit macht frei.

Discuss

Previously published on Krebscycle.

I have not been able to watch much of the Zimmerman trial because I find it too infuriating, but the media coverage has been very revealing in what it has missed. Imagine a 17 year old boy, walking back to his father's house from a trip to the 7-11. It's night, it's raining. Like most US teenagers, he's got the earbuds in and is on the phone. He's chatting with a friend, not a girlfriend, but a girl who is his friend.

Gradually, this kid realizes he is being followed by a creepy looking man in a black SUV. Maybe at first he doubts it, but he keeps on walking and the SUV keeps following him. If he's like most teenage boys, the last thing he wants to do is tell a girl that he is scared, but he tells his friend he is being followed. He should be scared because the 200lb man in the car is armed, with a bullet in the chamber of a gun with no safety, he's been arrested for violent behavior in the past, been fired for violent behavior, has applied for and been rejected by police departments, has been doing martial arts training, and is on prescription drugs that are known to have side effects of aggression and hallucinations. That man gets out of the car, in the dark and the rain, with his gun and an intention not to let one of "those assholes" escape,  and the teenager ends up with a bullet in his heart.  This is a horror movie come to life for the boy and his parents. Any parent or brother or sister or cousin or just fellow human being should be horrified.


Even though the scenario I describe above just repeats uncontested facts, for many Americans, it has been more natural to imagine the scenario in which the honor roll high school student with no police record was the aggressor and the armed man who followed him in the dark was the victim. Those people imagine the dead kid as some sort of dangerous criminal on the loose who assaulted the man who killed him.  What a depraved and creepy view of the world - and it's a common view among millions of our fellow citizens.  We live in a world where normal looking people around us are filled with so much ill-will and are so empty of empathy and ordinary human feeling that they identify with a killer and not his victim. This is a horror movie come to life for all of us - we are surrounded by zombies or alien invaders who look just like people.

Discuss

Tue Jun 04, 2013 at 04:41 PM PDT

Maiden Lane and the financial crisis

by citizen k

Previously published onKrebscycle

"Maiden Lane"  is both a street in the Financial District of New York and the name of three different bailout funds that the Federal Reserve Bank created as the financial crisis reached flood stage.  Some critics of the government action in the crisis described those bailouts as monstrous, criminal thefts from the public. They said that the government had purchased "toxic assets" at absurdly high prices in order to dump money on "banksters". People like Yves Smith said that the valuations the government had used for those "toxic assets" were literally fraudulent. Duncan Black ("Atrios") said that losses from these funds would be many many billions and that the government had purchased a "shitpile".   All this was, in the words of Colbert, "widely reported" across the  media and blogs. Since 2012, the loans from the three Maiden Lane funds have all been paid back


  1. There were no losses at all. In fact the Federal Reserve Bank made billions of dollars of profit from those Maiden Lane "toxic assets".  And most of that went to the US Treasury to help pay for the cost of government operations.
  2. Nobody who participated in the hysterical predictions of ruin and doom, let alone the accusations of criminal fraud, nobody involved has ever admitted error or even discussed what they got wrong. They just moved on to other scandals.

From the Federal Reserve Bank  site:

November 15, 2012: Net proceeds from additional sales of securities in Maiden Lane LLC enabled the full repayment of the subordinate loan made by JPMorgan Chase & Co. plus accrued interest. The New York Fed will receive 100 percent of future cash flows generated from the remaining ML LLC assets, in accordance with the ML LLC waterfall.


August 23, 2012: Maiden Lane III LLC sold all remaining securities. Subsequent to the repayment of ML III LLC’s liabilities to the New York Fed and AIG, net proceeds from sales of the securities, as well as cash flow the securities generated while held by ML III LLC, provided a net gain of approximately $6.6 billion for the benefit of the U.S. public.
July 16, 2012: Net proceeds from additional sales of securities in Maiden Lane III LLC enabled the full repayment of AIG’s equity contribution plus accrued interest and provided residual profits to the New York Fed. The New York Fed will continue to receive 67 percent of residual profits generated by future sales of ML III LLC assets.
June 14, 2012: Maiden Lane LLC and Maiden Lane III LLC repaid the loans made by the New York Fed, with interest. The successful repayment of the loans marks the retirement of the last remaining debts owed to the New York Fed from the crisis-era interventions with Bear Stearns and AIG.
February 28, 2012: Maiden Lane II LLC sold all remaining securities*. Net proceeds from sales of all the securities, as well as cash flow the securities generated while held by ML II LLC, enabled the full repayment of ML II LLC's liabilities to the New York Fed and AIG while also providing a net gain of approximately $2.8 billion for the benefit of the U.S. public.


See also Timmeh-gets-the-last-laugh-on-the-clueless-hippies

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