Monday, September 22, 2008

Socializing cost, privatizing profit, screwing everybody

Apparently, there's been something going on with the nation's economy lately. The BBC gave Noam Chomsky very limited time or space to make some broad points, all of which he has written on extensively in the past. Some snippets:
Markets have inherent and well-known inefficiencies. One factor is failure to calculate the costs to those who do not participate in transactions. These "externalities" can be huge. That is particularly true for financial institutions.

Their task is to take risks, calculating potential costs for themselves. But they do not take into account the consequences of their losses for the economy as a whole.

Hence the financial market "underprices risk" and is "systematically inefficient," as John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalization and reviewing the substantial costs already incurred - and also proposing solutions, which have been ignored.
He also discusses the Clinton administration's repeal of the Glass-Steagall act of 1933,
thus freeing financial institutions "to innovate in the new economy," in Clinton's words -- and also "to self-destruct, taking down with them the general economy and international confidence in the US banking system," financial analyst Nomi Prins adds.
The more important point remains, however:
The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialise cost and risk and privatize profit, without a public voice.

That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system.
And just today Goldman Sachs and Morgan Stanley have agreed to become bank-holding companies subject to tighter regulation, essentially bringing back Glass-Steagall.

8 comments:

Sir Fantastic said...

At this point, hard to argue with those points. I didn't mean to use point twice in that sentence, but here we are.

rananda said...

Yes, though I'm not sure there's another point where it'd be easier to argue with those points. And it's funny, I was re-reading some of my old posts the other day (I was fixing that annoying continue reading that showed up on all the posts for a little while, I'm not just constantly re-reading my own blog), and I came across this in a footnote in the very first post, the simpsons monstrosity: "It’s probably not a good idea to question your entire thesis in the very first endnote, but here we are." Is that a common joke structure? Where did we get that from?

Sir Fantastic said...

I don't know where the joke structure is from. I think it is the Simpsons. I can picture Homer saying something like, "I never thought we'd get to the point where (something horrible) but here we are."

I took your post to be saying that wall st. has not priced the true cost of its bets, and that the rest of us are paying the costs while they profited. At this point that looks like exactly what is going to happen. Either taxpayers fund a bailout of sorts, or we don't and suffer through a recession while the fat cats stay fat. But there is a possibility that the fat cats will have to internalize the costs either through congressional action that is backwards looking and disgorges some individuals of their money, civil law suits by shareholders, or even criminal convictions. And while not probable, it remains possible that the costs to society won't be that high. Perhaps if we taxpayers go down the bailout road we see a return on our investment. So at this point looks like private profits social cost, but in the future we might have a different perspective.

rananda said...

I took your post to be saying that wall st. has not priced the true cost of its bets, and that the rest of us are paying the costs while they profited.

I think that's probably correct, but I think that's the narrow point. The broader point, and applicable to cases beyond a specific failure of the credit or securities markets as we have here, is that these financial markets are fundamentally undemocratic. Because risk is spread around and profit privatized, there is an inherent inefficiency (inefficient for the public as a whole, not for the actors making the decisions). That's why I'm not sure it matters whether or not it remains possible that the costs to society won't be that high. The fact that it remains possible that the costs will be high to compensate for actions, taken completely within the rules of the "market" and the system mind you, is enough to render such institutions as inherently problematic and undemocratic, I would argue.

As Chomsky notes, you see this in other state-run realms. Military spending is a perfect example of the public subsidizing private research and development. The government spends a ton of money on the military in for purposes of national security. Sometimes that results in technological advances, like the internet or containerization. Once those advances become profitable, they are sold, or more accurately given away, to private companies, who then reap profits. It doesn't matter that there's a chance, or that sometimes, the public doesn't get ripped off here. There's a chance, and often times, they do. And that's the problem.

I think ultimately it boils down to who is making the decisions that affect our lives? At least government officials are ostensibly elected. Bankers and fund managers are not. Officials privatize the risk of their actions in the sense that they must consider public disapproval. That mechanism doesn't extend to private financial institutions.

Sir Fantastic said...

I guess I just feel like it's not necessarily going to cost us- like I said, we could recoup our investment. And as far as the government allowing private entities to take advantage of public research discoveries, I am not as troubled by that. Sometimes its a situation where the private enterprises can run the system more efficiently and sometimes it does benefit the public. Using the internet as an example, I'm pretty sure its better that the government didn't take complete control over its development, allowing for users all over the world to express their own ideas and develop their own businesses. And I think we received a huge benefit with the only cost being the monthly bill from an isp and an addiction that keeps me out of the sunlight.

But I guess your problem is that there is the chance that we will get ripped off. I'm not sure any system of government, no matter how it is designed, will prevent that. I mean, the Churchill quote is that democracy is the worst form of government except compared to all the others. And you know how I love quoting Churchill. But history is filled with examples of the aristocracy, nobles, industrialists- whatever you want to call them- accumulating wealth with no concern for the welfare of their fellow man. At least our system of government allows for corrections when those actors step over the line. We will see criminal investigations at the very least, and the public outrage will probably result in convictions. Just look at Enron- private citizens behaving badly, public outrage, criminal convictions then Ken Lay fakes his own death. Anyways, I think we will see that here. Not sure who is going to fake their own death though.

rananda said...

But I guess your problem is that there is the chance that we will get ripped off. I'm not sure any system of government, no matter how it is designed, will prevent that.

Exactly, but this has nothing to do with government. We're talking about decisions made by private financial institutions and actors that are not elected or responsible to the citizenry in any way. That's the problem. That banks and investors commit acts that contain a risk associated with them, and that that risk is spread out by non-actors in the transactions, that's the problem.

Sir Fantastic said...

Yea but we ordinary folk are always subject to the whims of those who don't take our welfare into account. By mobsters, ex-girlfriends, and when we go out in the road and there are drunk or reckless drivers. Hopefully now the government has seen the consequences of letting these doods do their business without any oversight, though, and that oversight can protect the rest of us.

I think I wasn't completely understanding your argument in my last post. That you are saying it's just too undemocratic that they exercise the level of influence that they do being that they are private actors. And I agree with that. And it's much more influence then those mobsters and reckless drivers so perhaps my analogy wasn't perfect. (I'd put it at less than ex-girlfriends.) But I think the proper oversight and regulation of these institutions by our democratic government can mitigate the costs to us. And at this point, I'm not clear if we are disagreeing at all any more. But I kind of hope we are because the only other thing on my plate is old episodes of Psych- and I'm starting to worry that the show is becoming formulaic.

rananda said...

That you are saying it's just too undemocratic that they exercise the level of influence that they do being that they are private actors. And I agree with that.

Phew.

And at this point, I'm not clear if we are disagreeing at all any more.

I don't think we are, at least not in a meaningful way.

Hopefully now the government has seen the consequences of letting these doods do their business without any oversight, though, and that oversight can protect the rest of us.

I agree there probably needs to be more government oversight and regulation, but I don't think mere regulation is alone sufficient to solve the larger problem. There needs to be a paradigm shift not only institutionally but culturally and socially and individually in terms of how we view success and wealth and compassion and equality and equity, etc. But those are for numerous others posts for different days.