Today's Buggy Topic

The subject-title above only hints, really, at the far more ambitious buggy commentary today --- a ranging summary of several prof bug posts here at the buggy web site a few years ago, all adding up to a probing effort to show why the US has never had any strong socialist traditions in its political history: whether Marxist or otherwise.  In this respect, the US is unique among all advanced industrial countries these days --- whether in Europe, Asia, or the English-speaking democracies.

The English-Speaking Countries

In Britain, Canada, Australia, or New Zealand, Marxism never had much influence either.  All these countries, though, had a Labor Party, shaped originally in Australia (1891) and in Britain 9 years later.  Not only was it not Marxist revolutionary, unlike all the other socialist parties of the day --- whether in theoretical commitment or practice --- but when, a few years after the Labour Party originated in 1900, it sought to join the Marxist Second International, its application was held up for months.  The reason?  To the Continental European socialists, British Labour never subscribed to class-warfare, let alone the notion that socialism could only emerge victorious in capitalist societies by means of ultimate revolution. 

In the end, a compromise was reached.  The British Labour Party, it was said, subscribed to the notion of "class struggle", but not "class warfare." 

Later, at the end of WWI, the entire Socialist International split.  The radical wings of Socialist parties joined the Communist Third International, a tool of the Soviet CP from the outset.  Those socialists who condemned the Communist seizure of power in Russia and the imposition of CP dictatorship formed their own Social Democratic International.  Later, all these Social Democratic Parties --- starting with the Swedish party in the early 1930s, then after WWII all of them in West Europe --- not only formally renounced ultimate socialist revolution as a goal, but (with the exception of the French Socialists) went further and formally disowned the goal of state control of the economy.

Australia and Canada

Like the British Labour Party, the Australian Labour Party still survives as one of the two major parties in that country.  And like the British Labour party, it always was democratic and evolutionary, and like Labour too in the 1990s, it even backed away noticeably --- like Tony Blair's governments after 1997 in Britain --- from supporting a large welfare state.

Canada's Labour Party was short-lived.  Founded in 1917, it last only about a decade and never made much progress in national elections.  A socialist tradition does live on, though, in some of the western provinces under different party names, but nationally Canada's major party system has been dominated on the Left by the Liberal Party . . . with powerful roots in especially Quebec and the eastern provinces.  The Liberals essentially ruled Canada for 3/4 of the period from the late 1950s until early in the current decade, moving the country to what looked like a Continental EU welfare-state. 

That leaves the News Zealand Labour Party.

Its roots go back to the start of th 20th century, and its evolution as one of the two major parties in its country parallels in most respects the fairly flexible, non-Marxist doctrines and up-dated commitments to largely free markets that mark the history of the British and Australian Labour Parities.

Why the US Is An Exception

The causal influences that prevented the US working-class and farming population --- and most intellectuals --- from espousing a British-like Labour Party, never mind a Marxist socialist one, are multiple and heavily rooted in the history of our country.  Seeing that the buggy post on this topic --- left at a very good web site, Economist's View (run by a moderate centrist economist) --- sets out the reasons carefully in two long commentaries last week, there's no need to say more here by way of introduction. 

Click here for the buggy stuff.

Today's Bugged-Out Topic

Still on the current global and US financial and economic trouble, it shifts focus and looks at the recent hints in the official Chinese CP-news media that China, Japan, and the EU should join hands with Russia and others and undermine the alleged US hegemonic dollar role.  If achieved, an epochal reorientation of Chinese economic development would be required for the Chinese to substitute their currency --- with or without the Japanese and EU --- for the dollar as the world's major reserve currency.

A Ranging Analysis

The buggy commentary on these hints expanded to a long analysis of the huge dependence of the Chinese economy for two decades on export-led growth . . . and the multiple large-scale problems that would ensue if the Chinese government had to reorient growth toward the domestic economy.  Prof bug also questioned just how reliable officially reported Chinese stats are for GDP growth-rates; noted the tremendous excess capacity in export-oriented factories if, as has been happening for a year now, the decline in export-volume continues into the future . . . never mind an acceleration of this trend.  Then, too, China's 1.4 billion people are poor compared to the American people. 

In effect, the average US household spends about $41,000 a year; the average Chinese household 1/10 that.  Do the Chinese CP heads and top technocrats really expect that the domestic market could absorb all the goods produced by existing export-oriented factories . . . themselves, note, largely part of a global multi-level production chain, dominated (about 65% of the total value of Chinese exports) by foreign multinationals that use China's diligent work force and its low-wages as an assembly-platform for finishing products to be shipped abroad?

A Final Claim

Then, too, so prof bug asks at the end of his lengthy commentary, what would be the drawbacks for the US economy's long-term growth prospects if we did shake off the reserve-currency role.  To date, it has kept the $US largely overvalued compared to the Asian export-oriented countries, and the result has been to favor financial services and government deficit spending --- by attracting huge inflows of capital from abroad to balance the equivalent deficits in current account (trade in goods and services) --- at the expense of the goods-producing sectors of the US economy.

The lengthy buggy analysis can be found at The Naked Capitalist, a finance and economic-oriented web site that is ranked number two or three in popularity among econ blogs as measured by the number of daily visitors.  Click here for the link to the original post that started the thread and prof bug's and others' comments.  Note that generally there is a largely intelligent number of posters who visit that site.  Prof bug hopes to be among those regulars, starting today.

Today's 2nd Buggy Topic

Believe it or not, there are libertarian economists who have been striving the last month to deny that the U.S. --- they never seem concerned with other countries --- was sliding into a serious credit-crunch, in which neither big businesses and small businesses, not to forget households, would find it ever harder and maybe impossible to get loans from financial institutions . . . either short-term or long-term. 

The Great Depression As a Comparative Standard 

The drying up of credit facilities is what happened in the Great Depression during the Herbert Hoover years, between 1929 and 1933.  The result was a precipitious drop in GDP by 30%.  In the same period, Industrial production fell 47%.  Serious deflation also occurred: wholesale prices declined 33%, with debtors still obligated legally to pay loans taken out when the price level was much higher (and hence money incomes and wages).  As for unemployment, it fell by almost a quarter by the time FDR came to office in 1929. 

To grasp just how severely harmful these sharp declines were, consider what the worst recession in the US since then caused by comparison. 

That was in 1981-1982.  Real GDP fell only 2%; the unemployment rate rose to about 10%; and instead of deflation, prices continued to rise . . . at, please note, a much slower rate than before the recession, which was the reason the Federal Reserve clamped down severely on the money supply and hence interest rates that quickly caused the short recessionary period.  Fortunately, inflationary expectations quickly subsided during the recession.  Simultaneously, the large federal deficit caused by the Reagan tax cuts then brought the country quickloy out of the downturn . . . although, once steady GDP growth and prosperity returned, the deficits kept growing rapidly. 

The Longer-Term Outcome Here: An Important Digression with Current-Day Implications

To repeat, the longer-term outcome of these new federal deficits that started in the Reagan era, in which national debt tripled in 8 years? 

Well, just this: these rising federal deficits were no longer countercylical, but structural; and they continued to grow throughout the Reagan years, those federal deficits, and during the four years of Bush-Sr.  Only in the Clinton era did the structural deficit stop growing faster than GDP; eventually, in the last three years of the 1990s, it turned into a surplus . . . only, of course, for the Bush-W tax cuts to initiate a new 7 year period of structural deficits.  (The current yearly one, mind you, might turn out to be not just large, but counter-cyclical and help to keep the US from falling into a severe recession.) 

But hey . . .  maybe if we wait for a 4th sequence in the game of cut-taxes-especially-for-the-rich --- say, after the Obama period --- the belief that such tax-cutting will not cause structural deficits but pay for themselves will finally be vindicated, right? 

Don't bet your mortgage on it.

Enter the Libertarian Campaign by Some Economists To Deny There Has Been a New Financial Meltdown and Looming Credit-Crunch 

You'll find it posted at the Marginal Revolution, where the regular invited guest economist, Alex Tabarrock --- feeling slighted by his original post about the "myths" regarding our current credit-troubles --- has tried again.  And just as prof bug left a fairly lengthy comment critical of the original Tabarrock post of two days ago, so he did yesterday when Tabarrock renewed his campaign. 

Click here for the Marginal Revolution thread and prof bug's latest views.  (The most informative comments, a couple of them and long too, were left by a financial expert who posts under the name of "Francois".  Alas, his knowledgeable analyses are marred by a lot of jargon and acronyms and at times hard-to-fathom syntax.)

Today's Buggy Topic

At Carpe Diem, a good econ blog run by Prof. Mark Perry of the University of Michigan --- Perry a libertarian; prof bug not --- prof bug left a lengthy commentary yesterday about the confessions of failure set out by three libertarian enthusiasts, all with past or present posts of great power in the public sphere: Alan Greenspan, our former Federal Reserve chief; John Snow, Bush-W's Secretary of the Treasury from 2003 untili the summer of 2006; and Chris Cox, the head of the SEC since 2005.

Their Confessions 

Each testified at length to the House Oversight Comittee, and each admitted that their beliefs that free financial markets would be self-regulating were misguided or just flatly wrong.  John Snow now wants not just to regulate them anew and extend regulatory oversight to the derivatives and other innovative, unregulated markets --- all policies that would reverse the Reagan-Bush Sr-Clinton-Bush-W initiatives undertaken since 1980 --- but, additionally, wants to have a nationally centralized regulatory head . . . something, presumably, like what happened after 9/11 that led to the creation of Homeland Security.  Only, it seems, with even more control over the sprawling number of uncoordinated regulatory agencies the federal government has at its disposal.

A Second Buggy Commentary

After prof bug left a lengthy set of comments about these confessions by former true-believing libertarians, he was challenged to list the kinds of financial deregulations that he, prof bug, had been referring to.  A long list, systematically analyzed, was the buggy response.

Click here for the Carpe Diem thread.

Today's Buggy Topic

It's found at the Marginal Revolution in a thread that a regulasr visitor to that site, Prof. Alex Tabarrock, posted today (Oct. 22, 2008)--- a libertarian apologia, which fails to do what it sets out: to show that it's government once more that hasn't just screwed up the free-market functioning of our financial system, but in effect created the financial panic that never really existed . . . presumably out of stupidity or self-aggrandizing efforts to impose statist controls.

Click here.

Today's Buggy Topic

Left in the evening of Tuesday, October 21, 2008 at Carpe Diem --- along with a couple of related bugged-out commentaries there --- today's main topic deals with the sorrowful seamy side of the blogging sphere: it's full of economic and political blogs where the faithful gather to have their core belief-systems reinforced, while scorning and attacking heretics, apostates, and non-believers. 

No need to say more.  The commentaries left by the buggy prof are easy to follow.  Click here for the link.

Today's Buggy Topic

As usual, it's about our financial crisis --- today, more specifically, once again about the multiple causes of it --- and as usual, too, it's found at a libertarian econ-site, this time at the Marginal Revolution.  Prof bug, you see, always something of a contrarian . . . and so, given his mental habits shot through with charged emotional content --- impossible to separate in anyone's make-up, not just his --- he finds it easier to knock out a lengthy commentary in scuttling flashes if he's on the attack. 

Needless to add, there's no shortage of  countless human follies and claptrap to lay into daily, maybe even hourly or every minute, that shoot up and swarm all over the Internet . . . not least on the left and on the right.  

The Source 

Click here for the original Tyler Cowen post at his web site, the Marginal Revolution, which summarizes his New York Times article of October 19th, 2008 . . . one in a series of his weekly Times' efforts. 

Click here for the Cowen-initiated thread and prof bug's and others' comments. 

Observe Something Else n the Thread 

Note how Cowen is assaulted by dozens of faithful, Ayn Rand pledge-takers . . . Cowen himself a flexible, open-minded libertarian who has dared to break with the free-market zealots and note that the causes of the current financial meltdown can't all be traced back to governmental policies and regulations.  Nothing like angry, high-pounding ideologues on the rabid warpath when they find their ideological urges are frustrated, once more, by events, is there?

The crackling assaults on Cowen and the few others of libertarian bent who share his flexibility are simple enough to understand: in the eyes of the faithful, they're apostates . . .  fit to be put on the rack and then --- after a series of auto-de-fe expressions of repentance, coerced out of them in the Catholic Inquisitional manner  --- burned at the stake in large number as a warning to other apostates and heretics: not to forget, you understand, those of us like prof bug who aren't libertarian nuts to begin with. 

(For a good, brief summary of how the Spanish Inquisition used torture and forced confessions in its ritual public burnings, click here))

Seem Familiar, This Sour-Grapes Witchhunt-Zeal?

It should.  Tersely put, all these recriminations and rage-driven scapegoating in libertarian-land are reminescent of the furious finger-pointing and teeth-clenching apologia that shook and rattled Marxist cirles after the total collapse of the Soviet Union and the world-wide Communist movement in 1990-91.  The system of full-fledged statist-socialism, you see, was never really socialism anyway.  And, for others, it was a good system but run, you see further, by rogues and demons.   

As for the 100 million killed by Communist regimes after 1918 --- a finding set out authoritatively in a collected scholarly work published in France about a decade ago --- what do they matter compared to the 30 or 40 million native Americans killed by the Spanish and Portugueses in Latin America or the 10 million African slaves shipped to the Americas (with, lest we forget, a similar amount caravan-led to Arab countries and later the Ottoman Empire between 700 A.D. and the late 1800s . . . not to mention the half-dozen Arab states where slavery is still practiced)?  Of course, the 100 million slaughtered by Communist totalitarians have to be matched up with about 300-400 million family members terrorized by the Communists . . . but hey, once again: you can't make an omelette as the French say without breaking some eggs, can you?

Today's Buggy Topic

At Carpe Diem, the data-driven web-site run by Prof. Mark Perry of the University of Michigan --- a libertarian econblog --- a thread was started by Prof. Perry that noted that the super-rich were largely voting for Obama and the garden-variety rich largely for McCain. 

The super-rich were those worth more than $10 million (no total number given). The garbage-collecting rich counted their wealth between $1 and $10 million.  Oddly, prof bug --- who bought a house in Santa Barbara in 1969, only to see its market-value shoot up 12-fold (in 2000-dollars) --- would have to be considered part of the tiny minority of your run-of-the-mill "millionaires."  No matter.  Note too that the survey, which appeared in today's Wall Street Journal, was very limited in number . . . and obviously not a sample survey drawn from the much larger pool of rich and super-rich. 

The Focus of Buggy Comments Left in the Thread Were Elsewhere

In particular, leaving aside the flaws of the survey --- don't want to be too pedantic, no es verdad? ---prof bug tried to add some in-depth historical perspective on the uncommon, maybe even unique, philanthropic tendencies of the American super-rich and rich compared to their counterparts in Europe and Asia.  Note, before you click on the link, that in the middle part of this decade, per capita charitable donations in the US were about $650, as opposed to 1/13th in the EU . . . though the British came in better, around 1/5th the US level. 

Oh, not to forget.  Some of the difference is due to tax deductions for charity, but those deductions exist in some EU countries.  What's more, the large majority of US taxpayers don't itemize their deductions and simply use the standard deduction that ignores charity.

Click here for the lengthy bugged-out commentary at Carpe Diem.

                                      Today's 3rd Buggy Topic

Well, to my surprise, it was originally posted on October 13, 2008, at Carpe Diem, but for some reason --- his perfect right, mind you --- Professor Mark Perry who runs that impressive web site decided to delete prof bug's lengthy commentaries . . . three of them.  No matter.  Here is the relevant middle commentary.  As you can see, it deals with Prof. Perry's original post a few days earlier on the World Economic Forum's selection of the top competitive economies.  What the buggy prof did --- at odds to an extent with Prof Perry's own, well-defended and open-minded libertarian impulses, show that the Heritage Foundation and the Wall Street Journal's collaborative yearly rankings of economies world-wide in terms of economic freedom from government interference --- on several criteria like taxes, regulations, government spending as a percentage of GDP and the like --- do not closely match up. 

More specifically, the findings are ambiguous, and maybe at odds with libertarian impulses.

                            The Buggy Argument Set Out 

1) At the end of an earlier buggy commentary in this Carpe Diem thread about Paul Krugman's Nobel Prize in Economics,, I noted that I personally preferred the less statist US political-economy compared to the more statist economies of the Continental Europeans --- or the highly regulated Japanese economy. Then, noted, I explained why our system was less statist in a good 10 lengthy articles at my web site in 2004 and 2005.

In particular, why we have no socialist legacy on the left in this country, nor --- since the destruction of the landed, slave-holding, and militarized southern aristocracy in the Civil War --- conservative traditions rooted in pre-industrial, pre-democratic feudalism.

.....

2) Still, as I also noted, it doesn't follow that the West European welfare-state systems haven't considerable economic and political achievements to their credit . . . above all (should have mentioned this) the complex welfare-state mixed economy that emerged in Sweden in the early 1930s --- and was emulated everywhere in West Europe (even in Britain until the Thatcher era of the 1980s) --- ended once and for all, it seems, the violent, polarized ideological conflicts between socialism and capitalism of various kinds in Europe.

......

3) Now, as for the concrete economic achievements, here is the quoted query left by Paul, a poster in Mark Perry's thread on Friday (Oct. 10th) where Mark listed the 10 top-ranked economies of the world in terms of competitive vigor . . . the ranking put out each year by the World Economic Forum on the basis of a variety of criteria.
....
Paul's good, left-unanswered query:
"Mark, how does this competitive ranking compare to rankings on economic freedom, e.g. from the heritage foundation, which has the US at 5th in the world in economic freedom"

.....

4) Here's a fact-based, straightforward reply, Paul:.

First: the 10 top ranked economies by the World Economic Forum posted by Mark in column 1, and the ranking in economic freedom by the Heritage Foundation in cooperation with the Wall Street Journal. Click here

.......

5) As you can see, 4 of the top 10 WEF-ranked countries in economic competitiveness are listed by the Heritage/WSJ index as being in the top 10 free economies.

Another 4 are found between 11 and 20 on the econ freedom index.

And 2 --- Germany and Sweden --- are 23rd and 27th.

.....

Click to Continue ----> 

Today's 2nd Bugged-Out Topic

Faithful buggy regulars --- at least two or three of whom, world-wide, must reside outside padded cells in mental hospitals for the seriously disturbed --- might recall that back in late December, 2007, prof bug came back from a long self-imposed sabbatical leave and started up his posts here again with favorable comments about both Barak Obama and John McCain . . . the two candidates he hoped would gain their parties' presidential nomination.  By early summer, he committed himself to the Obama camp in the presidential race itself, and everything that has happened politically since then --- including the McCain selection of Sarah Palin for his veep (a brazen, swaggering ignoramus, who specializes in beauty-contest sound-bites and winks and, to boot, a penchant for lbursts of rabid clapper-clawing demagogy) --- has only solidifed his preferences for an Obama presidency.

A Buggy Challenge and Buggy Reply

At Carpe Diem, the data-driven libertarian web-site run by Prof. Mark Perry of the University of Michigan, prof bug was challenged by a regular poster there --- under the log-in name of QT --- to spell out in detail the reasons for his support for Obama.  Two lengthy prof bug commentaries then followed.  Note that the thread at Carpe Diem is pretty long, and prof bug posted a couple of earlier commentaries that were linked to a few days ago at this site . . . all relating to the well deserved ranking by the World Economic Forum of the US Economy as no. 1 in competitiveness.  It's a rank that the US has held every year except two or three since 1993.

The two relevant buggy posts are down toward the very bottom of that thread.  Click here for the stuff.

Today's Buggy Topic No. 1

A little while ago, prof bug argued at length that any analogies betwseen today's economic troubles and those of the Great Depression era --- including the prospects that we'll end up with like troubles --- were flatly wrong.  Today he continues disputing those analogies, with some specific governmental and policy changes --- including international cooperation financially to deal with the financial crisis --- that have emerged since 1940 and would buffer and counteract the impact of a serious recession. 

No need to say more.  Click here for the two lengthy buggy commentaries on this subject, posted originally at Carpe Diem --- the libertarian web site of Professor Mark Perry of the University of Michigan.

Today's Second Buggy Commentary

These follow-up comments and analysis were posted at Carpe Diem . . . the libertarian site maintained by a good economist, Professor Mark Perry of the University of Michigan.  They reproduce some of the comments left by prof bug at the Marginal Revolution, a very popular web site run by Prof. Tyler Cowen and Perry's former Ph.D. thesis-superviser; but those comments at Carpe Diem range far more widely, and are intended to elicit some reactions from Professor Perry's libertarian followers.

Click here for the follow-up comments on Krugman, his trade theoretical work, his Nobel prize, and American industrialization in the 19th and early 20th century behind considerable trade protection . . . with the Republican Party until the post WWII era the bedrock of protectionist sentiment in America. 

Today's Buggy Topic

As usual, it's set out at either Carpe Diem or The Marginal Revolution in a thread started by the heads of those two libertarian web-sites . . . both of them, Professor Mark Perry of the Univ. of Michigan and Professor Tyler Cowen of George Mason University, very decent to allow the buggy guy to lay out his ideas in typical lengthy fashion.

Today's topic will be found at The Marginal Revolution: click here for it.  You'll find, when you do, that prof bug analyzed Paul Krugman's impressive theoretical contributions to traditional trade theories that won him, deservedly, the Nobel Prize today (October 13, 2008).  And the buggy analysis notes what other posters in that thread  --- including Tyler Cowen's lengthy introductory post --- have omitted . . . some very valuable matters, full of political implications for both trade policy and the populist backlash against globalization these days in the US and elsewhere.

Today's Second Buggy Commentary

Found at the Marginal Revolution --- run by a flexible libertarian economist ,Tyler Cowen --- the bugged out stuf today replies to a short post that started the thread by Cowen.  Among other things, he said categorically that the US recovery from its current financial crisis will be dragged out for a decade . . . the length of time it took Japan to deal with its huge financial and real-estate balloon and bust.

Prof bug disagreed.  Strongly.  There are some similarities, of course, between the two crises, but the differences stand out starkly . . . and much to the favor of the US.  Click here for the original Cowen post and prof bug's rejoinder.

Today's Buggy Topic

The answer is set out a length by prof bug, with lots of data, at Carpe Diem . . . the libertarian web site run by Prof. Mark Perry of the University of Michigan.  Prof. Perry's data-driven posts are always stimulating, whether you agree with them or not.  And when you don't, you know exactly why, and he has been very decent in allowing lots of critical rejoinders by prof. bug. 

Click here for the original Perry post that started the thread, and prof bug's rejoinder. 

An Added Pleasure

After prof bug posted the previous two paragraphs on the buggy site yesterday, one of the diehard libertarians logged onto the thread in question at Carpe Diem and left what "looked" like the most hilarious send-up the buggy guy has ever seen . . . looked, you understand, not read. That's because that libertarian zealot, someone called QT --- Cutie, get it? --- seems without a scintilla of humor and undoubtedly believed the rollicking hokum to the very core of his (her) being. 

QT's Claim?

JFK (John Kennedy) and Bill Clinton --- who had very good economic years in their presidencies --- were really covert Republican presidents in Democratic-drag.  Oppositely, the awful years of Richard Nixon and George W. Bush showed that they were really Democratic Trojan-Horses that whinnied their ways into the Republican citadel.

At which point, thanks to this marvelous Alice-in-Wonderland logic, the historical performance of the US economy under Republican and Democratic presidents since 1948 on 8 different criteria do a down-the-rabbit-hole flip-flop and voila! ...immediately, at the bottom of the tumble, the figures end up inverted in a superior Republican performance.

Wow!

?What next, QT --- I mean, besides the universe now putting question marks at the start of English sentences.

 Well, let's see . . . I know! With a tad change in my DNA, I could easily become Albert Buggy-Einstein, and make even more startling scientific discoveries than the original 2nd-rater 20th century precursor.  And QT, with perhaps more change in his or her DNA, could become overnight Angelina Cutie-Jolie.  Following which changes, Albert-the-Buggy and Angelina the Cutie-Jolie would, by destiny, run into one another in a plush Beverley Hills Hotel, immediately feel uncontrollable urges in the right place, rush to the reception desk, then --- as fast the elevator could carry them to their penthouse suite --- make love that soon, again and again and again, sent the both of them soaring sexually on the emotional level into interstellar space . . . with Albert-the-Bugged-SexManiac carefully showing Angelina-the-Cutie-Jolie (to the 10th power) how to avoid falling, emotionally, into a black hole

Naturally, our star-studded night-in-the-heavens didn't just end the next morning.  Not on your life. 

We would continue to be lovers for decades . . . provided (the hitch you see) Angelina Cutie-Jolie could figure out a way to keep Brad-the-Pitt(s) from donning his Achilles-skirt and the rest of his Ancient World drag-stuff, then waiting in the shrubs at the mansion one night --- all O.J.-like --- and slashing my love and me to little pieces on his driveway after Albert-Buggy drove her home. 

Followed, needless to say, by the trial-of-the-century, in which Brad's lawyers get him off in court by claiming Cutie and Buggy would hurl anti-Ancient Greek slurs that way . . . the two of us, you see, reincarnated Trojan warriors who bore him a grudge or two.

The Moral?

Couldn't put it better than this dilly of a quote:

"To be ignorant of one's ignorance is the malady of the ignorant." --- Amos Bronson Alcott

Today's Buggy Topic

It sets out at great length, with more detail, the analysis that was linked to in yesterday's bugged-out commentary (September 7, 2008).  And like the previous commentary, it was posted originally at another web site, The Marginal Revolution . . . one of the two or three most popular economic blogs on the Internet; and like Carpe Diem, libertarian to boot.  

Click here for the original post in the thread by the Marginal Revolution's economist, Tyler Cowen, as well as prof bug's comments and those of others.

A Second Buggy Topic Today

Yes, not just another bugged-out commentary, but a lengthy second posted comment in the same thread at Carpe Diem, left by prof bug in response to the sheer ignorance that was reflected in the long thread by some other commentators, all libertarian zealots who blame government for almost everything that goes wrong in economic and social life, on how the existing governmental role taken by the Federal Reserve, the US Treasury, and other government agencies to deal with the existing financial crisis --- signed into law last week by President Bush (a free-market enthusiast), after Congress passed the revised economic rescue package --- might just lead to some hyperinflation(!) of the sort, these zealots claimed, that flared in the Weimar Republic and led to Nazism(!).

The Rejoinder

Prof bug responded.  He set out a lengthy analysis of the causal chain that led to the first real German democratic system --- which emerged in late 1918 after defeat in WWI and lasted only about 14 years in a Nazi takeover --- and showed that the hyperinflation was over in 1923 . . . followed by six years of the Weimar republic's "golden age" of prosperity and stability.

It was the Great Depression, chief and foremost, that let the Nazi party to grow from 2.6% of the vote in the 1929 to 33% in November 1932.  Two months later, conservative elites in the political world, financial sectors, and big business --- along with the officer corps --- maneuvered to bring Hitler to power, thinking they could control him for their own political ends.  They were wrong.  In the March 1933 election that Hitler called for a few weeks after his appointment as Chancellor by President Hindenburg (the top military officer in WWI and widely popular), the Nazis got 44% of the vote and soon ended the collapsing Republic, suspended all civil liberties, and established a Nazi dictatorship . . . followed by massive rearmament and a German welfare state for the masses, with vast Jew-hating propaganda aimed at preparing the Germans for total warfare to conquer first Europe and later the world. Heute Deutschland! Morgen die Welt!  And Jews --- about 1/2 of 1.0% of the German population --- were said to control simultaneously Communist Russia, the British empire, and Wall Street.

The Wider Repercussions of the Great Depression

These are set out carefully in the buggy comments.  By 1939, only the tiny Scandinavian countries --- along with tiny Switzerland, tiny Holland, and tiny Belgium --- were solid and stable democracies.  All the new ones --- Italy (Mussolini in 1922), Spain, Portugal, Nazi Germany, and the new East European countries --- had all seen their shaky democratic systems collapse under the pressures of the Great Depression, class- and ethnic-conflicts and hatred, and extremist political polarization, with militarized or fascist or Nazi regimes in place.  (Tiny Czechoslovakia, stable but with a disgruntled and tiny German minority in its borders that Hitler exploited, was abandoned by France and Britain and the Soviet Union at Munich in September 1938, followed a few months later by outright Nazi conquest . . . the prelude to WWII.).  Further to the east was the mass-murdering gulag slave-labor system of Stalinist and Communist Russia.

That left two large democratic countries in West Europe: Britain and France. France, however, was torn in the late 1930s by polarized politics and class-animosities, and --- despite its mighty military on paper --- was quickly defeated by the Nazi Germans in May and June 1940.

The Modern Democratic Welfare-State

That was the benign longer-term consequence of the Great Depression, initiated in its midst by the Swedish Social Democrats.  Alarmed by what they saw happening all over Europe, one democracy falling after another to right-wing extremist movements, they reached an historic compromise with the Swedish big business and financial sectors (along with small businesses).  They would give up their ultimate socialist goals of nationalizing industry in return for a large government role to stabilize the battered economy and set up what soon emerged as the modern welfare state.  Even today, 75 years or so after this historic compromise, big Swedish industry and virtually all the business sectors are still in private hands.

After WWII, every European country in West Europe followed the Swedish example . . . even Britain.  And, going back to the New deal of FDR, to an extent in the US . . . historically a country with no socialist traditions on the left or statist-Conservative of the pre-democratic, pre-industrial sort that flourished in Europe.  And, of course, the new former Soviet-ruled members of the EU in East Europe have a similar mixed-economy, with the US --- even in the Bush-W era --- moving to reassert government regulation over most of the financial world in this country, along with an ever larger role for government spending.

Click here for the buggy commentary.

Today's Initial Topic

It's set out clearly in the subject-title for the current buggy commentary, and you'll find it posted at Carpe Diem, where prof bug agrees in part with Prof. Mark Perry's liberrtarian views about the culpability of certain government policies --- above all, in this case, the enthusiasm of both the Clinton and Bush-W administrations to expand house-purchases to millions of Americans . . . with, in the upshot, Fannie Mae and Freddie Mac buying and selling a large number of house-mortgages whose credit-standards had been lowered by these two private, but government-backed, agencies in the mid-1990s Clinton era.

What Freddie and Fannie Do

These shaky mortgages were set up and financed originally by banks and other mortgage-dealing financial enterprises, especially once they became aware of the relaxed lending standards and new credit-lines to the US Treasury that the two agencies had.  Called sub-prime mortgages because Fannie Mae and Freddie Mac would buy or insure the mortgages from the banks and other mortgage-dealers that were written as a contract with the original house-buyer at about 1/4%  to 1/2% lower than prevailing rates.  These sub-prime loans were aimed at low-income families who otherwise wouldn't be able to afford a house.  The relaxed credit standards were further expanded to reduce or even ignore the need for any downpayment. 

You'll sometimes see the term --- until recently! --- GSE, or government-sponsored enterprises, applied to Fannie Mae and Freddie Mac. 

They don't themselves originate mortgages, remember. 

Instead, they buy and insure them from the original banks and other lenders of long-term house-loans.  Some of these mortgages they hold themselves, deriving money-income from the fees they charge the banks and mortgage-dealing lenders.  Lots of them, though, Fannie Mae and Freddie Mac "securitize": they bundle them together in MBS or mortgage-backed securities and sell them to other financial enterprises: investment banks, other commercial banks (which have investment affiliates under law since 1999), hedge-funds, sovereign (government-owned foreign) funds, mutual funds, credit agencies, insurance firms like AIG, and "virtual" banks . . . the latter not having any more of a brick-and-concrete location than Amazon does. 

In This Way, House Mortgages Here and Abroad Entered the Derivative Secondary Financial Markets

Of course, the two agencies ---- remember, ostensibly private but backed by the US Treasury and susceptible to political pressures (in this case, to extend "risky" housing mortgages to low-income families without the necessary credit-standards, income, or down-payments that most housing mortgages required --- these two agencies weren't the only buyers and sellers of mortgages in the derivative secondary markets, let alone the only ones creating new and large repackaged mortgages.

To clarify quickly, about a half of the $12 trillion worth of housing mortgages active in the US today are owned or guaranteed by the two agencies.  The remainder is in the hands of totally non-governmental agencies . . . at any rate in this country (some may be owned by sovereign foreign-government funds, most likely the Chinese and Arab-oil rich countries governments.  And of course similar mortgage-extension was going on in the EU and elsewhere during the last decade, a large but unknown percentage of which ended up as CDO's too: collateralized debt obligations, with the housing (Mortgage Backed Securities) the biggest chunk world-wide, with the sub-primes and other risky house-mortgages slapped together and sold and resold and credit-swapped in the process in long-reaching, non-transparent, non-regulated, non-accountable global chains of creditors and insurers linked together in opaque ways. 

Still, Fannie Mae and Freddie Mac --- essentially bankrupt in terms of liquidity --- have recently been put under government conservatorship and will play a big role in the new government rescue package.  (They may soon have to take over another 25% of the housing mortgage-market --- hence a total of 75% of the $12 trillion mortgage-based total --- if the economy enters a serious recession.)

The Wider Issue at Carpe Diem.

A libertarian, Prof Perry --- who believes free markets would work with near-perfection if governments didn't muck things up (the core-belief of all libertarian economics) --- stops with government and government policies as the only culpable causal agent of the global financial crisis . . . now risking, on top of everything else, a huge confidence-crisis that is choking up credit lending even between banks, let alone between banks and businesses and households. 

The buggy prof, no libertarian --- he has always supported deregulation in industry and non-financial markets, but always been suspicious of extending it to financial institutions because of what he learned early on about the financial system in the 1930s Great Depression.  More general, prof bug not only noted the role of market-oriented institutions --- poor credit-analysis, a failure to manage risk properly (all investments are risky and volatile to one degree or another), a desire to make a quick buck, a shaky belief the risks could be managed or passed down the line to unknown other financial agents in repackaged deals, extremely high leverage, and so on --- but insisted as a general methodological matter that few complex events or behavior, even by individuals, can be reduced to just one cause.  Social scientists, not just economists, are always trained to look for multiple causes, sort through them with the evidence, and weight them in terms of significance.  If possible, statistical models do this.  If the behavior or events can't be easily modeled statistically, good case-studies --- using a cross-comparative or historical perspective (or both, along with whatever quantitative data can be pinned down and analyzed) --- are needed.

Enough Said:

Click here for the original Perry comments and the bugged-out reply.