Replacing Consumerism

Lemme see if I can unwind the financial crisis in a bit more of a straightforward fashion. This is what happened in the US, at any rate:Step 1. An enriching developing world - mostly China - dramatically increased demand for investments. They had a bunch of new money and needed someplace to grow it. The US financial markets expanding something that was actually fairly old - "collateralized debt obligations", a way of selling slices (or "tranches") of existing mortgages. Mortgages are a kind of investment, you see, because you get paid back with interest. Better yet, they're "collateralized", or secured with an underlying, valuable physical asset - the land and house the mortgage is for.Step 2. The inflating housing market meant that you could keep making new mortgages and slicing and selling them, and the inflating price of homes meant that relatively few people would have trouble making good on their mortgage - if they couldn't keep up, you could take the home and sell it at a profit because its equity value was increasing. An industry emerged of mortgage brokers, who loaned money and then turned around and sold those mortgages to investment firms, who sold those to all the people who were looking for investments.Bad Incentive 1: If you're not the guy who has to be paid back, you don't really care about the actual risk of the mortgage borrower. What you care about is presenting evidence to the mortgage buyer that your mortgages are low risk. A lot of mortgage brokers did this by flat-out lying on the applications, convincing poor credit risks to take loans they probably couldn't have paid back, and actually buying off ratings agencies to give their mortgages AAA rating - a rating level that meant that certain investors, who are legally obligated to make only the safest investments (like the people who manage pensions), could purchase these CDO's. Some of these risky "subprime" mortgages were sold to people who didn't have the income to pay a traditional interest rate by making it a "balloon mortgage", where interest rates are low but the mortgage automatically defaults if the equity of the home drops below a certain ratio.Bad Incentive 2: Ratings agencies are paid by the corporations that sell the CDO's, so they have to provide the ratings that their customers want, not the ratings that accurately represent the risk.Step 3. The market for CDO's became so large that there weren't enough mortgages to make enough CDO's. So they came up with a derivative product that pays the same interest rate. In order to keep the AAA rating on these, some financial groups backed them with a special kind of insurance - a "Credit default swap", where an insurance company (like AIG) pays out if a certain portion of the mortgages underlying the CDO that underlies the derivative go into forclosure.Step 4. The housing market peaks. The housing market actually starts to decline and people start to lose equity in their homes. For the most part this isn't that serious, but for a non-trivial number of mortgages this triggers an automatic default. A lot of people just mail in the keys and abandon the property. Banks start accruing all these foreclosed homes that they don't want to sell into a buyer's market, because they're listed on their books at the original sale price and if they take the "haircut", they risk sinking below their capital holdings requirements and getting closed down by the FDIC (that's the US agency that insures bank accounts and closes banks to prevent runs.) Insurance companies like AIG start having to pay out on their CDS insurance policies, which they didn't expect they would have to do.Step 5. The dominoes begin to fall. People are losing their homes because they can't make ballooning payments triggered by the loss of home equity. Banks are losing their shirts because profitable mortgages are being turned into foreclosed homes with one half or less of the original sale value. Banks are going under when they can't keep pretending that their "toxic assets" are actually worth anything. AAA-rated CDO's turn out to be a lot riskier than anyone was made aware and investors are losing their shirts. Insurance companies are paying out trillions because of the credit default swaps they sold on the assumption that the CDO's were not as risky as they turned out to be. A bunch of the banks go under and the other banks stop lending so that they can assess their current risk exposure. Suddenly corporations can't get the money they need to make payroll and other payments. If you're a small business owner, maybe a few of your biggest corporate clients tell you they can't pay you what you're owed for a few months, and your business has to close down. A bunch of people lose their jobs.Step 6. The liquidity trap. It's 2008. Businesses can't get the quick, cheap loans they need to make payroll and pay expenses. People are losing their jobs; everybody knows someone who lost their home or their job or both and most people decide they need to start saving. People start consuming less. This is Keynes "Paradox of Thrift" where everybody decides to pay down their debts at the same time and kill the economy. The US government says, oh, no big deal - these big banks got into this mess, they need to get themselves out of it or go out of business. We don't want to create a moral hazard for being "too big to fail."Step 7. Lehman Bros turns out not to be too big to fail, and it fails. The stock market takes a nosedive and everybody freaks the fuck out. Congress passes an emergency measure to authorize many trillions in free loans to Wall Street to prevent any more mega-bank closures. Obama is inaugurated. He tries to get a stimulus through Congress to offset the massive decline in aggregate demand and forestall a depression. It halfway works because he gets about half the stimulus we needed, and the economy was already way worse than they realized.Step 8. The present day. Banks have tons of "toxic asset" homes that they're trying to foreclose on, frequently by illegal means. Aggregate demand is recovering, but only as fast as it was originally growing - we need extra growth in GDP to catch up to where we should be. Unemployment remains high because businesses don't want to create new jobs when demand is depressed.tl;dr: A bunch of people bet on housing prices going up and they didn't; a lot of other people bet on those first people being right and they weren't. A lot of people were sold mortgages they couldn't pay but didn't know they couldn't pay. A lot of those mortgages were sold to people who didn't know that the mortgage holders couldn't pay. The ratings agencies were paid (paid off) by the people selling the investments they were supposed to rate. A lot of people lost their jobs, lost their homes, or knew people who lost both so they decided to spend less and save more. When people spend less, a lot of people lose their jobs. That's where we are today.

Well, like I say I really see it more as a demand crisis - aggregate demand is down in the US by about a trillion dollars below the trend. That's a big deal! That's a lot of people not buying what they used to buy, not paying for the services they used to pay for, not paying the taxes they used to pay.The appropriate response (in my country) is for the government to make up as much of that demand as it can, and to cut big-ass checks to the states so they don't have to fire policemen and teachers. More debt, in other words. But currently the US can borrow money at a negative real interest rate, so they should take advantage. That's free cash fucking money. Reining in government spending and cutting down the deficit is something you do when the economy is strong, so that it can absorb the loss of government demand. But we did exactly the opposite because we let intellectual children run the show - Bush cut taxes when he should have raised them, so we'd have the freedom to spend spend spend now when its what we need to stimulate the economy.Your country? I don't know; there's issues because you live in a country that doesn't print its own money. Pretty sure Clegg's austerity budget is a bad idea. Is it the least bad idea? I'm not sure.

Well, no, it's because the US savings rate is up - nearly highest its been since the end of WWII.Why is the savings rate up? Because people responded to what they consider economic signals - foreclosures in their neighborhoods, people they know being laid off, closed local businesses - in a locally-rational, globally-destructive way: they stopped spending so much and started saving money. You know, in case something bad happened to them.That's the "paradox of thrift" - we can't all save money at the same time, because consumption is income. Your new "responsible" spending behavior puts me out of work, and now I can't save any money or pay a mortgage because I have no income.You're trying to make it a moral issue - an issue of responsibility - when its really not. Well, not quite true. Certainly there are people who are responsible for the economic crisis: the ratings agencies who were paid off by the owners of the securities they were tasked with rating, the mortgage brokers who committed fraud by misrepresenting the incomes and default risk of the people they were lending to, the foreclosure companies who forged signatures and illegally altered paperwork to push through foreclosures of homes they couldn't even legally prove they owned (and in many cases, didn't!)Few people were genuinely spending beyond their means. That's one of the Great Lies of the recession. Most Americans stayed within the boundaries, spent modestly, managed their equity responsibly. Many of those Americans were taken advantage of by Wall Street - sold worse (and more profitable) mortgages than they were qualified for, sold homes at artificially inflated prices - and the rest of us responded, quite reasonably, by putting away money for future rainier days. It just so happens that that was the single worst thing we could have done in aggregate. Well, we're a net importer I believe, so QE can work in the US. It has already been working. EU countries are in kind of a weird situation where they have monetary union but not political union. Oh, that's right. God, I'm dumb. Why didn't I remember that the UK isn't on the Euro? I was just there last May, WTF is wrong with me?Totally agree that they should drop it into the hands of regular people. We have somewhat the same situation here where banks are sitting on enormous reserves and not lending. There's some infrastructure work going on, some direct payments to state governments (which helps keep state employees in jobs) and there's some evidence that our economy is improving, but it seems like for every three private sector jobs created, we lose one public sector job. So the economy is somewhat stunted by the shrinking public sector. Fair enough, I'm honestly not that up on the UK (as I think I've made pretty obvious via this series of blunders.) And you're right, this is 100% Keynesian. Textbook.

Then you may as well call it "incomeism", and note that the system falls apart as soon as people become content with what they have and stop looking for new or increased sources of income.And, you know, we could certainly move away from a system where people's livelihoods was so dependent on their employment income. We could guarantee people a certain living wage for menial, service employment. We could guarantee them a certain income regardless of their employment. Or we could focus on quality of life and guarantee people a certain level of medical care, apportioned out by need and effectiveness; a certain level of housing; a certain level of subsidized food; and a certain level of income for their retirement when they're no longer as physically capable of working.But somehow I get the feeling that you're not in favor of any of those things. My sense is that you'd prefer it, in fact, if people's livelihoods were more dependent on their incomes, and their incomes were more dependent on their ability to do things that the free market felt was valuable. How do you square the contradiction? I'm curious.

That's good work, Jon! Now I feel like the discussion can actually start.Have you heard of "medium chill"? That might be the sort of "anti-consumerism" you're looking for.

Now that you're doing the work of presenting an argument substantiated by evidence, instead of relying on your interlocutors to present a rotating series of propositions for you to simply shoot down, I find that I'm in more agreement with you than when I started.It's certainly the case that system-wide reform is needed. I think those reforms start with Federally-mandated vacation days, establishing a 36-hour workweek as the norm, decoupling employment from health care, and so on. But I think there's a space for people to normalize the "medium chill" simply by living it. That creates the social pressure from people who want to live that way but see the system standing in their way.I'd be interested to know about reforms that you would support. Earlier I presented a list of progressive agenda items identified as anathema not only by current movement conservatives, but by all mainstream conservative figures since the beginning of the intellectual conservative movement with Burke and Oakeshott. You seem to have embraced them. I'd like to know how you square that sort of thing with your conservativism.

I dunno, I guess. I thought you were one of the "EvC conservatives." There aren't honestly all that many so I feel like I can name you all.Am I full of shit about that? If so I apologize. Love it. (For what it's worth I reuse grocery bags as trash can liners and for the cat litter box. But even so a dime a bag sounds like a great idea. I love that IKEA makes you buy bags.) I think decoupling health care and employment will help with this. Currently companies feel like they have to hire full-time or not at all; there's not really a mechanism to hire a guy for a few hours of work. The fixed costs of adding a new employee mean its easier to just make a current hire work a few more hours. Not me. I cut the cable. Now it's just Hulu and Netflix and a lot less TV time, in general. I don't know how to roll back the advertising, though. It's a bit of a red queen's race - if you're a marketer, you have to expose people to more and more ads just to stand out from the background noise.

I'm sorry, I wasn't trying to introduce a value judgement. Certainly one of the reasons its easier to give more hours to an existing employee than to make a new hire for 8 hours a week is because you get pushback from existing employees who want the hours.I don't think that's right or wrong, I'm just explaining why American companies generally increase productivity by increasing hours worked by existing employees instead of increasing the size of their workforce.I think seniority is a flawed system, for the most part, but I certainly see the fairness problem involved with taking seniority away from workers who very patiently endured the disadvantages of being at the bottom because they knew, eventually, they'd be at the top. Pulling the rug out just as they get there is bullshit, I agree.Like I say, part of the problem with the critique of "consumerism" is that you might just as well call it "incomeism", but looked at it that way, it's no longer about people buying things they don't really need, it's about the money in the pockets of working people.

And I guess I'm trying to tell you that you've been sold a bill of goods. The problem is the sharp decrease in aggregate demand in 2007-2008 that left factories idle, workers unemployed, and people without the income to spend on goods and services.I don't think it's in any way a debt crisis. I think it's a demand crisis.

I agree. Income inequality bids up prices.