Naomi Klein on Wall Street Cronyism and “Free Market” Fundamentalism

There is a really great, long interview of Naomi Klein at wowowow.com by Joan Juliet Buck:

JOAN: And can Obama provide the real deal?

NAOMI: What gave me hope was that when the economic crisis hit, Obama got serious and his analysis became more concrete. It’s really worth remembering that he started winning the election when Lehman collapsed and he started putting the ideology of Reaganism on trial. He started saying, “This economic crisis is the result of the policies of deregulation and trickle-down economics that have dominated this country.” But he said, “for the last eight years.” That was wrong. And that was part of the problem.

JOAN: Because it’s the last 30.

NAOMI: It’s the last 30 and, you know, that was a piece of intellectual dishonesty that I think has cost us dearly. That was a good electoral line because we all wanted to be able to blame it all on Republicans, because that was a much more sellable election slogan. “Everything was fine in the ‘90s when you had Clinton and we just need to get back to that.” And what that did was gloss over the absolutely central role that Robert Rubin and Larry Summers played in creating this crisis. And lo and behold, they’re back with their protégés in tow. There’s really a shared responsibility, and it’s an argument for more intellectual honesty, more principled stands and fewer strategic calculations. What worries me so much is that it’s fine for politicians to be strategic. But social movements should be principled. They shouldn’t always be thinking about what’s the right strategy, what’s the sellable message, what’s the talking point, because then you end up in a situation like this. Larry Summers is back. Larry Summers was given a pass during the entire election.

Ms. Klein makes some very deep observations on the dynamics of politicized mass movements:

JOAN: Just start with the Icelandic protests. Why are there no protests in the streets in America?

NAOMI: This comes back to the problems of hero worship. It’s hard to protest your hero. But it’s more than that. It’s also that the virulence of the Right in the United States is so frightening and the problem is that it is the merger of the extreme far right and large corporations, in the form of media conglomerates. So Glenn Beck on Fox or Lou Dobbs on CNN have these unbelievable megaphones to attack Obama, and to spread fear, which makes reasonable people feel that their main political role is to defend the Obama administration against this very frightening right-wing onslaught. It’s understandable but it’s also hard to do that while being in the streets protesting that administration’s bailout – which is what’s happening in Britain, which is what’s happening in France, what’s happening in Italy. I think the problem in the U.S. is that many people who were part of the campaign to get Obama into power now see their role as being kind of an unofficial arm of the administration, with some groups even taking talking points from the White House. It’s a recipe for political failure, because what actually makes space for Obama to do more of what we want him to do is to make him look less radical, by being more radical ourselves.

This is a very acute problem in two-party systems like the one in the US. It’s very hard to critique one party without the fear of playing into the hands of the other one.

I am totally dumbfounded at the lack of campaigning for a true multi-party political system in the US. What makes the idea such a non-starter? Are Americans just so used to the system that they have that they don’t even consider any alternatives?

It is natural that neither of the two power parties are going to embrace a multi-party system. Maybe this crisis could act as a lightning rod for a new multi-party revolution, as it becomes ever more clear that both parties are in the pockets of moneyed interests: employers for Republicans and Wall Street for Democrats.

Naomi presents some of the issues as a gender bias.

NAOMI: Brooksley Born [chairwoman of the Commodity Futures Trading Commission], who, during the Clinton administration, blew the whistle on the unregulated derivative industry and wanted to regulate it like any other banking sector. For her prescience she was bullied by Rubin and Greenspan and Summers, who’s actually the enforcer of the three. He was the one who called her. They argued that just by talking about the need to regulate derivatives, she was going to create market panic. So not only wouldn’t they consider it, they wouldn’t even let her talk about it. She saw this whole crisis coming. You often hear this: “Well, no one saw this coming.” And that is such a reflection on who these men believe is someone. But there are so many people who saw this coming, and they’re considered nobodies. The only way you get to be a somebody is if you agree with them. Brooksley Born saw it coming. Elizabeth Warren has been an incredible watchdog. Sheila Bair, chair of the FDIC, also had a much more principled and ethical vision of what the bailout should be, in arguing that they should be offering direct aid to homeowners, as opposed to this top-down bailout. I feel like this gender split is not coincidental. There’s a need for more of a feminist analysis in understanding how we got here.

I think Ms. Klein exaggerates the issue a bit. There were a lot of men who saw this coming. But in some cases the men were not tossed aside as easily as the women.

I do think that it is a lot easier for men to leverage their positions. It is not as easy for women to get the benefit of the doubt. It is usually men who are treated with “for his position, he has to know what he’s talking about”. Just look at the deification of Alan Greenspan. If he had been a woman, his speeches would have received a whole lot more criticism.

Somehow, I also think that women are more readily accepted as having rigidly ideological views, even when they make great and reasonable analysis based on facts and research. It is also a lot more easy to brush aside pessimistic analysis from a woman as just instinctive worrying, which is seen as a feminine trait and a weakness of mind in the irrational macho culture that is still dominant, especially in the financial world.

The dominance of macho culture and euphoric over-optimism is quite understandable in modern finance. People with normal attitudes to risk simply can not function in an industry so clearly based on an unsustainable bubble. It’s pretty much a case of self-enhancing adverse selection. At the start of an irrational boom, people who see it as such are pushed aside or drop out voluntarily, which just makes the boom stronger.

Ms. Klein presents some unfounded opposition to market-based solutions to climate change:

And at this point, I think there’s a lot of rightful cynicism about the Kyoto protocol because the whole question of "How are we going to respond to climate change?" was entirely infected by market fundamentalism. Bringing it back full circle to where we started, the ideas that have dominated for the past 30 years have utterly shaped the environmental debate during the Kyoto era. So the idea was to always find “market-based solutions” to climate change, which meant that we couldn’t really legislate, and everything had to be creating market incentives for the private sector to solve the problem for us. And I think that’s a much harder sell today in the context of people rightfully losing faith in the ability of the market to solve our most pressing problems. So I think you’re going to see a lot of very different, non-market-based solutions being proposed ahead of the Copenhagen Summit, which is in December 2009.

There is nothing wrong in principle in market-based solutions, but markets have to have clear, fair and binding rules to work properly. Solutions that would be based on unregulated markets obviously don’t work, but a well-thought-out, competitive, non-oligopolistic market solution would not be against the goals of social development.

It is truly unfortunate that people are losing their faith in the market. What they really should be losing their faith in, is the concept of “free market” as practised on Wall Street. Really free markets have strong and fair rules in effect that everybody is bound to. The modern “free market” is a mix of the law of the jungle, with a firm and unfair control from above by a semi-private block of financial interests, represented by central banks.

Principled opposition to markets is like opposition to the rule of law, because of bad laws. Anarchy is not a solution. The progressive movement is badly hurt by people who propose price controls as a way to social goals. There is really no alternative to the market in some aspects of human behaviour. We should instead be focused on the rules that govern the market.

The “free market” fundamentalism as teached by the Chicago school of economics is a perversion of the ideas of Adam Smith. David Korten wrote in his book When Corporations Rule the World:

These practices were strongly condemned by Adam Smith in The Weath of Nations. Smith saw corporations, much as he saw governments, as instruments for suppressing the beneficial competitive forces of the market. His condemnation of corporations was uncompromising. He specifically mentioned them twelve times in his classic thesis, and not once did he attribute any favorable quality to them. Typical is his observation that: “It is to prevent this reduction of price, and consequently of wages and profit, by restraingin that free competition which would most certainly occcasion it, that all corporations, and the greater part of corporation law, have been established.”

It is easy to forget, that the world of Adam Smith was very much different from ours. Back then, it was the government that had actively granted very profitable monopolies to favored corporations. Now, corporations mostly gain monopoly positions by utilizing the lack of willingness to enforce regulations that would limit their growth in size.

Smith was against monopolization, not all government action. He was not an anarchist. He was all for sensible regulation of finance, for example. In the current business atmosphere, Adam Smith would have strongly supported anti-trust legislation, which has not been properly enforced in a long time.

Economist Dean Baker recently made a good point about incorporation being a privilege:

Finally, the article asserts that: "certain very large companies must organize as separate entities that are taxed twice -- on profits and shareholder dividends." Actually, it is not true that any business "must" organize as a separate entity. Certain very large businesses choose to incorporate because they find that the benefits that the government gives them by granting corporate status are so great as to make it worthwhile to pay the corporate income tax.

Market regulation is not inherently antithetical to freedom, as long as the same rules apply equally to everybody, and no special favous are provided. The rules of the markets should be arranged so that there is a price to be paid for all actions that have adverse effects on others. Incorporation is itself an act by the government, extracting a cost from other market participants in the form of reduced competition.

But markets are ultimately made of people. Markets do not have a soul of their own, even if it sometimes seems like that. And people can not be truly free without a fair set of rules to protect their freedom. The modern “free market” fundamentalists are actually nothing but market anarchists.

The Bubbles Are Piling Up

It seems that a Kazakh bank might be the first one to collapse from losses that originated in the commodity bubble.

New York Times: The largest bank in the Central Asian nation of Kazakhstan, whose economy soared when oil prices were high, announced on Friday that it could no longer repay $11 billion in foreign debt.

The bank, BTA, said it would pay only interest to foreign creditors, who lavished the country with loans during the commodity boom. The move underscored the growing financial instability in countries all across the former Soviet Union.

[...]

BTA had been wobbly for some time. The Kazakh government partly nationalized the bank in February. That was taken as a sign that the bank’s debt might be covered by a sovereign guarantee, though even at the time government-appointed executives said they were studying ways to restructure foreign debt.

I have long been suspecting that the dangers of letting large banks fail have been much exaggerated, especially compared to the burden that is caused by governments picking up the tab. Hopefully the economy of Kazakhstan will not completely collapse.

The losses from the housing market and structured credit bubbles haven't been cleared. Yet we are already witnessing huge losses from the commodity bubble.

Since the 60's the US has seen an ever more rapid sequence of bubbles: conglomerates, junk bonds, real estate, tech stocks, housing, structured credit, commodities, and finally, government bonds. When the accumulation of foreign dollar reserves reverses itself, the government bond bubble will come to an end. That might actually be pretty close now.

It seems that the era of serial bubbles is ending in bubbles that are ever more short in duration, until they can no longer be “fixed” by creating a new one.

When looking at the whole trend, I can't help but to think that the biggest bubble of all has been of the standards of living in the developed world. Western standards of living were raised to unsustainable levels by relying on undercompensated use of colonial resources, until the 1960's. After the colonial period, a massive accumulation of debt has been used to delay the inevitable balancing of global consumption patterns. All the other bubbles are just minor manifestations of this all-enclosing bubble of debt.

Pain in the Fertilizer Supply Chain

Bad news on global agricultural output:

The Globe and Mail (Canada): Farmers across Canada, the United States and elsewhere are ... holding off on fertilizer purchases in the hope prices will fall. Their collective action has sent fertilizer sales into an unprecedented nosedive and pummelled the bottom lines of agriculture giants like Potash Corp. of Saskatchewan Inc., [POT-T]Viterra Inc., Bunge Ltd. and Terra Industries Inc.

[...]

Fertilizer dealers have been hit even harder and a few small stores in Canada have gone out of business.

"It's not good," said Bob McNaughton, who runs Sylvite Agri-Services Inc. in Putnam, Ont., which has six locations. He knows several stores that are facing financial trouble. "They're gone, or will be."

Many stores bought potash last year at close to $1,000 a tonne, he said. The price has fallen to around $800, which many still believe is too high. Even if a retailer can make a sale, Mr. McNaughton said the owners have to eat the loss.

"Everybody was expecting a mind-blowing, record fall season and it was a bust," said David MacKay, executive director of the Winnipeg-based Canadian Association of Agri-Retailers, which represents about 1,000 fertilizer dealers.

It seems that retailers will rather let their stockpiles lay still than sell at a heavy loss. I have a radical suggestion: If the producers want to see potash move in the market, they should accept that the super high prices of last fall were a mistake. They should make temporary offers of retrospective rebates to retailers, payable against retail sales, to encourage reductions in stockpiles.

Potash chief executive officer Bill Doyle said farmers are playing a "dangerous game" that will have consequences.

"This level of reduction has never been seen before," he told analysts on a conference call. "No one can state precisely what the impact will be on the world's food supply, immediately or over the longer term. But we know with scientific certainty that nutrient underapplication damages both crop yields and quality."

Mr. Doyle said farmers in Brazil and Argentina are already witnessing the fallout. They used far less fertilizer on their crops and are now seeing production yields fall by as much as 20 per cent.

He said fertilizer sales to North American farmers have dropped as much as 86 per cent but farmers still plan to plant the same amount of corn, canola and other crops as last year. If farmers around the world follow the same path, global food supplies will be affected. "After two record world crops in 2007 and 2008, the year 2009 could be a completely different story," he said.

No, it’s the potash producers who are playing a dangerous game by trying to leverage their oligopolistic market status to extract excessive profits at the expense of the whole population of the earth. Farmers don't have the money.

These kinds of “pile-ups” in the supply chain are an unfortunate side effect of unregulated speculation on essential commodities.

Tom Toles on Waterboarding Iraq–al Qaida “Links”

Tom Toles just got it:



False confessions flow naturally from torture. I think Tom just summed it up perfectly. It's a feature.

The Seducing Simplicity of Gaussian Models

This is a great illustration from Paul De Grauwe, Leonardo Iania and Pablo Rovira Kaltwasser of the dangers of using the wrong probability distributions in a statistical model. In eurointelligence.com (ht Yves Smith, emphasis is mine):

October 2008 was certainly a spectacular month in the stock markets. Large daily changes occurred that surprised most investors. Yet, although many investors had not seen such wild gyrations of stock prices for a long time, there was a general sense that this had happened before.

Those of us who studied modern finance theory, however, were truly astonished by the sheer improbability of the events occurring in the stock markets during that fateful month. One of the basic assumptions used in almost all our finance models is that returns are normally distributed. These models are widely used to price derivatives and other complex financial products. What do these models tell us about the probabilities of the events that occurred in October?

The following table gives an answer. We selected the six largest daily percentage changes in the Dow Jones Industrial Average during October, and asked the question of how frequent these changes occur assuming that, as is commonly done in finance models, these events are normally distributed. The results are truly astonishing. There were two daily changes of more than 10% during the month. With a standard deviation of daily changes of 1.032% (computed over the period 1971-2008) movements of such a magnitude can occur only once every 73 to 603 trillion billion years. Since our universe, according to most physicists, exists a mere 20 billion years we, finance theorists, would have had to wait for another trillion universes before one such change could be observed. Yet it happened twice during the same month. A truly miraculous event. The other four changes during the same month of October have a somewhat higher frequency, but surely we did not expect these to happen in our lifetimes.

Trying to explain these deviations as just a few outliers in an otherwise well-behaving Gaussian process just doesn't cut it. A simple visual comparison of these time series is enough:

Figure 1: Dow Jones Industrial Average 1928-2008

Figure 2: Random Normal Process

The “Tortuous” Search for Iraq-al Qaida Links

Jonathan S. Landay of McClatchy Newspapers drops a bomb:

The Bush administration applied relentless pressure on interrogators to use harsh methods on detainees in part to find evidence of cooperation between al Qaida and the late Iraqi dictator Saddam Hussein's regime, according to a former senior U.S. intelligence official and a former Army psychiatrist.

Such information would've provided a foundation for one of former President George W. Bush's main arguments for invading Iraq in 2003. In fact, no evidence has ever been found of operational ties between Osama bin Laden's terrorist network and Saddam's regime.

So detainees were tortured while trying to make them speak of a non-existing issue. So much for the ticking time bomb scenario. This gives whole new meaning to the original source for the title phrase of this blog. “Go massive” indeed.

Collateral Damage and Force Protection

Tom Engelhardt writes thoroughly in TomDispatch.com about the deaths of civilians in US operations in Afghanistan and the various approaches for handling the cases by the military brass.

Admittedly, there's been a change in the assertion/repeated denial/investigation pattern instituted by American forces. Now, assertion and denial are sometimes followed relatively quickly by acknowledgement, apology, and payment. Now, when the irrefutable meets the unchallengeable, American spokespeople tend to own up to it. Yep, we killed them. Yep, they were women and kids. Nope, they had, as far as we know, nothing to do with terrorism. Yep, it was our fault and we'll pony up for our mistake.

This new tactic is a response to rising Afghan outrage over the repeated killing of civilians in U.S. raids and air strikes. But like the denials and the investigations, this, too, is intended to make everything go away, while our war itself -- those missiles loosed, those doors kicked down in the middle of the night -- just goes on.

[...]

But let's consider here just one recent incident that went almost uncovered in the U.S. media. According to an Agence France Presse account, in a raid in the eastern Afghan province of Khost, the U.S. military first reported a small success: four "armed militants" killed.

It took next to no time, however, for those four militants to morph into the family of an Afghan National Army artillery commander named Awal Khan. As it happened, Khan himself was on duty in another province at the time. According to the report, the tally of the slain, some of whom may have gone to the roof of their house to defend themselves against armed men they evidently believed to be robbers or bandits, included: Awal Khan's "schoolteacher wife, a 17-year-old daughter named Nadia, a 15-year-old son, Aimal, and his brother, who worked for a government department. Another daughter was wounded. After the shooting, the pregnant wife of Khan's cousin, who lived next door, went outside her home and was shot five times in the abdomen..."

[...]

All of this was little more than a shadow play against which the ongoing war continues to be relentlessly prosecuted. In Afghanistan (and increasingly in Pakistan), civilian deaths are inseparable from this war. Though they may be referred to as "collateral damage," increasingly in all wars, and certainly in counterinsurgency campaigns involving air power, the killing of civilians lies at the heart of the matter, while the killing of soldiers might be thought of as the collateral activity.

Pretending that these "mistakes" will cease or be ameliorated as long as the war is being prosecuted is little short of folly. After all, "mistake" after "mistake" continues to be made. That first Afghan wedding party was obliterated in late December 2001 when an American air strike killed up to 110 Afghan revelers with only two survivors. The fifth one on record was blown away last year. And count on it, there will be a sixth.

[...]

Let's for a moment assume, however, that our safety really was, and remains, at stake in a war halfway across the planet. If so, let me ask you a question: What's your "safety" really worth? Are you truly willing to trade the lives of Awal Khan's family for a blanket guarantee of your safety -- and not just his family, but all those Afghan one-year olds, all those wedding parties that are -- yes, they really are -- going to be blown away in the years to come for you?

Tom correctly identifies the huge costs of trying to obtain maximum safety. Unfortunately he misses one important aspect of safety in war that plays a very important role in actually promoting the deaths of innocent civilians: force protection.

Force protection has been put into a prime position in the list of priorities for the US military, ever since the mistaken perception that the Vietnam War was lost for the loss of morale at home. Troops are trained to shoot first and ask questions later to avoid potentially hazardous situations that could be triggered by the extra few seconds or minutes that would be needed to adequately asses the threat. This is well highlighted by the case of the cousin of Awal Khan mentioned in the quote above. She most probably received five bullets in the abdomen “just in case”, simply to protect the US troops involved from even theoretical risks.

Overreliance on air power is the most awful measure of force protection. Air raids are safe for the military, but disastrous for the civilian population in anti-insurgency warfare.

This is simply wrong. Soldiers should be bearing the risks to protect the civilian population, not engaging in reckless endangerment and voluntary manslaughter on a massive scale. In this case, it is not even a case of enemy civilians, but the very civilians that the soldiers are supposed to be protecting.

Giving the safety of soldiers priority above that of the civilian population is not only wrong, but stupid as well. It unnecessarily enrages the population and enhances the popularity of the insurgency. If US soldiers are not ready to risk their lives in protecting foreign nationals, they should not engage in wars of “liberation” in the first place.

See also my post from October 2007: “Human Terrain Teams and Dehumanization of Civilians”.