Ending the Great Stagnation: Some Practical Issues

I don't know if it's just happenstance or just me but the flavor du jour of a lot of my reading lately has been how we've just got to do something to dig ourselves out from under this debt mountain.   Public, maybe, okay, maybe not, but certainly private--the great ice cornice of mortgage debt that still hangs over our head from the aughts, and the.  Also maybe the fiery implacable demon of student loan debt whose menace is, I suspect, still only beginning to sink in on us.

Yes, well, right, sure.  But as to mortgage debt in particular--just exactly how would you do it?  As a matter of simple politics, we've  observed from the beginning  that there's large  and well-disciplined        view that any effort to assist these deadbeats  borrowers would be about as unpopular as it was to      succor the cigar-chomping gluttons perched atop the mountains of gold merde in the vaults of  Wall Street.

Yes well again.  But suppose we overrode the moral objections and soothed the instrumental fears, just exactly should we do?   Leave debtors in  possession of their homes with lower liabilities?    Write down a whole bunch of principal?  Have a jubilee?

I know the standard way to stick it to the man in creditor's rights is inflation: pay off the expensive debts with inflated confetti money.  Even if that were a good idea, it doesn't seem to be in the offing, so set it aside. I gather also that in the 30s, the Feds did engage in a kind of mortgage relief program where they bought up debt on the cheap, then refinanced with the magic of triple tax free, leaving the debtors in possession under a more tolerable burden (do I have this right?).   I know (this time I'm more sure) that the Supreme Court invalidated a farm bankruptcy law, only to to pirouette around and endorse an almost-indistinguishable statute a couple of years later. Good stories both, but do they matter to us now?

Oh, and there's that little matter of who takes the fall here--who owns those bond we want to write down?  I haven't seen or constructed a comprehensive flow of funds statement here, but I'm thinking of all those pension funds, grotesquely underfunded, scrambling for yield to meet their magical-thinking projections, happy to price as "safe" any borrower with a pulse. The pensions funds. Oh. Right. That would be me.

The Name is Bond...Convertible Bond

And here I thought this was going to be about the bond market:

The Budget and the Debt: Two Good Books

Sometimes good things really do come in pairs.  Last spring I read, back to back, two super introductions to the tax system.  This week, here's another pairing, this on the conjoined problems of budget/debt.

That would be: Red Ink by David Wessell, and White House Burning by Simon Johnson and James Kwak.  They're not identical, neither in content nor in style.  Wessell mostly limits himself to the mechanics of the budgetary process.  Johnson/Kwak cover everything from from the War of 1812 (actually, from 1789) to the beginning of the next ice age.  Wessell, though he has a narrative, still reads a bit like one who makes his paycheck meeting a daily deadline.   Johnson/Kwak remind you that their ideas may have started in the classroom.  But at the end of the day, they're both telling the same story.   That is: we've got a debt problem--maybe not critical today and perhaps not even tomorrow, but bound to come home to roost within the lifetime of a large part of the voting public.  And we can't solve it by icing Big Bird.

You knew that.  You know the litany of conventional responses: we raises taxes, or we cut taxes and solve the problem on the backs and necks of the poor.  Neither book really challenges that framework, although Johnson/Kwak do throw out a couple of points that don't seem (to me) to have gotten the attention they deserve.

One: cutting "government spending" does not necessarily cut spending.  You'd think the voters--particularly in a place like California, where we started capping taxes in 1979--would have figured this out before.  There's  no end of instances out here were voters who rejected the notion of paying taxes for something or other have waked up to discover they have to pay, ahem user fees for the same damn thing. Stuff is not free; if you don't pay for it one way, you may wind up paying for it another. Like I say,  not rocket science.  Surprising we would even need Kwak/Johnson to remind us.

The other is perhaps one step more subtle.   This one addresses the supposed peril of increases taxes--i.e., the peril that as tax increase will destroy jobs.  Grant it: given the right particulars; still the point is that if true, then we have not a tax problem but an employment problem.

At the end of the day, there's probably nothing much in either book not already well known by the conscientious wonk.  But never so well presented.  If I had to read just one, I'd go for Kwak/Johnson, but go ahead and read them both; well worth the effort.

Graeber's Debt

I've just now put down (“finished” might be a bit strong) David Graeber's Debt: the First 5,000 Years . I find myself remembering what Harold Demsetz used to (maybe still does) say of John Kenneth Galbraith: he said "I can't find a testable hypothesis."  Same thing here. This is a highly entertaining read, brimming with ideas—or at least anecdotes that suggest ideas. It's easy enough to get a general notion of what he is up to but you'll play the very devil trying to figure out exactly what it is he is trying to say.

Graeber does have one worthwhile core point that he believes underlies much what he says. In a nutshell, we were born with a sense of obligation; debt emerges from the primordial ooze. All our sense what we owe to others begins there; it may ramify and permutate in a thousand ways but we all emerge from under the same. This is a fascinating and provocative idea, surely wrong in particular but no matter, still worth trying to clarify and understand.

A second fundamental idea is trickier. That is: Graeber seems to be trying to distinguish an older, more humane (?) form of obligation from a harder, more impersonal variety that we might call, for lack of a better name “economic.” This too is an interesting and provocative idea though at this point it is hardly a new one. Indeed, Graeber here seems to be flirting with a modern anthropology that is perhaps as old as Hesiod or Rousseau, if not Marx, saying nothing of so much of 19th and 20th Century anthropology—postulating a “primitive” past which can clarify our understanding and also provide a stage for criticism of the present.

The fact that this sort of thing has been tried before without success is no reason to try it again, but here is where Graeber gets maddeningly slippery. He makes much turn, for example on occasion of creation of coinage—an event that seems to occur simultaneously in various places around the world at, give or take, around 600 BC. Here we encounter, it seems, a new device for imposing state power: impose coins, use coins to collect taxes, uses taxes to build military might, all at the expense—the impoverishment—of “the poor,” particularly the peasants.

This is surely a plausible account of some events in some places at some times but it is far from clear how it fits into the larger story. For example, is he saying that state power creates coinage, or that coinage creates state power? If the former, of course we would like to know what does create state power. If the latter, it might be useful to spell out just how the new “coining empires”differ from other occurrences of human oppression—going back to, say, the rise of an agricultural surplus around, perhaps, 3000 BC. The very fact of an agricultural surplus yields priests, clerks, warriors and slaves, not so? Are we to believe that there is something about these earlier forms that are necessarily more humane than we get in the “coinage empires?”

I'd grant that Graeber's story seems most plausible—and he himself seems most energized—when he is talking about polities that impose themselves on weaker and less sophisticated neighbors—what he seems to have observed in brutally clear form in Madagascar under the French. But this isn''' the only form of debtor-commerce. Yet curiously, Graeber says little or nothing about “ordinary” or “every day” commerce. Indeed at one point he tries to show how a particular kind of exchange-counter is used not in the m market-place, but precisely for non-market transactions—marriage alliances, for example, or compensation for injury. He dismisses the market place, with seeming irony, as women's work. Yes, well, fine, but what is going on the market place? What is this woman's work, and how has it been carried out for all these thousands of years? It's an odd exclusion for a book with so vast a claim to coverage. Yet it's the kind of thing you come to expect from this stimulating, suggestive, yet ultimately exasperating, book.

And by the way, no, I do not repent of what I said the other day.

Private Equity Unveiled

I was having coffee with my bud Ignoto on the patio outside the Palookaville Borders today, in the warm breezes and the spring sunshine.

"Three questions," I posed to Ignoto, who knows much more about this stuff than I do.  "One, is it true that there was a ton of private equity investing between '03 and '07?  Two, can you generalize as to what they spent it on?  And three, isn't it true that they lost a bundle?"

 Answers: "Yes as to one and three" (which is pretty much what I expected).  "As to two--well, let me tell you how private equity makes its money.  Forget about 'undervalued investment opportunities.'  Forget about improved management,' blah blah.  The components are: (a) easy money; and (b) nonrecourse finance.  The banks were desperate to move money; the PE firms are strong enough they can insist on nonrecourse.  So, leverage up on debt, say six-one, and keep what flows throw to the equity.  It's that simple."

Nonrecourse.  I should have though of that.   

Fun fact: The annual budget of the Securities and Exchange commission is about $1.1 billion. Seven top Wall Street investment fund managers--each individually--make more than that.