Posts filed under 'Analysis & Commentary'
Riffing off of Lord Acton’s quote on liberty and good government, I came up with an analogy that was well-received at last month’s inaugural Acton on Tap. In his essay, “The History of Freedom in Antiquity,” Acton said the following: Now Liberty and good government do not exclude each other; and there are excellent reasons why they should go together; but they do not necessarily go together. Liberty is not a means to a higher political end. It is itself the highest political end. It is not for the sake of a good public administration that it is required, but for security in the pursuit of the highest objects of civil society, and of private life. I tried to think of an image or analogy that captured what Acton meant by “good government.” Perhaps not surprisingly, I came up with a sports analogy…
March 14th, 2010
Over at Public Discourse, Acton’s Samuel Gregg has just published a piece about the future of money. The issuance of money, he writes, is often associated with issues of national sovereignty, despite the fact that governments have long abused their monopoly of the money supply. Gregg argues, however, that the role played by mismanaged monetary policy in the 2008 financial crisis may well open up the opportunity to consider some truly radical options for how we supply money to the economy…
March 14th, 2010
Richard Smith, a London-based capital markets information technology manager, was kind enough to provide an advance copy of his review for the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism by Yves Smith, the author of the well-known financial blog Naked Capitalism.
Mr. Smith (real name, and no relation to Yves) helped in the proofing of the copy and fact searches, so he was already well familiar with the text. Perhaps this makes him a not entirely dispassionate source, given the regard that even copy editors can obtain for their associated works. But I thought it was a very nice summary of many of the salient points, and that you would enjoy having the opportunity to read it.
I intend to read the book in order to both learn something, and to be entertained as well. I love reading accounts of this period of time that are both authoritative and well-written, and understandable by the non-expert. Given the author’s performance on her blog, and her detailed industry knowledge and experience, it looks to be a ‘must read’ for those following the financial crisis and its associated developments.
Reading ECONned
By Richard Smith
http://jessescrossroadscafe.blogspot.com/2010/03/guest-post-econned-book-review.html
March 6th, 2010
NPR’s Morning Edition had a touching piece the other day that illustrated how great a blessing business can be, and just how terrible things can be when there’s no freedom to innovate, produce, and create wealth. Chana Joffe-Walt and Adam Davidson of Planet Money put together the narrative of George Sassine of Haiti and Fernando Capellan of the Dominican Republic, “Island Of Hispaniola Has Two Varied Economies.”
February 20th, 2010
The Economics of Calvin and Calvinism
by Murray N. Rothbard on February 18, 2010
John Calvin’s social and economic views closely parallel Luther’s, and there is no point in repeating them here. There are only two main areas of difference: their views on usury, and on the concept of the “calling,” although the latter difference is more marked for the later Calvinist Puritans of the 17th century.
Calvin’s main contribution to the usury question was in having the courage to dump the prohibition altogether.
This son of an important town official had only contempt for the Aristotelian argument that money is sterile. A child, he pointed out, knows that money is only sterile when locked away somewhere; but who in their right mind borrows to keep money idle? Merchants borrow in order to make profits on their purchases, and hence money is then fruitful.
As for the Bible, Luke’s famous injunction only orders generosity towards the poor, while Hebraic law in the Old Testament is not binding in modern society. To Calvin, then, usury is perfectly licit, provided that it is not charged in loans to the poor, who would be hurt by such payment. Also, any legal maximum of course must be obeyed. And finally, Calvin maintained that no one should function as a professional moneylender.
The odd result was that hedging his explicit pro-usury doctrine with qualification, Calvin in practice converged on the views of such Scholastics as Biel, Summenhart, Cajetan, and Eck. Calvin began with a sweeping theoretical defense of interest taking and then hedged it about with qualifications; the liberal Scholastics began with a prohibition of usury and then qualified it away. But while in practice the two groups converged and the Scholastics, in discovering and elaborating upon exceptions to the usury ban, were theoretically more sophisticated and fruitful, Calvin’s bold break with the formal ban was a liberating breakthrough in Western thought and practice. It also threw the responsibility for applying teachings on usury from the Church or state to the individual’s conscience. As Tawney puts it, “The significant feature in his [Calvin's] discussion of the subject is that he assumes credit to be a normal and inevitable incident in the life of a society.”[1]
A more subtle difference, but in the long run perhaps having more influence on the development of economic thought, was the Calvinist concept of the “calling.” This new concept was embryonic in Calvin and was developed further by later Calvinists, and especially Puritans, in the late 17th century. Older economic historians, such as Max Weber, made far too much of the Calvinist as against Lutheran and Catholic conceptions of the “calling.” All these religious groups emphasized the merit of being productive in one’s labor or occupation, one’s “calling” in life. But there is, especially in the later Puritans, the idea of success in one’s calling as a visible sign of being a member of the elect. The success is striven for, of course, not to prove that one is a member of the elect destined to be saved but, assuming that one is in the elect by virtue of one’s Calvinist faith, to strive to labor and succeed for the glory of God. A Calvinist emphasis on postponement of earthly gratification led to a particular stress on saving. Labor or “industry” and thrift, almost for their own sake, or rather for God’s sake, were emphasized in Calvinism much more than in the other segments of Christianity.[2]
The focus, then, both in Catholic countries and in Scholastic thought, became very different from that of Calvinism. The Scholastic focus was on consumption, the consumer, as the goal of labor and production. Labor was not so much a good in itself as a means toward consumption on the market. The Aristotelian balance, or golden mean, was considered a requisite of the good life, a life leading to happiness in keeping with the nature of man. And that balanced life emphasized the joys of consumption, as well as of leisure, in addition to the importance of productive effort.
“The Scholastic focus was on consumption, the consumer, as the goal of labor and production.”
In contrast, a rather grim emphasis on work and on saving began to be stressed in Calvinist culture. This de-emphasis on leisure of course fitted with the iconoclasm that reached its height in Calvinism — the condemnation of the enjoyment of the senses as a means of expressing religious devotion. One of the expressions of this conflict came over religious holidays, which Catholic countries enjoyed in abundance. To the Puritans, this was idolatry; even Christmas was not supposed to be an occasion for sensate enjoyment.
There has been considerable dispute over the “Weber thesis,” propounded by the early-20th-century German economic historian and sociologist, Max Weber, which attributed the rise of capitalism and the Industrial Revolution to the late Calvinist concept of the calling and the resulting “capitalist spirit.” For all its fruitful insights, the Weber thesis must be rejected on many levels. First, modern capitalism, in any meaningful sense, begins not with the Industrial Revolution of 18th and 19th centuries but, as we have seen, in the Middle Ages and particularly in the Italian city-states. Such examples of capitalist rationality as double-entry bookkeeping and various financial techniques begin in these Italian city-states as well. All were Catholic.
Indeed, it is in a Florentine account book of 1253 that there is first found the classic procapitalist formula: “In the name of God and of profit.”
No city was more of a financial and commercial center than Antwerp in the 16th century, a Catholic center. No man shone as much as financier and banker as Jacob Fugger, a good Catholic from southern Germany. Not only that: Fugger worked all his life, refused to retire, and announced that “he would make money as long as he could.” A prime example of the Weberian “Protestant ethic” from a solid Catholic! And we have seen how the Scholastic theologians moved to understand and accommodate the market and market forces.
On the other hand, while it is true that Calvinist areas in England, France, Holland, and the North American colonies prospered, the solidly Calvinist Scotland remained a backward and undeveloped area, even to this day.[3]
But even if the focus on calling and labor did not bring about the Industrial Revolution, it might well have led to another outstanding difference between Calvinist and Catholic countries — a crucial difference in the development of economic thought. Professor Emil Kauder’s brilliant speculation to this effect will inform the remainder of this work. Thus Kauder:
Calvin and his disciples placed work at the center of their social theology … All work in this society is invested with divine approval. Any social philosopher or economist exposed to Calvinism will be tempted to give labor an exalted position in his social or economic treatise, and no better way of extolling labor can be found than by combining work with value theory, traditionally the very basis of an economic system. Thus value becomes labor value, which is not merely a scientific device for measuring exchange rates but also the spiritual tie combining Divine Will with economic everyday life.[4]
“A certain balanced hedonism is an integrated part of the Aristotelian theory of the good life.”
In their extolling of work, the Calvinists concentrated on systematic, continuing industriousness, on a settled course of labor. Thus the English Puritan divine Samuel Hieron opined that “He that hath no honest business about which ordinarily to be employed, no settled course to which he may betake himself, cannot please God.”
Particularly influential was the early-17th-century Cambridge University academic, the Rev. William Perkins, who did much to translate Calvinist theology into English practice. Perkins denounced four groups of men who had “no particular calling to walk in”: beggars and vagabonds; monks and friars; gentlemen who “spend their days in eating and drinking”; and servants, who allegedly spent their time waiting. All these were dangerous because unsettled and undisciplined. Particularly dangerous were wanderers, who “avoided the authority of all.” Furthermore, believed Perkins, the “lazy multitude was always inclined … to popish opinions, always more ready to play than to work; its members would not find their way to heaven.”[5]
In contrast to the Calvinist glorification of labor, the Aristotelian-Thomist tradition was quite different:
Instead of work, moderate pleasure-seeking and happiness form the center of economic actions, according to Aristotelian and Thomistic philosophy. A certain balanced hedonism is an integrated part of the Aristotelian theory of the good life. If pleasure in a moderate form is the purpose of economics, then following the Aristotelian concept of the final cause, all principles of economics including valuation must be derived from this goal. In this pattern of Aristotelian and Thomistic thinking, valuation has the function of showing how much pleasure can be derived from economic goods.[6]
Hence, Great Britain, heavily influenced by Calvinist thought and culture, and its glorification of the mere exertion of labor, came to develop a labor theory of value, while France and Italy, still influenced by Aristotelian and Thomist concepts, continued the Scholastic emphasis on the consumer and his subjective valuation as the source of economic value. While there is no way to prove this hypothesis conclusively, the Kauder insight has great value in explaining the comparative development of economic thought in Britain and in the Catholic countries of Europe after the 16th century.
Notes
[1] Richard H. Tawney, Religion and the Rise of Capitalism (1927, New York: New American Library, 1954), p. 95.
[2] In contrast to the Catholics, to Luther, and probably to Calvin (who, however, was ambivalent on the subject), the Puritans were “postmillennialist,” i.e., they believed that human beings would have to establish the Kingdom of God on earth for a thousand years before Christ would return. The others were either “premillennialist” (Christ would return to earth and then set up a thousand years of the Kingdom of God on earth), or, like the Catholics, amillennialist (Christ would return period, and then the world would end). Postmillennialism, of course, tended to induce in its believers eagerness and even haste to get on with their own establishment of the Kingdom of God on earth so that Jesus could eventually return.
[3] The fact that only late Calvinism developed this version of the calling indicates that Weber might have had his causal theory reversed: that the growth of capitalism might have led to a more accommodating Calvinism rather than the other way round. Weber’s approach holds up better in analyzing those societies, such as China, where religious attitudes seem to have crippled capitalist economic development. Thus, see the analysis of religion and economic development in China and Japan by the Weberian Norman Jacobs, The Origin of Modern Capitalism and Eastern Asia (Hong Kong: Hong Kong University Press, 1958).
[4] Emil Kauder, A History of Marginal Utility Theory (Princeton, NJ: Princeton University Press, 1965), p. 5.
[5] Michael Walzer, The Revolution of the Saints: A Study in the Origins of Radical Politics (Cambridge, Mass.: Harvard University Press, 1965), p. 216; see also pp. 206–26.
[6] Kauder, op. cit., note 7, p. 9.
February 20th, 2010
“We cannot have reform of the system driven by what each country sees that it needs for itself,” Dominique Strauss-Kahn, head of the International Monetary Fund, told the Davos forum on Saturday. “We need to have co-ordination – we cannot afford to have different solutions in different parts of the world.”
Bankers fight controls
As Davos ends, bankers fight to fend off controls on matters ranging from bonuses to proprietary trading and derivatives.
February 7th, 2010
Bill Bonner writes at The Daily Reckoning:
The stock market has not been corrected. It could easily get cut in half in the next six months. (We’re leaving our ‘Crash Alert’ flying over the building with the gold balls…until stocks reach bargain prices.)
The bond market could crash any time. The US is borrowing more money than ever before – trillions more. With such a huge increase in supply, demand…and prices…it should crack, sooner or later. Higher bond yields would send the whole economy into a much deeper depression.
Even our gold holdings could lose 20%-30% of their value. And gold stocks? They could get killed in the next stock market downswing.
Despite a truly monumental (albeit imbecilic) effort to revive the economy…the latest figures show the weakest post-recession recovery ever. Jobs are missing. Consumer credit is shrinking. Inflation is going negative. There is no real recovery…it’s a mirage created by government spending.
Monetary policy is useless (banks won’t lend; consumers won’t borrow). And fiscal policy, while apparently more effective, destroys wealth; it doesn’t add to it.
The more the government increases spending, to offset the correction, the more the economy becomes addicted to it. It’s like trying to cure an alcoholic by introducing him to heroin. Take away the government spending – as Japan tried to do – and the economy collapses into a deeper depression. Not only that, but the budget deficit actually grows!
In other words, the feds spend money they don’t have trying to fight a correction. This creates huge budget deficits, but it makes it look like the economy is recovering. So they slack off. Then, they discover that their fiscal stimulus didn’t really create any genuine economic activity. Take away the fiscal stimulus and the economy collapses again…reducing tax receipts and widening the deficit. In effect, the cure became a disease of its own! Now they can’t cut government spending. The economy depends on it. Instead, they’re locked into a debt spiral…more and more deficits…higher and higher debt…down, down, down, until…
..until the whole thing finally crashes.
Japan faced this problem in the ’90s. It eased off its stimulus program…and the economy collapsed. Now, it’s become hooked on government spending. Where does it lead? We repeat this prescient note from The Telegraph, which we sent you yesterday:
“This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time…
“Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE [quantitative easing...aka 'printing money']. The country will flip from deflation to incipient hyperinflation…”
But we’re not worried. Somehow it will all work out. Americans are still trying to get even. They still believe that the stock market will recover – fully. They still think the Fed is in control…and that our economists know what they are doing. They are delusional, in other words.
January 9th, 2010
Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.
Then he got elected.
What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.
How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?
Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.
How did we get here? It started just moments after the election — and almost nobody noticed.
Previous Next Page
December 13th, 2009
By Edward Harrison of Credit Writedowns.
A reader at Naked Capitalism asked us to respond to a recent article from the Christian Science Monitor asking Does US need a second stimulus to create jobs?
Marshall Auerback has already done some heavy lifting – and taken all of the heat in the comments. He says emphatically yes.
Now I want to take a crack at this. My short answer is no. But before I go into this, as an aside, I wanted to mention Marshall’s new smiling, happy picture up at the great blog New Deal 2.0 where he now writes. Earlier, when Credit Writedowns was hosted at Blogger, he used a picture best described as a mug shot in his profile, but he has changed that one too (although he smiles there a little less). He thinks we haven’t noticed this sleight of hand. Well I have! Once upon a time, Marshall wrote with a man I called all bearish, all the time this summer. Take a look at that post; you don’t see him smiling now do you? We have Lynn Parramore, New Deal 2.0’s editor to thank for making Marshall Auerback into an optimist.
November 21st, 2009
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times
November 21st, 2009
Myths of Our Times
By Paul Craig Roberts
Humanity has endeavored for millennia to control evil with morality. In the American “superpower,” this effort has collapsed and failed. Continue
November 14th, 2009
JPMorgan Chase, Wells Fargo and other bank behemoths have bulked up over the past year. But they’re not the only ones getting bigger these days.
Dozens of small banks that were otherwise anonymous in the years leading up to the financial crisis have also enjoyed robust growth in recent months.
Some of them have expanded so rapidly, in fact, that they have transformed themselves into what some argue is the next generation of regional banking leaders.
Chicago’s MB Financial (MBFI), for example, drastically widened its deposit base by buying local rivals that failed. In September, the company made its boldest purchase yet when it scooped up 11 branches and $7 billion worth of deposits controlled by Corus Bankshares after Corus was seized by the FDIC.
And with the fragmented Chicago banking landscape continuing to shift, MB Financial’s buying spree may be far from over.
“We think there is quite a bit of opportunity in the area for similar transactions in the future,” said Mitchell Feiger, chief executive officer of MB Financial.
Other fast-growing regional banks, such as Prosperity Bancshares (PRSP), have been buoyed by a resilient economy in their home market and diligent underwriting practices.
The Houston, Texas-based lender has not only reported consistently higher profits so far this year, but it also recently hiked its dividend and was reportedly a key contender for Guaranty Bank, a significantly larger peer that failed in late August. Guaranty was eventually acquired by Spain’s BBVA.
And some banks have simply managed to harness the broader market forces at work, including consumers’ flight from stocks to cash earlier this year and widespread discontent with larger banks in the wake of taxpayer bailouts.
Signature Bank (SBNY), which operates solely within the New York metropolitan area, is one of those banks. Between July and September alone, the company reported almost double-digit growth in both loans and deposits, a feat that is not lost on many industry analysts.
“That is pretty phenomenal,” said Andy Stapp, a senior equity research analyst at brokerage B. Riley & Company, who tracks Signature.
Life at the top
Of course, much of the spoils of the recent shakeup in the banking industry have gone to the biggest players in the business.
Both JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) dramatically expanded their retail banking operations after they bought Washington Mutual and Wachovia respectively.
Today, the nation’s 10 largest banks control approximately $3.4 trillion in deposits, according to recent FDIC data, $700 billion more than they did just a year ago.
Some would even argue that the banking field is much more crowded these days with the entry of Goldman Sachs (GS, Fortune 500), American Express and GMAC, all of whom got into the deposit-taking business last fall when they were unable to access traditional sources of liquidity.
Still, that has hardly deterred many ambitious bankers looking to expand.
Los Angeles-based City National (CYN), which caters largely to businesses as well as affluent customers, recently indicated it was looking to expand its presence in Northern California after it acquired a branch in the Silicon Valley region in late August.
“Going to San Jose was always part of our plan,” said City National CEO Russell Goldsmith. “It was an attractive way to get into the third-largest city in California and complete the circle around the [San Francisco] Bay area.”
Risks versus rewards
Tepid loan demand has complicated growth plans for many ambitious banks, however.
With unemployment now above 10%, Americans are broadly reining in their spending. Consumers and businesses remain hesitant to seek out credit, according to the most recent survey of senior bank loan officers by the Federal Reserve.
And if forthcoming federal legislation requires banks to hold more capital, that could heighten the competition for customers.
“It will be harder for banks to grow deposits, which is one of the reasons why we are so interested to get them now,” said MB Financial’s Feiger.
If banks like MB Financial can navigate all those hurdles and aren’t constrained by issues like commercial real estate loan losses, the opportunities to grow could be huge, notes Aaron Deer, an equity bank analyst for Sandler O’Neill.
With potentially hundreds of additional banks likely to fail in the months and years ahead, competition will continue to ease. And should credit remain tough to come by, banks will likely be able to fetch a premium even on new loans made to those borrowers with sterling credit.
“My guess is the opportunities for organic growth is probably going to accelerate over the coming year,” said Deer. “Right now banks are finding very attractive lending opportunities.”
Meet the New Leaders of Banking – David Ellis, CNNMoney
November 14th, 2009
The Job Report: Another month, another drop in payrolls. Will it ever occur to our leaders in Washington that what they’re doing isn’t working – and may actually be damaging our economy?
News that the unemployment rate jumped to 10.2% in October, its highest level since 1983, as the economy shed 190,000 nonfarm jobs, underscores the spectacular failure of the so-called fiscal stimulus to stimulate anything other than economic misery.
Since the $787 billion stimulus was passed in February, the economy has lost 2.9 million jobs – for a total of 4.3 million since the end of 2008. The silver lining, some say, is the number of jobs lost each month is shrinking. But they lose sight of this: There’s no guarantee the economy’s 3.5% growth in the third quarter will continue.
Indeed, some worry the economy is on a slow-growth path that will lead to permanently high joblessness, weaker income growth and fewer opportunities. The Blue Chip consensus of more than 50 economists nationwide expects unemployment to remain above 8% at least into 2012.
Why should this be? Well, start with the fact that virtually all job growth comes from companies with fewer than 500 employees, and that startups and very small businesses are responsible for more than half of all new jobs.
Today, these entrepreneurial job creators are running scared. That the White House vows to jack up taxes on those with “high incomes” (that is, entrepreneurs) is one reason why. Next year’s scheduled expiration of the Bush tax cuts that pulled the economy out of the 2001 recession is another.
Higher income taxes, a flood of stiff new regulations and the possibility of at least $2 trillion in new taxes related to cap-and-trade and a health care overhaul over the next decade have created a climate of uncertainty – for small and large businesses alike.
Businesses are hunkered down. They have $1 trillion in cash stashed away, but they won’t invest out of fear it’ll be taxed away or some government czar will tell them how to run their business.
At the same time, banks have a record $800 billion in reserves but can’t seem to find any worthy borrowers.
The White House claims its stimulus “saved or created” 640,000 to 1 million jobs. But no evidence shows that’s true. Stimulus has failed. If anything, borrowing hundreds of billions of dollars to fund such feckless initiatives is destroying private-sector jobs. Time has come for a dramatic change of course.
The Stimulus Plan Has Failed – Editorial, Investor’s Business Daily
November 8th, 2009
We need to take a different turn. Bill Gates and Warren Buffet offer splendid examples of great, capitalist fortunes put to social use, making the capitalism they exemplify more palatable. When modern corporations do this, we call it corporate social responsibility. More of this will clearly have to be done.
But we also need to respond to the steady erosion of the American myth of mobility. Today, after nearly a quarter century of wage stagnation, and growing evidence that educational access for the poor has also declined, that myth is in a disastrous decline.
We have to respond by improving education and by relieving anxiety through reforms that make health care part of a basic provision for the poor. These reforms strengthen capitalism. Without them, the economic populists will enjoy a success that they do not deserve.
Jagdish Bhagwati is University Professor and Senior Fellow in International Economics at Columbia University. He is the author of In Defense of Globalization (Oxford, 2004) and Termites in the Trading System: How Preferential Agreements Undermine Free Trade (Oxford, 2009).
Feeble Critiques: Capitalism’s Petty Detractors
Jagdish Bhagwati
October 31st, 2009
When Irving Kristol joined the new magazine Commentary, he distinguished himself from the other editors–Clement Greenberg, part-time then, Robert Warshow, and me. First, he had an interest in politics, real politics, electoral politics, and not just the politics of left-wing anti-Stalinists, mulling over what was living and what was dead in Marxism, the fate of socialism, the future of capitalism, communist influence in the intellectual world–no mean issues, but hardly ones to affect who won and who lost an election. So Irving discovered the wonderful political reporter and analyst Sam Lubell in the pages of The Saturday Evening Post, persuaded him to write for Commentary, and made me an enthusiast for his books, now hardly noted (although Sam Tanenhaus’s recently published The Death of Conservatism uses one of Lubell’s central theses as a guiding theme). None of the rest of us had ever read or noticed The Saturday Evening Post.
http://www.tnr.com/article/books-and-arts/the-interested-man
October 31st, 2009
Paul Krugman has concentrated his fire recently on those “thumping their chests” over the falling dollar. He has particular scorn for those recommending a return to the gold standard. In Krugman’s view, a simple look at the historical facts will show that it was a superstitious fetish for the yellow metal that prolonged the Great Depression.
A careful, comprehensive response to Krugman’s charges would involve an explanation of the classical gold standard, and the wonderful peace and prosperity it showered on the world. It was only after the major countries abandoned gold during World War I that major imbalances in international trade began to fester — imbalances that eventually exploded during the early 1930s.[1] As a good capitalist pig, I point the reader to my book on the Depression for the full story.
Fortunately, we can take a shortcut in the present article. Using Krugman’s own graph, we can see that the case for abandoning gold — and devaluing currencies in the process — is not nearly as straightforward as he seems to think.
http://mises.org/story/3778
October 31st, 2009
Once upon a (not long ago) time, there was a widely established set of blueprints for regimes of monetary and exchange rate policies, one expected to fit not only the full range of economies in the global arena, but also to serve as a guide for international monetary cooperation. Confidence in the effectiveness of those blueprints has been shattered by the scale and simultaneity of asset price booms and busts that led to the current global economic crisis. A reshuffle of views on monetary and exchange rate policies may turn out to be a companion to the revision of financial regulation.
It is now increasingly accepted that, to some degree and width, mainstreaming reactions to asset price moves in monetary policy is to become a new norm. It is also becoming clear that the previous world of theoretical determinacy and optimum rules of conduct is to give place to less-obvious policy choices and more discretion.
The purpose of this note is to highlight how the special complexity and indeterminacy intrinsic to international monetary-financial relations will deepen under the new regime. In the case of financial transactions between advanced financial systems and emerging markets, there is in addition an asymmetrical impact in terms of higher foreign reserve requirements on the latter.
The determinate world of inflation targeting and exchange-rate corner solutions
“The past 10 years have been the decade of inflation targeting. (…) Narrowly defined, inflation targeting commits central banks to annual inflation goals, invariably measured by the consumer price index (CPI), and to being judged on their ability to hit those targets. Flexible inflation targeting allows central banks to aim at both output and inflation, as enshrined in the famous Taylor Rule. The orthodoxy says that central banks should essentially pay no attention to asset prices, the exchange rate, or export prices, except to the extent that they are harbingers of inflation”(Frankel. 2009).
Asset price cycles were seen as basically harmless – or non-significant as a channel of transmission of monetary policy, as in the case of developing economies without financial depth. Even when the frequent appearance of bubbles started to be acknowledged, the belief – “the Greenspan doctrine” – was that attempts to detect and prick them at an early stage would be impossible to accomplish and potentially harmful. If necessary, resorting to interest rate cuts to safeguard the economy after bubble bursts would be a safer procedure.
Low and stable inflation could then be attained through a forecast-oriented, anticipatory manipulation of basic interest rates, as the single focus for monetary authorities. Movements of floating nominal exchange rates would reinforce the effectiveness of interest rates set to target inflation. Stable inflation would also lead to low risk premiums and higher financial stability.
In the case of small countries, fixing the nominal exchange rate and abdicating of monetary policy would import stability from inflation-targeting countries. The “Great Moderation” period, with developed economies exhibiting relatively low inflation rates and output fluctuations from mid-80s onward, seemed to vindicate that confidence.
This world of presumed stable and stabilizing monetary and financial spheres was shaken by the global financial crisis. With hindsight, asset price booms and busts became acknowledged as both increasingly pervasive and harmful: real-estate and stock-market booms leading to excess US household debt and to fragile asset-liability structures; a generalized bubble burst pushing the global economy to a quasi-collapse.
Endogenous creation of liquidity and the “sea of bubbles”
Chapter 3 of the latest IMF’s “World Economic Outlook” brings evidence on the presence of real-estate and stock-market asset price busts over the past 40 years (WEO – ch.3). The recent experience with widespread busts of both house and stock prices is singular in the last 40 years (Chart 1). However, one can observe not only the frequency of previous episodes, but also that those “asset price busts are relatively evenly distributed before and after 1985 – a year that broadly marks the beginning of the ‘Great Moderation’” (p.95).
The Arrival of Asset Prices in Monetary Policy by Otaviano Canuto
October 25th, 2009
|
Market Commentary
How the Recovery Might Unfold
With economists estimating that the recession is drawing to a close, the question is what type of recovery will follow. Hear from our vice president of market analysis.
More
|
 |
|
|
Investing Ideas
Sizing Up Small-Cap Stocks
The recession took a toll on small-cap stocks, but optimism has risen. See why they might be of interest now.
More
|
|
|
Personal Finance
Would You Benefit From a Roth IRA Conversion?
If you’ve been shut out of a Roth IRA because your income is too high, you may finally be able to have one because of changes that take effect in 2010.
More
How to Help Make Your Retirement Portfolio Last
While you cannot control the market’s impact on your portfolio, you can control something that can make a significant difference in how long your portfolio will last—how much you withdraw from it.
More
|
October 25th, 2009
Europe Concerned as Dollar Decline Continues
A number of European countries have embarked on a slow recovery following the economic collapse late last year. But with the euro now at a 14-month high against the dollar, euro zone officials worry exports could suffer.
October 24th, 2009
Before I knew anything about the finance industry, if someone had thrown out the name “Blackrock” I would have conjured up a scene from the Wild West, a cattle rancher hiring a gunslinger to roust out the sheep farmers and take control of the town. But now, of course, I know that BlackRock is a financial behemoth with $1.5 trillion in assets under management — soon to be over $2 trillion due to its purchase of Barclay’s asset management business. But of more note than its asset footprint is the mantle BlackRock is gradually assuming as the arbiter of value.
BlackRock won a set of contracts to provide analytics for the New York Fed’s trillion dollar mortgage-backed purchase program. Now, BlackRock may end up with an NAIC contract to analyze the mortgage-backed securities in insurers’ portfolios.
I do not mean to diminish BlackRock’s laudable role in assisting in many ways with the financial crisis – coming forward when a number of other large firms demurred. But as one contract is piled on another, their models will become the standard for pricing mortgages, complex derivatives and structured products. Unlike the money management business, which is competitive and relatively transparent, this is a monopoly ready for the making. A monopoly because the more institutions, industry associations and regulatory bodies that employ their services, the more they become the de facto standard. Over time, auditors, clients and equity holders – perhaps even regulators – will start saying, “Well, it is nice to see what your internal models have to say about your portfolio value, but we want your portfolio benchmarked using the BlackRock model.” A BlackRock seal of approval; BlackRock, the JD Powers of portfolio quality.
Here are the problems with this:
First, of course, is the well-known issue of allowing a private enterprise to have monopoly control of a utility – in this case a de facto replacement of the rating agencies (not a bad thing in itself) by putting one firm in the position of providing the benchmark pricing of financial products. Second, there are natural conflicts of interest given that BlackRock is also the asset manager for the New York Fed’s Maiden Lane portfolios and has raised over half a billion in private capital to purchase legacy securities as part of PPIP. (Though I should add that BlackRock is aware of this issue and has stated the firm has strict internal controls preventing any valuation services from being gamed by its investment arm. Which should make us all feel a lot better).
But the most critical problem is that its approach is at variance with the broadly held view that we need to have transparency in the derivatives markets because, unlike, say, RiskMetrics, BlackRock does not share the specifications of the models it employs. We don’t really know what these models are doing. Valuations based on a black-box BlackRock model, or, for that matter, anyone else’s black box model, do not get us the transparency we need. I don’t care what a trading desk uses for its decision making, but when it comes to valuations that carry beyond the firm, we need to be able to see and critique the models that are being used. If a model is to become a standard, if it is going to be used for regulatory or other benchmarking purposes, it should be transparent and subject to peer review.
Which gets to a simple point: If we want to go down the path of standardized valuation and comparability in these complex portfolios, we need open derivatives models. One thing we should have learned from the rating agency debacle is that even if we put aside the issues of monopoly power and conflict of interest, we cannot stop with having the proprietor of such models say, “Trust me, I know what I’m doing.”
Originally published at Rick Bookstaber’s Blog
October 17th, 2009
From the Wall Street Journal:
Borrow from the Federal Reserve at zero and lend to Treasury for a profit. That’s some racket.
Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have announced that the recession is over. Now that the Dow Jones Industrial Average has broken the 10,000 mark, we’ll surely be hearing assurances that economic growth is here to stay. But the credit markets are in much worse shape than some indicators suggest.
October 17th, 2009
Public trust has economic consequences, by Howard Davies, Commentary, Project Syndicate: Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed. … But … if this loss of trust persists, it could be costly for us all.
As Ralph Waldo Emerson remarked, “Our distrust is very expensive.” The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance. Without mutual trust, economic activity is severely constrained. …
So if it is true that trust in financial institutions – and in the governments that oversee them – has been damaged by the crisis, we should care a lot, and we should be devising responses which seek to rebuild that trust. …
In the United States,… a … systematic, independent survey promoted by economists at the University of Chicago Booth School of Business … did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers.
That fall in confidence affected banks, the stock market, and the government and its regulators. Furthermore, the survey showed that … if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks.
So falling trust had real economic consequences. Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply. This has been positive for the stock market.
There is also a little more confidence in the government’s response and in financial regulation than there was at the end of last year. The latter point, which no doubt reflects the Obama administration’s attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government’s ability to regulate.
It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG. Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground. …
Researchers at the European University Institute in Florence and UCLA recently demonstrated that there is a relationship between trust and individuals’ income. …
The data show, intriguingly, that … if you diverge markedly from society’s average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated and abused. …
Maybe we should trust each other more – but not too much.
October 17th, 2009
How did the Dow break 10,000 when the rest of the economy is in the toilet?
1. Corporate earnings are up — mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies’ costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don’t have jobs or are afraid of losing them, they won’t buy, and company profits will disappear. 2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can’t keep up forever, though.
3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That’s good news for the Street because it means money stays cheap — and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street’s earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.
4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you’re one of the last in.
In other words, this is all temporary fluff, folks. Anyone who hasn’t learned by now that there’s almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.
Originally published at Robert Reich’s Blog
October 17th, 2009
Washington Post Crashed-and-Burned-and-Smoking Watch: …[The Washington Posts's] Fred Hiatt this morning:
Re-Stimulating. Unemployment is bad. More fiscal debt might be worse: At 9.8 percent, the unemployment rate is higher than it has been since it hit 10.1 percent in June 1983. Since the recession began 21 months ago, the economy has shed nearly 7 million jobs. Whole industries — cars, housing, finance — have been devastated and may never recover fully. Nevertheless, White House economists reported in September that “employment is estimated to be between 600,000 and 1.1 million higher than it would otherwise have been” because of the Obama administration’s stimulus plan and other government policies, especially the Fed’s monetary expansion. While no one can prove or disprove that — much less apportion credit between fiscal and monetary policy — basic economics suggests that things might have been even worse if the government had done nothing…
It does not necessarily follow, however, that the economy needs more stimulus now. Government has managed to blunt the recession, but at a cost — a higher national debt burden, which future Americans must pay off by working harder and saving more than they otherwise would have…
Ummm…
So far the stimulus spendout has been some $160 billion. The midpoint estimate by Christy Romer and company is that GDP is now 1% higher than it would have been otherwise. That higher level of production and employment than we would have seen otherwise is going to lead to the collection of an extra $80 billion in tax revenues. That means that the net effect of the $160 billion we have pushed out the door has been to raise the national debt by $80 billion. The Treasury can now borrow through its TIPS program for 20 years at an interest rate of 2% plus inflation. That means that taxes in the future have to be higher by $1.6 billion per year–by $5 per person per year.
Thus the stimulus package so far:
- Incur an extra forward-looking tax burden per person of 1.3 cents per day…
- Get an extra 800,000 people productively at work–and get all the stuff they make and do–this year…
That looks like a very good deal: buying an extra productive job for an American today at a cost of $2000 per year in higher taxes looking forward–particularly when you think that some of those extra jobs build up our productive capacity to make us richer in the future as well.
The stimulus arithmetic suggests we should be doing more of it. The benefit-cost ratio at current stimulus spending levels is very good…
But nobody on Fred Hiatt’s staff realized this. For nobody on Fred Hiatt’s staff thinks that doing any arithmetic is part of their job description. Indeed, nobody on Fred Hiatt’s staff is capable of doing any arithmetic at all.
October 17th, 2009
One hundred and seventy-nine years ago, a short span in the life of a nation, the representatives of the American people, in arms against the British Crown, proclaimed on a new continent a new philosophy of government. After the end of the military struggle for independence this philosophy was set forth in detail, and with rare insight and erudition, in the Federalist Papers and finally embodied in the Constitution of the United States.
The Fourth of July could well be an occasion for getting a firm grasp on the principles on which the American Republic was founded. Our educational institutions have not coped adequately with the task of communicating these principles to students. I know from personal experience that it is possible to go through a first-rate preparatory school and an excellent college without being impressed by the sheer thrill of political and intellectual adventure associated with the launching of the United States as an independent nation.
For it was an adventure, about which there were many prophets of gloom and doom on the other side of the Atlantic and some in the newly emancipated colonies themselves. Here were thirteen sparsely populated states, more distant from each other in terms of travel and communication than New York now is from London or Tokyo, starting out as a new nation without institutions which most Europeans then regarded as essential to stability without a monarchy, an hereditary aristocracy, or an established national church.
It was easy to imagine a relapse into anarchy, followed by the emergence of a “strong man” as dictator. But apart from the tragic schism of the Civil War (slavery and the right of a state to secede from the Union were two issues which the Constitution left unsolved), the United States has enjoyed almost two centuries of ordered freedom, unmarred by plots, internal sedition and successful or unsuccessful coups d’état.
The ideal of self-government, first proclaimed for the three million Americans of 1776, scattered along the Atlantic fringe of the country, still works for 160 million Americans who have filled up a vast country. The debt which Americans today owe to the men who framed the institutions of the young Republic, to Washington and Jefferson, Hamilton and Madison, Adams and Jay, is beyond estimation.
These men sometimes differed among themselves; but when they differed, it was usually because they emphasized two aspects of a single political truth. The product of their collective wisdom, the United States Constitution, is a mechanism of extraordinarily delicate balance. So far as human wisdom could foresee dangers and provide safeguards, the individual is secured against oppression by the central government, the states are left in possession of all the functions which are not clearly the proper concern of the federal government, and the powers and limitations of the three branches of the federal government are so defined that no one of these branches can dominate the others and become all-powerful.
The Founding Fathers’ Forethought
No form of government devised in history was so careful to avoid the dangers of concentrated power and so favorable to letting the citizen go as far and as fast as his individual capacity would carry him, without state coddling, state regulation and state domination, which always go hand in hand. The Founding Fathers were mindful of the admonition voiced by one of the strongest and clearest political thinkers of the Revolution, John Adams:
The institutions now made in America will not wholly wear out for thousands of years. It is of the last importance, then, that they should begin right. If they set out wrong, they will never be able to return, unless it be by accident, to the right path.
Adams and Jefferson, Madison and Hamilton, and many of their colleagues were men of exceptional learning. They were steeped in the Greek and Latin classics, in the history of medieval and modern Europe, in British and French constitutional theory and practice. At the same time they were not cloistered scholars, but men of action, who played leading roles in overturning an old form of government and setting up a new one. As a result of this double capacity, they possessed a panoramic view of the rise and fall of states in the past combined with a clear, intimate knowledge of the special conditions of America.
A coherent body of ideas figures prominently in the philosophy of the founders of the American Republic and may be studied to advantage in the Federalist Papers. These ideas, incidentally, are not only of tremendous historical importance, but are of the utmost reality and vitality in our own time. For the noble ideal of liberty, the word most often used in the literature of the American Revolution, has been horribly perverted by fanatics and cynically misused by tyrants.
It was not only in Jacobin France that many crimes, as Madame Roland cried on the scaffold, were committed in the name of liberty. As Professor J. L. Talmon brings out in his erudite and stimulating book, The Rise of Totalitarian Democracy (Beacon Press), the ideological origins of Soviet communism are not entirely in the writings of Marx and Engels.
Robespierre and the French Jacobins, nourished on Rousseau and some of the less known collectivist thinkers of the eighteenth century, worked out a conception of a virtuous elite that was morally entitled to persuade the people — with the aid of the guillotine, and for the people’s own good, of course — to hold and express unanimous opinions which would coincide with those of the virtuous elite. This was the Model T version of modern communism, and fascism borrowed something in theory and a good deal in practice from communism.
Against all utopian conceptions, such as Rousseau’s “general will,” which would lead to an absolute concentration of governmental power, the Founding Fathers set their faces like flint. From study and personal experience they knew what liberty was and what it was not. They knew that a mob or political party operating without opposition could be just as cruel, just as destructive of freedom, as an absolute monarch or a military dictator. One of the clearest and profoundest statements of this deep distrust of concentrated state power is that of Madison in Number 47 of The Federalist:
The accumulation of all powers, legislative, executive and judiciary, in the same hands, whether of one, a few or many, and whether hereditary, self-appointed or elective, may justly he pronounced the very definition of tyranny.
Safeguards against Big Government
Far from deifying the state, the Founding Fathers regarded government as a necessary but dangerous instrument, which required many safeguards against abuse. Although they were accustomed, especially in New England, to the grassroots local democracy of the town meeting, they drew a careful distinction between the terms democracy and republic. Madison states the distinction in Number 14 of The Federalist:
In a democracy the people meet and exercise the government in person; in a republic they assemble and administer it by their representatives and agents. A democracy, consequently, will be confined to a small spot. A republic may be extended over a large region.
It is evident from the tone of The Federalist and other political writings of the time that the Founding Fathers were not devotees of unlimited majority rule or of over-strong government. They recognized that minorities and individuals have rights, such as life, liberty and property, which no majority may lawfully take away. It is significant that the Constitution devotes at least as much attention to telling the government what it may not do as to telling it what it may do, and its prohibitions are expressed in plain, unambiguous, uncompromising language:
Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.
It is worthwhile to contrast these simple flat assurances with the long-winded resolutions of the United Nations on these subjects, full of escape clauses, weasel words, and loopholes for evasion. The Declaration of Independence takes its stand on “the laws of Nature and of Nature’s God”; and belief in natural law and inalienable rights which men possess independently of government and which no government may lawfully deny, withhold, or abridge is one of the cornerstones of American liberty.
In the literature of the American Revolution there is no demagogic attempt to set human rights against property rights. In the Federalist Papers and in other publications it is recognized that the right to acquire and own property is a basic and very important human right. As John Adams wrote:
The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.
Here, then, are the foundations of the free society of the American Republic: belief in natural law and inherent, inalienable human rights, intense distrust of any concentration of power in government, a suspicious attitude toward tyranny, whether of monarch or mob, including tyranny of the majority. Insofar as these foundations have been respected, America has prospered and grown great. It is where they have been most eroded and whittled away that some of the clearest danger signals in our national life are flying.
The Young French Visitor
Some of these danger signals were clear as early as the 1830s to the most profound and clear-sighted observer of the young American Republic, Alexis de Tocqueville. His work, Democracy in America, is a double masterpiece. It is a most penetrating study of the United States, its political institutions, its psychological traits, at the time of Andrew Jackson’s presidency, and it contains some strikingly accurate predictions of the American future. It is also a most searching study of the positive and negative sides of the leveling democracy which was beginning to prevail in the Western world. And it is written in a style that is always lucid and readable and often strikingly brilliant. For understanding the main political and psychological currents in the American history, de Tocqueville’s work is a worthy companion of the cogent, close-knit reasoning of the Federalist Papers.
As an observer of American life, de Tocqueville steers a middle course between sentimental gush and the squeamish repulsion which some cultivated Europeans like Mrs. Trollope felt for the free-and-easy frontier manners, with the copious expectorations of tobacco juice and the habit of calling all and sundry colonel or captain. He notes the self-reliant individualism of the American character:
The citizen of the United States is taught from his earliest infancy to rely upon his own exertions in order to resist the evils and the difficulties of life; he looks upon social authority with an eye of mistrust and anxiety, and he only claims its assistance when he is quite unable to shift without it.
Praised Local Initiative
As an authentic nineteenth-century liberal, de Tocqueville approves this tendency; he notes that the sum of private undertakings far exceeds all that the government could have done. He notes that there is no such thing as an American peasant and that although education is spread thinly, there are no pools of total illiteracy and stagnation. Again and again he praises the vitality of local initiative which builds excellent schools and churches and keeps the roads in good repair without any meddling interference from a centralized bureaucracy. And he pays to America of that time two compliments which are more impressive because he does not spare criticism on other points:
The European generally submits to a public officer because he represents a superior force, but to an American he represents a right. In America it may be said that no one renders obedience to man, but to justice and to law….
All commodities and ideas circulate throughout the Union as freely as in a country inhabited by one people. Nothing checks the spirit of enterprise…. The Union is as happy and free as a small people, and as glorious and strong as a great nation.
De Tocqueville is not blind to the fact that Americans possess the defects of their virtues. He notes a considerable downgrading of intelligence in high places since the formative years of the Republic. There is a memorable picture of the restless materialism which causes Americans to pursue illusions to the end of their days:
A native of the United States clings to this world’s goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications…. Death at length overtakes him, but it is before he is weary of his bootless chase of that complete felicity which is forever on the wing.
A source of fascination in de Tocqueville is his rare gift of accurate prediction. Some of his observations fit America, and the world, in the middle of the twentieth century even better than the conditions of his own time. There was no income tax in the America which de Tocqueville visited; but he foresaw the shape of things to come:
Universal suffrage invests the poor with the government of society…. Wherever the poor direct public affairs and dispose of the natural resources it appears certain that, as they profit by the expenditure of the State, they are apt to augment that expenditure…. I have no hesitation in predicting that, if the people of the United States is ever involved in serious difficulties, its taxation will speedily be increased to the rate of that which prevails in the greater part of the aristocracies and monarchies of Europe.
There is the famous and remarkable forecast of the era of the American-Russian Cold War:
There are, at the present time, two great nations in the world which seem to tend toward the same end, although they started from different points: I allude to the Russians and the Americans…. All other nations seem to have nearly reached their natural limits…but these are still in the act of growth…. The Anglo-American relies upon personal interest to accomplish his ends, and gives free scope to the unguided exertions and common sense of the citizens; the Russian centers all the authority of society in the single arm; the principal instrument o£ the former is freedom; of the latter servitude. Their starting point is different and their courses are not the same; yet each of them seems marked out by the will of heaven to sway the destinies of half the globe.
De Tocqueville was alarmed not by “excessive liberty” in the United States, but by inadequate securities against tyranny. For, like other nineteenth-century libertarians who were democrats only with reservations — like Burckhardt, Acton, Mill — he realized that there was danger in the tyranny of the majority and sensed that the dykes which the framers of the Constitution had erected against this kind of tyranny were being weakened by the upsurge of democracy in the raw.
He realized that the day of the absolute hereditary monarch and of the privileged aristocrat was gone; but he saw new perils to liberty on the horizon of the future. With remarkable perspicacity he foresaw two developments which became realities in the twentieth century: the totalitarian society of communism and fascism and the paternalistic Welfare State. Regarding the former, he noted the likelihood that
those hideous eras of Roman oppression, when the manners of the people were corrupted, their traditions obliterated, their habits destroyed, their opinions shaken and freedom, expelled from the laws, could find no refuge in the land
might recur. Certainly the crimes of a Stalin, a Hitler, a Mao Tse-tung, far exceed anything that could be laid to the charge of a legitimate ruler in the era of royal absolutism.
There’s never been a better time to remember the revolutionary and even libertarian roots of the American founding, and there’s no better guide to what this means in the narrative of the Colonial period than Murray Rothbard.
Still more vivid and eloquent is de Tocqueville’s imaginary sketch of a paternalistic state which would not practice the bloody oppression of dictators, but would reduce each nation “to nothing better than a flock of timid and industrious animals, of which the government is the shepherd,” that would undertake “to spare its subjects all the care of thinking and all the trouble of living.” The American Republic was, in the winged phrase of Lincoln, conceived in liberty.
But liberty is one of the most complex, as it is one of the most precious, of human conceptions. It flourishes best in the kind of equilibrium between government and citizen, individual and society, majority and minority which the Founding Fathers wrote into the Constitution. The dangers to true liberty vary from generation to generation; but it can never be maintained without constant struggle. There is no surer guide to the principles of political liberty than the Federalist Papers; no more penetrating and imaginative study of the forces that may wreck or sap liberty than de Tocqueville’s great classic.
There could be no better Fourth of July reading than some of the outstanding passages in both these works.
This article was originally published July 1955 in The Freeman.
An MP3 audio file of this article, read by Floy Lilley, is available for download.
October 11th, 2009
Previous Posts
