To bail or not to bail

by CarlD

In the Communist Manifesto Karl and Fred Marxnengels famously hypothesized that “the bourgeoisie has at last, since the establishment of Modern Industry and of the world market, conquered for itself, in the modern representative State, exclusive political sway. The executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie.” Like a rip saw this has since proven a powerful tool for rough work and a clumsy one for finer craft. As far as I can see this is true yet again in the case of the current ‘crisis’ of the U.S. finance sector and its political epiphenomena.

To review the broad outlines of the mess we’re in as I understand it from my non-expert perspective: A market economy is enabled or constrained, in part, by the liquidity to buy the goods and services that are produced. Liquidity may come in the form of solid assets or credit, nominally based on assets and functionally based on trust. (Money itself is a form of credit nominally based, nowadays, on the overall productivity of the nation that issues it as i.o.u.’s. You trust the money insofar as you trust the nation.) Economies based solely on the production and exchange of solid assets (barter) are highly constrained by time and space. Credit systems enable a relative transcendence of time and space and therefore, radically enable economic activity and growth.

Although the U.S. economy remains in many respects concretely productive, over the last little while its growth and its position as the consumption engine of the global economy (from which we all benefit, to varying and controversial degrees) have been largely driven by the invention of increasingly sophisticated means of expanding functional liquidity through the creation and manipulation of debt (in the old days called ‘margin’ and currently euphemized as ‘leverage’). Every time a loan is made, functional liquidity is multiplied: the loan money enters the market for use by the debtor, while also being retained with interest by the creditor as a holdable or saleable asset in the form of an i.o.u.. Consumer debt is an obvious example of the invention of liquidity out of thin air. But that’s nothing compared to the creativity that has gone into fabricating profit from the home mortgage market, in the first instance by giving home loans to increasingly risky borrowers, and in the second instance by packaging those loans for resale or as collateral for further loans (‘derivatives‘) – multiplying liquidity each time – in increasingly complicated and intermediated ways.

The limits of reasonable risk in the granting and repackaging of loans are, in the short term, an empirical matter. You try it and see if it works; it may even be statistically probable that it will. The problem is that the whole bloom of liquidity in the mortgage resale market ultimately rests on trust in the value of the concrete real estate asset and its ‘owner’s’ ability to pay it off long-term. As long as real estate holds or increases its value, all is well even if some of the loans default. What has happened now is that real estate has not kept its value, in part because of a feedback loop from all the ‘sub-prime’ mortgages in the market; not just the defaulted ones, but severely impaired trust about the value of the undefaulted ones. And because the actual loans have been so cleverly chopped up, repackaged and intermixed with more traditionally-reliable paper, this suddenly ‘toxic’ debt has polluted the good stuff too, resulting in a crisis of confidence and a pervasive unwillingness to lend money based on uncertain collateral. This is the account of things that makes sense of the current bailout plan’s focus on buying out the toxic debt so that the credit markets can get back to work based on renewed trust in the paper that’s left.

No surprises here. “Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones…. The need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe.” – Communist Manifesto, ch. 1.

Since everything from parties to payrolls in an advanced economy like ours is financed in the short or long term through the credit markets, none of us is unaffected by this. Failure of credit markets would be catastrophic for everyone who didn’t live on a subsistence farm. Nevertheless, there’s lots of room for disagreement about how to handle the current situation. There are of course the mortal enemies of capitalism, for whom this is a moment of perhaps ironic triumph. There are various strains of outrage and fretting from the sections of the Democratic orchestra, more or less aware of their tunes’ contrapuntal texturing of the opus. But to finally get to my main topic here, what interests me is the fact that Republicans, the party of big business, cannot find a consensus. In fact, ‘they’ seem to be the main opponents of the bailout. What’s that about?

Well, what we’ve been finding out over the last four years, if we didn’t know it already, is that the Republican Party is every bit the motley hodgepodge everyone knows the Democrats to be. As with all collective identities, “Republican” turns out to be a convenient collector of myths and fictions that can sometimes, under the right conditions, be activated and leveraged to bring disparate persons together for a common purpose. This turns out not to be one of those conditions; quite the contrary.

So, for the libertarian fraction of the party, where the free-market fundamentalists hang out, the omnipotent self-regulation of the market is an unquestionable article of faith. Whatever drowning may be involved while we wait for the market to slosh itself back into its channel is a small price to pay compared to the stumbling disruptions of even well-intentioned regulation. And there’s the problem of moral hazard – once you mess with the market by removing the costs of risk, you forever destroy the market’s power to self-regulate risk by inflicting punishment on bad ones. If we’re not careful, we’ll kill the market and be stuck with a planned economy; and big government is bad.

For the social conservatives, rural in sensibility if not residence and already suspicious of rascally city-slickers, radical individual responsibility is a sacred value high enough to make taking down the economy a small price to pay for properly punishing the greedy corporate honchos who got us into this mess. They share the libertarians’ suspicion of big government. Moral hazard is a more tangentially compelling argument to these folks, not because they believe in the free market, but because they believe in sin and damnation.

For the national security/law and order fraction of the party this all starts as an embarrassing sideshow. But once they look deeper, they notice that the bailout money will have to be borrowed by the government, will probably come mostly from China and other foreign powers, and by putting us in their debt therefore further undermines our freedom of movement against whatever foes we may choose.

Not even the pro-business wing of the party, which turns out here definitively to be George W.’s, is entirely on board here. True, they’ll sacrifice the free market when it’s not working for them just as shamelessly as they promoted it when it was. But perhaps we should not be surprised that the representatives of capitalist enterprise would be lukewarm about a massive socialist nationalization of private equity, even if it does work to their short-term benefit. And it’s also worth remembering that it’s the finance sector that’s into trouble here, not business in general (yet); in fact, the finance guys have pretty much screwed things up for everyone else. So I imagine that for the manufacturing and service sectors and their political representatives a certain omerta’ is in tension with a touch of Schadenfreude or even outright vendetta.

Once again, it’s not safe to overlump the ruling class. Which is a good thing from the perspective of change, because as Marx himself knew, if they had their fecal matter entirely aggregated there would be little hope for an alternative.


2 Comments to “To bail or not to bail”

  1. So, tell about the Angry Green Girl. Very expressive, that one.

  2. Yay! Thanks for asking. She is Vendetta, one of the main characters in the web comic Making Fiends (she is the fiend-maker). Her nemesis, Charlotte, is so relentlessly friendly and positive that she thwarts Vendetta’s every effort to tear her down. It’s hilariously dry.

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