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The New Dark Financial Ages

It’s been two months since Timothy Geithner welcomed us to what he called economic recovery in a New York Times op-ed. It’s been about that long since I argued here that the so-called recovery was a joke. Who can you trust? Is there a consensus shaping up elsewhere that would help you decide between these positions?

It’s been two months since Timothy Geithner welcomed us to what he called economic recovery in a New York Times op-ed. It’s been about that long since I argued here that the so-called recovery was a joke.

Who can you trust? Is there a consensus shaping up elsewhere that would help you decide between these positions?

How about the financial press and the Masters of the Universe themselves? What are they saying about the future, near and far? Not that we should accredit their opinions just because they believe in capitalism. Five years ago, they were betting on a future that looks nothing like the present. Even so, they have the kind of real stake in economic forecasts that neither Geithner nor I possess (apart of course from our vested interest in the continuation of civilization as such). Their opinions matter differently.

If we may judge from these opinions, I’m right, the recovery is a joke and hard times are ahead, no later than 2011. Just about everywhere you look in the financial press outside of the editorial page of the Wall Street Journal—where the occasion of every jeremiad is Obama’s economic policies—you’ll discover a sense of an ending, a disquieted, even fearful attitude toward the recent past and the impending future. It’s actually pretty scary out there.

The detonating event was probably Mohamed El-Erian’s remarks in the Financial Times of August 12, 2010. He’s the public face of Pimco, one of the world’s largest and most successful bond funds, so his utterance has real effects in real time. What are the odds that Japanese-style deflation will undermine recovery in the US and the larger world economy, he asked, and answered almost reassuringly—only 25 percent. But here’s how he concluded: “And if you are still wondering on this last issue, ask yourself the following question: would you accept a lift from a person who has a one-in-four chance of getting into a really bad car accident?”

Thereafter the financial press went just about crazy with apocalyptic forecasts. The rest of August was gloom and doom: by comparison, the “New Normal,” the state where we’re supposed to be accustomed to 10 percent unemployment, strenuous frugality, and budgets balanced on the backs of public employees, looked like a nice place to live. Maybe everybody was out of town—every location, in time or in space, even the “New Normal,” looks good if nobody’s there to interrupt your point of view. Unless you’re Mort Zuckerman, who railed against this normalcy—“an ongoing employment crisis,” he said, echoing Bob Herbert, of all people—in the Wall Street Journal on August 16, but from somewhere in the Hamptons.

Let me give you some examples of the apocalypse that seems to be upon us. On August 17, Paul Farrell of cited Bill Gross, Larry Kotlikoff, Peter Morici, and Simon Johnson—each a heavily credentialed and widely published analyst—in describing the “coming dark days of 2011.” On August 19, David Calloway, the editor-in-chief of MarketWatch, noted that a lot of investors—for the most part, hedge funds—were “going dark,” folding up the tents and moving on. He, too, named names, like Duquesne Capital Management, Raptor Global (don’t you love that one?), Pequot Capital, Atticus Capital, among many others. His summary of their dystopic mood: “an endless low-interest rate layover: think Japan, and you can see where this could lead.”

A New Dark Age? Calloway kept citing Todd Harrison, whose site attracts more hits and reads than HNN, every day (what are we historians doing wrong?). Harrison’s language is extreme but, I believe, instructive. His sidebar for the cited post was from a Grateful Dead song: “We used to play for silver, now we play for life/ One’s for sport and one’s for blood, at the point of a knife.” Here is how he characterized our current condition on August 18: “We live in interesting times … This isn’t just about money anymore; our civil liberties, the foundation of free market capitalism and the quality of life for future generations are dynamically shifting.” A New Age Dark Age!

In a previous post at his own site (7/28), Harrison had alluded to “an emerging class war”; at MarketWatch on the 18th, he spoke of an “overarching societal shift,” “collective tension,” “societal fray,” on his way toward the anecdotal analysis that marks him as an insider: “Some of the smarter folks I know are ‘going dark’—selling businesses, unwinding trading ops, distancing themselves from the capital markets. The thematic reasoning is straight out of an Ayn Rand novel.”

Hello? What kind of reasoning is that? Calling Howard Roark: are you going to blow this thing up, or just walk away? Calling Alasdair MacIntyre: are these the new Scipian exiles you invoked in After Virtue, the men who called for abstention and withdrawal from the obvious decay and impending demise of republican Rome?

I don’t want you to think that a profound sense of an ending is confined to those Masters of the Universe who made a killing in the first decade of the twenty-first century by betting on and then against Main Street. Tom Petruno is a business columnist at the Los Angeles Times who specializes in aphorisms for individual investors—think Ralph Waldo Emerson with a real job in our time, giving advice to people who are finally accustomed to free markets. On August 14, he wrote about the “fear pushing bond yields down” (demand for government issued debt increases insofar as fear of the future does, which could increase interest rates [yields], but cannot in the current circumstance because this debt is so huge). That fear is of course the “deflationary spiral” El-Arian invoked two days earlier. A minimal return on your investment sounds good if price deflation makes your dollars worth more—so, Petruno, citing El-Arian, said avoid equities, shun real estate, and hold cash. In other words, hold tight, batten down the hatches, get ready for the “worst-case scenario.”

But surely things have gotten better since August. Kids are back at school, teenage unemployment is therefore down, state budgets are going to be balanced because Tea Party activists will insist on it, and the Republicans will use a House majority to impose federal spending cuts. Also, the memory of El-Arian’s dire warning has receded. What, me worry?

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Well, yeah, I am worried. So are the pundits and analysts who populate the financial press. Remember Peter Morici, the former chief economist at the International Trade Commission, I mentioned him five paragraphs ago? On September 20, he published a little on-line piece called “The Decadence of Election 2010” which has now gone viral, infecting the financial press and its attitudes toward the future. This is a reputable, respectable guy, but here he sounds like Glenn Beck—good God, everybody sounds more or less like this fool, because everybody is afraid of the future, near and far. The exceptions to this rule belong to the exclusive club Charles I founded. Its prominent members include Marie Antoinette, Edwin Ruffin, and Nicholas II, rulers who believed they deserved their standing and therefore couldn’t see how they’d be swept away by rapid social change; it newest members are the Wall Street traders with the bonuses who congratulate themselves for earning a living.

Here’s a sample of Morici. Notice the syntactical and grammatical estrangement at work in his language, his sentences are coming apart along with his country:

But Obama’s two signature initiatives … simply won’t work. [Health care reform] fails to address the root problem—Americans pay 50 percent more for hospitals, doctors and drugs—than subscribers to national health care plans in Germany, France and other decadent socialist European countries, and [and?] the banks are back to their old tricks.

Like I said, a reputable guy. But in his extremity, he’s reaching for an eloquence that an economist can’t muster, not when he’s preaching on behalf of regulated markets: believe in the God that failed, he says, but hedge your bets.

“Americans needs [sic] a prophet—another Harry Truman or Ronald Reagan—who will level with them,” he insists, as if Truman ever did or Reagan knew how. “Americans must accept fewer government-paid benefits—for the rich, the poor, and those in between—and must acknowledge the markets work best most of the time, but it [sic] is not working in health care, banking, China, and oil.” OK, he’s got a thing about China’s trade surplus, how the price of their exports is by definition a deduction from American income. Even so, his call for a lot more regulation in all these places (this “sounds radical,” he acknowledges) expresses another kind of a sense of an ending—like the bleary-eyed Glenn Beck, always on the verge of tears, Morici is weary, he’s given up, he’s ready to try any alternative to the status quo. He and George Soros will soon match up at EHarmony. Meanwhile he’s roiling the markets.

A more recent random walk through,, RealClearMarkets, and some other, more obscure websites, not to mention the good old Financial Times and the Wall Street Journal, would suggest that Morici’s sense of an ending—of impending doom—is everywhere reshaping behavior in the present. Expectations are determining realities, imagine that. Does that mean we’re experiencing a “crisis of confidence” created by government policies? Has the Tea Party sensibility penetrated every crevice of our political unconscious?

Paul Krugman and Robin Wells say no, but not exactly in thunder, in their current piece in the New York Review of Books. A “restoration of banking confidence” hasn’t brought a return to “strong economic growth,” they note, and so they conclude, quite rationally, that “banks were only part of the problem” and that Obama’s stimulus package can’t be blamed for anemic job growth or any other symptom of stagnation. But they also cite a “failure of nerve” at the Fed and in the government more generally as the proximate cause of the continuation of the crisis—in their view, neither has done enough to offset the catastrophic decline of demand triggered by the collapse of the housing bubble. So either way you read this dire situation, with or without Krugman and Wells, the psychology of investment, private or public, is the key to the future. Everybody’s waiting for something awful to happen because nobody knows how to make something good happen. Everybody’s afraid of that future.

And that means the seemingly tiresome debate between J. M. Keynes and Friedrich Hayek is actually relevant in the here and now, as Robert Skidelsky, Niall Ferguson, Gerald O’Driscoll, Mario Rizzo, and Jennifer Schuessler, among others, have been suggesting since July—and as Glenn Beck, yes, him again, insisted on June 8, in an hour-long FOX News tutorial on The Road to Serfdom, Hayek’s 1944 masterpiece. For the question the already eminent economists publicly debated in 1932 was more practical than theoretical: what is to be done about the slump, they asked, which in effect was a question about private consumption and public spending as sources of renewed growth.

Hayek insisted then and after that, if cultivated, these components of aggregate demand would pave the way to the benevolent feudalism of fascism, socialism, and communism. Keynes assumed that capitalism had collapsed, and that demand had to be reconstituted one way or another, whether through private consumption, private investment, or public spending. But toward the end of the two-volume Treatise on Money (1930), written before, during, and after the Crash, he had noted—using data from the US—that idle profits were piling up because reinvestment in the name of increased productivity and output was simply unnecessary: a “profit inflation” and a “great expansion of corporate saving” coincided with a “deficiency of investment,” just like today (2: 190-94). So the passage from saving to investment was a mystery to be solved, not an automatic movement to be measured—and the obstacles to that passage were not a simple matter of “hoarding,” as Hayek wanted to believe.

Keynes solved the mystery in the General Theory (1936), but to no one’s satisfaction, by saying this: “The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, must, by increasing the demand for investments, provide a stimulus to their production. … It is of this fallacy that it is most difficult to disabuse men’s minds. It comes from believing that the owner of wealth desires a capital asset as such, whereas what he really desires is its prospective yield…. [There] is always an alternative to the ownership of real capital assets, namely the ownership of money and debts” (211-12).

So the question for both Hayek and Keynes was how to provide incentives to spending as against saving, how to offset saving with consumption or investment, and the answers, then as now, like it or not, were government policies. For Hayek, the basic incentive was public policy that promised stability, so that the hoarded savings of private individuals could take productive form as active investments. He never advocated do-nothing government. “The question whether the state should or should not ‘act’ or ‘interfere’ poses an altogether false alternative,” he insisted in The Road to Serfdom, “The important question is whether the individual can foresee the action of the state” (118). For Keynes, the basic incentive was any policy that would elicit spending—demand—by investors, consumers, governments, whatever.

But their question is just not being asked now—that question was how to offset saving or hoarding, call it what you want and line up where you will, with Keynes or Hayek, just acknowledge the real problem. Don’t hide with Niall Ferguson behind the idea that government debt as such induces investor anxiety—it doesn’t. The real problem is this: the banks are sitting on piles of money, the non-financial corporations have been staging a capital strike since 2001—according to the OECD, the difference between retained earnings and investment now amounts to almost 8 percent of GDP—and the saviors of the recent past, us consumers, are tapped out, we can’t borrow any more because our wages are stagnant and our line of credit has reached its outer limit.

So increased private consumption won’t happen. But neither will increased private investment happen, not even if we extend the Bush tax cuts to infinity, because the future, near and far, feels too perilous to those with the savings, whether corporate or individual. As both Martin Wolf and Alan Greenspan have said repeatedly since 2007—the latter most recently in the Financial Times on October 6—the huge gap between corporate profits and investment is growing, and won’t be soon closed because “the sense of a frightening future” (that’s Greenspan on the 6th) disallows the commitment of resources.

Government spending is, then, our last line of defense against disaster, no matter where we stand on Keynes vs. Hayek. But the ideological constraints on this option are now so real that I might as well be describing heaven to Christopher Hitchens. So yeah, me too, I feel the darkness rising—I know, it’s supposed to fall—and I finally get this sense of an ending that saturates the financial press. It’s the end of the world as we know it. But in view of what we have come to know about this world, maybe that’s not such a bad thing.

James Livingston is Professor of History at Rutgers University. His latest book is The World Turned Inside Out: American Thought and Culture at the End of the 20th Century (Rowman & Littlefield, 2009). He blogs at

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